TIDMMCRO
RNS Number : 3881O
Micro Focus International plc
09 February 2021
9 February 2021
Micro Focus International plc
Preliminary results for the year ended 31 October 2020
Micro Focus International plc ("the Company" or "the Group",
LSE: MCRO.L, NYSE: MFGP), the global enterprise software group,
announces Preliminary results for the year ended 31 October 2020
("FY20").
Summary:
-- Micro Focus has completed the first year of a three-year
turnaround plan and has made solid progress in the key objectives
of evolving our business model and improving operational
effectiveness.
-- Revenue decline moderated during the year from 11% reported
in the first half of the year to 9% in the second half, with
revenues of $3.0bn, a decline of approximately 10% at both actual
and constant exchange rates. This is in line with expectations and
starting to reflect the progress in the turnaround plan
-- Adjusted EBITDA(1) of $1.2bn (FY19: $1.4bn) at an Adjusted
EBITDA margin of 39.1% (FY19: 40.7%), towards the upper end of
expectations, driven by tight operational cost control and several
cost reduction programmes. These also contributed to the funding of
planned investments in key opportunity areas.
-- The Group has successfully completed the first stage of IT
systems migration in January 2021 with a significant number of
employees now operating on the new IT platform. The remaining teams
will be transitioned later in FY21.
-- The Group recorded an exceptional charge related to goodwill
impairment of $2,799m in the period driven by changes in the
Group's trading performance and overall environment when compared
to the original projections produced at the time of the HPE
Software acquisition. This impairment charge does not impact the
Group's cash generation in the period which has remained
strong.
-- Cash generated from operating activities of $1.1bn in FY20 (FY19: $1.1bn).
-- Adjusted cash conversion improvement of 17.3ppts to 112.6% in
FY20 resulting in Free Cash Flow of $0.5bn (FY19 $0.6bn)
-- Successful refinancing of $1.4bn Term Loan in May 2020 means
the Group now has no term loan maturities until June 2024.
-- Given the Group's continued strong cash performance, the
Board has elected to reinstate the dividend and recommend a final
dividend of 15.5 cents per share (FY19: nil).
Results at a glance Year ended Year ended Growth/
31 October 31 October Decline
2020 2019 %
Alternative performance measures from
continuing operations(1)
Revenue (versus CCY comparatives) $3,001.0m $3,336.1m (10.0)%
Adjusted EBITDA (versus CCY comparatives) $1,173.7m $1,358.7m (13.6)%
% Adjusted EBITDA margin (versus CCY (1.6)
comparatives) 39.1% 40.7% ppt
Adjusted Diluted Earnings per Share ("EPS")
- continuing operations 154.37 cents 195.89 cents (21.2)%
Net Debt $4,153.5m $4,608.3m 9.9%
Net Debt / Adjusted EBITDA ratio (2) 3.5x 3.2x
Year ended Year ended
Statutory results 31 October 31 October
2020 2019
--------------------------------------------- ------------- ------------- -----------
Revenue - continuing operations $3,001.0m $3,348.4m (10.4)%
Operating (loss)/profit - continuing
operations $(2,661.4)m $221.7m (1,300.5)%
(Loss)/ Profit for the period $(2,969.5)m $1,469.1m (302.1)%
(886.15)
Basic EPS - continuing operations cents (4.87) cents 18,096.1%
(886.15)
Diluted EPS - continuing operations cents (4.87) cents 18,096.1%
(1) The definition and reconciliations of Adjusted EBITDA,
Adjusted Diluted EPS, Free Cash Flow, Net Debt and Constant
Currency ("CCY") are in the "Alternative Performance Measures"
section of this Preliminary announcement.
(2) Net debt/ Adjusted EBITDA ratio for year ended 31 October
2019 as previously reported and therefore includes profit for
discontinued operations.
Stephen Murdoch, Chief Executive Officer, said:
"We are now 12 months into our three-year turnaround plan and
whilst there remains a great deal to do, we have made solid
progress in delivery of our key strategic objectives and
improvements in operational effectiveness. We continue to work
closely with our customers around the world enabling them to build
on their existing IT investments with the latest innovations to
help accelerate their digital transformation programmes."
This announcement contains information that was previously
Inside Information, as that term is defined in the Market Abuse
Regulation (Regulation (EU) No 596/2014 of the European Parliament
and of the Council of 16 April 2014) as it forms part of domestic
law by virtue of The European Union (Withdrawal) Act 2018.
Results conference call
A conference call to cover the results for the year ended 31
October 2020 will be held today at 1.30pm UK time.
A live webcast and recording of the presentation will be
available at https://investors.microfocus.com/ during and after the
event. For dial in only, access numbers are as follows:
UK & International: +44 (0) 33 0551 0200
UK Toll Free: 0808 109 0700
USA: +1 212 999 6659
USA Toll Free: 1 866 966 5335
Enquiries:
Micro Focus Tel: +44 (0) 1635 565200
Stephen Murdoch, Chief Executive
Officer
Brian McArthur-Muscroft, Chief
Financial Officer
Ben Donnelly, Head of Investor
relations
Brunswick Tel: +44 (0) 20 7404 5959
Sarah West MicroFocus@brunswickgroup.com
Jonathan Glass
About Micro Focus
Micro Focus (LSE: MCRO.L, NYSE: MFGP) is an enterprise software
Company supporting the technology needs and challenges of customers
globally. Our solutions help organisations leverage existing IT
investments, enterprise applications and emerging technologies to
address complex, rapidly evolving business requirements while
protecting corporate information at all times. Within the Micro
Focus Product Portfolio are the following product groups:
Application Modernisation & Connectivity, Application Delivery
Management, IT Operations Management, Security, and Information
Management & Governance. For more information, visit:
www.microfocus.com .
Forward-looking statements
Certain statements in these preliminary results are
forward-looking. Although the Group believes that the expectations
reflected in these forward-looking statements are reasonable, it
can give no assurance that these expectations will prove to be
correct. Because these statements involve risks and uncertainties,
actual results may differ materially from those expressed or
implied by these forward-looking statements. The Group undertakes
no obligation to update any forward-looking statements whether as a
result of new information, future events or otherwise.
Chief Executive's Strategic review
"We are now 12 months into our three-year turnaround plan and
whilst there remains a great deal to do, I am pleased with progress
made in delivery of our key strategic objectives and improvements
in overall operational effectiveness".
Stephen Murdoch
Chief Executive Officer
Performance in the period
This time last year, we presented our three-year ambition for
Micro Focus and the priorities for the period under review.
Clearly, when doing so, we had no idea of the profound impact
COVID-19 would have on our customers, employees and the communities
we share.
The operational headwind and macro uncertainty resulting from
the pandemic required us to be agile in adapting our approach and
the sequencing of priorities as we executed multiple programmes
that comprise the transformation of our business to deliver against
the objectives we set.
I am proud of how our team has adapted to the challenges
presented and ensured we stayed focused on delivering for our
customers and other stakeholders whilst improving our business
performance. Our business model remains resilient in the face of
COVID-19, underpinned by high levels of recurring revenues and
long-term customer relationships. As such, we made the decision not
to furlough any employees as a result of the pandemic and have
worked as a Board to support our employees through these
challenging times.
For the year months ended 31 October 2020 ("FY20"), we reported
revenues of $3,001.0m (FY19: $3,348.4m). This represents a 10%
decline on both an actual and constant currency basis.
We made encouraging progress during the year in re-engineering
our Go-To-Market approach, simplifying core operations and
sharpening our focus on delivering product innovation in support of
our customers' digital transformation programmes. This contributed
to the improvement in the second half of the fiscal period despite
the broader macro context, when we were able to deliver a
moderation in the rate of revenue decline when compared to the
first half of the year. Considering the year as a whole, the
performance varied across the Product Portfolios.
In Application Modernisation and Connectivity ("AMC"), customer
demand for mainframe application modernisation solutions, where we
have a leadership position, has never been stronger but delays to
customer projects as they dealt with the unique circumstances faced
this year impacted our performance. We are increasingly confident
that demand for mainframe application modernisation will increase
and will contribute to the ongoing strength and stability of this
portfolio.
Performance in Application Delivery Management ("ADM") and IT
Operations Management ("ITOM") was below our expectations. The
actions taken to date have delivered some early signs of progress
and further improving execution such that we accelerate progress is
a key priority. Our objective remains to build a strong core of
stable recurring revenues.
Initial progress within Security and IM&G has been
encouraging. The targeted investments we have made in Security and
Big Data (reported within IM&G) have yielded improvement in
performance and we remain confident that the continued execution of
our strategy will deliver revenue growth in these areas.
We generated a statutory operating loss of $2,661.4m for FY20
(FY19 profit: $221.7m), driven by total impairment charges of
$2,799.2m in the period. This impairment charge reflects of our
trading performance and the macro environment when compared to the
original projections produced at the time of the HPE Software
acquisition, compounded by the impact of COVID-19. This charge is a
non-cash item and so does not impact the cash generated by the
business in the year which has remained strong.
From an operational standpoint, Micro Focus remains profitable
and highly cash generative delivering $1.2bn in Adjusted EBITDA at
a margin of 39.1% (FY19: $1.4bn Adjusted EBITDA at 40.7% margin)
and free cash flow of $511.2m in FY20 (FY19: $563.3m).
Adjusted EBITDA and free cash flow were towards the upper end of
our expectations in FY20. Enhancing cash flows through cost control
measures and strong working capital management remains a primary
focus area for management.
Update on our three-year plan
The three-year ambition we set was to deliver stable revenues,
Adjusted EBITDA margins towards the mid-40s percent, and be able to
generate at least $700m of free cash flow annually.
These targets were set prior to COVID-19 and given the ongoing
situation and associated uncertainty we remain unable to predict
the magnitude and duration of the impact COVID-19 will have. The
resulting macro-economic impacts are likely to delay the
achievement of these specific objectives, but the principles of
revenue stabilisation and margin expansion, in order to deliver
strong and sustainable levels of free cash flow remain the aim for
FY23 and beyond.
In pursuit of this plan, our main initiatives are focused on two
key objectives. Firstly, evolving our business model to ensure we
continually assess and address customer needs and adapt to changes
in the market to deliver value and capture growth opportunities.
Secondly, delivering operational excellence through business
process and infrastructure simplification with a relentless focus
on improving levels and consistency of execution.
Overall, there was solid progress made in the period.
Evolving our business model
We deliver mission critical technology that helps power the
digital economy. This means we serve a central role in thousands of
core strategic and operational functions within our customers'
business operations.
In doing this we take a differentiated approach focused on
supporting our customers' need to both run and transform their
businesses simultaneously in support of their digital
transformation programmes. This means delivering innovation that
enables customers to leverage existing investments to exploit new
use cases or address new threats.
Our pragmatic approach supports customers in balancing agility,
cost and risk by bridging their existing investments with the
newest technology and helping ensure resources are deployed against
the areas of highest return.
In FY20 we continued to invest significantly in our products
delivering key enhancements and major new releases across every
portfolio. In total we delivered over 500 enhancements or new
releases with notable developments including:
- Information, Management & Governance: major releases of
our leading Compliance & Archiving and Big Data solutions to
deliver expanded cloud capabilities and coverage and support new
cross-industry use cases;
- IT Operations & Management: delivery of a new architecture
and Artificial Intelligence capabilities to enable the rapidly
increasing levels of operational data to be collected, analysed and
actioned more effectively;
- Application Delivery Management: new SaaS capabilities and
advancements in support of modern quality management practices;
- Application Modernisation and Connectivity: major enhancements
to support customers in modernising mainframe workload with
expanded cloud capability further consolidating our leadership
position in this increasingly important area; and
- Security: new Artificial Intelligence and Machine Learning
capabilities, expanded multi-cloud support and enhanced
capabilities to support customers in their key data privacy
initiatives.
Adapting to market changes: transition to SaaS and
Subscription
In FY20, we also began to take a more definitive approach to
delivering Subscription and SaaS based offerings as a key part of
our strategy and to accelerate the transition to these models where
appropriate within our portfolios. The transition is being managed
over multiple financial periods with initial focus on products
where this model is the emerging or de-facto market standard.
In FY20, accomplishments include:
- Investment in infrastructure to improve service levels and
scale with our customer demands;
- The realignment of compensation plans to deliver this
strategy; and
- The release of multiple Security and Big Data offerings in
SaaS and Subscription form delivering year-on-year growth in
bookings and new logos in both portfolios.
In FY21, we will continue to invest in improving our SaaS
infrastructure and develop existing and new offerings. In FY21, we
will lead with SaaS or Subscription in targeted areas of our
portfolio and expect, by FY22, SaaS or Subscription to be the only
offerings available in these targeted areas.
Capturing growth: Security and Big Data
In FY20 we began to take a differentiated approach to investment
and operational management in Security and Big Data, in order to
better position ourselves to address growth opportunities.
Examples of the initial output from this increased investment
are outlined above and the priorities remain: delivering new
innovation in response to rapidly changing market opportunities,
expanded cloud and cross-industry use case support and further
developing existing and new SaaS and Subscription offerings.
In Security we also completed a small acquisition to deliver
native Security, Orchestration and Remediation (S.O.A.R.)
capabilities, which removed a gap in our offering. Our Security
portfolio is broad and our experience and expertise is deep. From
this foundation we will continue to focus on delivering
comprehensive solutions and thought leadership around Cyber
Resilience as customers seek to protect their businesses from new
and increasingly sophisticated threats.
Changes in operational management have focused on improving
speed and agility through better end-to-end organisational
alignment. This has been supported by more targeted customer
coverage underpinned by the addition of dedicated and improved
leadership capacity and talent, and specialist sales resources.
In FY21, we will consolidate improvements made and seek to
accelerate in key areas of application security, data privacy and
next generation security incident and event management. In addition
to delivering on our product innovation commitments, progress will
be underpinned by ongoing investment in specialist sales capability
and the development of improved indirect channels to market.
Operational effectiveness
Delivering consistently: Go-To-Market
Our goal is delivering consistent, sustained improvement to our
revenue performance through increases in sales productivity and the
more effective alignment of our resources to opportunity. Our sales
processes have been overly complex in part because acquisitions
have not been fully integrated.
Notable achievements include:
- A single methodology deployed globally to enable more
consistent execution;
- A new planning process to drive more effective deployment of
resources to the right opportunities within our customer base and
specialisation by Product Portfolio to better pursue market
opportunities;
- Improvements to the leadership team through internal moves and
significant levels of external recruitment; and
- Improved enablement training and the implementation of new
support tools.
In the second half of the year, these changes led to better
predictability and improved performance across key sales metrics
and over time we expect them to deliver better revenue performance
for the Group.
The objective for FY21 is to ensure these changes are fully
embedded in the organisation and accelerate initiatives aimed at
improving performance in maintenance and delivering new
capabilities in both SaaS and Subscription to capture new
opportunities and further improve the mix of recurring revenue
within the Group.
Improving infrastructure: completion of simplification
programmes
We continue to execute multiple programmes to deliver improved
operational effectiveness and agility. These programmes are
advanced and the key project to complete remains the migration to
one set of core IT systems.
Digital transformation programmes on this scale are inherently
complex, in this instance made even more by COVID-19 presenting the
unique challenge of having to execute the programme with fully
remote internal and system integration partner teams.
I am pleased to report that on 13 January 2021 we began to
transition employees to our new IT infrastructure which is an
important milestone for the Group but the work ahead remains
significant, impacting every employee and our core business
processes. This migration will happen in two phases, one now and
the second in the summer, followed by the period of familiarisation
and stabilisation typical in any global IT project.
The priority for FY21 is to complete this transition as
effectively as possible with minimum disruption to day-to-day
operations. When complete and embedded this will provide the
foundation for capturing operational improvements and efficiencies
evident and achievable in the business. The completion will also be
an important step culturally, facilitating closer alignment of our
operations, regardless of heritage company, enabling our people to
work more effectively and productively as one team focused on
improving our business and delivering a much smoother and richer
experience for our customers.
The impact of COVID-19 has also presented opportunities for us
to re-evaluate how and where we work. Not only the dynamic of home
working versus office working, but also how and where key business
processes are executed. This, combined with our systems work
outlined above, presents additional opportunities to further
improve efficiencies into the future. We will carefully consider
each opportunity, in particular whether the future efficiencies and
benefits outweigh the additional one-off costs in the short-term,
and will proceed where we see the opportunity to generate
longer-term value.
Environmental and social responsibility
Micro Focus is celebrating the one year anniversary of our
INSPIRE programme, a framework for our environmental and social
responsibility commitments, which contribute to economic
development while improving the quality of life of our workforce
and their families as well as of our local communities and society
at large. The leadership team is proud of the significant progress
made in our first year and I am confident that we can go much
further in our goals in this important area.
Capital allocation
Cash generation and working capital management remain strengths
and priorities for the Group. Improvements have been delivered in
the period despite the challenges of COVID-19 and as a result Net
debt reduced in absolute dollar terms by $0.4bn in the fiscal
period.
We refinanced our term loan structure and revolving credit
facility with voluntary repayments made, revolving credit facility
requirements reduced and maturities now extended to 2024 and
beyond.
The cash generative nature of our business means we can operate
effectively at current leverage levels. That said, the board
remains committed to reducing leverage towards historical target
levels and will continue to reduce net debt in absolute dollar
terms in the coming fiscal periods.
The board has reviewed and considered the key factors of cash
performance, balance sheet and macro-economic factors and have
concluded it is now appropriate to re-instate the Group's dividend.
The board is recommending a final dividend of 15.5 cents for FY20.
This is equivalent to half a year's dividend at 5 x cover.
In terms of dividend policy, we will initially aim to pay a
dividend which is approximately five times covered by our Adjusted
Profit After tax in each financial period. Our aim is then to
increase the percentage of profits distributed to shareholders as
we execute our strategy of stablising the business.
Outlook
Micro Focus delivers enterprise software across multiple
geographies and vertical sectors. We believe our core value
propositions and capabilities offer significant value to customers
as they pursue their digital transformation programmes and remain
fully focused on delivering the product innovation they need to
succeed.
The majority of our revenues are contractual and recurring in
nature and management is targeting initiatives to increase this
mix. The resilience this high level of recurring revenue affords
can be seen in the company's ability to generate cash and manage
costs as required even within a challenging macro environment. We
have made significant progress in cost rationalisation and will
continue to focus on this area in order to maximize the potential
profit and cash flow that our revenue streams represent.
We are focussed on delivering the objective of revenue
stabilisation as we exit FY23 and continue to target incremental
improvements in revenue trajectory annually in order to achieve
this goal.
The second half of FY20 saw a sequential improvement in revenue
performance and we have continued this momentum into the first
quarter of FY21.
The board and management team is focused on delivering our
three-year turnaround plan. We are confident this work will
simplify operations, strengthen Product Portfolios and sharpen our
ability to address the needs of our customers at the same time as
delivering attractive and sustainable shareholder returns over the
long-term.
Stephen Murdoch
Chief Executive Officer
8 February 2021
Chief Financial Officer's report
"Micro Focus has a highly cash generative operating model. The
Group is one-year into a three-year transformation which we believe
will deliver substantial returns for shareholders".
Brian McArthur-Muscroft
Chief Financial Officer
Statutory results
Revenue from continuing operations
$3.0bn
Compared to $3.3bn in the year ended 31 October 2019.
Operating lOSS
$2.7bn
After recognising an impairment charge of $2.8bn. Compared to
profit of $0.2bn in the year ended 31 October 2019.
loss for the year
$3.0bn
Compared to profit of $1.5bn in the year ended 31 October
2019.
Introduction
The current financial period represents the first year of a
three-year turnaround plan, which the Group has embarked upon
following the Strategic & Operational Review presented in
February 2020.
COVID-19 has required the board to adapt these plans in order to
protect the business for the long-term. For Micro Focus, this meant
the cancellation of the final FY19 dividend and the suspension of
the FY20 interim dividend. However, the Group's business model has
remained relatively resilient with only a modest impact on Adjusted
EBITDA margins following the implementation of a number of cost
control programmes. We have continued to deliver strong cash
performance and have no significant bad debts. In addition, the
board made the conscious decision to ensure no state support was
requested in any of the countries we operate within during the
period. The board also extended the Group's financing arrangements,
with no maturities now until June 2024.
Statutory results Year ended Year ended
31 October 2020 31 October 2019
Continuing operations $m $m
-------------------------- ----------------- -----------------
Revenue 3,001.0 3,348.4
-------------------------- ----------------- -----------------
Operating profit (before
exceptional items) 350.2 515.9
Exceptional items (3,011.6) (294.2)
-------------------------- ----------------- -----------------
Operating (loss)/profit (2,661.4) 221.7
Net finance costs (279.0) (255.8)
-------------------------- ----------------- -----------------
Loss before tax (2,940.4) (34.1)
Taxation (34.2) 16.0
-------------------------- ----------------- -----------------
Loss from continuing
operation (2,974.6) (18.1)
Profit from discontinued
operations 5.1 1,487.2
-------------------------- ----------------- -----------------
(Loss)/profit for the
year (2,969.5) 1,469.1
-------------------------- ----------------- -----------------
Revenue
In the year ended 31 October 2020, the Group generated revenue
of $3,001.0m, which represents a decrease of 10.4% on the results
for the year ended 31 October 2019. The rate of decline includes a
0.4% decrease due to the strengthening of the dollar against most
major currencies.
In order to fully understand the underlying trading performance
of the continuing operations, the directors feel revenue is better
considered on a constant currency basis ("CCY") when comparing the
year ended 31 October 2020 and the year ended 31 October 2019.
Excluding the impact of foreign exchange, revenue declined by
10.0%. Revenue performance presented on a CCY basis can be found
later in this report.
Operating loss
In the year ended 31 October 2020, the Group generated an
operating loss of $2,661.4m (31 October 2019 profit: $221.7m). The
reduction was driven by an impairment charge of $2,799.2m, which
was recorded in the year. The impact of the impairment was
partially offset by reduced spend on exceptional items which
decreased from $294.2m in the year ended 31 October 2019 to $212.4m
in the year ended 31 October 2020, as well as the multiple cost
control programmes implemented in response to the year.
Exceptional items (included within operating profit)
Year ended Year ended
31 October 31 October 2019
2020
Exceptional items $m $m
--------------------------------------------------- ------------ -----------------
System and IT infrastructure costs 100.6 126.3
Integration costs 52.0 119.6
Severance 28.3 32.1
Property costs 3.6 16.3
--------------------------------------------------- ------------ -----------------
MF/HPE Software business integration
related costs 184.5 294.3
HPE Software business acquisition/pre-acquisition
costs - (3.9)
Other acquisition costs 0.2 5.4
Restructuring property costs 11.6 -
Restructuring severance 5.4 -
Gain on disposal of Atalla - (3.7)
Other costs 10.7 2.1
--------------------------------------------------- ------------ -----------------
212.4 294.2
Impairment charge 2,799.2 -
--------------------------------------------------- ------------ -----------------
Total exceptional costs (reported
in Operating (loss)/profit)* 3,011.6 294.2
--------------------------------------------------- ------------ -----------------
* Exceptional costs excludes gain on disposal of SUSE, which is
separately included in Profit from discontinued operations.
In the year ended 31 October 2020, exceptional costs totalled
$3,011.6m, of which $2,799.2m related to impairment of goodwill
(see below). Excluding this impairment charge, exceptional costs
predominantly relate to the integration of the HPE Software
business. The costs incurred in the year include:
- System and IT infrastructure costs of $100.6m principally
reflect the IT migration of the Micro Focus business onto a single
IT platform ("Stack C");
- Integration costs of $52.0m across a wide range of projects
undertaken to conform, simplify and increase efficiency across the
two businesses;
- Severance costs of $28.3m in relation to on-going headcount
reductions as we continue to remove duplication and streamline the
continuing operations; and
- Property costs of $3.6m as the Group continues the process of
simplifying the real estate footprint.
