SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|☐||REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934|
|☒||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal year ended July 31, 2021
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
|☐||SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
Date of event requiring this shell company report
For the transition period from to
Commission file number: 001-40066
(Exact name of registrant as specified in its charter)
(Translation of Registrant’s name into English)
Jersey, Channel Islands
(Jurisdiction of incorporation or organization)
1020 Eskdale Road, Winnersh Triangle, Wokingham,
Berkshire, RG41 5TS. United Kingdom
(Address of principal executive offices)
Group Chief Executive
c/o 1020 Eskdale Road, Winnersh Triangle, Wokingham,
Berkshire, RG41 5TS. United Kingdom +44 (0) 118 927 3800
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
|Title of each class||Trading symbol||Name of each exchange on which registered|
|Ordinary Shares of 10 pence||FERG||London Stock Exchange|
|New York Stock Exchange|
Securities registered or to be registered pursuant to Section 12(g) of the Act: None.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: As of July 31, 2021, the number of outstanding ordinary shares was 222,308,366.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
If this is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
|Accelerated filer||☐||Non-accelerated filer||☒|
|Emerging growth company||☐|
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP ☐ International Financial Reporting Standards as issued by the International Accounting Standards Board ☒ Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐
TABLE OF CONTENTS
Unless otherwise specified or the context otherwise requires, the term “the Company” refers to Ferguson plc, and the terms “Ferguson,” “Group,” “we,” “us,” and “our” and other similar terms refer to Ferguson plc and its subsidiaries.
Certain information included in this annual report is forward-looking, including within the meaning of the Private Securities Litigation Reform Act of 1995, and involves risks, assumptions and uncertainties that could cause actual results to differ materially from those expressed or implied by forward-looking statements. Forward-looking statements cover all matters which are not historical facts and include, without limitation, statements or guidance regarding or relating to our future financial position, results of operations and growth, projected interest in and ownership of our shares by domestic U.S. investors, plans and objectives for future capabilities, risks associated with changes in global and regional economic, market and political conditions, ability to manage supply chain challenges, ability to manage the impact of product price fluctuations, our financial condition and liquidity, including our ability to repay our indebtedness and obtain financing in the future to fund capital expenditures and other general corporate activities, legal or regulatory development changes, and other statements concerning the success of our business and strategies.
Forward-looking statements can be identified by the use of forward looking terminology, including terms such as “believes,” “estimates,” “anticipates,” “expects,” “forecasts,” “intends,” “continues,” “plans,” “projects,” “goal,” “target,” “aim,” “may,” “will,” “would,” “could” or “should” or, in each case, their negative or other variations or comparable terminology and other similar references to future periods. Forward-looking statements speak only as of the date on which they are made. They are not assurances of future performance and are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Therefore, you should not place undue reliance on any of these forward-looking statements. Although we believe that the forward-looking statements contained in this annual report are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in such forward-looking statements, including but not limited to:
•weakness in the economy, market trends, uncertainty and other conditions in the markets in which we operate, and other factors beyond our control;
•adverse impacts caused by the COVID-19 pandemic or related variants;
•decreased demand for our products as a result of operating in highly competitive industries and the impact of declines in the residential and non-residential repair, maintenance and improvement (“RMI”) markets as well as the new construction market;
•failure to rapidly identify or effectively respond to consumer wants, expectations or trends;
•failure of a key information technology system or process as well as exposure to fraud or theft resulting from payment-related risks;
•unsuccessful execution of our operational strategies;
•failure to attract, retain and motivate key associates;
•ineffectiveness of or disruption in our international supply chain or our fulfillment network, including delays in inventory, increased delivery costs or lack of availability;
•fluctuations in foreign currency and fluctuating product prices (inflation/deflation);
•inherent risks associated with acquisitions, partnerships, joint ventures and other business combinations, dispositions or strategic transactions;
•regulatory, product liability and reputational risks and the failure to achieve and maintain a high level of product quality as a result of our suppliers’ or manufacturers’ mistakes or inefficiencies;
•legal proceedings as well as failure to comply with domestic and foreign laws and regulations or the occurrence of unforeseen developments such as litigation;
•changes in, interpretations of, or compliance with tax laws in the United States, the United Kingdom, Switzerland or Canada;
•privacy and protection of sensitive data failures, including failures due to data corruption, cybersecurity incidents or network security breaches;
•exposure of associates, contractors, customers, suppliers and other individuals to health and safety risks;
•funding risks related to our defined benefit pension plans;
•inability to renew leases on favorable terms or at all as well as any obligation under the applicable lease;
•failure to effectively manage and protect our facilities and inventory;
•our indebtedness and changes in our credit ratings and outlook;
•risks associated with our intention to relocate our primary listing to the United States and any volatility in our share price and shareholder base in connection therewith; and
•other risks and uncertainties set forth under the heading “Risk Factors” in this annual report.
