20-F 1 s002031x1_20f.htm FORM 20-F

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 FORM 20-F
 (Mark One)

Registration statement pursuant to section 12(b) or (g) of the Securities Exchange Act of 1934

or
Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

or
☒  Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
       For the transition period from May 1, 2017 to October 31, 2017

or
Shell company report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

Date of event requiring shell company report _____________
 
Commission file number 001-38187

Micro Focus International plc
(Exact Name of Registrant as specified in its charter)


 
The Lawn
 
22-30 Old Bath Road
 
Newbury
 
Berkshire RG14 1QN
United Kingdom
United Kingdom
(Jurisdiction of Incorporation or Organization)
(Address of Principal Executive Offices)

Tim Brill
Director of Investor Relations and Corporate Communications
c/o Micro Focus International plc
    The Lawn, 20-30 Old Bath Road
    Newbury, Berkshire RG14 1QN
    United Kingdom
    Tel: +44 (0) 1635 32646
    Email: investors@microfocus.com
 (Name, Telephone, E-mail and/or facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

American Depository Shares, each representing one ordinary share of Micro Focus International plc
 New York Stock Exchange
(Title of each class)
(Name of exchange on which registered)
 

Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of Class)
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of October 31, 2017, 152,775,726 American Depository Shares were issued and outstanding.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes           No ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes           No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒          No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes            No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See the definitions of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer            Accelerated filer  ☐          Non-accelerated filer ☒          Emerging growth company 
 
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. 
 
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

US GAAP             International Financial Reporting Standards as issued by the International Accounting Standards Board  ☒        Other

If “Other” has been checked in the previous question, indicate by check mark which financial statement item the registrant has elected to follow.   Item 17           Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  Yes        No




TABLE OF CONTENTS


Explanatory Notes

In connection with the completion of the merger between Micro Focus International plc (the “Company”) and HPE Software’s business segment (“HPE Software”), together the “Enlarged Group” or “Enlarged Company”, the Board of Directors authorized a change of fiscal year end from April 30, 2018 to October 31, 2018 to allow the Company to launch the Enlarged Company’s financial year with effect from November 1, 2017. As a result, the Company is required to file this transition report on Form 20-F for the transition period of May 1, 2017 to October 31, 2017.

After filing the transition report the Company’s next annual report will be for the 18 month period ending October 31, 2018. A comparison of our operating results for the 6-month periods ended October 31, 2017 and 2016 has been included within Item 5.A.

Financial information presented in this Form 20-F is for the 6-month period ended October 31, 2017 and October 31, 2016. The Company notes that this transition report on Form 20-F is filed pursuant to Rule 13a-10(g)(4) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which permits the Company to respond to only Items 5, 8.A.7., 13, 14 and 18 of Form 20-F.



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The Securities and Exchange Commission, or the SEC, encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. Except for the historical information contained in this transition report on Form 20-F, the statements contained in this transition report are “forward-looking statements” which reflect our current view with respect to future events and financial results.

Words such as “may,” “anticipate,” “estimate,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance, identify forward looking statements. Forward-looking statements represent management’s present judgment regarding future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks include, but are not limited to, risks and uncertainties regarding:

·
our ability to attract and retain sufficiently qualified management and key employees;
·
restrictions on our ability to secure additional financing or refinance our existing financing;
·
the ongoing integration of HPE Software into the Company, which may impede the ability of the Enlarged Group to obtain the same types and levels of benefits, services and resources that have historically been provided to HPE Software by HPE, which could lead to a failure to realize the anticipated benefits of the Merger;
·
the implementation of the U.S. Tax Cuts and Jobs Act and any impact to our earnings;
·
our exposure to fluctuations in interest rates, which could affect our variable rate indebtedness and currency exchange rates;
·
the covenants under the New Facilities;
·
our dependence on intellectual property, our ability to protect intellectual property and third party claims of infringement on intellectual property;
·
our ability to develop products and services that satisfy the needs of our customers;
·
competition in the markets in which we operate;
·
the availability, integrity and security of our IT systems;
·
our ability to protect the personal information of our customers;
·
the effectiveness of our sales force and distribution channels;
·
our potential liability or lost business opportunities related to defective products;
·
decisions to discontinue or restrict development expenditures;
·
our exposure to tax liabilities and indemnification in certain circumstances; and
·
our ability to manage the risks involved in the foregoing.

In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this transition report might not occur. Investors are cautioned not to place undue reliance on the forward looking statements, which speak only as of the date of this transition report. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to us or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this document.

1


ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion and analysis is intended to provide investors with an understanding of the historical performance of Micro Focus International plc (“the Company” or “the Group”, LSE: MCRO.L, NYSE: MFGP) and its financial condition. This discussion and analysis presents the factors that had a material effect on the results of operations of Micro Focus for the interim period from May 1, 2017 to October 31, 2017. The following should be read in conjunction with the Group’s unaudited consolidated financial statements and the notes thereto included elsewhere in this transition report. The following discussion and analysis contains forward-looking statements. See ‘‘Special Note Regarding Forward-Looking Statements’’ in this Form 20-F and “Risk Factors in our Form F-4 filed with the Securities and Exchange Commission on August 3, 2017 for a discussion of the uncertainties, risks and assumptions associated with these statements.

5.A Operating results

Business Overview

Micro Focus International plc is listed on the London Stock Exchange and is a member of the FTSE 100 index.  The Company’s American Depositary Receipts (the “ADRs”) are listed on the New York Stock Exchange.

The Group is a global enterprise software provider supporting the technology needs and challenges of the Forbes Global 2000. The Groups solutions help organizations leverage existing IT investments, enterprise applications and emerging technologies to address complex, rapidly evolving business requirements, including the protection of corporate information at all times. The Group has more than 16,000 employees in 49 countries worldwide and has over 20,000 customers, including 91 of the Fortune 100 companies.

On September 1, 2017, the Company announced the completion of the merger (the “Transaction” or the “Merger”) of its wholly owned subsidiary, with and into Seattle SpinCo, Inc. (“Completion”), which held the software business segment (HPE Software) of Hewlett Packard Enterprise Company (“HPE”).  As such, the period under review has seen the completion of the combination of Micro Focus with HPE Software to create one of the world’s largest pure play software companies.  This was a complex transaction with 12 months between announcement and completion. We are now fully engaged in the integration of the combined businesses.

The combination with HPE Software has clear business logic to extend Micro Focus’ market presence in mature infrastructure software segments:

·
to increase operational efficiency of the Enlarged Group;
·
to deliver effective product management focused on customer centered innovation; and
·
to improve sales productivity.

The Group has two operating segments: Micro Focus Product Portfolio and SUSE Product Portfolio.

Micro Focus Product Portfolio

Following Completion of the Transaction we continued to run the HPE Software business separately within the Micro Focus Product Portfolio during the interim period ended October 31, 2017 to avoid disruption.

Existing Micro Focus Product Portfolio. The Existing Micro Focus Product Portfolio contains our mature infrastructure software products that are managed on a portfolio basis akin to a “fund of funds” investment portfolio. This portfolio is being managed through the 4 BOX Model underpinned by consistent end to end processes to make and maintain the software, whilst the software is sold and supported through a geographic Go-to-Market (“GTM”) organization. Products are organized into five sub-portfolios based on industrial logic:  COBOL Development & Mainframe Solutions (CDMS), Host Connectivity, Identity & Access Security (IAS), Development & IT Operations Management Tools (“ITOM”), and Collaboration & Networking.

HPE Software. Within HPE Software our solution portfolios are IT Operation Management, Application Delivery Management, Enterprise Security Product, Platform, and Information Management Business.

SUSE Product Portfolio

SUSE’s characteristics are different due to the Open Source nature and the growth profile of its offerings. Through SUSE, a pioneer in Open Source software, we provide reliable, interoperable Linux, cloud infrastructure and storage solutions. The SUSE Product Portfolio comprises SUSE Linux Enterprise Server and Extensions, SUSE OpenStack Cloud, SUSE Enterprise Storage, SUSE Manager, and SUSE Linux Enterprise Desktop and Workstation Extension.

With effect from November 1, 2017, the Micro Focus Product Portfolio will be managed as one consolidated portfolio, with five sub-portfolios (Security, IT Operations Management, Application Delivery Management, Information Management & Governance and Application Modernization & Connectivity) based on industrial logic. From that date we have operated two product portfolios, Micro Focus and SUSE, consistent with how the Company has operated since May 1, 2015. We have aligned our financial year end to October 31, and will report an 18-month financial period ending October 31, 2018, with interim results statements for the six month periods ended October 31, 2017 and April 30, 2018.

2


We set out a new four phase plan below for the combination of the Micro Focus and HPE Software businesses whilst continuing to deliver sustainable shareholder returns.


Financial Year/Period ending
October 31, 2017
October 31, 2018
October 31, 2019
October 31, 2020
Phase
Assessment
Integration
Stabilization
Growth
Action
·
Deliver plans for FY17
·
Standardize systems
·
Stabilize top line
·
Top line growth
 
·
Detailed review of combined businesses
·
Rationalize properties
·
Improve GTM
·
Click and repeat!
 
·
Invigorate product management
·
New Go to Market (“GTM”) model
·
Growth from new areas  
   
·
Maintain/improve cash conversion
·
Improved profitability  
   
·
Rationalize underperforming elements
·
Standardize systems  
   
·
New market initiatives
·
Rationalize legal entities  

The Group has a clear strategy and business model that has been in place since 2011. This strategy and business model are focused on the way in which we believe that mature infrastructure software businesses should be managed and that the market for these businesses is going to consolidate. We believe that the consolidator in this market place needs to have scale and needs to operate efficiently. The Group has set out to be an effective company at managing a portfolio of mature infrastructure software assets. We believe that our proven ability to execute not only delivers significant amounts of cash and consequently great flexibility, but also a competitive advantage in the acquisition of other similar assets.

Our focused strategic priorities are:

·          Integrate the companies seamlessly;
·          Strengthen the GTM engine;
·          Drive customer-centred innovation in everything we do;
·          Capture value from the Transaction;
·          Build a combined company that employees want to be part of and that customers value as a strategic partner; and
·          Execute value creating mergers and acquisitions

The Group is affected by many challenges and risks which are continuously monitored by its executives. The Group operates a global business and is exposed to a variety of external economic and political risks which may affect the Groups business operations and execution of the Groups strategy. The Groups executives focus on the following areas when managing the business:

·
Ensuring the Group’s products continue to meet the requirements of its customers. The Group has a large number of products, at differing stages of their life cycle, and each requiring varying levels of investment and a tailored strategic approach. The extent of investment in each product set needs to be managed and prioritized considering expected future prospects, to ensure an effective balance between growth and legacy products.

·
The adoption of an effective GTM model. For the Group to succeed in meeting revenue and growth targets it requires successful GTM models across the full product portfolio, with effective strategies and plans to exploit channel opportunities and focus the sales force on all types of customer categories.

·
Changes in the competitive landscape. The Groups major competitors are expanding their product and service offerings with integrated products and solutions. Comprehensive information about the markets in which the Group operates is required for it to assess competitive risks effectively and to perform successfully.

·
Challenges in relation to the retention of key employees. The retention and recruitment of highly skilled and motivated employees, at all levels of the Group, is critical to the success and future growth of the Group in all countries in which it operates. Employees require clear business objectives, and a well communicated vision and values, for the Group to achieve alignment and a common sense of corporate purpose among the workforce.

·
A number of major change projects including acquisitions to grow the business by strengthening the Group’s portfolio of products and capabilities, and projects to standardize systems and processes. The successful integration of acquired businesses will build a solid base for further expansion.