The remaining costs of the HPE business integration primarily
relate to the Stack C programme. In the year, we have made good
progress in delivering this programme despite the substantial
impact COVID-19 has had on the delivery of this project. At the
date of this report, a substantial number of the workforce have
transitioned to the new stack with the remaining employees
transferring later in FY21. The remaining cost of the programme is
estimated to be approximately $80m and will be incurred in
FY21.
In addition, the Group incurred costs of $10.7m associated with
the Strategic & Operational Review, included in Other costs.
These costs reflect third party advisor fees in relation to the
review of the business, potential strategic options avaliable and
implementation of these initiatives.
In the period, the board has undertaken an initial review of the
Group's required operating model post-COVID-19 and as a result has
identified material cost savings which can be achieved by adapting
the way we work and the reduction of our real estate footprint.
These programmes are designed to reduce fixed costs associated with
property and gain efficiencies. We estimate the exceptional costs
associated with this programme in FY21 to be between $50.0m -
$60.0m and these programmes are expected to deliver annualised cost
savings of approximately $90.0m. More importantly, these changes
will result in a more agile cost base in the outer years.
Goodwill impairment
Impairment of goodwill is tested annually, or more frequently
where there is an indication of impairment. The Group has
recognised an impairment charge of $2,799.2m in the year. This
impairment charge reflects our trading performance and the macro
environment when compared to the original projections produced at
the time of the HPE Software acquisition, which was exacerbated by
the impact of COVID-19. This charge is a non-cash item and so does
not impact the cash generated by the business in the year which has
remained strong.
Net finance costs
Net finance costs were $279.0m in the year ended 31 October
2020, compared to $255.8m in the year ended 31 October 2019.
Finance costs predominantly relate to interest on the term loans
put in place as part of the transaction to acquire the HPE Software
business. In addition, included within the net finance costs is
$58.0m in relation to the amortisation of facility costs and
original issue discounts, which were paid on initiation of the term
loan.
The majority of the increase in net finance costs was caused by
bank interest received reducing by $13.9m year-on-year. Interest
income in the year ended 31 October 2019 was earned in respect of
cash held following the $2.53bn disposal of SUSE, prior to returns
to shareholders. The remainder of the increase reflects the change
in interest rates as a result of the refinancing activities
undertaken by the Group in the current financial period.
In May 2020, the Group successfully refinanced its $1.4bn term
loan due for repayment in November 2021. The successful completion
of this refinancing was particularly pleasing given the strong
demand for the Group's debt, at a time of significant
macro-economic uncertainty. The offering was substantially
oversubscribed with approximately $2.5bn in the order book at
closing. As part of the refinancing the Group also elected to repay
$143m of the original term loan facility, which partially offset
the increased interest expense.
Furthermore, the Group has access to a $350m Revolving Credit
Facility ("RCF") which was undrawn as at 31 October 2020. This
facility was also refinanced in the period, with the Group electing
to reduce the size of the facility from $500m and extend the
facility to June 2024. As a result of the refinancing initiatives,
there are no maturity dates on Group facilities prior to June
2024.
Following the adoption of IFRS 16 on 1 November 2019, finance
costs also include a modest amount of interest in relation to
capitalised leases.
The Group holds interest rate swaps to hedge against the cash
flow risk in the LIBOR rate charged on $2,250.0m of the debt issued
by Seattle Spinco, Inc. (the investment company used to acquire the
HPE Software business) from 19 October 2017 to 30 September 2022.
Under the terms of the interest rate swaps, the Group pays a fixed
rate of 1.95% and receives one month USD LIBOR.
Taxation
The Group reported a tax charge for the year ended 31 October
2020 of $34.2m (2019: credit of $16.0m).
Profit from discontinued operation
The profit on the disposal of discontinued operation of $5.1m in
the year ended 31 October 2020 related to conclusion of the working
capital settlement on the disposal of the SUSE business and
adjustments in respect of income tax balances in relation to
pre-transaction periods (2019: profit $1,487.2m).
Reconciliation from statutory results to Alternative Performance
Measures
This section sets out a reconciliation from the statutory
results presented above to Alternative Performance Measures used by
the business to assess operating performance and liquidity
including Adjusted EBITDA, Adjusted Profit before tax and Adjusted
EPS. For further details relating to the definition and relevance
of such measures, please refer to the Alternative Performance
Measures of these financial statements. The Group believes that
these and similar measures are used widely by certain investors,
securities analysts and other interested parties as supplemental
measures of performance and liquidity.
Adjusted EBITDA
A reconciliation between Operating profit and Adjusted EBITDA is
shown below:
Year ended Year ended
31 October 31 October
2020 2019
$m $m
-------------------------------------------------- ------------ ------------
Operating (loss)/ profit (2,661.4) 221.7
Add back/(deduct):
Exceptional items (reported in Operating profit) 3,011.6 294.2
Share-based compensation charge 17.0 68.8
Amortisation of intangiblr assets 674.1 716.5
Depreciation of property, plant anf equipment 42.0 52.6
Depreciation of right-of-use assets 76.9 13.9
Product development intangible costs capitalised (16.2) (16.5)
Foreign exchange loss 29.7 11.3
-------------------------------------------------- ------------ ------------
Adjusted ETBITDA* at actual rates 1,173.7 1,362.5
Constant currency adjustment - (3.8)
-------------------------------------------------- ------------ ------------
Constant currency Adjusted EBITDA* 1,173.7 1,358.7
-------------------------------------------------- ------------ ------------
* Adjusted EBITDA is for continuing operations only.
Adjusted Profit before tax
Adjusted Profit before tax is defined as loss before tax
excluding the effects of share-based compensation, the amortisation
of purchased intangible assets, and all exceptional items.
The following tables are reconciliations from loss before tax
for the period to Adjusted Profit before tax:
Year ended Year ended
31 October 31 October
2020 2019
Continuing operations $m $m
--------------------------------------- ------------ ------------
Loss before tax (2,940.4) (34.1)
Adjusting items:
Share-based compensation charge 17.0 68.8
Amortisation of purchased intangibles 604.1 655.7
Exceptional items 3,011.6 294.2
--------------------------------------- ------------ ------------
3,632.7 1,018.7
Adjusted Profit before tax 692.3 984.6
--------------------------------------- ------------ ------------
Adjusted effective tax rate
The tax charge on Adjusted Profit before tax for the year ended
31 October 2020 was $174.1m (2019: $235.7m), which represents an
effective tax rate ("ETR") on Adjusted Profit before tax ("Adjusted
ETR") of 25.1% (2019: 23.9%). The Group's Adjusted tax charge is
subject to various factors, many of which are outside the control
of the Group. The current economic environment creates an increase
in the level of uncertainty and may result in changes to this tax
rate in future accounting periods.
In April 2019, the European Commission published its final
decision on its state aid investigation into the UK's 'Financing
Company Partial Exemption' legislation and concluded that part of
the legislation is in breach of EU State Aid rules. Similar to
other UK based international groups that have acted in accordance
with the UK legislation in force at the time, the Group may be
affected by the finding and is monitoring developments. The UK
government and UK-based international companies, including the
Group, have appealed to the General Court of the European Union
against the decision. The UK government is required to start
collection proceedings and on 5 February 2021, State Aid charging
notices (excluding interest) were received totalling $45.2m and
will be settled by the Group within 30 days. In addition, there has
been a challenge from the UK Tax Authorities into the historic
financing arrangements of the Group. Based on its current
assessment and supported by external professional advice, the Group
consider that the maximum liability of both of these items to be
$60m.
Year ended Year ended
31 October 2020 31 October 2019
---------------------------------- ---------------------------------
Effective tax rate (continuing Adjusting Adjusted Adjusting Adjusted
operations) Actual items Measures Actual items measures
$m $m $m $m $m $m
-------------------------------- ---------- ---------- ---------- --------- ---------- ----------
(Loss)/profit before
tax (2,940.4) 3,632.7 692.3 (34.1) 1,018.7 984.6
Taxation (34.2) (139.9) (174.1) 16.0 (251.7) (235.7)
-------------------------------- ---------- ---------- ---------- --------- ---------- ----------
(Loss)/profit after taxation (2,974.6) 3,492.8 518.2 (18.1) 748.9
-------------------------------- ---------- ---------- ---------- --------- ---------- ----------
Effective tax rate (1.2)% 25.1% 46.9% 23.9%
-------------------------------- ---------- ---------- ---------- --------- ---------- ----------
In computing Adjusted Profit before tax for the year ended 31
October 2020, $3,632.7m of Adjusting items have been added back
(see Adjusted Profit before tax section above) and the associated
tax is $139.9m.
Earnings per share and Adjusted Earnings per share
The table below sets out the Earnings per Share ("EPS") on both
a reported and Adjusted basis. The Group is also required to
present EPS for both the continuing and discontinued
operations.
Year ended Year ended
31 October 2020 31 October 2019
---------------------- -------------------
Basic Diluted(1) Basic Diluted
Cents Cents Cents Cents
------------------------ --------- ----------- -------- ---------
Continuing operations (886.15) (886.15) (4.87) (4.87)
Discontinued operation 1.52 1.52 393.37 389.16
------------------------ --------- ----------- -------- ---------
Total EPS (884.63) (884.63) 388.50 384.35
------------------------ --------- ----------- -------- ---------
Adjusted EPS
Continuing operations 154.37 154.37 198.01 195.89
Discontinued operation 2.17 2.17 8.25 8.16
------------------------ --------- ----------- -------- ---------
Adjusted EPS 156.54 156.54 206.26 204.05
------------------------ --------- ----------- -------- ---------
1 The Group reported a loss from continuing and discontinued
operations attributable to the ordinary equity shareholders of the
Company for the year ended 31 October 2020. The Diluted EPS is
reported as equal to Basic EPS, as no account can be taken of the
effect of dilutive securities under IAS 33.
The Adjusted EPS is defined as Basic EPS where the earnings
attributable to ordinary shareholders are adjusted by adding back
gains on discontinued operations, exceptional items, share-based
compensation charge and the amortisation of purchased intangibles
and the tax attributable to these charges. These are presented as
management believes they are important to understanding the impact
that the underlying trading performance has on the Group's EPS.
In the year ended 31 October 2020, the Group generated an
Adjusted EPS from continuing operations of 154.37 cents. This
compares to 198.01 cents in the year ended 31 October 2019. The
decrease was primarily related to a reduction in Adjusted EBITDA as
the Group seeks to stabilise the business as part of the three-year
turnaround plan.
Micro Focus - Alternative Performance Measures
CONSTANT CURRENCY REVENUE
(10.0)%
in the year ended 31 October 2020.
CONSTANT CURRENCY COSTS
(7.6)%
Continued operational efficiencies delivering cost reduction of
7.6% year-on-year.
CONSTANT CURRENCY ADJUSTED EBITDA
$1.2bn
in the year ended 31 October 2020, compared to $1.4bn in the
year ended 31 October 2019.
Constant currency adjusted ebitda MARGIN
39.1%
Adjusted EBITDA margin decrease of 1.6ppt from 40.7% in the year
ended 31 October 2019.
The table below has been prepared on a constant currency basis
and is for continuing operations only. See the Alternative
Performance Measures section for further detail.
Year ended Year ended Year-on-year
31 October 31 October change
2020 2019
$m $m %
------------------------------------------ ------------ ------------ -------------
Constant currency revenue:
Licence 646.5 799.2 (19.1)%
Maintenance 1,921.2 2,050.0 (6.3)%
SaaS & other recurring 245.5 278.4 (11.8)%
Consulting 188.4 215.3 (12.5)%
------------------------------------------ ------------ ------------ -------------
Constant currency revenue before harcut 3,001.6 3,342.9 (10.2)%
Deferred revenue haircut (0.6) (6.8) (91.2)%
------------------------------------------ ------------ ------------ -------------
Constant currency revenue 3,001.0 3,336.1 (10.0)%
------------------------------------------ ------------ ------------ -------------
Constant currency costs (1,827.3) (1,977.4) (7.6)%
------------------------------------------ ------------ ------------ -------------
Constant currency Adjusted EBITDA 1,173.7 1,358.7 (13.6)%
------------------------------------------ ------------ ------------ -------------
Constant currency Adjusted EBITDA margin
% 39.1% 40.7% (1.6ppt)
------------------------------------------ ------------ ------------ -------------
Revenue by stream performance (versus constant currency
comparatives)
In the year ended 31 October 2020, the four revenue streams
performance versus the year ended 31 October 2019 was as
follows:
Licence revenue declined by 19.1%. The Group's Licence revenue
performance in the year was impacted by the Go-To-Market
transformation activities undertaken during the period, which are
designed to moderate the rate of revenue decline over the next
three years. In the first quarter, a new global sales model was
launched and a number of sales leadership changes were made as part
of this transformation which has resulted in an improvement in the
underlying sales operating metrics. This gives the board confidence
that the changes are beginning to have an impact and in the second
half of the financial period, the rate of Licence revenue decline
moderated.
The stabilisation of Licence revenue remains a key objective of
the Group and the steps outlined within the Chief Executive's
Strategic review of this document are the focus areas required to
improve the performance in future periods.
Maintenance revenue declined by 6.3%. The maintenance trends and
renewal rates vary at a product group level with different growth
profiles witnessed at a portfolio level (as set out later in this
section).
The change in product mix combined with corrective actions in
underperforming areas of the portfolio are intended to drive a
gradual moderation in the rate of maintenance decline as part of
the overall revenue stabilisation plans.
SaaS and other recurring revenue declined by 11.8%. In February
2020, the board outlined the intention to transition certain areas
of the business to subscription or SaaS revenue models. The current
financial period is the first year of this multi-period transition
and the focus has been on extending the capabilities within the
Security and Big Data product offerings.
In addition, the Group also took deliberate actions to further
rationalise unprofitable operations and practices and refocused
resources and investments to deliver the product enhancements
required for long-term success. As a result, SaaS and other
recurring revenue declined in line with our expectations during the
current financial year.
Consulting revenue declined by 12.5%. The work to re-position
our Consulting revenue stream to focus on projects related to the
sale of new licences and retention of the installed base is broadly
complete and it is anticipated that this revenue stream will
stabilise in future financial periods subject to the impact of
COVID-19.
Revenue by product group (versus constant currency
comparatives)
The Group has more than 300 products reported under five product
groups. Investment decisions are made at a granular level by
product depending on their growth trajectories and the profile of
markets they participate in, and are intended to deliver the
greatest return on investment. The nature of the software order
cycle means that when considering underlying revenue trends,
year-on-year growth rates by product group are not always
indicative of an underlying trend and will be impacted by the
timing of customer projects.
Year ended
31 October 2020
----------------------------------------------------------------
SaaS &
other
Licence Maintenance recurring Consulting Total
$m $m $m $m $m
------------------------ ---------- -------------- ----------- ------------- --------
Product group:
AMC* 138.6 321.6 - 10.1 470.3
ADM* 102.0 439.2 73.9 15.9 631.0
ITOM* 175.1 559.4 4.6 113.9 853.0
Security* 162.6 416.8 33.6 33.1 646.1
IM&G* 68.2 184.2 133.4 15.4 401.2
------------------------ ---------- -------------- ----------- ------------- --------
Revenue before haircut 646.5 1,921.2 245.5 188.4 3,001.6
Haircut - (0.4) (0.2) - (0.6)
------------------------ ---------- -------------- ----------- ------------- --------
Revenue 646.5 1,920.8 245.3 188.4 3,001.0
------------------------ ---------- -------------- ----------- ------------- --------
Regional:
North America 276.4 974.1 187.0 65.8 1,503.3
International 264.7 735.5 46.2 98.8 1,145.2
Asia Pacific & Japan 105.4 211.6 12.3 23.8 353.1
------------------------ ---------- -------------- ----------- ------------- --------
Revenue before haircut 646.5 1,921.2 245.5 188.4 3,001.6
Haircut - (0.4) (0.2) - (0..6)
------------------------ ---------- -------------- ----------- ------------- --------
646.5 1,920.8 245.3 188.4 3,001.0
------------------------ ---------- -------------- ----------- ------------- --------
CCY % change to year ended 31 October
2019**
----------------------------------------------------------------
SaaS &
other
Licence Maintenance recurring Consulting Total
$m $m $m $m $m
------------------------ ---------- -------------- ----------- ------------- --------
Product group:
AMC* (18.9%) (1.3%) - (13.7%) (7.5%)
ADM* (21.4%) (10.3%) (15.3%) (11.7%) (12.9%)
ITOM* (26.2%) (12.7%) (55.3%) (9.6%) (15.9%)
Security* (12.3%) 1.0% (4.0%) (23.4%) (4.5%)
IM&G* (9.8%) 1.5% (8.6%) (6.1%) (4.3%)
------------------------ ---------- -------------- ----------- ------------- --------
Revenue before haircut (19.1%) (6.3%) (11.8%) (12.5%) (10.2%)
Haircut - (93.3%) (75.0%) - (91.2%)
------------------------ ---------- -------------- ----------- ------------- --------
Revenue (19.1%) (6.0%) (11.6%) (12.5%) (10.0%)
------------------------ ---------- -------------- ----------- ------------- --------
Regional:
North America (28.3%) (9.3%) (9.3%) (13.6%) (13.7%)
International (10.1%) (3.3%) (21.4%) (11.3%) (6.6%)
Asia Pacific & Japan (11.5%) (1.8%) (8.2%) (14.1%) (6.0%)
------------------------ ---------- -------------- ----------- ------------- --------
Revenue before haircut (19.1%) (6.3%) (11.8%) (12.5%) (10.2%)
Haircut - (93.3%) (75.0%) - (91.2%)
------------------------ ---------- -------------- ----------- ------------- --------
(19.1%) (6.0%) (11.6%) (12.5%) (10.0%)
------------------------ ---------- -------------- ----------- ------------- --------
* The trends discussed in this section are presented before the
impact of the deferred revenue haircut.
** See page 45 for underlying data for the year ended 31 October
2019.
Application Modernisation Licence revenue declined by 18.9% in the year ended 31
& Connectivity October 2020.
("AMC")
$470.3m Period to period volatility is not unusual in AMC driven
(15.7% of total by the timing of large scale modernisation projects. In
FY20 revenue) the current year, the Group witnessed increasing demand
for such projects; however the initiation of new modernisation
projects has been impacted by COVID-19, with customers
electing to defer such projects to future accounting periods.
Maintenance and Consulting revenues declined by 1.3% and
13.7% respectively, as the level of maintenance and consulting
support to licence sales continued to track at historical
rates.
========================= ===================================================================
Application Delivery Licence revenue declined by 21.4%, Maintenance revenue
Management ("ADM") by 10.3% and SaaS and other recurring revenues declined
$631.0m by 15.3% in the year ended 31 October 2020.
(21.0% of FY20
revenue) The Group's ADM product group has performed below expectation
in the current financial period. In addition to the actions
within the overall Go-To-Market transformation, which
are designed to improve sales execution, we have undertaken
a number of corrective actions specific to ADM. These
actions are focused on product positioning, maintenance
renewals and SaaS offerings. The combination of the Go-To-Market
transformation actions and portfolio specific actions
are aimed at driving improvement in performance within
the portfolio.
========================= ===================================================================
IT Operations Licence revenue declined by 26.2% and Maintenance revenue
Management ("ITOM") by 12.7% in the year ended 31 October 2020.
$853.0m
(28.4% of total Management actions to exit non-core revenue and the licence
FY20 revenue) performance drove the 9.6% decline in Consulting revenue.
This performance is below our expectations and significant
focus is being applied to correct the trajectory. In addition
to the actions within the overall Go-To-Market transformation,
the Group is undertaking structural changes to products
in order to re-position the core proposition within this
product group and achieve a defensible core of stable
recurring revenue.
========================= ===================================================================
Security Licence revenue declined by 12.3% in the year ended 31
$646.1m October 2020.
(21.5% of total
FY20 revenue) In the period, the Group has released a number of new
capabilities and enhancements to the existing products
following investments outlined within the Strategic &
Operational Review. As a result, the Group is seeing moderation
in the rate of decline in a number of sub-portfolios with
some products returning to year-over-year licence growth.
Maintenance revenue increased by 1.0% in the year ended
31 October 2020. This growth is driven by a change in
mix at a sub-portfolio level and an improvement in renewal
rates in our core propositions.
SaaS revenue declined by 4.0% in the year ended 31 October
2020. The majority of work in re-architecting the product
road maps is now complete and as a result, SaaS revenue
in the second half of the current financial year returned
to growth when compared to the second half of the previous
period.
Consulting revenue declined by 23.4% in the year ended
31 October 2020 driven by the deliberate management actions
to deliver a consulting practice more closely aligned
to product implementation and growth in new licence sales.
========================= ===================================================================
Information Management Licence revenue declined by 9.8% in the year ended 31
& Governance ("IM&G") October 2020.
$401.2m
(13.4% of FY20 Maintenance revenues increased by 1.5%. The increase is
revenue) primarily driven by growth in Vertica, the Group's big
data offering. In the period, the Group launched Vertica
EON Mode which is delivered in a subscription form. This
revenue is recorded as a term licence with associated
maintenance, the impact of which being a greater portion
of the revenue is deferred over the life of the contract
when compared to a traditional perpetual model. In the
period, the Group has made encouraging progress with this
transition to subscriptions, with both bookings and new
logos up substantially year-over-year.
In addition, SaaS revenue declined 8.6% due to a deliberate
reduction in revenue generated from managed services offerings
within the product group as we re-architect key offerings
for more flexible cloud deployment options.
Consulting revenue declined by 6.1% over the same period.
========================= ===================================================================
Adjusted EBITDA performance (versus constant currency
comparatives)
The Group generated an Adjusted EBITDA of $1,173.7m in the year
ended 31 October 2020, at an Adjusted EBITDA margin of 39.1%. This
represents a 1.6ppt decrease in Adjusted EBITDA margin between the
periods on a continuing basis. This decline was driven by the
overall revenue decline which has been partially offset by cost
reduction programmes undertaken by the Group.
As indicated as part of our results for the six months ended 30
April 2020, we have taken steps to mitigate the impact on Adjusted
EBITDA from COVID-19. This has been achieved primarily through
close management of variable and discretionary costs, in addition
to a natural reduction in certain costs as a direct result of
COVID-19. These cost measures have been undertaken without the need
to furlough any staff globally.
In addition to this cost management, the board continues to make
the investments outlined as part of the Strategic & Operational
Review primarily in our Security and Big Data products in order to
drive incremental revenue and profit in future accounting
periods.
MFI cash generation
The Group's Consolidated statement of cash flows is presented on
page 31. The table presented below focuses on those items which
specifically relate to the Group's Adjusted free cash flow, which
is considered to be a Key Performance Indicator ("KPI") of the
Group. In the year, we have elected to change our KPI to Adjusted
free cash flow. This change was made as the board feels this
measure more accurately reflects the underlying cash generation of
the business excluding transformation activities. The measure also
aligns to our Remuneration policy, which was set last year,
following a shareholder vote. In the current financial period we
have elected to report both Free cash flow and Adjusted free cash
flow in order to aid comparability between periods.
Year ended Year ended
31 October 31 October
2020 2019
$m $m
----------------------------------------------- ------------ ------------
Cash generated from operations before working
capital 1,050.2 1,177.5
Movement in working captal 32.6 (121.2)
----------------------------------------------- ------------ ------------
Cash generated from operations 1,082.8 1,056.3
Interest payments (207.1) (227.1)
Bank loan costs (47.9) -
Tax payments (149.6) (167.4)
Purchase of intangible assets (60.6) (29.3)
Purchase of property, plant and equipment (26.3) (56.3)
Lease-related capital payments(1) (80.1) (12.9)
----------------------------------------------- ------------ ------------
Free cash flow 511.2 563.3
Cash impact of exceptional 148.9 n/a
----------------------------------------------- ------------ ------------
Adjusted free cash flow 660.1 n/a
----------------------------------------------- ------------ ------------
(1) Lease-related capital payments are now included as a
financing cash flow following the adoption of IFRS 16.
