The weighted average amortization periods for acquired technology and customer intangible assets are approximately six years and eight years, respectively.
The following table shows the estimated future amortization expense for the fiscal years indicated. This calculation assumes no future adjustments to acquired intangible assets:
Deposits and restricted cash primarily relate to security deposits provided to landlords in accordance with facility lease agreements and cash restricted per the terms of certain contractual-based agreements.
We are required to return certain of our leased facilities to their original state at the conclusion of our lease. As of December 31, 2017,September 30, 2022, the present value of this obligation was $15.0$15.5 million (June 30, 2017—2022—$13.415.8 million), with an undiscounted value of $16.8$16.2 million (June 30, 2017—2022—$15.016.4 million).
NOTE 10—11—LONG-TERM DEBT
Long-term | | | | | | | | | | | |
| As of September 30, 2022 | | As of June 30, 2022 |
| Total debt | | | |
| Senior Notes 2031 | $ | 650,000 | | | $ | 650,000 | |
| Senior Notes 2030 | 900,000 | | | 900,000 | |
| Senior Notes 2029 | 850,000 | | | 850,000 | |
| Senior Notes 2028 | 900,000 | | | 900,000 | |
| Senior Notes 2026 | — | | | — | |
| Term Loan B | 955,000 | | | 957,500 | |
| Revolver | — | | | — | |
| Acquisition Term Loan | — | | | — | |
| Bridge Loan | — | | | — | |
| Total principal payments due | 4,255,000 | | | 4,257,500 | |
| | | |
| | | |
Debt issuance costs (1) | (36,453) | | | (37,933) | |
| Total amount outstanding | 4,218,547 | | | 4,219,567 | |
| Less: | | | |
| Current portion of long-term debt | | | |
| Term Loan B | 10,000 | | | 10,000 | |
| Total current portion of long-term debt | 10,000 | | | 10,000 | |
| | | |
| Non-current portion of long-term debt | $ | 4,208,547 | | | $ | 4,209,567 | |
____________________________
(1)As of September 30, 2022, there was an additional $47.0 million of deferred debt
Long-term debt is comprised of issuance costs related to the following:
|
| | | | | | | |
| | As of December 31, 2017 | | As of June 30, 2017 |
| Total debt | | | |
| Senior Notes 2026 | $ | 850,000 |
| | $ | 850,000 |
|
| Senior Notes 2023 | 800,000 |
| | 800,000 |
|
| Term Loan B | 768,240 |
| | 772,120 |
|
| Revolver | 375,000 |
| | 175,000 |
|
| Total principal payments due | 2,793,240 |
| | 2,597,120 |
|
| | | | |
| Premium on Senior Notes 2026 | 6,311 |
| | 6,597 |
|
| Debt issuance costs | (31,082 | ) | | (33,900 | ) |
| Total amount outstanding | 2,768,469 |
| | 2,569,817 |
|
| | | | |
| Less: | | | |
| Current portion of long-term debt | | | |
| Term Loan B | 7,760 |
| | 7,760 |
|
| Revolver | 375,000 |
| | 175,000 |
|
| Total current portion of long-term debt | 382,760 |
| | 182,760 |
|
| | | | |
| Non-current portion of long-term debt | $ | 2,385,709 |
| | $ | 2,387,057 |
|
Senior Unsecured Fixed Rate Notes
Senior Notes 2031
On November 24, 2021, OpenText Holdings, Inc. a wholly-owned indirect subsidiary of the Company, issued $650 million in aggregate principal amount of 4.125% Senior Notes due 2031 guaranteed by the Company (Senior Notes 2031) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (Securities Act), and to certain non-U.S. persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes 2031 bear interest at a rate of 4.125% per annum, payable semi-annually in arrears on June 1 and December 1, commencing on June 1, 2022. Senior Notes 2031 will mature on December 1, 2031, unless earlier redeemed, in accordance with their terms, or repurchased.
For the three months ended September 30, 2022, we recorded interest expense of $6.7 million relating to Senior Notes 2031 (three months ended September 30, 2021—nil).
Senior Notes 2030
On February 18, 2020, OpenText Holdings, Inc. a wholly-owned indirect subsidiary of the Company, issued $900 million in aggregate principal amount of 4.125% Senior Notes due 2030 guaranteed by the Company (Senior Notes 2030) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes 2030 bear interest at a rate of 4.125% per annum, payable semi-annually in arrears on February 15 and August 15, commencing on August 15, 2020. Senior Notes 2030 will mature on February 15, 2030, unless earlier redeemed, in accordance with their terms, or repurchased.
For the three months ended September 30, 2022, we recorded interest expense of $9.3 million relating to Senior Notes 2030 (three months ended September 30, 2021—$9.3 million).
Senior Notes 2029
On November 24, 2021, we issued $850 million in aggregate principal amount of 3.875% Senior Notes due 2029 (Senior Notes 2029) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to
certain non-U.S. persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes 2029 bear interest at a rate of 3.875% per annum, payable semi-annually in arrears on June 1 and December 1, commencing on June 1, 2022. Senior Notes 2029 will mature on December 1, 2029, unless earlier redeemed, in accordance with their terms, or repurchased.
For the three months ended September 30, 2022, we recorded interest expense of $8.2 million relating to Senior Notes 2029 (three months ended September 30, 2021—nil).
Senior Notes 2028
On February 18, 2020, we issued $900 million in aggregate principal amount of 3.875% Senior Notes due 2028 (Senior Notes 2028 and, together with the Senior Notes 2031, Senior Notes 2030 and Senior Notes 2029, the Senior Notes) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes 2028 bear interest at a rate of 3.875% per annum, payable semi-annually in arrears on February 15 and August 15, commencing on August 15, 2020. Senior Notes 2028 will mature on February 15, 2028, unless earlier redeemed, in accordance with their terms, or repurchased.
For the three months ended September 30, 2022, we recorded interest expense of $8.7 million relating to Senior Notes 2028 (three months ended September 30, 2021—$8.7 million).
Senior Notes 2026
On May 31, 2016, we issued $600 million in aggregate principal amount of 5.875% Senior Notes due 2026 (Senior Notes 2026) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (Securities Act), and to certain persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes 2026 bearhad interest at a rate of 5.875% per annum, payable semi-annually in arrears on June 1 and December 1, commencing on December 1, 2016. Senior Notes 2026 will maturewould have matured on June 1, 2026, unless earlier redeemed, in accordance with their terms, or repurchased.2026.
On December 20, 2016, we issued an additional $250 million in aggregate principal amount by reopening our Senior Notes 2026 at an issue price of 102.75%. The additional notes havehad identical terms, arewere fungible with and are awere part of a single series with the previously issued $600 million aggregate principal amount of Senior Notes 2026. The outstanding aggregate principal amount of Senior Notes 2026, after taking into consideration the additional issuance, iswas $850 million.million as of December 9, 2021.
On December 9, 2021, we redeemed Senior Notes 2026 in full at a price equal to 102.9375% of the principal amount plus accrued and unpaid interest to, but excluding, the redemption date. A portion of the net proceeds from the offerings of Senior Notes 2029 and Senior Notes 2031 was used to redeem Senior Notes 2026. Upon redemption, Senior Notes 2026 were cancelled and any obligation thereunder was extinguished. The resulting loss of $27.4 million, consisting of $25.0 million relating to the early termination call premium, $6.2 million relating to unamortized debt issuance costs and $(3.8) million relating to unamortized premium, has been recorded as a component of Other income (expense), net in our Condensed Consolidated Statements of Income. See Note 22 “Other Income (Expense), Net.”
For the three and six months ended December 31, 2017,September 30, 2022, we recordeddid not record any interest expense of $12.5 million and $25.0 million, respectively, relating to Senior Notes 2026 (three and six months ended December 31, 2016—September 30, 2021—$9.4 million and $18.2 million, respectively)12.5 million).
Senior Notes 2023
On January 15, 2015, we issued $800 million in aggregate principal amount of 5.625% Senior Notes due 2023 (Senior Notes 2023 and together with Senior Notes 2026, Senior Notes) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and to certain persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes 2023 bear interest at a rate of 5.625% per annum, payable semi-annually in arrears on January 15 and July 15, commencing on July 15, 2015. Senior Notes 2023 will mature on January 15, 2023, unless earlier redeemed, in accordance with their terms, or repurchased.
For the three and six months ended December 31, 2017, we recorded interest expense of $11.2 million and $22.5 million, respectively, relating to Senior Notes 2023 (three and six months ended December 31, 2016—$11.2 million and $22.5 million, respectively).
Term Loan B
We enteredOn May 30, 2018, we refinanced our existing term loan facility, by entering into a new $1 billion term loan facility (Term Loan B), whereby we borrowed $1 billion on that day and repaid in full the loans under our prior $800 million term loan facility (Term Loan B) and borrowed the full amountoriginally entered into on January 16, 2014. Borrowings under Term Loan B are secured by a first charge over substantially all of our assets on a pari passu basis with the Revolver, (definedAcquisition Term Loan and Bridge Loan (each as defined below).
Term Loan B has a seven yearseven-year term, maturing in May 2025, and repayments made under Term Loan B are equal to 0.25% of the principal amount in equal quarterly installments for the life of Term Loan B, with the remainder due at maturity. Borrowings under Term Loan B currently bear a floating rate of interest equal to 2.0%1.75% plus LIBOR. As of December 31, 2017,September 30, 2022, the outstanding balance on the Term Loan B bears an interest rate of approximately 3.35%4.27%. For more information regarding the impact and discontinuance of LIBOR, see “Stress in the global financial system may adversely affect our finances and operations in ways that may be hard to predict or to defend against” included within Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for Fiscal 2022.
Under Term Loan B, we must maintain a “consolidated net leverage” ratio of no more than 4:1 at the end of each financial quarter. Consolidated net leverage ratio is defined for this purpose as the proportion of our total debt reduced by unrestricted cash, including guarantees and letters of credit, over our trailing twelve months net income before interest, taxes, depreciation, amortization, restructuring, share-based compensation and other miscellaneous charges. As of September 30, 2022, our consolidated net leverage ratio was 2.1:1.
For the three and six months ended December 31, 2017,September 30, 2022, we recorded interest expense of $6.4$9.7 million and $12.8 million, respectively, relating to Term Loan B (three and six months ended December 31, 2016—September 30, 2021—$6.5 million and $13.0 million, respectively)4.6 million).
Revolver
We currently have a $450 millionOn October 31, 2019, we amended our committed revolving credit facility (the Revolver) which matures onto increase the total commitments under the Revolver from $450 million to $750 million as well as to extend the maturity from May 5, 2022.2022 to October 31, 2024. Borrowings under the Revolver are secured by a first charge over substantially all of our assets, on a pari passu basis with Term Loan B.B, the Acquisition Term Loan and Bridge Loan. The Revolver has no fixed repayment date prior to the end of the term. Borrowings under the Revolver bear interest per annum at a floating rate of LIBOR plus a fixed margin dependent on our consolidated net leverage ratio ranging from 1.25% to 1.75%. For more information regarding the impact and discontinuance of LIBOR, see “Stress in the global financial system may adversely affect our finances and operations in ways that may be hard to predict or to defend against” included within Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for Fiscal 2022.
As of December 31, 2017, theSeptember 30, 2022, we had no outstanding balance onunder the Revolver bears a weighted average interest rate of approximately 3.20%(June 30, 2022—nil).
During For the three and six months ended December 31, 2017,September 30, 2022, we drew down nil and $200 million, respectively, fromdid not record any interest expense relating to the Revolver (three months ended September 30, 2021—nil).
Acquisition Term Loan
On August 25, 2022, we entered into a first lien term loan facility (the Acquisition Term Loan) which provides for a senior secured delayed-draw term loan facility in an aggregate principal amount of $2.585 billion. The proceeds of the Acquisition Term Loan, if drawn, will be used solely by the Company to finance the acquisitionMicro Focus Acquisition (see Note 19 — “Acquisitions” for more details).
The Acquisition Term Loan has a seven-year term from the date of Guidance (threefunding, and six months ended December 31, 2016—nil, respectively).repayments under the Acquisition Term Loan are equal to 0.25% of the principal amount in equal quarterly installments for the life of the Acquisition Term Loan, with the remainder due at maturity. Borrowings under the Acquisition Term Loan will bear interest at rates as specified in the Acquisition Term Loan Agreement.
The Acquisition Term Loan has incremental facility capacity of (i) $250 million plus (ii) additional amounts, subject to meeting a “consolidated senior secured net leverage” ratio not exceeding 2.75:1.00, in each case subject to certain conditions. Consolidated senior secured net leverage ratio is defined for this purpose as the proportion of the Company’s total debt reduced by unrestricted cash, including guarantees and letters of credit, that is secured by the Company’s or any of the Company’s subsidiaries’ assets, over the Company’s trailing four financial quarter net income before interest, taxes, depreciation, amortization, restructuring, share-based compensation and other miscellaneous charges. Under the Acquisition Term Loan, we must maintain a “consolidated net leverage” ratio of no more than 4.5:1.00 at the end of each financial quarter. Consolidated net leverage ratio is defined for this purpose as the proportion of the Company’s total debt reduced by unrestricted cash, including guarantees and letters of credit, over the Company’s trailing four financial quarter net income before interest, taxes, depreciation, amortization, restructuring, share-based compensation and other miscellaneous charges as defined in the Acquisition Term Loan Agreement. As of September 30, 2022, our consolidated net leverage ratio was 2.1:1.
The Acquisition Term Loan is unconditionally guaranteed by certain subsidiary guarantors, as defined in the Acquisition Term Loan Agreement, and is secured by a first charge on substantially all of the assets of the Company and the subsidiary guarantors on a pari passu basis with the Revolver, Term Loan B and the Bridge Loan. Certain adjustments may be made to the applicable margin and other terms of the Acquisition Term Loan in limited circumstances where necessary to achieve successful syndication.
As of September 30, 2022, we had no borrowings under the Acquisition Term Loan. For the three and six months ended December 31, 2017,September 30, 2022, we recordeddid not record any interest expense of $2.8 million and $4.6 million, respectively, relating to amounts drawnthe Acquisition Term Loan (three months ended September 30, 2021—nil).
Bridge Loan
On August 25, 2022, we entered into a bridge loan agreement (Bridge Loan) which provides for commitments of up to $2.0 billion to finance a portion of the repayment of Micro Focus’ existing debt.
The Bridge Loan has a one-year term from the initial date of funding, with an extension mechanism pursuant to which such borrowings would convert into secured financing maturing five years from the initial funding date. Borrowings under the Bridge Loan would bear interest at rates as specified in the Bridge Loan Agreement, subject to a total cap.
The Bridge Loan is unconditionally guaranteed by certain subsidiary guarantors, as defined in the Bridge Loan Agreement, and is secured by a first charge on substantially all of the assets of the Company and the subsidiary guarantors on a pari passu basis with the Revolver, (threeTerm Loan B and sixAcquisition Term Loan. The Company intends to reduce commitments or
the borrowings under the Bridge Loan by accessing the debt capital markets directly or through certain affiliates prior to or following the closing of the Micro Focus Acquisition, but no assurance can be given that the Company will be able to do so. The Company expects that such debt to also be secured.
As of September 30, 2022, we had no borrowings under the Bridge Loan. For the three months ended December 31, 2016—nil, respectively)September 30, 2022, we did not record any interest expense relating to the Bridge Loan (three months ended September 30, 2021—nil).
Debt Issuance Costs and Premium on Senior Notes
Debt issuance costs relate primarily to costs incurred for the purpose of obtaining our credit facilities and issuing our Senior Notes and are being amortized through interest expense over the respective terms of the Senior Notes and Term Loan B, Revolver, Acquisition Term Loan and the RevolverBridge Loan using the effective interest method. Additionally, as of September 30, 2022, we had $47.0 million in deferred debt issuance costs included in “Other Assets” (see Note 9 “Prepaid Expenses and Other Assets” for more details).
The premium on Senior Notes 2026 represents the excess of the proceeds received over the face value of Senior Notes 2026. This premium is amortized as a credit to interest expense over the term of Senior Notes 2026 using the effective interest method.
NOTE 11—12—PENSION PLANS AND OTHER POST RETIREMENT BENEFITS
The following table provides details of our defined benefit pension plans and long-term employee benefit obligations for Open Text Document Technologies GmbH (CDT), GXS GmbH (GXS GER) and GXS Philippines, Inc. (GXS PHP) as of December 31, 2017 and June 30, 2017:
|
| | | | | | | | | | | |
| | As of December 31, 2017 |
| | Total benefit obligation | | Current portion of benefit obligation* | | Non-current portion of benefit obligation |
| CDT defined benefit plan | $ | 30,825 |
| | $ | 642 |
| | $ | 30,183 |
|
| GXS Germany defined benefit plan | 25,304 |
| | 983 |
| | 24,321 |
|
| GXS Philippines defined benefit plan | 4,566 |
| | 102 |
| | 4,464 |
|
| Other plans | 3,404 |
| | 159 |
| | 3,245 |
|
| Total | $ | 64,099 |
| | $ | 1,886 |
| | $ | 62,213 |
|
|
| | | | | | | | | | | |
| | As of June 30, 2017 |
| | Total benefit obligation | | Current portion of benefit obligation* | | Non-current portion of benefit obligation |
| CDT defined benefit plan | $ | 28,881 |
| | $ | 583 |
| | $ | 28,298 |
|
| GXS Germany defined benefit plan | 23,730 |
| | 926 |
| | 22,804 |
|
| GXS Philippines defined benefit plan | 4,495 |
| | 81 |
| | 4,414 |
|
| Other plans | 3,256 |
| | 145 |
| | 3,111 |
|
| Total | $ | 60,362 |
| | $ | 1,735 |
| | $ | 58,627 |
|
*The current portion of the benefit obligation has been included within "Accrued salaries and commissions", all within "Accounts payable and accrued liabilities" in the Condensed Consolidated Balance Sheets (see note 9 "Accounts Payable and Accrued Liabilities").
Defined Benefit Plans
CDT Plan
CDT sponsors an unfunded defined benefit pension plan covering substantially all CDT employees (CDT pension plan) which provides for old age, disability and survivors’ benefits. Benefits under the CDT pension plan are generally based on age at retirement, years of service and the employee’s annual earnings. The net periodic cost of this pension plan is determined using the projected unit credit method and several actuarial assumptions, the most significant of which are the discount rate and estimated service costs. No contributions have been made since the inception of the plan. Actuarial gains or losses in excess of 10% of the projected benefit obligation are being amortized and recognized as a component of net periodic benefit costs over the average remaining service period of the plan's active employees. As of December 31, 2017, there is approximately $0.3 million in accumulated other comprehensive income related to the CDT pension plan that is expected to be recognized as a component of net periodic benefit costs over the remainder of Fiscal 2018.
GXS GermanyGER Plan
As part of our acquisition of GXS Group, Inc. (GXS) in Fiscal 2014, we assumed an unfunded defined benefit pension plan covering certain German employees which provides for old age, disability and survivors' benefits. The GXS GER plan has been closed to new participants since 2006. Benefits under the GXS GER plan are generally based on a participant’s remuneration, date of hire, years of eligible service and age at retirement. The net periodic cost of this pension plan is determined using the projected unit credit method and several actuarial assumptions, the most significant of which are the discount rate and estimated service costs. No contributions have been made since the inception of the plan. Actuarial gains or losses in excess of 10% of the projected benefit obligation are being amortized and recognized as a component of net periodic benefit costs over the average remaining service period of the plan’s active employees. As of December 31, 2017, there is approximately $36.1 thousand in accumulated other comprehensive income related to the GXS GER plan that is expected to be recognized as a component of net periodic benefit costs over the remainder of Fiscal 2018.
GXS PhilippinesPHP Plan
As part of our acquisition of GXS in Fiscal 2014, we assumed a primarily unfunded defined benefit pension plan covering substantially all of the GXS Philippines employees which provides for retirement, disability and survivors' benefits. Benefits under the GXS PHP plan are generally based on a participant’s remuneration, years of eligible service and age at retirement. The net periodic cost of this pension plan is determined using the projected unit credit method and several actuarial assumptions, the most significant of which are the discount rate and estimated service costs. Aside from an initial contribution which has a fair value of approximately $33.3 thousand$(0.03) million as of December 31, 2017,September 30, 2022, no additional contributions have been made since the inception of the plan. Actuarial gains or losses in excess
The following are the details of the change in the benefit obligation for each of the above mentioned pension plans for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2017 | | As of June 30, 2017 |
| | CDT | | GXS GER | | GXS PHP | | Total | | CDT | | GXS GER | | GXS PHP | | Total |
| Benefit obligation—beginning of period | $ | 28,881 |
| | $ | 23,730 |
| | $ | 4,495 |
| | $ | 57,106 |
| | $ | 29,450 |
| | $ | 24,729 |
| | $ | 7,341 |
| | $ | 61,520 |
|
| Service cost | 249 |
| | 234 |
| | 447 |
| | 930 |
| | 467 |
| | 395 |
| | 1,051 |
| | 1,913 |
|
| Interest cost | 301 |
| | 243 |
| | 114 |
| | 658 |
| | 456 |
| | 377 |
| | 226 |
| | 1,059 |
|
| Benefits paid | (280 | ) | | (482 | ) | | (60 | ) | | (822 | ) | | (469 | ) | | (807 | ) | | (53 | ) | | (1,329 | ) |
| Actuarial (gain) loss | 352 |
| | 492 |
| | (444 | ) | | 400 |
| | (1,708 | ) | | (1,548 | ) | | (3,728 | ) | | (6,984 | ) |
| Foreign exchange (gain) loss | 1,322 |
| | 1,087 |
| | 14 |
| | 2,423 |
| | 685 |
| | 584 |
| | (342 | ) | | 927 |
|
| Benefit obligation—end of period | 30,825 |
| | 25,304 |
| | 4,566 |
| | 60,695 |
| | 28,881 |
| | 23,730 |
| | 4,495 |
| | 57,106 |
|
| Less: Current portion | (642 | ) | | (983 | ) | | (102 | ) | | (1,727 | ) | | (583 | ) | | (926 | ) | | (81 | ) | | (1,590 | ) |
| Non-current portion of benefit obligation | $ | 30,183 |
| | $ | 24,321 |
| | $ | 4,464 |
| | $ | 58,968 |
| | $ | 28,298 |
| | $ | 22,804 |
| | $ | 4,414 |
| | $ | 55,516 |
|
The following are details of net pension expense relating to the following pension plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2022 | | 2021 |
| Pension expense: | CDT | | GXS GER | | GXS PHP | | Total | | CDT | | GXS GER | | GXS PHP | | Total |
| Service cost | $ | 52 | | | $ | 25 | | | $ | 351 | | | $ | 428 | | | $ | 94 | | | $ | 43 | | | $ | 428 | | | $ | 565 | |
| Interest cost | 195 | | | 119 | | | 149 | | | 463 | | | 112 | | | 80 | | | 133 | | | 325 | |
| Amortization of actuarial (gains) losses | — | | | (15) | | | 46 | | | 31 | | | 125 | | | 6 | | | (23) | | | 108 | |
| Net pension expense | $ | 247 | | | $ | 129 | | | $ | 546 | | | $ | 922 | | | $ | 331 | | | $ | 129 | | | $ | 538 | | | $ | 998 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, |
| | | 2017 | | 2016 |
| Pension expense: | | CDT | | GXS GER | | GXS PHP | | Total | | CDT | | GXS GER | | GXS PHP | | Total |
| Service cost | | $ | 125 |
| | $ | 117 |
| | $ | 228 |
| | $ | 470 |
| | $ | 112 |
| | $ | 94 |
| | $ | 203 |
| | $ | 409 |
|
| Interest cost | | 151 |
| | 122 |
| | 59 |
| | 332 |
| | 109 |
| | 90 |
| | 45 |
| | 244 |
|
| Amortization of actuarial (gains) and losses | | 134 |
| | 18 |
| | (62 | ) | | 90 |
| | 150 |
| | 40 |
| | (12 | ) | | 178 |
|
| Net pension expense | | $ | 410 |
| | $ | 257 |
| | $ | 225 |
| | $ | 892 |
| | $ | 371 |
| | $ | 224 |
| | $ | 236 |
| | $ | 831 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended December 31, |
| | | 2017 | | 2016 |
| Pension expense: | | CDT | | GXS GER | | GXS PHP | | Total | | CDT | | GXS GER | | GXS PHP | | Total |
| Service cost | | $ | 249 |
| | $ | 234 |
| | $ | 447 |
| | $ | 930 |
| | $ | 232 |
| | $ | 195 |
| | $ | 642 |
| | $ | 1,069 |
|
| Interest cost | | 301 |
| | 243 |
| | 114 |
| | 658 |
| | 226 |
| | 186 |
| | 121 |
| | 533 |
|
| Amortization of actuarial (gains) and losses | | 268 |
| | 36 |
| | (123 | ) | | 181 |
| | 310 |
| | 83 |
| | (24 | ) | | 369 |
|
| Net pension expense | | $ | 818 |
| | $ | 513 |
| | $ | 438 |
| | $ | 1,769 |
| | $ | 768 |
| | $ | 464 |
| | $ | 739 |
| | $ | 1,971 |
|
In determining the fair valueService-related net periodic pension costs are recorded within operating expense and all other non-service related net periodic pension costs are classified under “Interest and other related expense, net” on our Condensed Consolidated Statements of the pension plan benefit obligations as of December 31, 2017 and June 30, 2017, respectively, we used the following weighted-average key assumptions:
|
| | | | | | | | | | | |
| | As of December 31, 2017 | | As of June 30, 2017 |
| | CDT | | GXS GER | | GXS PHP | | CDT | | GXS GER | | GXS PHP |
| Assumptions: | | | | | | | | | | | |
| Salary increases | 2.00% | | 2.00% | | 6.20% | | 2.00% | | 2.00% | | 6.20% |
| Pension increases | 1.75% | | 2.00% | | N/A | | 1.75% | | 2.00% | | N/A |
| Discount rate | 1.93% | | 1.93% | | 5.75% | | 2.00% | | 2.00% | | 5.00% |
| Normal retirement age | 65 | | 65-67 | | 60 | | 65 | | 65-67 | | 60 |
| Employee fluctuation rate: | | | | | | | | | | | |
| to age 20 | —% | | —% | | 12.19% | | —% | | —% | | 12.19% |
| to age 25 | —% | | —% | | 16.58% | | —% | | —% | | 16.58% |
| to age 30 | 1.00% | | —% | | 13.97% | | 1.00% | | —% | | 13.97% |
| to age 35 | 0.50% | | —% | | 10.77% | | 0.50% | | —% | | 10.77% |
| to age 40 | —% | | —% | | 7.39% | | —% | | —% | | 7.39% |
| to age 45 | 0.50% | | —% | | 3.28% | | 0.50% | | —% | | 3.28% |
| to age 50 | 0.50% | | —% | | —% | | 0.50% | | —% | | —% |
| from age 51 | 1.00% | | —% | | —% | | 1.00% | | —% | | —% |
Anticipated pension payments under the pension plans for the fiscal years indicated below are as follows:
|
| | | | | | | | | | | |
| Fiscal years ending June 30, |
| CDT |
| GXS GER |
| GXS PHP |
| 2018 (six months ended June 30) | $ | 304 |
|
| $ | 484 |
|
| $ | 51 |
|
| 2019 | 674 |
|
| 997 |
|
| 131 |
|
| 2020 | 727 |
|
| 1,004 |
|
| 149 |
|
| 2021 | 821 |
|
| 1,047 |
|
| 240 |
|
| 2022 | 904 |
|
| 1,057 |
|
| 270 |
|
| 2023 to 2027 | 5,652 |
|
| 5,637 |
|
| 1,990 |
|
| Total | $ | 9,082 |
|
| $ | 10,226 |
|
| $ | 2,831 |
|
Other Plans
Other plans include defined benefit pension plans that are offered or statutorily required by certain of our foreign subsidiaries. Many of these plans were assumed through our acquisitions or are required by local regulatory requirements. These other plans are primarily unfunded, with the aggregate projected benefit obligation included in our pension liability. The net periodic costs of these plans are determined using the projected unit credit method and several actuarial assumptions, the most significant of which are the discount rate and estimated service costs.
NOTE 12—13—SHARE CAPITAL, OPTION PLANS AND SHARE-BASED PAYMENTS
Cash Dividends
For the three and six months ended December 31, 2017,September 30, 2022, pursuant to the Company’s dividend policy, we declared total non-cumulative dividends of $0.1320 and $0.2640, respectively,$0.24299 per Common Share in the aggregate amount of $34.8$64.7 million and $69.8 million, respectively, which we paid during the same period.
For the three and sixperiod (three months ended December 31, 2016, pursuant to the Company’s dividend policy, we paid total non-cumulative dividends of $0.1150 and $0.2300, respectively,September 30, 2021—$0.2209 per Common Share in the aggregate amount of $27.9 million and $55.7 million, respectively.
$59.9 million).
Share Capital
Our authorized share capital includes an unlimited number of Common Shares and an unlimited number of Preference Shares. No Preference Shares have been issued.
Treasury Stock
Repurchase
During the three and six months ended December 31, 2017,From time to time we did not repurchase anymay provide funds to an independent agent to facilitate repurchases of our Common Shares for potential reissuancein connection with the settlement of awards under ourthe Long-Term Incentive Plans (LTIP) or other plans (three and six months ended December 31, 2016—nil, respectively). See below for more details on our various plans.
Reissuance
During the three and six months ended December 31, 2017,September 30, 2022 and 2021, we reissued 379,111 and 387,443did not repurchase any Common Shares respectively, from treasury stock (three and sixon the open market for potential settlement of awards under our LTIP or other plans as described below.
During the three months ended December 31, 2016—341,588 and 349,922September 30, 2022, we delivered to eligible participants 120,406 Common Shares respectively),that were purchased in the open market in connection with the settlement of awards.awards and other plans (three months ended September 30, 2021—141,452 Common Shares).
Share Repurchase Plan
On November 4, 2021, the Board authorized a share repurchase plan (Fiscal 2022 Repurchase Plan), pursuant to which we may purchase in open market transactions, from time to time over the 12-month period commencing November 12, 2021, up to an aggregate of $350 million of our Common Shares.
During the three months ended September 30, 2022 and 2021, we did not repurchase and cancel any Common Shares.
Share-Based Payments
Total share-basedShare-based compensation expense for the periods indicated below is detailed as follows:
| | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2022 | | 2021 |
| Stock Options (issued under Stock Option Plans) | $ | 3,585 | | | $ | 4,267 | |
| Performance Share Units (issued under LTIP) | 4,235 | | | 3,445 | |
| Restricted Share Units (issued under LTIP) | 2,175 | | | 2,166 | |
| Restricted Share Units (other) | 10,637 | | | 1,728 | |
| Deferred Share Units (directors) | 961 | | | 830 | |
| Employee Stock Purchase Plan | 1,615 | | | 1,498 | |
| Total share-based compensation expense | $ | 23,208 | | | $ | 13,934 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Stock options | $ | 2,729 |
| | $ | 2,787 |
| | $ | 6,031 |
| | $ | 6,675 |
|
| Performance Share Units (issued under LTIP) | 937 |
| | 947 |
| | 1,972 |
| | 1,828 |
|
| Restricted Share Units (issued under LTIP) | 1,513 |
| | 1,765 |
| | 3,399 |
| | 3,367 |
|
| Restricted Share Units (other) | 198 |
| | 743 |
| | 677 |
| | 1,495 |
|
| Deferred Share Units (directors) | 945 |
| | 830 |
| | 1,492 |
| | 1,341 |
|
| Employee Share Purchase Plan | 836 |
| | 500 |
| | 1,822 |
| | 1,006 |
|
| Total share-based compensation expense | $ | 7,158 |
| | $ | 7,572 |
| | $ | 15,393 |
| | $ | 15,712 |
|
SummaryA summary of Outstanding unrecognized compensation cost for unvested shared-based payment awards is as follows:
| | | | | | | | | | | |
| | As of September 30, 2022 |
| | Unrecognized Compensation Cost | | Weighted Average Recognition Period (years) |
| Stock Options (issued under Stock Option Plans) | 49,204.7 | | | 2.6 |
| Performance Share Units (issued under LTIP) | 45,389.4 | | | 2.5 |
| Restricted Share Units (issued under LTIP) | 23,596.2 | | | 1.8 |
| Restricted Share Units (other) | 76,748.6 | | | 1.9 |
| Total unrecognized share-based compensation cost | $ | 194,938.9 | | | |
Stock Option Plans
Stock Options
A summary of activity under our stock option plans for the three months ended September 30, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Weighted-
Average Exercise
Price | | Weighted-
Average
Remaining
Contractual Term
(years) | | Aggregate Intrinsic Value
($’000's) |
| Outstanding at June 30, 2022 | 8,820,662 | | | $ | 42.74 | | | 4.68 | | $ | 7,111 | |
| Granted | 1,872,400 | | | 35.24 | | | | | |
| Exercised | (72,080) | | | 27.66 | | | | | |
| Forfeited or expired | (505,374) | | | 44.34 | | | | | |
| Outstanding at September 30, 2022 | 10,115,608 | | | $ | 41.38 | | | 4.87 | | $ | — | |
| Exercisable at September 30, 2022 | 3,651,940 | | | $ | 39.07 | | | 3.30 | | $ | — | |
As of December 31, 2017, an aggregate of 8,452,430 options to purchase Common Shares were outstanding and an additional 11,196,176September 30, 2022, 8,227,818 options to purchase Common Shares were available for issuance under our stock option plans. Our stock options generally vest over four years and expire between seven and ten years from the date of the grant. Currently we also have options outstanding that vest over five years, as well as options outstanding that vest based on meeting certain market conditions. The exercise price of all our options is set at an amount that is not less than the closing price of our Common Shares on the NASDAQ on the trading day immediately preceding the applicable grant date.
A summary of activity under our stock option plans for the six months ended December 31, 2017 is as follows:
|
| | | | | | | | | | | | |
| | Options | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value ($’000s) |
| Outstanding at June 30, 2017 | 8,977,830 |
| | $ | 24.57 |
| | | | |
| Granted | 823,830 |
| | 34.49 |
| | | | |
| Exercised | (1,193,226 | ) | | 16.37 |
| | | | |
| Forfeited or expired | (156,004 | ) | | 31.23 |
| | | | |
| Outstanding at December 31, 2017 | 8,452,430 |
| | $ | 26.57 |
| | 4.34 | | $ | 76,949 |
|
| Exercisable at December 31, 2017 | 3,224,756 |
| | $ | 21.74 |
| | 2.96 | | $ | 44,909 |
|
We estimate the fair value of stock options using the Black-Scholes option-pricing model or, where appropriate, the Monte Carlo Valuation Method,pricing model, consistent with the provisions of ASC Topic 718, "Compensation—“Compensation—Stock Compensation"Compensation” (Topic 718) and SEC Staff Accounting Bulletin No. 107. The option-pricing models require input of subjective assumptions, including the estimated life of the option and the expected volatility of the underlying stock over the estimated life of the option. We use historical volatility as a basis for projecting the expected volatility of the underlying stock and estimate the expected life of our stock options based upon historical data.
We believe that the valuation techniques and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair value of our stock option grants. Estimates of fair value are not intended, however, to predict actual future events or the value ultimately realized by employees who receive equity awards.
For the periods indicated, the weighted-average fair value of options and weighted-average assumptions estimated under the Black-Scholes option-pricing model were as follows:
| | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2022 | | 2021 |
| Weighted–average fair value of options granted | $ | 8.16 | | | $ | 9.75 | |
| Weighted-average assumptions used: | | | |
| Expected volatility | 27.46 | % | | 26.62 | % |
| Risk–free interest rate | 2.86 | % | | 0.55 | % |
| Expected dividend yield | 2.32 | % | | 1.56 | % |
| Expected life (in years) | 4.18 | | 4.16 |
| Forfeiture rate (based on historical rates) | 7 | % | | 7 | % |
| Average exercise share price | $ | 39.09 | | | $ | 52.62 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Weighted–average fair value of options granted | $ | 7.49 |
| | $ | 6.58 |
| | $ | 7.46 |
| | $ | 6.54 |
|
| Weighted-average assumptions used: | | | | | | | |
| Expected volatility | 26.64 | % | | 28.53 | % | | 27.11 | % | | 29.29 | % |
| Risk–free interest rate | 1.95 | % | | 1.22 | % | | 1.81 | % | | 1.06 | % |
| Expected dividend yield | 1.48 | % | | 1.43 | % | | 1.45 | % | | 1.45 | % |
| Expected life (in years) | 4.58 |
| | 4.34 |
| | 4.42 |
| | 4.33 |
|
| Forfeiture rate (based on historical rates) | 6 | % | | 5 | % | | 6 | % | | 5 | % |
| Average exercise share price | $ | 34.48 |
| | $ | 30.37 |
| | $ | 34.49 |
| | $ | 29.83 |
|
As of December 31, 2017,During the total compensation cost related tothree months ended September 30, 2022, we granted 1,000,000 performance options (during the unvested stock option awards not yet recognized was approximately $21.2 million, which will be recognized over a weighted-average period of approximately 2.4 years.
No cash was used by us to settle equity instruments granted under share-based compensation arrangements in any of the periods presented.
We have not capitalized any share-based compensation costs as part of the cost of an asset in any of the periods presented.three months ended September 30, 2021—nil).
For the threeperiod in which performance options were granted, the weighted-average fair value of performance options and six months ended December 31, 2017, cash inweighted-average assumptions estimated under the amount of $3.4 million and $19.6 million, respectively, was receivedMonte Carlo pricing model were as the result of the exercise of options granted under share-based payment arrangements. The tax benefit realized by us during the three and six months ended December 31, 2017 from the exercise of options eligible for a tax deduction was $0.2 million and $0.3 million, respectively.follows:
For the three and six months ended December 31, 2016, cash in the amount of $2.1 million and $4.5 million, respectively, was received as the result of the exercise of options granted under share-based payment arrangements. The tax benefit realized by us during the three and six months ended December 31, 2016 from the exercise of options eligible for a tax deduction was $0.3 million and $0.4 million, respectively. | | | | | |
| Three Months Ended September 30, |
| 2022 |
| Weighted–average fair value of options granted | $ | 8.09 | |
| Derived service period (in years) | 1.7 |
| Weighted-average assumptions used: | |
| Expected volatility | 26.00 | % |
| Risk–free interest rate | 3.21 | % |
| Expected dividend yield | 2.00 | % |
| Average exercise share price | $ | 31.89 | |
Long-Term Incentive Plans
We incentivize our executive officers,certain eligible employees, in part, with long-term compensation pursuant to our LTIP. The LTIP is a rolling three yearthree-year program that grants eligible employees a certain number of target Performance Share Units (PSUs) and/or Restricted Share Units (RSUs). Target PSUs become vested upon the achievement of certain financial and/or operational performance criteria (the Performance Conditions) that are determined at the time of the grant. Target RSUs become vested when an eligible employee remains employed throughout the vesting period. LTIP grants that have recently vested, or have yet to vest, are described below. LTIP grants are referred to in this Quarterly Report on Form 10-Q based upon the year in which the grants are expected to vest.
Fiscal 2017 LTIP
Grants made in Fiscal 2015 under the LTIP (collectively referred to as Fiscal 2017 LTIP), consisting of PSUs and RSUs, took effect in Fiscal 2015 starting on September 4, 2014. We settled the Fiscal 2017 LTIP by issuing 312,651 Common Shares from treasury stock during the three months ended December 31, 2017, with a cost of $6.7 million.
Fiscal 2018 LTIP
Grants made in Fiscal 2016 under the LTIP (collectively referred to as Fiscal 2018 LTIP), consisting of PSUs and RSUs, took effect in Fiscal 2016 starting on August 23, 2015. The Performance Conditions for vesting of the PSUs are based solely upon market conditions. The RSUs are employee service-based awards and vest over the life of the Fiscal 2018 LTIP. We expect to settle the Fiscal 2018 LTIP awards in stock.
Fiscal 2019 LTIP
Grants made in Fiscal 2017 under the LTIP (collectively referred to as Fiscal 2019 LTIP), consisting of PSUs and RSUs, took effect in Fiscal 2017 starting on August 14, 2016. The Performance Conditions for vesting of the PSUs are based solely upon market conditions. The RSUs are employee service-based awards and vest over the life of the Fiscal 2019 LTIP. We expect to settle the Fiscal 2019 LTIP awards in stock.
Fiscal 2020 LTIP
Grants made in Fiscal 2018 under the LTIP (collectively referred to as Fiscal 2020 LTIP), consisting of PSUs and RSUs, took effect in Fiscal 2018 starting on August 7, 2017. The Performance Conditions for vesting of the PSUs are based solely upon market conditions. The RSUs are employee service-based awards and vest over the life of the Fiscal 2020 LTIP. We expect to settle the Fiscal 2020 LTIP awards in stock.
PSUs and RSUs granted under the LTIPsLTIP have been measured at fair value as of the effective date, consistent with Topic 718, and will be charged to share-based compensation expense over the remaining life of the plan. Stock options granted under the LTIPs have been measured using the Black-Scholes option-pricing model, consistent with Topic 718. We estimate the fair value of PSUs using the Monte Carlo pricing model and RSUs have been valued based upon their grant date fair value. Stock options granted under the LTIP have been measured using the Black-Scholes option-pricing model, consistent with Topic 718.
AsLTIP 2025
Grants made in Fiscal 2023 under the LTIP (collectively referred to as LTIP 2025), consisting of December 31, 2017,PSUs and RSUs, took effect in Fiscal 2023 starting on August 8, 2022. The Performance Conditions for vesting of the total expected compensation cost relatedPSUs are based solely upon market conditions. The RSUs are employee service-based awards and vest over the life of the LTIP 2025. We expect to settle the unvested LTIP 2025 awards not yet recognized was $19.0 million, whichin Common Shares. The LTIP 2025 PSU and RSU awards are eligible to receive dividend equivalent units that vest under the same conditions as the underlying grants.