·
The Group’s operations, as is the case with most businesses, are dependent on maintaining and protecting the integrity and security of the IT systems and management of information. The Group may experience a major breach of its system security or cyber-attack.

3


Results of Operations

The following discussion provides an analysis of our results of operations and should be read in conjunction with the condensed consolidated interim financial statements included under Item 18 in this Form 20-F. The condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”) applicable to interim reporting, International Accounting Standard 34 (“IAS 34”), “Interim Financial Reporting”.

We include certain non-IFRS financial measures which assist management in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect our underlying operations. Included in the following discussion is Adjusted Operating Profit, Adjusted Profit before tax and Adjusted EBITDA, all of which are non-IFRS financial measures. For additional information on Adjusted Operating Profit, Adjusted Profit before tax and Adjusted EBITDA see Non-IFRS Measures”.

In addition, the following discussion also provides a supplemental analysis of revenue and our non-IFRS financial measures, prepared on a constant currency (“CCY”) basis, where management believes that discussing CCY results provides a better understanding of the Groups performance and trends because it allows for more meaningful comparisons of current period to that of prior periods. For additional information on CCY and our non-IFRS financial measures see Non-IFRS Measures.

Following Completion, we reviewed the measures that we use to assess the financial performance of the business and concluded that, in order to simplify reporting on the Enlarged Group, we would cease using the non-IFRS measures previously reported as “Facility EBITDA” and “Adjusted EBITDA”. We will continue to use and report the non-IFRS measure previously reported as “Underlying Adjusted EBITDA”, now renamed “Adjusted EBITDA”. In addition, we have begun reporting “Adjusted Profit before tax” to supplement our analysis of results of operations relating to taxation.

Six months ended October 31, 2017 compared to the six months ended October 31, 2016

The following table sets forth the components of profit for the six months ended October 31, 2017 and 2016.

   
Six months ended October 31, 2017
   
Six months ended October 31, 2016 *
       
   
Before
exceptional
items
   
Exceptional
items
   
Total
   
Before
exceptional
items
   
Exceptional
items
   
Total
   
Total
(Decline)
/ Growth
 
   
(dollars in millions)
   
%
 
Revenue
   
1,234.5
     
-
     
1,234.5
     
684.7
     
-
     
684.7
     
80.3
%
Cost of sales
   
(270.8
)
   
(3.1
)
   
(273.9
)
   
(122.2
)
   
(1.3
)
   
(123.5
)
   
121.9
%
Gross Profit
   
963.7
     
(3.1
)
   
960.6
     
562.5
     
(1.3
)
   
561.2
     
71.1
%
Selling and distribution costs
   
(390.1
)
   
(8.6
)
   
(398.7
)
   
(216.5
)
   
(2.0
)
   
(218.5
)
   
82.4
%
Research and development expenses
   
(166.2
)
   
(7.4
)
   
(173.6
)
   
(84.2
)
   
(2.2
)
   
(86.4
)
   
101.0
%
Administrative expenses
   
(89.0
)
   
(79.4
)
   
(168.4
)
   
(57.5
)
   
(35.6
)
   
(93.1
)
   
80.9
%
Operating Profit
   
318.4
     
(98.5
)
   
219.9
     
204.3
     
(41.1
)
   
163.2
     
34.7
%
Share of results of associates
   
(0.4
)
   
-
     
(0.4
)
   
(1.1
)
   
-
     
(1.1
)
   
61.1
%
Finance costs
   
(69.2
)
   
(6.3
)
   
(75.5
)
   
(49.5
)
   
-
     
(49.5
)
   
52.6
%
Finance income
   
1.2
     
0.6
     
1.8
     
0.5
     
-
     
0.5
     
238.4
%
Profit before tax
   
250.0
     
(104.2
)
   
145.8
     
154.2
     
(41.1
)
   
113.1
     
28.7
%
Taxation
   
(64.7
)
   
25.5
     
(39.2
)
   
(28.1
)
   
5.6
     
(22.5
)
   
73.2
%
Profit for the period
   
185.3
     
(78.7
)
   
106.6
     
126.1
     
(35.5
)
   
90.6
     
17.6
%

*In the year ended April 30, 2017, the Company reviewed its consolidated statement of comprehensive income presentation and as a result re-classified both “Amortization of product development costs” and “Amortization of acquired technology intangibles” from Research and Development Expenses to Costs of Sales. The six months ended October 31, 2016 comparatives have been reclassified accordingly. Also refer to Consolidated Statement of Comprehensive Income.

The Group acquired HPE Software on September 1, 2017. The Group results for the six months ended October 31, 2017 contain the results for HPE Software from September 1, 2017 to October 31, 2017, while the Group results for the six months ended October 31, 2016 do not contain any results for HPE Software.

4


Revenues

Revenues grew by $549.8 million, or 80.3%, ($551.5 million, or 80.7% on a CCY basis) to $1,234.5 million in the six months ended October 31, 2017 as compared to $684.7 million ($683.0 million on a CCY basis) in the six months ended October 31, 2016. The increase in revenues was primarily driven by the acquisition of HPE Software, contributing an additional $569.8 million of revenues and growth in revenues in the SUSE Product Portfolio where reported revenues grew by $17.0 million or 11.5% in line with the Infrastructure Linux market offset by anticipated declines in the existing Micro Focus Product Portfolio which declined by $37.0 million or 6.9%.

The breakdown in revenue of our two operating segments, Micro Focus and SUSE, by revenue type in the six months ended October 31, 2017 compared to the six months ended October 31, 2016 and CCY revenues in the six months ended October 31, 2016 is shown in the table below:

   
Six months
ended
October 31,
2017
Actual
   
Six months
ended
October 31,
2016
Actual
   
Six months
ended
October 31,
2017
Actual
(Decline)/
Growth
   
Six months
ended
October 31,
2017
Actual
(Decline)/
Growth
   
Six months
ended
October 31,
2016
CCY
   
Six months
ended
October 31,
2017
CCY
(Decline)/
Growth
   
Six months
ended
October 31,
2017
CCY
(Decline)/
Growth
 
   
(dollars in millions)
   
%
   
(dollars in millions)
   
%
 
Existing Micro Focus Product Portfolio
                                         
Licence
   
122.9
     
146.9
     
(24.0
)
   
(16.3
%)
   
148.1
     
(25.2
)
   
(17.0
%)
Maintenance
   
354.1
     
364.2
     
(10.1
)
   
(2.8
%)
   
363.2
     
(9.1
)
   
(2.5
%)
Consultancy
   
23.3
     
26.2
     
(2.9
)
   
(11.1
%)
   
26.4
     
(3.1
)
   
(11.7
%)
     
500.3
     
537.3
     
(37.0
)
   
(6.9
%)
   
537.7
     
(37.4
)
   
(7.0
%)
HPE Software
                                                       
Licence
   
204.8
     
-
     
204.8
     
-
     
-
     
204.8
     
-
 
Maintenance
   
257.4
     
-
     
257.4
     
-
     
-
     
257.4
     
-
 
Consultancy
   
55.2
     
-
     
55.2
     
-
     
-
     
55.2
     
-
 
Software as a Service (‘‘SaaS”)
   
52.4
     
-
     
52.4
     
-
     
-
     
52.4
     
-
 
     
569.8
     
-
     
569.8
     
-
     
-
     
569.8
     
-
 
Total Micro Focus Product Portfolio
                                                       
Licence
   
327.7
     
146.9
     
180.8
     
123.1
%
   
148.1
     
179.6
     
121.3
%
Maintenance
   
611.5
     
364.2
     
247.3
     
67.9
%
   
363.2
     
248.3
     
68.4
%
Consultancy
   
78.5
     
26.2
     
52.3
     
199.6
%
   
26.4
     
52.1
     
197.3
%
SaaS
   
52.4
     
-
     
52.4
     
-
     
-
     
52.4
     
-
 
     
1,070.1
     
537.3
     
532.8
     
99.2
%
   
537.7
     
532.4
     
99.0
%
SUSE Product Portfolio
                                                       
Subscription
   
162.6
     
144.9
     
17.7
     
12.2
%
   
142.7
     
19.9
     
13.9
%
Consultancy
   
1.8
     
2.5
     
(0.7
)
   
(28.0
%)
   
2.6
     
(0.8
)
   
(30.8
%)
     
164.4
     
147.4
     
17.0
     
11.5
%
   
145.3
     
19.1
     
13.1
%
Total Revenue
                                                       
Licence
   
327.7
     
146.9
     
180.8
     
123.1
%
   
148.1
     
179.6
     
121.3
%
Maintenance
   
611.5
     
364.2
     
247.3
     
67.9
%
   
363.2
     
248.3
     
68.4
%
Subscription
   
162.6
     
144.9
     
17.7
     
12.2
%
   
142.7
     
19.9
     
13.9
%
Consultancy
   
80.3
     
28.7
     
51.6
     
179.8
%
   
29.0
     
51.3
     
176.9
%
SaaS
   
52.4
     
-
     
52.4
     
-
     
-
     
52.4
     
-
 
     
1,234.5
     
684.7
     
549.8
     
80.3
%
   
683.0
     
551.5
     
80.7
%

5


Micro Focus Product Portfolio

Revenue for the Micro Focus Product Portfolio grew by 99.0% on a CCY basis as a result of the inclusion of two months of HPE Software partially offset by a decline in the existing Micro Focus Product Portfolio. The contribution of HPE Software to each of the revenue categories is shown in the table above for the period from completion to October 31, 2017. Without HPE Software, revenue for the existing Micro Focus Product Portfolio declined by 7.0% on CCY basis, primarily due to weakness in the Host Connectivity portfolio, particularly in North America, where there has been a continued impact of the loss of a sales team in this area in the second half of last year. The category movements are explained below.

Licence revenue

Licence revenue for the existing Micro Focus Product Portfolio declined by 17.0% on a CCY basis. There was year-on-year licence revenue growth in IAS, ITOM and Collaboration & Networking offset by declines in CDMS and, primarily, Host Connectivity.

Maintenance revenue

Maintenance revenues for the existing Micro Focus Product Portfolio declined by only 2.5% on a CCY basis. Growth in CDMS was offset by declines in the other sub-portfolios.

Consultancy revenue

Consultancy revenues for the existing Micro Focus Product Portfolio declined by 11.7% on a CCY basis as we completed the implementation of the established Micro Focus policy of focusing only on consulting business that supports our licence business.

SUSE Product Portfolio

The SUSE Product Portfolio revenue increased by 13.1% to $164.4 million compared with the CCY revenues for the comparative period of $145.3 million, with the Subscription revenue increasing by 13.9% to $162.6 million compared to $142.7 million for the comparative period on a CCY basis.