The Group has continued to be highly cash generative in the year
ended 31 October 2020, generating $511.2m of Free cash flow
compared to $563.3m in the year ended 31 October 2019. Adjusted
free cash flow for the period totalled $660.1m.
Cash generation continues to be a key focus area of the
business; the decline year-on-year includes one-time costs of
$47.9m associated with the refinancing of the Group's debt in the
current fiscal period, the adoption of IFRS 16 and the inclusion of
four months SUSE trading performance (Adjusted EBITDA c.$40m) in
the prior year. Excluding these items, the Group's Free cash flow
has increased year-on-year despite the reduction in Adjusted
EBITDA.
The impact of IFRS 16 is such that the presentation of
individual line items, notably Adjusted EBITDA, Interest payments
and lease-related capital payments are not comparable year-on-year.
In the table above, the presentation of free cash flow in the year
ended 31 October 2019 has been revised to include lease-related
capital payments. This means total free cash flow is not impacted
year-on-year by changes to IFRS 16 and is therefore comparable.
In addition, the Group continued to reduce the trade receivables
balance and collect aged receivables in the period. This resulted
in an Adjusted cash conversion rate of 112.6% (31 October 2019:
95.3%). See page 18 in the Alternative Performance Measures for
further detail of cash conversion.
In the year ended 31 October 2020, purchases of intangible
assets (relating predominantly to software licences) totalled
$60.6m compared to $29.3m in the year ended 31 October 2019. In
addition, purchase of property, plant and equipment decreased from
$56.3m to $26.3m over the same period.
The Group's ability to preserve Free cash clow whilst
transforming our business demonstrates the resilience of our
business model. The cash impact of exceptional items reduced FY20
cash flow by $148.9m. Excluding these items, the Group generated an
Adjusted free cash flow of $660.1m
Net debt
As at 31 October 2020, net debt was $4,153.5m (31 October 2019:
$4,338.5m). In the period, the Group adopted the IFRS 16 accounting
standard in respect of leases. This change in accounting standard
results in an increase in both Net debt and Adjusted EBITDA, and
modestly reduces leverage. In order to demonstrate the impact the
below table shows Net debt excluding IFRS 16 (as reported in FY19)
and including IFRS 16, which is how the Group will disclose net
debt going forward.
This represents a net debt to Adjusted EBITDA ratio as
follows:
Including IFRS 16 Excluding IFRS
Lease liabilities 16
Lease liabilities
-------------------------- --------------------------
Year ended Year ended Year ended Year ended
31 October 31 October 31 October 31 October
2020 2019 2020 2019
Post-IFRS Post-IFRS Pre-IFRS Pre-IFRS
16 16 16 16
$m $m $m $m
-------------------------------- ------------ ------------ ------------ ------------
Adjusted EBITDA 1,173.7 1,428.4 1,098.0 1,362.5
Net Debt (4,153.5) (4,608.3) (3,923.3) (4,338.5)
Net debt/Adjusted ETBIDA ratio 3.5 times 3.2 times 3.6 times 3.2 times
-------------------------------- ------------ ------------ ------------ ------------
We have continued to reduce our net debt in absolute dollar
terms by $454.8m in the fiscal period. The Group's medium-term
leverage target remains 2.7x Adjusted EBITDA. The current leverage
remains above this level, due to the on-going investments we are
making in the business.
The Group intends to reduce leverage back to this level in the
medium-term and will balance debt repayments and equity returns in
the short-term in order to deliver on this.
In addition to the term loans and cash reserves, the Group has
access to a $350m revolving credit facility, which is undrawn at 31
October 2020.
Consolidated statement of financial position
The Group's Consolidated statement of financial position is
presented on pages 27 to 28. A summarised version is presented
below:
Year ended Year ended
31 October 31 October
2020 2019
$m $m
--------------------------------------------------- ------------ ------------
Non-current assets 9,605.0 12,846.7
Current assets 1,541.8 1,448.1
--------------------------------------------------- ------------ ------------
Total assets 11,146.8 14,294.8
--------------------------------------------------- ------------ ------------
Current liabilities 1,788.3 1,802.0
Non-current liabilities 6,143.4 6,216.5
--------------------------------------------------- ------------ ------------
Total liabilities 7,931.7 8,018.5
--------------------------------------------------- ------------ ------------
Net assets 3,215.1 6,276.3
--------------------------------------------------- ------------ ------------
Total equity attributable to owners if the parent 3,215.1 6,275.0
Non-controlling interests - 1.3
--------------------------------------------------- ------------ ------------
Total equity 3,215.1 6,276.3
--------------------------------------------------- ------------ ------------
The net assets of the Group have decreased from $6,276.3m to
$3,215.1m between 31 October 2019 and 31 October 2020. In the year,
the key movements were as follows:
- Non-current assets decreased by $3,241.7m to $9,605.0m
primarily due to the impairment of the Group's goodwill of
$2,799.2m recognised in the year, as well as $674.1m resulting from
the annual amortisation charge on intangible assets. These
reductions are partially offset by the recognition of $207.2m of
right-of-use assets as a result of the adoption of IFRS 16 'Leases'
during the period;
- Current assets increased by $93.7m to $1,541.8m driven by an
increase in cash and cash equivalents of $381.5m, which was offset
by a reduction in trade and other receivables of $301.5m. Trade and
other receivables decreased due to a reduction of aged receivables
of $225.0m. The reduction in aged receivables has been a continuing
key focus of the finance team in the financial year. The increase
in cash and cash equivalents is the result of the cash collected
from trade and other receivables and actions taken during the
period to retain cash so as to maximise the Group's resilience to
any financial risks resulting from the on-going COVID-19 pandemic
including the cancellation of the FY19 final dividend and the
decision to not pay an FY20 interim dividend;
- Current liabilities decreased by $13.7m to $1,788.3m,
primarily due to a $107.5m reduction in trade and other payables,
offset by an increase in lease obligations of $70.4m as a result of
the adoption of IFRS 16 and an increase of $21.4m in short-term
borrowings; and
- Non-current liabilities decreased by $73.1m to $6,143.4m,
primarily due to a $163.0m reduction in current and deferred tax
liabilities, a decrease in borrowings of $51.8m, and a decrease of
$32.7m of contract liabilities, offset by an increase in lease
obligations of $156.5m as a result of the adoption of IFRS 16 and a
$41.4m increase in the derivative liability.
Other financial matters
IFRS 16 "Leases"
The Group adopted IFRS 16 "Leases" from the transition date of 1
November 2019. Under the IFRS 16 adoption method chosen by the
Group, prior-year comparatives are not restated to conform to the
new policies.
Consequently, the year-on-year change of profit and Adjusted
EBITDA in the year ended 31 October 2020 is impacted by the change
in policies. The impact on Adjusted EBITDA and profit for the year
ended 31 October 2020 is estimated at an increase of $75.7 and a
decrease of $3.1m respectively.
Contractual cash obligations
The following table reflects a summary of obligations and
commitments outstanding as of 31 October 2020:
Payment due by period
-----------------------------------------------------------
Less than After
1 year 1-3 years 3-5 years 5 years Total
$m $m $m $m $m
----------------------------------- ---------- ------------ ------------ --------- --------
Debt principal repayment 34.3 128.2 4,570.7 - 4,733.2
Interest payments on debt 169.3 326.3 159.0 - 654.6
----------------------------------- ---------- ------------ ------------ --------- --------
Total excluding lease obligations 203.6 454.5 4,729.7 - 5,387.8
Lease obligations 82.2 112.8 49.3 36.3 280.6
----------------------------------- ---------- ------------ ------------ --------- --------
Total including leases 285.8 567.3 4,779.0 36.3 5,668.4
----------------------------------- ---------- ------------ ------------ --------- --------
Dividend
The board proposes a final dividend of 15.5 cents, taking total
dividend per share to 15.5 cents for the period. The dividend will
be paid in Pound Sterling equivalent to 11.3 pence per share, based
on an exchange rate of GBP1 = $1.37, the rate applicable on 8
February 2021, the date on which the board resolved to propose the
dividend. Subject to approval by shareholders, the dividend will be
paid on 15 April 2021 to shareholders on the register at 12 March
2021.
Brian McArthur-Muscroft
Chief Financial Officer
8 February 2021
Alternative Performance Measures
The Group uses certain measures to assess the financial
performance of its business. These measures are termed "Alternative
Performance Measures" because they exclude amounts that are
included in, or include amounts that are excluded from, the most
directly comparable measure calculated and presented in accordance
with IFRS, or are calculated using financial measures that are not
calculated in accordance with IFRS.
The Group uses such measures to measure operating performance
and liquidity in presentations to the board and as a basis for
strategic planning and forecasting, as well as monitoring certain
aspects of its operating cash flow and liquidity. The Group
believes that these and similar measures are used widely by certain
investors, securities analysts and other interested parties as
supplemental measures of performance and liquidity.
The Alternative Performance Measures may not be comparable to
other similarly titled measures used by other companies and have
limitations as analytical tools and should not be considered in
isolation or as a substitute for, or superior to, the equivalent
measures calculated and presented in accordance with IFRS.
An explanation of the relevance of each of the Alternative
Performance Measures, a reconciliation of the Alternative
Performance Measures to the most directly comparable measures
calculated and presented in accordance with IFRS and a discussion
of their limitations is set out below. The Group does not regard
these Alternative Performance Measures as a substitute for, or
superior to, the equivalent measures calculated and presented in
accordance with IFRS.
The Group has adopted IFRS 16 "Leases" at 1 November 2019,
therefore results for the year ended 31 October 2020 include the
impact of adopting IFRS 16. The impact of the adoption of IFRS 16
on the definition of Alternative Performance Measures is determined
based on the relative importance of the impact as well as
practicalities in obtaining relevant prior year data as
follows:
-- The definition of Alternative Performance Measure 6 "Free
Cash Flow" has been adjusted, so that the resulting free cash flow
is consistent for each period.
-- Alternative Performance Measures 2 "EBITDA and Adjusted
EBITDA", 7 "Net Debt" and 8 "Adjusted cash conversion ratio" have
not been adjusted and therefore are not comparable
year-on-year.
-- Alternative Performance Measures 2 "EBITDA and Adjusted
EBITDA" includes greater depreciation in the year ended 31 October
2020 than in the year ended 31 October 2019 as only depreciation on
IAS 17 finance leases is included for the year ended 31 October
2019.
-- Alternative Performance Measure 7 "Net Debt" includes higher
lease liabilities at 31 October 2020 than 31 October 2019, as only
IAS 17 finance lease liabilities were included at 31 October
2019.
No other Alternative Performance Measures are impacted by the
adoption of IFRS 16.
1. Impact of deferred revenue haircut
The following table shows the impact of the acquisition
accounting adjustment of deferred revenue haircut (i.e. the
unwinding of fair value adjustment to acquired deferred revenue) on
reported revenues.
Year ended Year ended
31 October 2020 31 October 2019
-------------------------------------- -------------------------------------
Continuing Discontinued Continuing Discontinued
operations operation Total operations operation Total
$m $m $m $m $m $m
---------------------------------- ------------ ------------- --------- ------------ ------------- --------
Revenue before deferred
revenue haircut 3,001.6 - 3,001.6 3,355.2 127.1 3,482.3
Unwinding of fair value
adjustment to acquired deferred
revenue (0.6) - (0.6) (6.8) (0.1) (6.9)
---------------------------------- ------------ ------------- --------- ------------ ------------- --------
Revenue 3,001.0 - 3,001.0 3,348.4 127.0 3,475.4
---------------------------------- ------------ ------------- --------- ------------ ------------- --------
2. EBITDA and Adjusted EBITDA
EBITDA is defined as net earnings before finance costs, finance
income, taxation, share of results of associates, depreciation of
property, plant and equipment, right-of-use asset depreciation and
amortisation of intangible assets. The Group presents EBITDA
because it is widely used by securities analysts, investors and
other interested parties to evaluate the profitability of
companies. EBITDA eliminates potential differences in performance
caused by variations in capital structures (affecting net finance
costs), tax positions (such as the availability of net operating
losses against which to relieve taxable profits), the cost and age
of tangible assets (affecting relative depreciation expense) and
the extent to which intangible assets are identifiable (affecting
relative amortisation expense).
The Group defines Adjusted EBITDA as comprising of EBITDA (as
defined above), exceptional items including the loss/(profit) on
disposal of discontinued operation, share-based compensation,
product development intangible cost capitalised and foreign
exchange gains/losses. Adjusted EBITDA is the primary measure used
internally to measure performance and to incentivise and reward
employees.
Adjusted EBITDA Margin refers to each measure defined above as a
percentage of actual revenue recorded in accordance with IFRS for
the year.
Adjusted EBITDA is a key profit measure used by the board to
assess the underlying financial performance of the Group. Adjusted
EBITDA is stated before the following items for the following
reasons:
-- Exceptional items (note 3), including the loss/(profit) on
disposal of discontinued operation, are excluded by virtue of their
size, nature or incidence, in order to show the underlying business
performance of the Group.
-- Share-based payment charges are excluded from the calculation
of Adjusted EBITDA because these represent a non-cash accounting
charge for transactions that could otherwise have been settled in
cash or not be limited to employee compensation. These charges also
represent long-term incentives designed for long-term employee
retention, rather than reflecting the short-term underlying
operations of the Group's business. The directors acknowledge that
there is an ongoing debate on the add-back of share-based payment
charges but believe that as they are not included in the analysis
of segment performance used by the Chief Operating Decision Maker
and their add-back is consistent with metrics used by a number of
other companies in the technology sector, that this treatment
remains appropriate.
2. EBITDA and Adjusted EBITDA (continued)
-- Actual spend on product development costs during the year is
deducted from EBITDA as this reflects the required underlying
expenditure. This is because the capitalisation and subsequent
amortisation of such costs are based on judgements about whether
they meet the capitalisation criteria set out in IAS 38 "Intangible
Assets" and on the period of their estimated economic benefit. In
addition, product development costs for the year are included in
the analysis of segment performance used by the Chief Operating
Decision Maker.
-- Foreign exchange movements are excluded from Adjusted EBITDA
in order to exclude foreign exchange volatility when evaluating the
underlying performance of the business.
The following table is a reconciliation from profit for the
period to EBITDA and Adjusted EBITDA:
Year ended Year ended
31 October 2020 31 October 2019
--------------------------------------- -----------------------------------------
Continuing Discontinued Continuing Discontinued
operations operation Total operations operation Total
$m $m $m $m $m $m
------------------------------ ------------ ------------- ---------- ------------ ------------- ------------
(Loss)/profit for
the year (2,974.6) 5.1 (2,969.5) (18.1) 1,487.2 1,469.1
Finance costs 281.6 - 281.6 282.4 - 282.4
Finance income (2.6) - (2.6) (26.6) - (26.6)
Taxation 34.2 (8.1) 26.1 (16.0) 318.1 302.1
Share of results
of associates - - - 0.3 0.3
Depreciation of property,
plant and equipment 42.0 - 42.0 52.6 - 52.6
Depreciation of right-of-use
assets 76.9 - 76.9 13.9 - 13.9
Amortisation of intangible
assets 674.1 - 674.1 716.5 - 716.5
------------------------------ ------------ ------------- ---------- ------------ ------------- ------------
EBITDA (1,868.4) (3.0) (1,871.4) 1,004.7 1,805.6 2,810.3
Exceptional items
(reported in loss/(profit)
from discontinued
operation) - 3.0 3.0 - (1,767.9) (1,767.9)
Exceptional items
(reported in Operating
profit) 3,011.6 - 3,011.6 294.2 - 294.2
Share-based compensation
charge 17.0 - 17.0 68.8 2.5 71.3
Product development
intangible costs
capitalised (16.2) - (16.2) (16.5) - (16.5)
Foreign exchange
loss/(gain) 29.7 - 29.7 11.3 (0.2) 11.1
Adjusted EBITDA 1,173.7 - 1,173.7 1,362.5 40.0 1,402.5
------------------------------ ------------ ------------- ---------- ------------ ------------- ------------
Revenue 3,001.0 - 3,001.0 3,348.4 127.0 3,475.4
Adjusted EBITDA Margin 39.1% n/a 39.1% 40.7% 31.5% 40.4%
------------------------------ ------------ ------------- ---------- ------------ ------------- ------------
3. Adjusted Profit before tax
Adjusted Profit before tax is defined as (loss)/profit before
tax excluding the effects of, share-based compensation, the
amortisation of purchased intangible assets and all exceptional
items including loss/(profit) on disposal of discontinued
operation. These items are individually material items that are not
considered to be representative of the trading performance of the
Group:
-- Exceptional items (note 3), including the loss/(profit) on
disposal of discontinued operation, are excluded by virtue of their
size, nature or incidence, in order to show the underlying business
performance of the Group.
-- Share-based payment charges are excluded from the calculation
of Adjusted Profit before tax because these represent a non-cash
accounting charge for transactions that could otherwise have been
settled in cash or not be limited to employee compensation. These
charges also represent long-term incentives designed for long-term
employee retention, rather than reflecting the short-term
underlying operations of the Group's business. The directors
acknowledge that there is an ongoing debate on the add-back of
share-based payment charges but believe that as they are not
included in the analysis of segment performance used by the Chief
Operating Decision Maker and their add-back is consistent with
metrics used by a number of other companies in the technology
sector, that this treatment remains appropriate.
-- Charges for the amortisation of intangibles are excluded from
the calculation of Adjusted Profit before tax. This is because
these charges are based on judgements about their value and
economic life, are the result of the application of acquisition
accounting rather than core operations, and whilst revenue
recognised in the income statement does benefit from the underlying
intangibles that has been acquired, the amortisation costs bear no
relation to the Group's underlying ongoing operational performance.
In addition, amortisation of acquired intangibles is not included
in the analysis of segment performance used by the Chief Operating
Decision Maker.
Adjusted Profit before tax is presented as it is required for
the calculation of the Group's effective tax rate.
The following table is a reconciliation from profit before tax
for the year to Adjusted Profit before tax:
Year ended Year ended
31 October 2020 31 October 2019
--------------------------------------- -----------------------------------------
Continuing Discontinued Continuing Discontinued
operations operation Total operations operation Total
$m $m $m $m $m $m
------------------------------ ------------ ------------- ---------- ------------ ------------- ------------
(Loss)/profit before
tax (2,940.4) (3.0) (2,943.4) (34.1) 1,805.3 1,771.2
Share-based compensation
charge 17.0 - 17.0 68.8 2.5 71.3
Amortisation of purchased
intangibles 604.1 - 604.1 655.7 - 655.7
Exceptional items, including
loss/(profit) on disposal
of discontinued operation 3,011.6 3.0 3,014.6 294.2 (1,767.9) (1,473.7)
------------------------------ ------------ ------------- ---------- ------------ ------------- ------------
Adjusting items 3,632.7 3.0 3,635.7 1,018.7 (1,765.4) (746.7)
Adjusted Profit before
tax 692.3 - 692.3 984.6 39.9 1,024.5
------------------------------ ------------ ------------- ---------- ------------ ------------- ------------
4. Adjusted Effective Tax Rate
The Adjusted Effective Tax Rate is defined as the reported tax
(charge)/credit on continuing operations, less tax on adjusting
items on continuing operations (share-based compensation, the
amortisation of purchased intangible assets and exceptional items),
divided by the Adjusted Profit Before Tax on continuing operations
(defined above). This is an Alternative Performance Measure and is
presented because management believe it is important to
understanding the Group's tax position on its trading
performance.
The tax charge on Adjusted Profit before tax for the year ended
31 October 2020 was $174.1m (2019: $235.7m). This represents an
Adjusted Effective Tax Rate ("Adjusted ETR") of 25.1% (2019:
23.9%). The calculation of the Adjusted ETR is set out below.
Effective tax Year ended Year ended
rate (continuing 31 October 2020 31 October 2019
operations)
Adjusting Adjusted Adjusting Adjusted
Statutory items measures Statutory items Measures
$m $m $m $m $m $m
------------------- ------------ ---------- ---------- ------------ ---------- ----------
(Loss)/profit
before tax (2,940.4) 3,632.7 692.3 (34.1) 1,018.7 984.6
Taxation (34.2) (139.9) (174.1) 16.0 (251.7) (235.7)
------------------- ------------ ---------- ---------- ------------ ---------- ----------
(Loss)/profit
after tax (2,974.6) 3,492.8 518.2 (18.1) 767.0 748.9
------------------- ------------ ---------- ---------- ------------ ---------- ----------
Effective tax
rate (1.2)% 25.1% 46.9% 23.9%
------------------- ------------ ---------- ---------- ------------ ---------- ----------
In computing Adjusted Profit before tax for the year ended 31
October 2020, $3,632.7m (2019: $1,018.7m) of adjusting items have
been added back (see Adjusted Profit before tax section above) and
the associated tax credit is $139.9m (2019: $251.7m). In the period
to 31 October 2019, the Group recognised a one off credit within
Adjusting items of $48.6m in relation to the recognition of
deferred tax on historical UK interest restrictions.
5. Adjusted Earnings per Share and Diluted Adjusted Earnings per Share
The Adjusted Earnings per Share ("EPS") is defined as Basic EPS
where the earnings attributable to ordinary shareholders are
adjusted by adding back all exceptional items including the
loss/(profit) on the disposal of discontinued operation,
share-based compensation charge and the amortisation of purchased
intangibles because they are individually or collectively material
items that are not considered to be representative of the trading
performance of the Group. These are presented as management believe
they are important to understanding the change in the Group's
EPS.
Year ended Year ended
31 October 2020 31 October 2019
CENTS
EPS from continuing operations attributable
to the ordinary equity shareholders of the
Company
Basic EPS - cents (886.15) (4.87)
Diluted EPS - cents (1) (886.15) (4.87)
Basic Adjusted EPS - cents 154.37 198.01
Diluted Adjusted EPS - cents 154.37 195.89
EPS from discontinued operation
Basic EPS - cents 1.52 393.37
Diluted EPS - cents 1.52 389.16
Basic Adjusted EPS - cents 2.17 8.25
Diluted Adjusted EPS - cents 2.17 8.16
Total EPS attributable to the ordinary equity
shareholders of the Company
Basic EPS - cents (884.63) 388.50
Diluted EPS - cents (1) (884.63) 384.35
Basic Adjusted EPS - cents 156.54 206.26
Diluted Adjusted EPS - cents 156.54 204.05
----------------------------------------------- ----------------- -----------------
PENCE
EPS from continuing operations attributable
to the ordinary equity shareholders of the
Company
Basic EPS - pence (693.45) (3.82)
Diluted EPS - pence (1) (693.45) (3.82)
Basic Adjusted EPS - pence 120.81 155.49
Diluted Adjusted EPS - pence 120.81 153.82
EPS from discontinued operation
Basic EPS - pence 1.19 308.89
Diluted EPS - pence 1.19 305.59
Basic Adjusted EPS - pence 1.70 6.48
Diluted Adjusted EPS - pence 1.70 6.41
Total EPS attributable to the ordinary equity
shareholders of the Company
Basic EPS - pence (692.26) 305.07
Diluted EPS - pence (1) (692.26) 301.81
Basic Adjusted EPS - pence 122.51 161.97
Diluted Adjusted EPS - pence 122.51 160.23
----------------------------------------------- ----------------- -----------------
(1) The Group reported a loss from continuing and discontinued
operations attributable to the ordinary equity shareholders of the
Company for the year ended 31 October 2020. The Diluted EPS is
reported as equal to Basic EPS, as no account can be taken of the
effect of dilutive securities under IAS 33.