Performance Share Units (Issued Under LTIP)
A summary of activity under our performance share units issued under the LTIP for the three months ended September 30, 2022 is expectedas follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Units | | Weighted-Average
Grant Date Fair Value | | Weighted-
Average
Remaining
Contractual Term
(years) | | Aggregate Intrinsic Value
($’000's) |
| Outstanding at June 30, 2022 | 812,937 | | | $ | 61.29 | | | 1.89 | | $ | 30,762 | |
Granted (1) | 526,865 | | | 54.70 | | | | | |
| Vested | — | | | — | | | | | |
| Forfeited or expired | (58,350) | | | 67.10 | | | | | |
| Outstanding at September 30, 2022 | 1,281,452 | | | $ | 58.37 | | | 2.12 | | $ | 33,882 | |
__________________________
(1)PSUs are earned based on market conditions and the actual number of PSUs earned, if any, is dependent upon performance and may range from 0 to be recognized over a weighted average period200 percent.
For the periods indicated, the weighted-average fair value of 2.1 years.PSUs issued under LTIP, and weighted-average assumptions estimated under the Monte Carlo pricing model were as follows:
| | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2022 | | 2021 |
| Weighted–average fair value of performance share units granted | $ | 55.06 | | | $ | 75.15 | |
| Weighted-average assumptions used: | | | |
| Expected volatility | 29.00 | % | | 28.00 | % |
| Risk–free interest rate | 3.13 | % | | 0.45 | % |
| Expected dividend yield | — | % | | 1.70 | % |
| Expected life (in years) | 3.11 | | 3.10 |
| Forfeiture rate (based on historical rates) | 7 | % | | 7 | % |
Restricted Share Units (RSUs)(Issued Under LTIP)
DuringA summary of activity under our RSUs issued under the LTIP for the three and six months ended December 31, 2017,September 30, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Units | | Weighted-Average
Grant Date Fair Value | | Weighted-
Average
Remaining
Contractual Term
(years) | | Aggregate Intrinsic Value
($’000's) |
| Outstanding at June 30, 2022 | 611,743 | | | $ | 44.14 | | | 1.62 | | $ | 23,148 | |
| Granted | 394,584 | | | 38.97 | | | | | |
| Vested | — | | | — | | | | | |
| Forfeited or expired | (45,030) | | | 45.85 | | | | | |
| Outstanding at September 30, 2022 | 961,297 | | | $ | 41.94 | | | 2.07 | | $ | 25,417 | |
Restricted Share Units (Other)
In addition to the grants made in connection with the LTIP discussed above, from time to time, we granted 1,496 and 4,464may grant RSUs respectively, to certain employees in accordance with employment and other agreements (three and six months ended December 31, 2016—nil and 7,800, respectively). Thenon-LTIP related agreements. RSUs (other) vest over a specified contract date, typically two or three years from the respective date of grants. We expect to settle the awards in stock.
A summary of activity under our RSUs (other) issued for the three and six months ended December 31, 2017, we issued 66,460 and 74,792 Common Shares, respectively, from treasury stock, with a cost of $1.4 million and $1.6 million, respectively, in connection with the settlement of these vested RSUs (three and six months ended December 31, 2016—1,666 and 10,000, respectively, with a cost of $20.5 thousand and $0.1 million, respectively).September 30, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Units | | Weighted-Average
Grant Date Fair Value | | Weighted-
Average
Remaining
Contractual Term
(years) | | Aggregate Intrinsic Value
($’000's) |
| Outstanding at June 30, 2022 | 2,593,707 | | | $ | 44.90 | | | 2.86 | | $ | 98,146 | |
| Granted | — | | | — | | | | | |
| Vested | (120,406) | | | 37.83 | | | | | |
| Forfeited or expired | (88,587) | | | 44.84 | | | | | |
| Outstanding at September 30, 2022 | 2,384,714 | | | $ | 44.86 | | | 2.68 | | $ | 63,052 | |
Deferred StockShare Units (DSUs)
During the three and six months ended December 31, 2017, weThe DSUs are granted 77,606 and 80,809 DSUs, respectively, to certain non-employee directors (three and six months ended December 31, 2016—73,254 and 75,696, respectively). Thedirectors. DSUs wereare issued under our Deferred Share Unit Plan. DSUs granted as compensation for director fees vest immediately, whereas all other DSUs granted vest at our next annual general meeting following the granting of the DSUs. No DSUs are payable by us until the director ceases to be a member of the Board.
A summary of activity under our deferred share units issued for the three months ended September 30, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Units | | Weighted-Average
Price | | Weighted-
Average
Remaining
Contractual Term
(years) | | Aggregate Intrinsic Value
($’000's) |
Outstanding at June 30, 2022 (1) | 885,701 | | | $ | 31.49 | | | 0.36 | | $ | 33,515 | |
| Granted | 13,747 | | | 32.41 | | | | | |
Outstanding at September 30, 2022 (1) | 899,448 | | | $ | 31.50 | | | 0.10 | | $ | 21,934 | |
______________________
(1) Includes 55,520 unvested DSUs.
Employee ShareStock Purchase Plan (ESPP)
Our ESPP offers employees the opportunity to purchase our Common Shares at a purchase price discount of 15%.
During the three and six months ended December 31, 2017, 146,248 and 338,617September 30, 2022, 354,465 Common Shares respectively, were eligible for issuance to employees enrolled in the ESPP (three and six months ended December 31, 2016—116,224 and 219,856, respectively)September 30, 2021—225,731 Common Shares).
During the three and six months ended December 31, 2017,September 30, 2022, cash in the amount of approximately $4.4$8.0 million and $10.1 million, respectively, was received from employees relating to the ESPP (three and six months ended December 31, 2016—September 30, 2021—$3.3 million and $6.2 million, respectively)9.4 million).
NOTE 13—14—GUARANTEES AND CONTINGENCIES
We have entered into the following contractual obligations with minimum payments for the indicated fiscal periods as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments due between |
| | Total | | October 1, 2022 -
June 30, 2023 | | July 1, 2023 -
June 30, 2025 | | July 1, 2025 -
June 30, 2027 | | July 1, 2027
and beyond |
Long-term debt obligations (1) | $ | 5,336,028 | | | $ | 134,121 | | | $ | 1,289,157 | | | $ | 263,500 | | | $ | 3,649,250 | |
Purchase obligations for contracts not accounted for as lease obligations (2) | 93,168 | | | 36,137 | | | 44,352 | | | 12,679 | | | — | |
| $ | 5,429,196 | | | $ | 170,258 | | | $ | 1,333,509 | | | $ | 276,179 | | | $ | 3,649,250 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Payments due between |
| | Total | | January 1, 2018—
June 30, 2018 | | July 1, 2018—
June 30, 2020 | | July 1, 2020—
June 30, 2022 | | July 1, 2022
and beyond |
Long-term debt obligations (1) | $ | 3,548,840 |
| | $ | 444,606 |
| | $ | 256,925 |
| | $ | 952,559 |
| | $ | 1,894,750 |
|
Operating lease obligations (2) | 376,430 |
| | 38,543 |
| | 128,976 |
| | 96,213 |
| | 112,698 |
|
| Purchase obligations | 20,515 |
| | 5,158 |
| | 14,776 |
| | 581 |
| | — |
|
| | $ | 3,945,785 |
| | $ | 488,307 |
| | $ | 400,677 |
| | $ | 1,049,353 |
| | $ | 2,007,448 |
|
(1)Includes interest up to maturity and principal payments. We currently have borrowings outstanding under the Revolver ($375 million as of December 31, 2017), which we expect to repay within the next 12 months. Please see note 10 "Long-Term Debt"Note 11 “Long-Term Debt” for more details.
(2) Net of $7.2 million of sublease incomeFor contractual obligations relating to be received from properties which we have subleased to third parties.leases and purchase obligations accounted for under ASC Topic 842, please see Note 6 “Leases.”
Guarantees and Indemnifications
We have entered into customer agreements which may include provisions to indemnify our customers against third partythird-party claims that our software products or services infringe certain third partythird-party intellectual property rights and for liabilities related to
a breach of our confidentiality obligations. We have not made any material payments in relation to such indemnification provisions and have not accrued any liabilities related to these indemnification provisions in our Condensed Consolidated Financial Statements.Statements.
Occasionally, we enter into financial guarantees with third parties in the ordinary course of our business, including, among others, guarantees relating to taxes and letters of credit on behalf of parties with whom we conduct business. Such agreements have not had a material effect on our results of operations, financial position or cash flows.
Litigation
We are currently involved in various claims and legal proceedings.
Quarterly, we review the status of each significant legal matter and evaluate such matters to determine how they should be treated for accounting and disclosure purposes in accordance with the requirements of ASC Topic 450-20 "Loss Contingencies"“Loss Contingencies” (Topic 450-20). Specifically, this evaluation process includes the centralized tracking and itemization of the status of all our disputes and litigation items, discussing the nature of any litigation and claim, including any dispute or claim that is reasonably likely to result in litigation, with relevant internal and external counsel, and assessing the progress of each matter in light of its merits and our experience with similar proceedings under similar circumstances.
If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss in accordance with Topic 450-20. As of the date of this Quarterly Report on Form 10-Q, the aggregate of such estimated lossesaccrued liabilities was not material to our consolidated financial position or resultresults of operations and we do not believe as of the date of this filing that it is reasonably possible that a loss exceeding the amounts already recognized will be incurred that would be material to our consolidated financial position or results of operations.
Contingencies
IRS Matter
As described more fully below, we have previously disclosed, the United States Internal Revenue Service (IRS) is examining certainare unable at this time to estimate a possible loss or range of our tax returns for our fiscal year ended June 30, 2010 (Fiscal 2010) through our fiscal year ended June 30, 2012 (Fiscal 2012), and in connection with those examinations is reviewing our internal reorganization in Fiscal 2010 to consolidate certain intellectual property ownership in Luxembourg and Canada and our integration of certain acquisitions into the resulting structure. We also previously disclosed that the examinations may lead to proposed adjustments to our taxes that may be material, individually or in the aggregate, and that we have not recorded any material accruals for any such potential adjustments in our Condensed Consolidated Financial Statements.
As part of these examinations, which remain ongoing, on July 17, 2015 we received from the IRS an initial Notice of Proposed Adjustment (NOPA) in draft form proposing a one-time approximately $280 million increase to our U.S. federal taxes arising from the reorganization in Fiscal 2010 and proposing penalties equal to 20% of the additional taxes, plus interest at the applicable statutory rate (which will continue to accrue until the matter is resolved and may be substantial). A NOPA is an IRS
position and does not impose an obligation to pay tax. The draft NOPA may be changed before the final NOPA is issued, including because the IRS reserved the right in the draft NOPA to increase the adjustment. Based on discussions with the IRS, we expect we will receive an additional NOPA proposing an approximately $80 million increase to our U.S. federal taxes for Fiscal 2012 arising from the integration of Global 360 Holding Corp. into the structure that resulted from the reorganization, accompanied by proposed penalties and interest (although there can be no assurance that this will be the amount reflected in the NOPA when received, including because the IRS may assign a higher value to our intellectual property). Depending upon the outcome of these matters, additional state income taxes plus penalties and interest may be due. We currently estimate that, as of December 31, 2017, adjustments under the draft NOPA in its present form and the anticipated additional NOPA could result in an aggregate liability of approximately $600 million, inclusive of U.S. federal and state taxes, penalties and interest. The increase from the initially disclosed estimated aggregate liability is solely due to an estimate of interest that has accrued.
We strongly disagree with the IRS’ position and intend to vigorously contest the proposed adjustments to our taxable income. We are examining various alternatives available to taxpayers to contest the proposed adjustments. Any such alternatives could involve a lengthy process and result in the incurrence of significant expenses. As of the date of this Quarterly Report on Form 10-Q, we have not recorded any material accrualslosses in respect of these examinations in our Condensed Consolidated Financial Statements. An adverse outcome of these tax examinations could have a material adverse effect on our financial position and results of operations.certain disclosed matters.
Contingencies
CRA Matter
As part of its ongoing audit of our Canadian tax returns, the Canada Revenue Agency (CRA) has disputed our transfer pricing methodology used for certain intercompany transactions with our international subsidiaries. The CRAsubsidiaries and has issued a noticenotices of reassessment for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2016. Assuming the utilization of available tax attributes (further described below), we estimate our potential aggregate liability, as of September 30, 2022, in connection with the CRA's reassessments for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2016, to be limited to penalties, interest and provincial taxes that may be due of approximately $70 million. As of September 30, 2022, we have provisionally paid approximately $32 million in order to fully preserve our rights to object to the CRA's audit positions, being the minimum payment required under Canadian legislation while the matter is in dispute. This amount is recorded within “Long-term income taxes recoverable” on the Condensed Consolidated Balance Sheets as of September 30, 2022.
The notices of reassessment for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2016 would, as drafted, increase our taxable income for that year by approximately $90 million (offset by the tax attributes referred to below) and is expected to propose related penalties$100 million for each of approximatelythose years, as well as impose a 10%. We strongly disagree with the CRA position and believe the reassessment of Fiscal 2012 and any related proposed penalties are without merit. We will continue to vigorously contest both penalty on the proposed adjustmentsadjustment to our taxable income and the penalty assessment. We have filed a notice of objection and will also seek competent authority consideration under applicable international treaties in respect of this reassessment. As of the date of this Quarterly Report on Form 10-Q, we have not recorded any accruals in respect of this reassessment in our Condensed Consolidated Financial Statements.
Even if we are unsuccessful in challenging the CRA’s reassessment to increase our taxable income for Fiscal 2012, we have elective deductions available in Fiscal 2012 that would offset such increased amount so that no additional cash tax would be payable for Fiscal 2012, exclusive of any proposed penalties.income. Audits by the CRA of our tax returns for fiscal years prior to Fiscal 2012 have been completed with no reassessment of our income tax liabilityliability.
We strongly disagree with the CRA's positions and believe the reassessments of Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2016 (including any penalties) are without merit, and we are continuing to contest these reassessments. On June 30, 2022, we filed a notice of appeal with the Tax Court of Canada seeking to reverse all such reassessments (including penalties) in full.
Even if we are unsuccessful in challenging the CRA's reassessments to increase our taxable income for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2016, we have elective deductions available for those years (including carry-backs from later years) that would offset such increased amounts so that no additional cash tax would be payable, exclusive of any assessed penalties and interest, as described above.
The CRA has audited Fiscal 2017 on a basis that we strongly disagree with and are contesting. The focus of the CRA audit has been the valuation of certain intellectual property and goodwill when one of our subsidiaries continued into Canada from Luxembourg in July 2016. In accordance with applicable rules, these assets were recognized for tax purposes at fair market value as of that time, which value was supported by an expert valuation prepared by an independent leading accounting and advisory firm. CRA’s position for Fiscal 2017 relies in significant part on the application of its positions regarding our transfer pricing methodology that are the basis for its reassessment of our fiscal years 2012 to 2016 described above, and that we believe are without merit. Other aspects of CRA’s position for Fiscal 2017 conflict with the expert valuation prepared by the
independent leading accounting and advisory firm that was used to support our original filing position. On January 27, 2022, the CRA issued a notice of reassessment in respect of our international transactions, including the transfer pricing methodology applied to them. The CRA is currently auditing Fiscal 2013, 2014 and 2015, and has proposed to reassess Fiscal 2013 in2017 on a mannerbasis consistent with its proposal to reduce the available depreciable basis of assets in Canada. On April 19, 2022, we filed our notice of objection regarding the reassessment in respect of Fiscal 2012.2017. If we are ultimately unsuccessful in defending our position, the estimated impact of the proposed adjustment could result in us recording an income tax expense, with no immediate cash payment, to reduce the stated value of our deferred tax assets of up to approximately $470 million. Any such income tax expense could also have a corresponding cash tax impact that would primarily occur over a period of several future years based upon annual income realization in Canada. We strongly disagree with the CRA’s position for Fiscal 2017 and intend to vigorously defend our original filing position. We are in ongoing discussions withnot required to provisionally pay any cash amounts to the CRA andas a result of the reassessment in respect of Fiscal 2017 due to the utilization of available tax attributes; however, to the extent the CRA reassesses subsequent fiscal years on a similar basis, we expect to make certain minimum payments required under Canadian legislation, which may need to be provisionally made starting in Fiscal 2024 while the matter is in dispute.
We will continue to vigorously contest the CRA's audit position.
GXS Brazil Matter
As partadjustments to our taxable income and any penalty and interest assessments, as well as any reduction to the basis of our acquisitiondepreciable property. We are confident that our original tax filing positions were appropriate. Accordingly, as of GXS,the date of this Quarterly Report on Form 10-Q, we inherited a tax disputehave not recorded any accruals in Brazil between the Company’s subsidiary, GXS Tecnologia da Informação (Brasil) Ltda. (GXS Brazil), and the municipalityrespect of São Paulo,these reassessments or proposed reassessment in connection with GXS Brazil’s judicial appealour Condensed Consolidated Financial Statements. The CRA is currently in preliminary stages of a tax claim. During the first quarter ofauditing Fiscal 2018 the courts ruled in favour of the municipality of São Paulo. The Company has decided not to pursue further appeal. and Fiscal 2019.
Carbonite Class Action Complaint
On OctoberAugust 1, 2017, the Company reached a settlement with the municipality and paid $1.4 million.
Historically,2019, prior to our acquisition of GXS, GXS would charge certainCarbonite, a purported stockholder of Carbonite filed a putative class action complaint against Carbonite, its former Chief Executive Officer, Mohamad S. Ali, and its former Chief Financial Officer, Anthony Folger, in the United States District Court for the District of Massachusetts captioned Ruben A. Luna, Individually and on Behalf of All Others Similarly Situated v. Carbonite, Inc., Mohamad S. Ali, and Anthony Folger (No. 1:19-cv-11662-LTS). The complaint alleges violations of the federal securities laws under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The complaint generally alleges that the defendants made materially false and misleading statements in connection with Carbonite’s Server Backup VM Edition, and seeks, among other things, the designation of the action as a class action, an award of unspecified compensatory damages, costs and expenses, including counsel fees and expert fees, and other relief as the court deems appropriate. On August 23, 2019, a nearly identical complaint was filed in the same court captioned William Feng, Individually and on Behalf of All Others Similarly Situated v. Carbonite, Inc., Mohamad S. Ali, and Anthony Folger (No. 1:19- cv-11808-LTS) (together with the Luna Complaint, the “Securities Actions”). On November 21, 2019, the district court consolidated the Securities Actions, appointed a lead plaintiff, and designated a lead counsel. On January 15, 2020, the lead plaintiff filed a consolidated amended complaint generally making the same allegations and seeking the same relief as the complaint filed on August 1, 2019. The defendants moved to its subsidiaries, including GXS Brazil, primarily baseddismiss the Securities Actions on historical transfer pricing studies that were intendedMarch 10, 2020. The motion was fully briefed in June 2020 and a hearing on the motion to reflectdismiss the costs incurred by subsidiaries in relationSecurities Actions was held on October 15, 2020. Following the hearing, on October 22, 2020, the district court granted with prejudice the defendants’ motion to services provided bydismiss the parent companySecurities Actions. On November 20, 2020, the lead plaintiff filed a notice of appeal to the subject subsidiary. GXS recorded taxesCourt of Appeals for the First Circuit. On December 21, 2021, the First Circuit issued a decision reversing and remanding the Securities Actions to the district court for further proceedings. The defendants remain confident in their position, believe the Securities Actions are without merit, and will continue to vigorously defend the matter.
Carbonite vs Realtime Data
On February 27, 2017, before our acquisition of Carbonite, a non-practicing entity named Realtime Data LLC (Realtime Data) filed a lawsuit against Carbonite in the U.S. District Court for the Eastern District of Texas “Realtime Data LLC v. Carbonite, Inc. et al (No 6:17-cv-00121-RWS-JDL).” Therein, it alleged that certain of Carbonite’s cloud storage services infringe upon certain patents held by Realtime Data. Realtime Data’s complaint against Carbonite sought damages in an unspecified amount and injunctive relief. On December 19, 2017, the U.S. District Court for the Eastern District of Texas transferred the case to the U.S. District Court for the District of Massachusetts (No. 1:17-cv-12499). Realtime Data has also filed numerous other patent suits on amounts billed,the same asserted patents against other companies. After a stay pending appeal in one of those suits, on January 21, 2021, the district court held a hearing to construe the claims of the asserted patents. As to the fourth patent asserted against Carbonite, on September 24, 2019, the U.S. Patent & Trademark Office Patent Trial and Appeal Board invalidated certain claims of that were consideredpatent, including certain claims that had been asserted against Carbonite. The parties then jointly stipulated to dismiss that patent from this action. On August 23, 2021, in one of the suits against other companies, the District of Delaware (No. 1:17-cv-800), held all of the patents asserted against Carbonite to be due based oninvalid. Realtime Data has appealed that decision to the intercompany charges. GXS subsequently re-evaluated its intercompany charges to GXS Brazil and related taxes and, upon taking into consideration the current environment and judicial proceedings in Brazil, concluded that it was probable that certain indirect taxes would be assessable and payable based upon the accrualU.S. Court of such intercompany charges and has approximately $3.9 million accruedAppeals for the probable amountFederal Circuit. We continue to vigorously defend the matter, and the U.S. District Court for the District of Massachusetts has issued a settlementclaim construction order. We have not accrued a loss contingency related to the indirect taxes, interestthis matter because litigation related to a non-practicing entity is inherently unpredictable. Although a
loss is reasonably possible, an unfavorable outcome is not considered by management to be probable at this time and penalties.
GXS India Matter
Our Indian subsidiary, GXS India Technology Centre Private Limited (GXS India), is subjectwe remain unable to potential assessments by Indian tax authorities in the cityreasonably estimate a possible loss or range of Bangalore. GXS India has received assessment orders from the Indian tax authorities alleging that the transfer price applied to intercompany transactions was not appropriate. Based on advice from our tax advisors, we believe that the facts that the Indian tax authorities are using to support their assessment are incorrect. We have filed appeals
and anticipate an eventual settlementloss associated with the Indian tax authorities. We have accrued $1.3 million to cover our anticipated financial exposure in this matter.litigation.
Please also see Part II,I, Item 1A, "Risk Factors" elsewhere“Risk Factors” in this Quarterlyour Annual Report on Form 10-Q.10-K for Fiscal 2022.
NOTE 14—15—INCOME TAXES
OurThe Company’s effective tax rate representsfor the net effectthree months ended September 30, 2022, was (40.4)%, compared to a provision of 24.8% for the three months ended September 30, 2021. The Company’s effective tax rate for the three months ended September 30, 2022, differs from the Canadian statutory rate of 26.5% primarily due to the pre-tax loss created by the mark-to-market valuation on the derivatives not designated as hedges that the Company entered into in connection with the proposed Micro Focus Acquisition, and the inability to recognize a majority of the mixmark-to-market losses for tax purposes (see Note 17 “Derivative Instruments and Hedging Activities”). The mark-to-market losses are considered capital losses for tax purposes and require capital income to be recognized. Therefore we recorded a valuation allowance on the portion of income earned in various tax jurisdictionsthe losses that are subjectnot supportable by capital gains. Other items impacting the rate include provision to return adjustments, a wide range ofnet increase in uncertain tax positions, and permanent items such as disallowed stock-based compensation and foreign passive income inclusion, partially offset by research and development credits. The Company’s effective tax rates.
We recognize interest expense and penalties related to income tax matters in income tax expense.
Forrate for the three and six months ended December 31, 2017September 30, 2021, differs from the Canadian statutory rate primarily due to research and 2016, we recognized the following amounts as income tax-related interest expensedevelopment credits, partially offset by US Base Erosion and penalties:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Interest expense | $ | 1,811 |
| | $ | 1,501 |
| | $ | 3,897 |
| | $ | 2,783 |
|
| Penalties expense (recoveries) | (624 | ) | | (218 | ) | | (543 | ) | | (324 | ) |
| Total | $ | 1,187 |
| | $ | 1,283 |
| | $ | 3,354 |
| | $ | 2,459 |
|
As of December 31, 2017September 30, 2022, the gross amount of unrecognized tax benefits accrued is $58.9 million, which is inclusive of interest and Junepenalties accrued of $8.6 million (June 30, 2017, the following amounts have been accrued on account of income tax-related interest expense2022 — $54.1 million and penalties:
|
| | | | | | | |
| | As of December 31, 2017 | | As of June 30, 2017 |
| Interest expense accrued * | $ | 52,105 |
| | $ | 47,402 |
|
| Penalties accrued * | $ | 2,230 |
| | $ | 2,160 |
|
| |
* | These balances have been included within "Long-term income taxes payable" within the Condensed Consolidated Balance Sheets.
|
$8.4 million, respectively). We believe that it is reasonably possible that the gross unrecognized tax benefits, as of December 31, 2017,benefit could decrease tax expenseby $6.8 million in the next 12 months, by $2.0 million, relating primarily to the expiration of competent authority relief and tax years becoming statute barred for purposes of future tax examinations by local taxing jurisdictions.
Our four most significantWe are subject to income tax audits in all major taxing jurisdictions are Canada, the United States, Luxembourgin which we operate, and Germany. Our tax filings remain subject to income tax audits by applicable tax authorities for a certain length of time following the tax year to which those tax filings relate. The earliest fiscal years open for examination are 2009 for Germany, 2010 for the United States, 2011 for Luxembourg, and 2012 for Canada.
We are subject to tax audits in all major taxing jurisdictions in which we operate and currently have income tax audits open in Canada, the United States, France, Germany India, Italy, Malaysia, and other immaterial jurisdictions. The earliest fiscal years open for examination for our major jurisdictions are 2012 for Canada, 2016 for the United Kingdom.States and 2012 for Germany. As of December 31, 2021, the Fiscal 2015 and Fiscal 2016 tax years for Luxembourg became statute barred. On a quarterly basis we assess the status of these examinations and the potential for adverse outcomes to determine the adequacy of the provision for income and other taxes. Statements regarding the United States and Canada audits are included in note 13 "GuaranteesNote 14 “Guarantees and Contingencies".Contingencies.”
The timing of the resolution of income tax audits is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next 12 months we will receive additional assessments by various tax authorities or possibly reach resolution of income tax audits in one or more jurisdictions. These assessments or settlements may or may not result in changes to our contingencies related to positions on tax filings. The actual amount of any change could vary significantly depending on the ultimate timing and nature of any settlements. We cannot currently provide an estimate of the range of possible outcomes. For more information relating to certain income tax audits, please refer to note 13 "GuaranteesNote 14 “Guarantees and Contingencies".Contingencies.”
As at December 31, 2017,of September 30, 2022, we have provided $28.0recognized a provision of $20.7 million (June 30, 2017—2022—$22.119.9 million) in respect of both additional foreign taxes or deferred income tax liabilities for temporary differences related to the undistributed earnings of certain non-United States subsidiaries and planned periodic repatriations from certain United States and German subsidiaries, that will be subject to withholding taxes upon distribution. We have not provided for additional foreign withholding taxes or deferred income tax liabilities related to undistributed earnings of all other non-Canadian subsidiaries, since such earnings are considered permanently invested in those subsidiaries or are not subject to withholding taxes. It is not practicable to reasonably estimate the amount of additional deferred income tax liabilities or foreign withholding taxes that may be payable should these earnings be distributed in the future.
The effective tax rate decreased to a provision of 38.5% for the three months ended December 31, 2017, compared to a provision of 40.6% for the three months ended December 31, 2016. The increase in tax expense of $22.3 million was primarily due to (i) the impact of changes in US tax legislation in Fiscal 2018 resulting in a provisional charge of $15.3 million (see below), (ii) an increase of $13.3 million on account of the Company having higher income before taxes, including the impact of foreign tax rates, and (iii) an increase of $1.6 million resulting from the reversals of reserves in Fiscal 2017 that did not reoccur in Fiscal 2018, offset by (i) a decrease of $4.8 million relating to differences in tax filings from provisions, and (ii) a decrease of $1.1 million relating to a decrease in amortization of deferred charges. The remainder of the difference was due to normal course movements and non-material items.
The effective tax rate increased to a provision of 39.8% for the six months ended December 31, 2017, compared to a recovery of 640.6% for the six months ended December 31, 2016. The increase in tax expense of $909.1 million was primarily due to (i) a significant tax benefit of $876.1 million resulting from the Fiscal 2017 internal reorganization as described below which did not reoccur in Fiscal 2018, (ii) the impact of changes in US tax legislation in Fiscal 2018 resulting in a provisional charge of $15.3 million (see below), (iii) an increase of $17.1 million on account of the Company having higher income before taxes, including the impact of foreign tax rates, and (iv) an increase of $5.2 million resulting from the reversals of reserves in Fiscal 2017 that did not reoccur in Fiscal 2018, offset by (i) a decrease of $2.6 million relating to differences in tax filings from provisions, and (ii) a decrease of $2.1 million relating to a decrease in amortization of deferred charges. The remainder of the difference was due to normal course movements and non-material items.
In July 2016, we implemented a reorganization of our subsidiaries worldwide with the view to continuing to enhance operational and administrative efficiencies through further consolidated ownership, management, and development of our intellectual property (IP) in Canada, continuing to reduce the number of entities in our group and working towards our objective of having a single operating legal entity in each jurisdiction. A significant tax benefit of $876.1 million, associated primarily with the recognition of a net deferred tax asset arising from the entry of the IP into Canada, was recognized in the first quarter of Fiscal 2017. For more information relating to this, please refer to our Annual Report on Form 10-K for the year ended June 30, 2017.
On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act, which significantly changes the existing US tax laws, including a reduction in the federal corporate tax rate from 35% to 21%, and the transition of US international taxation from a worldwide tax system to a territorial tax system. As a result of the enactment of the legislation, the Company incurred a provisional one-time tax expense of $15.3 million in the second quarter of Fiscal 2018, primarily related to the transition tax on accumulated foreign earnings and the re-measurement of certain deferred tax assets and liabilities. The portion of this anticipated increase to tax expense attributable to the transition tax is payable over a period of up to eight years. The impact of the $15.3 million adjustment resulting from the US legislation on the effective tax rate is an increase of 11.1% for the three months ended December 31, 2017 and 7.6% for the six months ended December 31, 2017.
The $15.3 million is a provisional amount in respect of rate change, Alternative Minimum Tax (AMT), and foreign earnings in accordance with Staff Accounting Bulletin 118 “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (SAB 118). The finalization of the provisional one-time amount is pending finalization of the re-assessment of the timing of reversals of certain deferred tax assets and liabilities and additional considerations related to undistributed foreign earnings and evaluating whether any portion of our existing AMT credit carryforwards are not expected to be refundable as a result of the repeal of corporate AMT. Additional information such as final Fiscal 2018 income and detailed earnings and profits calculations for foreign subsidiaries may result in changes to the provisional amount during the SAB 118 measurement period.
The Company continues to assess the impact of the new law on its consolidated financial statements and anticipates finalizing the determination on or before December 22, 2018 in accordance with SAB 118.
NOTE 15—16—FAIR VALUE MEASUREMENT
ASC Topic 820 “Fair Value Measurement” (Topic 820) defines fair value, establishes a framework for measuring fair value, and addresses disclosure requirements for fair value measurements. Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value, in this context, should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including our own credit risk.
In addition to defining fair value and addressing disclosure requirements, Topic 820 establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which are determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
•Level 1—inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
•Level 2—inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3—inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models and similar techniques.
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis:
Our financial assets and liabilities that are measured at fair value on a recurring basis consisted of the following types of instruments as of December 31, 2017September 30, 2022 and June 30, 2017:2022:
| | | | | | | | | | | | | | | | | |
| | | Fair Value |
| Fair Value Hierarchy | | September 30, 2022 | | June 30, 2022 |
| Financial Assets (Liabilities): | | | | | |
| Designated as Hedging Instruments | | | | | |
| Cash flow hedge (Note 17) | Level 2 | | $ | (4,637) | | | $ | (892) | |
| | | | | |
| Not Designated as Hedging Instruments | | | | | |
| Deal-contingent forward contracts (Note 17) | Level 3 | | $ | (125,331) | | | $ | — | |
| Non-contingent forward contract (Note 17) | Level 2 | | $ | (26,203) | | | $ | — | |
| Cross currency swap contract (Note 17) | Level 2 | | $ | (29,927) | | | $ | — | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | June 30, 2017 |
| | | | Fair Market Measurements using: | | | | Fair Market Measurements using: |
| | December 31, 2017 | | Quoted prices in active markets for identical assets/ (liabilities) | | Significant other observable inputs | | Significant unobservable inputs | | June 30, 2017 | | Quoted prices in active markets for identical assets/ (liabilities) | | Significant other observable inputs | | Significant unobservable inputs |
| (Level 1) | | (Level 2) | | (Level 3) | | (Level 1) | | (Level 2) | | (Level 3) |
| Financial Assets: | | | | | | | | | | | | | | | |
| Marketable securities | N/A |
| | N/A | | N/A |
| | N/A | | $ | 3,023 |
| | N/A | | $ | 3,023 |
| | N/A |
| Derivative financial instrument asset (note 16) | 1,078 |
| | N/A | | 1,078 |
| | N/A | | 1,174 |
| | N/A | | 1,174 |
| | N/A |
| | $ | 1,078 |
| | N/A | | $ | 1,078 |
| | N/A | | $ | 4,197 |
| | N/A | | $ | 4,197 |
| | N/A |
The following tables provides a reconciliation of changes in the fair value of our Level 3 deal-contingent foreign currency forward contract between June 30, 2022 and September 30, 2022.
| | | | | | | | |
| | Deal-contingent foreign currency forward contract |
| Balance as of June 30, 2022 | | $ | — | |
| Gain (loss) recognized in income | | (125,331) | |
| Balance as of September 30, 2022 | | $ | (125,331) | |
Our valuation techniques used to measure the fair valuesvalue of theour Level 2 and Level 3 derivative instruments, the counterpartycounterparties to which hashave high credit ratings, were derived from pricing models including discounted cash flow techniques, with all significant inputs derived from or corroborated by observable market data, as no quoted market prices exist for these instruments. Our discounted cash flow techniques use observable market inputs, such as, where applicable, foreign currency spot and forward rates. The valuation technique for our Level 3 derivative instrument utilizes management estimates related to the probability and timing of our proposed Micro Focus Acquisition that are unobservable, and are not deemed to be significant inputs for the overall valuation.
Our cash and cash equivalents, along with our accounts receivable and accounts payable and accrued liabilities balances, are measured and recognized in our Condensed Consolidated Financial Statements at an amount that approximates theirthe fair value (a Level 2 measurement) due to their short maturities.
The fair value of our Senior Notes is determined based on observable market prices and categorized as a Level 2 measurement. As of September 30, 2022, the fair value was $2.6 billion (June 30, 2022—$2.8 billion). The carrying value of our other long-term debt facilities approximates the fair value since the interest rate is at market. Please see Note 11 “Long-Term Debt” for further details.
If applicable, we will recognize transfers between levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurs. During the three and six months ended December 31, 2017September 30, 2022 and 2016, 2021, respectively, we did not have any transfers between Level 1, Level 2 or Level 3.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We measure certain assets and liabilities at fair value on a nonrecurring basis. These assets and liabilities are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the three and six months ended December 31, 2017September 30, 2022 and 2016,2021, respectively, no indications of impairmentimpairments were identified and therefore no fair value measurements were required.
Marketable Securities
Marketable securities are classified as available for sale securities and are recorded within "Other assets" on our Condensed Consolidated Balance Sheets at fair value with unrealized gains or losses reported as a separate component of Accumulated other comprehensive income. We did not hold any marketable securities as of December 31, 2017.
A summary of our marketable securities outstanding as of December 31, 2017 and June 30, 2017 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2017 | | As of June 30, 2017 |
| | Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Estimated Fair Value | | Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Estimated Fair Value |
| Marketable securities | N/A | | N/A | | N/A | | N/A | | $ | 2,406 |
| | $ | 617 |
| | $ | — |
| | $ | 3,023 |
|
NOTE 16—17—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Foreign Currency Forward ContractsCash Flow Hedge
We are engaged in hedging programs with various banks to limit the potential foreign exchange fluctuations incurred on future cash flows relating to a portion of our Canadian dollar payroll expenses. We operate internationally and are therefore exposed to foreign currency exchange rate fluctuations in the normal course of our business, in particular to changes in the Canadian dollar on account of large costs that are incurred from our centralized Canadian operations, which are denominated in Canadian dollars. As part of our risk management strategy, we use foreign currency forward contracts to hedge portions of our payroll exposure with typical maturities of between one and twelve months. We do not use derivativesforeign currency forward contracts for speculative purposes.
We have designated these transactions as cash flow hedges of forecasted transactions under ASC Topic 815 “Derivatives and Hedging” (Topic 815). As the critical terms of the hedging instrument and of the entire hedged forecasted transaction are the same, in accordance with Topic 815, we have been able to conclude that changes in fair value or cash flows attributable to the risk being hedged are expected to completely offset at inception and on an ongoing basis. Accordingly, quarterly unrealized gains or losses on the effective portion of these forward contracts have been included within other comprehensive income. The“Other Comprehensive Income (Loss) - net.” As of September 30, 2022, the fair value of the contracts as of December 31, 2017, is recorded within "Prepaid expenses“Accounts payable and accrued liabilities” and represents the net loss before tax effect that is expected to be reclassified from accumulated other current assets”.comprehensive income (loss) into earnings with the next twelve months.
As of December 31, 2017,September 30, 2022, the notional amount of forward contracts we held to sell U.S. dollars in exchange for Canadian dollars was $46.8$79.0 million (June(June 30, 2017—2022—$39.066.5 million).
Non-designated Hedges
In connection with the Micro Focus Acquisition, in August 2022, the Company entered into certain derivative transactions to meet certain foreign currency obligations under UK cash confirmation requirements related to the purchase price of the proposed Micro Focus Acquisition, mitigate the risk of foreign currency appreciation in the GBP denominated purchase price and mitigate the risk of foreign currency appreciation in the EUR denominated existing debt held by Micro Focus. The Company entered into the following derivatives: (i) three deal-contingent forward contracts, (ii) a non-contingent forward contract, and (iii) EUR/USD cross currency swaps.
The deal-contingent forward contracts have an aggregate notional amount of £1.475 billion, and settlement is contingent upon closing the Micro Focus Acquisition. The non-contingent forward contract has a notional amount of £350 million. The cross currency swaps are comprised of a 5 year EUR/USD cross currency swap with a notional amount of €690 million). and a 7 year EUR/USD cross currency swap with a notional amount of €690 million.
These instruments were entered into as economic hedges to mitigate foreign currency risks associated with the proposed Micro Focus Acquisition. The instruments do not qualify for hedge accounting at inception. Derivative financial instruments that do not apply hedge accounting are recognized on the Condensed Consolidated Balance Sheets as either assets or liabilities. As of September 30, 2022, the forward contracts and the foreign currency swaps are in a net liability position and are classified within “Accounts payable and accrued liabilities.” The forward contracts and cross currency swaps are measured at fair value with changes to fair value being recognized in the Condensed Consolidated Statements of Income within “Other income (expense), net.”
Fair Value of Derivative Instruments and Effect of Derivative Instruments on Financial Performance
The effectfair values of theseoutstanding derivative instruments are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of
September 30, 2022 | | As of
June 30, 2022 |
| Instrument | | Balance Sheet Location | | Asset | | Liability | | Asset | | Liability |
| Derivatives designated as hedges: | | | | | | | | | | |
| Cash flow hedge | | Accounts payable and accrued liabilities | | $ | — | | | $ | (4,637) | | | $ | — | | | $ | (892) | |
| Total derivatives designated as hedges: | | | | $ | — | | | $ | (4,637) | | | $ | — | | | $ | (892) | |
| | | | | | | | | | |
| Derivatives not designated as hedges: | | | | | | | | | | |
| Deal-contingent forward contracts | | Accounts payable and accrued liabilities | | — | | | (125,331) | | | — | | | — | |
| Non-contingent forward contract | | Accounts payable and accrued liabilities | | — | | | (26,203) | | | — | | | — | |
| Cross currency swap contracts | | Accounts payable and accrued liabilities | | — | | | (29,927) | | | — | | | — | |
| Total derivatives not designated as hedges: | | | | $ | — | | | $ | (181,461) | | | $ | — | | | $ | — | |
| Total derivatives | | | | $ | — | | | $ | (186,098) | | | $ | — | | | $ | (892) | |
The effects of gains (losses) from derivative instruments on our Condensed Consolidated Financial Statements forof Income is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, |
| Instrument | | Income Statement Location | | 2022 | | 2021 |
| Derivatives designated as hedges: | | | | | | |
| Cash flow hedges | | Operating expenses | | $ | (800) | | | $ | 390 | |
| | | | | | |
| Derivatives not designated as hedges: | | | | | | |
| Deal-contingent forward contract | | Other income (expense), net | | (125,331) | | | — | |
| Non-contingent forward contract | | Other income (expense), net | | (26,203) | | | — | |
| Cross currency swap contracts | | Other income (expense), net | | (29,927) | | | — | |
| Total | | | | $ | (182,261) | | | $ | 390 | |
The effects of the periods indicated below were as follows (amounts presented do not include any income tax effects).