6


Regional Revenue

Regional revenue performance for the Group

The breakdown in revenue of our two operating segments, Micro Focus Product Portfolio and SUSE Product Portfolio, by region for the six months ended October 31, 2017 compared to the six months ended October 31, 2016 and CCY revenues for the six months ended October 31, 2016 is shown in the table below:

   
Six months
ended
October 31,
2017
Actual
   
Six months
ended
October 31,
2016
Actual
   
Six months
ended
October 31,
2017
Actual
(Decline)/
Growth
   
Six months
ended
October 31,
2017
Actual
(Decline)/
Growth
   
Six months
ended
October 31,
2016
CCY
   
Six months
ended
October 31,
2017
CCY
(Decline)/
Growth
   
Six months
ended
October 31,
2017
CCY (Decline)/
Growth
 
   
(dollars in millions)
   
%
   
(dollars in millions)
   
%
 
Micro Focus Product Portfolio
                                         
North America
   
267.9
     
299.8
     
(31.9
)
   
(10.6
%)
   
300.2
     
(32.3
)
   
(10.8
%)
International
   
188.2
     
187.7
     
0.5
     
0.3
%
   
189.0
     
(0.8
)
   
(0.4
%)
Asia Pacific & Japan
   
44.2
     
49.8
     
(5.6
)
   
(11.2
%)
   
48.5
     
(4.3
)
   
(8.9
%)
     
500.3
     
537.3
     
(37.0
)
   
(6.9
%)
   
537.7
     
(37.4
)
   
(7.0
%)
HPE Software acquisition
   
569.8
     
-
     
569.8
     
-
     
-
     
569.8
     
-
 
Total
   
1,070.1
     
537.3
     
532.8
     
99.2
%
   
537.7
     
532.4
     
99.0
%
SUSE Product Portfolio
                                                       
North America
   
65.1
     
59.9
     
5.2
     
8.7
%
   
59.9
     
5.2
     
8.7
%
International
   
76.0
     
70.0
     
6.0
     
8.6
%
   
68.2
     
7.8
     
11.4
%
Asia Pacific & Japan
   
23.3
     
17.5
     
5.8
     
33.1
%
   
17.2
     
6.1
     
35.5
%
Total
   
164.4
     
147.4
     
17.0
     
11.5
%
   
145.3
     
19.1
     
13.1
%
 
Total Group
                                                       
Existing Micro Focus
                                                       
North America
   
333.0
     
359.7
     
(26.7
)
   
(7.4
%)
   
360.1
     
(27.1
)
   
(7.5
%)
International
   
264.2
     
257.7
     
6.5
     
2.5
%
   
257.2
     
7.0
     
2.7
%
Asia Pacific & Japan
   
67.5
     
67.3
     
0.2
     
0.3
%
   
65.7
     
1.8
     
2.7
%
     
664.7
     
684.7
     
(20.0
)
   
(2.9
%)
   
683.0
     
(18.3
)
   
(2.7
%)
HPE Software acquisition *
   
569.8
     
-
     
569.8
     
-
     
-
     
569.8
     
-
 
Total revenue
   
1,234.5
     
684.7
     
549.8
     
80.3
%
   
683.0
     
551.5
     
80.7
%

* The HPE Software acquisition has not been split by region here as the regions were not consistent with the existing Micro Focus regions. The HPE Software regions split is provided below.

7


HPE Software regional revenue performance

   
Six months
ended
October 31,
2017
Actual
 
   
(dollars in millions)
 
Americas
     
Licence
   
119.4
 
Maintenance
   
150.9
 
Consultancy
   
22.7
 
SaaS
   
39.5
 
     
332.5
 
EMEA
       
Licence
   
58.6
 
Maintenance
   
80.4
 
Consultancy
   
24.9
 
SaaS
   
9.7
 
     
173.6
 
Asia Pacific & Japan
       
Licence
   
26.8
 
Maintenance
   
26.1
 
Consultancy
   
7.6
 
SaaS
   
3.2
 
     
63.7
 
Total
       
Licence
   
204.8
 
Maintenance
   
257.4
 
Consultancy
   
55.2
 
SaaS
   
52.4
 
     
569.8
 

Micro Focus Product Portfolio regional revenue performance

North America had a disappointing performance in the six months ended October 31, 2017 with licence revenue down 31.3% on a CCY basis compared to the six months to October 31, 2016. Growth in IAS, Collaboration & Networking and ITOM were more than offset by declines in CDMS and Host Connectivity. The latter continued to be impacted by the loss of an entire sales team to a competitor in the second half of the year ended April 30, 2017 and the subsequent disruption to customer engagement and flow.  Maintenance revenue declined as expected and overall revenues were down 10.8% on a CCY basis.
 
International’s revenues were broadly flat year over year with growth in licence more than offsetting the decline in Maintenance and Consultancy. Licence growth in CDMS, IAS and ITOM more than offset the decline in IAS and Collaboration & Networking. Maintenance and Consultancy declines were in line with expectations.

Asia Pacific & Japan saw an 8.9% revenue decline in the six months to October 31, 2017 on a CCY basis. Licence revenues were down in all portfolios except Collaboration & Networking whilst maintenance revenues declined in line with expectations.

HPE Software revenue contribution for the period from completion to October 31, 2017 was $569.8 million.  There is no comparative information by region for the HPE Software business because the comparative period is before Completion. The delivered revenue in the two months brought the total revenue for the HPE Software business in the year to October 31, 2017 to the bottom of the range of guidance we gave after Completion.
 
On a go-forward basis, the Enlarged Group’s revenue regions will be organized in to the Americas (consisting of North America and Latin America), EMEA, and Asia Pacific & Japan.

SUSE Product Portfolio regional revenue performance

North America, International and Asia Pacific & Japan regions have shown growth in revenue on a CCY basis of 8.7%, 11.4% and 35.5% respectively. Growth in these regions was derived across all routes to market, coming into the period with a strong deferred income roll out together with securing new business with large enterprise accounts directly and through the various alliances and channel partners.

We are pleased to note that the change to specializing and aligning the field sales and marketing resources to SUSE in the Asia Pacific & Japan has continued to result in sustained recurring profitable revenue growth.

We made changes to the sales leadership in North America in the June to September timeframe and are rebuilding the sales team there. This contributed to the lower than expected revenue growth in North America in the period.

8


Operating Costs

   
Six months
ended
October 31,
2017
Actual
   
Six months
ended
October 31,
2016
Actual
   
Six months
ended
October 31,
2017
Actual
(Decline)/
Growth
   
Six months
ended
October 31,
2017
Actual
(Decline)/
Growth
   
Six months
ended
October 31,
2016
CCY
   
Six months
ended
October 31,
2017
CCY
(Decline)/
Growth
   
Six months
ended
October 31,
2017
CCY (Decline)/
Growth
 
   
(dollars in millions)
   
%
   
(dollars in millions)
   
%
 
Cost of goods sold
   
273.9
     
123.4
     
150.5
     
122.0
%
   
123.8
     
150.1
     
121.2
%
Selling and distribution costs
   
398.6
     
218.5
     
180.1
     
82.4
%
   
219.4
     
179.2
     
81.7
%
Research and development expenses
   
173.6
     
86.4
     
87.2
     
100.9
%
   
87.4
     
86.2
     
98.6
%
Administrative expenses
   
168.4
     
93.1
     
75.3
     
80.9
%
   
93.3
     
75.1
     
80.5
%
Total Operating Costs
   
1,014.5
     
521.4
     
493.1
     
94.6
%
   
523.9
     
490.6
     
93.6
%

Total operating costs. Total operating costs for the period increased by $493.1 million, or 94.6% ($490.6 million, or 93.6% on a CCY basis) to $1,014.5 million in the six months ended October 31, 2017 as compared to $521.4 million in the six months ended October 31, 2016 (2016: $523.9 million on a CCY basis). As described below in the individual cost categories, the increase is primarily in relation to the acquisition of HPE Software, increasing total operating costs by $457.7 million. Excluding HPE Software, total operating costs increased by $35.4 million, primarily due to an increase in exceptional items of $37.3 million.

Cost of sales. Cost of sales increased by $150.5 million, or 122.0% ($150.1 million, or 121.2% on a CCY basis) to $273.9 million in the six months ended October 31, 2017 as compared to $123.4 million in the six months ended October 31, 2016. The acquisition of HPE Software increased cost of sales by $159.3 million. Cost of sales excluding HPE Software decreased by $8.8 million to $114.6 million. There was a decrease in the amortization of purchased intangibles of $3.0 million to $34.0 million as compared to $37.0 million in the six months ended October 31, 2016, a reduction in staff-related costs of $2.3 million and a reduction in travel costs of $0.5 million. Exceptional items included in cost of sales increased $1.9 million to $3.1 million. Exceptional items are discussed later in this section.

Selling and distribution costs. Selling and distribution costs increased $180.1 million, or 82.4% ($179.2 million, or 81.7% on a CCY basis) to $398.6 million in the six months ended October 31, 2017 as compared to $218.5 million in the six months ended October 31, 2016. The acquisition of HPE Software increased selling and distribution costs by $171.3 million. Selling and distribution costs excluding HPE Software increased by $8.8 million. This increase in selling and distribution costs includes an increase in exceptional items of $6.6 million to $8.6 million, and an increase in the amortization of purchased intangibles of $1.5 million to $70.9 million. Exceptional items are discussed later in this section.

Research and development expenses. Research and development expenses increased by $87.2 million, or 100.9% ($86.2 million, or 98.6% on a CCY basis) to $173.6 million in the six months ended October 31, 2017 as compared to $86.4 million in the six months ended October 31, 2016. The acquisition of HPE Software increased research and development by $70.3 million.  Research and development expenses excluding HPE Software increased by $16.9 million. This increase in research and development costs includes an increase in exceptional items of $5.2 million to $7.4 million and an increase in staff-related costs of $14.2 million. Exceptional items are discussed later in this section.

Administrative expenses. Administrative expenses increased by $75.3 million, or 80.9% ($75.1 million, or 80.5% on a CCY basis) to $168.4 million in the six months ended October 31, 2017 as compared to $93.1 million in the six months ended October 31, 2016. The acquisition of HPE Software increased administrative expenses by $56.8 million. Administrative expenses excluding HPE Software increased by $18.5 million. Exceptional items included in administrative expenses increased $43.8 million to $79.4 million, share-based payments increased by $2.8 million to $18.3 million and exchange gains increased by $1.9 million to $9.0 million. Excluding acquisitions in the year, exceptional items, share-based payments and exchange gains, administrative expenses decreased by $5.5 million to $43.5 million. The decrease relates primarily to a reduction in staff-related costs of $13.5 million. Exceptional items are discussed later in this section.

9


Share of results of associates. Share of results of associates decreased by $0.7 million with a loss of $0.4 million in the six months ended October 31, 2017 as compared to a loss of $1.1 million in the six months ended October 31, 2016. This decrease is driven by the dilution of investment in the associate from 14.3% to 12.5% in the six months to April 30, 2016.

Finance costs. Finance costs increased by $20.0 million, or 40.4%, to $75.5 million in the six months ended October 31, 2017 as compared to $49.5 million in the six months ended October 31, 2016. This decrease in finance costs is primarily attributable to the increased loan interest and commitment fees of $17.9 million and an increase in the amortization of prepaid facility arrangements, original issue discounts and facility fees of $6.1 million as a result of the increased Group borrowings resulting from the acquisition of HPE Software.

Finance income. Finance income increased by $1.2 million, or 238.4%, to $1.7 million in the six months ended October 31, 2017 as compared to $0.5 million in the six months ended October 31, 2016. This is primarily due to interest income of $0.6 million earned on additional term loan facilities drawn down in relation to the acquisition, between the date the facilities were drawn into escrow and the acquisition date of HPE Software, and additional interest earned on increased cash balances as a result of the acquisition of HPE Software.

Exceptional items: Exceptional items increased by $63.3 million, or 154.4% to $104.3 million in the six months ended October 31, 2017 as compared to $41.0 million in the six months ended October 31, 2016.

The increase in exceptional items in the six months ended October 31, 2017 was as a result of an increase in pre-acquisition costs of $23.3 million relating to the acquisition of HPE Software, an increase in integration costs of $6.6 million in bringing acquired businesses together with the existing Micro Focus business, an increase in severance and legal costs of $5.8 million (primarily relating to staff reductions in HPE Software), an increase in acquisition costs of $24.4 million, and a reduction of property provisions of $2.6 million.