Additionally, forward-looking statements regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Other than in accordance with our legal or regulatory obligations, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
A [Removed and Reserved]
B Capitalization and Indebtedness
C Reasons for the Offer and Use of Proceeds
D Risk Factors
In addition to the other information contained in this annual report, you should carefully consider the following risk factors before investing in our ordinary shares. The risks and uncertainties we describe below are not the only ones we face. Additional risks and uncertainties of which we are not aware or that we currently believe are immaterial may also adversely affect the business, financial condition and results of operations of the Company. If any of the possible events described below were to occur, the business, financial condition and results of operations of the Company could be materially and adversely affected. If that happens, the market price of our shares could decline, and you could lose all or part of your investment.
This annual report also contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks described below and elsewhere in this annual report.
Risks Relating to Our Business
Weakness in the economy, market trends, uncertainty and other conditions in the markets in which we operate, particularly in the United States, may adversely affect the profitability and financial stability of our customers, and could negatively impact our sales growth and results of operations.
Our financial performance depends significantly on industry trends and general economic conditions, including the state of the residential, commercial, civil/infrastructure and industrial markets, as well as changes in gross domestic product in the geographic markets in which we operate, particularly in the United States where we generated 94 percent of our revenue from continuing operations in fiscal 2021. We serve several end markets in which the demand for our products is sensitive to the construction activity, capital spending and demand for products of our customers. Many of these customers operate in markets that are subject to cyclical fluctuations resulting from market uncertainty, costs of goods sold, currency exchange rates, foreign competition, offshoring of production, oil and natural gas prices, geopolitical developments, wage inflation and a variety of other factors beyond our control. Any of these factors could cause customers to idle or close facilities, delay purchases, reduce production levels or experience reductions in the demand for their own products or services.
Adverse conditions in, or uncertainty about, the markets in which we operate, the economy or the political climate could also adversely impact the customers of our end markets and their confidence or financial condition, causing them to decide not to purchase our products or alter the timing of purchasing decisions or construction projects, and could also impact their ability to pay for products. Other factors beyond our control, including but not limited to unemployment, mortgage delinquency and foreclosure rates, inventory loss due to theft, interest rate and foreign currency fluctuations, labor and healthcare costs, the availability of financing, the state of the credit markets, changes in tax laws affecting the real estate industry, product availability constraints as a result of ineffectiveness of or disruption to our domestic or international supply chain or the fulfillment network, weather, cybersecurity incidents or network security breaches, natural disasters, acts of terrorism, global pandemics, such as the COVID-19 pandemic, international trade tensions, and geopolitical uncertainties, could have a material adverse effect on our business, financial condition and results of operations.
Any of these events could impair the ability of our customers to make full and timely payments or reduce the volume of products these customers purchase from us and could cause increased pressure on our selling prices and terms of sale. Accordingly, a significant or prolonged slowdown in activity in our relevant markets could negatively impact revenue growth and results of operations. In addition, we may have to close underperforming branches and/or showrooms from time to time as warranted by general economic conditions and/or weakness in the end markets in which we operate. Such closures could have a material adverse effect on our business, financial condition and results of operations.
The COVID-19 pandemic has had an adverse impact on many sectors of the economy and, if it is prolonged or intensifies, it could have a material and adverse impact on our business and results of operations.
In December 2019, the COVID-19 virus, commonly known as “coronavirus,” surfaced in Wuhan, China. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Thereafter, the COVID-19 virus spread across the world, and notwithstanding the introduction of several vaccines, variants of the COVID-19 virus have developed and continue to develop, and the duration of the COVID-19 pandemic is unknown.
Many governments, including in the United States, United Kingdom, and Canada, imposed stringent restrictions to seek to mitigate, or slow, the spread of COVID-19, including restrictions on international and local travel, public gatherings and participation in business meetings, as well as closures of workplaces, schools, and other public sites, and are continuing to encourage “social distancing.” Although many of these restrictions have been lifted, some of these restrictions remain and, due to the unpredictability of the COVID-19 pandemic, including due to variants, it is possible that some or all of these measures could be reinstated.