Fair Value of Derivative Instruments in thecash flow hedges on our Condensed Consolidated Balance Sheets (see note 15 "Fair Value Measurement")Statements of Comprehensive Income:
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, |
| Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income Location | | 2022 | | 2021 |
| Gain (loss) recognized in OCI (loss) on derivatives (effective portion) | Unrealized gain (loss) on cash flow hedges | | $ | (4,546) | | | $ | (1,477) | |
Gain (loss) reclassified from AOCI into income (effective portion) | Operating expenses | | $ | (800) | | | $ | 390 | |
|
| | | | | | | | |
| | | As of December 31, 2017 | | As of June 30, 2017 |
| Derivatives | Balance Sheet Location | Fair Value
Asset (Liability) | | Fair Value
Asset (Liability) |
| Foreign currency forward contracts designated as cash flow hedges | Prepaid expenses and other current assets | $ | 1,078 |
| | $ | 1,174 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three and Six Months Ended December 31, 2017 |
| Derivatives in Cash Flow Hedging Relationship | Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion) | | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Location of Gain or (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) | | Amount of Gain or (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
| | Three Months Ended December 31, 2017 | | Six Months Ended December 31, 2017 | | | | Three Months Ended December 31, 2017 | | Six Months Ended December 31, 2017 | | | | Three Months Ended December 31, 2017 | | Six Months Ended December 31, 2017 |
| Foreign currency forward contracts | $ | (228 | ) | | $ | 1,520 |
| | Operating
expenses | | $ | 532 |
| | $ | 1,616 |
| | N/A | | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | |
| Three and Six Months Ended December 31, 2016 |
| Derivatives in Cash Flow Hedging Relationship | Amount of Gain or (Loss)
Recognized in OCI on
Derivatives
(Effective
Portion) | | Location of
Gain or (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion) | | Amount of Gain or
(Loss) Reclassified from
Accumulated OCI into
Income (Effective
Portion) | | Location of
Gain or (Loss)
Recognized
in Income on
Derivatives
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing) | | Amount of Gain or (Loss) Recognized in
Income on Derivatives
(Ineffective Portion
and Amount Excluded
from Effectiveness
Testing) |
| | Three Months Ended December 31, 2016 | | Six Months Ended December 31, 2016 | | | | Three Months Ended December 31, 2016 | | Six Months Ended December 31, 2016 | | | | Three Months Ended December 31, 2016 | | Six Months Ended December 31, 2016 |
| Foreign currency forward contracts | $ | (950 | ) | | $ | (1,433 | ) | | Operating
expenses | | $ | 124 |
| | $ | 146 |
| | N/A | | $ | — |
| | $ | — |
|
NOTE 17—18—SPECIAL CHARGES (RECOVERIES)
Special charges (recoveries) include costs and recoveries that relate to certain restructuring initiatives that we have undertaken from time to time under our various restructuring plans, as well as acquisition-related costs and other charges.
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | |
| 2022 | | 2021 | | | | |
| Fiscal 2022 Restructuring Plan | $ | 6,110 | | | $ | — | | | | | |
| Other historical restructuring plans | (468) | | | (602) | | | | | |
| Acquisition-related costs | 4,585 | | | 728 | | | | | |
| Other charges (recoveries) | 4,054 | | | 218 | | | | | |
| Total | $ | 14,281 | | | $ | 344 | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Fiscal 2018 Restructuring Plan | $ | 1,965 |
| | $ | — |
| | $ | 8,354 |
| | $ | — |
|
| Fiscal 2017 Restructuring Plan | (942 | ) | | 761 |
| | 3,422 |
| | 1,856 |
|
| Restructuring Plans prior to Fiscal 2017 Restructuring Plan | 339 |
| | (2,627 | ) | | 256 |
| | (1,804 | ) |
| Acquisition-related costs | 1,197 |
| | 3,892 |
| | 3,453 |
| | 10,666 |
|
| Other charges (recoveries) | (1,844 | ) | | 9,091 |
| | 3,261 |
| | 12,853 |
|
| Total | $ | 715 |
| | $ | 11,117 |
| | $ | 18,746 |
| | $ | 23,571 |
|
Fiscal 20182022 Restructuring Plan
During the firstthird quarter of Fiscal 2018 and in the context2022, as part of our acquisitions of Covisint and Guidance (each defined below),return to office planning, we beganmade a strategic decision to implement restructuring activities to streamline our operations (collectively referred to asand further reduce our real estate footprint around the Fiscal 2018world (Fiscal 2022 Restructuring Plan). The Fiscal 20182022 Restructuring Plan charges will relate to facility costs and workforce reductionsreductions. Facility costs will include the accelerated amortization associated with the abandonment of ROU assets, the write-off of fixed assets and facility consolidations.other related variable lease and exit costs. These charges require management to make certain judgments and estimates regarding the amount and timing of restructuring charges or recoveries. Our estimated liability could change subsequent to its recognition, requiring adjustments to the expense and the liability recorded. On a quarterly basis, we conduct an evaluation of the related liabilities and expenses and revise our assumptions and estimates as appropriate.
During the three months ended September 30, 2022, we recognized costs of $3.8 million related to abandoned office space that have been early terminated or assigned to a third party, of which $2.9 million was related to the write-off of right of use assets.
As of December 31, 2017,September 30, 2022, we expect total costs to be incurred in conjunctionconnection with the Fiscal 20182022 Restructuring Planto be approximately $12.0$40.0 million to $45.0 million, of which $8.4$31.9 million has already been recorded within "Special“Special charges (recoveries)"” to date.
A reconciliation of the beginning and ending restructuring liability, which is included within “Accounts payable and accrued liabilities”in our Condensed Consolidated Balance Sheets, for the sixthree months ended December 31, 2017September 30, 2022 is shown below. |
| | | | | | | | | | | |
| Fiscal 2018 Restructuring Plan | Workforce reduction | | Facility costs | | Total |
| Balance payable as at June 30, 2017 | $ | — |
| | $ | — |
| | $ | — |
|
| Accruals and adjustments | 7,535 |
| | 819 |
| | 8,354 |
|
| Cash payments | (7,859 | ) | | (73 | ) | | (7,932 | ) |
| Foreign exchange and other non-cash adjustments | 930 |
| | 6 |
| | 936 |
|
| Balance payable as at December 31, 2017 | $ | 606 |
| | $ | 752 |
| | $ | 1,358 |
|
Fiscal 2017 Restructuring Plan
During Fiscal 2017 and in the context of our acquisitions of Recommind, CCM Business and ECD Business (each as defined below), we began to implement restructuring activities to streamline our operations (collectively referred to as the Fiscal 2017 Restructuring Plan). The Fiscal 2017 Restructuring Plan charges relate to workforce reductions and facility consolidations. These charges require management to make certain judgments and estimates regarding the amount and timing of restructuring charges or recoveries. Our estimated liability could change subsequent to its recognition, requiring adjustments to the expense and the liability recorded. On a quarterly basis, we conduct an evaluation of the related liabilities and expenses and revise our assumptions and estimates as appropriate.
As of December 31, 2017, we expect total costs to be incurred in conjunction with the Fiscal 2017 Restructuring Plan to be approximately $45.0 million, of which $37.0 million has already been recorded within "Special charges (recoveries)" to date.
A reconciliation of the beginning and ending liability for the six months ended December 31, 2017 is shown below.
| | | Fiscal 2017 Restructuring Plan | Workforce reduction | | Facility costs | | Total | |
| Balance payable as at June 30, 2017 | $ | 10,045 |
| | $ | 1,369 |
| | $ | 11,414 |
| |
| Fiscal 2022 Restructuring Plan | | Fiscal 2022 Restructuring Plan | Workforce reduction | | Facility charges | | Total |
| Balance payable as of June 30, 2022 | | Balance payable as of June 30, 2022 | $ | 989 | | | $ | 5,410 | | | $ | 6,399 | |
| Accruals and adjustments | 2,880 |
| | 542 |
| | 3,422 |
| Accruals and adjustments | 2,270 | | | 952 | | | 3,222 | |
| Cash payments | (10,539 | ) | | (914 | ) | | (11,453 | ) | Cash payments | (1,147) | | | (431) | | | (1,578) | |
| Foreign exchange and other non-cash adjustments | 600 |
| | 4 |
| | 604 |
| Foreign exchange and other non-cash adjustments | (120) | | | — | | | (120) | |
| Balance payable as at December 31, 2017 | $ | 2,986 |
| | $ | 1,001 |
| | $ | 3,987 |
| |
| Balance payable as of September 30, 2022 | | Balance payable as of September 30, 2022 | $ | 1,992 | | | $ | 5,931 | | | $ | 7,923 | |
Acquisition-related costs
IncludedAcquisition-related costs, recorded within "Special“Special charges (recoveries)"” include direct costs of potential and completed acquisitions. Acquisition-related costs for the three and six months ended December 31, 2017 are costs incurred directly in relation to acquisitions in the amount of $1.2September 30, 2022 were $4.6 million and $3.5 million, respectively (three and six months ended December 31, 2016—September 30, 2021—$3.9 million and $10.7 million, respectively).
Other charges (recoveries)
ERP Implementation Costs
During Fiscal 2018, we implemented a broad enterprise resource planning (ERP) system.
For the three and six months ended December 31, 2017, we recorded a recovery of $0.2 million and a charge of $3.5 million, respectively, relating to the implementation of this project (three and six months ended December 31, 2016—$2.3 million and $4.7 million, respectively)0.7 million).
Other charges (recoveries)
For the three months ended December 31, 2017, "Other recoveries" is primarily dueSeptember 30, 2022, “Other charges” includes $3.6 million, related to a recoverypre-acquisition equity incentives of $2.3Zix Corporation (Zix), which upon acquisition were replaced by equivalent value cash settlements (see Note 19 “Acquisitions”) and $0.5 million relatingrelated to certain pre-acquisition sales and use tax liabilities that were recovered outside of the acquisition's one year measurement period. This recovery was partially offset by $0.7 million ofother miscellaneous other charges.
For the six months ended December 31, 2017, "Other charges" includes a recovery of $2.3 million relating to certain pre-acquisition sales and use tax liabilities that were recovered outside of the acquisition's one year measurement period, partially offset by $2.1 million relating to miscellaneous other charges.
For the three months ended December 31, 2016, "Other charges" primarily include (i) $8.2 million relating to commitment fees and (ii) $0.1 million relating to certain interest on pre-acquisition liabilities. These charges were partially offset by (i) a recovery of $1.4 million relating to certain pre-acquisition sales and use tax liabilities being released upon becoming statute barred and (ii) a recovery ofSeptember 30, 2021, “Other charges” includes $0.2 million relatingrelated to post-acquisition integration costs necessaryother miscellaneous charges.
NOTE 19—ACQUISITIONS
Fiscal 2023 Acquisitions
Proposed Acquisition of Micro Focus
On August 25, 2022, we announced an agreement on the terms of an all-cash offer (through our wholly-owned subsidiary), to streamline an acquired companyacquire the entire issued and to be issued share capital of Micro Focus, at a price of 532 pence per share, for a total purchase price of approximately $6.0 billion, inclusive of Micro Focus’ cash and debt. The all-cash consideration for the Micro Focus Acquisition is expected to be funded by new debt, cash on hand and a draw on our Revolver. Concurrent with the announcement of the Micro Focus Acquisition, the Company entered into our operations. The remaining amounts relate to miscellaneous other charges.
For the sixAcquisition Term Loan and Bridge Loan (see Note 11 “Long-Term Debt”) as well as certain derivative transactions (see Note 17 “Derivative Instruments and Hedging Activities”). These derivative transactions were marked-to-market during the three months ended December 31, 2016, "Other charges" primarily include (i) $9.2 million relatingSeptember 30, 2022, with the resulting unrealized gains (losses) on these derivatives recognized in other income (expense) within our Condensed Consolidated Statements of Income (see Note 22 “Other Income (Expense), Net”). On October 18, 2022 the shareholders of Micro Focus approved the all-cash offer. The Micro Focus Acquisition is expected to commitment fees and (ii) $1.1 million relatingclose in the first quarter of calendar 2023, subject to post-acquisition integrationthe satisfaction (or, where applicable, waiver) of certain conditions. See Part II, Item 1A, “Risk Factors” included within this Quarterly Report on Form 10-Q.
Acquisition-related costs necessary to streamline an acquired company into our operations. These chargesfor Micro Focus included in “Special Charges (Recoveries)” in the Condensed Consolidated Financial Statements for the three months ended September 30, 2022 were partially offset by a recovery of $2.6 million relating to certain pre-acquisition sales and use tax liabilities being released upon becoming statute barred. The remaining amounts relate to miscellaneous other charges.
NOTE 18—ACQUISITIONS$4.4 million.
Fiscal 20182022 Acquisitions
Acquisition of Guidance Software, Inc.Zix Corporation
On September 14, 2017,December 23, 2021, we acquired all of the equity interest in Guidance,Zix, a leading provider of forensic securityleader in software as a service (SaaS) based email encryption, threat protection and compliance cloud solutions for approximately $240.5 million.small and medium-sized businesses (SMB). Total consideration for Zix was $894.5 million paid in cash, inclusive of cash acquired and $18.6 million relating to the cash settlement of pre-acquisition vested share-based compensation that was previously accrued but since paid as of March 31, 2022. In accordance with ASCAccounting Standards Codification (ASC) Topic 805 "Business Combinations"“Business Combinations” (Topic 805), this acquisition was accounted for as a business combination. We believe thisthe acquisition complementsincreases our position in the data protection, threat management, email security and extends our Enterprise Information Management (EIM) portfolio.compliance solutions spaces.
The results of operations of this acquisitionZix have been consolidated with those of OpenText beginning September 14, 2017.
The following tables summarize the preliminary consideration paid for Guidance and the amount of the assets acquired and liabilities assumed, as well as the goodwill recorded as of the acquisition date:
|
| | | |
| Cash consideration* | $ | 237,291 |
|
| Guidance shares already owned by OpenText through open market purchases (at fair value) | 3,247 |
|
| Preliminary purchase consideration | $ | 240,538 |
|
*Inclusive of $2.3 million accrued for but unpaid as of December 31, 2017. See "Appraisal Proceedings" below for more information.
23, 2021.
Preliminary Purchase Price Allocation
The recognized amounts of identifiable assets acquired and liabilities assumed, based uponon their preliminary fair values as of September 14, 2017,December 23, 2021, are set forth below:
|
| | | |
| Current assets (inclusive of cash acquired of $5.7 million) | $ | 24,754 |
|
| Non-current tangible assets | 10,540 |
|
| Intangible customer assets | 71,230 |
|
| Intangible technology assets | 51,851 |
|
| Liabilities assumed | (48,776 | ) |
| Total identifiable net assets | 109,599 |
|
| Goodwill | 130,939 |
|
| Net assets acquired | $ | 240,538 |
|
| | | | | |
| Current assets (inclusive of cash acquired of $38.3 million) | $ | 74,230 | |
| Non-current tangible assets | 13,450 | |
| Intangible customer assets | 212,400 | |
| Intangible technology assets | 92,650 | |
| Liabilities assumed | (79,941) | |
| Total identifiable net assets | 312,789 | |
| Goodwill | 581,672 | |
| Net assets acquired | $ | 894,461 | |
The goodwill of $130.9$581.7 million is primarily attributable to the synergies expected to arise after the acquisition. Of this goodwill, approximately $1.9 millionThere is expected to be deductible for tax purposes.
Included in total identifiable net assets is acquired deferred revenue with a fair value of $26.6 million, which represents our estimate of the fair value of the contractual obligations assumed based on a preliminary valuation. In arriving at this fair value, we reduced the acquired company’s original carrying value by $7.6 million.
The fair value of current assets acquired includes accounts receivable with a fair value of $10.3 million. The gross amount receivable was $11.8$103.7 million of which $1.5 million of this receivablegoodwill that is expected to be uncollectible.
An amount of $0.8 million, representing the mark to market gain on the shares we held in Guidance prior to the acquisition, was recorded to "Other income" in our Condensed Consolidated Statements of Income for the six months ended December 31, 2017.
Acquisition-related costs for Guidance included in "Special charges (recoveries)" in the Condensed Consolidated Financial Statements for the three and six months ended December 31, 2017 were $1.1 million and $2.3 million, respectively.
The acquisition had no significant impact on revenues and net earnings for the three and six months ended December 31, 2017 since the date of acquisition.
Pro forma results of operations for this acquisition have not been presented because they are not material to the consolidated results of operations.
The finalization of the purchase price allocation is pending the finalization of the valuation of fair value for assets acquired and liabilities assumed, including tax balances. We expect to finalize this determination on or before September 30, 2018.
Appraisal Proceedings
Under Section 262 of the Delaware General Corporation Law, shareholders who did not tender their shares in connection with our tender offer were entitled to have their shares appraised by the Delaware Court of Chancery and receive payment of the “fair value” of such shares. On August 31, 2017 we received notice from the record holder of approximately 1,519,569 shares or 5% of the issued and outstanding Guidance shares as of the date of acquisition, demanding an appraisal of the fair value of Guidance shares as they believed the price we paid for Guidance shares was less than its fair value. We accrued $10.8 million in connection with these claims, which is equivalent to paying $7.10 per Guidance share, the amount these Guidance shareholders otherwise would have received had they tendered their shares in our offer. During the second quarter of Fiscal 2018, we paid $8.5 million to the trust account of dissenting shareholders’ attorney, leaving $2.3 million accrued and unpaid for this matter. The amount accrued has been included within "Accounts payable and accrued liabilities" in the Condensed Consolidated Balance Sheets, with no impact to our Condensed Consolidated Statements of Income provided the courts rule within the open measurement period of 12 months from acquisition date.
Acquisition of Covisint Corporation
On July 26, 2017, we acquired all of the equity interest in Covisint, a leading cloud platform for building Identity, Automotive, and Internet of Things applications, for approximately $102.8 million. In accordance with Topic 805, this acquisition was accounted for as a business combination. We believe this acquisition complements and extends our EIM portfolio.
The results of operations of this acquisition have been consolidated with those of OpenText beginning July 26, 2017.
Preliminary Purchase Price Allocation
The recognized amounts of identifiable assets acquired and liabilities assumed, based upon their preliminary fair values as of July 26, 2017, are set forth below: |
| | | |
| Current assets (inclusive of cash acquired of $31.5 million) | $ | 41,586 |
|
| Non-current tangible assets | 3,426 |
|
| Intangible customer assets | 36,600 |
|
| Intangible technology assets | 17,300 |
|
| Liabilities assumed | (23,033 | ) |
| Total identifiable net assets | 75,879 |
|
| Goodwill | 26,905 |
|
| Net assets acquired | $ | 102,784 |
|
The goodwill of $26.9 million is primarily attributable to the synergies expected to arise after the acquisition. Of this goodwill, approximately $26.8 million is expected to be deductible for tax purposes.
Included in total identifiable net assets is acquired deferred revenue with a fair value of $12.2 million, which represents our estimate of the fair value of the contractual obligations assumed based on a preliminary valuation. In arriving at this fair value, we reduced the acquired company’s original carrying value by $4.6 million.
The fair value of current assets acquired includes accounts receivable with a fair value of $7.8 million. The gross amount receivable was $7.9 million of which $0.1 million of this receivable is expected to be uncollectible.
Acquisition-related costs for Covisint included in "Special charges (recoveries)" in the Condensed Consolidated Financial Statements for the three and six months ended December 31, 2017 were $0.1 million and $0.9 million, respectively.
The acquisition had no significant impact on revenues and net earnings for the three and six months ended December 31, 2017 since the date of acquisition.
Pro forma results of operations for this acquisition have not been presented because they are not material to the consolidated results of operations.
The finalization of the purchase price allocation is pending the finalization of the valuation of fair value for assets acquired and liabilities assumed, including tax balances. We expect to finalize this determination on or before June 30, 2018.
Fiscal 2017 Acquisitions
Purchase of an Asset Group Constituting a Business - ECD Business
On January 23, 2017, we acquired certain assets and assumed certain liabilities of the enterprise content division of EMC Corporation, a Massachusetts corporation, and certain of its subsidiaries, collectively referred to as Dell-EMC (ECD Business) for approximately $1.62 billion. In accordance with Topic 805, this acquisition was accounted for as a business combination. ECD Business offers OpenText a suite of leading Enterprise Content Management solutions with deep industry focus, including the DocumentumTM, InfoArchiveTM, and LEAPTM product families. We believe this acquisition complements and extends our EIM portfolio.
The results of operations of this acquisition were consolidated with those of OpenText beginning January 23, 2017.
Purchase Price Allocation
The recognized amounts of identifiable assets acquired and liabilities assumed, based upon their fair values as of January 23, 2017, are set forth below: |
| | | |
| Current assets | $ | 11,339 |
|
| Non-current tangible assets | 103,672 |
|
| Intangible customer assets | 407,000 |
|
| Intangible technology assets | 459,000 |
|
| Liabilities assumed | (182,301 | ) |
| Total identifiable net assets | 798,710 |
|
| Goodwill | 823,684 |
|
| Net assets acquired | $ | 1,622,394 |
|
The goodwill of $823.7 million is primarily attributable to the synergies expected to arise after the acquisition. Of this goodwill, approximately $378.5 million is expected to be deductible for tax purposes.
Included in total identifiable net assets is acquired deferred revenue with a fair value of $163.8 million, which represents our estimate of the fair value of the contractual obligations assumed based on a preliminary valuation. In arriving at this fair value, we reduced the acquired company’s original carrying value by $52.0 million.
Further, included within total identifiable net assets are also certain contract assets which represent revenue earned by the ECD Business on long-term projects for which billings had not yet occurred as of January 23, 2017. As these long-term projects have now been inherited by OpenText, we will be responsible for billing and collecting cash on these projects at the appropriate time, yet we will not recognize revenue for these billings. The fair value assigned to these contract assets as of January 23, 2017 was $8.4 million.
Purchase of an Asset Group Constituting a Business - CCM Business
On July 31, 2016, we acquired certain customer communications management software and services assets and liabilities from HP Inc. (CCM Business) for approximately $315.0 million. In accordance with Topic 805, this acquisition was accounted for as a business combination. We believe this acquisition complements our current software portfolio, and allows us to better serve our customers by offering a wider set of CCM capabilities.
The results of operations of this acquisition were consolidated with those of OpenText beginning July 31, 2016.
Purchase Price Allocation
The recognized amounts of identifiable assets acquired and liabilities assumed, based upon their fair values as of July 31, 2016, are set forth below: |
| | | |
| Current assets | $ | 683 |
|
| Non-current deferred tax asset | 11,861 |
|
| Non-current tangible assets | 2,348 |
|
| Intangible customer assets | 64,000 |
|
| Intangible technology assets | 101,000 |
|
| Liabilities assumed | (38,090 | ) |
| Total identifiable net assets | 141,802 |
|
| Goodwill | 173,198 |
|
| Net assets acquired | $ | 315,000 |
|
The goodwill of $173.2 million is primarily attributable to the synergies expected to arise after the acquisition. Of this goodwill, approximately $105.1 million is expected to be deductible for tax purposes.
Acquisition of Recommind, Inc.
On July 20, 2016, we acquired all of the equity interest in Recommind, Inc. (Recommind), a leading provider of eDiscovery and information analytics, for approximately $170.1 million. In accordance with Topic 805, this acquisition was accounted for as a business combination. We believe this acquisition complements our EIM solutions, and through eDiscovery and analytics, provides increased visibility into structured and unstructured data.
The results of operations of Recommind, were consolidated with those of OpenText beginning July 20, 2016.
Purchase Price Allocation
The recognized amounts of identifiable assets acquired and liabilities assumed, based upon their fair values as of July 20, 2016, are set forth below:
|
| | | |
| Current assets | $ | 30,034 |
|
| Non-current tangible assets | 1,245 |
|
| Intangible customer assets | 51,900 |
|
| Intangible technology assets | 24,800 |
|
| Long-term deferred tax liabilities | (1,780 | ) |
| Other liabilities assumed | (27,497 | ) |
| Total identifiable net assets | 78,702 |
|
| Goodwill | 91,405 |
|
| Net assets acquired | $ | 170,107 |
|
The goodwill of $91.4 million is primarily attributable to the synergies expected to arise after the acquisition. No portion of this goodwill is expected to be deductible for tax purposes.
The fair value of current assets acquired includes accounts receivable with a fair value of $28.7$28.4 million. The gross amount receivable was $29.6$32.7 million, of which $0.9$4.3 million of this receivable wasis expected to be uncollectible.
Acquisition-related costs for Zix included in “Special Charges (Recoveries)” in the Condensed Consolidated Financial Statements for the three months ended September 30, 2022 were $0.2 million.
Pre-acquisition equity incentives of $26.4 million were replaced upon acquisition by equivalent value cash settlements to be settled in accordance with the original vesting dates, primarily over the next two years. Of these equity incentives, $3.6 million for the three months ended September 30, 2022 were included in “Special Charges (Recoveries).”
The finalization of the above purchase price allocation is pending the finalization of the valuation of fair value for the assets acquired and liabilities assumed, including intangible assets and taxation-related balances as well as for potential unrecorded liabilities. We expect to finalize this determination during our quarter ending December 31, 2022.
Acquisition of Bricata Inc.
On November 24, 2021, we acquired all of the equity interest in Bricata Inc. (Bricata) for $17.8 million. In accordance with Topic 805, this acquisition was accounted for as a business combination. We believe the acquisition strengthens our OpenText Security and Protection Cloud with Network Detection and Response technologies.
The results of operations of Bricata have been consolidated with those of OpenText beginning November 24, 2021.
NOTE 19—20—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustments | | Cash Flow Hedges | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income (Loss) |
| Balance as of June 30, 2022 | $ | (3,316) | | | $ | (656) | | | $ | (3,687) | | | $ | (7,659) | |
| Other comprehensive income (loss) before reclassifications, net of tax | (36,366) | | | (3,340) | | | 4,164 | | | (35,542) | |
| Amounts reclassified into net income, net of tax | — | | | 588 | | | 37 | | | 625 | |
| Total other comprehensive income (loss) net, for the period | (36,366) | | | (2,752) | | | 4,201 | | | (34,917) | |
| Balance as of September 30, 2022 | $ | (39,682) | | | $ | (3,408) | | | $ | 514 | | | $ | (42,576) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustments | | Cash Flow Hedges | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income (Loss) |
| Balance as of June 30, 2021 | $ | 75,408 | | | $ | 830 | | | $ | (10,000) | | | $ | 66,238 | |
| Other comprehensive income (loss) before reclassifications, net of tax | (10,092) | | | (1,086) | | | (1,049) | | | (12,227) | |
| Amounts reclassified into net income, net of tax | — | | | (287) | | | 162 | | | (125) | |
| Total other comprehensive income (loss) net, for the period | (10,092) | | | (1,373) | | | (887) | | | (12,352) | |
| Balance as of September 30, 2021 | $ | 65,316 | | | $ | (543) | | | $ | (10,887) | | | $ | 53,886 | |
NOTE 21—SUPPLEMENTAL CASH FLOW DISCLOSURES
| | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2022 | | 2021 |
| Cash paid during the period for interest | $ | 46,423 | | | $ | 41,659 | |
| Cash received during the period for interest | $ | 5,431 | | | $ | 838 | |
| Cash paid during the period for income taxes | $ | 38,459 | | | $ | 12,780 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Cash paid during the period for interest | $ | 34,398 |
| | $ | 24,394 |
| | $ | 64,864 |
| | $ | 53,585 |
|
| Cash received during the period for interest | $ | 247 |
| | $ | 700 |
| | $ | 541 |
| | $ | 1,470 |
|
| Cash paid during the period for income taxes | $ | 19,252 |
| | $ | 32,862 |
| | $ | 28,834 |
| | $ | 39,682 |
|
NOTE 20—22—OTHER INCOME (EXPENSE), NET
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2022 | | 2021 |
| Foreign exchange gains (losses) | $ | (1,361) | | | $ | 351 | |
Unrealized losses on derivatives not designated as hedges (1) | (181,461) | | | — | |
OpenText share in net income (losses) of equity investees (2) | (6,534) | | | 29,315 | |
| | | |
| Other miscellaneous income (expense) | 125 | | | 116 | |
| Total other income (expense), net | $ | (189,231) | | | $ | 29,782 | |
(1)Represents the unrealized losses on our derivatives not designated as hedges related to the proposed Micro Focus Acquisition (see Note 17 “Derivative Instruments and Hedging Activities” for more details).
(2)Represents our share in net income (losses) of equity investees, which approximates fair value and subject to volatility based on market trends and business conditions, based on our interest in certain investment funds in which we are a limited partner. Our interests in each of these investees range from 4% to below 20% and these investments are accounted for using the equity method (see Note 9 “Prepaid Expenses and Other Assets” for more details).
NOTE 23—EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share are computed by dividing net income (loss) attributable to OpenText, by the weighted average number of Common Shares outstanding during the period. Diluted earnings (loss) per share are computed by dividing net income (loss) attributable to OpenText, by the shares used in the calculation of basic earnings (loss) per share plus the dilutive effect of Common Share equivalents, such as stock options, using the treasury stock method. Common Share equivalents are excluded from the computation of diluted earnings (loss) per share if their effect is anti-dilutive. For periods in which we incur a net loss, our outstanding Common Share equivalents are not included in the calculation of diluted loss per share as their effect is anti-dilutive.
| | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2022 | | 2021 |
| Basic earnings (loss) per share | | | |
| Net income (loss) attributable to OpenText | $ | (116,929) | | | $ | 131,915 | |
| Basic earnings (loss) per share attributable to OpenText | $ | (0.43) | | | $ | 0.48 | |
| Diluted earnings (loss) per share | | | |
| Net income (loss) attributable to OpenText | $ | (116,929) | | | $ | 131,915 | |
| Diluted earnings (loss) per share attributable to OpenText | $ | (0.43) | | | $ | 0.48 | |
| Weighted-average number of shares outstanding (in '000's) | | | |
| Basic | 269,804 | | | 272,044 | |
| Effect of dilutive securities | — | | | 1,188 | |
| Diluted | 269,804 | | | 273,232 | |
Excluded as anti-dilutive (1) | 9,452 | | | 1,973 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| Basic earnings per share | | | | | | | | |
| Net income attributable to OpenText | $ | 85,111 |
| | $ | 45,022 |
| | $ | 121,707 |
| | $ | 957,906 |
| (1) |
| Basic earnings per share attributable to OpenText | $ | 0.32 |
| | $ | 0.18 |
| | $ | 0.46 |
| | $ | 3.92 |
| |
| Diluted earnings per share | | | | | | | | |
| Net income attributable to OpenText | $ | 85,111 |
| | $ | 45,022 |
| | $ | 121,707 |
| | $ | 957,906 |
| (1) |
| Diluted earnings per share attributable to OpenText | $ | 0.32 |
| | $ | 0.18 |
| | $ | 0.46 |
| | $ | 3.89 |
| |
| Weighted-average number of shares outstanding | | | | | | | | |
| Basic | 265,504 |
| | 245,653 |
| | 265,153 |
| | 244,282 |
| |
| Effect of dilutive securities | 1,353 |
| | 1,848 |
| | 1,396 |
| | 1,841 |
| |
| Diluted | 266,857 |
| | 247,501 |
| | 266,549 |
| | 246,123 |
| |
Excluded as anti-dilutive(2) | 2,795 |
| | 1,618 |
| | 2,635 |
| | 1,445 |
| |
(1) Please also see note 14 "Income Taxes" for details relating to a one-time tax benefit of $876.1 million recorded during the three months ended September 30, 2016 in connection with an internal reorganization of our subsidiaries.
(2)Represents options to purchase Common Shares excluded from the calculation of diluted earnings (loss) per share because the exercise price of the stock options was greater than or equal to the average price of the Common Shares during the period or the inclusion of the potential dilutive options to purchase Common Shares results in anti-dilution due to the net loss for the period.
NOTE 21—24—RELATED PARTY TRANSACTIONS
Our procedure regarding the approval of any related party transaction requires that the material facts of such transaction be reviewed by the independent members of the Audit Committee and the transaction be approved by a majority of the independent members of the Audit Committee. The Audit Committee reviews all transactions in which we are, or will be, a participant and any related party has or will have a direct or indirect interest in the transaction. In determining whether to approve a related party transaction, the Audit Committee generally takes into account, among other facts it deems appropriate, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances; the extent and nature of the related person’s interest in the transaction; the benefits to the Company of the proposed transaction; if applicable, the effects on a director’s independence; and if applicable, the availability of other sources of comparable services or products.
During the sixthree months ended December 31, 2017,September 30, 2022, Mr. Stephen Sadler, a director,member of the Board of Directors, earned$0.7 million (six $7 thousand (three months ended December 31, 2016—September 30, 2021—$0.7 million)4 thousand) in consulting fees from OpenText for assistance with acquisition-related business activities. Mr. Sadler abstained from voting on all transactions from which he would potentially derive consulting fees.
NOTE 22—25—SUBSEQUENT EVENTEVENTS
Cash Dividends
As part of our quarterly, non-cumulative cash dividend program, we declared, on January 30, 2018,November 2, 2022, a dividend of $0.1320$0.24299 per Common Share. The record date for this dividend is MarchDecember 2, 20182022 and the payment date is March 23, 2018.December 22, 2022. Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination and discretion of our Board.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 27A of the U.S. Securities Act of 1933, as amended (the Securities Act), and is subject to the safe harbors created by those sections. All statements other than statements of historical facts are statements that could be deemed forward-looking statements.
When used in this report, the words “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “may”, “could”, “would”, "might"“might”, "will"“will” and other similar language, as they relate to Open Text Corporation (“OpenText”(OpenText or the “Company”)Company), are intended to identify forward-looking statements under applicable securities laws. Specific forward-looking statements in this report include, but are not limited to:to, statements regarding: (i) statements about our focus in the fiscal year beginning July 1, 20172022 and ending June 30, 20182023 (Fiscal 2018)2023) and July 1, 2023 and ending June 30, 2024 (Fiscal 2024) on growth in earnings and cash flows; (ii) creating value through investments in broader Enterprise Information Management (EIM) capabilities; (iii) our future business plans and operations, and business planning process; (iv) statements relating to business trends; (v) statements relating to distribution; (vi) the Company’s presence in the cloud and in growth markets; (vii) our expectation to grow MSPs; (viii) product and solution developments, enhancements and releases, the timing thereof and the timing thereof; (viii)customers targeted; (ix) the Company’s financial conditions,condition, results of operations and earnings; (ix)(x) the basis for any future growth and for our financial performance; (x)(xi) declaration of quarterly dividends; (xi)(xii) future tax rates; (xii)(xiii) the changing regulatory environment including the new tax reform legislation enacted through the Tax Cuts and Jobs Act in the United States and its impact on our business; (xiii)environment; (xiv) annual recurring revenues; (xiv)(xv) research and development and related expenditures; (xv)(xvi) our building, development and consolidation of our network infrastructure; (xvi)(xvii) competition and changes in the competitive landscape; (xvii)(xviii) our management and protection of intellectual property and other proprietary rights; (xviii)(xix) existing and foreign sales and exchange rate fluctuations; (xix)(xx) cyclical or seasonal aspects of our business; (xx)(xxi) capital expenditures; (xxi)(xxii) potential legal and/or regulatory proceedings; (xxii) statements about(xxiii) acquisitions and their expected impact, including expectations regarding the financing of pending acquisitions, our ability to close on pending acquisitions and our ability to realize the benefits expected from the acquisitions and to successfully integrate the assets we acquire or utilize such assets to their full capacity, including in connection with the acquisition of Zix Corporation and the proposed Micro Focus Acquisition (see Note 19 “Acquisitions” to our Condensed Consolidated Financial Statements for more details); (xxiv) tax audits; (xxv) the expected impact of OpenText Magellanour decision to cease all direct business in Russia and OpenText Release 16;Belarus and (xxiii)with known Russian-owned companies;(xxvi) expected costs of the restructuring plans; (xxvii) targets regarding greenhouse gas emissions, waste diversion, energy consumption and Equity, Diversity and Inclusion (ED&I) initiatives; and (xxviii) other matters.
In addition, any statements or information that refer to expectations, beliefs, plans, projections, objectives, performance or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking, and based on our current expectations, forecasts and projections about the operating environment, economies and markets in which we operate. Forward-looking statements reflect our current estimates, beliefs and assumptions, which are based on management’s perception of historic trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. The forward-looking statements contained in this report are based on certain assumptions including the following: (i) countries continuing to implement and enforce existing and additional customs and security regulations relating to the provision of electronic information for imports and exports; (ii) our continued operation of a secure and reliable business network; (iii) the stability of general political, economic and market conditions, currency exchange rates,including any potential recession; (iv) our ability to manage inflation, including increased labour costs associated with attracting and retaining employees and rising interest rates; (iv)(v) our continued ability to manage certain foreign currency risk through hedging; (vi) equity and debt markets continuing to provide us with access to capital; (v)(vii) our continued ability to identify, source and sourcefinance attractive and executable business combination opportunities; and (vi)(viii) our continued compliance withability to avoid infringing third party intellectual property rights.rights; and (ix) our ability to successfully implement our restructuring plans. Management’s estimates, beliefs and assumptions are inherently subject to significant business, economic, competitive and other uncertainties and contingencies regarding future events and, as such, are subject to change. We can give no assurance that such estimates, beliefs and assumptions will prove to be correct.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to differ materially from the anticipated results, performance or achievements expressed or implied by such forward-looking statements. The risks and uncertainties that may affect forward-looking statements include, but are not limited to: (i) those relating to the failure of the Micro Focus Acquisition to be consummated on these terms or at all for any reason; (ii) those relating to the significant transaction costs incurred in connection with the Micro Focus Acquisition; (iii) the inability to obtain required governmental and regulatory approvals for the Micro Focus Acquisition; (iv) the inability of us to realize successfully any anticipated synergy benefits when the Micro Focus Acquisition is implemented; (v) the actual and potential impacts of the use of cash and incurrence of indebtedness, including the granting of security interests related to such debt, in connection with financing of the Micro Focus Acquisition; (vi) the actual and potential change in scope and size of our operations following the Micro Focus Acquisition; (vii) the uncertainty around expectations related to Micro Focus’s business prospects; (viii) actual and potential risks and uncertainties relating to the ultimate geographic spread of COVID-19, the severity of the disease and the duration of the COVID-19 pandemic and issues relating to the resurgence of COVID-19 and/
or new strains of COVID-19, including potential material adverse effects on our business, operations and financial performance; (ix) actions that have been and may be taken by governmental authorities to contain the COVID-19 pandemic or to treat its impact on our business (or failure to implement additional stimulus programs) and the availability, effectiveness and use of treatments and vaccines (including the effectiveness of boosters); (x) the actual and potential negative impacts of COVID-19 on the global economy and financial markets; (xi) integration of acquisitions and related restructuring efforts, including the quantum of restructuring charges and the timing thereof; (ii)(xii) the possibility that we may be unable to successfully integrate the assets we acquire or fail to utilize such assets to their full capacity and not realize the benefits we expect from our acquired portfolios and businesses, including the acquisition of Zix Corporation, (xiii) the potential for the incurrence of or assumption of debt in connection with acquisitions, its impact on future operations and the impact on the ratings or outlooks of rating agencies on our outstanding debt securities; (iii)securities, and the possibility of not being able to generate sufficient cash to service all indebtedness; (xiv) the possibility that the Company may be unable to meet its future reporting requirements under the Exchange Act, and the rules promulgated thereunder, or applicable Canadian securities regulation; (iv)(xv) the risks associated with bringing new products and services to market; (v)(xvi) fluctuations in currency exchange rates (including as a result of the impact of Brexit and any policy changes resulting from trade and tariff disputes) and the new U.S. administration); (vi)impact of mark-to-market valuation relating to associated derivatives; (xvii) delays in the purchasing decisions of the Company’s customers; (vii) the(xviii) competition the Company faces in its industry and/or marketplace; (viii)(xix) the final determination of litigation, tax audits (including tax examinations in Canada, the United States Canada or elsewhere) and other legal proceedings; (ix)(xx) potential exposure to greater than anticipated tax liabilities or expenses, including with respect to changes in Canadian, U.S.United States or international tax regimes; (x)(xxi) the possibility of technical, logistical or planning issues in connection with the deployment of the Company’s products or services; (xi)(xxii) the continuous commitment of the Company’s customers; (xii)(xxiii) demand for the Company’s products and services; (xiii)(xxiv) increase in exposure to international business risks (including as a result of the impact of Brexitgeopolitical instability, political unrest, war and any policy changes resulting from the new U.S. administration)other global conflicts, as we continue to increase our international operations; (xiv)(xxv) adverse macroeconomic conditions, including inflation, disruptions in global supply chains and increased labour costs; (xxvi) inability to raise capital at all or on not unfavorable terms in the future; (xv)(xxvii) downward pressure on our share price and dilutive effect of future sales or issuances of equity securities (including in connection with future acquisitions); and (xvi)(xxviii) potential changes in ratings or outlooks of rating agencies on our outstanding debt securities. Other factors that may affect forward-looking statements include, but are not limited to: (i) the future performance, financial and otherwise, of the Company; (ii) the ability of the Company to bring new products and services to market and to
increase sales; (iii) the strength of the Company’s product development pipeline; (iv) failure to secure and protect patents, trademarks and other proprietary rights; (v) infringement of third-party proprietary rights triggering indemnification obligations and resulting in significant expenses or restrictions on our ability to provide our products or services; (vi) failure to comply with privacy laws and regulations that are extensive, open to various interpretations and complex to implement;implement including General Data Protection Regulation (GDPR), California Consumer Privacy Act, California Privacy Rights Act, Virginia Consumer Data Protection Act, Colorado Privacy Act, Connecticut Data Privacy Act, Utah Consumer Privacy Act, and Country by Country Reporting (including with respect to transferring personal data outside of the European Economic Area and the United Kingdom, as a result of the ruling of the Court of Justice of the European Union that the EU-US Privacy Shield is an invalid data transfer mechanism and that Standard Contractual Clauses (SCCs) are a valid transfer mechanism unless the country to which personal data is exported restricts the ability to comply with such Clauses (Schrems II), and with respect to the new SCCs published by the European Commission and the International Data Transfer Agreement and Addendum published by the United Kingdom’s Information Commissioner’s Office to meet the requirements of GDPR and Schrems II); (vii) the Company’s growth and other profitability prospects; (viii) the estimated size and growth prospects of the EIMInformation Management market; (ix) the Company’s competitive position in the EIMInformation Management market and its ability to take advantage of future opportunities in this market; (x) the benefits of the Company’s products and services to be realized by customers; (xi) the demand for the Company’s products and services and the extent of deployment of the Company’s products and services in the EIMInformation Management marketplace; (xii) the Company’s financial condition and capital requirements; (xiii) system or network failures or information security, cybersecurity or other data breaches in connection with the Company's offerings;offerings or the information technology systems used by the Company generally, the risk of which may be increased during times of natural disaster or pandemic (including COVID-19) due to remote working arrangements; (xiv) failure to achieve our environmental goals on energy consumption, waste diversion and (xiv)greenhouse gas emissions or our targets relating to ED&I initiatives; and (xv) failure to attract and retain key personnel to develop and effectively manage the Company's business.business; and (xvi) the ability of the Company’s subsidiaries to make distributions to the Company.