The pre-acquisition costs relate to the acquisition of HPE Software which was announced in September 2016 and completed on September 1, 2017. These costs related to accounting, legal and commercial due diligence work, legal work on the various agreements, professional advisors’ fees and pre-integration costs relating to activities in readiness for the HPE Software acquisition across all functions of the existing Micro Focus business.

Included within acquisition costs is $7.7 million in respect of US excise tax payable on the award of Long Term Incentives and Additional Share Grants to four senior employees.

Exceptional finance costs incurred in escrow period of $6.3 million relates to interest charges on additional term loan facilities drawn down in relation to the acquisition, between the date the facilities were drawn into escrow and the acquisition date of HPE Software.

Exceptional finance income earned in escrow period of $0.6 million relates to interest income earned on additional term loan facilities drawn down in relation to the acquisition, between the date the facilities were drawn into escrow and the acquisition date of HPE Software.

Profit before tax: Profit before tax increased by $32.5 million, or 28.7%, to $145.7 million in the six months ended October 31, 2017 as compared to $113.2 million in the six months ended October 31, 2016 as a result of an increase in operating profit before exceptional items of $114.1 million and an increase in $0.7 million from share of results in associates, offset by an increase in net finance costs before exceptional items of $19.1 million and an increase in exceptional items of $63.3 million.

Currency impact: During the six months ended October 31, 2017, 62.3% of our revenues were contracted in US dollars, 20.2% in Euros, 4.5% in Sterling, 2.8% in CAD dollars and 10.2% in other currencies. In comparison, 50.5% of our costs are US dollar denominated, 16.8% in Euros, 9.7% in Sterling, 1.6% in CAD dollars and 21.4% in other currencies.

This weighting of revenue and costs means that if the US dollars-to-Euro or US dollar-to-CAD dollar exchange rates move during the period, the revenue impact is greater than the cost impact and whilst if US dollar-to-Sterling rate moves during the period the cost impact exceeds the revenue impact. Consequently, actual US dollars EBITDA can be impacted by significant movements in US dollar to Euro, CAD dollars and Sterling exchange rates.

The currency movement for the US dollar against Sterling, Euro and CAD dollar was a strengthening of 2.9% and a weakening of 3.3% and 1.5% respectively when looking at the average exchange rates in the six months ended October 31, 2017 compared to those in the six months ended October 31, 2016.

In order to provide CCY comparatives, we have restated the results of the Group for the six months ended October 31, 2016 at the same average exchange rates as those used in reported results for the six months ended October 31, 2017. Consequently, CCY revenues reduce to $683.0 million from $684.7 million reported, a reduction of 0.2%, and CCY Adjusted EBITDA reduces to $316.1 million from $320.3 million reported, a reduction of 1.3%.

Intercompany loan arrangements within the Group are typically denominated in the local currency of the overseas affiliate.  Consequently, any movement in the respective local currency and US dollar will have an impact on the converted US dollars value of the loans. This foreign exchange movement is taken to the consolidated statement of comprehensive income. The Group’s UK Corporation Tax liability is denominated in Sterling and any movement of the US dollar: Sterling rate will give rise to a foreign exchange gain or loss which is also taken to the consolidated statement of comprehensive income. The foreign exchange gain for the period is approximately $4.7 million.

10


Taxation. The tax charge increased by $16.5 million, or 73.2%, to $39.1 million in the six months ended October 31, 2017 as compared to $22.6 million in the six months ended October 31, 2016. The impact of exceptional items on the tax charge increased by $20.0 million to a credit of $25.5 million in the six months ended October 31, 2017 compared to a credit of $5.5 million in the six months ended October 31, 215%016. Excluding exceptional items, the tax charge increased by $36.5 million to $64.7 million (reflecting a marginal tax rate of 25.9%) for the six months ended October 31, 2017 as compared to $28.2 million (tax rate of 18.2%) for the six months ended October 31, 2016. This increase in the tax rate is primarily due to the inclusion of HPE Software profits, which are subject to tax at a higher rate than existing Micro Focus profits, and restrictions on the deductibility of interest expenses under new UK tax rules.

On December 22, 2017, the U.S. President signed into law federal tax legislation commonly referred to as the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act provides for significant and wide-ranging changes to the U.S. Internal Revenue Code. The reforms are complex, and it will take some time to assess the implications thoroughly. Broadly, the implications most relevant to the Enlarged Group include: a) a reduction in the U.S. federal corporate income tax rate from 35% to 21%, with various “base erosion” rules that may effectively limit the tax deductibility of certain payments made by U.S. entities to non-U.S. affiliates and additional limitations on deductions attributable to interest expense; and b) adopting elements of a territorial tax system. To transition into this system, the Tax Cuts and Jobs Act includes a one-time tax on cumulative retained earnings of U.S.-owned foreign subsidiaries, at a rate of 15.5% for earnings represented by cash or cash equivalents and 8.0% for the balance of such earnings. Taxpayers may make an election to pay this tax over eight years.

These tax reforms will give rise to significant consequences, both immediately in terms of one-off impacts relating to the transition tax and the measurement of deferred tax assets and liabilities and going forward in terms of the Group’s taxation expense. An initial review and estimate has been undertaken, which will be updated over the coming weeks and months as the Group works through these complex changes with its advisors. Based on the Group’s initial estimate, the transition tax and re-measurement of deferred tax balances are estimated to give rise to a one-off credit to the income statement in the period to April 30, 2018 in the range of $600 million to $700 million. The Tax Cuts and Jobs Act could be subject to potential amendments and technical corrections, any of which could lessen or increase adverse impacts of the law.

Going forward, in the medium-term, these tax reforms are estimated to reduce the Group’s taxation expense as a percentage of Adjusted Profit before tax to 25% from the previous medium term guidance of 33%.

Also refer to Notes to the Consolidated Financial Statements- Note 12. Taxation for further discussion of taxation.

Adjusted EBITDA. Adjusted EBITDA increased by $209.7 million, or 65.5%, to $530.1 million in the six months ended October 31, 2017 as compared to $320.3 million in the six months ended October 31, 2016.

On a CCY basis, Adjusted EBITDA increased by $214.0 million, to $530.1 million as compared to $316.1 million in the six months ended October 31, 2016. This increase in Adjusted EBITDA was primarily driven by an increase of $226.9 million due to the HPE Software acquisition. Excluding the impact of HPE Software, Adjusted EBITDA on a CCY basis for the Group decreased by $12.9 million to $303.2 million as compared to $316.1 million in the six months ended October 31, 2016, due to a a $4.4 million increase from the SUSE Product Portfolio and a $17.3 million decline from the Micro Focus Product Portfolio where operational efficiencies were put on hold pending the completion of the HPE Software transaction.

Adjusted Operating Profit. Adjusted Operating Profit increased by $193.9 million, or 59.4% to $520.2 million in the six months ended October 31, 2017 as compared to $326.3 million in the six months ended October 31, 2016.  On a CCY basis, Adjusted Operating Profit increased $197.9 million, or 61.4% to $520.2 million in the six months ended October 31, 2017 as compared to $322.3 million in the six months ended October 31, 2016.

The Micro Focus Product Portfolio Adjusted Operating Profit in the six months ended October 31, 2017 was $470.4 million, delivering a margin of 44.0% which compares with the margin on a reported basis of 50.8% and a margin of 50.6% on a CCY basis in the six months ended October 31, 2016. The decrease in margin arose mainly due to the effect of lower margins in the newly acquired HPE Software business.

The SUSE Product Portfolio Adjusted Operating Profit in the six months ended October 31, 2017 was $49.8 million delivering a margin of 30.3%. Compared to the reported Adjusted Operating Profit in the six months ended October 31, 2016, this is a decrease of $3.7 million and a profit margin decrease of 6.0%. Compared to the CCY Adjusted Operating Profit in the six months ended October 31, 2016, this is a decrease of $0.6 million (1.2%) and a profit margin decrease of 4.4%.
 
We have seen a significant increase in directly managed costs in SUSE that is consistent with the investment being made to deliver the SUSE growth charter.

11


Critical Accounting Estimates and Policies

The condensed consolidated interim financial statements of the Group included at Item 18 have been prepared in accordance with IFRS applicable to interim reporting, IAS 34. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed below.

In preparing the condensed consolidated interim financial statements, the Group has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Group regularly reviews these estimates and updates them as required. Actual results could differ from these estimates. Unless otherwise indicated, the Group does not believe that it is likely that materially different amounts would be reported related to the accounting estimates and assumptions described below. The Group considers the following to be a description of the most significant estimates, which require the Group to make subjective and complex judgments, and matters that are inherently uncertain.

Revenue recognition

The Group recognizes revenues from sales of software Licences (including Intellectual Property and Patent rights, to end-users, resellers and Independent Software Vendors (“ISV”)), software maintenance, subscription, SaaS, technical support, training and professional services, upon firm evidence of an arrangement, delivery of the software and determination that collection of a fixed or determinable fee is reasonably assured. ISV revenue includes fees based on end usage of ISV applications that have our software embedded in their applications. When the fees for software upgrades and enhancements, maintenance, consulting and training are bundled with the Licence fee, they are unbundled using the Group’s objective evidence of the fair value of the elements represented by the Group’s customary pricing for each element in separate transactions. If evidence of fair value exists for all undelivered elements and there is no such evidence of fair value established for delivered elements, revenue is first allocated to the elements where fair value has been established and the residual amount is allocated to the delivered elements. If evidence of fair value for any undelivered element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that there is evidence of delivery.

If the arrangement includes acceptance criteria, revenue is not recognized until the Group can objectively demonstrate that the acceptance criteria have been met, or the acceptance period lapses, whichever is earlier.

The Group recognizes Licence revenue derived from sales to resellers upon delivery to resellers, provided that all other revenue recognition criteria are met; otherwise revenue is deferred and recognized upon delivery of the product to the end-user. Where the Group sells access to a Licence for a specified period of time and collection of a fixed or determinable fee is reasonably assured, Licence revenue is recognized upon delivery, except in instances where future substantive upgrades or similar performance obligations are committed to. Where these future performance obligations are specified in the Licence agreement, and fair value can be attributed to those upgrades, revenue for the future performance obligations is deferred and recognized on the basis of the fair value of the upgrades in relation to the total estimated sales value of all items covered by the Licence agreement. Where the future performance obligations are unspecified in the Licence agreement, revenue is deferred and recognized ratably over the specified period.

For Subscription revenue where access and performance obligations are provided evenly over a defined term, the revenue is deferred and recognized ratably over the specified period.

The Group recognizes revenue for SaaS arrangements as the service is delivered, generally on a straight-line basis, over the contractual period of performance. In SaaS arrangements, the Group considers the rights provided to the customer (e.g. whether the customer has the contractual right to take possession of the software at any time during the contractual period without significant penalty, and the feasibility of the customer to operate or contract with another vendor to operate the software) in determining whether the arrangement includes the sale of a software licence. In SaaS arrangements where software licences are sold, licence revenue is generally recognized according to whether perpetual or term licences are sold, when all other revenue recognition criteria are satisfied.

Maintenance revenue is recognized 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 recognizes revenue as services are rendered and recognizes costs as they are incurred. The Group recognizes revenue from fixed-price professional services contracts as work progresses over the contract period on a proportional performance basis, as determined by the percentage of labor costs incurred to date compared to the total estimated labor costs of a contract. Estimates of total project costs for fixed-price contracts are regularly reassessed during the life of a contract. Amounts collected prior to satisfying the above revenue recognition criteria are included in deferred income.

Rebates paid to partners as part of a contracted program are netted against revenue where the rebate paid is based on the achievement of sales targets made by the partner, unless the Company receives an identifiable good or service from the partner that is separable from the sales transaction and for which the Group can reasonably estimate fair value.