5. Adjusted Earnings per Share and Diluted Adjusted Earnings per Share continued
Year ended Year ended
31 October 2020 31 October 2019
$m $m
------------------------------------------------ ----------------- -----------------
(Loss)/profit for the year (2,969.5) 1,469.1
Non-controlling interests - (0.3)
------------------------------------------------ ----------------- -----------------
Earnings attributable to ordinary shareholders (2,969.5) 1,468.8
From continuing operations(1) (2,974.6) (18.4)
From discontinued operation 5.1 1,487.2
------------------------------------------------ ----------------- -----------------
Earnings attributable to ordinary shareholders (2,969.5) 1,468.8
Adjusting items:
Loss/(profit) on discontinued operation 3.0 (1,767.9)
Exceptional items 3,011.6 294.2
Share-based compensation charge 17.0 71.3
Amortisation of purchased intangibles 604.1 655.7
------------------------------------------------ ----------------- -----------------
3,635.7 (746.7)
Tax relating to above adjusting items (140.7) 57.7
Adjusted earnings attributable to ordinary
shareholders 525.5 779.8
------------------------------------------------ ----------------- -----------------
From continuing operations(1) 518.2 748.6
From discontinued operation 7.3 31.2
------------------------------------------------ ----------------- -----------------
Adjusted earnings attributable to ordinary
shareholders 525.5 779.8
------------------------------------------------ ----------------- -----------------
Weighted average number of shares: Number Number
m m
------------------------------------------------ ----------------- -----------------
Basic 335.7 378.1
Effect of dilutive securities - Options - 4.1
------------------------------------------------ ----------------- -----------------
Diluted 335.7 382.2
------------------------------------------------ ----------------- -----------------
(1 For the purposes of calculating EPS measures, Earnings and
Adjusted earnings attributable to ordinary shareholders from
continuing operations excludes the impact of non-controlling
interests since these are not attributable to ordinary
shareholders.)
Year ended Year ended
31 October 2020 31 October 2019
Continuing Discontinued Continuing Discontinued
operations operation Total operations operation Total
$m $m $m $m $m $m
------------------------------ ------------ ------------- ---------- ------------ ------------- ------------
Adjusting items:
Exceptional items, including
loss/(profit) on disposal
of discontinued operation 3,011.6 3.0 3,014.6 294.2 (1,767.9) (1,473.7)
Share-based compensation
charge 17.0 - 17.0 68.8 2.5 71.3
Amortisation of purchased
intangibles 604.1 - 604.1 655.7 - 655.7
------------------------------ ------------ ------------- ---------- ------------ ------------- ------------
3,632.7 3.0 3,635.7 1,018.7 (1,765.4) (746.7)
Tax relating to above
adjusting items (139.9) (0.8) (140.7) (251.7) 309.4 57.7
------------------------------ ------------ ------------- ---------- ------------ ------------- ------------
3,492.8 2.2 3,495.0 767.0 (1,456.0) (689.0)
------------------------------ ------------ ------------- ---------- ------------ ------------- ------------
6. Free cash flow and Adjusted free cash flow
Free cash flow is defined as cash generated from operations less
interest payments, bank loan costs, tax payments, purchase of
intangible assets, purchase of property, plant and equipment and
interest and capital payments in relation to leases (which are now
included as a financing cash flow following the adoption of IFRS
16). This is presented as management believe it is important to the
understanding of the Group's Cash flow.
This measure has been adjusted for IFRS 16 as the adoption of
IFRS 16 has no impact on the Group's Cash flow therefore management
believe it would be misleading to show an increase in Free cash
flow. As a result, the year ended 2019 comparative has been revised
below to present free cash flow on a consistent basis as in 2020
following the adoption of IFRS 16.
A new alternative performance measure Adjusted free cash flow
has been introduced in the year ended 31 October 2020. This measure
adjusts Free cash flow for the exclusion of the cash impact of
exceptional items and aligns the way Free cash flow is presented to
the definition of Cumulative Free cash flow used in certain LTIP
awards as disclosed in the Directors' Remuneration Report. This
adjustment was not made for the year ended 31 October 2019, as this
definition did not apply for that period.
Year ended Year ended
31 October 31 October
2020 2019
$m $m
---------------------------------------------- ------------ ------------
Cash generated from operating activities 1,082.8 1,056.3
Less:
Interest payments (207.1) (227.1)
Bank loan costs (47.9) -
Tax payments (149.6) (167.4)
Purchase of intangible assets (60.6) (29.3)
Purchase of property, plant and equipment (26.3) (56.3)
Lease related interest and capital payments (80.1) (12.9)
---------------------------------------------- ------------ ------------
Free cash flow 511.2 563.3
------------
Exclude the cash impact of exceptional items 148.9
---------------------------------------------- ------------
Adjusted free cash flow 660.1
---------------------------------------------- ------------
7. Net Debt
Net debt is defined as cash and cash equivalents less borrowings
and finance lease obligations. The adoption of IFRS 16 has resulted
in all lease obligations being included in Net Debt at 31 October
2020.
31 October 2020 31 October
2019
$m $m
---------------------------------------- ---------------- -----------
Borrowings (4,640.3) (4,670.7)
Cash and cash equivalents 737.2 355.7
Lease obligations (2019: Finance lease
obligations) (250.4) (23.5)
---------------------------------------- ---------------- -----------
Net debt (4,153.5) (4,338.5)
---------------------------------------- ---------------- -----------
8. Adjusted cash conversion ratio
The Group's adjusted cash conversion ratio is defined as cash
generated from operations divided by Adjusted EBITDA less
exceptional items (reported in Operating (loss)/profit and
excluding any goodwill impairment charge, as this is deemed
non-cash related). This is presented as management believe it is
important to the understanding the Group's conversion of underlying
results to cash.
Year ended Year ended
31 October 2020 31 October 2019
$m $m
---------------------------------------- ----------------- -----------------
Cash generated from operations 1,082.8 1,056.3
Adjusted EBITDA 1,173.7 1,402.5
Less: exceptional items (reported in
Operating profit) (3,011.6) (294.2)
Excluded: Goodwill impairment charge 2,799.2 -
---------------------------------------- ----------------- -----------------
Adjusted EBITDA less exceptional items 961.3 1,108.3
---------------------------------------- ----------------- -----------------
Adjusted cash conversion ratio 112.6% 95.3%
---------------------------------------- ----------------- -----------------
9. Constant Currency
The Group's reporting currency is the US Dollar however, the
Group's significant international operations give rise to
fluctuations in foreign exchange rates. To neutralise foreign
exchange impact and to better illustrate the underlying change in
results from one year to the next, the Group has adopted the
practice of discussing results on an as reported basis and in
constant currency.
The Group uses US Dollar based constant currency models to
measure performance. These are calculated by restating the results
of the Group for the comparable year at the same average exchange
rates as those used in reported results for the current year. This
gives a US Dollar denominated income statement, which excludes any
variances attributable to foreign exchange rate movements.
The most important foreign currencies for the Group are: Pounds
Sterling, the Euro, Canadian Dollar, Israeli Shekel and Japanese
Yen and in the year ended 31 October 2020 also the Indian Rupee and
Chinese Yuan. The exchange rates used are as follows:
Year ended Year ended
31 October 2020 31 October 2019
Average Closing Average Closing
------------ --------- -------- --------- --------
GBP1 = $ 1.28 1.30 1.27 1.29
EUR1 = $ 1.13 1.17 1.12 1.12
C$ = $ 0.74 0.75 0.75 0.76
ILS = $ 0.29 0.29 0.28 0.28
INR = $ 0.01 0.01 n/a n/a
CNY = $ 0.14 0.15 n/a n/a
100 JPY = $ 0.93 0.96 1.10 1.08
------------ --------- -------- --------- --------
Consolidated statement of comprehensive income
for the year ended 31 October 2020
Year ended Year ended
31 October 2020 31 October 2019(1)
-------------------- ---- ------------------------------------------ ----------------------------------------------
Before exceptional Exceptional
Exceptional items items
Before exceptional items (note
items (note 3) Total 3) Total
Continuing Note
operations $m $m $m $m $m $m
-------------------- ---- ------------------ ----------- --------- -------------------- ------------- ---------
Revenue 1,2 3,001.0 - 3,001.0 3,348.4 - 3,348.4
Cost of sales (698.7) (4.0) (702.7) (777.3) (12.6) (789.9)
Gross profit 2,302.3 (4.0) 2,298.3 2,571.1 (12.6) 2,558.5
Selling and
distribution
expenses (1,099.2) (12.9) (1,112.1) (1,216.4) (8.4) (1,224.8)
Research and
development
expenses (512.7) (0.9) (513.6) (491.7) 0.5 (491.2)
Administrative
expenses (340.2) (2,993.8) (3,334.0) (347.1) (273.7) (620.8)
Operating
(loss)/profit 350.2 (3,011.6) (2,661.4) 515.9 (294.2) 221.7
-------------------- ---- ------------------ ----------- --------- -------------------- ------------- ---------
Finance costs (281.6) - (281.6) (282.4) - (282.4)
Finance income 2.6 - 2.6 26.6 - 26.6
-------------------- ---- ------------------ ----------- --------- -------------------- ------------- ---------
Net finance costs (279.0) - (279.0) (255.8) - (255.8)
Profit/(loss) before
tax 71.2 (3,011.6) (2,940.4) 260.1 (294.2) (34.1)
Taxation 4 (72.9) 38.7 (34.2) (38.3) 54.3 16.0
-------------------- ---- ------------------ ----------- --------- -------------------- ------------- ---------
Loss from continuing
operations (1.7) (2,972.9) (2,974.6) 221.8 (239.9) (18.1)
-------------------- ---- ------------------ ----------- --------- -------------------- ------------- ---------
Profit from
discontinued
operation
(attributable
to equity
shareholders
of the Company) 7.3 (2.2) 5.1 28.7 1,458.5 1,487.2
(Loss)/profit for
the
year 5.6 (2,975.1) (2,969.5) 250.5 1,218.6 1,469.1
Attributable to:
Equity shareholders
of
the Company 5.6 (2,975.1) (2,969.5) 250.2 1,218.6 1,468.8
Non-controlling
interests - - - 0.3 - 0.3
-------------------- ---- ------------------ ----------- --------- -------------------- ------------- ---------
(Loss)/profit for
the
year 5.6 (2,975.1) (2,969.5) 250.5 1,218.6 1,469.1
-------------------- ---- ------------------ ----------- --------- -------------------- ------------- ---------
(1) In accordance with the requirements of IFRS 16 "Leases" the
comparative amounts have not been restated.
The accompanying notes form part of the financial
statements.
Consolidated statement of comprehensive income continued
for the year ended 31 October 2020
Year ended Year ended
31 October 2020 31 October 2019(1)
-------------------------------------- ---- ------------------------------------ ----------------------------------
Exceptional Before Exceptional
Before items exceptional items
exceptional (note items (note
items 3) Total 3) Total
Note $m $m $m $m $m $m
-------------------------------------- ---- ------------ ----------- --------- ------------ ----------- -------
(Loss)/profit for the year 5.6 (2,975.1) (2,969.5) 250.5 1,218.6 1,469.1
Other comprehensive (expense)/income
for the year:
Items that will not be reclassified
to profit or loss
Continuing operations:
Actuarial loss on pension schemes
liabilities 9 (0.4) - (0.4) (26.2) - (26.2)
Actuarial gain on non-plan pension
assets 9 0.4 - 0.4 0.3 - 0.3
Deferred tax movement on pension
schemes (5.0) - (5.0) 13.0 - 13.0
Discontinued operation:
Actuarial gain on pension schemes
liabilities 9 - - - 0.1 - 0.1
Actuarial gain on non-plan pension
assets 9 - - - 0.1 - 0.1
Currency translation differences
- discontinued operation recycled
to profit and loss in the year - - - - (1.5) (1.5)
Continuing items that may be
subsequently reclassified to
profit or loss
Cash flow hedge movements (41.3) - (41.3) (122.9) - (122.9)
Current tax movement on cash
flow hedge movements 7.8 - 7.8 23.3 - 23.3
Deferred tax movement on currency
translation differences (8.7) - (8.7) 14.0 - 14.0
Deferred tax movement on Euro
loan foreign exchange hedging 11.1 - 11.1 - - -
Currency translation differences
- continuing operations (67.0) - (67.0) (206.2) - (206.2)
Other comprehensive (expense)/income
for the year (103.1) - (103.1) (304.5) (1.5) (306.0)
Total comprehensive (expense)/income
for the year (97.5) (2,975.1) (3,072.6) (54.0) 1,217.1 1,163.1
-------------------------------------- ---- ------------ ----------- --------- ------------ ----------- -------
Attributable to:
Equity shareholders of the Company (97.5) (2,975.1) (3,072.6) (54.3) 1,217.1 1,162.8
Non-controlling interests - - - 0.3 - 0.3
-------------------------------------- ---- ------------ ----------- --------- ------------ ----------- -------
Total comprehensive (expense)/income
for the year (97.5) (2,975.1) (3,072.6) (54.0) 1,217.1 1,163.1
-------------------------------------- ---- ------------ ----------- --------- ------------ ----------- -------
Total comprehensive (expense)/income
attributable to the equity
shareholders
of the Company arises from:
Continuing operations (104.8) (2,972.9) (3,077.7) (82.9) (239.9) (322.8)
Discontinued operation 7.3 (2.2) 5.1 28.9 1,457.0 1,485.9
-------------------------------------- ---- ------------ ----------- --------- ------------ ----------- -------
(97.5) (2,975.1) (3,072.6) (54.0) 1,217.1 1,163.1
-------------------------------------- ---- ------------ ----------- --------- ------------ ----------- -------
Earnings per share (cents)
From continuing and discontinued cents cents
operations
- basic 6 (884.63) 388.50
- diluted 6 (884.63) 384.35
From continuing operations
- basic 6 (886.15) (4.87)
- diluted 6 (886.15) (4.87)
-------------------------------------- ---- ------------ ----------- --------- ------------ ----------- -------
Earnings per share (pence)
From continuing and discontinued pence pence
operations
- basic 6 (692.26) 305.07
- diluted 6 (692.26) 301.81
From continuing operations
- basic 6 (693.45) (3.82)
- diluted 6 (693.45) (3.82)
-------------------------------------- ---- ------------ ----------- --------- ------------ ----------- -------
(1) In accordance with the requirements of IFRS 16 "Leases" the
comparative amounts have not been restated.
The accompanying notes form part of the financial
statements.
Consolidated statement of financial position continued
as at 31 October 2020
31 October 2020 31 October 2019
Note $m $m(1)
----------------------------------------- ---- --------------- ---------------
Non-current assets
Goodwill 7 3,835.4 6,671.3
Other intangible assets 5,383.0 5,942.3
Property, plant and equipment 93.7 140.5
Right-of-use assets 207.2 -
Long-term pension assets 9 18.2 17.1
Contract-related costs 35.7 31.5
Other non-current assets 31.8 44.0
9,605.0 12,846.7
Current assets
Inventories - 0.1
Trade and other receivables 731.4 1,032.9
Contract-related costs 27.9 19.3
Current tax receivables 4 45.3 40.1
Cash and cash equivalents 737.2 355.7
----------------------------------------- ---- --------------- ---------------
1,541.8 1,448.1
Total assets 11,146.8 14,294.8
----------------------------------------- ---- --------------- ---------------
Current liabilities
Trade and other payables 503.5 611.0
Borrowings 8 21.4 -
Lease obligations (2019: Finance leases) 82.2 11.8
Provisions 49.7 29.3
Current tax liabilities 4 150.1 104.0
Contract liabilities 981.4 1,045.9
1,788.3 1,802.0
Non-current liabilities
Contract liabilities 117.2 149.9
Borrowings 8 4,618.9 4,670.7
Lease obligations (2019: Finance leases) 168.2 11.7
Derivative liability 77.9 36.5
Retirement benefit obligations 9 155.0 141.4
Provisions 22.5 49.1
Other non-current liabilities 39.9 50.4
Current tax liabilities 4 102.7 119.7
Deferred tax liabilities 4 841.1 987.1
6,143.4 6,216.5
Total liabilities 7,931.7 8,018.5
----------------------------------------- ---- --------------- ---------------
Net assets 3,215.1 6,276.3
----------------------------------------- ---- --------------- ---------------
Consolidated statement of financial position continued
as at 31 October 2020
31 October 2020 31 October 2019
$m $m(1)
------------------------------------- --- --------------- ---------------
Capital and reserves
Share capital 47.3 47.2
Share premium account 46.5 44.0
Merger reserve 1,767.4 1,739.8
Capital redemption reserve 2,485.0 2,485.0
Hedging reserve (63.1) (29.6)
Retained earnings (741.3) 2,250.7
Foreign currency translation reserve (326.7) (262.1)
Total equity attributable to owners
of the parent 3,215.1 6,275.0
Non-controlling interests - 1.3
------------------------------------------ --------------- ---------------
Total equity 3,215.1 6,276.3
------------------------------------------ --------------- ---------------
(1) In accordance with the requirements of IFRS 16 "Leases" the
comparative amounts have not been restated.
The accompanying notes form part of the financial
statements.
Consolidated statement of changes in equity
for the year ended 31 October 2020
Year ended 31 October 2020
Share Share Retained Foreign Capital Hedging Merger Total Non-controlling Total
capital premium earnings currency redemption reserve reserve equity interests equity
account translation reserves attributable
reserve to owners
of the
parent
Note $m $m $m $m $m $m $m $m $m $m
---------------- ---- ------- ------- --------- ----------- ---------- ------- ------- ------------ --------------- ---------
Balance as at
1 November 2019 47.2 44.0 2,250.7 (262.1) 2,485.0 (29.6) 1,739.8 6,275.0 1.3 6,276.3
Impact of
adoption
of IFRS 16 - - (8.4) - - - - (8.4) - (8.4)
---------------- ---- ------- ------- --------- ----------- ---------- ------- ------- ------------ --------------- ---------
Revised balance
at 1 November
2019 47.2 44.0 2,242.3 (262.1) 2,485.0 (29.6) 1,739.8 6,266.6 1.3 6,267.9
Loss for the
financial
year - - (2,969.5) - - - - (2,969.5) - (2,969.5)
Other
comprehensive
expense for the
year - - (5.0) (64.6) - (33.5) - (103.1) - (103.1)
---------------- ---- ------- ------- --------- ----------- ---------- ------- ------- ------------ --------------- ---------
Total
comprehensive
expense for the
year - - (2,974.5) (64.6) - (33.5) - (3,072.6) - (3,072.6)
Share options:
Issue of share
capital - share
options 0.1 2.5 0.3 - - - - 2.9 - 2.9
Share-based
payment
charge - - 18.3 - - - - 18.3 - 18.3
Current tax on
share options 4 - - 0.1 - - - - 0.1 - 0.1
Deferred tax on
share options 4 - - (1.5) - - - - (1.5) - (1.5)
Purchase of
remaining
non-controlling
interest - - 1.3 - - - - 1.3 (1.3) -
Reallocation of
merger reserve - - (27.6) - - - 27.6 - - -
Total movements
for the year 0.1 2.5 (2,983.6) (64.6) - (33.5) 27.6 (3,051.5) (1.3) (3,052.8)
Balance as at
31 October 2020 47.3 46.5 (741.3) (326.7) 2,485.0 (63.1) 1,767.4 3,215.1 - 3,215.1
---------------- ---- ------- ------- --------- ----------- ---------- ------- ------- ------------ --------------- ---------
The accompanying notes form part of the financial
statements.
Consolidated statement of changes in equity
for the year ended 31 October 2020
Year ended 31 October 2019(1)
Share Share Retained Foreign Capital Hedging Merger Total Non-controlling Total
capital premium earnings currency redemption reserve reserve equity interests equity
account translation reserves attributable
reserve to owners
of the
parent
Note $m $m $m $m $m $m $m $m $m $m
----------------- ---- ------- ------- --------- ----------- ---------- ------- --------- ------------ --------------- ---------
Balance as at
1 November 2018 65.8 41.0 3,275.2 (51.7) 666.3 70.0 3,724.4 7,791.0 1.0 7,792.0
Impact of
adoption
of IFRS 15 - - 52.4 - - - - 52.4 - 52.4
Impact of
adoption
of IFRS 9 - - (15.6) - - - - (15.6) - (15.6)
----------------- ---- ------- ------- --------- ----------- ---------- ------- --------- ------------ --------------- ---------
Revised balance
at 1 November
2018 65.8 41.0 3,312.0 (51.7) 666.3 70.0 3,724.4 7,827.8 1.0 7,828.8
Profit for the
financial year - - 1,468.8 - - - - 1,468.8 0.3 1,469.1
Other
comprehensive
income/(expense)
for the year - - 4.0 (210.4) - (99.6) - (306.0) - (306.0)
----------------- ---- ------- ------- --------- ----------- ---------- ------- --------- ------------ --------------- ---------
Total
comprehensive
income/(expense)
for the year - - 1,472.8 (210.4) - (99.6) - 1,162.8 0.3 1,163.1
Transactions with
owners:
Dividends 5 - - (439.2) - - - - (439.2) - (439.2)
Share options:
Issue of share
capital - share
options 0.1 3.0 (3.8) - - - - (0.7) - (0.7)
Share-based
payment
charge - - 64.5 - - - - 64.5 - 64.5
Current tax on
share options 4 - - 13.1 - - - - 13.1 - 13.1
Deferred tax on
share options 4 - - (7.6) - - - - (7.6) - (7.6)
Share
reorganisation
and buy-back:
Return of Value
- share
consolidation (18.7) - - - 18.7 - - - - -
Expenses relating
to Return of
Value - - (1.0) - - - - (1.0) - (1.0)
Issue and
redemption
of B shares - - (1,800.0) - 1,800.0 - (1,800.0) (1,800.0) - (1,800.0)
Share buy-back - - (544.7) - - - - (544.7) - (544.7)
Reallocation of
merger reserve - - 184.6 - - - (184.6) - - -
Total movements
for the year (18.6) 3.0 (1,061.3) (210.4) 1,818.7 (99.6) (1,984.6) (1,552.8) 0.3 (1,552.5)
Balance as at
31 October 2019 47.2 44.0 2,250.7 (262.1) 2,485.0 (29.6) 1,739.8 6,275.0 1.3 6,276.3
----------------- ---- ------- ------- --------- ----------- ---------- ------- --------- ------------ --------------- ---------
The accompanying notes form part of the financial
statements.
(1) In accordance with the requirements of IFRS 16 "Leases" the
comparative amounts have not been restated.
Consolidated statement of cash flows
for the year ended 31 October 2020
Year ended Year ended
31 October 31 October
2020 2019
Note $m $m(1)
------------------------------------------------------- ----- ----------- -----------
Cash flows from operating activities
Cash generated from operations 12 1,082.8 1,056.3
Interest paid (207.1) (227.1)
Bank loan costs (47.9) -
Tax paid (149.6) (167.4)
------------------------------------------------------- ----- ----------- -----------
Net cash generated from operating activities 678.2 661.8
Cash flows from investing activities
Payments for intangible assets (60.6) (29.3)
Purchase of property, plant and equipment (26.3) (56.3)
Interest received 2.4 26.6
Payment for acquisition of business (6.0) (89.0)
Net cash acquired with acquisitions - 1.2
Investing cash flows generated from disposals 1.3 20.0
Investing cash flows generated from discontinued
operation, net of cash disposed - 2,473.5
Tax paid on divestiture gain - (264.6)
Net cash (used in)/generated from investing activities (89.2) 2,082.1
Cash flows used in financing activities
Proceeds from issue of ordinary share capital 2.6 3.1
Purchase of treasury shares and related expenses - (544.7)
Return of Value paid to shareholders - (1,800.0)
Expenses relating to Return of Value - (1.0)
Payment for lease liabilities (2019: payment for
finance lease liabilities) (80.1) (12.9)
Settlement of foreign exchange derivative 10 (21.8) -
Repayment of bank borrowings 8 (1,589.7) (212.6)
Proceeds from bank borrowings 8 1,490.8 -
Dividends paid to owners 5 - (439.2)
------------------------------------------------------- ----- ----------- -----------
Net cash used in financing activities (198.2) (3,007.3)
Effects of exchange rate changes (9.3) (1.8)
------------------------------------------------------- ----- ----------- -----------
Net increase/(decrease) in cash and cash equivalents 381.5 (265.2)
Cash and cash equivalents at beginning of the year 355.7 620.9
------------------------------------------------------- ----- ----------- -----------
Cash and cash equivalents at end of the year 737.2 355.7
------------------------------------------------------- ----- ----------- -----------
(1) In accordance with the requirements of IFRS 16 "Leases" the
comparative amounts have not been restated.