For additional information with respect to risks and other factors which could occur, seeReaders should carefully review Part II, Item 1A "Risk Factors"“Risk Factors” herein and the Company's Annual Report on Form 10-K, including Part I, Item 1A "Risk Factors" therein;“Risk Factors” therein, Quarterly ReportsReport on Form 10-Q, including Item 1A hereintherein and other documents we file from time to time with the Securities and Exchange Commission (SEC) and other securities regulators. A number of factors may materially affect our business, financial condition, operating results and prospects. These factors include but are not limited to those set forth in Part II, Item 1A “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and in the Company's Annual Report on Form 10-K. Any one of these factors, and other factors that we are unaware of, or currently deem immaterial, may cause our actual results to differ materially from recent results or from our anticipated
future results. Readers are cautioned not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Unless otherwise required by applicable securities laws, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The following MD&A is intended to help readers understand our results of operations and financial condition, and is
provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and
the accompanying Notes to our Condensed Consolidated Financial Statements under Part I, Item 1 of this Quarterly Report on Form 10-Q.
All dollar and percentage comparisons made herein generally refer to the three and six months ended December 31, 2017September 30, 2022 compared with the three and six months ended December 31, 2016,September 30, 2021, unless otherwise noted.
Where we say “we”, “us”, “our”, “OpenText” or “the Company”, we mean Open Text Corporation or Open Text Corporation and its subsidiaries, as applicable.
EXECUTIVE OVERVIEW
At OpenText, we believe information and knowledge make business and people better. We operate inare an Information Management company that provides software and services that empower digital businesses of all sizes to become more intelligent, connected and responsible. Our innovations maximize the EIM market. We develop enterprise softwarestrategic benefits of data and content for digital transformation. OpenText’sour customers, strengthening their productivity, growth and competitive advantage.
Our comprehensive Information Management platform and suite of software products and services provide secure and scalable solutions for global companies. Our software assistscompanies, small and medium-sized businesses (SMBs), governments and consumers around the world. We have a complete and integrated portfolio of Information Management solutions delivered at scale in the OpenText Cloud, helping organizations with finding, utilizingmaster modern work, power modern experiences and sharing business information from any device in ways that are intuitive, efficientoptimize their digital supply chains. To do this, we bring together our Content Cloud, Business Network Cloud, Experience Cloud, Security Cloud and productive.Developer Cloud. We also help ensureaccelerate information modernization with intelligent tools and services for moving off paper, automating classification and building clean data lakes for Artificial Intelligence (AI), analytics and automation.
We are fundamentally integrated into the parts of our customers' businesses that information remains secure and private, as demanded in today’s highly regulated climate. In addition, we provide solutions that facilitatematter, so they can securely manage the exchangecomplexity of information flow end to end. Through automation and transactions betweenAI, we connect, synthesize and deliver information where it is needed to drive new efficiencies, experiences and insights. We make information more valuable by connecting it to digital business processes, enriching it with capture and analytics, protecting and securing it throughout its entire lifecycle, and leveraging it to create engaging digital experiences. Our solutions also connect large digital supply chain participants, such as manufacturers, retailers, distributorschains in manufacturing, retail and financial institutions. These are centralservices.
Our solutions also enable organizations and consumers to secure their information so that they can collaborate with confidence, stay ahead of the regulatory technology curve, identify threats on any endpoint or across their networks, enable privacy, leverage eDiscovery and digital forensics to defensibly investigate and collect evidence, and ensure business continuity in the event of a company’s ability to collaborate effectively with its partners. Our focus is to help customers automate processes. The algorithms embedded in our software aim to enable customers to unlock massive amounts of data and gain better insight into their business, which ultimately can lead to better decision making.
We offer software through traditional on-premise solutions, cloud solutions or a combination of both on-premise and cloud solutions (hybrid). We are agnostic as to which delivery method a customer prefers. We believe giving customers choice and flexibility will help us to strive to obtain long-term customer value.security incident.
Our initial public offering was on the NASDAQ in 1996 and we were subsequently listed on the Toronto Stock Exchange (TSX) in 1998. We are a multinational company and as of December 31, 2017, employed approximately 12,100 people worldwide.
Our ticker symbol on both the NASDAQ and the TSX is "OTEX"“OTEX”.
As of September 30, 2022, we employed a total of approximately 14,500 individuals, of which 6,900 or 48% are in the Americas, 2,720 or 19% are in EMEA and 4,880 or 34% are in Asia Pacific. Currently, we have employees in 35 countries enabling strong access to multiple talent pools while ensuring reach and proximity to our customers. Please see “Results of Operations” below for our definitions of geographic regions.
Quarterly Summary:
During the first quarter of Fiscal 2022 we saw the following activity:
•Total revenue was $734.4$852.0 million, up 35.3%2.4% compared to the same period in the prior fiscal year; up 32.6%7.1% after factoring in the unfavorable impact of $14.6$39.7 million of foreign exchange rate changes.
•Total annual recurring revenue, which we define as the sum of cloud services and subscriptions revenue and customer support revenue, was $516.2$722.0 million, up 30.8%4.4% compared to the same period in the prior fiscal year; up 28.8%8.9% after factoring in the unfavorable impact of $7.8$31.6 million of foreign exchange rate changes.
•Cloud services and subscriptions revenue was $208.1$404.7 million, up 18.9%13.5% compared to the same period in the prior fiscal year; up 18.3%16.9% after factoring in the unfavorable impact of $0.9$12.1 million of foreign exchange rate changes.
License revenue was $135.2 million, up 38.3% compared to the same period in the prior fiscal year; up 33.6% after factoring the impact of $4.7 million of foreign exchange rate changes.
GAAP-based EPS, diluted, was $0.32 compared to $0.18 in the same period in the prior fiscal year.
Non-GAAP-based EPS, diluted, was $0.76 compared to $0.54 in the same period in the prior fiscal year.
•GAAP-based gross margin was 67.3%69.7% compared to 69.0% in the same period in the prior fiscal year.
•Non-GAAP-based gross margin was 22.7%75.2% compared to 19.7%75.7% in the same period in the prior fiscal year.
Non-GAAP-based operating margin•GAAP-based net income (loss) attributable to OpenText was 36.5%$(116.9) million compared to 34.0%$131.9 million in the same period in the prior fiscal year.year, primarily due to $181.5 million unrealized losses on derivatives not designated as hedges.
GAAP-based•Non-GAAP-based net income attributable to OpenText was $85.1$206.8 million compared to $45.0$227.8 million in the same period in the prior fiscal year.
•GAAP-based earnings (loss) per share (EPS), diluted, was $(0.43) compared to $0.48 in the same period in the prior fiscal year.
•Non-GAAP-based EPS, diluted, was $0.77 compared to $0.83 in the same period in the prior fiscal year.
•Adjusted EBITDA was $290.1$304.0 million compared to $199.8$323.4 million in the same period in the prior fiscal year.
•Operating cash flow was $233.7$132.0 million for the six months ended December 31, 2017, up 29.5% fromcompared to $189.7 million in the same period in the prior fiscal year.year, down 30.4%.
•Cash and cash equivalents was $476.0were $1,704.4 million as of December 31, 2017,September 30, 2022, compared to $443.4$1,693.7 million as of June 30, 2017.2022.
•Enterprise cloud bookings were $111.7 million, an increase of approximately 37% over the same period in the prior fiscal year. We define Enterprise cloud bookings as the total value from cloud services and subscription contracts entered into in the period that is new, committed and incremental to our existing contracts, excluding the impact of Carbonite and Zix.
See "Use“Use of Non-GAAP Financial Measures"Measures” below for definitions and reconciliations of GAAP-based measures to Non-GAAP-based measures.
See "Acquisitions"“Acquisitions” below for the impact of acquisitions on the period-to-period comparability of results.
Acquisitions
Our competitive position in the marketplace requires us to maintainAs a complex and evolving array of technologies, products, services and capabilities. In lightresult of the continually evolvingchanging marketplace in which we operate, on an ongoing basis we regularly evaluate acquisition opportunities within the EIMour market and at any time may be in various stages of discussions with respect to such opportunities.
Proposed Acquisition of Guidance Software, Inc.Micro Focus
On August 25, 2022, we announced an agreement on the terms of an all-cash offer (through our wholly-owned subsidiary), to acquire the entire issued and to be issued share capital of Micro Focus, at a price of 532 pence per share, for a total purchase price of approximately $6.0 billion, inclusive of Micro Focus’ cash and debt. The all-cash consideration for the Micro Focus Acquisition is expected to be funded by new debt, cash on hand and a draw on our Revolver. Concurrent with the announcement of the Micro Focus Acquisition, the Company entered into the Acquisition Term Loan and Bridge Loan (see Note 11 “Long-Term Debt”) as well as certain derivative transactions (see Note 17 “Derivative Instruments and Hedging Activities”). These derivative transactions were marked-to-market during the three months ended September 14, 2017,30, 2022, with the resulting unrealized gains (losses) on these derivatives recognized in Other Income (Expense) within our Condensed Consolidated Statements of Income. On October 18, 2022 the shareholders of Micro Focus approved the all-cash offer. The Micro Focus Acquisition is expected to close in the first quarter of calendar 2023, subject to the satisfaction (or, where applicable, waiver) of certain conditions. Micro Focus’s leadership positions in key complementary markets will expand OpenText’s strategic presence in high value segments. See Note 1 “Basis of Presentation” to our Condensed Consolidated Financial Statements for more details, and see Part II, Item 1A, “Risk Factors” included within this Quarterly Report on Form 10-Q.
Acquisition of Zix Corporation
On December 23, 2021, we acquired all of the equity interest in Guidance Software Inc. (Guidance)Zix Corporation (Zix), a leading provider of forensic securityleader in software as a service (SaaS) based email encryption, threat protection and compliance cloud solutions for approximately $240.5 million. ThisSMBs. Total consideration for Zix was $894.5 million paid in cash, inclusive of $38.3 million of cash acquired and $18.6 million relating to the cash settlement of pre-acquisition vested share-based compensation. We believe the acquisition complementsincreases our position in the data protection, threat management, email security and extends our EIM portfolio.compliance solutions spaces. The results of operations of this acquisitionZix have been consolidated with those of OpenText beginning September 14, 2017.
Acquisition of Covisint Corporation
On July 26, 2017, we acquired all of the equity interest in Covisint Corporation (Covisint), a leading cloud platform for building Identity, Automotive, and Internet of Things applications, for approximately $102.8 million. This acquisition complements and extends our EIM portfolio. The results of operations of this acquisition have been consolidated with those of OpenText beginning July 26, 2017.
We believe our acquisitions support our long-term strategic direction, strengthen our competitive position, expand our customer base, provide greater scale to accelerate innovation, grow our earnings and provide superior shareholder value. We expect to continue to strategically acquire companies, products, services and technologies to augment our existing business. Our acquisitions, particularly significant ones, can affect the period-to-period comparability of our results.December 23, 2021. See note 18 "Acquisitions"Note 19 “Acquisitions” to our Condensed Consolidated Financial Statements for more details.
Impacts of COVID-19
We expectcontinue to closely monitor the potential effects and impact of the spread of COVID-19 on our operations, businesses and financial performance, including liquidity and capital usage. We have conducted business with modifications to employee travel and work locations and also virtualization of certain events, along with modified interactions with customers and suppliers, among other modifications. In addition, we have implemented a Flex-Office program in which a majority of our employees work a portion of their time in the office and a portion remotely. We will continue to actively monitor the impact of the COVID-19 pandemic on all aspects of our business and geographies, and may take further actions that alter our business operations as may be required by governments, or that we determine are in the best interest of our employees, customers, partners, suppliers and shareholders.
The ultimate impact of the COVID-19 pandemic on our operations and financial performance depends on many factors that are not within our control. For more information, please see Part II, Item 1A “Risk Factors” included elsewhere within this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for Fiscal 2022.
Impacts of Russia-Ukraine Conflict
We have ceased all direct business in Russia and Belarus and with known Russian-owned companies. To support certain of our cloud customers headquartered in the United States or allied countries that rely on our network to manage their global business (including their business in Russia), we have nonetheless allowed these customers to continue to pursue strategic acquisitionsuse our services to the extent that it can be done in strict compliance with all applicable sanctions and export controls. However, we may adjust our business practices as required by applicable rules and regulations. While we do not expect our decision to cease all direct business in Russia and Belarus and with known Russian-owned companies to have a material adverse effect on our overall business, results of operations or financial condition, it is not possible to predict the future to strengthenbroader consequences of this conflict, including adverse effects on the global economy, on our business and operations as well as those of our customers, partners and third party service offeringsproviders. For more information, please see Part I, Item 1A “Risk Factors” included in the EIM market, and at any time may be in various stagesour Annual Report on Form 10-K for Fiscal 2022.
Outlook for Remainder of discussions with respect to such opportunities. We believeFiscal 2023
As an organization, we are acommitted to “Total Growth,” meaning we strive towards delivering value orientedthrough organic initiatives, innovations and acquisitions, as well as financial performance. With an emphasis on increasing recurring revenues and expanding our margins, we believe our Total Growth strategy will ultimately drive overall cash flow generation, thus helping to fuel our disciplined acquirer, having efficiently deployed approximately $5.8 billion on acquisitions over the last 10 years. We seecapital allocation approach and further our ability to successfully integrate acquired companiesdeepen our account coverage and assets into our business as a strengthidentify and pursuingexecute strategic acquisitions. With strategic acquisitions, we are well positioned to expand our product portfolio and improve our ability to innovate and grow organically, which will help us to meet our long-term growth targets. We believe our Total Growth strategy is an important aspecta durable model that will create both near and long-term shareholder value through organic and acquired growth, capital efficiency and profitability.
We are committed to our growth strategy. During Fiscal 2018, we further demonstrated the implementation of this strategy by acquiring Covisint and Guidance.
While continuing to acquire companies is our leading growth driver, our growth strategy also includes organic growth through internalcontinuous innovation. This quarter we invested approximately $80 millionOur investments in research and development (R&D) push product innovation, increasing the value of our offerings to our installed customer base and new customers, which includes Global 10,000 companies (G10K), SMB and consumers. The G10K are the world's largest companies, ranked by estimated total revenues, as well as the world's largest governments and organizations. More valuable products, coupled with our established global partner program, lead to greater distribution and cross-selling opportunities which further help us to achieve organic growth. On a fiscal year-to-date basis, we have invested $110.2 million or approximately 11%12.9% of revenue and wein R&D expense, in line with our target to spend approximately 11%12% to 13%14% of revenues for R&D expense this fiscal year. We believe
Looking ahead, the destination for innovation is hybrid-cloud. Businesses of all sizes rely on a combination of public and private clouds, managed services and off-cloud solutions. As a result, we are committed to continue to modernize our ability totechnology infrastructure and leverage our global presenceexisting investments in the OpenText Cloud and programs to help customers off-cloud. The combination of OpenText cloud-native applications and managed services, together with the scalability and performance of our partner public cloud providers, offer more secure, reliable and compliant solutions to customers wanting to deploy cloud-based Information Management applications. The OpenText Cloud is helpfuldesigned to build additional flexibility and scalability for our customers: becoming cloud-native, connecting anything, and extending capabilities quickly with multi-tenant SaaS applications and services.
We anticipate that we will complete the Micro Focus Acquisition in the first quarter of calendar year 2023, subject to the satisfaction (or, where applicable, waiver) of certain conditions. The Micro Focus Acquisition will substantially expand our scope and size by adding substantial assets and operations to our organic growth initiatives.
existing business. We have released an Artificial Intelligence (AI) platform called “OpenText Magellan” (Magellan). Our approachincurred and will continue to AI is via an open source codeincur, transaction costs in connection with the Micro Focus Acquisition, including payment of certain fees and we believe in making long-term, strategic investmentsexpenses to developing AI. As our enterprise
software has historically been focused on managing dataobtain financing for the Micro Focus Acquisition. Concurrent with the announcement of the Micro Focus Acquisition, the Company entered into the Acquisition Term Loan and content archives, we believe we are well positioned to turn these archives of data into active “data lakes” and we believe we can develop AI to transform this digital information into useful knowledge and insight for our customers.
We see an opportunity to help our customers become “digital businesses” and, with Magellan and OpenText Release 16Bridge Loan (see Note 11 “Long-Term Debt”) as well as certain derivative
transactions (see Note 17 “Derivative Instruments and Hedging Activities”). We intend to reduce the commitments or borrowings under the Bridge Loan by accessing the debt capital markets directly or through certain affiliates prior to or following the closing of the Micro Focus Acquisition, but no assurance can be given that the Company will be able to do so. Derivative transactions that were entered into were marked-to-market during the three months ended September 30, 2022, with the resulting unrealized gains (losses) on these derivatives recognized in Other Income (Expense) within our recent acquisitions,Condensed Consolidated Statements of Income (see Note 22 “Other Income (Expense), Net”). We anticipate mark-to-market valuation adjustments to continue, based on market fluctuations, and will be recognized in Other Income (Expense) up to the completion of the Micro Focus Acquisition. For the tax impact of the mark-to-market valuation adjustment (see Note 15 “Income Taxes”). We anticipate we believe wewill also incur additional integration costs following the close of the Micro Focus Acquisition. See also Part II, Item 1A, “Risk Factors” included within this Quarterly Report on Form 10-Q.
We will continue to closely monitor the potential impacts of COVID-19, inflation with respect to wages, services and goods, concerns regarding any potential recession, rising interest rates, financial market volatility, and the Russia-Ukraine conflict on our business. We do not expect our decision to cease all direct business in Russia and Belarus and with known Russian-owned companies to have a strong platform to integrate personalized analyticsmaterial adverse effect on our overall business, results of operations or financial condition. See Part II, Item 1A, “Risk Factors” included within this Quarterly Report on Form 10-Q and insights ontoPart I, Item 1A, “Risk Factors” in our OpenText EIM suites of products, which will further our vision to enable “the digital world” and strengthen our position among leaders in EIM.
Annual Report on Form 10-K for Fiscal 2022.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates, judgments and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements. These estimates, judgments and assumptions are evaluated on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable at that time, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.time. Actual results may differ materially from those estimates. The policies listed below are areas that may contain key components of our results of operations and are based on complex rules requiring us to make judgments and estimates and consequently, we consider these to be our critical accounting policies. Some of these accounting policies involve complex situations and require a higher degree of judgment, either in the application and interpretation of existing accounting literature or in the development of estimates that reflectaffect our more significant estimates, judgments and assumptions andfinancial statements. The critical accounting policies which we believe are the most criticalimportant to aid in fully understanding and evaluating our reported financial results include the following:
| |
(ii) | Capitalized software, |
| |
(iii) | Business combinations, |
| |
(vi) | Restructuring charges, |
| |
(vii) | Foreign currency, and |
During the second quarter(i)Revenue recognition,
(ii)Goodwill,
(iii)Acquired intangibles, and
(iv)Income taxes.
For a full discussion of Fiscal 2018, there were no significant changes toall our critical accounting policies, please see Note 2 “Accounting Policies and estimates. However, income tax estimates were impacted byRecent Accounting Pronouncements” to the Tax Cuts and Jobs Act which was enacted in the United States on December 22, 2017. The Company recorded a provisional charge in the second quarter of Fiscal 2018 and continues to assess the effect of the new law on its consolidated financial statements in accordance with Staff Accounting Bulletin 118 “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (SAB 118). For more details related to this matter, please refer to note 14 "Income Taxes" to our Condensed Consolidated Financial Statements. Furthermore, for a detailed discussion of our critical accounting and estimates, please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations containedStatements included in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended June 30, 2017.Fiscal 2022.
RESULTS OF OPERATIONS
The following tables provide a detailed analysis of our results of operations and financial condition. For each of the periods indicated below, we present our revenues by product type, revenues by major geography, cost of revenues by product type, total gross margin, total operating margin, gross margin by product type, and their corresponding percentage of total revenue.
In addition, we provide Non-GAAP measures for the periods discussed in order to provide additional information to investors that we believe will be useful as this presentation is in linealigns with how our management assesses our Company's performance. See "Use“Use of Non-GAAP Financial Measures"Measures” below for a reconciliation of GAAP-based measures to Non-GAAP-based measures.
Summary of Results of Operations | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| (In thousands) | 2022 | | Change
increase (decrease) | | 2021 |
| Total Revenues by Product Type: | | | | | |
| Cloud services and subscriptions | $ | 404,651 | | | $ | 48,062 | | | $ | 356,589 | |
| Customer support | 317,351 | | | (17,886) | | | 335,237 | |
| License | 62,548 | | | (10,981) | | | 73,529 | |
| Professional service and other | 67,486 | | | 533 | | | 66,953 | |
| Total revenues | 852,036 | | | 19,728 | | | 832,308 | |
| Total Cost of Revenues | 258,348 | | | 225 | | | 258,123 | |
| Total GAAP-based Gross Profit | 593,688 | | | 19,503 | | | 574,185 | |
| Total GAAP-based Gross Margin % | 69.7 | % | | | | 69.0 | % |
| Total GAAP-based Operating Expenses | 447,335 | | | 55,839 | | | 391,496 | |
| Total GAAP-based Income from Operations | $ | 146,353 | | | $ | (36,336) | | | $ | 182,689 | |
| | | | | |
| % Revenues by Product Type: | | | | | |
| Cloud services and subscriptions | 47.5 | % | | | | 42.8 | % |
| Customer support | 37.2 | % | | | | 40.3 | % |
| License | 7.3 | % | | | | 8.8 | % |
| Professional service and other | 8.0 | % | | | | 8.1 | % |
| | | | | |
| Total Cost of Revenues by Product Type: | | | | | |
| Cloud services and subscriptions | $ | 131,799 | | | $ | 12,020 | | | $ | 119,779 | |
| Customer support | 27,354 | | | (2,129) | | | 29,483 | |
| License | 2,758 | | | (1,211) | | | 3,969 | |
| Professional service and other | 53,800 | | | 2,075 | | | 51,725 | |
| Amortization of acquired technology-based intangible assets | 42,637 | | | (10,530) | | | 53,167 | |
| Total cost of revenues | $ | 258,348 | | | $ | 225 | | | $ | 258,123 | |
| | | | | |
| % GAAP-based Gross Margin by Product Type: | | | | | |
| Cloud services and subscriptions | 67.4 | % | | | | 66.4 | % |
| Customer support | 91.4 | % | | | | 91.2 | % |
| License | 95.6 | % | | | | 94.6 | % |
| Professional service and other | 20.3 | % | | | | 22.7 | % |
| | | | | |
Total Revenues by Geography: (1) | | | | | |
Americas (2) | $ | 557,788 | | | $ | 38,096 | | | $ | 519,692 | |
EMEA (3) | 228,353 | | | (16,244) | | | 244,597 | |
Asia Pacific (4) | 65,895 | | | (2,124) | | | 68,019 | |
| Total revenues | $ | 852,036 | | | $ | 19,728 | | | $ | 832,308 | |
| % Revenues by Geography: | | | | | |
Americas (2) | 65.5 | % | | | | 62.4 | % |
EMEA (3) | 26.8 | % | | | | 29.4 | % |
Asia Pacific (4) | 7.7 | % | | | | 8.2 | % |
| | | | | |
| Other Metrics: | | | | | |
| GAAP-based gross margin | 69.7 | % | | | | 69.0 | % |
Non-GAAP-based gross margin (5) | 75.2 | % | | | | 75.7 | % |
| Net income (loss), attributable to OpenText | $ | (116,929) | | | | | $ | 131,915 | |
| GAAP-based EPS (loss), diluted | $ | (0.43) | | | | | $ | 0.48 | |
Non-GAAP-based EPS, diluted (5) | $ | 0.77 | | | | | $ | 0.83 | |
Adjusted EBITDA (5) | $ | 304,047 | | | | | $ | 323,353 | |
_______________________________ (1)Total revenues by geography are determined based on the location of our direct end customer.
(2)Americas consists of countries in North, Central and South America.
(3)EMEA primarily consists of countries in Europe, the Middle East and Africa.
(4)Asia Pacific primarily consists of Japan, Australia, China, Korea, Philippines, Singapore, India and New Zealand.
(5)See “Use of Non-GAAP Financial Measures” (discussed later in this MD&A) for definitions and reconciliations of GAAP-based measures to Non-GAAP-based measures.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, | | Six Months Ended December 31, |
| (In thousands) | | 2017 | | Change increase (decrease) | | 2016 | | 2017 | | Change increase (decrease) | | 2016 |
| Total Revenues by Product Type: | | | | | | | | | | | | |
| License | | $ | 135,244 |
| | $ | 37,480 |
| | $ | 97,764 |
| | $ | 213,475 |
| | $ | 55,055 |
| | $ | 158,420 |
|
| Cloud services and subscriptions | | 208,121 |
| | 33,060 |
| | 175,061 |
| | 401,974 |
| | 57,226 |
| | 344,748 |
|
| Customer support | | 308,070 |
| | 88,414 |
| | 219,656 |
| | 603,474 |
| | 173,612 |
| | 429,862 |
|
| Professional service and other | | 82,970 |
| | 32,742 |
| | 50,228 |
| | 156,169 |
| | 54,826 |
| | 101,343 |
|
| Total revenues | | 734,405 |
| | 191,696 |
| | 542,709 |
| | 1,375,092 |
| | 340,719 |
| | 1,034,373 |
|
| Total Cost of Revenues | | 240,312 |
| | 72,279 |
| | 168,033 |
| | 463,812 |
| | 131,426 |
| | 332,386 |
|
| Total GAAP-based Gross Profit | | 494,093 |
| | 119,417 |
| | 374,676 |
| | 911,280 |
| | 209,293 |
| | 701,987 |
|
| Total GAAP-based Gross Margin % | | 67.3 | % | | | | 69.0 | % | | 66.3 | % | | | | 67.9 | % |
| Total GAAP-based Operating Expenses | | 327,485 |
| | 59,966 |
| | 267,519 |
| | 657,549 |
| | 136,781 |
| | 520,768 |
|
| Total GAAP-based Income from Operations | | $ | 166,608 |
| | $ | 59,451 |
| | $ | 107,157 |
| | $ | 253,731 |
| | $ | 72,512 |
| | $ | 181,219 |
|
| | | | | | | | | | | | | |
| % Revenues by Product Type: | | | | | | | | | | | | |
| License | | 18.4 | % | | | | 18.0 | % | | 15.5 | % | | | | 15.3 | % |
| Cloud services and subscriptions | | 28.3 | % | | | | 32.2 | % | | 29.2 | % | | | | 33.3 | % |
| Customer support | | 42.0 | % | | | | 40.5 | % | | 43.9 | % | | | | 41.6 | % |
| Professional service and other | | 11.3 | % | | | | 9.3 | % | | 11.4 | % | | | | 9.8 | % |
| | | | | | | | | | | | | |
| Total Cost of Revenues by Product Type: | | | | | | | | | | | | |
| License | | $ | 4,587 |
| | $ | 2,196 |
| | $ | 2,391 |
| | $ | 7,547 |
| | $ | 1,311 |
| | $ | 6,236 |
|
| Cloud services and subscriptions | | 90,418 |
| | 17,268 |
| | 73,150 |
| | 174,748 |
| | 31,306 |
| | 143,442 |
|
| Customer support | | 33,194 |
| | 5,845 |
| | 27,349 |
| | 65,985 |
| | 12,898 |
| | 53,087 |
|
| Professional service and other | | 64,985 |
| | 24,690 |
| | 40,295 |
| | 124,444 |
| | 42,806 |
| | 81,638 |
|
| Amortization of acquired technology-based intangible assets | | 47,128 |
| | 22,280 |
| | 24,848 |
| | 91,088 |
| | 43,105 |
| | 47,983 |
|
| Total cost of revenues | | $ | 240,312 |
| | $ | 72,279 |
| | $ | 168,033 |
| | $ | 463,812 |
| | $ | 131,426 |
| | $ | 332,386 |
|
| | | | | | | | | | | | | |
| % GAAP-based Gross Margin by Product Type: | | | | | | | | | | | | |
| License | | 96.6 | % | | | | 97.6 | % | | 96.5 | % | | | | 96.1 | % |
| Cloud services and subscriptions | | 56.6 | % | | | | 58.2 | % | | 56.5 | % | | | | 58.4 | % |
| Customer support | | 89.2 | % | | | | 87.5 | % | | 89.1 | % | | | | 87.7 | % |
| Professional service and other | | 21.7 | % | | | | 19.8 | % | | 20.3 | % | | | | 19.4 | % |
| | | | | | | | | | | | | |
Total Revenues by Geography:(1) | | | | | | | | | | | | |
Americas (2) | | $ | 418,723 |
| | $ | 101,659 |
| | $ | 317,064 |
| | $ | 796,126 |
| | $ | 182,926 |
| | $ | 613,200 |
|
EMEA (3) | | 243,025 |
| | 66,751 |
| | 176,274 |
| | 439,838 |
| | 115,933 |
| | 323,905 |
|
Asia Pacific (4) | | 72,657 |
| | 23,286 |
| | 49,371 |
| | 139,128 |
| | 41,860 |
| | 97,268 |
|
| Total revenues | | $ | 734,405 |
| | $ | 191,696 |
| | $ | 542,709 |
| | $ | 1,375,092 |
| | $ | 340,719 |
| | $ | 1,034,373 |
|
| | | | | | | | | | | | | |
| % Revenues by Geography: | | | | | | | | | | | | |
Americas (2) | | 57.0 | % | | | | 58.4 | % | | 57.9 | % | | | | 59.3 | % |
EMEA (3) | | 33.1 | % | | | | 32.5 | % | | 32.0 | % | | | | 31.3 | % |
Asia Pacific (4) | | 9.9 | % | | | | 9.1 | % | | 10.1 | % | | | | 9.4 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, | | Six Months Ended December 31, |
| | | 2017 | | | | 2016 | | 2017 | | | | 2016 | |
| GAAP-based gross margin | | 67.3 | % | | | | 69.0 | % | | 66.3 | % | | | | 67.9 | % | |
| GAAP-based operating margin | | 22.7 | % | | | | 19.7 | % | | 18.5 | % | | | | 17.5 | % | |
| GAAP-based EPS, diluted | | $ | 0.32 |
| | | | $ | 0.18 |
| | $ | 0.46 |
| | | | $ | 3.89 |
| (6) |
| Net income, attributable to OpenText | | $ | 85,111 |
| | | | $ | 45,022 |
| | $ | 121,707 |
| | | | $ | 957,906 |
| (6) |
Non-GAAP-based gross margin (5) | | 73.9 | % | | | | 73.8 | % | | 73.1 | % | | | | 72.7 | % | |
Non-GAAP-based operating margin (5) | | 36.5 | % | | | | 34.0 | % | | 34.1 | % | | | | 32.5 | % | |
Non-GAAP-based EPS, diluted (5) | | $ | 0.76 |
| | | | $ | 0.54 |
| | $ | 1.30 |
| | | | $ | 0.97 |
| |
Adjusted EBITDA (5) | | $ | 290,142 |
| | | | $ | 199,798 |
| | $ | 510,064 |
| | | | $ | 366,440 |
| |
|
| |
(1) | Total revenues by geography are determined based on the location of our end customer. |
(2) | Americas consists of countries in North, Central and South America. |
(3) | EMEA primarily consists of countries in Europe, the Middle East and Africa. |
(4) | Asia Pacific primarily consists of the countries Japan, Australia, China, Korea, Philippines, Singapore and New Zealand. |
(5) | See "Use of Non-GAAP Financial Measures" (discussed later in the MD&A) for definitions and reconciliations of GAAP-based measures to Non-GAAP-based measures. |
(6) | We recorded a significant tax benefit in the first quarter of Fiscal 2017 of $876.1 million. This significant tax benefit is specifically tied to the Company's internal reorganization and applied to the first quarter of Fiscal 2017 only and as a result, has not and will not continue in future periods.
|
Revenues, Cost of Revenues and Gross Margin by Product Type
1) License:
License revenues consist of fees earned from the licensing of software products to customers. Our license revenues are impacted by the strength of general economic and industry conditions, the competitive strength of our software products, and our acquisitions. Cost of license revenues consists primarily of royalties payable to third parties.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, | | Six Months Ended December 31, |
| (In thousands) | | 2017 | | Change increase (decrease) | | 2016 | | 2017 | | Change increase (decrease) | | 2016 |
| License Revenues: | | | | | | | | | | | | |
| Americas | | $ | 60,244 |
| | $ | 12,658 |
| | $ | 47,586 |
| | $ | 101,555 |
| | $ | 22,980 |
| | $ | 78,575 |
|
| EMEA | | 54,807 |
| | 13,691 |
| | 41,116 |
| | 80,179 |
| | 17,861 |
| | 62,318 |
|
| Asia Pacific | | 20,193 |
| | 11,131 |
| | 9,062 |
| | 31,741 |
| | 14,214 |
| | 17,527 |
|
| Total License Revenues | | 135,244 |
| | 37,480 |
| | 97,764 |
| | 213,475 |
| | 55,055 |
| | 158,420 |
|
| Cost of License Revenues | | 4,587 |
| | 2,196 |
| | 2,391 |
| | 7,547 |
| | 1,311 |
| | 6,236 |
|
| GAAP-based License Gross Profit | | $ | 130,657 |
| | $ | 35,284 |
| | $ | 95,373 |
| | $ | 205,928 |
| | $ | 53,744 |
| | $ | 152,184 |
|
| GAAP-based License Gross Margin % | | 96.6 | % | | | | 97.6 | % | | 96.5 | % | | | | 96.1 | % |
| | | | | | | | | | | | | |
% License Revenues by Geography: | | | | | | | | | | | | |
| Americas | | 44.5 | % | | | | 48.7 | % | | 47.6 | % | | | | 49.6 | % |
| EMEA | | 40.5 | % | | | | 42.1 | % | | 37.6 | % | | | | 39.3 | % |
| Asia Pacific | | 15.0 | % | | | | 9.2 | % | | 14.8 | % | | | | 11.1 | % |
License revenues increased by $37.5 million during the three months ended December 31, 2017 as compared to the same period in the prior fiscal year, inclusive of the positive impact of foreign exchange of approximately $4.7 million. Geographically, the overall increase was attributable to an increase in EMEA of $13.7 million, an increase in Americas of $12.7 million, and an increase in Asia Pacific of $11.1 million. The number of license deals greater than $0.5 million that closed during the second quarter of Fiscal 2018 was 38 deals, of which 16 deals were greater than $1.0 million, compared to 41 deals in the second quarter of Fiscal 2017, of which 17 deals were greater than $1.0 million. The average size of the deals greater than $1.0 million that closed during the second quarter of Fiscal 2018, however, was slightly higher than what it was in the same period in the prior fiscal year. License revenue, as a proportion of our total revenues, remained stable at approximately 18%.
License revenues increased by $55.1 million during the six months ended December 31, 2017 as compared to the same period in the prior fiscal year, inclusive of the positive impact of foreign exchange of approximately $5.7 million. Geographically, the overall increase was attributable to an increase in Americas of $23.0 million, an increase in EMEA of $17.9 million, and an increase in Asia Pacific of $14.2 million. The number of license deals remained relatively stable compared to the same period in the prior fiscal year, with 63 deals greater than $0.5 million, of which 23 deals were greater than $1.0 million, that closed during the first six months of Fiscal 2018, compared to 64 deals in the same period in Fiscal 2017, of which 24 deals were greater than $1.0 million. The average size of the deals greater than $1.0 million that closed during the first six months of Fiscal 2018, however, was slightly higher than what it was in the same period in the prior fiscal year. License revenue, as a proportion of our total revenues, remained stable at approximately 15%.
Cost of license revenues increased by $2.2 million during the three months ended December 31, 2017 as compared to the same period in the prior fiscal year as a result of an increase in royalties payable to third parties. Overall, the gross margin percentage on license revenues decreased slightly to approximately 97% from approximately 98%.
Cost of license revenues increased by $1.3 million during the six months ended December 31, 2017 as compared to the same period in the prior fiscal year as a result of an increase in royalties payable to third parties. Overall, the gross margin percentage on license revenues remained stable at approximately 96%.
2) Cloud Services and Subscriptions:
Cloud services and subscriptionsubscriptions revenues consistare from hosting arrangements where in connection with the licensing of (i)software, the end user does not take possession of the software, as a service offerings, (ii) managed service arrangements and (iii) subscription revenues relating to on premise offerings. These offerings allow our customers to make use of OpenText software, services and content over Internet enabled networks supported by OpenText data centers. These web applications allow customers to transmit a variety of content between various mediums and to securely manage enterprise information without the commitment of investing in related hardware infrastructure. Revenues are generated on several transactional usage-based models, are typically billed monthly in arrears, and can therefore fluctuatewell as from period to period. Certain service fees are occasionally charged to customize hosted software for some customers and are either amortized over the estimated customer life, in the case of setup fees, or recognized in the period they are provided.
In addition, we offer business-to-business (B2B) integration solutions, such as messaging services, and managed services. Messaging services allow for the automated and reliable exchange of electronic transaction information, such as purchase orders, invoices, shipment notices and other business documents, among businesses worldwide. Managed services provide an end-to-end fully outsourced B2B integration solutionsolutions to our customers including program implementation, operational management,(collectively referred to as cloud arrangements). The software application resides on our hardware or that of a third party, and the customer support. These services enable customersaccesses and uses the software on an as-needed basis via an identified line. Our cloud arrangements can be broadly categorized as platform as a service (PaaS), SaaS, cloud subscriptions and managed services. For the quarter ended September 30, 2022, our cloud renewal rate, excluding the impact of Carbonite Inc. (Carbonite) and Zix, increased to effectively manage94% from 93% over the flow of electronic transaction information with their trading partners and reduce the complexity of disparate standards and communication protocols. Revenues are primarily generated through transaction processing. Transaction processing fees are recurring in nature and are recognized on a per transaction basis in the period in which the related transactions are processed. Revenues from contracts with monthly, quarterly or annual minimum transaction levels are recognized based on the greater of the actual transactions or the specified contract minimum amounts during the relevant period. Customers who are not committed to multi-year contracts generally are under contracts for transaction processing solutions that automatically renew every month or year, depending on the terms of the specific contracts.quarter ended September 30, 2021.
Cost of Cloud services and subscriptions revenues is comprised primarily of third partythird-party network usage fees, maintenance of in-house data hardware centers, technical support personnel-related costs amortization of customer set up and implementation costs, and some third party royalty costs.
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| (In thousands) | 2022 | | Change
increase (decrease) | | 2021 |
| Cloud Services and Subscriptions: | | | | | |
| Americas | $ | 308,347 | | | $ | 40,254 | | | $ | 268,093 | |
| EMEA | 71,502 | | | 8,816 | | | 62,686 | |
| Asia Pacific | 24,802 | | | (1,008) | | | 25,810 | |
| Total Cloud Services and Subscriptions Revenues | 404,651 | | | 48,062 | | | 356,589 | |
| Cost of Cloud Services and Subscriptions Revenues | 131,799 | | | 12,020 | | | 119,779 | |
| GAAP-based Cloud Services and Subscriptions Gross Profit | $ | 272,852 | | | $ | 36,042 | | | $ | 236,810 | |
| GAAP-based Cloud Services and Subscriptions Gross Margin % | 67.4 | % | | | | 66.4 | % |
| | | | | |
| % Cloud Services and Subscriptions Revenues by Geography: | | | | | |
| Americas | 76.2 | % | | | | 75.2 | % |
| EMEA | 17.7 | % | | | | 17.6 | % |
| Asia Pacific | 6.1 | % | | | | 7.2 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, | | Six Months Ended December 31, |
| (In thousands) | | 2017 | | Change increase (decrease) | | 2016 | | 2017 | | Change increase (decrease) | | 2016 |
| Cloud Services and Subscriptions: | | | | | | | | | | | | |
| Americas | | $ | 139,901 |
| | $ | 21,667 |
| | $ | 118,234 |
| | $ | 268,714 |
| | $ | 34,366 |
| | $ | 234,348 |
|
| EMEA | | 48,823 |
| | 8,797 |
| | 40,026 |
| | 92,255 |
| | 15,393 |
| | 76,862 |
|
| Asia Pacific | | 19,397 |
| | 2,596 |
| | 16,801 |
| | 41,005 |
| | 7,467 |
| | 33,538 |
|
| Total Cloud Services and Subscriptions Revenues | | 208,121 |
| | 33,060 |
| | 175,061 |
| | 401,974 |
| | 57,226 |
| | 344,748 |
|
| Cost of Cloud Services and Subscriptions Revenues | | 90,418 |
| | 17,268 |
| | 73,150 |
| | 174,748 |
| | 31,306 |
| | 143,442 |
|
| GAAP-based Cloud Services and Subscriptions Gross Profit | | $ | 117,703 |
| | $ | 15,792 |
| | $ | 101,911 |
| | $ | 227,226 |
| | $ | 25,920 |
| | $ | 201,306 |
|
| GAAP-based Cloud Services and Subscriptions Gross Margin % | | 56.6 | % | | | | 58.2 | % | | 56.5 | % | | | | 58.4 | % |
| | | | | | | | | | | | | |
| % Cloud Services and Subscriptions Revenues by Geography: | | | | | | | | | | | | |
| Americas | | 67.2 | % | | | | 67.5 | % | | 66.8 | % | | | | 68.0 | % |
| EMEA | | 23.5 | % | | | | 22.9 | % | | 23.0 | % | | | | 22.3 | % |
| Asia Pacific | | 9.3 | % | | | | 9.6 | % | | 10.2 | % | | | | 9.7 | % |
Cloud services and subscriptions revenues increased by $33.1$48.1 million or 13.5% during the three months ended December 31, 2017September 30, 2022 as compared to the same period in the prior fiscal year, inclusiveyear; up 16.9% after factoring in the unfavorable impact of the positive impact$12.1 million of foreign exchange of approximately $0.9 million.rate changes. The increase was primarily driven by incremental Cloud services and subscriptions revenues from acquisitions over the comparative period. Geographically, the overall change was attributable to an increase in Americas of $21.7$40.3 million and an increase in EMEA of $8.8 million, and an increasepartially offset by a decrease in Asia Pacific of $2.6$1.0 million. The number of Cloud
There were 18 cloud services dealscontracts greater than $1.0 million that closed during the secondfirst quarter of Fiscal 2018 was 14 deals,2023, compared to 8 deals in16 contracts during the secondfirst quarter of Fiscal 2017.2022.