12


Exceptional Items and Integration / Restructuring Provisions

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 Groups financial performance. Management of the Group first evaluates group strategic projects such as acquisitions, divestitures and integration activities, company tax restructuring and other one off events such as restructuring programs. In determining whether an event or transaction is exceptional, management of the Group considers quantitative and qualitative factors such as its expected size, precedent for similar items and the commercial context for the particular transaction, while ensuring consistent treatment between favorable and unfavorable transactions impacting revenue, income and expense for all periods presented. Examples of transactions which may be considered of an exceptional nature include major restructuring programmes, cost of acquisitions or the cost of integrating acquired businesses.

The classification of these items as exceptional is a matter of judgment . This judgment is made by management after evaluating each item deemed to be exceptional against the criteria set out within the defined accounting policy.

Business Combinations
When making acquisitions, the Group has to make judgments and best estimates about the fair value allocation of the purchase price. Where acquisitions are significant, appropriate advice is sought from professional advisors before making such allocations, otherwise valuations are done by management using consistent methodology used on prior year acquisitions where appropriate professional advice was sought. The valuation of goodwill and other intangibles is tested annually or whenever there are changes in circumstances indicating that the carrying amounts may not be recoverable. These tests require the use of estimates.

There was judgment used in identifying who the accounting acquirer was in the acquisition of HPE Software, as the resulting shareholdings were not definitive to identify the entity which obtains control in the Transaction.  As such, the Group considered the other factors laid down in IFRS, such as the composition of the governing body of the combined entity, composition of senior management of the combined entity, the entity that issued the equity interest, terms of exchange of equity interests, the entity which initiated the combination, relative size of each entity, the existence of a large minority voting interest in the combined entity and other factors (e.g. location of headquarters of the combined entity and entity name). The conclusion of this assessment is that the Company is the accounting acquirer of HPE Software, and the acquisition accounting as set out in Notes to the Consolidated Financial Statements—Note 28. Business Combinations have been performed on this basis.

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 fair value measurement for intangible assets and deferred revenue requires the use of assumptions including the expected future cash flows, discount rates, and estimated economic lives. The excess of the cost of acquisition over the fair value of the Groups share of the identifiable net assets acquired is recorded as goodwill.

Where new information is obtained within the measurement period (defined as the earlier of the period until which the Group receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable, or one year from the acquisition date) about facts and circumstances that existed as at the acquisition date and, if known, would have affected the measurement of the amounts recognized as of that date, the Group recognizes these adjustments to the acquisition balance sheet with an equivalent offsetting adjustment to goodwill. Where new information is obtained after this measurement period has closed, this is reflected in the post-acquisition period.

Foreign currency translation

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. The Group uses the local currency as the functional currency, except for two entities based in Ireland (Novell Ireland Software Limited and Novell Ireland Real Estate Limited), the parent company, and the HPE Software entities, where the functional currency is the US dollar Certain HPE Software entities moved to local functional currencies from November 1. 2017, reflecting changes in their underlying business model and transactional conditions.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statement of comprehensive income.

13


Group companies

The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

·
Assets and 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;
·
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
·
All resulting exchange differences are recognized 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

Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each of those cash-generating units represents the Groups investment in each area of operation by each primary reporting segment.

The Group tests annually whether goodwill has suffered any impairment. The recoverable amounts of cash-generating units are determined based on value-in-use calculations. These calculations require the use of estimates such as the discount rate applied to each cash generating unit, operating margin, and the long term growth rate of net operating cash flows.

Impairment of non-financial assets

Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the assets carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an assets fair value less costs to sell 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 an impairment are reviewed for possible reversal of the impairment at each reporting date. Assets that are subject to amortization and depreciation are also reviewed for any possible impairment at each reporting date.

Development expenditure

The Group invests in the development of future products. The assessment as to whether this expenditure will achieve a complete product for which the technical feasibility is assured is a matter of judgment, as is the forecasting of how the product will generate future economic benefit. Finally, the period of time over which the economic benefit associated with the expenditure occurred will arise is also a matter of judgment. These judgments are made by evaluating the development plan prepared by the research and development department and approved by management, regularly monitoring progress by using an established set of criteria for assessing technical feasibility and benchmarking to other products.

Taxation

The Group is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognizes liabilities for anticipated settlement of tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

The Group carries appropriate provision, based on best estimates, until tax computations are agreed with the taxation authorities.

Current and deferred tax are recognized in the consolidated statement of comprehensive income, except when the tax relates to items charged or credited directly to equity, in which case the tax is also dealt with directly in equity.

14


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 or loss, it is not accounted for. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the consolidated statement of financial position date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

Current tax is recognized based on the amounts expected to be paid or recovered under the tax rates and laws that have been enacted or substantively enacted at the consolidated statement of financial position date.

Loss Contingencies

Loss contingencies for onerous leases, restructuring costs and legal claims are recognized 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. Restructuring contingencies comprise lease termination penalties and employee termination payments. Contingencies are not recognized for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A loss contingency is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Loss contingencies 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 loss contingency due to the passage of time is recognized as an interest expense.

New Accounting Standards

For discussion of the impact and adoption of accounting standards, see Notes to the Consolidated Financial Statements—Note 3. Accounting policies.

Quantitative and Qualitative Disclosures about Market Risk

Financial risk factors

Micro Focus Groups multi-national operations expose it to a variety of financial risks that include the effects of changes in credit risk, foreign currency risk, interest rate risk and liquidity risk. Risk management is carried out by a central treasury department under policies approved by the board of directors. Group treasury identifies and evaluates financial risks alongside the Groups operating units. The board provides written principles for risk management together with specific policies covering areas such as foreign currency risk, interest rate risk, credit risk and liquidity risk, use of derivative financial instruments and non-derivative financial instruments as appropriate, and investment of excess funds.

Credit risk

Financial instruments which potentially expose the Group to a concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash equivalents are deposited with predominately high-credit quality financial institutions. The Group provides credit to customers in the normal course of business. Collateral is not required for those receivables, but on-going credit evaluations of customers financial conditions are performed. The Group maintains a provision for impairment based upon the expected collectability of accounts receivable. The Group sells products and services to a wide range of customers around the world and therefore believes there is no material concentration of credit risk.

Foreign currency risk

The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to UK Sterling, Candadian Dollar and the Euro. Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations. Foreign exchange risk arises when future commercial transactions, recognized assets and liabilities are denominated in a currency that is not the entitys functional currency. There were no hedging transactions in place at October 31, 2017 and October 31, 2016 for foreign currency risk. The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk.

15


Interest rate risk

The Groups income and cash generated from operations are substantially independent of changes in market interest rates. The Groups 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 entered into interest rate swaps in the six months to October 31, 2017, to hedge against the cash flow risk in the LIBOR rate charged on $2,250 million of the debt issued by Seattle Spinco, Inc. from October 19, 2017 to September 30, 2022. Under the terms of the interest rate swaps, the Group pays a fixed rate of 1.94% and receives 1 month USD LIBOR.

Liquidity risk

Central treasury carries out cash flow forecasting for the Group to ensure that it has sufficient cash to meet operational requirements and to allow the repayment of the bank facility. Surplus cash in the operating units over and above what is required for working capital needs is transferred to Group treasury. These funds are used to repay bank borrowings or invested in interest bearing current accounts, time deposits or money market deposits of the appropriate maturity period determined by consolidated cash forecasts. Trade payables arise in the normal course of business and are all current. Onerous lease provisions are expected to mature between less than 12 months and nine years.

At October 31, 2017 gross borrowings of $5,047.7 million (compared to $1,775.9 million on October 31, 2016) related to our secured debt facilities. $37.9 million (compared to $307.8 million on October 31, 2016) is current of which none (compared to $245.0 million on October 31, 2016) is the revolving credit facility. The borrowings disclosed in the balance sheet are net of pre-paid facility costs. See Notes to the Consolidated Financial Statements—Note 19. Borrowings.

Non-IFRS measures

The Group uses certain measures to assess the financial performance of its business. Certain of these measures are termed “non-IFRS 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.

Following Completion, we reviewed the measures that we use to assess the financial performance of the business and concluded that, in order to simplify reporting on the Enlarged Group, we would cease using the non-IFRS measures previously reported as “Facility EBITDA” and “Adjusted EBITDA”. We will continue to use and report the non-IFRS measure previously reported as “Underlying Adjusted EBITDA”, now renamed “Adjusted EBITDA”. In addition, we have begun reporting “Adjusted Profit before tax” to supplement our analysis of results of operations relating to taxation.

The non-IFRS measures may not be comparable to other similarly titled measures used by other companies and have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of the Group’s operating results as reported under IFRS.

An explanation of the relevance of each of the non-IFRS measures, a reconciliation of the non-IFRS measures to the most directly comparable measures calculated and presented in accordance with IFRS and a discussion of their limitations is set out below. The Group does not regard these non-IFRS measures as a substitute for, or superior to, the equivalent measures calculated and presented in accordance with IFRS or those calculated using financial measures that are calculated in accordance with IFRS.

EBITDA and Adjusted EBITDA

EBITDA is defined as net earnings before finance costs, finance income, share of results of associates, taxation, depreciation of property, plant and equipment, and amortization 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 amortization expense).

During the six months ended October 31, 2017, the Group has redefined its Adjusted EBITDA definition and this is now the only adjusted EBITDA measure presented in the Group results. The new “Adjusted EBITDA” definition was previously reported as “Underlying Adjusted EBITDA”.

16


Adjusted EBITDA is comprised of EBITDA (as defined above), adjusted for, exceptional items (integration costs, acquisition costs, pre-acquisition costs, property costs, severance costs, royalty provision release, impairment of intangible assets, and impairment of prepayments), share based compensation, amortization and impairment of development costs, foreign exchange gains/losses and net capitalization/amortization of development costs.

These items are excluded from Adjusted EBITDA because they are individually or collectively material items that are not considered to be representative of the trading performance of the Group. Management believes that Adjusted EBITDA should, therefore, be made available to securities analysts, investors and other interested parties to assist in their assessment of the trading performance of our business.

Adjusted EBITDA Margin refers to each measure defined above as a percentage of actual revenue recorded in accordance with IFRS for the period.

EBITDA and Adjusted EBITDA have limitations as analytical tools. Some of these limitations are:

·
they do not reflect the Group’s cash expenditures or future requirements for capital expenditure or contractual commitments;
·
they do not reflect changes in, or cash requirements for, the Group’s working capital needs;
·
they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Group’s debt;
·
they are not adjusted for all non-cash income or expense items that are reflected in the Group’s statements of cash flows;
·
the further adjustments made in calculating Adjusted EBITDA are those that management consider are not representative of the underlying operations of the Group and therefore are subjective in nature; and
·
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements.

The following table is a reconciliation from profit for the period to EBITDA and Adjusted EBITDA:

   
Six months ended
31 October 2017
   
Six months ended
31 October 2016
 
   
(dollars in thousands)
 
             
Profit for the period
   
106,605
     
90,617
 
Finance costs
   
75,487
     
49,455
 
Finance income
   
(1,699
)
   
(502
)
Taxation
   
39,129
     
22,589
 
Share of results of associates
   
438
     
1,127
 
Depreciation of property, plant and equipment
   
16,289
     
5,712
 
Amortization of intangible assets
   
198,606
     
119,085
 
EBITDA
   
434,855
     
288,083
 
Exceptional items (reported in Operating profit)
   
98,480
     
41,048
 
Share-based compensation charge
   
18,302
     
15,521
 
Amortization of and impairment of product development costs
   
(12,375
)
   
(12,117
)
Foreign exchange gain
   
(4,699
)
   
(9,270
)
Net capitalization of product development costs
   
(4,503
)
   
(2,931
)
Adjusted EBITDA
   
530,060
     
320,334
 
                 
Revenue
   
1,234,520
     
684,743
 
Adjusted EBITDA Margin
   
42.9
%
   
46.8
%

Exceptional items are those significant items which are separately disclosed by virtue of their size, nature or incidence to enable a full understanding of the Group’s financial performance. These items are collectively totaled and identified as “exceptional items”, as set out in Notes to the Consolidated Financial Statements- Note 7. Exceptional Items.