The accompanying notes form part of these financial
statements.
General information
Micro Focus International plc ("Company") is a public limited
company incorporated and domiciled in the UK. The address of its
registered office is: The Lawn, 22-30 Old Bath Road, Newbury, RG14
1QN, UK.
Micro Focus International plc and its subsidiaries (together
"Group") provide innovative software to clients around the world
enabling them to dramatically improve the business value of their
enterprise applications. As at 31 October 2020, the Group had a
presence in 48 countries (31 October 2019: 48) worldwide and
employed approximately 11,900 people (31 October 2019: 12,100).
The Company is listed on the London Stock Exchange and its
American Depositary Shares are listed on the New York Stock
Exchange.
The Group Consolidated financial statements were authorised for
issuance by the board of directors on 8 February 2021.
I Significant Accounting policies
A Basis of preparation
The summary financial information set out above does not
constitute the Group's statutory Consolidated Financial Statements
for the year ended 31 October 2020 or the year ended 31 October
2019. Statutory Consolidated Financial Statements for the Group for
the year ended 31 October 2019, prepared in accordance with adopted
IFRS, have been delivered to the Registrar of Companies and those
for the 12 months ended 31 October 2020 will be delivered in due
course. The auditors have reported on those accounts; their report
was (i) unqualified, (ii) did not include a reference to any
matters to which the auditors drew attention by way of any emphasis
without qualifying their report and (iii) did not contain a
statement under Section 498 (2) or (3) of the Companies Act
2006.
The summary financial information for the 12 months ended 31
October 2020 has been prepared by the directors based upon the
results and position that are reflected in the Consolidated
Financial Statements of the Group.
The consolidated financial statements have been 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 2019 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. This assessment covers the
period to February 2022, which is consistent with the FRC
guidance.
The Chief Financial Officer's report on pages 7 to 17 includes
information on our Group financial results, financial outlook, cash
flow and net debt, and the balance sheet position.
In making this assessment, the directors considered the Group's
liquidity and solvency position. 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 February 2022 the Group has no term loans maturing until
June 2024 (see note 8 "Borrowings" for an analysis of borrowing
maturity and additional details on repayment requirements). The
Revolving Facility was undrawn at 31 October 2020 and the Group had
$737.2 million of cash balances at 31 October 2020 providing total
liquidity of $1,087.2 million. The Group's Revolving Facility is
subject to a net leverage covenant when it is more than 35% drawn
at the quarter end (see note 10 "Financial risk management and
instruments" for additional details). Under the Group's forecasts
the Revolving Facility is not forecast to be drawn in the period to
February 2022 and therefore no covenant tests are expected to
apply.
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 Revolving Facility 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.
Also in assessing liquidity, the board considered the reported
net current liability position of $246.5 million at 31 October
2020. This is the result of $981.4 million 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.
COVID-19 and sensitivity
In assessing going concern the Group has estimated the financial
impact of severe but plausible scenarios, which take into account
the Group's principal risks, impacting both revenue and Adjusted
EBITDA, including a greater than forecast level of exceptional
expenditure to complete the Group's IT implementation being
incurred. The impact of COVID-19 on Group's cash flow in the
current year has been limited however the severe but plausible
scenarios reflect a wider macro-economic impact from COVID-19
continuing for the entire 12 month going concern assessment period
to February 2022. 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
Revolving Facility in the period to February 2022 and therefore no
covenant test would be expected to apply.
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 February 2022,
which is consistent with the FRC guidance.
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. The
existence and effect of potential voting rights that are currently
exercisable or convertible are considered when assessing control.
Control is presumed to exist when the Group owns more than half of
the voting rights (which does not always equal percentage
ownership) unless it can be demonstrated that ownership does not
constitute control. The results of subsidiaries are consolidated
from the date on which control passes to the Group. The results of
disposed subsidiaries are consolidated up to the date on which
control passes from the Group.
The purchase method of accounting is 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.
For partly owned subsidiaries, the allocation of net assets and
net earnings to outside shareholders is shown in the line
"Attributable to non-controlling interests" on the face of the
consolidated statement of comprehensive income and the consolidated
statement of financial position.
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 of disposal groups
classified as held for sale are shown separately on the face of the
balance sheet.
The results of discontinued operations are shown as a single
amount on the face of the Consolidated statement of comprehensive
income comprising the post-tax profit or loss of discontinued
operations and the post-tax gain or loss 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.
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
license 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 license. 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. The professional service
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 licenses 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 on-going 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
stand-alone selling price of that performance obligation. Given the
highly variable selling price of licenses, the Group has not
established SSP for licenses. 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 licenses.
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 right to use the
software on customer premises 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). Licence revenue is considered right to
use as the customer receives the right to download and use the
software. 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).
For SaaS arrangements where customers access the functionality
of a hosted software over the contract period without taking
possession of the software, and performance obligations are
provided evenly over a defined term, the Group recognises revenue
over the period in which the subscriptions are provided as the
service is delivered, generally on a straight-line basis.
In SaaS arrangements where the customer has the contractual
right to take possession of the software at any time during the
contractual period without significant penalty and the customer can
operate, or contract with another vendor to operate the software,
the Group evaluates whether the arrangement includes the sale of a
software licence. In SaaS arrangements where software licences are
sold, licence revenue is generally 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. 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 multiyear 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 program are
accounted for as a reduction of the transaction price and netted
against revenue where the rebate paid is based on the achievement
of sales targets made by the partner. If the Group receives an
identifiable good or service from the reseller that is separable
from the sales transaction and for which fair value can be
reasonably estimated, the Group accounts for the purchase of the
good or service in the same way that it accounts for other
purchases from suppliers.
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 5
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.
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.
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 if it
is material, non-recurring or does not reflect the underlying
performance of the business. Exceptional items are allocated to the
financial statement lines (for example: cost of sales) in the
Consolidated statement of comprehensive income based on the nature
and function of the costs, for example restructuring costs related
to employees are classified where their original employment costs
are recorded.
Management of the Group first evaluates Group strategic projects
such as acquisitions, divestitures and integration activities,
Group restructuring and other one-off events such as restructuring
programmes. 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 obligations and long-term pension assets
The Group operates various pension schemes, including both
defined contribution and defined benefit pension plans. A defined
contribution plan is a pension plan under which the Group pays
fixed contributions into a separate entity. The Group has no legal
or constructive obligations to pay further contributions if the
fund does not hold sufficient assets to pay all employees the
benefits relating to employee service in the current and prior
periods. A defined benefit plan is a pension plan that is not a
defined contribution plan.
For defined contribution plans, the Group pays contributions to
publicly or privately administered pension insurance plans on a
mandatory, contractual or voluntary basis. The Group has no further
payment obligations once the contributions have been paid. The
contributions are 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, defined benefit plans define an amount of pension
benefit that an employee will receive on retirement or termination.
This is usually dependent on one or more factors such as age, years
of service and compensation.
The liability recognised in the consolidated statement of
financial position in respect of defined benefit pension plans is
the present value of the defined benefit obligation at the end of
the reporting period less the fair value of plan assets. Certain
long-term pension assets do not meet the definition of plan assets
as they have not been pledged to the plan and are subject to the
creditors of the Group. Such assets are recorded separately in the
consolidated statement of financial position as long-term pension
assets. The defined benefit obligation is calculated annually by
independent actuaries using the projected unit credit method. The
present value of the defined benefit obligation is determined by
discounting the estimated future cash outflows using interest rates
of high-quality corporate bonds that have terms to mature
approximating to the terms of the related pension obligation.
Actuarial gains and losses arising from experience adjustments
and changes in actuarial assumptions are charged or credited to
equity in other comprehensive income in the period in which they
arise. Past-service costs are recognised immediately in income.
The current service cost of the defined benefit plan, recognised
in the Consolidated statement of comprehensive income in employee
benefit expense, except where included in the cost of an asset,
reflects the increase in the defined benefit obligation resulting
from employee service in the current year, benefit changes,
curtailments and settlements.
a) Pension obligations and long-term pension assets
continued
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. 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 shares and share
premium account. Fair value is measured using the Black-Scholes
pricing model. The expected life used in the model has been
adjusted, based on management's best estimate for the effects of
non-transferability, exercise restrictions and behavioural
considerations. The Additional Share Grants have been valued using
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.
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.
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.
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, Israeli Shekel and Japanese
Yen and in the year ended 31 October 2020 also the Indian Rupee and
Chinese Yuan. The exchange rates used are as follows:
Year ended Year ended
31 October 2020 31 October 2019
------------------- -------------------
Average Closing Average Closing
------------ --------- -------- --------- --------
GBP1 = $ 1.28 1.30 1.27 1.29
EUR1 = $ 1.13 1.17 1.12 1.12
C$ = $ 0.74 0.75 0.75 0.76
ILS = $ 0.29 0.29 0.28 0.28
INR = $ 0.01 0.01 n/a n/a
CNY = $ 0.14 0.15 n/a n/a
100 JPY = $ 0.93 0.96 1.10 1.08
------------ --------- -------- --------- --------
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.
Where goodwill has been allocated to a cash-generating unit
(CGU) and part of the operation within that unit is classified as
held for sale, the goodwill associated with the held-for-sale
operation is measured based on the relative values of the
held-for-sale operation and the portion of the cash-generating unit
retained.
b) Computer software
Computer software licences are 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
license or based on the agreement for term license.
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, determined
at the acquisition date, will vary for each category of asset
acquired and to date are as follows:
Purchased software Term licence agreement based, generally three
to seven years
Technology Three to 12 years
Trade names Three to 20 years
Customer relationships Two to 15 years
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
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 includes cash in hand, deposits held
at call with banks, other short-term highly liquid investments with
original maturities of three months or less, and bank overdrafts.
Bank overdrafts are shown within borrowings in current liabilities
on the Consolidated statement of financial position.
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 period
of borrowing on an effective interest basis.
Q Leases
As disclosed in W ' Adoption of new and revised International
Financial Reporting Standards' below, the Group applied IFRS 16
"Leases" using the modified retrospective approach and therefore
the comparative information has not been restated and continues to
be reported under IAS 17 and IFRIC 4. The detailed accounting
policies under IAS 17 and IFRIC 4 are disclosed separately; key
differences between IFRS 16 and IAS 17 and IFRIC 4 are described in
W 'Adoption of new and revised International Financial Reporting
Standards'.
Lease accounting policy under IFRS 16
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.
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.
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.
Lease policy in the prior periods under IAS 17 and IFRIC 4
A lease is classified at the inception date as a finance lease
or an operating lease. A lease that transfers substantially all the
risks and rewards incidental to ownership to the Group is
classified as a finance lease.
Finance leases are capitalised at the commencement of the lease
at the inception date fair value of the leased property or, if
lower, at the present value of the minimum lease payments. Lease
payments are apportioned between finance charges and reduction of
the lease liability so as to achieve a constant rate of interest on
the remaining balance of the liability. Finance charges are
recognised in finance costs in the Consolidated statement of
comprehensive income.
A leased asset is depreciated over the useful life of the asset.
However, if there is no reasonable certainty that the Group will
obtain ownership by the end of the lease term, the asset is
depreciated over the shorter of the estimated useful life of the
asset and the lease term.
An operating lease is a lease other than a finance lease.
Operating lease payments are recognised as an operating expense in
the statement of profit or loss on a straight-line basis over the
lease term.
Operating sub-lease income is recorded as operating income on a
straight-line basis over the sub-lease term.
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.
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. 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.
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 2019, 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, except for IFRS 16
"Leases", which is covered in further detail below, are not
considered material:
- IFRIC 23, "Uncertainty over Income Tax Treatments".
- Amendments to IAS 28 Investments in Associates and Joint
Ventures - "Long-term Interests in Associates and Joint Ventures",
clarifies that IFRS 9 "Financial instruments" applies.
- Amendments to IAS 19 "Employee Benefits".
- Annual Improvements 2017 includes amendments to IFRS 3,
"Business combinations", IFRS 11 "Joint arrangements" and IAS 12
Income taxes.
IFRS 16 "Leases"
IFRS 16 "Leases" establishes the principles that an entity
should apply to report useful information to the uses of the
financial statements about the nature, amount, timing and
uncertainty of leases and cash flows associated with leases.
Application of this standard was mandatory for annual reporting
periods starting from 1 January 2019 onwards and was adopted by the
Group on 1 November 2019. The standard replaced IAS 17 "Leases" and
IFRC 4 "Determining whether an Arrangement contains a lease". Key
changes to the accounting policy previously applied and the impact
of adoption this on the financial statement at 1 November 2019 are
described below. The Group's new IFRS 16 accounting policy and
previous lease accounting policy under IAS 17 "Leases" are
disclosed in Q above.
IFRS 16 "Leases" was adopted with the cumulative retrospective
impact reflected as an adjustment to equity on the date of adoption
and therefore the comparative information has not been restated and
continues to be reported under IAS 17 and IFRIC 4. The Group has
applied the following expedients in relation to the adoption of
IFRS 16:
-- Arrangements were not reassessed to determine whether they
are, or contained, a lease at 1 November 2019. Instead, the Group
has applied IFRS 16 to leases that had previously been identified
as leases under IAS 17 "Leases" and IFRIC 4 "Determining whether an
arrangement contains a lease";
-- Where there is a group of leases with reasonably similar
characteristics, a single discount rate has been applied to each
lease portfolio;
-- The Group impaired the right-of-use asset recognised on
adoption by the value of the provisions for onerous leases held
under IAS 37 "Provisions, Contingent Liabilities and Contingent
Assets" at 31 October 2019 instead of performing a new impairment
review for those leases at 1 November 2019;
-- The Group excluded initial direct costs from the measurement
of the right-of-use asset at 1 November 2019;
-- Where the Group measured right-of-use asset as if IFRS 16 had
been applied since the inception of the lease, the Group applied
hindsight in assessing extension or termination options; and
-- Where the Group measured the right-of-use asset at an amount
equal to the lease liability at 1 November 2019 l ease prepayments
and accruals previously recognised under IAS 17 at 31 October 2019
were added to and deducted from, respectively, the value of the
right-of-use assets on adoption.
The key differences between the Group's IAS 17 accounting policy
(the 'previous policy' which is disclosed in Q above) and the
Group's IFRS 16 accounting policy (which is also provided in Q
above), as well as the primary impacts of applying IFRS 16 in the
current financial period are disclosed below.
Primary impacts of applying the IFRS 16 accounting policy
The primary impacts on the Group's financial statements, and the
key causes of the movements recorded in the consolidated statement
of financial position on 1 November 2019 (page 41), as a result of
applying the IFRS 16 ('current') accounting policy in place of the
previous policy are:
-- Under IAS 17, lessees were classified leases as either
operating or finance leases. Operating lease costs were expensed on
a straight-line basis over the period of the lease. Finance leases
resulted in the recognition, in the statement of financial
position, of an asset and a corresponding liability for lease
payments, at present value. Under IFRS 16 all lease agreements give
rise to the recognition of a 'right-of-use asset' representing the
right to use the leased item and a liability for any future lease
payments over the 'reasonably certain' period of the lease, which
may include future lease periods for which the Group has extension
options;
-- Lessee accounting under IFRS 16 is similar to finance lease
accounting for lessees under IAS 17; lease costs are recognised in
the form of depreciation of the right-of-use asset and interest on
the lease liability. The incremental borrowing rate of the Group
for that lease portfolio is generally used for discounting,
although the interest rate implicit in the lease is used when it is
readily determinable. Interest charges will typically be higher in
the early stages of a lease and will reduce over the term. Lease
interest costs are recorded in financing costs and associated cash
payments are classified as financing cash flows in the Group's cash
flow statement;
-- Under IFRS 16 cash inflows from operating activities and
payments classified within cash flow from financing activities both
increase, as payments made at both lease inception and subsequently
are characterised as repayments of lease liabilities and interest.
Under IAS 17 operating lease payments were treated as an operating
cash outflows. Net cash flow is not impacted by the change in
policy; Lessor accounting under IFRS 16 is similar to IAS 17. The
only substantive change is that when the Group sub-leases
right-of-use assets it classifies the lease out as either operating
or finance leases by reference to the terms of head lease contract
whereas under IAS 17 the classification was determined by reference
to the underlying asset leased out. This has resulted in additional
finance leases ('net investment in leases') being recognised under
IFRS 16 as the Group only acts as a lessor in relation to
under-utilised property leases;
The expedients applied at adoption noted above have resulted in
the following changes;
-- reclassifications of lease-related prepayments and accruals
at 1 November 2019 to the right-of-use assets where the Group has
measured the right-of-use at an amount equal to the liability.
-- release of lease-related prepayments and accruals at 1
November 2019 against retained earnings where the Group has
measured the right-of-use asset as if IFRS 16 had been applied
since inception of the lease.
-- re-classification of onerous leases provisions at 1 November
2019 to the right-of-use assets. Provisions remain for any onerous
non-rental contracts related to these properties.
During the year ended 31 October 2019, a rental expense of
$65.9m was charged for operating leases and depreciation and
interest of $15.9m was charged for finance leases. During the year
ended 31 October 2020, depreciation of $76.9m and interest of
$13.2m has been charged in relation to all leases.
Adoption judgements
In adopting, and in the ongoing application of, IFRS 16
judgements and estimates were made in relation to the grouping of
leases for the purpose of assigning a discount rate and in
calculating the discount rates. These judgements and estimates were
significant for the Group's IFRS 16 adoption activities but are not
considered critical accounting estimates or judgements for the
Group as they are not considered to have a significant effect on
the amounts recognised in the Group's financial statements.
Transition disclosures
The weighted average incremental borrowing rate applied to the
Group's lease liabilities recognised in the balance sheet at 1
November 2019 is 4.7%.
The Group's undiscounted operating lease commitments at 31
October 2019 were $301.2m; the most significant differences between
the IAS 17 lease commitments and the lease liabilities recognised
on transition to IFRS 16 are set out below :
$m
----------------------------------------------------------------- -------
Operating lease commitments under IAS 17 301.2
Committed leases not commenced(1) (0.3)
Cost of reasonably certain extensions(1) 1.3
Subtotal 302.2
Effect of discounting on payments included in the calculation
of the lease liability (excluding finance lease balances) (32.4)
----------------------------------------------------------------- -------
Subtotal 269.8
Other(2) 23.5
----------------------------------------------------------------- -------
Lease liability opening balance to be reported as at 1 November
2019 (IFRS 16) 293.3
----------------------------------------------------------------- -------
(1.) Undiscounted.
(2.) Includes Finance lease liabilities already reported under
IAS 17.
The impact of the adoption of IFRS 16 on the consolidated
statement of financial position at 1 November 2019 is set out
below.
Impact of adoption
31 October of IFRS 16 1 November
2019 2019
$m $m $m
------------------------------------- ------------ ------------------------------------ ------------
Non-current assets
Goodwill 6,671.3 - 6,671.3
Other intangible assets 5,942.3 (1.8) 5,940.5
Property, plant and equipment 140.5 (25.4) 115.1
Right-of-use assets - 253.4 253.4
Long term pension assets 17.1 - 17.1
Contract-related costs 31.5 - 31.5
Other non-current assets 44.0 7.7 51.7
12,846.7 233.9 13,080.6
Current assets
Inventories 0.1 - 0.1
Trade and other receivables 1,032.9 0.3 1,033.2
Contract-related costs 19.3 - 19.3
Current tax receivables 40.1 - 40.1
Cash and cash equivalents 355.7 - 355.7
1,448.1 0.3 1,448.4
------------------------------------- ------------ ------------------------------------ ------------
Total assets 14,294.8 234.2 14,529.0
------------------------------------- ------------ ------------------------------------ ------------
Current liabilities
Trade and other payables 611.0 1.4 612.4
Lease obligations 11.8 74.7 86.5
Provisions 29.3 (4.3) 25.0
Current tax liabilities 104.0 - 104.0
Contract liabilities 1,045.9 - 1,045.9
1,802.0 71.8 1,873.8
Non-current liabilities
Contract liabilities 149.9 - 149.9
Borrowings 4,670.7 - 4,670.7
Lease obligations 11.7 195.1 206.8
Derivative liability 36.5 - 36.5
Retirement benefit obligations 141.4 - 141.4
Provisions 49.1 (12.4) 36.7
Other non-current liabilities 50.4 (10.1) 40.3
Current tax liabilities 119.7 - 119.7
Deferred tax liabilities 987.1 (1.8) 985.3
6,216.5 170.8 6,387.3
------------------------------------- ------------ ------------------------------------ ------------
Total liabilities 8,018.5 242.6 8,261.1
------------------------------------- ------------ ------------------------------------ ------------
Net assets 6,276.3 (8.4) 6,267.9
Capital and reserves
Share capital 47.2 - 47.2
Share premium account 44.0 - 44.0
Merger reserve 1,739.8 - 1,739.8
Capital redemption reserve 2,485.0 - 2,485.0
Hedging reserve (29.6) - (29.6)
Retained earnings 2,250.7 (8.4) 2,242.3
Foreign currency translation deficit (262.1) - (262.1)
------------------------------------- ------------ ------------------------------------ ------------
Total equity attributable to owners
of the parent 6,275.0 (8.4) 6,266.6
Non-controlling interests 1.3 - 1.3
------------------------------------- ------------ ------------------------------------ ------------
Total equity 6,276.3 (8.4) 6,267.9
------------------------------------- ------------ ------------------------------------ ------------
Interpretations and amendments
The following interpretations and amendments to existing
standards are not yet effective and have not been adopted early by
the Group:
Effective for periods commencing after 1 January 2020/2021
- Amendments to References to the Conceptual Framework in IFRS
Standards - Amendments to IFRS 2, IFRS 3, IFRS 6, IFRS 14, IAS 1,
IAS 8, IAS 34, IAS 37, IAS 38, IFRIC 12, IFRIC 19, IFRIC 20, IFRIC
22, and SIC-32 to update those pronouncements with regard to the
revised the Conceptual Framework, effective for accounting periods
beginning after 1 January 2020. EU endorsed 29 November 2019.
- Amendments to IFRS 3 Business Combinations, effective 1
January 2020 clarify the definition of a business in acquisitions.
EU 15 January 2020.
- Amendments to IAS1 and IAS 8: guidance on the definition of
material, effective 1 January 2020 and endorsed by the EU on 29
November.
- Amendments to IFRS9, IAS 39, IFRS 7, IFRS 16 and IFRS 4:
Interest rate benchmark reforms. Phase 1 effective 1 January 2020
and EU endorsed covers hedge accounting impacts and discontinuance
exemptions, while Phase 2 effective January 2021 covers further
disclosures on transition to a new benchmark, EU endorsed 14
January 2021.
Effective for periods commencing after 1 January 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, subject to EU endorsement. 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 are all subject to EU endorsement.
- Amendments to IAS 37 Provisions, Contingent assets and
liabilities - guidance on costs in fulfilling onerous contracts,
subject to EU endorsement.
Effective for periods commencing after 1 January 2023, all
subject to EU endorsement:
- Amendments to IAS 1, Presentation of Financial Statements.
Amendment is presentational relates to the classification of
liabilities current and non-current.
- Amendments to IFRS 17, Insurance contracts. Rent concessions is not relevant for the Group.