Cost of Cloud services and subscriptions revenues increased by $57.2$12.0 million during the sixthree months ended December 31, 2017September 30, 2022 as compared to the same period in the prior fiscal year. The net impact of foreign exchange for the six months ended December 31, 2017This was immaterial. Geographically, the overall change was attributable to an increase in Americas of $34.4 million, an increase in EMEA of $15.4 million and an increase in Asia Pacific of $7.5 million. The number of Cloud services deals greater than $1.0 million that closed during the first six months of Fiscal 2018, compared to the same period in Fiscal 2017, remained stable at 21 deals.
Cost of Cloud services and subscriptions revenues increased by $17.3 million during the three months ended December 31, 2017 as compared to the same period in the prior fiscal year, primarily due to an increase in labour-related coststhird-party network usage fees of approximately $17.2 million, predominantly on account of recent acquisitions, and an increase in other miscellaneous costs of $0.1$8.1 million. Overall, the gross margin percentage on Cloud services and subscriptions revenues decreased slightlyincreased to approximately 57%67% from approximately 58%66%.
Cost of Cloud services and subscriptions revenues increased by $31.3 million during the six months ended December 31, 2017 as compared to the same period in the prior fiscal year, primarily due to an increase in labour-related costs of approximately $31.5 million, predominantly on account of recent acquisitions, partially offset by a decrease in other miscellaneous costs of $0.2 million. Overall, the gross margin percentage on Cloud services and subscriptions revenues decreased to approximately 57% from approximately 58%.
3)2) Customer Support:
Customer support revenues consist of revenues from our customer support and maintenance agreements. These agreements allow our customers to receive technical support, enhancements and upgrades to new versions of our software products when and if available. Customer support revenues are generated from support and maintenance relating to current year sales of software products and from the renewal of existing maintenance agreements for software licenses sold in prior periods. Therefore, changes in Customer support revenues do not always correlate directly to the changes in license revenues from period to period. The terms of support and maintenance agreements are typically twelve months, with customer renewal options.and are renewable, generally on an annual basis, at the option of the customer. Our management reviews our Customer support renewal rates on a quarterly basis, and we use these rates as a method of monitoring our customer service performance. For the quarter ended December 31, 2017,September 30, 2022, our Customer support renewal rate was approximately 90%increased to 95%, consistent with the Customer support renewal rate duringcompared to 94% for the quarter ended December 31, 2016.September 30, 2021.
Cost of Customer support revenues is comprised primarily of technical support personnel and related costs, as well as third party royalty costs.
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| (In thousands) | 2022 | | Change
increase (decrease) | | 2021 |
| Customer Support Revenues: | | | | | |
| Americas | $ | 183,472 | | | $ | (992) | | | $ | 184,464 | |
| EMEA | 107,889 | | | (13,934) | | | 121,823 | |
| Asia Pacific | 25,990 | | | (2,960) | | | 28,950 | |
| Total Customer Support Revenues | 317,351 | | | (17,886) | | | 335,237 | |
| Cost of Customer Support Revenues | 27,354 | | | (2,129) | | | 29,483 | |
| GAAP-based Customer Support Gross Profit | $ | 289,997 | | | $ | (15,757) | | | $ | 305,754 | |
| GAAP-based Customer Support Gross Margin % | 91.4 | % | | | | 91.2 | % |
| | | | | |
| % Customer Support Revenues by Geography: | | | | | |
| Americas | 57.8 | % | | | | 55.0 | % |
| EMEA | 34.0 | % | | | | 36.3 | % |
| Asia Pacific | 8.2 | % | | | | 8.7 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, | | Six Months Ended December 31, |
| (In thousands) | | 2017 | | Change increase (decrease) | | 2016 | | 2017 | | Change increase (decrease) | | 2016 |
| Customer Support Revenues: | | | | | | | | | | | | |
| Americas | | $ | 179,152 |
| | $ | 49,363 |
| | $ | 129,789 |
| | $ | 349,606 |
| | $ | 95,626 |
| | $ | 253,980 |
|
| EMEA | | 103,606 |
| | 32,224 |
| | 71,382 |
| | 203,365 |
| | 63,081 |
| | 140,284 |
|
| Asia Pacific | | 25,312 |
| | 6,827 |
| | 18,485 |
| | 50,503 |
| | 14,905 |
| | 35,598 |
|
| Total Customer Support Revenues | | 308,070 |
| | 88,414 |
| | 219,656 |
| | 603,474 |
| | 173,612 |
| | 429,862 |
|
| Cost of Customer Support Revenues | | 33,194 |
| | 5,845 |
| | 27,349 |
| | 65,985 |
| | 12,898 |
| | 53,087 |
|
| GAAP-based Customer Support Gross Profit | | $ | 274,876 |
| | $ | 82,569 |
| | $ | 192,307 |
| | $ | 537,489 |
| | $ | 160,714 |
| | $ | 376,775 |
|
| GAAP-based Customer Support Gross Margin % | | 89.2 | % | | | | 87.5 | % | | 89.1 | % | | | | 87.7 | % |
| | | | | | | | | | | | | |
| % Customer Support Revenues by Geography: | | | | | | | | | | | | |
| Americas | | 58.2 | % | | | | 59.1 | % | | 57.9 | % | | | | 59.1 | % |
| EMEA | | 33.6 | % | | | | 32.5 | % | | 33.7 | % | | | | 32.6 | % |
| Asia Pacific | | 8.2 | % | | | | 8.4 | % | | 8.4 | % | | | | 8.3 | % |
Customer support revenues increaseddecreased by $88.4$17.9 million or 5.3% during the three months ended September 30, 2022 as compared to the same period in the prior fiscal year; up 0.5% after factoring in the unfavorable impact of $19.5 million of foreign exchange rate changes. Geographically, the overall change was attributable to a decrease in EMEA of $13.9 million, a decrease in Americas of $1.0 million and a decrease in Asia Pacific of $3.0 million.
Cost of Customer support revenues decreased by $2.1 million during the three months ended December 31, 2017September 30, 2022 as compared to the same period in the prior fiscal year. This was primarily due to a decrease in labour-related costs of $2.3 million. Overall, the gross margin percentage on Customer support revenues remained stable at 91%.
3) License:
Our License revenue can be broadly categorized as perpetual licenses, term licenses and subscription licenses. Our License revenues are impacted by the strength of general economic and industry conditions, the competitive strength of our software products, and our acquisitions. Cost of License revenues consists primarily of royalties payable to third parties.
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| (In thousands) | 2022 | | Change
increase (decrease) | | 2021 |
| License Revenues: | | | | | |
| Americas | $ | 31,596 | | | $ | (5,197) | | | $ | 36,793 | |
| EMEA | 24,094 | | | (6,753) | | | 30,847 | |
| Asia Pacific | 6,858 | | | 969 | | | 5,889 | |
| Total License Revenues | 62,548 | | | (10,981) | | | 73,529 | |
| Cost of License Revenues | 2,758 | | | (1,211) | | | 3,969 | |
| GAAP-based License Gross Profit | $ | 59,790 | | | $ | (9,770) | | | $ | 69,560 | |
| GAAP-based License Gross Margin % | 95.6 | % | | | | 94.6 | % |
| | | | | |
| % License Revenues by Geography: | | | | | |
| Americas | 50.5 | % | | | | 50.0 | % |
| EMEA | 38.5 | % | | | | 42.0 | % |
| Asia Pacific | 11.0 | % | | | | 8.0 | % |
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
License revenues decreased by $11.0 million or 14.9% during the three months ended September 30, 2022 as compared to the same period in the prior fiscal year; down 9.7% after factoring in the unfavorable impact of $3.8 million of foreign exchange rate changes. Geographically, the overall change was attributable to a decrease in Americas of $5.2 million and a decrease in EMEA of $6.8 million, partially offset by an increase in Asia Pacific of $1.0 million.
During the first quarter of Fiscal 2023, we closed 22 license contracts greater than $0.5 million, of which 9 contracts were greater than $1.0 million, contributing $22.6 million of License revenues. This was compared to 17 license contracts greater
than $0.5 million during the first quarter of Fiscal 2022, of which 9 contracts were greater than $1.0 million, contributing $20.9 million of License revenues.
Cost of License revenues decreased by $1.2 million during the three months ended September 30, 2022 as compared to the same period in the prior fiscal year inclusiveas a result of the positive impact of foreign exchange of approximately $6.9 million. Geographically, the overall increase was attributable to an increase in Americas of $49.4 million, an increase in EMEA of $32.2 million and an increase in Asia Pacific of $6.8 million.
Customer support revenues increased by $173.6 million during the six months ended December 31, 2017 as compared to the same period in the prior fiscal year, inclusive of the positive impact of foreign exchange of approximately $10.0 million. Geographically, the overall increase was attributable to an increase in Americas of $95.6 million, an increase in EMEA of $63.1 million and an increase in Asia Pacific of $14.9 million.
Cost of Customer support revenues increased by $5.8 million during the three months ended December 31, 2017 as compared to the same period in the prior fiscal year, due to (i) an increase in labour-related costs of approximately $5.4 million, which was predominantly due to recent acquisitions and (ii) an increase in the installed base of third party products of approximately $0.4 million.lower third-party technology costs. Overall, the gross margin percentage on Customer supportLicense revenues increased slightly to approximately 89%96% from approximately 88%.
Cost of Customer support revenues increased by $12.9 million during the six months ended December 31, 2017 as compared to the same period in the prior fiscal year, due to (i) an increase in labour-related costs of approximately $11.2 million, which was predominantly due to recent acquisitions, (ii) an increase in the installed base of third party products of approximately $1.6 million, and (iii) an increase in other miscellaneous costs of $0.1 million. Overall, the gross margin percentage on Customer support revenues increased slightly to approximately 89% from approximately 88%95%.
4) Professional Service and Other:
Professional service and other revenues consist of revenues from consulting contracts and contracts to provide implementation, training and integration services (professional services). Other revenues consist of hardware revenues. These revenues, which are groupedincluded within the “Professional service and other” category because they are relatively immaterial to our service revenues. Professional services are typically performed after the purchase of new software licenses. Professional service and other revenues can vary from period to period based on the type of engagements as well as those implementations that are assumed by our partner network.
Cost of professionalProfessional service and other revenues consists primarily of the costs of providing integration, configuration and training with respect to our various software products. The most significant components of these costs are personnel-related expenses, travel costs and third partythird-party subcontracting.
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| (In thousands) | 2022 | | Change
increase (decrease) | | 2021 |
| Professional Service and Other Revenues: | | | | | |
| Americas | $ | 34,373 | | | $ | 4,031 | | | $ | 30,342 | |
| EMEA | 24,868 | | | (4,373) | | | 29,241 | |
| Asia Pacific | 8,245 | | | 875 | | | 7,370 | |
| Total Professional Service and Other Revenues | 67,486 | | | 533 | | | 66,953 | |
| Cost of Professional Service and Other Revenues | 53,800 | | | 2,075 | | | 51,725 | |
| GAAP-based Professional Service and Other Gross Profit | $ | 13,686 | | | $ | (1,542) | | | $ | 15,228 | |
| GAAP-based Professional Service and Other Gross Margin % | 20.3 | % | | | | 22.7 | % |
| | | | | |
| % Professional Service and Other Revenues by Geography: | | | | | |
| Americas | 50.9 | % | | | | 45.3 | % |
| EMEA | 36.8 | % | | | | 43.7 | % |
| Asia Pacific | 12.3 | % | | | | 11.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, | | Six Months Ended December 31, |
| (In thousands) | | 2017 | | Change increase (decrease) | | 2016 | | 2017 | | Change increase (decrease) | | 2016 |
| Professional Service and Other Revenues: | | | | | | | | | | | | |
| Americas | | $ | 39,426 |
| | $ | 17,971 |
| | $ | 21,455 |
| | $ | 76,251 |
| | $ | 29,954 |
| | $ | 46,297 |
|
| EMEA | | 35,789 |
| | 12,039 |
| | 23,750 |
| | 64,039 |
| | 19,598 |
| | 44,441 |
|
| Asia Pacific | | 7,755 |
| | 2,732 |
| | 5,023 |
| | 15,879 |
| | 5,274 |
| | 10,605 |
|
| Total Professional Service and Other Revenues | | 82,970 |
| | 32,742 |
| | 50,228 |
| | 156,169 |
| | 54,826 |
| | 101,343 |
|
| Cost of Professional Service and Other Revenues | | 64,985 |
| | 24,690 |
| | 40,295 |
| | 124,444 |
| | 42,806 |
| | 81,638 |
|
| GAAP-based Professional Service and Other Gross Profit | | $ | 17,985 |
| | $ | 8,052 |
| | $ | 9,933 |
| | $ | 31,725 |
| | $ | 12,020 |
| | $ | 19,705 |
|
| GAAP-based Professional Service and Other Gross Margin % | | 21.7 | % | | | | 19.8 | % | | 20.3 | % | | | | 19.4 | % |
| | | | | | | | | | | | | |
| % Professional Service and Other Revenues by Geography: | | | | | | | | | | | | |
| Americas | | 47.5 | % | | | | 42.7 | % | | 48.8 | % | | | | 45.7 | % |
| EMEA | | 43.1 | % | | | | 47.3 | % | | 41.0 | % | | | | 43.9 | % |
| Asia Pacific | | 9.4 | % | | | | 10.0 | % | | 10.2 | % | | | | 10.4 | % |
Professional service and other revenues increased by $32.7$0.5 million or 0.8% during the three months ended December 31, 2017September 30, 2022 as compared to the same period in the prior fiscal year, inclusiveyear; up 7.2% after factoring in the unfavorable impact of the positive impact$4.3 million of foreign exchange of approximately $2.1 million.rate changes. Geographically, the overall increasechange was attributable to an increase in Americas of $18.0 million, an increase in EMEA of $12.0$4.0 million and an increase in Asia Pacific of $2.7$0.9 million, offset by a decrease in EMEA of $4.4 million.
Cost of Professional service and other revenues increased by $54.8$2.1 million during the sixthree months ended December 31, 2017September 30, 2022 as compared to the same period in the prior fiscal year, inclusive of the positive impact of foreign exchange of approximately $3.7 million. Geographically, the overall increaseyear. This was attributableprimarily due to an increase in Americas of $30.0 million, an increase in EMEA of $19.6 million and an increase in Asia Pacific of $5.3 million.
Cost of Professional service and other revenues increased by $24.7 million during the three months ended December 31, 2017 as compared to the same period in the prior fiscal year, primarily as a result of an increase in labour-related costs of approximately $22.9 million, which was predominantly due to recent acquisitions, and an increase in other miscellaneous costs of $1.8$1.3 million. Overall, the gross margin percentage on Professional service and other revenues increaseddecreased to approximately 22%20% from approximately 20%23%.
CostAmortization of Professional service and other revenues increased by $42.8 millionAcquired Technology-based Intangible Assets
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| (In thousands) | 2022 | | Change
increase (decrease) | | 2021 |
| Amortization of acquired technology-based intangible assets | $ | 42,637 | | | $ | (10,530) | | | $ | 53,167 | |
Amortization of acquired technology-based intangible assets decreased during the sixthree months ended December 31, 2017September 30, 2022 by $10.5 million as compared to the same period in the prior fiscal year, primarily as a result of an increase in labour-related costs of approximately $40.2 million, which was predominantly due to recent acquisitions, and an increase in other miscellaneous costs of $2.6 million. Overall, the gross margin percentage on Professional service and other revenues increased to approximately 20% from approximately 19%.
Amortization of Acquired Technology-based Intangible Assets
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, | | Six Months Ended December 31, |
| (In thousands) | | 2017 | | Change increase (decrease) | | 2016 | | 2017 | | Change increase (decrease) | | 2016 |
| Amortization of acquired technology-based intangible assets | | $ | 47,128 |
| | $ | 22,280 |
| | $ | 24,848 |
| | $ | 91,088 |
| | $ | 43,105 |
| | $ | 47,983 |
|
Amortization of acquired technology-based intangible assets increased during the three and six months ended December 31, 2017 by $22.3 million and $43.1 million, respectively, as compared to the same periods in the prior fiscal year. This was primarily due to an increase in amortization of $24.3 million and $46.6 million, respectively, relating to newly acquired technology-basedcertain intangible assets from our acquisitions of Guidance, Covisint, certain assets and liabilities of the enterprise content division of EMC Corporation (ECD Business), certain customer communication management software assets and liabilities from HP Inc. (CCM Business), and Recommind Inc. The increase in amortization was partially offset by a reduction of $2.0 million and $3.5 million, respectively, relating to intangible assets pertaining to certain previous acquisitions becoming fully amortized.
| | | | | Three Months Ended December 31, | | Six Months Ended December 31, | | Three Months Ended September 30, |
| (In thousands) | | 2017 | | Change increase (decrease) | | 2016 | | 2017 | | Change increase (decrease) | | 2016 | (In thousands) | 2022 | | Change
increase (decrease) | | 2021 |
| Research and development | | $ | 80,304 |
| | $ | 15,583 |
| | $ | 64,721 |
| | $ | 157,933 |
| | $ | 34,640 |
| | $ | 123,293 |
| Research and development | $ | 110,198 | | | $ | 10,033 | | | $ | 100,165 | |
| Sales and marketing | | 129,142 |
| | 26,491 |
| | 102,651 |
| | 251,964 |
| | 54,165 |
| | 197,799 |
| Sales and marketing | 167,170 | | | 20,930 | | | 146,240 | |
| General and administrative | | 48,985 |
| | 9,071 |
| | 39,914 |
| | 97,900 |
| | 19,789 |
| | 78,111 |
| General and administrative | 78,074 | | | 6,597 | | | 71,477 | |
| Depreciation | | 22,071 |
| | 6,770 |
| | 15,301 |
| | 40,949 |
| | 10,378 |
| | 30,571 |
| Depreciation | 23,174 | | | 1,788 | | | 21,386 | |
| Amortization of acquired customer-based intangible assets | | 46,268 |
| | 12,453 |
| | 33,815 |
| | 90,057 |
| | 22,634 |
| | 67,423 |
| Amortization of acquired customer-based intangible assets | 54,438 | | | 2,554 | | | 51,884 | |
| Special charges (recoveries) | | 715 |
| | (10,402 | ) | | 11,117 |
| | 18,746 |
| | (4,825 | ) | | 23,571 |
| Special charges (recoveries) | 14,281 | | | 13,937 | | | 344 | |
| Total operating expenses | | $ | 327,485 |
| | $ | 59,966 |
| | $ | 267,519 |
| | $ | 657,549 |
| | $ | 136,781 |
| | $ | 520,768 |
| Total operating expenses | $ | 447,335 | | | $ | 55,839 | | | $ | 391,496 | |
| | | | | | | | | | | | | | |
| % of Total Revenues: | | | | | | | | | | | | | % of Total Revenues: | |
| Research and development | | 10.9 | % | | | | 11.9 | % | | 11.5 | % | | | | 11.9 | % | Research and development | 12.9 | % | | 12.0 | % |
| Sales and marketing | | 17.6 | % | | | | 18.9 | % | | 18.3 | % | | | | 19.1 | % | Sales and marketing | 19.6 | % | | 17.6 | % |
| General and administrative | | 6.7 | % | | | | 7.4 | % | | 7.1 | % | | | | 7.6 | % | General and administrative | 9.2 | % | | 8.6 | % |
| Depreciation | | 3.0 | % | | | | 2.8 | % | | 3.0 | % | | | | 3.0 | % | Depreciation | 2.7 | % | | 2.6 | % |
| Amortization of acquired customer-based intangible assets | | 6.3 | % | | | | 6.2 | % | | 6.5 | % | | | | 6.5 | % | Amortization of acquired customer-based intangible assets | 6.4 | % | | 6.2 | % |
| Special charges (recoveries) | | 0.1 | % | | | | 2.0 | % | | 1.4 | % | | | | 2.3 | % | Special charges (recoveries) | 1.7 | % | | — | % |
Research and development expenses consist primarily of payroll and payroll-related benefits expenses, contracted research and development expenses, and facility costs. Research and development assists withenables organic growth and improves product stability and functionality, and accordingly, we dedicate extensive efforts to update and upgrade our product offerings. The primary driver isdrivers are typically budgeted software upgrades and software development.
|
| | | | | | | | |
| | | Quarter-over-Quarter Change between Fiscal | | YTD-over-YTD
Change between Fiscal |
(In thousands) | | 2018 and 2017 | | 2018 and 2017 |
| Payroll and payroll-related benefits | | $ | 13,368 |
| | $ | 24,836 |
|
| Contract labour and consulting | | (1,143 | ) | | 2,433 |
|
| Share-based compensation | | (408 | ) | | (525 | ) |
| Travel and communication | | 93 |
| | 140 |
|
| Facilities | | 3,480 |
| | 7,590 |
|
| Other miscellaneous | | 193 |
| | 166 |
|
| Total year-over-year change in research and development expenses | | $ | 15,583 |
| | $ | 34,640 |
|
| | | | | |
| Change between Three Months Ended September 30, 2022 and 2021 |
(In thousands) | increase (decrease) |
| Payroll and payroll-related benefits | $ | 2,698 | |
| Contract labour and consulting | 928 | |
| Share-based compensation | 3,920 | |
| Travel and communication | 274 | |
| Facilities | 1,603 | |
| Other miscellaneous | 610 | |
| Total change in research and development expenses | $ | 10,033 | |
Research and development expenses increased by $15.6$10.0 million during the three months ended December 31, 2017September 30, 2022 as compared to the same period in the prior fiscal year. This wasyear, primarily due to an increase in payroll and payroll-related benefits of $13.4 million, an increase in the use of facility and related resources of $3.5 million, which were predominantly theas a result of recent acquisitions. These were partially offsetPayroll and payroll-related benefits, which is comprised of salaries, benefits and variable short-term incentives, increased by a decrease in contract labour$2.7 million, share-based compensation expense increased by $3.9 million and consulting of $1.1facility-related expenses increased by $1.6 million. Overall, our research and development expenses, as a percentage of total revenues, decreasedincreased to approximately 11% from approximately 12%.
Research and development expenses increased by $34.6 million during the six months ended December 31, 2017 as13% compared to the same period in the prior fiscal year. This was primarily due to an increase in payroll and payroll-related benefits of $24.8 million, an increase in the use of facility and related resources of $7.6 million, which were predominantly the result of recent acquisitions, and an increase in contract labour and consulting of $2.4 million. Overall, our research and development expenses, as a percentage of total revenues, decreased slightly to approximately 11% from approximatelyyear at 12%.
Our research and development labour resources increased by 725111 employees, from 2,4474,182 employees at December 31, 2016September 30, 2021 to 3,1724,293 employees at December 31, 2017, primarily as a resultSeptember 30, 2022.
Sales and marketing expenses consist primarily of personnel expenses and costs associated with advertising, marketing events and trade shows.
|
| | | | | | | | |
| | | Quarter-over-Quarter Change between Fiscal | | YTD-over-YTD
Change between Fiscal |
| (In thousands) | | 2018 and 2017 | | 2018 and 2017 |
| Payroll and payroll-related benefits | | $ | 13,773 |
| | $ | 29,434 |
|
| Commissions | | 6,540 |
| | 12,831 |
|
| Contract labour and consulting | | (109 | ) | | 739 |
|
| Share-based compensation | | (234 | ) | | 34 |
|
| Travel and communication | | 1,900 |
| | 2,947 |
|
| Marketing expenses | | 1,267 |
| | 2,381 |
|
| Facilities | | 2,207 |
| | 4,654 |
|
| Other miscellaneous | | 1,147 |
| | 1,145 |
|
| Total year-over-year change in sales and marketing expenses | | $ | 26,491 |
| | $ | 54,165 |
|
| | | | | |
| Change between Three Months Ended
September 30, 2022 and 2021 |
| (In thousands) | increase (decrease) |
| Payroll and payroll-related benefits | $ | 5,225 | |
| Commissions | 4,445 | |
| Contract labour and consulting | 40 | |
| Share-based compensation | 2,249 | |
| Travel and communication | 1,658 | |
| Marketing expenses | 2,597 | |
| Facilities | 1,000 | |
| Credit loss expense (recovery) | 1,783 | |
| Other miscellaneous | 1,933 | |
| Total change in sales and marketing expenses | $ | 20,930 | |
Sales and marketing expenses increased by $26.5$20.9 million during the three months ended December 31, 2017September 30, 2022 as compared to the same period in the prior fiscal year. This was primarily due to an increase in payroll and payroll-related benefits of $13.8 million and an increase in facility and related resources of $2.2 million, both of which were predominantly theyear, partially as a result of recent acquisitions. Additionally,Payroll and payroll-related benefits, which is comprised of salaries, benefits and variable short-term incentives, increased by $5.2 million, commissions increased by $4.4 million, marketing expenses increased by $2.6 million, share-based compensation expense increased by $6.5$2.2 million, in conjunction with higher revenues. The remainder of the change was primarily attributable to normal growth in our business operations.other miscellaneous costs increased by $1.9 million, credit loss expense increased by $1.8 million and travel and communication expenses increased by $1.7 million. Overall, our sales and marketing expenses, as a percentage of total revenues, decreasedincreased to approximately 18% from approximately 19%.
Sales and marketing expenses increased by $54.2 million during the six months ended December 31, 2017 as20% compared to the same period in the prior fiscal year. This was primarily due to an increase in payroll and payroll-related benefits of $29.4 million and an increase in facility and related resources of $4.7 million, both of which were predominantly the result of recent acquisitions. Additionally, commissions expense increased by $12.8 million in conjunction with higher revenues. The remainder of the change was primarily attributable to normal growth in our business operations. Overall, our sales and marketing expenses, as a percentage of total revenues, decreased to approximatelyyear at 18% from approximately 19%.
Our sales and marketing labour resources increased by 373100 employees, from 1,6382,556 employees at December 31, 2016September 30, 2021 to 2,0112,656 employees at December 31, 2017, primarily as a result of our recent acquisitions.September 30, 2022.
General and administrative expenses consist primarily of payroll and payroll related benefits expenses, related overhead, audit fees, other professional fees, contract labour and consulting expenses and public company costs.
|
| | | | | | | | |
| | | Quarter-over-Quarter Change between Fiscal | | YTD-over-YTD
Change between Fiscal |
| (In thousands) | | 2018 and 2017 | | 2018 and 2017 |
| Payroll and payroll-related benefits | | $ | 7,123 |
| | $ | 12,060 |
|
| Contract labour and consulting | | (2,838 | ) | | (1,733 | ) |
| Share-based compensation | | (214 | ) | | (678 | ) |
| Travel and communication | | 626 |
| | 1,070 |
|
| Facilities | | 475 |
| | 1,849 |
|
| Other miscellaneous | | 3,899 |
| | 7,221 |
|
| Total year-over-year change in general and administrative expenses | | $ | 9,071 |
| | $ | 19,789 |
|
| | | | | |
| Change between Three Months Ended
September 30, 2022 and 2021 |
| (In thousands) | increase (decrease) |
| Payroll and payroll-related benefits | $ | 2,048 | |
| Contract labour and consulting | 140 | |
| Share-based compensation | 1,329 | |
| Travel and communication | 954 | |
| Facilities | 798 | |
| Other miscellaneous | 1,328 | |
| Total change in general and administrative expenses | $ | 6,597 | |
General and administrative expenses increased by $9.1$6.6 million during the three months ended December 31, 2017September 30, 2022 as compared to the same period in the prior fiscal year, partially as a result of recent acquisitions. Payroll and payroll-related benefits, which is comprised of salaries, benefits and variable short-term incentives, increased by $2.0 million. Additionally, share-based compensation expense increased by $1.3 million, other miscellaneous costs, which include professional fees such as legal, audit and tax related expenses increased by $1.3 million, travel and communication expenses increased by $1.0 million and facility-related expenses increased by $0.8 million. Overall, general and administrative expenses, as a percentage of total revenues, remained stable at 9%.
Our general and administrative labour resources decreased by 48 employees, from 1,912 employees at September 30, 2021 to 1,864 employees at September 30, 2022.
Depreciation expenses:
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| (In thousands) | 2022 | | Change
increase (decrease) | | 2021 |
| Depreciation | $ | 23,174 | | | $ | 1,788 | | | $ | 21,386 | |
Depreciation expenses increased during the three months ended September 30, 2022 by $1.8 million compared to the same periods in the prior fiscal year. Depreciation expenses as a percentage of total revenue remained stable for the three months ended September 30, 2022 at 3% compared to the same periods in the prior fiscal year.
Amortization of acquired customer-based intangibleassets:
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| (In thousands) | 2022 | | Change
increase (decrease) | | 2021 |
| Amortization of acquired customer-based intangible assets | $ | 54,438 | | | $ | 2,554 | | | $ | 51,884 | |
Amortization of acquired customer-based intangible assets increased during the three months ended September 30, 2022 by $2.6 million as compared to the same period in the prior fiscal year. This was primarily duerelated to an increase in payroll and payroll-related benefits of $7.1 million and an increase in facilities expense of $0.5 million, which were predominantly the result of recent acquisitions, and an increase in other miscellaneous expenses of $3.9 million, which includes professional fees such as legal, audit and tax related expenses. These increases were partially offset by a $2.8 million reduction in contract labour and consulting. The remainder of the change was attributable to normal growth in our business operations. Overall, general and administrative expenses, as a percentage of total revenue remained stable at approximately 7%.
General and administrative expenses increased by $19.8 million during the six months ended December 31, 2017 as compared to the same period in the prior fiscal year. This was primarily due to an increase in payroll and payroll-related benefits of $12.1 million and an increase in facilities expense of $1.8 million, which was predominantly the result of recent acquisitions, and an increase in other miscellaneous expenses of $7.2 million, which includes professional fees such as legal,
audit and tax related expenses. These were partially offset by a $1.7 million reduction in contract labour and consulting. The remainder of the change was attributable to normal growth in our business operations. Overall, general and administrative expenses, as a percentage of total revenue decreased slightly to 7% from approximately 8%.
Our general and administrative labour resources increased by 276 employees, from 1,246 employees at December 31, 2016 to 1,522 employees at December 31, 2017, primarily as a result of our recent acquisitions.
Depreciation expenses:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, | | Six Months Ended December 31, |
| (In thousands) | | 2017 | | Change increase (decrease) | | 2016 | | 2017 | | Change increase (decrease) | | 2016 |
| Depreciation | | $ | 22,071 |
| | $ | 6,770 |
| | $ | 15,301 |
| | 40,949 |
| | 10,378 |
| | 30,571 |
|
Depreciation expenses increased by $6.8 million and $10.4 million, respectively, during the three and six months ended December 31, 2017 as compared to the same periods in the prior fiscal year, in accordance with increased capital asset expenditures. Depreciation expense remained relatively stable as a percentage of total revenue, at approximately 3%.
Amortization of acquired customer-based intangibleassets:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, | | Six Months Ended December 31, |
| (In thousands) | | 2017 | | Change increase (decrease) | | 2016 | | 2017 | | Change increase (decrease) | | 2016 |
| Amortization of acquired customer-based intangible assets | | $ | 46,268 |
| | $ | 12,453 |
| | $ | 33,815 |
| | $ | 90,057 |
| | $ | 22,634 |
| | $ | 67,423 |
|
Acquired customer-based intangible assets amortization expense increased by $12.5 million and $22.6 million, respectively, during the three and six months ended December 31, 2017 as compared to the same periods in the prior fiscal year. This was primarily due to an increase in amortization of $14.4 million and $27.6 million, respectively, relating to newly acquired customer-based intangible assets from ourrecent acquisitions of Guidance, Covisint, ECD Business, CCM Business, and Recommind. This increase in amortization was partially offset by a reduction of $2.0 million and $5.0 million, respectively, relating to certain customer-based intangible assets pertaining to previous acquisitions becoming fully amortized.over the prior fiscal year.
Special charges (recoveries):
Special charges (recoveries) typically relate to amounts that we expect to pay in connection with restructuring plans, relating to employee workforce reduction and abandonment of excess facilities, acquisition-related costs and other similar one-time charges and recoveries. Generally, we implement such plans in the context of integrating acquired entities with existing OpenText operations with that of acquired entities.and most recently in response to our return to office planning. Actions related to such restructuring plans are typically completed within a period of one year. In certain limited situations, if the planned activity does not need to be implemented, or an expense lower than anticipated is paid out, we record a recovery of the originally recorded expense to Special charges.charges (recoveries).
| | | | | Three Months Ended December 31, | | Six Months Ended December 31, | | Three Months Ended September 30, |
| (In thousands) | | 2017 | | Change increase (decrease) | | 2016 | | 2017 | | Change increase (decrease) | | 2016 | (In thousands) | 2022 | | Change
increase (decrease) | | 2021 |
| Special charges (recoveries) | | $ | 715 |
| | $ | (10,402 | ) | | $ | 11,117 |
| | $ | 18,746 |
| | $ | (4,825 | ) | | $ | 23,571 |
| Special charges (recoveries) | $ | 14,281 | | | $ | 13,937 | | | $ | 344 | |
Special charges decreased(recoveries) increased by $10.4$13.9 million during the three months ended December 31, 2017 asSeptember 30, 2022 over the comparative period. Restructuring activities increased by $6.1 million during the three months ended September 30, 2022 primarily related to the Fiscal 2022 Restructuring Plan. Additionally, acquisition related costs increased by $3.9 million, primarily due to the Micro Focus Acquisition and other miscellaneous charges increased by $3.8 million, primarily driven by pre-acquisition equity incentives of Zix, which upon acquisition were replaced by equivalent value cash settlements (see Note 19 “Acquisitions” to our Condensed Consolidated Financial Statements) compared to the same period in the prior fiscal year. The decrease was primarily due to (i) a reduction in expense of $8.2 million relating to one-time commitments fees incurred during Fiscal 2017 that did not reoccur in Fiscal 2018, (ii) a reduction in acquisition related costs of $2.7 million, (iii) a reduction in expense of $2.5 million relating to an Enterprise Resource Planning (ERP) implementation project that was implemented in early July 2017, and (iv) a decrease of $1.0 million relating to a higher net impact of reversals from certain pre-acquisition sales and use tax liabilities and interest being settled, or in certain instances, becoming statute barred, as compared to the prior fiscal year. These decreases were partially offset by (i) a $3.2 million increase in restructuring activities and (ii) an increase of $0.2 million relating to post-acquisition integration costs necessary to streamline acquired companies into our operations. The remainder of the change is due to miscellaneous items.
Special charges decreased by $4.8 million during the six months ended December 31, 2017 as compared to the same period in the prior fiscal year. The decrease was primarily due to (i) a reduction in expense of $9.2 million relating to commitments fees incurred during Fiscal 2017 that did not reoccur in Fiscal 2018, (ii) a reduction in acquisition related costs of
$7.2 million, (iii) a reduction in expenses of $1.2 million relating to post-acquisition integration costs necessary to streamline acquired companies into our operations and (iv) a reduction in expense of $1.2 million relating to an ERP implementation project that was implemented in early July 2017. These decreases were partially offset by (i) a $12.0 million increase in restructuring activities and (ii) $0.1 million relating to a lower net impact of reversals from certain pre-acquisition sales and use tax liabilities and interest being settled, or in certain instances, becoming statute barred, as compared to the prior fiscal year. The remainder of the change is due to miscellaneous items.
For more details on Special charges (recoveries), see note 17 "SpecialNote 18 “Special Charges (Recoveries)"” to our Condensed Consolidated Financial Statements.
Other Income (Expense), Net
OtherThe components of other income (expense), net relateswere as follows:
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| (In thousands) | 2022 | | Change
increase (decrease) | | 2021 |
Foreign exchange gains (losses) | $ | (1,361) | | | $ | (1,712) | | | $ | 351 | |
Unrealized losses on derivatives not designated as hedges (1) | (181,461) | | | $ | (181,461) | | | — | |
OpenText share in net income (loss) of equity investees (2) | (6,534) | | | (35,849) | | | 29,315 | |
| Other miscellaneous income (expense) | 125 | | | 9 | | | 116 | |
| Total other income (expense), net | $ | (189,231) | | | $ | (219,013) | | | $ | 29,782 | |
__________________________
(1)Represents the unrealized losses on our derivatives not designated as hedges related to certain non-operational charges consisting primarily of transactional foreign exchange gains (losses). This income (expense) is dependent upon the change in foreign currency exchange rates vis-à-vis the functional currency of the legal entity. Other income (expense), net also includesproposed Micro Focus Acquisition (see Note 17 “Derivative Instruments and Hedging Activities” for more details).
(2)Represents our share of income or losses in non-marketable equity securities accounted for under the equity method.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, | | Six Months Ended December 31, |
| (In thousands) | | 2017 | | Change increase (decrease) | | 2016 | | 2017 | | Change increase (decrease) | | 2016 |
| Other income (expense), net | | $ | 5,547 |
| | $ | 9,105 |
| | $ | (3,558 | ) | | $ | 15,771 |
| | $ | 12,630 |
| | $ | 3,141 |
|
For the three months ended December 31, 2017, Other income, net included (i) a gain of $5.0 million in connection with the settlement of a certain breach of contractual arrangement, (ii) foreign exchange gains of $0.3 million on our inter-company transactions compared to $4.0 million in foreign exchange losses during the same period in the prior fiscal year, and (iii) a net gain of approximately $0.3 million relating to our share of net income (loss) of equity investees, which approximates fair value and subject to volatility based on market trends and business conditions, based on our interest in non-marketable equitycertain investment funds in which we are a limited partner. Our interests in each of these investees range from 4% to below 20% and these investments are accounted for underusing the equity method compared to a gain of $0.5 million during the same period in the prior fiscal year.
For the six months ended December 31, 2017,(see Note 9 “Prepaid Expenses and Other income, net included (i) a gain of $5.0 million in connection with the settlement of a certain breach of contractual arrangement, (ii) foreign exchange gains of $9.1 million on our inter-company transactions compared to $2.9 million in foreign exchange losses during the same period in the prior fiscal year; (iii) a net loss of approximately $0.2 million relatingAssets” to our shareCondensed Consolidated Financial Statements for more details).
Interest and Other Related Expense, Net
Interest and other related expense, net is primarily comprised of interest paid and accrued on our debt facilities, offset by interest income earned on our cash and cash equivalents.
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| (In thousands) | 2022 | | Change
increase (decrease) | | 2021 |
Interest expense related to total outstanding debt (1) | $ | 43,168 | | | $ | 7,604 | | | $ | 35,564 | |
| Interest income | (5,431) | | | (4,593) | | | (838) | |
| Other miscellaneous expense | 2,645 | | | 316 | | | 2,329 | |
| Total interest and other related expense, net | $ | 40,382 | | | $ | 3,327 | | | $ | 37,055 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, | | Six Months Ended December 31, |
| (In thousands) | | 2017 | | Change increase (decrease) | | 2016 | | 2017 | | Change increase (decrease) | | 2016 |
| Interest and other related expense, net | | $ | 34,092 |
| | $ | 6,349 |
| | $ | 27,743 |
| | $ | 67,380 |
| | $ | 12,362 |
| | $ | 55,018 |
|
Interest and other related expense, net increased by $6.3 million and $12.4 million, respectively, during the three and six months ended December 31, 2017 as compared to the same periods in the prior fiscal year. This was primarily due to additional interest expense incurred relating to the reopening of Senior Notes 2026 (as defined herein), issued in December 2016, of $3.1 million and $6.8 million, respectively, and additional interest incurred relating to outstanding balances on the Revolver (as defined herein) of $2.8 million and $4.6 million, respectively.
(1)For more details see note 10 "Long-Term Debt"Note 11 “Long-Term Debt” to our Condensed Consolidated Financial Statements.
Provision for (Recovery of) Income Taxes
We operate in several tax jurisdictions and are exposed to various foreign tax rates. We also note that we are subject to
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| (In thousands) | 2022 | | Change
increase (decrease) | | 2021 |
| Provision for income taxes | $ | 33,625 | | | $ | (9,825) | | | $ | 43,450 | |
The Company’s effective tax rate discrepancies between our domesticfor the three months ended September 30, 2022 was (40.4)%, compared to a provision of 24.8% for the three months ended September 30, 2021. The Company’s effective tax rate and foreign tax ratesfor the three months ended September 30, 2022 differs from the Canadian statutory rate of 26.5% primarily due to the pre-tax loss created by the mark-to-market valuation on the derivatives not designated as hedges that are significant and these discrepancies are primarily related to earningsthe Company entered into in the United States.
Please also see Part II, Item 1A "Risk Factors" elsewhere in this Quarterly Report on Form 10-Q.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, | | Six Months Ended December 31, |
| (In thousands) | | 2017 | | Change increase (decrease) | | 2016 | | 2017 | | Change increase (decrease) | | 2016 |
| Provision for (recovery of) income taxes | | $ | 53,146 |
| | $ | 22,324 |
| | $ | 30,822 |
| | $ | 80,515 |
| | $ | 909,118 |
| | $ | (828,603 | ) |
In July 2016, we implemented a reorganization of our subsidiaries worldwideconnection with the viewproposed Micro Focus Acquisition, and the inability to continuing to enhance operational and administrative efficiencies through further consolidated ownership, management, and development of our IP in Canada, continuing to reduce the number of entities in our group and working towards our objective of havingrecognize a single operating legal entity in each jurisdiction. We believe our reorganization also reduces our exposure to global political and tax uncertainties, particularly in Europe. We believe that further consolidating our IP in Canada will continue to ensure appropriate legal protections for our consolidated IP, simplify legal, accounting and tax compliance, and improve our global cash management. A significant tax benefit of $876.1 million, associated primarily with the recognition of a net deferred tax asset arising from the entrymajority of the IP into Canada, was recognized in the first quarter of Fiscal 2017. We believe it is more likely than not that the deferredmark-to-market losses for tax asset will be realizedpurposes (see Note 17 “Derivative Instruments and therefore no valuation allowance was required. We continue to evaluate our taxable position quarterly and consider factors by taxing jurisdiction, including but not limited to factors such as estimated taxable income, any historical experience ofHedging Activities”). The mark-to-market losses are considered capital losses for tax purposes and require capital income to be recognized. Therefore we recorded a valuation allowance on the future growthportion of OpenText. This significantthe losses that are not supportable by capital gains. Other items impacting the rate include provision to return adjustments, a net increase in uncertain tax benefit is specifically tied to the reorganizationpositions, and applied to the first quarter of Fiscal 2017 onlypermanent items such as disallowed stock-based compensation and as a result, has notforeign passive income inclusion, partially offset by research and will not continue in future periods.
development credits. The Company’s effective tax rate decreased to a provision of 38.5% for the three months ended December 31, 2017, compared to a provision of 40.6% forSeptember 30, 2021 differs from the three months ended December 31, 2016. The increase in tax expense of $22.3 million wasCanadian statutory rate primarily due to (i) the impact of changes in US tax legislation in Fiscal 2018 resulting in a provisional charge of $15.3 million, (ii) an increase of $13.3 million on account of the Company having higher income before taxes, including the impact of foreign tax rates,research and (iii) an increase of $1.6 million resulting from the reversals of reserves in Fiscal 2017 that did not reoccur in Fiscal 2018,development credits, partially offset by (i) a decrease of $4.8 million relating to differences in tax filingsthe US Base Erosion and Anti-Abuse Tax (US BEAT).