17


Adjusted Operating Profit

Adjusted Operating Profit is defined as operating profit before share-based compensation, the amortization of purchased intangible assets, and exceptional items. Adjusted Operating Profit is also the measure used by the Executive Committee to assess the trading performance of our business and is therefore the measure of segment profit that the Group presents under IFRS. Adjusted Operating Profit is also presented on a consolidated basis because management believes it is important to consider our profitability on a basis consistent with that of our operating segments. When presented on a consolidated basis, Adjusted Operating Profit is a non-IFRS measure. The following table is a reconciliation from operating profit for the period excluding exceptional items to Adjusted Operating Profit:

   
Six months ended
October 31, 2017
   
Six months ended
October 31, 2016
 
   
(dollars in thousands)
 
Operating profit
   
219,960
     
163,286
 
Exceptional items (reported in Operating Profit)
   
98,480
     
41,048
 
Share-based compensation charge
   
18,302
     
15,521
 
Amortization of purchased intangible assets
   
183,478
     
106,394
 
Adjusted Operating Profit
   
520,220
     
326,249
 

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. These items are collectively totaled and identified as “exceptional items”, as set out in Notes to the Consolidated Financial Statements—Note 7. Exceptional Items).

Adjusted Profit before tax

Adjusted Profit before tax is defined as profit before tax excluding the effects of share-based compensation, the amortization of purchased intangible assets, and all exceptional items. Adjusted Profit before tax is presented to supplement our analysis of results of operations relating to taxation. When presented on a consolidated basis, Adjusted Profit before tax is a non-IFRS measure.

The following table is a reconciliation from profit before tax for the year to Adjusted Profit before Tax:

   
Six months ended
31 October 2017
(unaudited)
   
Six months ended
31 October 2016
(unaudited)
 
   
(dollars in thousands)
 
Profit before tax
   
145,734
     
113,206
 
Share-based compensation charge
   
18,302
     
15,521
 
Amortization of purchased intangibles
   
183,478
     
106,394
 
Exceptional items
   
104,253
     
41,048
 
Adjusted Profit before tax
   
451,767
     
276,169
 

Constant Currency (CCY)

The Group’s reporting currency is the U.S. dollar, however, the Group’s significant international operations give rise to fluctuations in foreign exchange rates. To neutralize foreign exchange impact and to better illustrate the underlying change in revenue and profit from one year to the next, the Group has adopted the practice of discussing results in both reportable currency (local currency results translated into US dollars at the prevailing foreign exchange rate) and constant currency.

The Group uses US dollar-based constant currency models to measure performance. These are calculated by restating the results of the Group for the six months ended October 31, 2016 at the same average exchange rates as those used in reported results for the six months ended October 31, 2017. This gives a US-dollar denominated income statement which excludes any variances attributable to foreign exchange rate movements.

18


The most important foreign currencies for the Group are: Pounds Sterling, the Euro and Canadian dollar. The exchange rates used are as follows:

   
Six months ended
October 31, 2017
   
Six months ended
October 31, 2016
 
   
Average
   
Closing
   
Average
   
Closing
 
£1 = $
   
1.30
     
1.33
     
1.35
     
1.22
 
€1 = $
   
1.14
     
1.16
     
1.12
     
1.10
 
CAD$ 1 = $
   
0.78
     
0.78
     
0.76
     
0.75
 

5. B Liquidity and capital resources

Our principal ongoing uses of cash are to meet working capital requirements to fund debt obligations and to finance our capital expenditures and acquisitions. The board continues to target a modest level of leverage for a company with the cash generating qualities of Micro Focus with a target net debt (defined as the total of borrowings and finance lease obligations less cash and cash equivalents) to Adjusted EBITDA multiple of 2.7 times. We are confident that this level of debt will not reduce our ability to deliver our strategy, invest in products and/or make appropriate acquisitions. As the integration of the businesses continues the board will keep the appropriate level of debt under review.

The Group’s operations are diversified across a number of currencies. Changes in foreign exchange rates are monitored and exposures regularly reviewed and actions taken to review exposures where necessary. The Group has significant committed facilities in place, the earliest of which matures in November 2021 and sufficient headroom to meet its operational requirements. The Group seeks to maintain strong relationships with its key banking partners and lenders and to proactively monitor the loan markets. The Group also has strong engagement with the providers of equity capital, which represents an alternative source of capital.

As at October 31, 2017, we had cash and cash equivalents of $730.3 million, which includes net cash and working capital adjustments to be paid to HPE of $289.0 million and other amounts due to HPE of $72.2 million, and excludes amounts due from HPE of $103.2 million. The company also has a $500.0 million Revolving Credit Facility (which is undrawn as at October 31, 2017). In addition, as a public listed company Micro Focus has access to equity capital markets for fund raising if required. There are no current plans to issue additional equity.

We believe that the Company’s current available working capital is adequate to sustain its operations at current levels through at least the next twelve months.

Cash flows from operating activities

Six months ended October 31, 2017 compared to the six months ended October 31, 2016

Net cash generated from operating activities decreased by $61.0 million, or 45.2%, to $74.0 million in the six months ended October 31, 2017 as compared to $135.0 million in the six months ended October 31, 2016. This is primarily due to an increase of $39.5 million in interest paid, $84.5 million of bank loan costs and an outflow of working capital of $142.2 million, which is partially offset by an increase in operating profit after adding back the effect of non-cash items of $207.5 million.

The acquisition of HPE Software contributed $207.9 million to the increase in operating profit after adding back the effect of non-cash items and $133.5 million to the outflow of working capital.

Cash flows from investing activities

Six months ended October 31, 2017 compared to the six months ended October 31, 2016

Net cash generated from investing activities increased by $842.7 million, or 148.9%, to $276.9 million in the six months ended October 31, 2017 as compared to net cash used in investing activities of $565.8 million in the six months ended October 31, 2016. This increase in net cash generated from investing activities is primarily due to an increase in net cash acquired with acquisitions of $252.6 million, a decrease of repayment of bank borrowings on acquisitions of $316.7 million, and a decrease in payments for acquisitions of subsidiaries of $293.8 million, partially offset by an increase of $18.1 million in payments for intangible assets.

Cash flows from financing activities

Six months ended October 31, 2017 compared to the six months ended October 31, 2016

Net cash generated from financing activities increased by $318.0 million, or 260.8%, to $196.1 million in the six months ended October 31, 2017 as compared to net cash used in financing activities of $121.9 million in the six months ended October 31, 2016. This increase in net cash generated from financing activities is primarily due to an increase of $928.8 million in cash inflows associated with the proceeds from bank borrowings offset by cash outflows of $500.0 million in relation to the return of value, increase in repayment of bank borrowings of $88.6 million, and an increase in dividends paid to shareholders of $22.9 million.

Borrowings
The Company announced on April 21, 2017 the successful syndication of the new credit facilities (the “New Facilities”) on behalf of both MA FinanceCo, LLC, a wholly owned subsidiary of Micro Focus, and Seattle SpinCo. Inc., the subsidiary that holds HPE Software which merged with a wholly owned subsidiary of Micro Focus at Completion.

The New Facilities comprise a $500.0 million Revolving Credit Facility at LIBOR plus 3.50% (subject to a LIBOR floor of 0.00%) placed with a number of financial institutions, $2,600.0 million term loan B issued by Seattle SpinCo, Inc., $385.0 million term loan B issued by MA FinanceCo LLC, and Eur 470.0 million (valued at $547.5 million as at October 31, 2017) issued by MA FinanceCo LLC.

New Facilities drawn as at April 30, 2017:

In relation to the existing senior secured term loans issued by MA FinanceCo, LLC the lenders in the Term Loan C of $412.5 million due November 2019 were offered a cashless roll of their investment into the existing Term Loan B, becoming Term Loan B-2, due November 2021 and this loan was re-priced to LIBOR plus 2.50% (subject to a LIBOR floor of 0.00%) and as a result of the cashless rollover increased in size from $1,102.7 million to $1,515.2 million, effective from April 28, 2017.

19


During the current period to October 31, 2017 the following New Facilities were drawn down:

HPE Software Facilities:

·
The new $2,600.0 million senior secured seven year term loan B issued by Seattle SpinCo. Inc. is priced at LIBOR plus 2.75% (subject to a LIBOR floor of 0.00%) with an original issue discount of 0.25%;
 
Micro Focus Facilities:
 
·
The new $385.0 million senior secured seven year term loan B issued by MA FinanceCo LLC is also priced at LIBOR plus 2.75% (subject to a LIBOR floor of 0.00%) with an original issue discount of 0.25%; and
·
The new Euro 470.0 million (equivalent to $547.5 million as at October 31, 2017) senior secured seven year term loan B issued by MA FinanceCo LLC is priced at EURIBOR plus 3.00% (subject to a EURIBOR floor of 0.00%) with an original issue discount of 0.25%.

As part of the HPE Software transaction, the New Facilities were used to:

i.
Fund the pre-Completion cash payment by Seattle SpinCo. Inc. to HPE of $2,500.0 million (subject to certain adjustments in limited circumstances);
ii.
Fund the Return of Value to Micro Focus’ existing Shareholders of $500.0 million; and
iii.
Pay transaction costs relating to the acquisition of HPE Software.

The balance will be used for general corporate and working capital purposes.

The only financial covenant attaching to these facilities relates to the Revolving Facility, which is subject to an aggregate net leverage covenant only in circumstances where more than 35% of the Revolving Facility is outstanding at a fiscal quarter end.

At October 31, 2017, the Revolving Facility was undrawn and $5,047.7 million Term Loan B-2 giving gross debt of $5,047.7 million drawn.

As a covenant test is only applicable when the Revolving Facility is drawn down by 35% or more, and Revolving Facility was undrawn at October 31, 2017, no covenant test is applicable.

Interest rate swaps

The Group entered into interest rate swaps in the six months to October 31, 2017, to hedge against the cash flow risk in the LIBOR rate charged on $2,250.0 million of the debt issued by Seattle Spinco, Inc. from October 19. 2017 to September 30, 2022, consistent with the Group’s strategy to hedge the risk of cash flow fluctuations due to fluctuations in the LIBOR rate for up to half of the Group’s US Dollar denominated borrowings. Under the terms of the interest rate swaps, the Group pays a fixed rate of 1.94% and receive 1 month USD LIBOR.

5.C Research and development

The Micro Focus Group invests heavily in product development and has seen significant enhancements to existing products and has accelerated the development of new products. New versions of products have been released in each sub-portfolio in the past year. Through its market knowledge and close contact with customers, Micro Focus has sought to refine products to respond to the changing needs of the Micro Focus Groups customers.

During the financial periods ended October 31, 2017, October 31, 2016, and October 31, 2015, an aggregate of $173.6 million, $86.4 million, and $76.3 million, respectively, were charged to the consolidated statement of comprehensive income of the Micro Focus Group in respect of research and development expenditure. The Micro Focus Board intends to continue to focus investment in growth and core products and does not intend to dispose of declining products unless such products can achieve greater than the discounted cash flow they would generate in the ownership of the Enlarged Group.