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 the 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
updates them as required. The Group has reviewed its critical
accounting estimates, assumptions and judgements considering the
impact of COVID-19 and no new critical accounting estimates,
assumptions and judgements were identified. COVID-19 has increased
the level of uncertainty in making the estimations required in
relation to the potential impairment of goodwill and other
intangibles assets and retirement benefit obligations. Sensitivity
analysis of these estimates, including the impact of COVID-19, are
included in note 7 "Goodwill" and note 9 "Pension commitments".
COVID-19 has been assessed as having no material impact on the
remaining critical estimates, assumptions and judgements disclosed
below. Following the adoption of IFRS 16 "Leases" in the current
year lease term has been determined as being a critical accounting
judgement.
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 Potential impairment of goodwill and other intangible
assets
Each year, or whenever there are changes in circumstances
indicating that the carrying amounts may not be recoverable, the
Group carries out impairment tests of goodwill and other assets
which require estimates to be made of the value in use of its
CGU's. These value in use calculations are dependent on estimates
of future cash flows including long-term growth rates, the average
annual revenue growth rate by product group and an appropriate
discount rate to be applied to future cash flows. Further details
on these estimates and sensitivity of the carrying value of
goodwill to the discount rate, the average annual revenue growth
rate by product group and the long-term growth rate are provided in
note 7 "Goodwil".
B Retirement benefit obligations
The valuation of retirement benefit obligations is dependent
upon a number of assumptions that are estimated at the year end
date, including estimates of mortality rates, inflation, salary
growth rates and the rate at which scheme liabilities are
discounted. Further detail on these estimates and the sensitivity
of the carrying value of the defined benefit obligation to these is
provided in note 9 "Pension commitments".
Critical accounting judgements
C Revenue recognition
Revenue recognition requires significant use of management
judgement to produce financial information. The most significant
accounting judgement 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 judgment 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.
Key judgements in the year were related to the EU state aid and
UK tax authority challenge in respect of prior periods. Based on
their assessment, the directors have concluded that no additional
material tax provisions are required with regards to these matters
(note 4).
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. There
is not a significant risk that any estimate associated with the
provision for income taxes will result in a material change within
the next 12 months.
F Lease term
Where leases include additional optional periods after an
initial lease term, significant judgement is required in
determining whether these optional periods should be included when
determining the lease term. As a lessee, optional periods are
included in the lease term if the Group is reasonably certain it
will exercise an extension option or will not exercise a
termination option; this depends on an analysis by management of
all relevant facts and circumstances including the leased asset's
nature and purpose, the economic and practical potential for
replacing the asset and any plans that the Group has in place for
the future use of the asset. Where it is impractical or uneconomic
to replace then the Group is more likely to judge that lease
extension options are reasonably certain to be exercised.
Where extension options are included in the lease term the
greater will be the value of the right-of-use asset and lease
liability recognised. The normal approach adopted for lease term by
asset class is described below.
The lease terms can vary significantly by type and use of asset
and geography. In addition, the exact lease term is subject to the
non-cancellable period and rights and options in each contract.
Generally, lease terms are judged to be the longer of the minimum
lease term and:
-- Up to 5 years for offices, unless the non-cancellable period
exceeds this, with optional extension periods only included in
leases expiring in the earlier part of this period and where clear
plans to extend the leases are already in place; and
-- Up to 3 years for data centres with optional extensions
periods, where they exist, included for leases expiring in the next
year and for which relocation of the assets located in the data
centre is considered uneconomic.
For vehicle leases the minimum lease term, typically 3 to 4
years, is judged to be the lease term. Extension options for
vehicles are not considered reasonably certain as the assets are
not highly customised or difficult to replace.
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 2020, the Operating Committee
consisted of the Chief Executive Officer, the Chief Financial
Officer, Chief Operating Officer, Chief HR Officer and 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:
Micro Focus Product Portfolio - The Micro Focus Product
Portfolio segment contains mature infrastructure software products
that are managed on a portfolio basis akin to a "fund of funds"
investment portfolio. This portfolio is managed with a single
product group that makes and maintains the software, whilst the
software is sold and supported through a geographic Go-to-Market
organisation. The products within the existing Micro Focus Product
Portfolio are grouped together into five sub-portfolios based on
industrial logic and management of the Micro Focus sub-portfolios:
Application Modernisation & Connectivity, Application Delivery
Management, IT Operations Management, Security and Information
Management & Governance.
The segmental reporting is consistent with that used in internal
management reporting and the profit measure used by the Operating
Committee is Adjusted EBITDA.
Year ended Year ended
31 October 31 October
2020 2019
Note $m $m
------------------------------------------ ----- ------------ ------------
Reconciliation to Adjusted EBITDA:
Loss before tax (2,940.4) (34.1)
Finance costs 281.6 282.4
Finance income (2.6) (26.6)
Depreciation of property, plant and
equipment 42.0 66.5
Right-of use asset depreciation 76.9 -
Amortisation of intangible assets 674.1 716.5
Exceptional items (reported in Operating
(loss)/profit) 3 3,011.6 294.2
Share-based compensation charge 17.0 68.8
Product development intangible costs
capitalised (16.2) (16.5)
Foreign exchange credit 29.7 11.3
Adjusted EBITDA 1,173.7 1,362.5
------------------------------------------ ----- ------------ ------------
For the reportable segment, the total assets were $11,146.8m
(2019: $14,294.8m) and the total liabilities were $7,931.7m (2019:
$8,018.5m) as at 31 October 2020.
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 Year ended
31 October 2020 31 October
2019
$m $m
--------- ----------------- ------------
UK 173.0 206.9
USA 1,289.8 1,523.0
Germany 218.7 220.7
Canada 108.0 115.9
France 101.4 123.3
Japan 96.9 108.6
Other 1,013.2 1,050.0
--------- ----------------- ------------
Total 3,001.0 3,348.4
--------- ----------------- ------------
The total of non-current assets other than financial instruments
and deferred tax assets as at 31 October 2020 located in the USA is
$3,301.0m (31 October 2019: $4,623.0m), the total in the non-USA is
$6,304.0m (31 October 2019: $8,192.2m). They exclude trade and
other receivables, derivative financial instruments and deferred
tax.
2 Supplementary information continued
Analysis of revenue from contracts with customers
Year ended Year ended
31 October 31 October
2020 2019
$m $m
--------------------------------------- ------------ ------------
Revenue from contracts with customers 3,001.0 3,348.4
Being:
Recognised over time:
Maintenance revenue 1,920.8 2,051.6
SaaS & other recurring revenue 245.3 278.9
--------------------------------------- ------------ ------------
2,166.1 2,330.5
Recognised at point in time:
Licence revenue 646.5 800.0
Consulting revenue 188.4 217.9
--------------------------------------- ------------ ------------
834.9 1,017.9
--------------------------------------- ------------ ------------
Total Revenue 3,001.0 3,348.4
--------------------------------------- ------------ ------------
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 2020
with comparatives:
Year ended 31 October 2020:
SaaS &
Licence Maintenance other recurring Consulting Total
$m $m $m $m $m
--------------------------------- ---------- -------------- ----------------- ------------- --------
Application Modernisation
& Connectivity 138.6 321.6 - 10.1 470.3
Application Delivery Management 102.0 439.2 73.9 15.9 631.0
IT Operations Management 175.1 559.4 4.6 113.9 853.0
Security 162.6 416.8 33.6 33.1 646.1
Information Management &
Governance 68.2 184.2 133.4 15.4 401.2
--------------------------------- ---------- -------------- ----------------- ------------- --------
Subtotal 646.5 1,921.2 245.5 188.4 3,001.6
Deferred revenue haircut - (0.4) (0.2) - (0.6)
--------------------------------- ---------- -------------- ----------------- ------------- --------
Total Revenue 646.5 1,920.8 245.3 188.4 3,001.0
--------------------------------- ---------- -------------- ----------------- ------------- --------
Year ended 31 October 2019:
SaaS &
Licence Maintenance other recurring Consulting Total
$m $m $m $m $m
--------------------------------- ---------- -------------- ----------------- ------------- --------
Application Modernisation
& Connectivity 170.9 326.1 - 11.7 508.7
Application Delivery Management 130.3 485.4 87.8 18.2 721.7
IT Operations Management 237.5 645.8 11.0 127.5 1,021.8
Security 185.7 416.7 35.0 43.9 681.3
Information Management &
Governance 75.6 183.6 145.9 16.6 421.7
--------------------------------- ---------- -------------- ----------------- ------------- --------
Subtotal 800.0 2,057.6 279.7 217.9 3,355.2
Deferred revenue haircut - (6.0) (0.8) - (6.8)
--------------------------------- ---------- -------------- ----------------- ------------- --------
Total Revenue 800.0 2,051.6 278.9 217.9 3,348.4
--------------------------------- ---------- -------------- ----------------- ------------- --------
3 Exceptional items
Year ended Year ended
31 October 31 October
2020 2019
Reported within Operating (loss)/profit: $m $m
------------------------------------------------- ------------ ------------
Integration costs 152.6 245.9
Acquisition costs 0.2 1.5
Property related costs 15.2 16.3
Severance and legal costs 33.7 32.1
Other restructuring costs 10.7 -
Divestiture - 2.1
Goodwill impairment 2,799.2 -
Gain on disposal of Atalla - (3.7)
Exceptional costs before tax 3,011.6 294.2
Tax effect of exceptional items (38.7) (54.3)
Reported within profit from discontinued
operation (attributable to equity shareholders
of the Company):
Loss/(gain) on disposal of discontinued
operation 2.2 (1,458.5)
Exceptional costs/(profit) after tax 2,975.1 (1,218.6)
-------------------------------------------------- ------------ ------------
Exceptional items are allocated to the financial statement lines
(for example: cost of sales) in the Consolidated statement of
comprehensive income based on the nature and function of the costs,
for example restructuring costs related to employees are classified
where their original employment costs are recorded.
Integration costs
Integration costs of $152.6m for the year ended 31 October 2020
(2019: $245.9m) reflect the IT design, build and migration onto a
single IT platform and a wide range of projects undertaken to
conform, simplify and increase efficiency across the business.
Acquisition costs
Acquisition costs of $0.2m in the year ended 31 October 2020
relate to the acquisition of Atar Labs. The acquisition costs of
$1.5m the year ended 31 October 2019 related to the acquisition of
Interset Software Inc. (note 12).
Property related costs
Property related costs of $15.2m for the year ended 31 October
2020 (2019: $16.3m) relate to the impairment or amendment to the
impairments of right-of-use assets for empty or sublet properties
held by the Group, any related onerous non-rental costs and the
cost of site consolidations as the Group simplifies its real estate
footprint as a result of the acquisition of HPE Software or other
significant restructuring projects.
Severance and legal costs
Severance and legal costs of $33.7m for the year ended 31
October 2020 (2019: $32.1m) and relate mostly to termination costs
for employees as the Group continues to remove duplication and
simplify the continuing operations as a result of the acquisition
of HPE Software.
Other restructuring costs
Other restructuring costs of $10.7m for the year ended 31
October 2020 (2019: $nil) relates to the costs of implementing the
initiatives included in the Strategic and Operational Review.
Divestiture
Divestiture costs of $2.1m for the year ended 31 October 2019
related mostly to employee activities involved in the disposal of
the SUSE business completed in 2019.
Goodwill impairment
A goodwill impairment charge of $2,799.2m was made in the year
ended 31 October 2020 (2019: $nil), see note 7 for additional
information.
Gain on disposal of Atalla
The non-recurring gain on disposal of $3.7m for the year ended
31 October 2019 related to Atalla business disposal.
Tax effect of exceptional items
The tax effect of exceptional items on the income statement is a
credit of $38.7m for the year ended 31 October 2020 (2019: $54.3m
credit).
Loss/(gain) on disposal of discontinued operation
The loss on the disposal of discontinued operation of $2.2m
(2019: gain $1,458.5m) in the year ended 31 October 2020 related to
conclusion of the working capital settlement on the disposal of the
SUSE business and adjustments in respect of income tax balances
owed in respect of pre-transaction periods.
4 Taxation
A Taxation in the Consolidated statement of comprehensive
income
Year ended Year ended
31 October 2020 31 October 2019
$m $m
--------------------------------------------------- ----------------- -----------------
Current tax
Current year 175.4 163.9
Adjustments to tax in respect of previous periods 7.8 (35.3)
183.2 128.6
--------------------------------------------------- ----------------- -----------------
Deferred tax
Origination and reversal of temporary differences (195.3) (139.7)
Adjustments to tax in respect of previous periods 10.7 24.5
Previously unrecognised temporary differences - (29.4)
Impact of changes in tax rates 35.6 -
--------------------------------------------------- ----------------- -----------------
(149.0) (144.6)
--------------------------------------------------- ----------------- -----------------
Total tax charge/(credit) 34.2 (16.0)
--------------------------------------------------- ----------------- -----------------
For the year ended 31 October 2020, a deferred tax charge of
$1.5m (2019: $7.6m debit) and a $0.1m current tax credit (2019:
$13.1m credit) have been recognised in equity in relation to share
options. A deferred tax credit of $1.8m has been booked on initial
adoption of IFRS 16 "Leases" in retained earnings. A current tax
credit of $7.8m (2019: $23.3m credit) has been recognised in the
hedging reserve. There is also a deferred tax credit of $11.1m in
relation to the currency translation differences. In addition, a
deferred tax charge of $5.0m (2019: $13.0m credit) has been
recognised in the Consolidated statement of comprehensive income in
relation to defined benefit pension schemes and a deferred tax
charge of $8.7m (2019: $14.0m) in relation to foreign exchange
movements on intangibles.
The tax charge for the year ended 31 October 2020 is higher than
the standard rate of corporation tax in the UK of 19.00% (2019:
19.00%). The differences are explained below:
Year ended Year ended
31 October 2020 31 October 2019
$m $m
--------------------------------------------------------- ----------------- -----------------
Loss before taxation (2,940.4) (34.1)
Tax at UK corporation tax rate 19.00% (2019: 19.00%) (558.7) (6.5)
Effects of:
Tax rates other than the UK standard rate (78.0) (4.4)
Intra-Group financing (21.0) (42.8)
Innovation tax credit benefits (31.8) (13.5)
US foreign inclusion income 20.4 43.7
Share options 4.1 7.1
Movement in deferred tax not recognised 11.1 14.4
Previously unrecognised temporary differences - (29.4)
Impact of rate changes 35.6 -
Goodwill impairment 592.8 -
Expenses not deductible and other permanent differences 41.2 26.2
--------------------------------------------------------- ----------------- -----------------
15.7 (5.2)
Adjustments to tax in respect of previous periods:
Current tax 7.8 (35.3)
Deferred tax 10.7 24.5
--------------------------------------------------------- ----------------- -----------------
18.5 (10.8)
Total taxation 34.2 (16.0)
--------------------------------------------------------- ----------------- -----------------
A change to the main UK corporation tax rate, announced in the
Budget on 11 March 2020, was substantively enacted for IFRS
purposes on 17 March 2020. Hence, the rate applicable from 1 April
2020 now remains at 19% rather than the previously enacted
reduction to 17%. The Group has remeasured its UK deferred tax
assets and liabilities at the end of the reporting period at the
rate of 19%. The impact of this and other changes in rate across
the group has resulted in the recognition of a deferred tax credit
of $35.6m in the income statement.
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 2020 being $31.8m (2019: $13.5m). The Group realised
benefits in relation to intra-Group financing of $21.0m for the
year ended 31 October 2020 (2019: $42.8.m). The benefits mostly
relate to arrangements put in place to facilitate the acquisition
of the HPE Software business.
US foreign inclusion income of $20.4m arising in the year ended
31 October 2020 (2019: $43.7m) is largely driven by new US tax
legislation introduced as part of US tax reforms in 2018.
The Group recognised a net overall charge in respect of share
options due to deferred tax credits arising on options held at the
balance sheet date being lower than the current tax charge because
of the terms of the options.
The expenses not deductible and other permanent differences
charge of $41.2m (2019: $26.2m) included $4.6m in relation to
uncertain tax positions and $6.5m related to irrecoverable
withholding tax.
The Group realised a net charge in relation to the true-up of
prior period, current and deferred tax estimates of $18.5m for the
year ended 31 October 2020 (2019: $10.8m credit).
4 Taxation continued
A Taxation in the Consolidated statement of comprehensive income continued
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 changes President Biden
will seek to introduce and global tax reform as governments respond
to COVID-19, the OECD's Base Erosion and Profit Shifting project
and the consequences of Brexit.
In April 2019, the European Commission published its final
decision on its state aid investigation into the UK's 'Financing
Company Partial Exemption' legislation and concluded that part of
the legislation is in breach of EU State Aid rules. Similar to
other UK based international groups that have acted in accordance
with the UK legislation in force at the time, the Group may be
affected by the finding and is monitoring developments. The UK
government and UK-based international companies, including the
Group, have appealed to the General Court of the European Union
against the decision. The UK government is required to start
collection proceedings and on 5 February 2021, State Aid charging
notices (excluding interest) were received from HM Revenue and
Customs totalling $45.2m and will be settled by the Group within 30
days. In addition, there has been a challenge from the UK Tax
Authorities into the historic financing arrangements of the Group.
Based on its current assessment and supported by external
professional advice, the Group consider that the maximum liability
of both of these items to be $60m. Based on its current assessment
and also supported by external professional advice, the Group
believes that no provision is required in respect of these issues.
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 finding on 1 January 2019, to be
compliant with EU law, and (ii) the unwind of the financing company
arrangements in question.
B Current tax receivables
31 October 2020 31 October 2019
$m $m
----------------- ---------------- ----------------
Corporation tax 45.3 40.1
----------------- ---------------- ----------------
The current tax receivable at 31 October 2020 is $45.3m (2019:
$40.1m).
C Current tax liabilities
31 October 2020 31 October 2019
$m $m
----------------- ---------------- ----------------
Corporation tax 150.1 104.0
----------------- ---------------- ----------------
The current tax creditor at 31 October 2020 is $150.1m (2019:
$104.0m). The current tax creditor includes liabilities in respect
of uncertain tax positions, net of overpayments.
Within current tax liabilities is $84.8m (2019: $78.3m) in
respect of the group income tax reserve, the majority of which
relates to the risk of challenge from the local tax authorities.
Aside from the impact of any change in judgement as the State Aid
and UK tax authority challenges progress, which is discussed above,
the Group does not anticipate that there will be any material
change to these provisions in the next 12 months. Due to the
uncertainty associated with such tax items, it is possible that at
a future date, on conclusion of open tax matters, the final outcome
may vary significantly.
D Non-current tax liabilities
31 October 2020 31 October 2019
$m $m
----------------- ---------------- ----------------
Corporation tax 102.7 119.7
----------------- ---------------- ----------------
The non-current tax creditor is $102.7m (2019: $119.7m). The
non-current creditor reflects the US transition tax payable more
than 12 months after the balance sheet date.
5 Dividends
Year ended Year ended
31 October 31 October
2020 2019
Equity - ordinary $m $m
------------------------------------------------ ------------- ------------
Final paid nil cents (2019: 58.33 cents) per
ordinary share - 240.7
Interim paid nil cents (2019: 58.33 cents) per
ordinary share - 198.5
- 439.2
-------------------------------------------------------------- ------------
On 18 March 2020, given the increased macro-economic uncertainty
as a result of the Covid-19 pandemic, as a precautionary measure,
the directors withdrew their recommendation for the payment of a
final dividend of 58.33 cents per share in respect of the year
ended 31 October 2019. Similarly, no dividend was paid in respect
of the six months to 30 April 2020.
The directors announced a final dividend of 15.5 cents per share
payable on 15 April 2021 to shareholders who are registered at 12
March 2021. This final dividend, amounting to $51.9m, has not been
recognised as a liability as at 31 October 2020.
6 Earnings per share
The calculation of the basic earnings per share has been based
on the earnings attributable to owners of the parent and the
weighted average number of shares for each year.
Reconciliation of the earnings and weighted average number of
shares:
Year ended Year ended
31 October 31 October
2020 2019
------------------------------------------------- ------------ ------------
Earnings ($m)
Loss for the year from continuing operations (2,974.6) (18.1)
Profit for the year from discontinued operation 5.1 1,487.2
------------------------------------------------- ------------ ------------
(2,969.5) 1,469.1
------------------------------------------------- ------------ ------------
Number of shares (m)
Weighted average number of shares 335.7 378.1
Dilutive effects of shares - 4.1
------------------------------------------------- ------------ ------------
335.7 382.2
------------------------------------------------- ------------ ------------
Earnings per share
Basic earnings per share (cents)
Continuing operations (886.15) (4.87)
Discontinued operation 1.52 393.37
Total Basic earnings per share (884.63) 388.50
Diluted earnings per share (cents)
Continuing operations (1) (886.15) (4.87)
Discontinued operation 1.52 389.16
Total Diluted earnings per share (1) (884.63) 384.35
Basic earnings per share (pence)
Continuing operations (693.45) (3.82)
Discontinued operation 1.19 308.89
Total Basic earnings per share (692.26) 305.07
Diluted earnings per share (pence)
Continuing operations (1) (693.45) (3.82)
Discontinued operation 1.19 305.59
Total Diluted earnings per share (1) (692.26) 301.81
Earnings attributable to ordinary shareholders
From continuing operations (2,974.6) (18.1)
Excluding non-controlling interests - (0.3)
------------------------------------------------- ------------ ------------
Loss for the year from continuing operations (2,974.6) (18.4)
From discontinued operation 5.1 1,487.2
------------------------------------------------- ------------ ------------
(2,969.5) 1,468.8
------------------------------------------------- ------------ ------------
Average exchange rate $1.28/GBP1 $1.27/GBP1
------------------------------------------------- ------------ ------------
(1) The Group reported a loss from continuing and discontinued
operations attributable to the ordinary equity shareholders of the
Company for the year ended 31 October 2020. The Diluted EPS is
reported as equal to Basic EPS, as no account can be taken of the
effect of dilutive securities under IAS 33.
The weighted average number of shares excludes treasury shares
that do not have dividend right.
7 Goodwill
31 October 2020 31 October 2019
$m $m
-------------------------------------------------------------------------- ---------------- ----------------
Cost
At 1 November 6,671.3 6,805.0
Acquisitions 1.4 26.8
Effects of movements in exchange rates (38.1) (160.5)
--------------------------------------------------------------------------- ---------------- ----------------
At 31 October 6,634.6 6,671.3
--------------------------------------------------------------------------- ---------------- ----------------
Impairment losses
At 1 November - -
Impairment charge for the year (2,799.2) -
-------------------------------------------------------------------------- ---------------- ----------------
At 31 October (2,799.2) -
-------------------------------------------------------------------------- ---------------- ----------------
Net book value 3,835.4 6,671.3
--------------------------------------------------------------------------- ---------------- ----------------
A segment-level summary of the goodwill allocation is presented below:
Micro Focus 3,835.4 6,671.3
--------------------------------------------------------------------------- ---------------- ----------------
Goodwill acquired through business combinations has been
allocated to a cash-generating unit ("CGU") for the purpose of
impairment testing.
The goodwill arising in the year ended 31 October 2020, related
to the acquisition of Atar Labs of $1.4m has been allocated to the
Micro Focus CGU as this is consistent with the segment reporting
that is used in internal management reporting. Of the addition to
goodwill, all amounts are expected to be deductible for tax
purposes.
The goodwill arising in the year ended 31 October 2019, related
to the acquisition of Interset Software Inc. of $26.8m has been
allocated to the Micro Focus CGU as this is consistent with the
segment reporting that is used in internal management reporting. Of
the addition to goodwill, all amounts are expected to be deductible
for tax purposes.
Impairment test
Impairment of goodwill is tested annually, 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. It was determined that the adverse
impact of COVID-19 on global economy and the challenging trading
environment that is likely to result from this was an indicator of
potential impairment as at 30 April 2020. Therefore, an additional
impairment test was performed at this date. As a result, for the
six months ended 30 April 2020, the Group recorded an impairment
charge of $0.9bn (2019: $nil). The impairment charge related solely
to goodwill and was recognised in administrative expenses as an
exceptional cost in the Consolidated Statement of Comprehensive
Income.