Additionally, the provision from provisions, and (ii) a decrease of $1.1 million relating to a decrease in amortization of deferred charges. The remainder of the difference was due to normal course movements and non-material items.
The effective tax rate increased to a provision of 39.8% for the six months ended December 31, 2017, compared to a recovery of 640.6% for the six months ended December 31, 2016. The increase in tax expense of $909.1 million was primarily due to (i) a significant tax benefit of $876.1 million resulting from the Fiscal 2017 internal reorganization as described above which did not reoccur in Fiscal 2018, (ii) the impact of changes in US tax legislation in Fiscal 2018 resulting in a provisional charge of $15.3 million, (iii) an increase of $17.1 million on account of the Company having higher income before taxes, including the impact of foreign tax rates, and (iv) an increase of $5.2 million resulting from the reversals of reserves in Fiscal 2017 that did not reoccur in Fiscal 2018, offset by (i) a decrease of $2.6 million relating to differences in tax filings from provisions, and (ii) a decrease of $2.1 million relating to a decrease in amortization of deferred charges. The remainder of the difference was due to normal course movements and non-material items.
For information with regards to certain potential tax contingencies, see note 13 "Guarantees and Contingencies" to our Condensed Consolidated Financial Statements.
On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act which significantly changes the existing US tax laws,of 2017 that requires capitalization and amortization of research and development costs is effective starting Fiscal 2023. If not deferred, modified or repealed, this provision may materially increase future cash taxes.
The Inflation Reduction Act and CHIPS and Science Act were signed into law in August 2022. The Inflation Reduction Act introduced new provisions, including a reduction in15% corporate alternative minimum tax for certain large corporations that have at least an average of $1 billion adjusted financial statement income over a consecutive three-tax-year period. The corporate minimum tax will be effective for Fiscal 2024. We are currently evaluating the federal corporate tax rate from 35% to 21%,applicability and the transition of US international taxation from a worldwide tax system to a territorial tax system. As a result of the enactment of the legislation, the Company incurred a provisional one-time tax expense of $15.3 million in the second quarter of Fiscal 2018, primarily related to the transition tax on accumulated foreign earnings and the re-measurement of certain deferred tax assets and liabilities. The portion of this anticipated increase to tax expense attributable to the transition tax is payable over a period of up to eight years. The impact of the $15.3 million adjustment resulting from the US legislation on the effective tax rate is an increase of 11.1% for the three months ended December 31, 2017 and 7.6% for the six months ended December 31, 2017.
The $15.3 million is a provisional amount in respect of rate change, Alternative Minimum Tax (AMT), and foreign earnings in accordance with SAB 118. The finalization of the provisional one-time amount is pending finalization of the re-assessment of the timing of reversals of certain deferred tax assets and liabilities and additional considerations related to undistributed foreign earnings and evaluating whether any portion of our existing AMT credit carryforwards are not expected to be refundable as a result of the repeal of corporate AMT. Additional information such as final Fiscal 2018 income and detailed earnings and profits calculations for foreign subsidiaries may result in changes to the provisional amount during the SAB 118 measurement period.
The Company continues to assess the impacteffect of the new law to our financial results.
For information on its consolidated financial statementscertain potential tax contingencies, including the CRA matter, see Note 14 “Guarantees and anticipates finalizing the determinationContingencies” and Note 15 “Income Taxes” to our Condensed Consolidated Financial Statements. Please also see Part I, Item 1A, “Risk Factors” in our Annual Report on or before December 22, 2018 in accordance with SAB 118.Form 10-K for Fiscal 2022.
Use of Non-GAAP Financial Measures
In addition to reporting financial results in accordance with U.S. GAAP, the Company provides certain financial measures that are not in accordance with U.S. GAAP (Non-GAAP). These Non-GAAP financial measures have certain limitations in that they do not have a standardized meaning and thus the Company's definition may be different from similar Non-GAAP financial measures used by other companies and/or analysts and may differ from period to period. Thus, it may be more difficult to compare the Company's financial performance to that of other companies. However, the Company's management compensates for these limitations by providing the relevant disclosure of the items excluded in the calculation of these Non-GAAP financial measures both in its reconciliation to the U.S. GAAP financial measures and its Condensed Consolidated Financial Statements, all of which should be considered when evaluating the Company's results.
The Company uses these Non-GAAP financial measures to supplement the information provided in its Condensed Consolidated Financial Statements, which are presented in accordance with U.S. GAAP. The presentation of Non-GAAP financial measures areis not meant to be a substitute for financial measures presented in accordance with U.S. GAAP, but rather should be evaluated in conjunction with and as a supplement to such U.S. GAAP measures. OpenText strongly encourages investors to review its financial information in its entirety and not to rely on a single financial measure. The Company therefore believes that despite these limitations, it is appropriate to supplement the disclosure of the U.S. GAAP measures with certain Non-GAAP measures defined below.
Non-GAAP-based net income and Non-GAAP-based EPS, attributable to OpenText, are consistently calculated as GAAP-based net income or earnings (loss) per share, attributable to OpenText, on a diluted basis, after giving effect toexcluding the effects of the amortization of acquired intangible assets, other income (expense), share-based compensation, and Specialspecial charges (recoveries), all net of tax and any tax benefits/expense items unrelated to current period income, as further described in the tables below. Non-GAAP-based gross profit is the arithmetical sum of GAAP-based gross profit and the amortization of acquired technology-based intangible assets and share-based compensation within cost of sales. Non-GAAP-based gross margin is calculated as Non-GAAP-based gross profit expressed as a percentage of total revenue. Non-GAAP-based income from operations is calculated as GAAP-based income from operations, excluding the amortization of acquired intangible assets, Specialspecial charges (recoveries), and share-based compensation expense. Non-GAAP-based operating margin is calculated as Non-GAAP-based income from operations expressed as a percentage of total revenue.
Adjusted earnings (loss) before interest, taxes, depreciation and amortization (Adjusted EBITDA) is consistently calculated as GAAP-based net income, attributable to OpenText, excluding interest income (expense), provision for income taxes, depreciation and amortization of acquired intangible assets, other income (expense), share-based compensation and Specialspecial charges (recoveries).
The Company's management believes that the presentation of the above defined Non-GAAP financial measures provides useful information to investors because they portray the financial results of the Company before the impact of certain non-operational charges. The use of the term “non-operational charge” is defined for this purpose as an expense that does not impact the ongoing operating decisions taken by the Company's management and ismanagement. These items are excluded based upon the way the Company's management evaluates the performance of the Company's business for use in the Company's internal reports. In the course of such evaluation and for the purpose of making operating decisions, the Company's management excludes certain items from its analysis, including amortization of acquired intangible assets, Special charges (recoveries), share-based compensation, other income (expense), and the taxation impact of these items. These items are excluded based upon the manner in which management evaluates the business of the Companyreports and are not excluded in the sense that they may be used under U.S. GAAP.
The Company does not acquire businesses on a predictable cycle, and therefore believes that the presentation of Non-GAAP measures, which in certain cases adjust for the impact of amortization of intangible assets and the related tax effects that are primarily related to acquisitions, will provide readers of financial statements with a more consistent basis for comparison across accounting periods and be more useful in helping readers understand the Company’s operating results and underlying operational trends. Additionally, the Company has engaged in various restructuring activities over the past several years, primarily due to acquisitions and most recently in response to our return to office planning, that have resulted in costs associated with reductions in headcount, consolidation of leased facilities and related costs, all which are recorded under the Company’s “Special charges (recoveries)” caption on the Condensed Consolidated Statements of Income. Each restructuring activity is a discrete event based on a unique set of business objectives or circumstances, and each differs in terms of its operational implementation, business impact and scope, and the size of each restructuring plan can vary significantly from period to period. Therefore, the Company believes that the exclusion of these special charges (recoveries) will also better aid readers of financial statements in the understanding and comparability of the Company's operating results and underlying operational trends.
In summary, the Company believes the provision of supplemental Non-GAAP measures allow investors to evaluate the operational and financial performance of the Company's core business using the same evaluation measures that management uses, and is therefore a useful indication of OpenText's performance or expected performance of future operations and facilitates period-to-period comparison of operating performance (although prior performance is not necessarily indicative of future performance). As a result, the Company considers it appropriate and reasonable to provide, in addition to U.S. GAAP measures, supplementary Non-GAAP financial measures that exclude certain items from the presentation of its financial results.
The following charts provide unaudited reconciliations of U.S. GAAP-based financial measures to Non-GAAP-based financial measures for the following periods presented:presented.
Reconciliation of selected GAAP-based measures to Non-GAAP-based measures
for the three months ended December 31, 2017September 30, 2022
(inIn thousands, except for per share data)
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| GAAP-based Measures | GAAP-based Measures
% of Total Revenue | Adjustments | Note | Non-GAAP-based Measures | Non-GAAP-based Measures
% of Total Revenue |
| Cost of revenues | | | | | | |
| Cloud services and subscriptions | $ | 131,799 | | | $ | (2,033) | | (1) | $ | 129,766 | | |
| Customer support | 27,354 | | | (567) | | (1) | 26,787 | | |
| Professional service and other | 53,800 | | | (1,525) | | (1) | 52,275 | | |
| Amortization of acquired technology-based intangible assets | 42,637 | | | (42,637) | | (2) | — | | |
| GAAP-based gross profit and gross margin (%) / Non-GAAP-based gross profit and gross margin (%) | 593,688 | | 69.7% | 46,762 | | (3) | 640,450 | | 75.2% |
| Operating expenses | | | | | | |
| Research and development | 110,198 | | | (6,854) | | (1) | 103,344 | | |
| Sales and marketing | 167,170 | | | (6,859) | | (1) | 160,311 | | |
| General and administrative | 78,074 | | | (5,370) | | (1) | 72,704 | | |
| Amortization of acquired customer-based intangible assets | 54,438 | | | (54,438) | | (2) | — | | |
| Special charges (recoveries) | 14,281 | | | (14,281) | | (4) | — | | |
| GAAP-based income from operations / Non-GAAP-based income from operations | 146,353 | | | 134,564 | | (5) | 280,917 | | |
| Other income (expense), net | (189,231) | | | 189,231 | | (6) | — | | |
| Provision for income taxes | 33,625 | | | 50 | | (7) | 33,675 | | |
| GAAP-based net income (loss) / Non-GAAP-based net income, attributable to OpenText | (116,929) | | | 323,745 | | (8) | 206,816 | | |
| GAAP-based earnings (loss) per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText | $ | (0.43) | | | $ | 1.20 | | (8) | $ | 0.77 | | |
(1)Adjustment relates to the exclusion of share-based compensation expense from our Non-GAAP-based operating expenses as this expense is excluded from our internal analysis of operating results.
(2)Adjustment relates to the exclusion of amortization expense from our Non-GAAP-based operating expenses as the timing and frequency of amortization expense is dependent on our acquisitions and is hence excluded from our internal analysis of operating results.
(3)GAAP-based and Non-GAAP-based gross profit stated in dollars and gross margin stated as a percentage of total revenue.
(4)Adjustment relates to the exclusion of special charges (recoveries) from our Non-GAAP-based operating expenses as special charges (recoveries) are generally incurred in the periods relevant to an acquisition and include certain charges or recoveries that are not indicative or related to continuing operations and are therefore excluded from our internal analysis of operating results. See Note 18 “Special Charges (Recoveries)” to our Condensed Consolidated Financial Statements for more details.
(5)GAAP-based and Non-GAAP-based income from operations stated in dollars.
(6)Adjustment relates to the exclusion of other income (expense) from our Non-GAAP-based operating expenses as other income (expense) generally relates to the transactional impact of foreign exchange and is generally not indicative or related to continuing operations and is therefore excluded from our internal analysis of operating results. Other income (expense) also includes our share of income (losses) from our holdings in investments as a limited partner. We do not actively trade equity securities in these privately held companies nor do we plan our ongoing operations based around any anticipated fundings or distributions from these investments. We exclude gains and losses on these investments as we do not believe they are reflective of our ongoing business and operating results. Other income (expense) also includes unrealized gains (losses) on our derivatives which are not designated as hedges, that are related to the financing of the Micro Focus Acquisition. We exclude gains and losses on these derivatives as we do not believe they are reflective on our ongoing business and operating results.
(7)Adjustment relates to differences between the GAAP-based tax provision rate of approximately (40)% and a Non-GAAP-based tax rate of approximately 14%; these rate differences are due to the income tax effects of items that are excluded for the purpose of calculating Non-GAAP-based net income. Such excluded items include amortization, share-based compensation, special charges (recoveries) and other income (expense), net. Also excluded are tax benefits/expense items unrelated to current period income such as changes in reserves for tax uncertainties and valuation allowance reserves and “book to return” adjustments for tax return filings and tax assessments. Included is the amount of net tax benefits arising from the internal reorganization that occurred in Fiscal 2017 assumed to be allocable to the current period based on the forecasted utilization period. In arriving at our Non-GAAP-based tax rate of approximately 14%, we analyzed the individual adjusted expenses and took into consideration the impact of statutory tax rates from local jurisdictions incurring the expense.
|
| | | | | | | | | | | | |
| | Three Months Ended December 31, 2017 |
| | GAAP-based Measures | GAAP-based Measures % of Total Revenue | Adjustments | Note | Non-GAAP-based Measures | Non-GAAP-based Measures % of Total Revenue |
| Cost of revenues | | | | | | |
| Cloud services and subscriptions | $ | 90,418 |
| | $ | (462 | ) | (1) | $ | 89,956 |
| |
| Customer support | 33,194 |
| | (327 | ) | (1) | 32,867 |
| |
| Professional service and other | 64,985 |
| | (603 | ) | (1) | 64,382 |
| |
| Amortization of acquired technology-based intangible assets | 47,128 |
| | (47,128 | ) | (2) | — |
| |
GAAP-based gross profit and gross margin (%) /
Non-GAAP-based gross profit and gross margin (%) | 494,093 |
| 67.3% | 48,520 |
| (3) | 542,613 |
| 73.9% |
| Operating expenses | | | | | | |
| Research and development | 80,304 |
| | (1,587 | ) | (1) | 78,717 |
| |
| Sales and marketing | 129,142 |
| | (2,095 | ) | (1) | 127,047 |
| |
| General and administrative | 48,985 |
| | (2,084 | ) | (1) | 46,901 |
| |
| Amortization of acquired customer-based intangible assets | 46,268 |
| | (46,268 | ) | (2) | — |
| |
| Special charges (recoveries) | 715 |
| | (715 | ) | (4) | — |
| |
| GAAP-based income from operations and operating margin (%) / Non-GAAP-based income from operations and operating margin (%) | 166,608 |
| 22.7% | 101,269 |
| (5) | 267,877 |
| 36.5% |
| Other income (expense), net | 5,547 |
| | (5,547 | ) | (6) | — |
| |
| Provision for (recovery of) income taxes | 53,146 |
| | (22,095 | ) | (7) | 31,051 |
| |
| GAAP-based net income / Non-GAAP-based net income, attributable to OpenText | 85,111 |
| | 117,817 |
| (8) | 202,928 |
| |
| GAAP-based earnings per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText | $ | 0.32 |
| | $ | 0.44 |
| (8) | $ | 0.76 |
| |
| | | | | | | | |
| Three Months Ended September 30, 2022 |
| | Per share diluted |
| GAAP-based net income (loss), attributable to OpenText | $ | (116,929) | | $ | (0.43) | |
| Add: | | |
| Amortization | 97,075 | | 0.36 | |
| Share-based compensation | 23,208 | | 0.09 | |
| Special charges (recoveries) | 14,281 | | 0.05 | |
| Other (income) expense, net | 189,231 | | 0.70 | |
| GAAP-based provision for income taxes | 33,625 | | 0.12 | |
| Non-GAAP-based provision for income taxes | (33,675) | | (0.12) | |
| Non-GAAP-based net income, attributable to OpenText | $ | 206,816 | | $ | 0.77 | |
Reconciliation of Adjusted EBITDA | | | | | |
| Three Months Ended September 30, 2022 |
(1)GAAP-based net income (loss), attributable to OpenText | Adjustment relates to the exclusion of share-based compensation expense from our Non-GAAP-based operating expenses as this expense is excluded from our internal analysis of operating results. |
(2)$ | Adjustment relates to the exclusion of amortization expense from our Non-GAAP-based operating expenses as the timing and frequency of amortization expense is dependent on our acquisitions and is hence excluded from our internal analysis of operating results. |
(3) | GAAP-based and Non-GAAP-based gross profit stated in dollars and gross margin stated as a percentage of total revenue. |
(4) | Adjustment relates to the exclusion of Special charges (recoveries) from our Non-GAAP-based operating expenses as Special charges (recoveries) are generally incurred in the periods relevant to an acquisition and include one-time, non-recurring charges or recoveries that are not indicative or related to continuing operations, and are therefore excluded from our internal analysis of operating results. See note 17 "Special Charges (Recoveries)" to our Condensed Consolidated Financial Statements for more details. |
(5) | GAAP-based and Non-GAAP-based income from operations stated in dollars and operating margin stated as a percentage of total revenue. |
(6) | Adjustment relates to the exclusion of Other income (expense) from our Non-GAAP-based operating expenses as Other income (expense) relates primarily to the transactional impact of foreign exchange and is generally not indicative or related to continuing operations and is therefore excluded from our internal analysis of operating results. Other income (expense) also includes our share of income (losses) from our holdings in non-marketable securities investments as a limited partner. We do not actively trade equity securities in these privately held companies nor do we plan our ongoing operations based around any anticipated fundings or distributions from these investments. We exclude gains and losses on these investments as we do not believe they are reflective of our ongoing business and operating results. |
(7) | Adjustment relates to differences between the GAAP-based tax provision rate of approximately 38% and a Non-GAAP-based tax rate of approximately 13%; these rate differences are due to the income tax effects of expenses that are excluded for the purpose of calculating Non-GAAP-based adjusted net income. Such excluded expenses include amortization, share-based compensation, Special charges (recoveries) and other income (expense), net. Also excluded are tax benefits/expense items unrelated to current period income such as changes in reserves for tax uncertainties and valuation allowance reserves, and “book to return” adjustments for tax return filings and tax assessments. Included is the amount of net tax benefits arising from the internal reorganization (see note 14 "Income Taxes") assumed to be allocable to the current period based on the forecasted utilization period. In arriving at our Non-GAAP-based tax rate of approximately 13%, we analyzed the individual adjusted expenses and took into consideration the impact of statutory tax rates from local jurisdictions incurring the expense. In addition, as a result of the changes in US tax reform legislation that was enacted on December 22, 2017 through the Tax Cuts and Jobs Act, the Company has reassessed its Non-GAAP-based tax rate to be approximately 14% for the six months ended December 31, 2017, down from 15%. Pursuant to this, the Non-GAAP-based tax rate of approximately 13% for the three months ended December 31, 2017 includes a one-time cumulative catch up of recoveries and charges, as though the Company's Non-GAAP-based tax rate was 14% as of July 1, 2017. |
|
| (116,929) | |
(8)Add: | Reconciliation |
| Provision for income taxes | 33,625 | |
| Interest and other related expense, net | 40,382 | |
Amortization of GAAP-basedacquired technology-based intangible assets | 42,637 | |
| Amortization of acquired customer-based intangible assets | 54,438 | |
| Depreciation | 23,174 | |
| Share-based compensation | 23,208 | |
| Special charges (recoveries) | 14,281 | |
Other (income) expense, net income to Non-GAAP-based net income: | 189,231 | |
| Adjusted EBITDA | $ | 304,047 | |
|
| | | | | | |
| | Three Months Ended December 31, 2017 |
| | | Per share diluted |
| GAAP-based net income, attributable to OpenText | $ | 85,111 |
| $ | 0.32 |
|
| Add: | | |
| Amortization | 93,396 |
| 0.35 |
|
| Share-based compensation | 7,158 |
| 0.03 |
|
| Special charges (recoveries) | 715 |
| — |
|
| Other (income) expense, net | (5,547 | ) | (0.02 | ) |
| GAAP-based provision for (recovery of ) income taxes | 53,146 |
| 0.20 |
|
| Non-GAAP-based provision for income taxes | (31,051 | ) | (0.12 | ) |
| Non-GAAP-based net income, attributable to OpenText | $ | 202,928 |
| $ | 0.76 |
|
Reconciliation of Adjusted EBITDA
|
| | | |
| | Three Months Ended December 31, 2017 |
| GAAP-based net income, attributable to OpenText | $ | 85,111 |
|
| Add: | |
| Provision for (recovery of) income taxes | 53,146 |
|
| Interest and other related expense, net | 34,092 |
|
| Amortization of acquired technology-based intangible assets | 47,128 |
|
| Amortization of acquired customer-based intangible assets | 46,268 |
|
| Depreciation | 22,071 |
|
| Share-based compensation | 7,158 |
|
| Special charges (recoveries) | 715 |
|
| Other (income) expense, net | (5,547 | ) |
| Adjusted EBITDA | $ | 290,142 |
|
Reconciliation of selected GAAP-based measures to Non-GAAP-based measures
for the three months ended December 31, 2016September 30, 2021
(inIn thousands, except for per share data)
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2021 |
| GAAP-based Measures | GAAP-based Measures
% of Total Revenue | Adjustments | Note | Non-GAAP-based Measures | Non-GAAP-based Measures
% of Total Revenue |
| Cost of revenues | | | | | | |
| Cloud services and subscriptions | $ | 119,779 | | | $ | (907) | | (1) | $ | 118,872 | | |
| Customer support | 29,483 | | | (721) | | (1) | 28,762 | | |
| Professional service and other | 51,725 | | | (721) | | (1) | 51,004 | | |
| Amortization of acquired technology-based intangible assets | 53,167 | | | (53,167) | | (2) | — | | |
| GAAP-based gross profit and gross margin (%) / Non-GAAP-based gross profit and gross margin (%) | 574,185 | | 69.0% | 55,516 | | (3) | 629,701 | | 75.7% |
| Operating expenses | | | | | | |
| Research and development | 100,165 | | | (2,934) | | (1) | 97,231 | | |
| Sales and marketing | 146,240 | | | (4,610) | | (1) | 141,630 | | |
| General and administrative | 71,477 | | | (4,041) | | (1) | 67,436 | | |
| Amortization of acquired customer-based intangible assets | 51,884 | | | (51,884) | | (2) | — | | |
| Special charges (recoveries) | 344 | | | (344) | | (4) | — | | |
| GAAP-based income from operations / Non-GAAP-based income from operations | 182,689 | | | 119,329 | | (5) | 302,018 | | |
| Other income (expense), net | 29,782 | | | (29,782) | | (6) | — | | |
| Provision for income taxes | 43,450 | | | (6,355) | | (7) | 37,095 | | |
| GAAP-based net income / Non-GAAP-based net income, attributable to OpenText | 131,915 | | | 95,902 | | (8) | 227,817 | | |
| GAAP-based earnings per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText | $ | 0.48 | | | $ | 0.35 | | (8) | $ | 0.83 | | |
(1)Adjustment relates to the exclusion of share-based compensation expense from our Non-GAAP-based operating expenses as this expense is excluded from our internal analysis of operating results.
(2)Adjustment relates to the exclusion of amortization expense from our Non-GAAP-based operating expenses as the timing and frequency of amortization expense is dependent on our acquisitions and is hence excluded from our internal analysis of operating results.
(3)GAAP-based and Non-GAAP-based gross profit stated in dollars and gross margin stated as a percentage of total revenue.
(4)Adjustment relates to the exclusion of special charges (recoveries) from our Non-GAAP-based operating expenses as special charges (recoveries) are generally incurred in the periods relevant to an acquisition and include certain charges or recoveries that are not indicative or related to continuing operations and are therefore excluded from our internal analysis of operating results. See Note 18 “Special Charges (Recoveries)” to our Condensed Consolidated Financial Statements for more details.
(5)GAAP-based and Non-GAAP-based income from operations stated in dollars.
(6)Adjustment relates to the exclusion of other income (expense) from our Non-GAAP-based operating expenses as other income (expense) generally relates to the transactional impact of foreign exchange and is generally not indicative or related to continuing operations and is therefore excluded from our internal analysis of operating results. Other income (expense) also includes our share of income (losses) from our holdings in investments as a limited partner. We do not actively trade equity securities in these privately held companies nor do we plan our ongoing operations based around any anticipated fundings or distributions from these investments. We exclude gains and losses on these investments as we do not believe they are reflective of our ongoing business and operating results.
(7)Adjustment relates to differences between the GAAP-based tax provision rate of approximately 25% and a Non-GAAP-based tax rate of approximately 14%; these rate differences are due to the income tax effects of items that are excluded for the purpose of calculating Non-GAAP-based adjusted net income. Such excluded items include amortization, share-based compensation, special charges (recoveries) and other income (expense), net. Also excluded are tax benefits/expense items unrelated to current period income such as changes in reserves for tax uncertainties and valuation allowance reserves, and “book to return” adjustments for tax return filings and tax assessments. Included is the amount of net tax benefits arising from the internal reorganization that occurred in Fiscal 2017 assumed to be allocable to the current period based on the forecasted utilization period. In arriving at our Non-GAAP-based tax rate of approximately 14%, we analyzed the individual adjusted expenses and took into consideration the impact of statutory tax rates from local jurisdictions incurring the expense.
|
| | | | | | | | | | | | |
| | Three Months Ended December 31, 2016 |
| | GAAP-based Measures | GAAP-based Measures
% of Total Revenue | Adjustments | Note | Non-GAAP-based Measures | Non-GAAP-based Measures % of Total Revenue |
| Cost of revenues | | | | | | |
| Cloud services and subscriptions | $ | 73,150 |
| | $ | (211 | ) | (1) | $ | 72,939 |
| |
| Customer support | 27,349 |
| | (270 | ) | (1) | 27,079 |
| |
| Professional service and other | 40,295 |
| | (468 | ) | (1) | 39,827 |
| |
| Amortization of acquired technology-based intangible assets | 24,848 |
| | (24,848 | ) | (2) | — |
| |
GAAP-based gross profit and gross margin (%) /
Non-GAAP-based gross profit and gross margin (%) | 374,676 |
| 69.0% | 25,797 |
| (3) | 400,473 |
| 73.8% |
| Operating expenses | | | | | | |
| Research and development | 64,721 |
| | (1,995 | ) | (1) | 62,726 |
| |
| Sales and marketing | 102,651 |
| | (2,329 | ) | (1) | 100,322 |
| |
| General and administrative | 39,914 |
| | (2,299 | ) | (1) | 37,615 |
| |
| Amortization of acquired customer-based intangible assets | 33,815 |
| | (33,815 | ) | (2) | — |
| |
| Special charges (recoveries) | 11,117 |
| | (11,117 | ) | (4) | — |
| |
| GAAP-based income from operations and operating margin (%) / Non-GAAP-based income from operations and operating margin (%) | 107,157 |
| 19.7% | 77,352 |
| (5) | 184,509 |
| 34.0% |
| Other income (expense), net | (3,558 | ) | | 3,558 |
| (6) | — |
| |
| Provision for (recovery of) income taxes | 30,822 |
| | (7,319 | ) | (7) | 23,503 |
| |
| GAAP-based net income / Non-GAAP-based net income, attributable to OpenText | 45,022 |
| | 88,229 |
| (8) | 133,251 |
| |
| GAAP-based earnings per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText | $ | 0.18 |
| | $ | 0.36 |
| (8) | $ | 0.54 |
| |
| | | | | | | | |
| Three Months Ended September 30, 2021 |
| | Per share diluted |
| GAAP-based net income, attributable to OpenText | $ | 131,915 | | $ | 0.48 | |
| Add: | | |
| Amortization | 105,051 | | 0.38 | |
| Share-based compensation | 13,934 | | 0.05 | |
| Special charges (recoveries) | 344 | | — | |
| Other (income) expense, net | (29,782) | | (0.11) | |
| GAAP-based provision for income taxes | 43,450 | | 0.17 | |
| Non-GAAP-based provision for income taxes | (37,095) | | (0.14) | |
| Non-GAAP-based net income, attributable to OpenText | $ | 227,817 | | $ | 0.83 | |
Reconciliation of Adjusted EBITDA | | | | | |
| Three Months Ended September 30, 2021 |
(1)GAAP-based net income, attributable to OpenText | Adjustment relates to the exclusion of share-based compensation expense from our Non-GAAP-based operating expenses as this expense is excluded from our internal analysis of operating results. |
(2)$ | Adjustment relates to the exclusion of amortization expense from our Non-GAAP-based operating expenses as the timing and frequency of amortization expense is dependent on our acquisitions and is hence excluded from our internal analysis of operating results. |
(3) | GAAP-based and Non-GAAP-based gross profit stated in dollars and gross margin stated as a percentage of total revenue. |
(4) | Adjustment relates to the exclusion of Special charges (recoveries) from our Non-GAAP-based operating expenses as Special charges (recoveries) are generally incurred in the periods relevant to an acquisition and include one-time, non-recurring charges or recoveries that are not indicative or related to continuing operations, and are therefore excluded from our internal analysis of operating results. See note 17 "Special Charges (Recoveries)" to our Condensed Consolidated Financial Statements for more details. |
(5) | GAAP-based and Non-GAAP-based income from operations stated in dollars and operating margin stated as a percentage of total revenue. |
(6) | Adjustment relates to the exclusion of Other income (expense) from our Non-GAAP-based operating expenses as Other income (expense) relates primarily to the transactional impact of foreign exchange and is generally not indicative or related to continuing operations and is therefore excluded from our internal analysis of operating results. Other income (expense) also includes our share of income (losses) from our holdings in non-marketable securities investments as a limited partner. We do not actively trade equity securities in these privately held companies nor do we plan our ongoing operations based around any anticipated fundings or distributions from these investments. We exclude gains and losses on these investments as we do not believe they are reflective of our ongoing business and operating results. |
(7) | Adjustment relates to differences between the GAAP-based tax provision rate of approximately 41% and a Non-GAAP-based tax rate of approximately 15%; these rate differences are due to the income tax effects of expenses that are excluded for the purpose of calculating Non-GAAP-based adjusted net income. Such excluded expenses include amortization, share-based compensation, Special charges (recoveries) and other income (expense), net. Also excluded are tax benefits/expense items unrelated to current period income such as changes in reserves for tax uncertainties and valuation allowance reserves, and “book to return” adjustments for tax return filings and tax assessments. Included is the amount of net tax benefits arising from the internal reorganization (see note 14 "Income Taxes") assumed to be allocable to the current period based on the forecasted utilization period. In arriving at our Non-GAAP-based tax rate of approximately 15%, we analyzed the individual adjusted expenses and took into consideration the impact of statutory tax rates from local jurisdictions incurring the expense. |
|
| 131,915 | |
(8)Add: | Reconciliation |
| Provision for income taxes | 43,450 | |
| Interest and other related expense, net | 37,055 | |
Amortization of GAAP-basedacquired technology-based intangible assets | 53,167 | |
| Amortization of acquired customer-based intangible assets | 51,884 | |
| Depreciation | 21,386 | |
| Share-based compensation | 13,934 | |
| Special charges (recoveries) | 344 | |
Other (income) expense, net income to Non-GAAP-based net income: | (29,782) | |
| Adjusted EBITDA | $ | 323,353 | |
|
| | | | | | |
| | Three Months Ended December 31, 2016 |
| | | Per share diluted |
| GAAP-based net income, attributable to OpenText | $ | 45,022 |
| $ | 0.18 |
|
| Add: | | |
| Amortization | 58,663 |
| 0.24 |
|
| Share-based compensation | 7,572 |
| 0.03 |
|
| Special charges (recoveries) | 11,117 |
| 0.04 |
|
| Other (income) expense, net | 3,558 |
| 0.01 |
|
| GAAP-based provision for (recovery of ) income taxes | 30,822 |
| 0.12 |
|
| Non-GAAP-based provision for income taxes | (23,503 | ) | (0.08 | ) |
| Non-GAAP-based net income, attributable to OpenText | $ | 133,251 |
| $ | 0.54 |
|
|
| | | |
| | Three Months Ended December 31, 2016 |
| GAAP-based net income, attributable to OpenText | $ | 45,022 |
|
| Add: | |
| Provision for (recovery of) income taxes | 30,822 |
|
| Interest and other related expense, net | 27,743 |
|
| Amortization of acquired technology-based intangible assets | 24,848 |
|
| Amortization of acquired customer-based intangible assets | 33,815 |
|
| Depreciation | 15,301 |
|
| Share-based compensation | 7,572 |
|
| Special charges (recoveries) | 11,117 |
|
| Other (income) expense, net | 3,558 |
|
| Adjusted EBITDA | $ | 199,798 |
|
Reconciliation of selected GAAP-based measures to Non-GAAP-based measures for the six months ended December 31, 2017
(in thousands except for per share data)
|
| | | | | | | | | | | | |
| | Six Months Ended December 31, 2017 |
| | GAAP-based Measures | GAAP-based Measures % of Total Revenue | Adjustments | Note | Non-GAAP-based Measures | Non-GAAP-based Measures % of Total Revenue |
| Cost of revenues | | | | | | |
| Cloud services and subscriptions | $ | 174,748 |
| | $ | (984 | ) | (1) | $ | 173,764 |
| |
| Customer support | 65,985 |
| | (656 | ) | (1) | 65,329 |
| |
| Professional service and other | 124,444 |
| | (1,200 | ) | (1) | 123,244 |
| |
| Amortization of acquired technology-based intangible assets | 91,088 |
| | (91,088 | ) | (2) | — |
| |
GAAP-based gross profit and gross margin (%) /
Non-GAAP-based gross profit and gross margin (%) | 911,280 |
| 66.3% | 93,928 |
| (3) | 1,005,208 |
| 73.1% |
| Operating expenses | | | | | | |
| Research and development | 157,933 |
| | (3,213 | ) | (1) | 154,720 |
| |
| Sales and marketing | 251,964 |
| | (5,183 | ) | (1) | 246,781 |
| |
| General and administrative | 97,900 |
| | (4,157 | ) | (1) | 93,743 |
| |
| Amortization of acquired customer-based intangible assets | 90,057 |
| | (90,057 | ) | (2) | — |
| |
| Special charges (recoveries) | 18,746 |
| | (18,746 | ) | (4) | — |
| |
| GAAP-based income from operations and operating margin (%) / Non-GAAP-based income from operations and operating margin (%) | 253,731 |
| 18.5% | 215,284 |
| (5) | 469,015 |
| 34.1% |
| Other income (expense), net | 15,771 |
| | (15,771 | ) | (6) | — |
| |
| Provision for (recovery of) income taxes | 80,515 |
| | (24,286 | ) | (7) | 56,229 |
| |
| GAAP-based net income / Non-GAAP-based net income, attributable to OpenText | 121,707 |
| | 223,799 |
| (8) | 345,506 |
| |
| GAAP-based earnings per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText | $ | 0.46 |
| | $ | 0.84 |
| (8) | $ | 1.30 |
| |
|
| |
(1) | Adjustment relates to the exclusion of share-based compensation expense from our Non-GAAP-based operating expenses as this expense is excluded from our internal analysis of operating results. |
(2) | Adjustment relates to the exclusion of amortization expense from our Non-GAAP-based operating expenses as the timing and frequency of amortization expense is dependent on our acquisitions and is hence excluded from our internal analysis of operating results. |
(3) | GAAP-based and Non-GAAP-based gross profit stated in dollars and gross margin stated as a percentage of total revenue. |
(4) | Adjustment relates to the exclusion of Special charges (recoveries) from our Non-GAAP-based operating expenses as Special charges (recoveries) are generally incurred in the periods relevant to an acquisition and include one-time, non-recurring charges or recoveries that are not indicative or related to continuing operations, and are therefore excluded from our internal analysis of operating results. See note 17 "Special Charges (Recoveries)" to our Condensed Consolidated Financial Statements for more details. |
(5) | GAAP-based and Non-GAAP-based income from operations stated in dollars and operating margin stated as a percentage of total revenue. |
(6) | Adjustment relates to the exclusion of Other income (expense) from our Non-GAAP-based operating expenses as Other income (expense) relates primarily to the transactional impact of foreign exchange and is generally not indicative or related to continuing operations and is therefore excluded from our internal analysis of operating results. Other income (expense) also includes our share of income (losses) from our holdings in non-marketable securities investments as a limited partner. We do not actively trade equity securities in these privately held companies nor do we plan our ongoing operations based around any anticipated fundings or distributions from these investments. We exclude gains and losses on these investments as we do not believe they are reflective of our ongoing business and operating results. |
(7) | Adjustment relates to differences between the GAAP-based tax provision rate of approximately 40% and a Non-GAAP-based tax rate of approximately 14%; these rate differences are due to the income tax effects of expenses that are excluded for the purpose of calculating Non-GAAP-based adjusted net income. Such excluded expenses include amortization, share-based compensation, Special charges (recoveries) and other income (expense), net. Also excluded are tax benefits/expense items unrelated to current period income such as changes in reserves for tax uncertainties and valuation allowance reserves, and “book to return” adjustments for tax return filings and tax assessments. Included is the amount of net tax benefits arising from the internal reorganization (see note 14 "Income Taxes") assumed to be allocable to the current period based on the forecasted utilization period. In arriving at our Non-GAAP-based tax rate of approximately 14%, we analyzed the individual adjusted expenses and took into consideration the impact of statutory tax rates from local jurisdictions incurring the expense. We also took into consideration changes in US tax reform legislation that was enacted on December 22, 2017 through the Tax Cuts and Jobs Act. |
|
| |
(8) | Reconciliation of GAAP-based net income to Non-GAAP-based net income: |
|
| | | | | | |
| | Six Months Ended December 31, 2017 |
| | | Per share diluted |
| GAAP-based net income, attributable to OpenText | $ | 121,707 |
| $ | 0.46 |
|
| Add: | | |
| Amortization | 181,145 |
| 0.68 |
|
| Share-based compensation | 15,393 |
| 0.06 |
|
| Special charges (recoveries) | 18,746 |
| 0.07 |
|
| Other (income) expense, net | (15,771 | ) | (0.06 | ) |
| GAAP-based provision for (recovery of ) income taxes | 80,515 |
| 0.30 |
|
| Non-GAAP-based provision for income taxes | (56,229 | ) | (0.21 | ) |
| Non-GAAP-based net income, attributable to OpenText | $ | 345,506 |
| $ | 1.30 |
|
Reconciliation of Adjusted EBITDA
|
| | | |
| | Six Months Ended December 31, 2017 |
| GAAP-based net income, attributable to OpenText | $ | 121,707 |
|
| Add: | |
| Provision for (recovery of) income taxes | 80,515 |
|
| Interest and other related expense, net | 67,380 |
|
| Amortization of acquired technology-based intangible assets | 91,088 |
|
| Amortization of acquired customer-based intangible assets | 90,057 |
|
| Depreciation | 40,949 |
|
| Share-based compensation | 15,393 |
|
| Special charges (recoveries) | 18,746 |
|
| Other (income) expense, net | (15,771 | ) |
| Adjusted EBITDA | $ | 510,064 |
|
Reconciliation of selected GAAP-based measures to Non-GAAP-based measures for the six months ended December 31, 2016
(in thousands except for per share data)
|
| | | | | | | | | | | | |
| | Six Months Ended December 31, 2016 |
| | GAAP-based Measures | GAAP-based Measures
% of Total Revenue | Adjustments | Note | Non-GAAP-based Measures | Non-GAAP-based Measures % of Total Revenue |
| Cost of revenues | | | | | | |
| Cloud services and subscriptions | $ | 143,442 |
| | $ | (571 | ) | (1) | $ | 142,871 |
| |
| Customer support | 53,087 |
| | (505 | ) | (1) | 52,582 |
| |
| Professional service and other | 81,638 |
| | (913 | ) | (1) | 80,725 |
| |
| Amortization of acquired technology-based intangible assets | 47,983 |
| | (47,983 | ) | (2) | — |
| |
GAAP-based gross profit and gross margin (%) /
Non-GAAP-based gross profit and gross margin (%) | 701,987 |
| 67.9% | 49,972 |
| (3) | 751,959 |
| 72.7% |
| Operating expenses | | | | | | |
| Research and development | 123,293 |
| | (3,738 | ) | (1) | 119,555 |
| |
| Sales and marketing | 197,799 |
| | (5,149 | ) | (1) | 192,650 |
| |
| General and administrative | 78,111 |
| | (4,836 | ) | (1) | 73,275 |
| |
| Amortization of acquired customer-based intangible assets | 67,423 |
| | (67,423 | ) | (2) | — |
| |
| Special charges (recoveries) | 23,571 |
| | (23,571 | ) | (4) | — |
| |
| GAAP-based income from operations and operating margin (%) / Non-GAAP-based income from operations and operating margin (%) | 181,219 |
| 17.5% | 154,689 |
| (5) | 335,908 |
| 32.5% |
| Other income (expense), net | 3,141 |
| | (3,141 | ) | (6) | — |
| |
| Provision for (recovery of) income taxes | (828,603 | ) | | 870,698 |
| (7) | 42,095 |
| |
| GAAP-based net income / Non-GAAP-based net income, attributable to OpenText | 957,906 |
| | (719,150 | ) | (8) | 238,756 |
| |
| GAAP-based earnings per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText | $ | 3.89 |
| | $ | (2.92 | ) | (8) | $ | 0.97 |
| |
|
| |
(1) | Adjustment relates to the exclusion of share-based compensation expense from our Non-GAAP-based operating expenses as this expense is excluded from our internal analysis of operating results. |
(2) | Adjustment relates to the exclusion of amortization expense from our Non-GAAP-based operating expenses as the timing and frequency of amortization expense is dependent on our acquisitions and is hence excluded from our internal analysis of operating results. |
(3) | GAAP-based and Non-GAAP-based gross profit stated in dollars and gross margin stated as a percentage of total revenue. |
(4) | Adjustment relates to the exclusion of Special charges (recoveries) from our Non-GAAP-based operating expenses as Special charges (recoveries) are generally incurred in the periods relevant to an acquisition and include one-time, non-recurring charges or recoveries that are not indicative or related to continuing operations, and are therefore excluded from our internal analysis of operating results. See note 17 "Special Charges (Recoveries)" to our Condensed Consolidated Financial Statements for more details. |
(5) | GAAP-based and Non-GAAP-based income from operations stated in dollars and operating margin stated as a percentage of total revenue. |
(6) | Adjustment relates to the exclusion of Other income (expense) from our Non-GAAP-based operating expenses as Other income (expense) relates primarily to the transactional impact of foreign exchange and is generally not indicative or related to continuing operations and is therefore excluded from our internal analysis of operating results. Other income (expense) also includes our share of income (losses) from our holdings in non-marketable securities investments as a limited partner. We do not actively trade equity securities in these privately held companies nor do we plan our ongoing operations based around any anticipated fundings or distributions from these investments. We exclude gains and losses on these investments as we do not believe they are reflective of our ongoing business and operating results. |
(7) | Adjustment relates to differences between the GAAP-based tax recovery rate of approximately 641% and a Non-GAAP-based tax rate of approximately 15%; these rate differences are due to the income tax effects of expenses that are excluded for the purpose of calculating Non-GAAP-based adjusted net income. Such excluded expenses include amortization, share-based compensation, Special charges (recoveries) and other income (expense), net. Also excluded are tax benefits/expense items unrelated to current period income such as changes in reserves for tax uncertainties and valuation allowance reserves and “book to return” adjustments for tax return filings and tax assessments. Included is the amount of net tax benefits arising from the internal reorganization (see note 14 "Income Taxes") assumed to be allocable to the current period based on the forecasted utilization period. In arriving at our Non-GAAP-based tax rate of approximately 15%, we analyzed the individual adjusted expenses and took into consideration the impact of statutory tax rates from local jurisdictions incurring the expense. |
|
| |
(8) | Reconciliation of GAAP-based net income to Non-GAAP-based net income: |
|
| | | | | | |
| | Six Months Ended December 31, 2016 |
| | | Per share diluted |
| GAAP-based net income, attributable to OpenText | $ | 957,906 |
| $ | 3.89 |
|
| Add: | | |
| Amortization | 115,406 |
| 0.47 |
|
| Share-based compensation | 15,712 |
| 0.06 |
|
| Special charges (recoveries) | 23,571 |
| 0.10 |
|
| Other (income) expense, net | (3,141 | ) | (0.01 | ) |
| GAAP-based provision for (recovery of ) income taxes | (828,603 | ) | (3.37 | ) |
| Non-GAAP-based provision for income taxes | (42,095 | ) | (0.17 | ) |
| Non-GAAP-based net income, attributable to OpenText | $ | 238,756 |
| $ | 0.97 |
|
Reconciliation of Adjusted EBITDA
|
| | | |
| | Six Months Ended December 31, 2016 |
| GAAP-based net income, attributable to OpenText | $ | 957,906 |
|
| Add: | |
| Provision for (recovery of) income taxes | (828,603 | ) |
| Interest and other related expense, net | 55,018 |
|
| Amortization of acquired technology-based intangible assets | 47,983 |
|
| Amortization of acquired customer-based intangible assets | 67,423 |
|
| Depreciation | 30,571 |
|
| Share-based compensation | 15,712 |
|
| Special charges (recoveries) | 23,571 |
|
| Other (income) expense, net | (3,141 | ) |
| Adjusted EBITDA | $ | 366,440 |
|
LIQUIDITY AND CAPITAL RESOURCES
The following tables set forth changes in cash flows from operating, investing and financing activities for the periods indicated:
| | | | | | | | | | | | | | | | | |
(In thousands) | As of September 30, 2022 | | Change
increase (decrease) | | As of June 30, 2022 |
| Cash and cash equivalents | $ | 1,704,385 | | | $ | 10,644 | | | $ | 1,693,741 | |
Restricted cash (1) | 1,898 | | | (272) | | | 2,170 | |
| Total cash, cash equivalents and restricted cash | $ | 1,706,283 | | | $ | 10,372 | | | $ | 1,695,911 | |
|
| | | | | | | | | | | | |
(In thousands) | | As of December 31, 2017 | | Change increase (decrease) | | As of June 30, 2017 |
| Cash and cash equivalents | | $ | 476,014 |
| | $ | 32,657 |
| | $ | 443,357 |
|
(1)Restricted cash is classified under the Prepaid expenses and other current assets and Other assets line items on the Condensed Consolidated Balance Sheets (see Note 9 “Prepaid Expenses and Other Assets” to our Condensed Consolidated Financial Statements for more details). | | | | | Six Months Ended December 31, | | Three Months Ended September 30, |
(In thousands) | | 2017 | | Change | | 2016 | (In thousands) | 2022 | | Change | | 2021 |
| Cash provided by operating activities | | $ | 233,749 |
| | $ | 53,279 |
| | $ | 180,470 |
| Cash provided by operating activities | $ | 131,959 | | | $ | (57,710) | | | $ | 189,669 | |
| Cash used in investing activities | | $ | (364,552 | ) | | $ | 151,326 |
| | $ | (515,878 | ) | Cash used in investing activities | $ | (36,324) | | | $ | (9,908) | | | $ | (26,416) | |
| Cash provided by (used in) financing activities | | $ | 155,914 |
| | $ | (634,495 | ) | | $ | 790,409 |
| |
| Cash used in financing activities | | Cash used in financing activities | $ | (57,161) | | | $ | (31,107) | | | $ | (26,054) | |
Cash and cash equivalents
Cash and cash equivalents primarily consist of balances with banks as well as deposits with original maturities of 90 days or less.