Research expenditure is recognized as an expense as incurred in the consolidated statement of comprehensive income in research and development expenses. Costs incurred on product development projects relating to the developing of new computer software programmes and significant enhancement of existing computer software programmes are recognized as intangible assets when it is probable that the project will generate future economic benefits, considering its commercial and technological feasibility, and costs can be measured reliably. Only direct costs are capitalized which are the software development employee costs and third party contractor costs. Product development costs previously recognized as an expense are not recognized as an asset in a subsequent period.

The assessment as to whether product development expenditure will achieve a complete product for which the technical feasibility is assured is a matter of judgment, as is the forecasting of how the product will generate future economic benefit. Finally, the period of time over which the economic benefit associated with the expenditure occurred will arise is also a matter of judgment. These judgments are made by evaluating the development plan prepared by the research and development department and approved by management, regularly monitoring progress by using an established set of criteria for assessing technical feasibility and benchmarking to other products.

20


5.D Trend information

Factors and Trends that affect our Results of Operations

The underlying premise behind our business strategy is that the Group should consistently and over the long-term deliver shareholder returns in the range of 15% to 20% per annum. To deliver this objective the Group has adopted an operational and financial strategy underpinned by consistent and effective management and reward systems. This strategy is capable of execution over the long-term. When considering investment priorities, both organic and inorganic, we evaluate our options against a set of characteristics enabling the categorization of our products into one of the following:

New Models – Products or consumption models (cloud and subscription) that open new opportunities that could become growth drivers or represent emerging use cases that we need to be able to embrace;

Growth Drivers – Products with consistent growth performance and market opportunity to build the future revenue foundations of the Group;

Optimize – Products with declining revenue performance driven by the market or execution where the trajectory must be corrected to move back to the core category or investments focused to optimize long-term returns; and

Core – Products that have maintained broadly flat revenue performance but represent the current foundations of the Group and must be protected and extended.

Within this overall portfolio we have some products that are growing significantly and others that are stable or in decline. Our business model means the way we manage the portfolio is analogous to a ‘‘fund of funds’’ with the objective of generating modest revenue growth over the medium-term, delivering high levels of profitability and strong cash generation and cash conversion ratio with a balanced portfolio approach. We will continue to focus investment in growth and core products and will not dispose of declining products unless we can achieve greater than the discounted cash flow they would generate in our ownership.  Within the Enlarged Group we have also discovered areas in the portfolio with similar research and development efforts where a shared set of technologies and architectures (e.g. data ingestion, visualization, container platform, application programming interfaces) enable more innovation with less “duplicated” investment further contributing to our ability to drive higher efficiency without compromising innovation.

The combination with HPE Software may delay the return to revenue growth as the HPE Software products are integrated. We expect HPE Software’s revenue trend to continue its historical decline until the transformation has been fully executed and the benefits take hold. This integration will be delivered by the four-year plan and the six key strategic priorities that will consolidate and strengthen the combined business, with the goal of delivering modest revenue growth in the medium-term as well as underpinning our margin improvement objectives.

The Enlarged Group is a strong platform and once we achieve our target cash conversion ratio of 90% to 95% we believe we will generate significant free cash flows from which we can deliver returns of value to our shareholders and/or further highly accretive acquisitions.

Also refer to Item 5.A of this Form 20-F for further discussion of trend information.

5.E Off balance sheet arrangements

There are no off-balance sheet arrangements, aside from those outlined in the contractual cash obligations table in Item 5.F of this Form 20-F, that have, or are reasonably likely to have, a current or future material effect on the Groups financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

21


5.F Tabular disclosure of contractual obligations

The following table summarizes our contractual obligations and other commercial commitments at October 31, 2017, as well as the effect these obligations and commitments, specifically long-term debt and lease obligations, are expected to have on our liquidity and cash flow in future periods:

   
Payments due by Period
 
   
Less than
1 year
   
1 - 3 years
   
3 -5 years
   
After
5 years
   
Total
 
   
(dollars in thousands)
 
Contractual cash obligations:
                             
Long-term debt
   
37,858
     
100,954
     
1,544,170
     
3,364,711
     
5,047,693
 
Finance leases
   
14,306
     
16,817
     
1,426
     
-
     
32,549
 
Operating leases
   
80,573
     
129,887
     
101,087
     
39,537
     
351,084
 
Interest payments
   
194,391
     
383,707
     
323,523
     
213,102
     
1,114,723
 
Total
   
327,128
     
631,365
     
1,970,206
     
3,617,350
     
6,546,049
 
 
The interest payments within the above table are presented based on the prevailing one-month LIBOR and foreign exchange rates as of October 31, 2017.

5. G. Safe harbor

Refer to the information set forth under the heading “Forward Looking Statements” on page 1.

22


ITEM 8. FINANCIAL INFORMATION- LEGAL PROCEEDINGS

8.A.7 Legal Proceedings

The Group is involved in various lawsuits, claims, investigations and proceedings including those consisting of IP, commercial, employment, employee benefits and environmental matters, which arise in the ordinary course of business. The Separation and Distribution Agreement, dated as of September 7, 2016, between Seattle SpinCo, Inc. and HPE (the “SDA”) includes provisions that allocate potential financial responsibility for litigation involving the parties, as well as provide for cross-indemnification of the parties against potential liabilities to one party arising out of potential liabilities allocated to the other party. In addition, as part of the SDA, HPE and Seattle have agreed to cooperate with each other in managing litigation that relates to both parties’ businesses.  The Group records a liability when it believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgment is required to determine both the probability of having incurred a liability and the estimated amount of the liability. Litigation is inherently unpredictable. However, the Group believes it has valid defenses with respect to legal matters pending against it. Nevertheless, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these contingencies. The Group believes it has recorded adequate provisions for any such matters and, as of October 31, 2017, it was not reasonably possible that a material loss had been incurred in connection with such matters in excess of the amounts recognized in its financial statements.

Litigation, Proceedings and Investigations

Forsyth, et al. vs. HP Inc. and HPE: This purported class and collective action was filed on August 18, 2016 and an amended (and operative) complaint was filed on December 19, 2016 in the United States District Court for the Northern District of California, against HP Inc. and HPE alleging defendants violated the Federal Age Discrimination in Employment Act (ADEA), the California Fair Employment and Housing Act, California public policy and the California Business and Professions Code by terminating older workers and replacing them with younger workers. Plaintiffs seek to certify a nationwide collective action under the ADEA comprised of all individuals aged 40 and older who had their employment terminated by an HP entity pursuant to a work force reduction (WFR) plan on or after December 9, 2014 for individuals terminated in deferral states and on or after April 8, 2015 in non-deferral states. Plaintiffs also seek to certify a Rule 23 class under California law comprised of all persons 40 years of age or older employed by defendants in the state of California and terminated pursuant to a WFR plan on or after August 18, 2012.  On January 30, 2017, Defendants filed a partial motion to dismiss Plaintiff’s First Amended Complaint and motions to compel the claims of those three named Plaintiffs to individual arbitrations.  On March 20, 2017, the Defendants filed additional motions to compel a number of the opt-in plaintiffs to individual arbitrations.  On September 20, 2017, the Court granted the motions to compel arbitration, denied the motion to dismiss without prejudice, stayed the action and administratively closed the case pending the completion of the compelled arbitrations. Plaintiffs moved for reconsideration on October 18, 2017, and also filed a notice of appeal on October 20, 2017.  Defendants’ opposition to Plaintiffs’ motion for reconsideration was filed on October 31, 2017.  On December 6, 2017, the Court entered an Order that requested further briefing on the limited issue of whether the claims of plaintiffs not subject to arbitration should be stayed.  As a result of the court ordered stay, no further activities will occur in the case until the Court rules on Plaintiffs’ Motion for Reconsideration and Defendants’ Motion to Stay.

Wall vs. HPE and HP Inc.: This certified California class action and Private Attorney General Act action was filed against Hewlett-Packard Company on January17, 2012 and the fifth (and operative) amended complaint was filed against HP Inc. and HPE on June 28, 2016. The complaint alleges that the defendants paid earned incentive compensation late and failed to timely pay final wages. On August 9, 2016, the court ordered the class certified without prejudice to a future motion to amend or modify the class certification order or to decertify. On December 20, 2017, the parties filed a Notice of Provisional Settlement and Joint Stipulation to Vacate the Trial Date notifying the Court that Plaintiffs and Defendants have reached a settlement in principle in this matter and requesting that the Court vacate the January 22, 2018 trial while the parties work toward finalizing a settlement.  On December 28, 2017, the Court vacated the trial date.

Realtime Data LLC: Realtime Data LLC (Realtime) filed three patent infringement actions in the Eastern District of Texas against HPE. The first was filed on May 8, 2015 against Hewlett-Packard Company, HP Enterprise Services and Oracle (Oracle matter) and accuses HPs Proliant servers running Oracles Solaris, HPEs StoreOnce, and HPEs Vertica. Oracle has agreed to indemnify HPE for all claims against HPE related to Oracles Solaris, including databases running Solaris with the ZFS file system on HP ProLiant servers. Following a March 23, 2017 mediation, Oracle and Realtime reached a settlement. The second lawsuit was filed on May 8, 2015 against Hewlett-Packard Company, HP Enterprise Services, and SAP America Inc., Sybase Inc. (SAP matter) and accuses HPs Converged Systems running SAP Hana. SAP agreed to indemnify HPE and HPES for the SAP related products. On June 16, 2016, SAP reached a settlement agreement with Realtime, which led to the dismissal of all of HPEs products indemnified by SAP. The third lawsuit was filed on February 26, 2016 (amended on August 15, 2016) against HPE, HP Enterprise Services, and Silver Peak Systems, Inc. (Silver Peak), and accuses HPEs StoreOnce, 3Par StoreServe, Connected MX, Connected Backup, and LiveVault. On November 17, 2016, the Magistrate Judge granted HPE and Realtimes joint motion to sever and consolidate the Oracle and Silver Peak matters. There are seven patents asserted in the remaining lawsuit. The patents generally relate to data compression techniques used to conserve storage space. HPE and the joint defense group have filed several inter partes review petitions with the Patent Trial and Appeal Board (“PTAB”) on all seven asserted patents. On February 3, 2017, the Magistrate Judge granted HPEs Motion to Stay Pending Inter Partes Review.  In September and October, 2017, the PTAB found 3 patents (U.S. Patent Nos. 6,597,812; 7,378,992; and 8,643,513) to be unpatentable.

23


Realtime appealed these decisions to the Federal Circuit.  On October 31, 2017, the PTAB found U.S. Patent No. 9,116,908 to be patentable; the petitioners filed an appeal on December 29, 2017 at the PTAB.  The PTAB’s final decisions on the remaining three patents (U.S. Patent Nos. 7,161,506; 7,415,530; and 9,054,728) are due in May 2018.

Turnkey Solutions Corporation vs. HPE: Turnkey Solutions Corporation (“TurnKey”) filed an action in the District of Colorado against HPE on July 21, 2015. The complaint alleged misappropriation of trade secrets, breach of contract, and fraud. HPE answered the complaint and asserted counterclaims against TurnKey on March 31, 2016. HPE voluntarily dismissed its counterclaims against TurnKey on December 20, 2017. A 9-day jury trial between HPE and Turnkey is scheduled to begin February 12, 2018.

24


ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

25


ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

26


ITEM 18. FINANCIAL STATEMENTS

Following Completion of the merger between the Company and HPE Software, the Board of Directors authorized a change of fiscal year end to October 31, 2018 to allow the Company to launch the Enlarged Group’s financial year with effect from November 1, 2017. As a result, the Company is required to file this transition report on Form 20-F for the transition period of May 1, 2017 to October 31, 2017.