The Group then performed the impairment test at 31 October 2020
incorporating its knowledge of the business into that testing and
noting at that date the market capitalisation was less than the net
assets of the Group, which was taken into account during the
impairment test. An additional impairment charge of $1.9bn has been
recognised resulting from the year end impairment test. The total
impairment charge recorded in the year ended 31 October 2020 was
$2.8bn and has been recognised in administrative expenses as an
exceptional cost in the Consolidated Statement of Comprehensive
Income. The recoverable amount of the Micro Focus CGU is $9.3bn,
based on value in use calculations. The impairment charge relates
solely to goodwill.
The recoverable amount of the Micro Focus CGU is determined
based on its Value In Use ("VIU"). The VIU includes estimates about
the future financial performance of the CGU and is based on
five-year projections and then a terminal value calculation. It
utilises discounted board approved forecasts for the five years.
The cash flow projections and inputs combine past performance with
adjustments as appropriate where the directors believe that past
performance and rates are not indicative of future performance and
rates.
Impairment reviews under IAS 36 are required to exclude the
estimated cash inflow and outflows arising from improving or
enhancing the performance of existing assets until the cash flow is
incurred. Therefore, the VIU calculation excludes the cash outflows
and resulting cash inflow arising from certain investment decisions
made in the Strategic Review which are included within the board
approved forecasts. In addition, the VIU calculation excludes the
cost saving impacts, which are included in the board approved
forecasts, resulting from restructuring activities which have not
commence.
The impairment charge recognised in the Micro Focus CGU
primarily reflects our trading performance and the macro-economic
environment when compared to the original projections produced at
the time of the HPE Software acquisition, which was exacerbated by
the impacts of the COVID-19 pandemic. Our assumption of a
moderation in the revenue decline and delivery of flat to low
single digit growth from the Strategic and Operational Review of
February 2020 remains valid in the board approved five year
forecasts; although as the VIU calculation excludes the cash
inflows resulting from a number of the investment decisions made in
the Strategic review the VIU calculation has a delay in the
achievement of flat growth versus the board approved five year
forecasts. Therefore as disclosed below, over the five year
forecast period, this has resulted in a reduction in the range of
average annual revenue growth rates by product group.
7 Goodwill continued
Key assumptions
Key assumptions in the VIU are considered to be the discount
rate, average annual revenue growth rate by product group and the
long-term cash flow growth rate. These have been assessed taking
into consideration the current economic climate and the resulting
impact on expected growth and discount rates.
The average annual revenue growth rate by product group,
long-term cash flow growth rate and discount rate used in the VIU
calculation are:
31 October 2020 31 October
2019
----------------------------------------------- ---------------- -----------
Long-term cash flow growth rate for terminal
value 1.0% 1.0%
Pre-tax discount rate(1) 10.9% 10.3%
Average annual revenue growth rate by product (8.1)% to 2.2% (2.4)% to
group(2) 0.8%
----------------------------------------------- ---------------- -----------
(1) This equates to a post-tax discount rate of 8.2% (2019:
8.0%)
(2) Medium-term annual revenue growth rate by product group was
considered the key assumption in 2019 with a range of (2.0)% to
2.1% disclosed. Given the future macroeconomic uncertainty caused
by the ongoing pandemic at the 30 April 2020 impairment test the
Group extended the key assumption going forward to cover the five
years forecasts used for impairment testing. The key assumption for
2019 has been restated to be presented on a consistent basis with
2020.
Sensitivity analysis
In undertaking this analysis, the directors have considered
reasonably possible changes in the key assumptions, taking into
consideration that the Group is insulated from some significant
adverse impacts by its geographical spread and that the Group's
cost base is flexible and could quickly respond to market changes
as shown by our responses to the COVID-19 pandemic where margins
have been largely maintained during the year. The sensitivities are
prepared on the basis that the reasonably possible change in each
key assumption would not have a consequential impact on other key
assumptions used in the impairment review and therefore leave all
other assumptions unchanged. The headroom and impairments disclosed
below are on the VIU calculation, which, as explained above,
excludes the cash inflow and outflow assumptions arising from the
investment decisions made in the Strategic Review where these have
not been fully implemented. The directors considered whether the
range of reasonably possible changes in key assumptions should be
widened as a result of the increased uncertainty resulting from the
COVID-19 outbreak. However, the directors concluded this was
unnecessary as the assumptions are either long term (i.e. 5 year
revenue growth and long term growth) and therefore exceed period
expected to be
impacted by COVID-19 or in the case of the discount rate, have
not seen significant volatility due to COVID-19.
The directors have assessed that a reasonably possible change in
the discount rate is an absolute movement of 1.0% (2019: 2.0%). The
directors have considered the sensitivity of the discount rate in
light of the impact the significant economic uncertainty resulting
from COVID-19 has had on the financial inputs used in determining
the discount rate and have concluded that reducing the reasonably
possible change from 2% to 1% is appropriate in light of the
limited volatility seen since 2018. An increase in the discount
rate of 1% to 11.9% would increase the impairment recognised at 31
October 2020 by $0.8bn. A decrease in the discount rate of 1% to
9.9% would decrease the impairment recognised at 31 October 2020 by
$1.0bn.
The directors have assessed that a reasonably possible change in
the average annual revenue growth rate by product group is an
absolute reduction of 2.0%. A decrease in the average annual
revenue growth rate by product group of 2% would increase the
impairment recognised at 31 October 2020 by $2.0bn. This
sensitivity has been presented exclusive of mitigating actions,
such as cost saving, that would be taken in such a scenario and
which would at least partially offset such a reduction in cash
flows.
The directors have assessed that a reasonably possible change in
the long-term growth rate is an increase or decrease of 0.5% to
1.5% or 0.5% respectively (2019: not reasonably possible). An
increase of 0.5% would decrease the impairment recognised at 31
October 2020 by $0.3bn. A decrease of 0.5% would increase the
impairment recognised at 31 October 2020 by $0.3bn.
8 Borrowings
31 October 31 October
2020 2019
$m $m
----------------------------------------------- ----------- -----------
Bank loan secured 4,733.2 4,775.0
Unamortised prepaid facility arrangement fees
and original issue discounts (92.9) (104.3)
----------------------------------------------- ----------- -----------
Carrying value 4,640.3 4,670.7
----------------------------------------------- ----------- -----------
31 October 2020 31 October 2019
----------------------------------------- ----------------------------------------
Unamortised Unamortised
prepaid facility prepaid facility
arrangement arrangement
fees and original fees and
Bank loan issue Bank loan original
secured discounts Total secured issue discounts T otal
Reported within: $m $m $m $m $m $m
--------------------- ---------- ------------------- -------- ---------- ------------------ --------
Current liabilities 34.2 (12.8) 21.4 - - -
Non-current
liabilities 4,699.0 (80.1) 4,618.9 4,775.0 (104.3) 4,670.7
--------------------- ---------- ------------------- -------- ---------- ------------------ --------
4,733.2 (92.9) 4,640.3 4,775.0 (104.3) 4,670.7
--------------------- ---------- ------------------- -------- ---------- ------------------ --------
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
amortised between three and six years. The remaining unamortised
fees of $92.9m have a remaining period of amortisation of three
years. Long-term borrowings with a drawn value of $4,733.2m before
unamortised prepaid facility fees, have a fair value estimate of
$4,535.1m based on trading prices as at 31 October 2020 (2019:
$4,686.0m).
Short-term borrowing of $34.2m represents capital repayments
falling due on the Group borrowings within one year less
unamortised prepaid facility arrangement fees and original issue
discounts of $12.8m.
8 Borrowings continued
On 29 May 2020, the Group announced that it had successfully
priced and allocated a EUR600.0m and a $650m Senior Secured Term
Loan. The new five-year facilities, along with $143.0m of existing
cash reserves, were used by the Group to fully refinance its
existing Senior Secured Term Loan B due November 2021 and pay
associated fees and expenses.
Prepaid facility fees of $12.2m, which were still to be
amortised, in relation to the Senior Secured Term Loan B due
November 2021 were fully expensed in June 2020 with the cost
recorded within finance costs in the Consolidated statement of
comprehensive income. Fees of $44m relating to the new Senior
Secured Term Loans were capitalised in June 2020.
On 3 September 2020, the Group announced that it had
successfully extended its revolving credit facility and reduced the
size from $500.0m to $350.0m. The Group also confirmed that it had
repaid the $175.0m previously drawn during the year as a
precautionary measure in response to the COVID-19 outbreak,
resulting in a balance outstanding of $nil. These actions resulted
in a reduction in the Group's gross debt and the borrowing costs
associated with the revolving credit facility. The remaining
prepaid facility fees of $4.5m to be amortised were expensed in the
period and new fees of $1.8m were capitalised for the new
arrangement.
Following these refinancing activities, the Group's earliest
debt maturity is in June 2024.
The following facilities were drawn as at 31 October 2020:
-- The EUR600m (equivalent to $700.3m) 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 $368.2m senior secured seven year term loan B-3 issued by
MA FinanceCo., LLC, 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 $650.0m 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%;
-- The $2,486.3m 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%; and
-- The EUR452.8m (equivalent to $528.4m) senior secured seven
year term loan B issued by MA FinanceCo., LLC, maturing in June
2024, is priced at EURIBOR plus 3.00% (subject to a EURIBOR floor
of 0.00%) with an original issue discount of 0.25%.
The following facilities were undrawn at 31 October 2020:
-- A senior secured revolving credit facility of $350.0m ($nil
drawn), ("Revolving Facility"), with an interest rate of 3.50%
above LIBOR on amounts drawn (and 0.5% on amounts undrawn)
thereunder (subject to a LIBOR floor of 0.00%).
At 31 October 2020, $nil of the Revolving Facility was drawn (31
October 2019: $nil), together with $4,733.2m of Term Loans giving
gross debt of $4,733.2m drawn.
There are no financial covenants on the Group's term-loan
borrowing facilities. The Revolving Facility is subject to a single
financial covenant, being an aggregate net leverage covenant only
in circumstances where more than 35% of the Revolving Facility is
outstanding at a fiscal quarter end. Throughout the year the
applicable covenant threshold was 4.35x, however no test was
applicable at 31 October 2020 or any previous test date, as the
facility was not drawn in excess of the 35% threshold. This
covenant is not expected to inhibit the Group's future operations
or funding plans.
The Group's borrowing arrangements include annual repayments of
1% of the initial par value for the B-3, Seattle Spinco and Euro
Term B loans and 2.5% of the initial par value for the B-1 and B4
loans with the amount paid in four equal quarterly instalments and
then a final balloon payment on maturity. In addition, the
borrowing arrangements require additional debt repayments where the
Group's net leverage exceeds 3.00x, when 25% of excess cash flow
for the prior year is required to be paid, and 3.30x, when 50% of
excess cash flow for the prior year is required to be paid.
8 Borrowings continued
The movements on the Group loans in the year were as
follows:
Term Term Term Term Seattle Euro
Loan Loan Loan Loan Spinco Term Revolving
B-1 EUR B-2 USD B-3 USD B-4 USD Term Loan Loan Facility Total
B B
$m $m $m $m $m $m $m $m
------------------ --------- ---------- --------- --------- ----------- ------- ------------ ----------
At 1 November
2018 - 1,503.8 382.1 - 2,580.5 530.5 - 4,996.9
Repayments - (89.1) (13.9) - (94.2) (15.4) - (212.6)
Foreign exchange - - - - - (9.3) - (9.3)
------------------ --------- ---------- --------- --------- ----------- ------- ------------ ----------
At 31 October
2019 - 1,414.7 368.2 - 2,486.3 505.8 - 4,775.0
------------------ --------- ---------- --------- --------- ----------- ------- ------------ ----------
At 1 November
2019 - 1,414.7 368.2 - 2,486.3 505.8 - 4,775.0
Draw downs 665.8 - - 650.0 - - 175.0 1,490.8
Repayments - (1,414.7) - - - - (175.0) (1,589.7)
Foreign exchange 34.5 - - - - 22.6 - 57.1
------------------ --------- ---------- --------- --------- ----------- ------- ------------ ----------
At 31 October
2020 700.3 - 368.2 650.0 2,486.3 528.4 - 4,733.2
------------------ --------- ---------- --------- --------- ----------- ------- ------------ ----------
Maturity of borrowings
The maturity profile of the anticipated future cash flows
including interest in relation to the Group's borrowings on an
undiscounted basis, which therefore, differs from both the carrying
value and fair value, is as follows:
As at 31 October 2020:
Term Seattle Euro
Term Loan Term Spinco Term
Loan B-3 Loan Term Loan Revolving
B-1 EUR USD B-4 USD Loan B B Facility Total
$m $m $m $m $m $m $m
--------------------- --------- ------ ---------- -------- ------ ---------- --------
Within one year 49.0 11.0 50.3 74.6 16.9 1.8 203.6
In one to two years 52.6 12.4 53.5 82.7 21.5 1.5 224.2
In two to three
years 47.4 14.6 48.6 98.4 21.3 - 230.3
In three to four
years 46.6 369.7 47.8 2,496.5 527.1 - 3,487.7
In four to five
years 642.8 - 599.2 - - - 1,242.0
At 31 October 2020 838.4 407.7 799.4 2,752.2 586.8 3.3 5,387.8
--------------------- --------- ------ ---------- -------- ------ ---------- --------
Less than
1 year 1-3 years 3-5 years Total
$m $m $m $m
-------------------------- ---------- ---------- ---------- --------
Debt principal repayment 34.2 128.2 4,570.8 4,733.2
Interest payment on debt 169.4 326.3 158.9 654.6
At 31 October 2020 203.6 454.5 4,729.7 5,387.8
-------------------------- ---------- ---------- ---------- --------
8 Borrowings continued
As at 31 October 2019:
Seattle Euro
Spinco Term
Term Term Term Loan Loan Revolving
Loan B-2 Loan B-3 B B Facility Total
$m $m $m $m $m $m
----------------------- ---------- ---------- ----------- ------ ---------- --------
Within one year 61.6 17.0 114.6 14.1 1.9 209.2
In one to two years 61.5 16.9 114.3 14.6 1.9 209.2
In two to three years 1,419.8 18.5 124.1 19.3 1.6 1,583.3
In three to four
years - 20.6 139.4 19.1 - 179.1
In four to five years - 373.5 2,522.6 503.6 - 3,399.7
At 31 October 2019 1,542.9 446.5 3,015.0 570.7 5.4 5,580.5
----------------------- ---------- ---------- ----------- ------ ---------- --------
Less than
1 year 1-3 years 3-5 years Total
$m $m $m $m
-------------------------- ---------- ---------- ---------- --------
Debt principal repayment - 1,431.7 3,343.3 4,775.0
Interest payment on debt 209.2 360.6 235.7 805.5
At 31 October 2019 209.2 1,792.3 3,579.0 5,580.5
-------------------------- ---------- ---------- ---------- --------
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.
9 Pension commitments
Defined contribution
The Group has established a number of pension schemes around the
world covering many of its employees. The principal funds are those
in the US, UK and Germany. These were funded schemes of the defined
contribution type.
Pension costs for defined contributions schemes are as
follows:
Year ended Year ended
31 October 2020 31 October 2019
Continuing operations $m $m
------------------------------ ----------------- -----------------
Defined contribution schemes 31.2 32.7
------------------------------- ----------------- -----------------
b) Defined benefit
31 October 2020 31 October
2019
$m $m
-------------------------------- --------------- ----------
Within non-current assets:
Long-term pension assets 18.2 17.1
-------------------------------- --------------- ----------
Within non-current liabilities:
Retirement benefit obligations (155.0) (141.4)
-------------------------------- --------------- ----------
As of 31 October 2020, there are a total of 33 defined benefit
plans in 10 countries around the world (2019: 30). The highest
concentration of the pension schemes are in Germany, where the
Group sponsors 12 separate schemes that comprise over 83% of the
total net retirement 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 in the form of a guaranteed level of pension
payable for life in the case of retirement, disability and death.
The level of benefits provided depends not only on the final salary
but also on member'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 a 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 and other types of statutory plans that provide a
one-time benefit at termination. 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 12 plans outside of Germany that are
open to new members, most of which are termination or retirement
indemnity plans or statutory plans providing a one-time benefit at
termination, retirement, death or disability. The Group
participates in multi-employer plans in Switzerland and Japan.
These plans are accounted for as defined benefit plans and the
Group's obligations are limited to the liabilities of our
employees.
9 Pension commitments continued
There were three plans reclassified to the net retirement
obligation during the year ended 31 October 2020. None of the plans
are final salary plans and none are material.
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 year ended 31 October 2020,
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 movement on the long-term pension asset is as follows:
31 October 31 October
2020 2019
Note $m $m
--------------------------------------------- ------ ----------- -----------
As at 1 November 17.1 16.7
Reclassification to assets held for sale - 0.1
Transfer to plan assets (0.4) -
Interest on non-plan assets 0.2 0.3
Benefits paid (0.1) (0.1)
Contributions 0.3 0.3
Included within other comprehensive income:
* Change in fair value assessment 0.4 0.4
0.4 0.4
Effects of movements in exchange rates 0.7 (0.6)
As at 31 October 18.2 17.1
----------------------------------------------------- ----------- -----------
Included within other comprehensive income:
Continuing operations 0.4 0.3
Discontinued operation - 0.1
----------------------------------------------------- ----------- -----------
0.4 0.4
---------------------------------------------------- ----------- -----------
The non-plan assets are considered to be Level 3 asset under the
fair value hierarchy as of 31 October 2020. These assets have been
valued by an external insurance expert by applying a discount rate
to the future cash flows and taking into account the fixed interest
rate, mortality rates and term of the insurance contract. There
have been no transfers between levels for the year ended 31 October
2020 (2019: none).
Retirement benefit obligations
The following amounts have been included in the consolidated
statement of comprehensive income for defined benefit pension
arrangements:
Year ended Year ended
31 October 31 October
2020 2019
$m $m
-------------------------------------------------- ------------ ------------
Current service charge 10.4 9.0
Charge to operating (loss)/profit 10.4 9.0
Current service charge - discontinued operations - 0.1
Interest on pension scheme liabilities 3.1 4.2
Interest on pension scheme assets (1.3) (1.8)
--------------------------------------------------- ------------ ------------
Charge to finance costs 1.8 2.4
Total continuing charge to (loss)/profit
for the year 12.2 11.5
--------------------------------------------------- ------------ ------------
The contributions for the year ended 31 October 2021 are
expected to be broadly in line with the year ended 31 October 2020.
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.
9 Pension commitments continued
Retirement benefit obligations
The following amounts have been recognised as movements in the
statement of other comprehensive income:
Year ended Year ended
31 October 31 October
2020 2019
$m $m
----------------------------------------------------- ------------ ------------
Actuarial return on assets excluding amounts
included in interest income 1.8 5.9
Re-measurements - actuarial gains/(losses):
- Demographic - (1.6)
* Financial (0.6) (38.8)
* Experience 3.0 8.4
------------ ------------
2.4 (32.0)
------------ ------------
Reclassification from defined contribution scheme
or other assets and liabilities to defined benefit (4.6) -
scheme
Movement in the year (0.4) (26.1)
----------------------------------------------------- ------------ ------------
Continuing operations (0.4) (26.2)
Discontinued operation - 0.1
----------------------------------------------------- ------------ ------------
(0.4) (26.1)
----------------------------------------------------- ------------ ------------
The weighted average key assumptions used for the valuation of
the schemes were:
31 October 2020 31 October 2019
---------------------------- ----------------------------
Germany Rest Total Germany Rest Total
of World of World
----------------------------- -------- ---------- ------ -------- ---------- ------
Rate of increase in final
pensionable salary 2.50% 3.09% 2.64% 2.50% 3.09% 2.65%
Rate of increase in pension
payments 1.50% 1.50% 1.50% 1.75% 1.50% 1.75%
Discount rate 0.79% 1.41% 0.90% 1.09% 1.71% 1.20%
Inflation 1.50% 1.25% 1.47% 1.75% 1.16% 1.69%
----------------------------- -------- ---------- ------ -------- ---------- ------
During the year ended 31 October 2019, the model used to derive
our discount rates was updated to better reflect yields on
corporate bonds over the life of our schemes. The key difference in
the revised model lies in the extrapolation of yields in the
outlying years of the curve and uses AA government bond rates to
determine these yields. This change resulted in a decrease in our
defined benefit obligation of approximately $14.0m in the year
ended 31 October 2019. The old and revised models are both
considered standard models devised by our external consolidating
actuary.