We continue to anticipate that our cash and cash equivalents, as well as available credit facilities, will be sufficient to fund our anticipated cash requirements for working capital, contractual commitments, capital expenditures, dividends and operating needs for the next twelve months. Any further material or acquisition-related activities may require additional sources of financing and would be subject to the financial covenants established under our credit facilities. For more details, see "Long-term“Long-term Debt and Credit Facilities"Facilities” below.
As of December 31, 2017,September 30, 2022, we have provided $28.0recognized a provision of $20.7 million (June 30, 2017—2022—$22.119.9 million) in respect of both additional foreign taxes or deferred income tax liabilities for temporary differences related to the undistributed earnings of certain non-United States subsidiaries and planned periodic repatriations from certain United States and German subsidiaries, that will be subject to withholding taxes upon distribution.
Cash flows provided by operating activities
Cash flows from operating activities increaseddecreased by $53.3$57.7 million, due to an increasea decrease in net income beforeafter the impact of non-cash items of $154.7$60.8 million, partially offset by a decreaseand an increase in changes from working capital of $101.4$3.2 million. The decrease in operating cash flow from changes in working capital was primarily due to the net impact of the following decreases: (i) $49.9 million relating to a higher accounts receivable balance, which is primarily due to increased billings associated with more revenue recognized during the six months of Fiscal 2018 as compared to the same period in the prior fiscal year, (ii) $48.5 million relating to a lower accounts payable and accrued liabilities balance, (iii) $17.3 million relating to prepaid and other current assets and (iv) $1.1 million relating to deferred revenues. These decreases were partially offset by the following increases: (i) $11.2 million relating to income taxes payable and deferred charges and credits, and (ii) $4.2 million relating to other assets.
During the secondfirst quarter of Fiscal 20182023 our days sales outstanding (DSO) was 63of 40 days remained stable compared to aour DSO of 52 days during the secondfirst quarter of Fiscal 2017. The increase in DSO is primarily attributable to an increase in unbilled receivables included in the Company's net accounts receivable balance. Please see note 3 "Allowance for Doubtful Accounts" to our Condensed Consolidated Financial Statements for more details.2022. The per day impact of our DSO in the second quartersfirst quarter of Fiscal 20182023 and Fiscal 20172022 on our cash flows was $8.2$9.5 million and $6.1$9.2 million, respectively. In arriving at DSO, we exclude contract assets as these assets do not provide an unconditional right to the related consideration from the customer.
Cash flows used in investing activities
Our cash flows used in investing activities is primarily on account of acquisitions and additions of property and equipment.
Cash flows used in investing activities decreasedincreased by $151.3$9.9 million, primarily due to a decrease of $191.7 million in consideration paid for acquisitions during the six months ended December 31, 2017 as compared to the same period in the prior fiscal year. This was offset by (i) an increase of $23.7 million in additionspurchases of property and equipment (ii) an increase of $9.2 million relating to the maturity of short term investments during the first quarter of Fiscal 2017 that did not reoccur in Fiscal 2018, and (iii) an increase in other investing activities of $7.5$9.6 million.
Cash flows provided by (used in)used in financing activities
Our cash flows from financing activities generally consist of long-term debt financing and amounts received from stock options exercised by our employees and Employee Stock Purchase Plan (ESPP) purchases by our employees. These inflows are typically offset by scheduled and non-scheduled repayments of our long-term debt financing and, when applicable, the payment of dividends and/or the repurchases of our Common Shares.
Cash flows provided byused in financing activities decreasedincreased by $634.5$31.1 million. This wasis primarily due to (i) net proceeds from our public offering of Common Shares during the second quarter of Fiscal 2017 which resulted in ahigher cash inflow of approximately $586.1dividends paid to shareholders by $4.8 million and did not reoccur during Fiscal 2018, (ii) the issuance of an additional $250 million in aggregate principal amount of Senior Notes 2026 at an issue price of 102.75% during the second quarter of Fiscal 2017, which resulted in cash inflow of approximately $256.9 million and did not reoccur during Fiscal 2018, and (iii) an increase in dividend payments made to our shareholders of $14.2 million. These decreases were partially offset by (i)lower proceeds from drawings on the Revolver of $200.0 million, (ii) an increase of $18.9 million relating to cash collected from the issuance of Common Shares foron the exercise of options and the OpenText Employee Share Purchase Plan (ESPP), and (iii) $4.2 million in debt issuance costs paid during the second quarter of Fiscal 2017, relating to our Senior Notes 2026, which did not reoccur during Fiscal 2018. The remainder of the change was due to miscellaneous items.
Cash DividendsESPP by $26.7 million.
During the three and six months ended December 31, 2017,September 30, 2022, we declared and paid cash dividends of $0.1320 and $0.2640$0.24299 per Common Share respectively, that totaled $34.8in the aggregate amount of $64.7 million and $69.8 million, respectively. (three months ended September 30, 2021—$0.2209 per Common Share in the aggregate amount of $59.9 million).
Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination and discretion of the Board. See Item 5 "Dividend Policy" in“Dividend Policy” included within our Annual Report on Form 10-K for Fiscal 20172022 for more information.
Long-term Debt and Credit Facilities
Senior Unsecured Fixed Rate Notes
Senior Notes 2031
On November 24, 2021, OpenText Holdings, Inc. (OTHI), a wholly-owned indirect subsidiary of the Company, issued $650 million in aggregate principal amount of 4.125% Senior Notes due 2031 guaranteed by the Company (Senior Notes 2031) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (Securities Act), and to certain non-U.S. persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes 2031 bear interest at a rate of 4.125% per annum, payable semi-annually in arrears on June 1 and December 1, commencing on June 1, 2022. Senior Notes 2031 will mature on December 1, 2031, unless earlier redeemed, in accordance with their terms, or repurchased.
OTHI may redeem all or a portion of the Senior Notes 2031 at any time prior to December 1, 2026 at a redemption price equal to 100% of the principal amount of the Senior Notes 2031 plus an applicable premium, plus accrued and unpaid interest, if any, to the redemption date. OTHI may also redeem up to 40% of the aggregate principal amount of the Senior Notes 2031, on one or more occasions, prior to December 1, 2024, using the net proceeds from certain qualified equity offerings at a redemption price of 104.125% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, subject to compliance with certain conditions. OTHI may, on one or more occasions, redeem the Senior Notes 2031, in whole or in part, at any time on and after December 1, 2026 at the applicable redemption prices set forth in the indenture governing the Senior Notes 2031, dated as of November 24, 2021, among OTHI, the Company, the subsidiary guarantors party thereto, The Bank of New York Mellon, as U.S. trustee, and BNY Trust Company of Canada, as Canadian trustee (the 2031 Indenture), plus accrued and unpaid interest, if any, to the redemption date.
If we experience one of the kinds of change of control triggering events specified in the 2031 Indenture, OTHI will be required to make an offer to repurchase the Senior Notes 2031 at a price equal to 101% of the principal amount of the Senior Notes 2031, plus accrued and unpaid interest, if any, to the date of purchase.
The 2031 Indenture contains covenants that limit OTHI, the Company and certain of the Company’s subsidiaries’ ability to, among other things: (i) create certain liens and enter into sale and lease-back transactions; (ii) in the case of our non-guarantor subsidiaries, create, assume, incur or guarantee additional indebtedness of OTHI, the Company or the guarantors without such subsidiary becoming a subsidiary guarantor of Senior Notes 2031; and (iii) consolidate, amalgamate or merge with, or convey, transfer, lease or otherwise dispose of its property and assets substantially as an entirety to, another person. These covenants are subject to a number of important limitations and exceptions as set forth in the 2031 Indenture. The 2031 Indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then-outstanding Senior Notes 2031 to be due and payable immediately.
Senior Notes 2031 are guaranteed on a senior unsecured basis by the Company and the Company’s existing and future wholly-owned subsidiaries (other than OTHI) that borrow or guarantee the obligations under our existing senior credit facilities. Senior Notes 2031 and the guarantees rank equally in right of payment with all of the Company’s, OTHI’s and the guarantors’ existing and future senior unsubordinated debt and will rank senior in right of payment to all of the Company’s, OTHI’s and the guarantors’ future subordinated debt. Senior Notes 2031 and the guarantees will be effectively subordinated to all of the Company’s, OTHI’s and the guarantors’ existing and future secured debt, including the obligations under the senior credit facilities, to the extent of the value of the assets securing such secured debt.
The foregoing description of the 2031 Indenture does not purport to be complete and is qualified in its entirety by reference to the full text of the 2031 Indenture, which is filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on November 24, 2021.
Senior Notes 2030
On February 18, 2020 Open Text Holdings, Inc. (OTHI), a wholly-owned indirect subsidiary of the Company, issued $900 million in aggregate principal amount of 4.125% Senior Notes due 2030 guaranteed by the Company (Senior Notes 2030) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (Securities Act), and to certain non-U.S. persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes 2030 bear interest at a rate of 4.125% per annum, payable semi-annually in arrears on February 15 and August 15, commencing on August 15, 2020. Senior Notes 2030 will mature on February 15, 2030, unless earlier redeemed, in accordance with their terms, or repurchased.
OTHI may redeem all or a portion of the Senior Notes 2030 at any time prior to February 15, 2025 at a redemption price equal to 100% of the principal amount of the Senior Notes 2030 plus an applicable premium, plus accrued and unpaid interest, if any, to the redemption date. OTHI may also redeem up to 40% of the aggregate principal amount of the Senior Notes 2030, on one or more occasions, prior to February 15, 2025, using the net proceeds from certain qualified equity offerings at a redemption price of 104.125% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, subject to compliance with certain conditions. OTHI may, on one or more occasions, redeem the Senior Notes 2030, in whole or in part, at any time on and after February 15, 2025 at the applicable redemption prices set forth in the indenture governing the Senior Notes 2030, dated as of February 18, 2020, among OTHI, the Company, the subsidiary guarantors party thereto, The Bank of New York Mellon, as U.S. trustee, and BNY Trust Company of Canada, as Canadian trustee (the 2030 Indenture), plus accrued and unpaid interest, if any, to the redemption date.
If we experience one of the kinds of change of control triggering events specified in the 2030 Indenture, OTHI will be required to make an offer to repurchase the Senior Notes 2030 at a price equal to 101% of the principal amount of the Senior Notes 2030, plus accrued and unpaid interest, if any, to the date of purchase.
The 2030 Indenture contains covenants that limit the Company, OTHI and certain of the Company's subsidiaries’ ability to, among other things: (i) create certain liens and enter into sale and lease-back transactions; (ii) in the case of our non-guarantor subsidiaries, create, assume, incur or guarantee additional indebtedness of the Company, OTHI or the guarantors without such subsidiary becoming a subsidiary guarantor of Senior Notes 2030; and (iii) consolidate, amalgamate or merge with, or convey, transfer, lease or otherwise dispose of its property and assets substantially as an entirety to, another person. These covenants are subject to a number of important limitations and exceptions as set forth in the 2030 Indenture. The 2030 Indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then-outstanding Senior Notes 2030 to be due and payable immediately.
Senior Notes 2030 are guaranteed on a senior unsecured basis by the Company and the Company's existing and future wholly-owned subsidiaries (other than OTHI) that borrow or guarantee the obligations under our existing senior credit facilities. Senior Notes 2030 and the guarantees rank equally in right of payment with all of the Company, OTHI and the guarantors’ existing and future senior unsubordinated debt and will rank senior in right of payment to all of the Company, OTHI and the guarantors’ future subordinated debt. Senior Notes 2030 and the guarantees will be effectively subordinated to all of the Company, OTHI and the guarantors’ existing and future secured debt, including the obligations under the senior credit facilities, to the extent of the value of the assets securing such secured debt.
The foregoing description of the 2030 Indenture does not purport to be complete and is qualified in its entirety by reference to the full text of the 2030 Indenture, which is filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on February 18, 2020.
Senior Notes 2029
On November 24, 2021, we issued $850 million in aggregate principal amount of 3.875% Senior Notes due 2029 (Senior Notes 2029) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes 2029 bear interest at a rate of 3.875% per annum, payable semi-annually in arrears on June 1 and December 1, commencing on June 1, 2022. Senior Notes 2029 will mature on December 1, 2029, unless earlier redeemed, in accordance with their terms, or repurchased.
We may redeem all or a portion of the Senior Notes 2029 at any time prior to December 1, 2024 at a redemption price equal to 100% of the principal amount of the Senior Notes 2029 plus an applicable premium, plus accrued and unpaid interest, if any, to the redemption date. We may also redeem up to 40% of the aggregate principal amount of the Senior Notes 2029, on one or more occasions, prior to December 1, 2024, using the net proceeds from certain qualified equity offerings at a redemption price of 103.875% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, subject to compliance with certain conditions. We may, on one or more occasions, redeem the Senior Notes 2029, in whole or in part, at any time on and after December 1, 2024 at the applicable redemption prices set forth in the indenture governing the Senior
Notes 2029, dated as of November 24, 2021, among the Company, the subsidiary guarantors party thereto, The Bank of New York Mellon, as U.S. trustee, and BNY Trust Company of Canada, as Canadian trustee (the 2029 Indenture), plus accrued and unpaid interest, if any, to the redemption date.
If we experience one of the kinds of change of control triggering events specified in the 2029 Indenture, we will be required to make an offer to repurchase the Senior Notes 2029 at a price equal to 101% of the principal amount of the Senior Notes 2029, plus accrued and unpaid interest, if any, to the date of purchase.
The 2029 Indenture contains covenants that limit our and certain of our subsidiaries’ ability to, among other things: (i) create certain liens and enter into sale and lease-back transactions; (ii) in the case of our non-guarantor subsidiaries, create, assume, incur or guarantee additional indebtedness of the Company or the guarantors without such subsidiary becoming a subsidiary guarantor of Senior Notes 2029; and (iii) consolidate, amalgamate or merge with, or convey, transfer, lease or otherwise dispose of its property and assets substantially as an entirety to, another person. These covenants are subject to a number of important limitations and exceptions as set forth in the 2029 Indenture. The 2029 Indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then-outstanding Senior Notes 2029 to be due and payable immediately.
Senior Notes 2029 are guaranteed on a senior unsecured basis by our existing and future wholly-owned subsidiaries that borrow or guarantee the obligations under our existing senior credit facilities. Senior Notes 2029 and the guarantees rank equally in right of payment with all of our and our guarantors’ existing and future senior unsubordinated debt and will rank senior in right of payment to all of our and our guarantors’ future subordinated debt. Senior Notes 2029 and the guarantees will be effectively subordinated to all of our and our guarantors’ existing and future secured debt, including the obligations under the senior credit facilities, to the extent of the value of the assets securing such secured debt.
The foregoing description of the 2029 Indenture does not purport to be complete and is qualified in its entirety by reference to the full text of the 2029 Indenture, which is filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on November 24, 2021.
Senior Notes 2028
On February 18, 2020 we issued $900 million in aggregate principal amount of 3.875% Senior Notes due 2028 (Senior Notes 2028) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes 2028 bear interest at a rate of 3.875% per annum, payable semi-annually in arrears on February 15 and August 15, commencing on August 15, 2020. Senior Notes 2028 will mature on February 15, 2028, unless earlier redeemed, in accordance with their terms, or repurchased.
We may redeem all or a portion of the Senior Notes 2028 at any time prior to February 15, 2023 at a redemption price equal to 100% of the principal amount of the Senior Notes 2028 plus an applicable premium, plus accrued and unpaid interest, if any, to the redemption date. We may also redeem up to 40% of the aggregate principal amount of the Senior Notes 2028, on one or more occasions, prior to February 15, 2023, using the net proceeds from certain qualified equity offerings at a redemption price of 103.875% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, subject to compliance with certain conditions. We may, on one or more occasions, redeem the Senior Notes 2028, in whole or in part, at any time on and after February 15, 2023 at the applicable redemption prices set forth in the indenture governing the Senior Notes 2028, dated as of February 18, 2020, among the Company, the subsidiary guarantors party thereto, The Bank of New York Mellon, as U.S. trustee, and BNY Trust Company of Canada, as Canadian trustee (the 2028 Indenture), plus accrued and unpaid interest, if any, to the redemption date.
If we experience one of the kinds of change of control triggering events specified in the 2028 Indenture, we will be required to make an offer to repurchase the Senior Notes 2028 at a price equal to 101% of the principal amount of the Senior Notes 2028, plus accrued and unpaid interest, if any, to the date of purchase.
The 2028 Indenture contains covenants that limit our and certain of our subsidiaries’ ability to, among other things: (i) create certain liens and enter into sale and lease-back transactions; (ii) in the case of our non-guarantor subsidiaries, create, assume, incur or guarantee additional indebtedness of the Company or the guarantors without such subsidiary becoming a subsidiary guarantor of Senior Notes 2028; and (iii) consolidate, amalgamate or merge with, or convey, transfer, lease or otherwise dispose of its property and assets substantially as an entirety to, another person. These covenants are subject to a number of important limitations and exceptions as set forth in the 2028 Indenture. The 2028 Indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then-outstanding Senior Notes 2028 to be due and payable immediately.
Senior Notes 2028 are guaranteed on a senior unsecured basis by our existing and future wholly-owned subsidiaries that borrow or guarantee the obligations under our existing senior credit facilities. Senior Notes 2028 and the guarantees rank equally in right of payment with all of our and our guarantors’ existing and future senior unsubordinated debt and will rank
senior in right of payment to all of our and our guarantors’ future subordinated debt. Senior Notes 2028 and the guarantees will be effectively subordinated to all of our and our guarantors’ existing and future secured debt, including the obligations under the senior credit facilities, to the extent of the value of the assets securing such secured debt.
The foregoing description of the 2028 Indenture does not purport to be complete and is qualified in its entirety by reference to the full text of the 2028 Indenture, which is filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on February 18, 2020.
Senior Notes 2026
On May 31, 2016 we issued $600 million in aggregate principal amount of 5.875% Senior Notes due 2026 (Senior Notes 2026) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and to certain persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes 2026 bearhad interest at a rate of 5.875% per annum, payable semi-annually in arrears on June 1 and December 1, commencing on December 1, 2016. Senior Notes 2026 will maturewould have matured on June 1, 2026, unless earlier redeemed, in accordance with their terms, or repurchased.2026.
On December 20, 2016, we issued an additional $250 million in aggregate principal amount by reopening our Senior Notes 2026 at an issue price of 102.75%. The additional notes havehad identical terms, arewere fungible with and arewere a part of a single series with the previously issued $600 million aggregate principal amount of Senior Notes 2026. The outstanding aggregate principal amount of Senior Notes 2026, after taking into consideration the additional issuance, iswas $850 million.million as of December 9, 2021.
We may redeem all or a portion of theOn December 9, 2021, we redeemed Senior Notes 2026 at any time prior to June 1, 2021in full at a redemption price equal to 100% of the principal amount of Senior Notes 2026 plus an applicable premium, plus accrued and unpaid interest, if any, to the redemption date. In addition, we may also redeem up to 40% of the aggregate principal amount of Senior Notes 2026, on one or more occasions, prior to June 1, 2019, using the net proceeds from certain qualified equity offerings at a redemption price of 105.875%102.9375% of the principal amount plus accrued and unpaid interest if any, to, the redemption date, subject to compliance with certain conditions. We may, on one or more occasions, redeem Senior Notes 2026, in whole or in part, at any time on and after June 1, 2021 at the applicable redemption prices set forth in the indenture governing the Senior Notes 2026, dated as of May 31, 2016 among the Company, the subsidiary guarantors party thereto, The Bank of New York Mellon, as U.S. trustee, and BNY Trust Company of Canada, as Canadian trustee (the 2026 Indenture), plus accrued and unpaid interest, if any, to the redemption date.
If we experience one of the kinds of changes of control triggering events specified in the 2026 Indenture, we will be required to make an offer to repurchase Senior Notes 2026 at a price equal to 101% of the principal amount of Senior Notes 2026, plus accrued and unpaid interest, if any, to the date of purchase.
The 2026 Indenture contains covenants that limit our and certain of our subsidiaries’ ability to, among other things: (i) create certain liens and enter into sale and lease-back transactions; (ii) create, assume, incur or guarantee additional indebtedness of the Company or the guarantors without such subsidiary becoming a subsidiary guarantor of the notes; and (iii) consolidate, amalgamate or merge with, or convey, transfer, lease or otherwise dispose of its property and assets substantially as an entirety to, another person. These covenants are subject to a number of important limitations and exceptions as set forth in the 2026 Indenture. The 2026 Indenture also provides for events of default, which, if any of them occurs, may permit or, in
certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then-outstanding notes to be due and payable immediately.
Senior Notes 2026 are initially guaranteed on a senior unsecured basis by our existing and future wholly-owned subsidiaries that borrow or guarantee the obligations under our existing senior credit facilities. Senior Notes 2026 and the guarantees rank equally in right of payment with all of our and our guarantors’ existing and future senior unsubordinated debt and will rank senior in right of payment to all of the our and our guarantors’ future subordinated debt. Senior Notes 2026 and the guarantees will be effectively subordinated to all of our and our guarantors’ existing and future secured debt, including the obligations under the senior credit facilities, to the extent of the value of the assets securing such secured debt.
The foregoing description of the 2026 Indenture does not purport to be complete and is qualified in its entirety by reference to the full text of the 2026 Indenture, which is filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2016.
Senior Notes 2023
On January 15, 2015, we issued $800 million in aggregate principal amount of our 5.625% Senior Notes due 2023 (Senior Notes 2023) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes 2023 bear interest at a rate of 5.625% per annum, payable semi-annually in arrears on January 15 and July 15, commencing on July 15, 2015. Senior Notes 2023 will mature on January 15, 2023, unless earlier redeemed in accordance with their terms, or repurchased.
We may redeem all or a portion of the Senior Notes 2023 at any time prior to January 15, 2018 at a redemption price equal to 100% of the principal amount of Senior Notes 2023 plus an applicable premium, plus accrued and unpaid interest, if any, tobut excluding, the redemption date. In addition, we may also redeem up to 40%A portion of the aggregate principal amount of Senior Notes 2023, on one or more occasions, prior to January 15, 2018, using the net proceeds from certain qualified equitythe offerings at a redemption price of 105.625% of the principal amount, plus accruedSenior Notes 2029 and unpaid interest, if any,Senior Notes 2031 was used to the redemption date, subject to compliance with certain conditions. We may, on one or more occasion, redeem Senior Notes 2023, in whole or in part, at any time on and after January 15, 2018 at the applicable2026. Upon redemption, prices set forth in the indenture governing the Senior Notes 2023, dated as2026 were cancelled, and any obligation thereunder was extinguished. The resulting loss of January 15, 2015, among the Company, the subsidiary guarantors party thereto, The Bank$27.4 million, consisting of New York Mellon (as successor to Citibank N.A.), as U.S. trustee, and BNY Trust Company of Canada (as successor to Citi Trust Company Canada), as Canadian trustee (the 2023 Indenture), plus accrued and unpaid interest, if any,$25.0 million relating to the redemption date.
If we experience oneearly termination call premium, $6.2 million relating to unamortized debt issuance costs and $(3.8) million relating to unamortized premium, has been recorded as a component of the kindsOther income (expense), net in our Condensed Consolidated Statements of changes of control triggering events specified in the 2023 Indenture, we will be requiredIncome. See Note 22 “Other Income (Expense), Net” to make an offer to repurchase Senior Notes 2023 at a price equal to 101% of the principal amount of Senior Notes 2023, plus accrued and unpaid interest, if any, to the date of purchase.
The 2023 Indenture contains covenants that limit our and certain of our subsidiaries’ ability to, among other things: (i) create certain liens and enter into sale and lease-back transactions; (ii) create, assume, incur or guarantee additional indebtedness of the Company or the subsidiary guarantors without such subsidiary becoming a subsidiary guarantor of Senior Notes 2023; and (iii) consolidate, amalgamate or merge with, or convey, transfer, lease or otherwise dispose of its property and assets substantially as an entirety to, another person. These covenants are subject to a number of important limitations and exceptions as set forth in the 2023 Indenture. The 2023 Indenture also provides for events of default, which, if any of them occurs, may permit or, in certain circumstances, require the principal, premium, if any, interest and any other monetary obligations on all the then-outstanding notes to be due and payable immediately.
Senior Notes 2023 are initially guaranteed on a senior unsecured basis by our existing and future wholly-owned subsidiaries that borrow or guarantee the obligations under our existing senior credit facilities. Senior Notes 2023 and the guarantees rank equally in right of payment with all of our and our subsidiary guarantors’ existing and future senior unsubordinated debt and will rank senior in right of payment to all of our and our subsidiary guarantors’ future subordinated debt. Senior Notes 2023 and the guarantees will be effectively subordinated to all of ours and our guarantors’ existing and future secured debt, including the obligations under the Revolver and Term Loan B (as defined herein), to the extent of the value of the assets securing such secured debt.
The foregoing description of the 2023 Indenture does not purport to be complete and is qualified in its entirety by reference to the full text of the 2023 Indenture, which is filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on January 15, 2015.Condensed Consolidated Financial Statements.
Term Loan B
On January 16, 2014,May 30, 2018, we entered into a credit facility, which provides for a $800 million$1 billion term loan facility with certain lenders named therein, Barclays Bank PLC (Barclays), as sole administrative agent and collateral agent, and with Barclays and RBC Capital Markets as lead arrangersarranger and joint bookrunnersbookrunner (Term Loan B) and borrowed the full amount on May 30, 2018 to, among other things, repay in full the loans under our prior $800 million term loan credit facility originally entered into on January 16,
2014. Repayments made under Term Loan B are equal to 0.25% of the principal amount in equal quarterly installments for the life of Term Loan B, with the remainder due at maturity.
Borrowings under Term Loan B are secured by a first charge over substantially all of our assets on a pari passu basis with the Revolver.Revolver, the Acquisition Term Loan and Bridge Loan. Term Loan B has a seven year term.seven-year term, maturing in May 2025.
Borrowings under Term Loan B bear interest at a rate per annum equal to an applicable margin plus, at the borrower’s option, either (1) the eurodollarEurodollar rate for the interest period relevant to such borrowing or (2) an ABR rate. The applicable margin for borrowings under Term Loan B is 2.00%1.75%, with respect to LIBOR advances and 1.00%0.75%, with respect to ABR advances. The interest on the current outstanding balance for Term Loan B is equal to 2.0%1.75% plus LIBOR.LIBOR (subject to a 0.00% floor). As of December 31, 2017,September 30, 2022, the outstanding balance on the Term Loan B bears an interest rate of approximately 3.35%4.27%. For more information regarding the impact and discontinuance of LIBOR, see “Stress in the global financial system may adversely affect our finances and operations in ways that may be hard to predict or to defend against” included within Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for Fiscal 2022.
Term Loan B has incremental facility capacity of (i) $250 million plus (ii) additional amounts, subject to meeting a “consolidated senior secured net leverage” ratio not exceeding 2.75:1.00, in each case subject to certain conditions. Consolidated senior secured net leverage ratio is defined for this purpose as the proportion of our total debt reduced by unrestricted cash, including guarantees and letters of credit, that is secured by our or any of our subsidiaries’ assets, over our trailing twelve months net income before interest, taxes, depreciation, amortization, restructuring, share-based compensation and other miscellaneous charges.
Under Term Loan B, we must maintain a “consolidated net leverage” ratio of no more than 4:1 at the end of each financial quarter. Consolidated net leverage ratio is defined for this purpose as the proportion of our total debt reduced by unrestricted cash, including guarantees and letters of credit, over our trailing twelve months net income before interest, taxes, depreciation, amortization, restructuring, share-based compensation and other miscellaneous charges. As of December 31, 2017,September 30, 2022, our consolidated net leverage ratio was 2.3:2.1:1.
For further details relating to our Term Loan B, please see note 10 "Long-Term Debt" to our Condensed Consolidated Financial Statements.
Revolver
We currently have a $450 millionOn October 31, 2019, we amended our committed revolving credit facility (the Revolver) which matures onto increase the total commitments under the Revolver from $450 million to $750 million as well as to extend the maturity from May 5, 2022.2022 to October 31, 2024. Borrowings under the Revolver are secured by a first charge over substantially all of our assets, and on a pari passu basis with Term Loan B.B, the Acquisition Term Loan and Bridge Loan. The Revolver has no fixed repayment date prior to the end of the term. Borrowings under the Revolver bear interest per annum at a floating rate of LIBOR plus a fixed margin dependent on our consolidated net leverage ratio ranging from 1.25% to 1.75%. For more information regarding the impact and discontinuance of LIBOR, see “Stress in the global financial system may adversely affect our finances and operations in ways that may be hard to predict or to defend against” included within Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for Fiscal 2022.
Under the Revolver, we must maintain a “consolidated net leverage” ratio of no more than 4:1 at the end of each financial quarter. Consolidated net leverage ratio is defined for this purpose as the proportion of our total debt reduced by unrestricted cash, including guarantees and letters of credit, over our trailing twelve months net income before interest, taxes, depreciation, amortization, restructuring, share-based compensation and other miscellaneous charges.
As of December 31, 2017, theSeptember 30, 2022, we had no outstanding balance onunder the Revolver bears(June 30, 2022—nil).
Acquisition Term Loan
On August 25, 2022, we entered into a weighted average interest ratefirst lien term loan facility (the Acquisition Term Loan) which provides for a senior secured delayed-draw term loan facility in an aggregate principal amount of approximately 3.20%.
During$2.585 billion. The proceeds of the three and six months ended December 31, 2017, we drew down nil and $200 million, respectively, fromAcquisition Term Loan, if drawn, will be used solely by the RevolverCompany to finance the acquisitionMicro Focus Acquisition (see Note 19 — “Acquisitions” for more details).
The Acquisition Term Loan has a seven-year term from the date of Guidance (threefunding, and six months ended December 31, 2016—nil).repayments under the Acquisition Term Loan are equal to 0.25% of the principal amount in equal quarterly installments for the life of the Acquisition Term Loan, with the remainder due at maturity. Borrowings under the Acquisition Term Loan will bear interest at rates as specified in the Acquisition Term Loan Agreement.
The Acquisition Term Loan has incremental facility capacity of (i) $250 million plus (ii) additional amounts, subject to meeting a “consolidated senior secured net leverage” ratio not exceeding 2.75:1.00, in each case subject to certain conditions. Consolidated senior secured net leverage ratio is defined for this purpose as the proportion of the Company’s total debt reduced by unrestricted cash, including guarantees and letters of credit, that is secured by the Company’s or any of the Company’s subsidiaries’ assets, over the Company’s trailing four financial quarter net income before interest, taxes, depreciation, amortization, restructuring, share-based compensation and other miscellaneous charges. Under the Acquisition Term Loan, we must maintain a “consolidated net leverage” ratio of no more than 4.5:1.00 at the end of each financial quarter. Consolidated net leverage ratio is defined for this purpose as the proportion of the Company’s total debt reduced by unrestricted cash, including guarantees and letters of credit, over the Company’s trailing four financial quarter net income before interest, taxes, depreciation, amortization, restructuring, share-based compensation and other miscellaneous charges as defined in the Acquisition Term Loan Agreement. As of September 30, 2022, our consolidated net leverage ratio was 2.1:1.
The Acquisition Term Loan is unconditionally guaranteed by certain subsidiary guarantors, as defined in the Acquisition Term Loan Agreement, and is secured by a first charge on substantially all of the assets of the Company and the subsidiary guarantors on a pari passu basis with the Revolver, Term Loan B and the Bridge Loan. Certain adjustments may be made to the applicable margin and other terms of the Acquisition Term Loan in limited circumstances where necessary to achieve successful syndication.
As of December 31, 2017September 30, 2022, we have an outstanding balance onhad no borrowings under the Revolver of $375 million (June 30, 2017—$175 million). We expect to repay the remaining balance within the next 12 months.
Acquisition Term Loan. For the three and six months ended December 31, 2017,September 30, 2022, we recordeddid not record any interest expense of $2.8 million and $4.6 million, respectively, relating to amounts drawnthe Acquisition Term Loan (three months ended September 30, 2021—nil).
The foregoing description of the Acquisition Term Loan does not purport to be complete and is qualified in its entirety by reference to the full text of the Acquisition Term Loan, which is filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on August 25, 2022.
Bridge Loan
On August 25, 2022, we entered into a bridge loan agreement (Bridge Loan) which provides for commitments of up to $2 billion to finance a portion of the repayment of Micro Focus’ existing debt.
The Bridge Loan has a one-year term from the initial date of funding, with an extension mechanism pursuant to which such borrowings would convert into secured financing maturing five years from the initial funding date. Borrowings under the Bridge Loan would bear interest at rates as specified in the Bridge Loan Agreement, subject to a total cap.
The Bridge Loan is unconditionally guaranteed by certain subsidiary guarantors, as defined in the Bridge Loan Agreement, and is secured by a first charge on substantially all of the assets of the Company and the subsidiary guarantors on a pari passu basis with the Revolver, (threeTerm Loan B and sixAcquisition Term Loan. The Company intends to reduce commitments or the borrowings under the Bridge Loan by accessing the debt capital markets directly or through certain affiliates prior to or following the closing of the Micro Focus Acquisition, but no assurance can be given that the Company will be able to do so. The Company expects that such debt to also be secured.
As of September 30, 2022, we had no borrowings under the Bridge Loan. For the three months ended December 31, 2016—nil, respectively)September 30, 2022, we did not record any interest expense relating to the Bridge Loan (three months ended September 30, 2021—nil).
The foregoing description of the Bridge Loan does not purport to be complete and is qualified in its entirety by reference to the full text of the Bridge Loan, which is filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on August 25, 2022.
For further details relating to our debt, please see Note 11 “Long-Term Debt” to our Condensed Consolidated Financial Statements.
Shelf Registration Statement
On August 30, 2017,December 6, 2021, we filed a universal shelf registration statement on Form S-3 with the SEC, which became effective automatically (the Shelf Registration Statement). The Shelf Registration Statement allows for primary and secondary offerings from time to time of equity, debt and other securities, including Common Shares, Preference Shares, debt securities, depositary shares, warrants, purchase contracts, units and subscription receipts. A short-form base shelf short-form prospectus qualifying the distribution of such securities was concurrently filed with Canadian securities regulators on August 30, 2017.December 6, 2021. The type of securities and the specific terms thereof will be determined at the time of any offering and will be described in the applicable prospectus supplement to be filed separately with the SEC and Canadian securities regulators.
PensionsShare Repurchase Plan / Normal Course Issuer Bid
AsOn November 5, 2020, the Board authorized a share repurchase plan (the Fiscal 2021 Repurchase Plan), pursuant to which we were authorized to purchase in open market transactions, from time to time over the 12 month period commencing November 12, 2020, up to an aggregate of December 31, 2017, our total unfunded pension plan obligations were $64.1$350 million of our Common Shares on the NASDAQ Global Select Market, the TSX and/or other exchanges and alternative trading systems in Canada and/or the United States, if eligible, subject to applicable law and stock exchange rules. The price that we were authorized to pay for Common Shares in open market transactions was the market price at the time of purchase or such other price as was permitted by applicable law or stock exchange rules.
The Fiscal 2021 Repurchase Plan was effected in accordance with Rule 10b-18 under the Exchange Act (Rule 10b-18). Purchases made under the Fiscal 2021 Repurchase Plan were subject to a limit of 13,618,774 shares (representing 5% of the Company’s issued and outstanding Common Shares as of November 4, 2020). All Common Shares purchased by us pursuant to the Fiscal 2021 Repurchase Plan were cancelled.