The following unaudited condensed consolidated financial statements are filed as part of this transition report:

Consolidated statement of comprehensive income (unaudited)

Consolidated statement of financial position (unaudited)

Consolidated statement of changes in equity (unaudited)

Consolidated statement of cash flow (unaudited)

Notes to the consolidated interim financial statements (unaudited)

27


SIGNATURES

The registrant hereby certifies that it meets all the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this transition report on its behalf:
 
 
Micro Focus International plc
 
 
By:
/s/ Chris Hsu
 
   
Name:
Chris Hsu
   
Title:
Chief Executive Officer

 
By:
/s/ Mike Phillips
 
   
Name:
Mike Phillips
   
Title:
Director of Mergers & Acquisitions

28


TABLE OF CONTENTS


F-1


Micro Focus International plc
Consolidated statement of comprehensive income (unaudited)
For the six months ended October 31, 2017

         
Six months ended
October 31, 2017
   
Six months ended
October 31, 2016*
 
         
(unaudited)
   
(unaudited)
 
   
Note
   
Before
exceptional
items
   
Exceptional
items
(note 7)
   
Total
   
Before
exceptional
items
   
Exceptional
items
(note 7)
   
Total
 
         
 
$’000
   
 
$’000
   
 
$’000
   
 
$’000
   
 
$’000
   
 
$’000
 
Revenue
   
5,6
     
1,234,520
     
-
     
1,234,520
     
684,743
     
-
     
684,743
 
Cost of sales comprising:
                                                       
Cost of sales (excluding amortization of product development costs and acquired  technology intangibles)
           
(195,291
)
   
(3,126
)
   
(198,417
)
   
(73,031
)
   
(1,265
)
   
(74,296
)
-  Amortization of product development costs
   
14
     
(12,375
)
   
-
     
(12,375
)
   
(12,117
)
   
-
     
(12,117
)
-  Amortization of acquired technology intangibles
   
14
     
(63,101
)
   
-
     
(63,101
)
   
(37,027
)
   
-
     
(37,027
)
Cost of sales
           
(270,767
)
   
(3,126
)
   
(273,893
)
   
(122,175
)
   
(1,265
)
   
(123,440
)
                                                         
Gross profit
           
963,753
     
(3,126
)
   
960,627
     
562,568
     
(1,265
)
   
561,303
 
                                                         
Selling and distribution costs
           
(390,085
)
   
(8,553
)
   
(398,638
)
   
(216,526
)
   
(2,002
)
   
(218,528
)
                                                         
Research and development expenses comprising:
                                                       
- Expenditure incurred in the period
           
(183,115
)
   
(7,402
)
   
(190,517
)
   
(99,263
)
   
(2,175
)
   
(101,438
)
- Capitalization of product development costs
   
14
     
16,878
     
-
     
16,878
     
15,048
     
-
     
15,048
 
Research and development expenses
           
(166,237
)
   
(7,402
)
   
(173,639
)
   
(84,215
)
   
(2,175
)
   
(86,390
)
                                                         
Administrative expenses
           
(88,991
)
   
(79,399
)
   
(168,390
)
   
(57,493
)
   
(35,606
)
   
(93,099
)
Operating profit
           
318,440
     
(98,480
)
   
219,960
     
204,334
     
(41,048
)
   
163,286
 
                                                         
Share of results of associates
   
16
     
(438
)
   
-
     
(438
)
   
(1,127
)
   
-
     
(1,127
)
                                                         
Finance costs
   
11
     
(69,161
)
   
(6,326
)
   
(75,487
)
   
(49,455
)
   
-
     
(49,455
)
Finance income
   
11
     
1,146
     
553
     
1,699
     
502
     
-
     
502
 
Net finance costs
   
11
     
(68,015
)
   
(5,773
)
   
(73,788
)
   
(48,953
)
   
-
     
(48,953
)
                                                         
Profit before tax
           
249,987
     
(104,253
)
   
145,734
     
154,254
     
(41,048
)
   
113,206
 
Taxation
   
12
     
(64,659
)
   
25,530
     
(39,129
)
   
(28,140
)
   
5,551
     
(22,589
)
Profit for the period
           
185,328
     
(78,723
)
   
106,605
     
126,114
     
(35,497
)
   
90,617
 
                                                         
Attributable to:
                                                       
Equity shareholders of the parent
           
185,024
     
(78,723
)
   
106,301
     
126,135
     
(35,497
)
   
90,638
 
Non-controlling interests
           
304
     
-
     
304
     
(21
)
   
-
     
(21
)
Profit for the period
           
185,328
     
(78,723
)
   
106,605
     
126,114
     
(35,497
)
   
90,617
 

*In the year ended April 30, 2017, the Company reviewed its consolidated statement of comprehensive income presentation and decided to re-classify both amortization of product development costs and amortization of acquired technology intangibles from research and development expenses to cost of sales. The six months ended October 31, 2016 comparative includes this reclassification (see accounting policies note 2).

F-2


Micro Focus International plc
Consolidated statement of comprehensive income (unaudited)
For the six months ended October 31, 2017

         
Six months ended
October 31, 2017
   
Six months ended
October 31, 2016*
       
         
(unaudited)
   
(unaudited)
       
   
Note
   
Before
exceptional
items
   
Exceptional
items
(note 7)
   
Total
   
Before
exceptional
items
   
Exceptional
items
(note 7)
   
Total
 
         
 
$’000
   
 
$’000
   
 
$’000
   
 
$’000
   
 
$’000
   
 
$’000
 
Profit for the period
         
185,328
     
(78,723
)
   
106,605
     
126,114
     
(35,497
)
   
90,617
 
Other comprehensive income:
                                                     
Items that will not be reclassified to profit or loss
                                                     
Actuarial gain/(loss) on pension schemes liabilities
   
22
     
6,859
     
-
     
6,859
     
(3,521
)
   
-
     
(3,521
)
Actuarial (loss)/gain on non-plan pension assets
   
22
     
(350
)
   
-
     
(350
)
   
2,482
     
-
     
2,482
 
Deferred tax movement
           
(655
)
   
-
     
(655
)
   
326
     
-
     
326
 
Items that may be subsequently reclassified to profit or loss
                                                       
Cash flow hedge movements
   
24
     
1,763
     
-
     
1,763
     
-
     
-
     
-
 
Currency translation differences
           
2,742
     
-
     
2,742
     
(5,708
)
   
-
     
(5,708
)
Other comprehensive income/(expense) for the period
           
10,359
     
-
     
10,359
     
(6,421
)
   
-
     
(6,421
)
Total comprehensive income for the period
           
195,687
     
(78,723
)
   
116,964
     
119,693
     
(35,497
)
   
84,196
 
Attributable to:
                                                       
Equity shareholders of the parent
           
195,383
     
(78,723
)
   
116,660
     
119,714
     
(35,497
)
   
84,217
 
Non-controlling interests
           
304
     
-
     
304
     
(21
)
   
-
     
(21
)
Total comprehensive income for the period
           
195,687
     
(78,723
)
   
116,964
     
119,693
     
(35,497
)
   
84,196
 
                                                         
Earnings per share expressed in cents per share
                         
cents
                   
cents
 
- basic
   
10
                     
35.83
                     
39.57
 
- diluted
   
10
                     
34.64
                     
38.12
 
Earnings per share expressed in pence per share
                         
pence
                   
pence
 
- basic
   
10
                     
27.50
                     
29.49
 
- diluted
   
10
                     
26.58
                     
28.41
 

The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.

F-3


Micro Focus International plc
Consolidated statement of financial position (unaudited)

   
Note
   
October 31, 2017
(unaudited)
$’000
   
October 31, 2016
(unaudited)
$’000
 
Non-current assets
                 
Goodwill
   
13
     
7,934,076
     
2,827,825
 
Other intangible assets
   
14
     
7,199,606
     
1,186,184
 
Property, plant and equipment
   
15
     
200,326
     
40,537
 
Investments in associates
   
16
     
11,019
     
11,584
 
Derivative asset
   
20
     
1,307
     
-
 
Long term pension assets
   
22
     
23,650
     
24,120
 
Other non-current assets
           
45,348
     
3,230
 
Deferred tax assets
           
209,992
     
208,230
 
             
15,625,324
     
4,301,710
 
Current assets
                       
Inventories
           
465
     
63
 
Trade and other receivables
   
17
     
1,251,582
     
277,958
 
Current tax receivables
           
-
     
3,432
 
Cash and cash equivalents
           
730,372
     
122,970
 
Assets classified as held for sale
           
-
     
888
 
             
1,982,419
     
405,311
 
Total assets
           
17,607,743
     
4,707,021
 
                         
Current liabilities
                       
Trade and other payables
   
18
     
934,749
     
151,163
 
Borrowings
   
19
     
17,727
     
294,192
 
Finance leases
           
14,481
     
-
 
Provisions
   
21
     
55,678
     
15,420
 
Current tax liabilities
           
102,709
     
29,583
 
Deferred income
           
1,312,635
     
582,412
 
             
2,437,979
     
1,072,770
 
Non-current liabilities
                       
Deferred income
           
335,463
     
204,342
 
Borrowings
   
19
     
4,831,489
     
1,441,337
 
Finance leases
           
18,413
     
-
 
Retirement benefit obligations
   
22
     
97,647
     
34,599
 
Long-term provisions
   
21
     
26,666
     
11,729
 
Other non-current liabilities
           
67,586
     
11,021
 
Deferred tax liabilities
           
2,166,639
     
349,464
 
             
7,543,903
     
2,052,492
 
Total liabilities
           
9,981,882
     
3,125,262
 
Net assets
           
7,625,861
     
1,581,759
 
Capital and reserves
                       
Share capital
   
23
     
65,590
     
39,650
 
Share premium account
           
36,422
     
190,727
 
Merger reserve
   
24
     
5,780,184
     
988,104
 
Capital redemption reserve
   
24
     
666,289
     
163,363
 
Hedging reserve
           
1,089
     
-
 
Retained earnings
           
1,095,246
     
221,593
 
Foreign currency translation deficit
           
(20,217
)
   
(22,714
)
Total equity attributable to owners of the parent
           
7,624,603
     
1,580,723
 
Non-controlling interests
   
25
     
1,258
     
1,036
 
Total equity
           
7,625,861
     
1,581,759
 

The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.

F-4


Micro Focus International plc
Consolidated statement of changes in equity (unaudited)


         
Share
capital
   
Share
premium
account
   
Retained
earnings/
(deficit)
   
Foreign
currency
translation
reserve
(deficit)
   
Capital
redemption
reserves
   
Hedging
reserve
   
Merger
reserve
   
Equity /
(deficit)
attributable
to the
parent
   
Non-
controlling
interests
   
Total
equity /
(deficit)
 
   
Note
   
 
$’000
   
 
$’000
   
 
$’000
   
 
$’000
   
 
$’000
   
 
$’000
   
 
$’000
   
 
$’000
   
 
$’000
   
 
$’000
 
Balance as at May 1, 2016
         
39,573
     
190,293
     
228,344
     
(17,006
)
   
163,363
     
-
     
988,104
     
1,592,671
     
1,057
     
1,593,728
 
Currency translation differences
         
-
     
-
     
-
     
(5,708
)
   
-
     
-
     
-
     
(5,708
)
   
-
     
(5,708
)
Profit for the period
         
-
     
-
     
90,638
     
-
     
-
     
-
     
-
     
90,638
     
(21
)
   
90,617
 
Re-measurement on defined benefit pension schemes
   
22
     
-
     
-
     
(3,521
)
   
-
     
-
     
-
     
-
     
(3,521
)
   
-
     
(3,521