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 2020 31 October 2019
---------------------------- -------------------------
Germany Rest Total Germany Rest Total
of World of
World
---------------------------------- -------- ---------- ------ -------- ------- ------
Retiring at age 65 at the end of
the reporting year:
Male 20 22 20 20 20 20
Female 24 25 24 23 23 23
Retiring 15 years after the end
of the reporting year:
Male 22 23 22 22 23 22
Female 26 26 25 25 26 25
---------------------------------- -------- ---------- ------ -------- ------- ------
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 2020 31 October 2019
------------------------------ ------------------------------
Germany Rest Total Germany Rest Total
of World of World
---------------------------------- -------- ---------- -------- -------- ---------- --------
Present value of defined benefit
obligations 248.4 54.9 303.3 213.5 48.0 261.5
Fair values of plan assets (119.1) (29.2) (148.3) (92.0) (28.1) (120.1)
---------------------------------- -------- ---------- -------- -------- ---------- --------
129.3 25.7 155.0 121.5 19.9 141.4
---------------------------------- -------- ---------- -------- -------- ---------- --------
9 Pension commitments continued
The defined benefit obligation has moved as follows:
31 October 2020
--------------------------------------------------------------------------------------------------------------------
Germany Rest of World Total
Defined benefit Defined Retirement Defined Retirement Defined Retirement
obligations benefit Scheme benefit benefit Scheme benefit benefit Scheme benefit
obligations assets obligations obligations assets obligations obligations assets obligations
$m $m $m $m $m $m $m $m $m
------------------- ------------ --------- ------------ ------------- -------- ------------- ------------
At 1 November
2019 213.5 (92.0) 121.5 48.0 (28.1) 19.9 261.5 (120.1) 141.4
Current service
cost 6.9 - 6.9 3.5 - 3.5 10.4 - 10.4
Reclassification
from other
liabilities/assets 14.7 (17.8) (3.1) 1.5 - 1.5 16.2 (17.8) (1.6)
Transfer from
long-term pension
assets - (0.4) (0.4) - - - - (0.4) (0.4)
Benefits paid (0.6) 0.6 - (2.9) 2.9 - (3.5) 3.5 -
Contributions
by plan
participants 1.1 (1.1) - 0.6 (0.6) - 1.7 (1.7) -
Contribution by
employer - (0.7) (0.7) - (2.3) (2.3) - (3.0) (3.0)
Interest
cost/(income) 2.3 (1.0) 1.3 0.8 (0.3) 0.5 3.1 (1.3) 1.8
Included within
other comprehensive
income:
Re-measurements
- actuarial (gains)
and losses:
- - - - - - - - -
* Demographic
* Financial (0.4) - (0.4) 1.0 - 1.0 0.6 - 0.6
* Experience (2.0) - (2.0) (1.0) - (1.0) (3.0) - (3.0)
Actuarial return
on assets
excluding
amounts included
in interest income - (2.4) (2.4) - 0.6 0.6 - (1.8) (1.8)
Reclassification
to defined
benefit
scheme 3.1 - 3.1 1.5 - 1.5 4.6 - 4.6
0.7 (2.4) (1.7) 1.5 0.6 2.1 2.2 (1.8) 0.4
Effects of
movements
in exchange rates 9.8 (4.3) 5.5 1.9 (1.4) 0.5 11.7 (5.7) 6.0
At 31 October
2020 248.4 (119.1) 129.3 54.9 (29.2) 25.7 303.3 (148.3) 155.0
31 October 2019
Germany Rest of World Total
Defined benefit
obligations Defined Retirement Defined Retirement Defined Retirement
benefit Scheme benefit benefit Scheme benefit benefit Scheme benefit
obligations assets obligations obligations assets obligations obligations assets obligations
$m $m $m $m $m $m $m $m $m
------------------- ------------ ------- ------------ ------------- -------- ------------- ------------ -------
At 1 November
2018 173.8 (82.1) 91.7 47.4 (28.7) 18.7 221.2 (110.8) 110.4
Reclassification
to assets held
for sale 0.3 - 0.3 0.2 (0.2) - 0.5 (0.2) 0.3
Current service
cost 6.0 - 6.0 3.1 - 3.1 9.1 - 9.1
Benefits paid (0.4) 0.3 (0.1) (4.2) 4.1 (0.1) (4.6) 4.4 (0.2)
Contributions
by plan
participants 1.5 (1.5) - 0.3 (0.3) - 1.8 (1.8) -
Contribution by
employer - (0.3) (0.3) - (4.2) (4.2) - (4.5) (4.5)
Interest
cost/(income) 3.1 (1.5) 1.6 1.1 (0.3) 0.8 4.2 (1.8) 2.4
Included within
other comprehensive
income:
Re-measurements
- actuarial (gains)
and losses:
* Demographic 1.6 - 1.6 - - - 1.6 - 1.6
* Financial 34.0 - 34.0 4.8 - 4.8 38.8 - 38.8
* Experience (3.2) - (3.2) (5.2) - (5.2) (8.4) - (8.4)
Actuarial return
on assets
excluding
amounts included
in interest income - (8.0) (8.0) - 2.1 2.1 - (5.9) (5.9)
32.4 (8.0) 24.4 (0.4) 2.1 1.7 32.0 (5.9) 26.1
Effects of
movements
in exchange rates (3.2) 1.1 (2.1) 0.5 (0.6) (0.1) (2.7) 0.5 (2.2)
At 31 October
2019 213.5 (92.0) 121.5 48.0 (28.1) 19.9 261.5 (120.1) 141.4
9 Pension commitments continued
None of the plan assets are represented by financial instruments
of the Group. None of the plan assets are occupied or used by the
Group. The major categories of the plan assets are as follows:
31 October 2020
Germany Rest of World Total
Quoted Unquoted Total Quoted Unquoted Total Quoted Unquoted Total
$m $m $m $m $m $m $m $m $m
------ -------- ------
Funds that invest in:
- Equity instruments 49.3 - 49.3 - 6.4 6.4 49.3 6.4 55.7
- Debt instruments 63.3 - 63.3 2.6 4.9 7.5 65.9 4.9 70.8
- Real estate - - - - 2.9 2.9 - 2.9 2.9
Cash and cash equivalents - - - - 2.6 2.6 - 2.6 2.6
Re-insurance contracts
with guaranteed interest
rates * - 6.5 6.5 - - - - 6.5 6.5
Other - - - - 9.8 9.8 - 9.8 9.8
Total 112.6 6.5 119.1 2.6 26.6 29.2 115.2 33.1 148.3
31 October 2019
Germany Rest of World Total
Quoted Unquoted Total Quoted Unquoted Total Quoted Unquoted Total
$m $m $m $m $m $m $m $m $m
------
Funds that invest in:
- Equity instruments 39.8 - 39.8 - 5.5 5.5 39.8 5.5 45.3
- Debt instruments 46.6 - 46.6 3.0 6.0 9.0 49.6 6.0 55.6
- Real estate - - - - 3.1 3.1 - 3.1 3.1
Cash and cash equivalents - - - - 1.7 1.7 - 1.7 1.7
Re-insurance contracts with
guaranteed interest rates
* - 5.6 5.6 - - - - 5.6 5.6
Other - - - - 8.8 8.8 - 8.8 8.8
Total 86.4 5.6 92.0 3.0 25.1 28.1 89.4 30.7 120.1
* The majority of the re-insurance contracts have guaranteed
interest rates of 4.0%, with the remaining at 3.25% or 2.75%.
Risk Management
Through its defined benefit schemes the Group is exposed to a
number of risks, the most significant of which are detailed
below:
- Changes in bond yields - A decrease in corporate bond yields
will increase the Group's IAS 19 plan liabilities, although this
will be partially offset by increases in the value of scheme
assets.
- Inflation - Some of the Group pension obligations are linked
to inflation, and higher inflation will lead to higher
liabilities.
- Life expectancy - The majority of the plan obligations are to
provide benefits over the life of the member, so increases in life
expectancy will result in an increase in the plan liabilities as
benefits would be paid over a longer period.
- 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.
9 Pension commitments continued
Sensitivities
The table below provides information on the sensitivity of the
defined benefit obligation to changes to the most significant
actuarial assumptions. The table shows the impact of changes to
each assumption in isolation, although, in practice, changes to
assumptions may occur at the same time and can either offset or
compound the overall impact on the defined benefit obligation.
These sensitivities have been calculated using the same
methodology as used for the main calculations. The weighted average
duration of the defined benefit obligation is 23 years for Germany
and 14 years for all other schemes.
Germany Rest of World
Change Change Change Change
Increase in defined Decrease in defined Increase in defined Decrease in defined
in benefit in benefit in benefit in benefit
assumption obligation assumption obligation assumption obligation assumption obligation
Discount
rate for
scheme
liabilities 0.50% (10.5%) 0.50% 12.1% 0.50% (6.5%) 0.50% 7.3%
Price
inflation/rate
of increase
in pension
payments* 0.25% 3.4% 0.25% (3.2)% 0.25% 0.9% 0.25% (0.9)%
Salary growth
rate 0.50% 1.1% 0.50% (1.1)% 0.50% 2.7% 0.50% (2.8)%
Life
expectancy 1 year 3.9% - - 1 year 2.0% - -
* For the German schemes the same values are used for both the
inflation assumption and the rate of increase in pension
payments.
10 Financial risk management and financial instruments
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 facility.
Surplus cash in the operating units over and above what is required
for working capital needs is transferred to Group treasury. These
funds are used to repay bank borrowings or are invested in interest
bearing current accounts, time deposits or money market deposits of
the appropriate maturity period determined by consolidated cash
forecasts.
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.
10 Financial risk management and financial instruments
continued
Risk Factors and Treasury risk management continued
Liquidity and Capital Risk continued
In March 2020, given the increased macro-economic uncertainty as
a result of the COVID-19 pandemic, as a precautionary measure, the
directors withdrew their recommendation for the payment of a final
dividend of 58.33 cents per share in respect of the year ended 31
October 2019. Similarly, no dividend was paid in respect of the six
months to 30 April 2020. The decision to not pay these dividends
has resulted in an increase in available liquidity compared to the
payments that would otherwise have been made under the Group's
existing dividend policy.
In May 2020, the Group refinanced its $1,415m term loans
maturing in November 2021 and made a voluntary debt repayment of
$143m. In September 2020, the Group refinanced its revolving credit
facility and reduced its size from $500m to $350m. Following these
refinancing activities the Group's earliest debt maturity is in
June 2024. The repayment of debt and reduction in size of the
revolving credit facility were made following an assessment of
potential future performance scenarios, taking into account the
current additional macro-economic uncertainties as a result of
COVID-19.
The only financial covenant attaching to the Group's borrowing
facilities relates to the revolving credit facility, which is
subject to an aggregate net leverage covenant only in circumstances
where more than 35% of the revolving credit facility is outstanding
at a fiscal quarter end. Throughout the year the applicable
covenant threshold was 4.35x, however no test was applicable at 31
October 2020 or any previous test date, as the facility was not
drawn in excess of the 35% threshold. This covenant is not expected
to inhibit the Group's future operations or funding plans.
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 four
interest rate swaps to manage its cash flow interest rate risk
arising from potential increases in the LIBOR interest rate.
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.
The Group has set a target of approximately half its borrowings
being subject to fixed interest rates in order to minimise its
exposure to changes in interest rates. This is achieved through
four USD interest swaps for a total notional value of $2.25bn, with
a maturity date of September 2022. The hedge accounting is
discussed further later in the note.
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 and the Chinese Yuan. 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.
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 Groups operations used to service those
borrowings. The May 2020 debt refinancing 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 groups debt
with the cash flows used to service that debt (note 8
Borrowings).
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 2020 two net
investment hedges totalling EUR1.05bn have been designated using
non-derivative Euro debt instruments to minimise the volatility in
shareholder's equity arising from foreign currency translation
(there were no net investment hedges as at 31 October 2019).
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 Measures for additional information.
10 Financial risk management and financial instruments
continued
Risk Factors and Treasury risk management continued
Credit risk
The Group provides credit to customers in the normal course of
business. Collateral is not required for those receivables but t he
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 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.
Financial Instruments
The tables below sets out the measurement categories and
carrying values of financial assets and liabilities with fair value
inputs where relevant.
Carrying Carrying
value Fair value
Measurement 31 October Fair value value 31 October
category 2020 2020 Hierarchy 2019
2020/2019
Note $m $m
-------------- ----------- -------------- ------------
Financial assets:
Non-current
Fair value
insurance Level
Long-term pension asset 9 FV OCI 18.2 based input 3 17.1
Current
Amortised
Cash and cash equivalent cost 737.2 - - 355.7
Amortised
Trade and other receivables cost 648.6 - - 922.7
Amortised
Contract assets cost 33.7 - - 56.3
-------------- ----------- -------------- ------------
1,437.7 1,351.8
-------------- ----------- -------------- ------------
Financial liabilities:
Non-current
Fair value
Derivative financial instruments Bank Level
- interest rate swaps(1) 10 FV OCI 77.9 Institutions 2 36.5
Amortised
Borrowings (gross)(2) 8 cost 4,699.0 4,535.1 - 4,775.0
Amortised
Lease obligations cost 82.2 - - 11.7
Amortised
Provisions cost 22.5 - - 49.1
Current
Amortised
Borrowings (gross)(2) 8 cost 34.2 - - -
Amortised
Lease obligations cost 168.2 - - 11.8
Amortised
Provisions cost 49.7 - - 29.3
Trade and other payables Amortised
- accruals cost 419.2 - - 530.3
-------------- ----------- -------------- ------------
5,552.9 5,443.7
-------------- ----------- -------------- ------------
(1) Derivative interest rate swaps are measured at 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 FVTPL.
(2) Borrowings have a carrying value (net of unamortised prepaid
facility arrangement fees and original issue discount) of $4,640.4m
(2019: $4,670.7m). Total borrowings (Gross) are shown in this table
as $4,733.2m (2019: $4,775.0m) for the fair value comparison.
10 Financial risk management and financial instruments
continued
Fair value measurement
For trade and other receivables, cash and cash equivalents,
provisions, 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 $4,640.3m (2019:
$4,670.7m ) (note 8 "Borrowings") including unamortised prepaid
facility fees and discounts, have a fair value estimate of
$4,535.1m (2019: $4,686.0m) based on trading prices obtained from
external banking providers as at 31 October 2020.
Derivative financial instruments measured at fair value are
classified as Level 2 in the fair value measurement hierarchy as
they have been determined using significant inputs based on
observable market data. The fair values of interest rate
derivatives are derived from forward interest rates based on yield
curves observable at the balance sheet date together with the
contractual interest rates. Valuations are updated by the
counter-party banks on a monthly basis.
The long-term pension assets are considered to be Level 3 asset
under the fair value hierarchy as of 31 October 2020. These assets
have been valued by an external insurance expert, by applying a
discount rate to the future cash flows and taking into account the
fixed interest rate, mortality rates and term of the insurance
contract. The movement in the long-term pension asset is disclosed
in note 9 "Pension 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.
31 October 31 Ocober
2020 2019
Interest rate risk $m $m
-------------
Interest rate swaps (receive variable, pay
fixed)
Fair value of Derivative liability (total of
4 swaps) (77.9) (36.5)
Notional amount (4 x $562.5m) 2,250.0 2,250.0
Maturity date 30 September 30 September
2022 2022
Change in fair value of outstanding hedging
instruments (OCI hedging reserve excluding
deferred tax) (41.3) (122.9)
Change in value of hedging instruments (as
above adjusted for impact of credit risk) (39.9) (121.9)
Hedging ratio 1.1 1.1
-------------
The Group has four interest rate swaps, which are designated in
a hedge relationship.
The Group's approved strategy in accordance with our risk
management policies is to minimise the risk of cash flow
fluctuations due to interest rate changes in relation to the 1M-USD
LIBOR rate for up to half of the Group's external borrowings for
the period 19 October 2017 to 30 September 2022.
The specific risk management objective is to hedge the interest
rate risk (cash flow risk) due to changes in the 1M-USD LIBOR rate
charged on $2,250.0m of the debt issued by Seattle Spin Co Inc.
between 19 October 2017 and 30 September 2022.
Derivatives are only used for economic hedging purposes and not
as speculative investments.
The swap contracts require settlement of net interest receivable
or payable on a monthly basis. The fixed interest rate for each
swap is 1.949% and the Group receives a variable rate in line with
LIBOR. The Seattle loan is priced at LIBOR (with a 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 is 4.699%. For the year to 31
October 2020, net interest (finance cost) paid for the swaps
amounted to $23.7m. For the life of the swap, net interest paid to
date amounted to $17.2m.
Non-Derivative financial instruments - Designated Euro
borrowings
31 October 31 October
2020 2019
Foreign exchange risk $m $m
-----------
Notional amounts for Designated Euro borrowing
Euro B-1 2020 tranche EUR 600m (Borrowings
maturity date: June 2025) 665.8 -
Foreign exchange (loss) on revaluation transferred
to OCI-CTA (34.5) -
No sources of ineffectiveness observed in review
Euro 2017 tranche EUR 453m (Borrowings maturity
date: June 2024) 528.5 -
Foreign exchange (loss) on revaluation transferred
to OCI-CTA (24.2) -
No sources of ineffectiveness observed in review
Hedge ratio for each of the 2 Net investment
hedges 1.1 -
-----------
The Group has designated two tranches of non-derivative Euro
borrowings in two hedge relationships The borrowings in place have
a designated initial carrying value of approx. EUR 1.05bn (note 8
"Borrowings") 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.
10 Financial risk management and financial instruments
continued
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 2020 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 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.
The Group also utilised a forward exchange contract to fix the
Sterling equivalent (GBP150.0m) on the cancelled May 2020 dividend
payment. The forward contract was not designated for formal hedge
accounting and was settled early for $21.8m within the reporting
year as the proposed dividend was cancelled. The charge was made to
foreign exchange losses in the Consolidated statement of
comprehensive income.
Credit risk
The carrying amount of financial assets represents the maximum
credit exposure. The maximum exposure to credit risk at 31 October
2020 was:
31 October 31 October
2020 2019
$m $m
Trade receivables (gross) 628.4 877.9
Cash and cash equivalents 737.2 355.7
1,365.6 1.233.6
The Group applies the IFRS 9 expedited approach to measuring
expected credit losses, which uses a lifetime expected credit loss
allowance for all trade receivables.
A provision of the lifetime expected credit loss is established
upon initial recognition of the underlying asset by predicting the
future cash flows based upon the days past due status of an invoice
and other relevant information. The model uses historical
collection data along with historical credit losses experienced.
The loss allowance is adjusted for forward-looking factors specific
to the receivable and the economic environment.
Trade receivables are written off when there is no reasonable
expectation of recovery. Impairment losses on trade receivables are
presented as net impairment losses within operating profit.
Subsequent recoveries of amounts previously written off are
credited against the same line item.
On that basis, the loss allowance as at 31 October 2020 and 2019
and movements in the loss allowance during each year were
determined as follows for trade receivables:
31 October 31 October
2020 2019
$m $m
At 1 November - calculated under IAS 39 41.9
Accounting policy change - IFRS 9 (recognised against
retained earnings on 1 November 2018) 20.0
At 1 November - calculated under IFRS 9 42.4 61.9
Loss allowance provided in the year (4.8) 16.0
Receivables written off as uncollectable (19.7) (35.5)
At 31 October 17.9 42.4
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.
The impact on the Consolidated statement of comprehensive income
of foreign exchange losses in the year ended 31 October 2020 is
$29.7m (2019: $11.3m loss). The foreign exchange loss in the year
includes the loss of $21.8m due to the settlement of the foreign
exchange contract regarding the cancelled dividend.
10 Financial risk management and financial instruments
continued
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. The Indian Rupee and Israeli
Shekel 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.
Group exposure +/- 5% +/- 10%
Key aggregate currency exposures* $m $m $m
---------------
Euro (1,280.1) 64.0 128.0
Indian Rupee (INR) (42.4) 2.1 4.2
Israeli Shekel (ILS) (29.2) 1.4 2.9
Chinese Yuan (CNY) (25.6) 1.3 2.6
Australian Dollar (AUD) (15.7) 0.8 1.6
Japanese Yen (JPY) 55.1 2.8 5.5
Swedish Krona (SEK) 23.5 1.2 2.4
Swiss Franc (CHF) 18.9 0.9 1.9
Danish Krone (DKK) 17.1 0.9 1.7
Canadian Dollar (CAD) 15.9 0.8 1.6
Mexican Peso (MXN) 14.6 0.7 1.5
United Arab Emirates Dirham (AED) 13.7 0.7 1.4
Czech Koruna (CZK) 10.3 0.5 1.0
---------------
* Presenting aggregate foreign exchange exposures in excess of
$10m equivalent.
Interest rate exposure
Borrowings exposures to variable interest rate LIBOR, EURIBOS
changes Group exposure +1%
(based on gross debt excluding the effects
of hedging)
$m $m
-----------------
Euro 1,228.7 12.3
USD 3,504.5 35.0
-----------------
Total Gross Debt (note 8) 4,733.2 47.0
-----------------
Net debt
The net debt of the Group at the Consolidated statement of
financial position date is as follows:
Note 31 October 31 October
2020 2019
$m $m
Borrowings 8 (4,640.3) (4,670.7)
Cash and cash equivalents 737.2 355.7
Lease obligations (2019: Finance lease
obligations) (250.4) (23.5)
Net debt (4,153.5) (4,338.5)
Borrowings are shown net of unamortised prepaid facility
arrangement fees of $92.9m (2019: $104.3m). Gross borrowings are
$4,733.2m (2019: $4,775.0m).
Change in liabilities arising from financing activities for
interest bearing loans (note 8 "Borrowings") and lease obligations
were as follows:
Interest bearing
loans Lease obligations Total
$m $m $m
----------------- --------------------
At 1 November 2019 4,775.0 23.5 4,798.5
Adoption of IFRS16 - 269.8 269.8
----------------- --------------------
4,775.0 293.3 5,068.3
Draw down / new leases 1,490.8 41.6 1,532.4
Repayments (1,589.7) (93.3) (1,683.0)
Disposals - (0.2) (0.2)
Interest - 13.2 13.2
Foreign exchange 57.1 (4.2) 52.9
----------------- --------------------
At 31 October 2020 4,733.2 250.4 4,983.6
----------------- --------------------
11 Contingent liabilities
The Company and several of its subsidiaries are, from time to
time, parties to legal proceedings and claims which arise in the
ordinary course of business. The directors do not anticipate that
the outcome of these proceedings, actions and claims, either
individually or in aggregate, will have a material adverse effect
upon the Group's financial position.
Shareholder litigation
Micro Focus International plc and certain current and former
directors and officers are involved in two consolidated class
action lawsuits in which plaintiffs are seeking damages for alleged
violations of the Securities Act of 1933 and the Exchange Act of
1934. Plaintiffs allege false and misleading statements or
omissions in offering documents issued in connection with the
Hewlett Packard Enterprise software business merger and issuance of
Micro Focus American Depository Shares ("ADS") as merger
consideration, and other purportedly false and misleading
statements. No liability has been recognised in either case as the
complaint in one lawsuit has been dismissed and plaintiffs are now
seeking an appeal, and the other lawsuit is still at an early stage
in proceedings and it is too soon to estimate whether there will be
any financial impact.
Patent litigation
On 2 July 2018, Wapp Tech Limited Partnership and Wapp Tech
Corp. (collectively, "Wapp") sued Micro Focus International plc in
the Eastern District of Texas, accusing it of infringing claims of
three patents in connection with Micro Focus International plc's
purported manufacture and sale of certain products in the ADM
product line, including LoadRunner and Performance Center. Wapp
also sued HPE, Wells Fargo & Company, and Bank of America
Corporation for their alleged use of the same accused products. On
13 August 2019, the Texas court dismissed Micro Focus International
plc for lack of personal jurisdiction, but granted Wapp's request
to amend its complaint to name Micro Focus International plc
subsidiaries Seattle SpinCo, Inc., EntIT Software LLC, EntCo
Interactive (Israel) Ltd., EntCo Government Software LLC, and Micro
Focus (US) Inc. (collectively, the "Subsidiary Defendants") as
defendants. On 20 August 2019, Wapp filed an amended (and
operative) complaint in that case naming the Subsidiary Defendants
as defendants. The Court stayed the cases against HPE, Bank of
America, and Wells Fargo. On 11 December 2020, Micro Focus filed a
motion for summary judgment, which the Court denied on 14 January
2021. On 18 December 2020, the case was mediated but did not
settle. The Final Pretrial Conference is scheduled for February
2021, and the Micro Focus trial is set for 1 March 2021. Micro
Focus' defenses against liability include that the patent claims
are not infringed, and that the patent claims are invalid. These
infringement and invalidity claims will be contested on their
merits at trial. Due to the Group's assessment that the asserted
patent claims are not infringed and/or are invalid, no provision is
recorded for this matter however as the outcome of the trial is
uncertain we have disclosed this potential obligation.
12 Cash flow statement
Year ended
Year ended 31 October
31 October 2020 2019
Note $m $m
Cash flows from operating activities
Loss from continuing operations (2,974.6) (18.1)
Profit from discontinued operation 5.1 1,487.2
(Loss)/profit for the year (2,969.5) 1,469.1
Adjustments for:
Gain on disposal of discontinued operation 3.0 (1,767.9)
Net finance costs 279.0 255.8
Taxation - continuing operations 4 34.2 (16.0)
Taxation - discontinued operation (8.1) 318.1
Share of results of associates - 0.3
Operating (loss)/profit (attributable to
continuing and discontinued operations) (2,661.4) 259.4
* continuing operations (2,661.4) 221.7
* discontinued operation - 37.7
(2,661.4) 259.4
Goodwill impairment charge 7 2,799.2 -
Research and development tax credits (1.8) (1.2)
Property, plant and equipment depreciation(1) 42.0 52.6
Right-of-use asset depreciation(1) 76.9 13.9
Loss on disposal of property, plant and
equipment 5.6 3.6
Loss on disposal of intangible assets 0.6 -
Gain on disposal of Atalla 3 - (3.7)
Amortisation of intangible assets 674.1 716.5
Amortisation of contract-related costs 16.1 10.2
Leases impairment 5.9 -
Share-based compensation charge 17.0 71.3
Foreign exchange movements 29.7 11.1
Provisions movements 46.3 43.8
Changes in working capital :
Inventories 0.1 -
Trade and other receivables 262.0 183.0
Increase in contract-related costs (26.5) (36.7)
Payables and other liabilities (69.8) (114.8)
Provision utilisation (37.5) (58.6)
Contract liabilities - deferred income (103.1) (98.5)
Pension funding difference to operating
profit charge 7.4 4.4
Cash generated from operations 1,082.8 1,056.3
(1) As a result of the adoption of IFRS 16, depreciation in the
12 months ended 31 October 2019 of $66.5m has been represented as
property, plant and equipment depreciation of $52.6m and
right-of-use asset depreciation of $13.9m. The comparative of
$13.9m relates to assets classified as property, plant and
equipment that were held under a finance lease.
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