On November 4, 2021, the Board authorized a share repurchase plan (the Fiscal 2022 Repurchase Plan), pursuant to which $1.9we may purchase in open market transactions, from time to time over the 12 month period commencing November 12, 2021, up to an aggregate of $350 million is payable withinof our Common Shares on the next twelve months. We expectNASDAQ Global Select Market, the TSX (as part of a Fiscal 2022 Normal-Course Issuer Bid (NCIB)) and/or other exchanges and alternative trading systems in Canada and/or the United States, if eligible, subject to applicable law and stock exchange rules. The price that we have paid and will pay for Common Shares in open market transactions has been and will be the market price at the time of purchase or such other price as may be permitted by applicable law or stock exchange rules.
The Fiscal 2022 Repurchase Plan has been and will be effected in accordance with Rule 10b-18. Purchases made under the Fiscal 2022 Repurchase Plan are subject to a limit of 13,638,008 shares (representing 5% of the Company’s issued and outstanding Common Shares as of October 31, 2021). All Common Shares purchased by us pursuant to the Fiscal 2022 Repurchase Plan have been and will be cancelled.
During the three months ended September 30, 2022 and 2021, we did not repurchase and cancel any Common Shares.
Normal Course Issuer Bid
The Company established the Fiscal 2021 NCIB in order to provide it with a means to execute purchases over the TSX as part of the overall Fiscal 2021 Repurchase Plan.
The TSX approved the Company’s notice of intention to commence the Fiscal 2021 NCIB, pursuant to which the Company was authorized to purchase Common Shares over the TSX for the period commencing November 12, 2020 until November 11, 2021 in accordance with the TSX's normal course issuer bid rules, including that such purchases were to be ablemade at prevailing market prices or as otherwise permitted. Under the rules of the TSX, the maximum number of Common Shares that could be purchased in this period was 13,618,774 (representing 5% of the Company’s issued and outstanding Common Shares as of November 4, 2020), and the maximum number of Common Shares that could be purchased on a single day was 143,424 Common Shares, which was 25% of 573,699 (the average daily trading volume for the Common Shares on the TSX for the six months ended October 31, 2020), subject to makecertain exceptions for block purchases, subject in any case to the long-termvolume and short-term payments relatedother limitations under Rule 10b-18.
The Company renewed the Fiscal 2022 NCIB in order to these obligationsprovide it with a means to execute purchases over the TSX as part of the overall Fiscal 2022 Repurchase Plan.
The TSX approved the Company's notice of intention to commence the Fiscal 2022 NCIB pursuant to which the Company may purchase Common Shares over the TSX for the period commencing November 12, 2021 until November 11, 2022 in accordance with the TSX's normal course issuer bid rules, including that such purchases are to be made at prevailing market prices or as otherwise permitted. Under the rules of operations.
Our anticipated payments under our most significant plansthe TSX, the maximum number of Common Shares that may be purchased in this period is 13,638,008 (representing 5% of the Company’s issued and outstanding Common Shares as of October 31, 2021), and the maximum number of Common Shares that may be purchased on a single day is 112,590 Common Shares, which is 25% of 450,361 (the average daily trading volume for the fiscal years indicated below are as follows:
|
| | | | | | | | | | | |
| | Fiscal years ending June 30, |
| | CDT | | GXS GER | | GXS PHP |
| 2018 (six months ended June 30) | $ | 304 |
| | $ | 484 |
| | $ | 51 |
|
| 2019 | 674 |
| | 997 |
| | 131 |
|
| 2020 | 727 |
| | 1,004 |
| | 149 |
|
| 2021 | 821 |
| | 1,047 |
| | 240 |
|
| 2022 | 904 |
| | 1,057 |
| | 270 |
|
| 2023 to 2027 | 5,652 |
| | 5,637 |
| | 1,990 |
|
| Total | $ | 9,082 |
| | $ | 10,226 |
| | $ | 2,831 |
|
For a detailed discussionCommon Shares on pensions, see note 11 "Pension Plansthe TSX for the six months ended October 31, 2021), subject to certain exceptions for block purchases, subject in any case to the volume and Other Post Retirement Benefits" to our Condensed Consolidated Financial Statements.other limitations under Rule 10b-18.
Commitments and Contractual Obligations
As of December 31, 2017,September 30, 2022, we have entered into the following contractual obligations with minimum payments for the indicated fiscal periods as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments due between |
(In thousands) | Total | | October 1, 2022 -
June 30, 2023 | | July 1, 2023 -
June 30, 2025 | | July 1, 2025 -
June 30, 2027 | | July 1, 2027
and beyond |
Long-term debt obligations (1) | $ | 5,336,028 | | | $ | 134,121 | | | $ | 1,289,157 | | | $ | 263,500 | | | $ | 3,649,250 | |
Operating lease obligations (2) | 281,067 | | | 50,268 | | | 103,186 | | | 62,269 | | | 65,344 | |
| Purchase obligations for contracts not accounted for as lease obligations | 93,168 | | | 36,137 | | | 44,352 | | | 12,679 | | | — | |
| $ | 5,710,263 | | | $ | 220,526 | | | $ | 1,436,695 | | | $ | 338,448 | | | $ | 3,714,594 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Payments due between |
| | Total | | January 1, 2018—
June 30, 2018 | | July 1, 2018—
June 30, 2020 | | July 1, 2020—
June 30, 2022 | | July 1, 2022
and beyond |
Long-term debt obligations (1) | $ | 3,548,840 |
| | $ | 444,606 |
| | $ | 256,925 |
| | $ | 952,559 |
| | $ | 1,894,750 |
|
Operating lease obligations (2) | 376,430 |
| | 38,543 |
| | 128,976 |
| | 96,213 |
| | 112,698 |
|
| Purchase obligations | 20,515 |
| | 5,158 |
| | 14,776 |
| | 581 |
| | — |
|
| | $ | 3,945,785 |
| | $ | 488,307 |
| | $ | 400,677 |
| | $ | 1,049,353 |
| | $ | 2,007,448 |
|
(1)Includes interest up to maturity and principal payments. We currently have borrowings outstanding under the Revolver ($375 million as of December 31, 2017), which we expect to repay within the next 12 months. Please see note 10 "Long-Term Debt"Note 11 “Long-Term Debt” to our Condensed Consolidated Financial Statements for more details.
(2) Net of $7.2 million ofRepresents the undiscounted future minimum lease payments under our operating leases liabilities and excludes sublease income expected to be received from properties which we have subleasedunder our various sublease agreements with third parties. Please see Note 6 “Leases” to third parties.our Condensed Consolidated Financial Statements for more details.
Guarantees and Indemnifications
We have entered into customer agreements which may include provisions to indemnify our customers against third party claims that our software products or services infringe certain third partythird-party intellectual property rights and for liabilities related to a breach of our confidentiality obligations. We have not made any material payments in relation to such indemnification provisions and have not accrued any liabilities related to these indemnification provisions in our Condensed Consolidated Financial Statements.Statements.
Occasionally, we enter into financial guarantees with third parties in the ordinary course of our business, including, among others, guarantees relating to taxes and letters of credit on behalf of parties with whom we conduct business. Such agreements have not had a material effect on our results of operations, financial position or cash flows.
Litigation
We are currently involved in various claims and legal proceedings.
Quarterly, we review the status of each significant legal matter and evaluate such matters to determine how they should be treated for accounting and disclosure purposes in accordance with the requirements of ASC Topic 450-20 "Loss Contingencies"“Loss Contingencies” (Topic 450-20). Specifically, this evaluation process includes the centralized tracking and itemization of the status of all our disputes and litigation items, discussing the nature of any litigation and claim, including any dispute or claim that is reasonably likely to result in litigation, with relevant internal and external counsel, and assessing the progress of each matter in light of its merits and our experience with similar proceedings under similar circumstances.
If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss in accordance with Topic 450-20. As of the date of this Quarterly Report on Form 10-Q, the aggregate of such estimated lossesaccrued liabilities was not material to our consolidated financial position or resultresults of
operations and we do not believe as of the date of this filing that it is reasonably possible that a loss exceeding the amounts already recognized will be incurred that would be material to our consolidated financial position or results of operations.
Contingencies
IRS Matter
As described more fully below, we have previously disclosed, the United States Internal Revenue Service (IRS) is examining certainare unable at this time to estimate a possible loss or range of our tax returns for our fiscal year ended June 30, 2010 (Fiscal 2010) through our fiscal year ended June 30, 2012 (Fiscal 2012), and in connection with those examinations is reviewing our internal reorganization in Fiscal 2010 to consolidate certain intellectual property ownership in Luxembourg and Canada and our integration of certain acquisitions into the resulting structure. We also previously disclosed that the examinations may lead to proposed adjustments to our taxes that may be material, individually or in the aggregate, and that we have not recorded any material accruals for any such potential adjustments in our Condensed Consolidated Financial Statements.
As part of these examinations, which remain ongoing, on July 17, 2015 we received from the IRS an initial Notice of Proposed Adjustment (NOPA) in draft form proposing a one-time approximately $280 million increase to our U.S. federal taxes arising from the reorganization in Fiscal 2010 and proposing penalties equal to 20% of the additional taxes, plus interest at the applicable statutory rate (which will continue to accrue until the matter is resolved and may be substantial). A NOPA is an IRS position and does not impose an obligation to pay tax. The draft NOPA may be changed before the final NOPA is issued, including because the IRS reserved the right in the draft NOPA to increase the adjustment. Based on discussions with the IRS, we expect we will receive an additional NOPA proposing an approximately $80 million increase to our U.S. federal taxes for Fiscal 2012 arising from the integration of Global 360 Holding Corp. into the structure that resulted from the reorganization, accompanied by proposed penalties and interest (although there can be no assurance that this will be the amount reflected in the NOPA when received, including because the IRS may assign a higher value to our intellectual property). Depending upon the outcome of these matters, additional state income taxes plus penalties and interest may be due. We currently estimate that, as of December 31, 2017, adjustments under the draft NOPA in its present form and the anticipated additional NOPA could result in an aggregate liability of approximately $600 million, inclusive of U.S. federal and state taxes, penalties and interest. The increase from the initially disclosed estimated aggregate liability is solely due to an estimate of interest that has accrued.
We strongly disagree with the IRS’ position and intend to vigorously contest the proposed adjustments to our taxable income. We are examining various alternatives available to taxpayers to contest the proposed adjustments. Any such alternatives could involve a lengthy process and result in the incurrence of significant expenses. As of the date of this Quarterly Report on Form 10-Q, we have not recorded any material accrualslosses in respect of these examinations in our Condensed Consolidated Financial Statements. An adverse outcome of these tax examinations could have a material adverse effect on our financial position and results of operations.certain disclosed matters.
Contingencies
CRA Matter
As part of its ongoing audit of our Canadian tax returns, the Canada Revenue Agency (CRA) has disputed our transfer pricing methodology used for certain intercompany transactions with our international subsidiaries. The CRAsubsidiaries and has issued a noticenotices of reassessment for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2016. Assuming the utilization of available tax attributes (further described below), we estimate our potential aggregate liability, as of September 30, 2022, in connection with the CRA's reassessments for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2016, to be limited to penalties, interest and provincial taxes that may be due of approximately $70 million. As of September 30, 2022, we have provisionally paid approximately $32 million in order to fully preserve our rights to object to the CRA's audit positions, being the minimum payment required under Canadian legislation while the matter is in dispute. This amount is recorded within “Long-term income taxes recoverable” on the Condensed Consolidated Balance Sheets as of September 30, 2022.
The notices of reassessment for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2016 would, as drafted, increase our taxable income for that year by approximately $90 million (offset by the tax attributes referred to below) and is expected to propose related penalties$100 million for each of approximatelythose years, as well as impose a 10%. We strongly disagree with the CRA position and believe the reassessment of Fiscal 2012 and any related proposed penalties are without merit. We will continue to vigorously contest both penalty on the proposed adjustmentsadjustment to our taxable income and the penalty assessment. We have filed a notice of objection and will also seek competent authority consideration under applicable international treaties in respect of this reassessment. As of the date of this Quarterly Report on Form 10-Q, we have not recorded any accruals in respect of this reassessment in our Condensed Consolidated Financial Statements.
Even if we are unsuccessful in challenging the CRA’s reassessment to increase our taxable income for Fiscal 2012, we have elective deductions available in Fiscal 2012 that would offset such increased amount so that no additional cash tax would be payable for Fiscal 2012, exclusive of any proposed penalties.income. Audits by the CRA of our tax returns for fiscal years prior to Fiscal 2012 have been completed with no reassessment of our income tax liabilityliability.
We strongly disagree with the CRA's positions and believe the reassessments of Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2016 (including any penalties) are without merit, and we are continuing to contest these reassessments. On June 30, 2022, we filed a notice of appeal with the Tax Court of Canada seeking to reverse all such reassessments (including penalties) in full.
Even if we are unsuccessful in challenging the CRA's reassessments to increase our taxable income for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2016, we have elective deductions available for those years (including carry-backs from later years) that would offset such increased amounts so that no additional cash tax would be payable, exclusive of any assessed penalties and interest, as described above.
The CRA has audited Fiscal 2017 on a basis that we strongly disagree with and are contesting. The focus of the CRA audit has been the valuation of certain intellectual property and goodwill when one of our subsidiaries continued into Canada from Luxembourg in July 2016. In accordance with applicable rules, these assets were recognized for tax purposes at fair market value as of that time, which value was supported by an expert valuation prepared by an independent leading accounting and advisory firm. CRA’s position for Fiscal 2017 relies in significant part on the application of its positions regarding our transfer pricing methodology that are the basis for its reassessment of our fiscal years 2012 to 2016 described above, and that we believe are without merit. Other aspects of CRA’s position for Fiscal 2017 conflict with the expert valuation prepared by the independent leading accounting and advisory firm that was used to support our original filing position. On January 27, 2022, the CRA issued a notice of reassessment in respect of our international transactions, including the transfer pricing methodology applied to them. The CRA is currently auditing Fiscal 2013, 2014 and 2015, and has proposed to reassess Fiscal 2013 in2017 on a mannerbasis consistent with its proposal to reduce the available depreciable basis of assets in Canada. On April 19, 2022, we filed our notice of objection regarding the reassessment in respect of Fiscal 2012.2017. If we are ultimately unsuccessful in defending our position, the estimated impact of the proposed adjustment could result in us recording an income tax expense, with no immediate cash payment, to reduce the stated value of our deferred tax assets of up to approximately $470 million. Any such income tax expense could also have a corresponding cash tax impact that would primarily occur over a period of several future years based upon annual income realization in Canada. We strongly disagree with the CRA’s position for Fiscal 2017 and intend to vigorously defend our original filing position. We are in ongoing discussions withnot required to provisionally pay any cash amounts to the CRA andas a result of the reassessment in respect of Fiscal 2017 due to the
utilization of available tax attributes; however, to the extent the CRA reassesses subsequent fiscal years on a similar basis, we expect to make certain minimum payments required under Canadian legislation, which may need to be provisionally made starting in Fiscal 2024 while the matter is in dispute.
We will continue to vigorously contest the CRA's audit position.
GXS Brazil Matter
As partadjustments to our taxable income and any penalty and interest assessments, as well as any reduction to the basis of our acquisitiondepreciable property. We are confident that our original tax filing positions were appropriate. Accordingly, as of GXS,the date of this Quarterly Report on Form 10-Q, we inherited a tax disputehave not recorded any accruals in Brazil between the Company’s subsidiary, GXS Tecnologia da Informação (Brasil) Ltda. (GXS Brazil), and the municipalityrespect of São Paulo,these reassessments or proposed reassessment in connection with GXS Brazil’s
judicial appealour Condensed Consolidated Financial Statements. The CRA is currently in preliminary stages of a tax claim. During the first quarter ofauditing Fiscal 2018 the courts ruled in favour of the municipality of São Paulo. The Company has decided not to pursue further appeal. and Fiscal 2019.
Carbonite Class Action Complaint
On OctoberAugust 1, 2017, the Company reached a settlement with the municipality and paid $1.4 million.
Historically,2019, prior to our acquisition of GXS, GXS would charge certainCarbonite, a purported stockholder of Carbonite filed a putative class action complaint against Carbonite, its former Chief Executive Officer, Mohamad S. Ali, and its former Chief Financial Officer, Anthony Folger, in the United States District Court for the District of Massachusetts captioned Ruben A. Luna, Individually and on Behalf of All Others Similarly Situated v. Carbonite, Inc., Mohamad S. Ali, and Anthony Folger (No. 1:19-cv-11662-LTS). The complaint alleges violations of the federal securities laws under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The complaint generally alleges that the defendants made materially false and misleading statements in connection with Carbonite’s Server Backup VM Edition, and seeks, among other things, the designation of the action as a class action, an award of unspecified compensatory damages, costs and expenses, including counsel fees and expert fees, and other relief as the court deems appropriate. On August 23, 2019, a nearly identical complaint was filed in the same court captioned William Feng, Individually and on Behalf of All Others Similarly Situated v. Carbonite, Inc., Mohamad S. Ali, and Anthony Folger (No. 1:19- cv-11808-LTS) (together with the Luna Complaint, the “Securities Actions”). On November 21, 2019, the district court consolidated the Securities Actions, appointed a lead plaintiff, and designated a lead counsel. On January 15, 2020, the lead plaintiff filed a consolidated amended complaint generally making the same allegations and seeking the same relief as the complaint filed on August 1, 2019. The defendants moved to its subsidiaries, including GXS Brazil, primarily baseddismiss the Securities Actions on historical transfer pricing studies that were intendedMarch 10, 2020. The motion was fully briefed in June 2020 and a hearing on the motion to reflectdismiss the costs incurred by subsidiaries in relationSecurities Actions was held on October 15, 2020. Following the hearing, on October 22, 2020, the district court granted with prejudice the defendants’ motion to services provided bydismiss the parent companySecurities Actions. On November 20, 2020, the lead plaintiff filed a notice of appeal to the subject subsidiary. GXS recorded taxesCourt of Appeals for the First Circuit. On December 21, 2021, the First Circuit issued a decision reversing and remanding the Securities Actions to the district court for further proceedings. The defendants remain confident in their position, believe the Securities Actions are without merit, and will continue to vigorously defend the matter.
Carbonite vs Realtime Data
On February 27, 2017, before our acquisition of Carbonite, a non-practicing entity named Realtime Data LLC (Realtime Data) filed a lawsuit against Carbonite in the U.S. District Court for the Eastern District of Texas “Realtime Data LLC v. Carbonite, Inc. et al (No 6:17-cv-00121-RWS-JDL).” Therein, it alleged that certain of Carbonite’s cloud storage services infringe upon certain patents held by Realtime Data. Realtime Data’s complaint against Carbonite sought damages in an unspecified amount and injunctive relief. On December 19, 2017, the U.S. District Court for the Eastern District of Texas transferred the case to the U.S. District Court for the District of Massachusetts (No. 1:17-cv-12499). Realtime Data has also filed numerous other patent suits on amounts billed,the same asserted patents against other companies. After a stay pending appeal in one of those suits, on January 21, 2021, the district court held a hearing to construe the claims of the asserted patents. As to the fourth patent asserted against Carbonite, on September 24, 2019, the U.S. Patent & Trademark Office Patent Trial and Appeal Board invalidated certain claims of that were consideredpatent, including certain claims that had been asserted against Carbonite. The parties then jointly stipulated to dismiss that patent from this action. On August 23, 2021, in one of the suits against other companies, the District of Delaware (No. 1:17-cv-800), held all of the patents asserted against Carbonite to be due based oninvalid. Realtime Data has appealed that decision to the intercompany charges. GXS subsequently re-evaluated its intercompany charges to GXS Brazil and related taxes and, upon taking into consideration the current environment and judicial proceedings in Brazil, concluded that it was probable that certain indirect taxes would be assessable and payable based upon the accrualU.S. Court of such intercompany charges and has approximately $3.9 million accruedAppeals for the probable amountFederal Circuit. We continue to vigorously defend the matter, and the U.S. District Court for the District of Massachusetts has issued a settlementclaim construction order. We have not accrued a loss contingency related to the indirect taxes, interestthis matter because litigation related to a non-practicing entity is inherently unpredictable. Although a loss is reasonably possible, an unfavorable outcome is not considered by management to be probable at this time and penalties.
GXS India Matter
Our Indian subsidiary, GXS India Technology Centre Private Limited (GXS India), is subjectwe remain unable to potential assessments by Indian tax authorities in the cityreasonably estimate a possible loss or range of Bangalore. GXS India has received assessment orders from the Indian tax authorities alleging that the transfer price applied to intercompany transactions was not appropriate. Based on advice from our tax advisors, we believe that the facts that the Indian tax authorities are using to support their assessment are incorrect. We have filed appeals and anticipate an eventual settlementloss associated with the Indian tax authorities. We have accrued $1.3 million to cover our anticipated financial exposure in this matter.litigation.
Please also see Part I, Item 1A "Risk Factors"“Risk Factors” in our Annual Report on Form 10-K for Fiscal 2017.2022.
Off-Balance Sheet Arrangements
We do not enter into off-balance sheet financing as a matter of practice, except for guarantees relating to taxes and letters of credit on behalf of parties with whom we conduct business, and the usebusiness.
Table of operating leases for office space, computer equipment, and vehicles. None of the operating leases described in the previous sentence has, and we currently do not believe that they potentially may have, a material effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources. In accordance with U.S. GAAP, neither the lease liability nor the underlying asset is carried on the balance sheet, as the terms of the leases do not meet the criteria for capitalization.Contents
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are primarily exposed to market risks associated with fluctuations in interest rates on our term loans, revolving loans and foreign currency exchange rates.
Interest rate risk
Our exposure to interest rate fluctuations relaterelates primarily to our Term Loan B, Revolver, Acquisition Term Loan and the Revolver.Bridge Loan.
As of December 31, 2017,September 30, 2022, we had an outstanding balance of $768.2$955.0 million on Term Loan B. Term Loan B bears a floating interest rate of 2.0%1.75% plus LIBOR. As of December 31, 2017,September 30, 2022, an adverse change of one percent on the interest rate would have the effect of increasing our annual interest payment on Term Loan B by approximately $7.7$9.6 million, assuming that the loan balance as of December 31, 2017September 30, 2022 is outstanding for the entire period (June 30, 2017—2022—$7.79.6 million).
As of December 31, 2017,September 30, 2022, we had anno outstanding balance of $375 million onunder the Revolver. Borrowings under the Revolver bear interest per annum at a floating rate of LIBOR plus a fixed rate that is dependent on our consolidated net leverage ratio ranging from 1.25% to 1.75%. As of December 31, 2017,September 30, 2022, with no outstanding balance on the Revolver, an adverse change of one percent on the interest rate would have theno effect of increasingon our annual interest payment (June 30, 2022—nil).
As of September 30, 2022, we had no borrowings under the Acquisition Term Loan. As of September 30, 2022, with no outstanding balance on the Revolver by approximately $3.8 million, assuming thatAcquisition Term Loan, an adverse change of one percent on the loan balance is outstanding for the entire yearinterest rate would have no effect on our annual interest payment (June 30, 2017—$1.8 million)2022—nil).
As of September 30, 2022, we had no borrowings under the Bridge Loan. As of September 30, 2022, with no outstanding balance on the Bridge Loan, an adverse change of one percent on the interest rate would have no effect on our annual interest payment (June 30, 2022—nil).
For more information regarding the impact of LIBOR and SOFR rates, see “Stress in the global financial system may adversely affect our finances and operations in ways that may be hard to predict or to defend against” included within Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for Fiscal 2022.
Foreign currency risk
Foreign currency transaction risk
We transact business in various foreign currencies. Our foreign currency exposures typically arise from intercompany fees, intercompany loans and other intercompany transactions that are expected to be cash settled in the near term.term and are transacted in non-functional currency. We expect that we will continue to realize gains or losses with respect to our foreign currency exposures. Our ultimate realized gain or loss with respect to foreign currency exposures will generally depend on the size and type of cross-currency transactions that we enter into, the currency exchange rates associated with these exposures and changes in those rates. Additionally, we
We have hedged certain of our Canadian dollar foreign currency exposures relating to our payroll expenses in Canada.
Based on the CAD foreign exchange forward contracts outstanding as of December 31, 2017,September 30, 2022, a one cent change in the Canadian dollar to U.S. dollar exchange rate would have caused a change of approximately $0.5$0.6 million in the mark to marketmark-to-market valuation on our existing foreign exchange forward contracts (June 30, 2017—2022—$0.40.5 million).
Additionally, in connection with the Micro Focus Acquisition, in August 2022, the Company entered into certain derivative transactions to meet certain foreign currency obligations related to the purchase price of the proposed Micro Focus Acquisition, mitigate the risk of foreign currency appreciation in the GBP denominated purchase price and mitigate the risk of foreign currency appreciation in the EUR denominated existing debt held by Micro Focus. The Company entered into the following derivatives: (i) three deal-contingent forward contracts, (ii) a non-contingent forward contract, and (iii) EUR/USD cross currency swaps. These instruments were entered into as economic hedges to mitigate foreign currency risks associated with the proposed Micro Focus Acquisition. The instruments do not qualify for hedge accounting at inception.
Based on the deal contingent and non-contingent forward contracts outstanding as of September 30, 2022, a one cent change in the British Pound to U.S. dollar forward exchange rate would have caused a change of $22.7 million in the mark-to-market valuation on our existing deal-contingent forward and non-contingent forward contracts (June 30, 2022—nil).
Based on the cross currency swaps outstanding as of September 30, 2022, a one cent change in the Euro to U.S. dollar forward exchange rate would have caused a change of $0.6 million in the mark-to-market valuation on our existing cross currency swaps (June 30, 2022—nil).
Foreign currency translation risk
Our reporting currency is the U.S. dollar. Fluctuations in foreign currencies impact the amount of total assets and liabilities that we report for our foreign subsidiaries upon the translation of these amounts into U.S. dollars. In particular, the
amount of cash and cash equivalents that we report in U.S. dollars for a significant portion of the cash held by these subsidiaries is subject to translation variance caused by changes in foreign currency exchange rates as of the end of each respective reporting period (the offset to which is recorded to accumulated other comprehensive income (loss) on our Condensed Consolidated Balance Sheets).
The following table shows our cash and cash equivalents denominated in certain major foreign currencies as of December 31, 2017September 30, 2022 (equivalent in U.S. dollar):
| | | (In thousands) | | U.S. Dollar
Equivalent at
December 31, 2017 | | U.S. Dollar
Equivalent at
June 30, 2017 | (In thousands) | U.S. Dollar Equivalent at September 30, 2022 | | U.S. Dollar Equivalent at June 30, 2022 |
| Euro | | $ | 89,592 |
| | $ | 121,621 |
| Euro | $ | 208,912 | | | $ | 254,546 | |
| British Pound | | 34,146 |
| | 30,425 |
| British Pound | 48,875 | | | 44,020 | |
| Canadian Dollar | | 16,761 |
| | 29,131 |
| Canadian Dollar | 14,372 | | | 14,640 | |
| Swiss Franc | | 18,330 |
| | 41,925 |
| Swiss Franc | 88,908 | | | 48,674 | |
| Other foreign currencies | | 93,447 |
| | 87,144 |
| Other foreign currencies | 154,470 | | | 127,060 | |
| Total cash and cash equivalents denominated in foreign currencies | | 252,276 |
| | 310,246 |
| Total cash and cash equivalents denominated in foreign currencies | 515,537 | | | 488,940 | |
| U.S. dollar | | 223,738 |
| | 133,111 |
| |
| U.S. Dollar | | U.S. Dollar | 1,188,848 | | | 1,204,801 | |
| Total cash and cash equivalents | | $ | 476,014 |
| | $ | 443,357 |
| Total cash and cash equivalents | $ | 1,704,385 | | | $ | 1,693,741 | |
If overall foreign currency exchange rates in comparison to the U.S. dollar uniformly weakened by 10%, the amount of cash and cash equivalents we would report in equivalent U.S. dollars would decrease by approximately $25.2$51.6 million (June 30,
2017— 2022—$31.048.9 million), assuming we have not entered into any derivatives discussed above under "Foreign“Foreign Currency Transaction Risk".Risk.”
Item 4. Controls and Procedures
(A) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, our management, with the participation of the Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act).Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2017,September 30, 2022, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act were recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that information required to be disclosed by us in the reports we file under the Exchange Act (according to Rule 13(a)-15(e)) is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
(B) Changes in Internal Control over Financial Reporting (ICFR)
Based on the evaluation completed by our management, in which our Chief Executive Officer and Chief Financial Officer participated, our management has concluded that there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2017September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART
Part II - Other Information
Item 1A. Risk Factors
The following risk factors update, and are in addition to,You should carefully consider the risk factors discussed in Part I, Item 1A, "Risk Factors"“Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended June 30, 2017, and should be read in conjunction therewith.2022. These are not the only risks and uncertainties facing us. Additional risks not currently known to us or that we currently believe are immaterial may also impair our operating results, financial condition and liquidity. Our business is also subject to general risks and uncertainties that affect many other companies.
Risks Related to the Micro Focus Acquisition
Our provisionWe may fail to consummate the Micro Focus Acquisition or may not consummate it on the terms described herein or in our other filings with the SEC
It is currently anticipated that we will complete the Micro Focus Acquisition in the first quarter of calendar year 2023. Completion of the Micro Focus Acquisition is subject to regulatory approvals and other customary closing conditions for income taxesthe acquisition of a UK public company, and effective income tax rate may vary significantlywe cannot provide assurance that such regulatory approvals will be obtained or that other customary closing conditions will be satisfied in a timely manner or at all. Even if all required consents and approvals are obtained and the other customary closing conditions are satisfied, no assurance can be given as to the terms, conditions and timing of the approvals. If we agree to any material requirements, limitations, costs, divestitures or restrictions in order to obtain any approvals required to consummate the Micro Focus Acquisition, these requirements, limitations, costs, divestitures or restrictions could adversely affect our ability to achieve the anticipated benefits of the Micro Focus Acquisition or result in a failure to consummate the Micro Focus Acquisition. As a result, the possible timing and likelihood of completion are uncertain and, accordingly, there can be no assurance that the Micro Focus Acquisition will be completed on the anticipated schedule or at all.
If the Micro Focus Acquisition is not consummated, we could be subject to a number of risks that may adversely affect our resultsbusiness, including:
•we will be required to pay costs relating to the Micro Focus Acquisition such as legal, accounting, financial advisory and printing fees, whether or not the Micro Focus Acquisition is consummated;
•time and resources committed by our management to matters relating to the Micro Focus Acquisition could otherwise have been devoted to pursuing other beneficial opportunities; and
•we would not realize the benefits we expect to realize from consummating the Micro Focus Acquisition.
The Micro Focus Acquisition is subject to the receipt of operationsgovernmental and cash resources
Significant judgment is required in determining our provision for income taxes. Various internal and external factors may have favorable or unfavorable effects on our future provision for income taxes, income taxes receivable, and our effective income tax rate. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, including the Tax Cuts and Jobs Act which was enacted in the United States on December 22, 2017, results of audits by tax authorities, changing interpretations of existing tax laws or regulations, changes in estimates of prior years' items, the impact of transactions we complete, future levels of research and development spending, changes in the valuation of our deferred tax assets and liabilities, transfer pricing adjustments, changes in the overall mix of income among the different jurisdictions in which we operate, and changes in overall levels of income before taxes. Changes in the tax laws of various jurisdictions in which we do business could result from the base erosion and profit shifting (BEPS) project being undertaken by the Organization for Economic Co-operation and Development (OECD). The OECD, a coalition of member countries, has been developing recommendations for international tax rules to address different types of BEPS, including situations in which profits are shifted (or payments are made) from higher tax jurisdictions to lower tax jurisdictions. Adoption of these recommendations (or other changes in law or policy) by the countries in which we do business could adversely affect our provision for income taxes and our effective tax rate. Furthermore, new accounting pronouncements or new interpretations of existing accounting pronouncements (such as thoseregulatory approvals that may be described in note 2 “Recent Accounting Pronouncements” in our notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q), and/or any internal restructuring initiatives we may implement from time to time to streamline our operations, can have a material impact on our effective income tax rate. In July 2016, we implemented a reorganization of our subsidiaries worldwide with the view to continuing to enhance operational and administrative efficiencies through further consolidated ownership, management, and development of our intellectual property (IP) in Canada, continuing to reduce the number of entities in our group and working towards our objective of having a single operational legal entity in each jurisdiction.
Tax examinations are often complex as tax authorities may disagree with the treatment of items reported by us and our
transfer pricing methodology based upon our limited risk distributor model, the result of whichimpose conditions that could have a materialan adverse effect on us or, if not obtained, could prevent consummation of the Micro Focus Acquisition
Consummation of the Micro Focus Acquisition is conditioned upon the receipt of governmental approvals, including certain antitrust and foreign investment approvals. There can be no assurance that these approvals will be obtained and that the other conditions to consummating the Micro Focus Acquisition will be satisfied. In addition, the governmental authorities from which the regulatory approvals are required may impose conditions on the consummation of the Micro Focus Acquisition or require changes to the terms of the Micro Focus Acquisition or agreements to be entered into in connection with the Micro Focus Acquisition. Such conditions or changes and the process of obtaining regulatory approvals could have the effect of delaying or impeding consummation of the Micro Focus Acquisition or of imposing additional costs or limitations on us following consummation of the Micro Focus Acquisition, any of which might have an adverse effect on our business, financial condition and results of operations. Although
We may fail to realize the benefits expected from the Micro Focus Acquisition, which could adversely affect our business and results of operations
The anticipated benefits we believeexpect from the Micro Focus Acquisition are, necessarily, based on projections and assumptions about our estimatescombined business with Micro Focus, which may not materialize as expected or which may prove to be inaccurate. Our business and results of operations could be adversely affected if we are reasonable,unable to realize the ultimate outcomeanticipated benefits from the Micro Focus Acquisition on a timely basis or at all, including realizing the anticipated synergies from the Micro Focus Acquisition in the anticipated amounts or within the anticipated timeframes or cost expectations or at all. Achieving the benefits of the Micro Focus Acquisition will depend, in part, on our ability to integrate the business and operations of Micro Focus successfully and efficiently with respectour business. The challenges involved in this integration, which may be complex and time-consuming, include the following:
•successfully managing relationships with our strategic partners, combined supplier and customer base;
•coordinating and integrating independent research and development and engineering teams across technologies and product platforms to enhance product development while reducing costs;
•coordinating sales and marketing efforts to effectively position the combined company’s capabilities and the direction of product development;
•limitations or restrictions required by regulatory authorities on the ability of Micro Focus’ and our management to conduct planning regarding the integration of the two companies;
•difficulties in integrating the systems and process of two companies with complex operations including multiple sites;
•the increased scale resulting from the Micro Focus Acquisition;
•retaining key employees;
•obligations that we will have to counterparties of Micro Focus that arise as a result of the change in control of Micro Focus; and
•the diversion of management attention from other important business objectives.
If we do not successfully manage these issues and the other challenges inherent in integrating an acquired business of the size and complexity of Micro Focus, then we may not achieve the anticipated benefits of the Micro Focus Acquisition and our revenue, expenses, operating results and financial condition could be adversely affected.
The use of cash and incurrence of substantial indebtedness in connection with the financing of the Micro Focus Acquisition may have an adverse impact on our liquidity, limit our flexibility in responding to other business opportunities and increase our vulnerability to adverse economic and industry conditions
If the Micro Focus Acquisition is consummated, we will have a significant amount of indebtedness outstanding. As of September 30, 2022 we have $4.3 billion of total indebtedness. In connection with the Micro Focus Acquisition, we intend to draw down on our Acquisition Term Loan, which provides approximately $2.6 billion aggregate principal amount of availability, and, if we are not able to access the debt capital markets directly or through certain affiliates prior to the taxesclosing of the Micro Focus Acquisition sufficiently to finance the Micro Focus Acquisition, the Bridge Loan, which provides for commitments of up to $2 billion. Both the Acquisition Term Loan and the Bridge Loan are secured by a first charge on substantially all of the assets of the Company and certain subsidiary guarantors on a pari passu basis with the Revolver and Term Loan B. If we owe may differare able to access the debt capital markets directly or through certain affiliates prior to or following the closing of the Micro Focus Acquisition to reduce commitments or the borrowings under the Bridge Loan, any such debt is expected to also be secured. This level of indebtedness could have important consequences to our business, including, but not limited to:
•increasing our debt service obligations, making it more difficult for us to satisfy our obligations;
•limiting our ability to borrow additional funds for working capital, capital expenditures, acquisitions and other general purposes and increasing the cost of any such borrowing;
•increasing our vulnerability to, and reducing our flexibility to respond to, general adverse economic and industry conditions;
•expose us to fluctuations in the interest rate environment because the interest rates under Term Loan B and the Revolver are variable;
•require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the amounts recordedavailability of our cash flow to fund working capital, capital expenditures, acquisitions, dividends and other general corporate purposes;
•limiting our flexibility in planning for, or reacting to, changes in our financial statements,business and this differencethe industry in which we operate, which may materially affectplace us at a competitive disadvantage compared to our financial positioncompetitors that have less debt;
•placing us at a competitive disadvantage as compared to certain of our competitors that are not as highly leveraged;
•increasing the risk of a future credit ratings downgrade of our debt, which could increase future debt costs and financial results inlimit the period or periods for which such determination is made.future availability of debt financing; and
•restricting us from pursuing certain business opportunities, including other acquisitions.
For more details of tax audits to which we are subject and the impact of the recently enacted Tax Cuts and Jobs Act in the United States,information on our indebtedness, see notes 13 "Guarantees and Contingencies" and 14 "Income Taxes", respectively,Note 11 “Long-Term Debt” to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
CertainAs a result of the Micro Focus Acquisition, we anticipate that the scope and size of our productsoperations and business will substantially change and will result in certain incremental risks to us. We cannot provide assurance that our expansion in scope and size will be successful
We anticipate that the Micro Focus Acquisition will substantially expand the scope and size of our business by adding substantial assets and operations to our existing business. The anticipated future growth of our business will impose significant added responsibilities on management, including the need to identify, recruit, train and integrate additional employees. Our
senior management’s attention may be perceived as, or determined bydiverted from the courtsmanagement of daily operations to be, a violation of privacy rights and related laws. Any such perception or determination could adversely affect our revenues and results of operations.
Becausethe integration of the nature of certain ofassets acquired in the Micro Focus Acquisition. Our ability to manage our products, including those relatingbusiness and growth will require us to digital investigations, potential customerscontinue to improve our operational, financial and purchasers of our products or the public in generalmanagement controls, reporting systems and procedures. We may perceive that use of these products may result in violations of their individual privacy rights. In addition, certain courts or regulatory authorities could determine that the use of our software solutionsalso encounter risks, costs and expenses associated with any undisclosed or other products is a violation of privacy laws, particularly in jurisdictions outsideunanticipated liabilities and use more cash and other financial resources on integration and implementation activities than we expect. We may not be able to integrate the Micro Focus business into our existing operations on our anticipated timelines or realize the full expected economic benefits of the United States. Any such determination or perception by potential customers, the general public, government entities or the judicial system could harm our reputation and adversely affectMicro Focus Acquisition, which may have a material adverse effect on our business, financial condition and results of operations.
In addition, the consummation of the Micro Focus Acquisition may heighten the potential adverse effects on our business, operating results or financial condition described in the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended June 30, 2022.
We have incurred significant transaction costs in connection with the Micro Focus Acquisition that could adversely affect our results of operations
Whether or not we complete the Micro Focus Acquisition, we have incurred, and will continue to incur, significant transaction costs in connection with the Micro Focus Acquisition, including payment of certain fees and expenses incurred in connection with the Micro Focus Acquisition and related transactions to obtain financing for the Micro Focus Acquisition that are expected to occur, including the entering of certain derivative transactions in connection with the Micro Focus Acquisition as further described herein. We anticipate mark-to-market valuation adjustments for the derivative transactions to continue, based on foreign currency fluctuations. For more information on our mark-to-market derivatives, see Note 17 “Derivative Instruments and Hedging Activities" and Note 22 “Other Income (Expense), Net” to our Condensed Consolidated Financial Statement and Item 2. Management's Discussion and Analysis of Financial condition and Results of Operations. Additional unanticipated costs may be incurred in the integration process. These could adversely affect our results of operations in the period in which such expenses are recorded or our cash flow in the period in which any related costs are actually paid.
Furthermore, we may incur severance expenses and restructuring charges in connection with the Micro Focus Acquisition, which may adversely affect our operating results following the closing of the Micro Focus Acquisition in which such expenses are recorded or our cash flow in the period in which any related costs are actually paid.
Item 6. Exhibits and Financial Statements Schedules
The following documents are filed as a part of this report:
| | | | | | | | | | | | | | | | | | | | |
Exhibit
Number | | Description | | Report or Registration Statement | | Exhibit Reference |
| | | | Company’s Form 8-K, filed August 25, 2022 | | Exhibit 2.1 |
| 4.1 | | | | | | |
Exhibit
| | Description of | | Company’s Form 8-K, filed September 15, 2022 | | Exhibit 4.1 |
31.1 | | | | Company’s Form 8-K, filed August 25, 2022 | | Exhibit 10.1 |
| | | | Company’s Form 8-K, filed August 25, 2022 | | Exhibit 10.2 |
| | | | Company’s Form 8-K, filed August 25, 2022 | | Exhibit 10.3 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| 101.INS | | XBRL instance document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | |
| 101.SCH | | Inline XBRL taxonomy extension schema. | | | | |
| 101.CAL | | Inline XBRL taxonomy extension calculation linkbase. | | | | |
| 101.DEF | | Inline XBRL taxonomy extension definition linkbase. | | | | |
| 101.LAB | | Inline XBRL taxonomy extension label linkbase. | | | | |
| 101.PRE | | Inline XBRL taxonomy extension presentation. | | | | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
OPEN TEXT CORPORATION
Date: January 31, 2018
|
| | | | |
| By: | /s/ MARK J. BARRENECHEA |
| Mark J. Barrenechea
Vice Chairman,Chair, Chief Executive Officer and Chief Technology Officer
(Principal Executive Officer)
|
| /s/ JOHN M. DOOLITTLEMADHU RANGANATHAN |
| John M. Doolittle
Madhu Ranganathan
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|
| /s/ ADITYA MAHESHWARIHOWARD ROSEN |
| Aditya Maheshwari
Howard Rosen
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer) |