As a result of government measures in calendar year 2020, the Company was required to, and also chose to voluntarily, close a number of showrooms in the United States and moved to virtual consultation with customers, and/or a model where customers submitted orders online or via telephone and visited our stores for pick up. We reopened showrooms by mid-June 2020 and allowed customers back into our locations with appropriate protective measures in place. Due to the unpredictability of the COVID-19 pandemic it is possible that restrictive measures could be reinstated and that we may be required to close branches, showrooms, distribution centers, or our other facilities, which could adversely affect our revenues. If significant numbers of associates, key personnel and/or senior management become unavailable due to sickness, legal requirements or self-isolation, our operations could be disrupted and materially adversely affected. The loss of revenue due to the pandemic, or the failure to identify and respond promptly to the evolving environment caused by the pandemic, could have a material adverse effect on the Company’s business, financial condition and results of operations.
The COVID-19 pandemic has resulted in supply chain disruptions and delays. See “If our domestic or international supply chain or our fulfillment network for our products is ineffective or disrupted for any reason, or if these operations are subject to trade policy changes, our business, financial condition and results of operations could be adversely affected.”
Moreover, the COVID-19 pandemic has resulted in significant effects on the U.S. and Canadian economies, including due to the virus and restrictive measures adopted to prevent its spread, as well as various government stimulus programs. Both the severity and duration of the pandemic, as well as the future impact on the economy and potential government stimulus programs, are unknown.
In calendar year 2020, in the initial months of the pandemic, the Company modified its business practices to preserve our liquidity and cash flow position, including pausing merger and acquisition activity, withdrawing the interim dividend due for payment in April 2020 and suspending our share buyback program. We have since reinstated our merger and acquisition activity, effectively reinstated our dividend program and reinitiated our share buyback program, however, we may once again modify our business practices to preserve liquidity and cash flow if circumstances warrant.
In addition to the factors mentioned above, the COVID-19 pandemic may also give rise to disruptions to our information technology system, increased cyber-attacks, higher volatility in foreign currency and inflation and changes in relevant tax laws. There is risk that the Company may not be able to successfully pass on costs to the customer from continued inflation. International travel restrictions imposed in connection with the COVID-19 pandemic may also affect our ability to ensure that we remain tax resident in (or solely in) the United Kingdom. If the Company were to cease to be a UK tax resident, this could potentially result in taxes on unrealized gains of the Company, and the possible application of withholding taxes to dividend and interest payments made to the Company from certain of the Company’s subsidiaries. Any of the factors above could have a material adverse effect on the Company’s business, financial condition and results of operations and may also have the effect of heightening many of the other risks described in this “Risk Factors” section.
The industries in which we operate are highly competitive, and changes in competition, including as a result of consolidation, could result in decreased demand for our products and related service offerings and could have a material effect on our sales and profitability.
We face competition in all markets we serve, from manufacturers (including some of our own suppliers) that sell directly to certain segments of the market, wholesale distributors, supply houses, retail enterprises and online businesses that compete with price transparency. In particular, wholesale and distribution businesses in other industry sectors have been disrupted by the arrival of new competitors with lower-cost non value added transactional business models or new technologies to aggregate demand away from incumbents. In the event that one or more online marketplace companies, which in some cases have larger customer bases, greater brand recognition and greater resources than we do, focus resources on competing in our markets, it could have a material adverse effect on our business, financial condition and results of operations. In addition, such competitors may use aggressive pricing and marketing tactics (such as paid search marketing) and devote substantially more financial resources to website and system development than we do. It is expected that competition could further intensify in the future as online commerce continues to grow worldwide. Increased competition may result in reduced revenue, lower operating margins, reduced profitability, loss of market share and diminished brand recognition.
The industries in which we operate may be disrupted by nontraditional competitors through acquisitions of traditional competitors to expand their capabilities. The industries in which we operate are also consolidating as customers are increasingly aware of the total costs of fulfillment and of the need to have consistent sources of supply at multiple locations. This competitor consolidation could cause the industries to become more competitive as greater economies of scale are achieved.
Additionally, we have experienced competitive pressure from certain of our suppliers who are now selling their products directly to customers. Suppliers can often sell their products at lower prices and maintain higher gross margins on their product sales than we can. Continued competition from our suppliers may negatively impact our business and results of operations, including through reduced sales, lower operating margins, reduced profitability, loss of market share and diminished brand recognition.
In response to these competitive pressures, among other initiatives, we are applying technology as an important medium for delivering better customer service alongside the supply of our products, and to create dedicated tools to save customers time and money. However, we may not continue to realize benefits from such investments and such initiatives may not be successful. In addition, failure to effectively execute our strategies, including the development and acquisition of such new business models or technologies, or successfully identify future market and competitive pressures, could have a material adverse effect on revenue and profitability.
We may not rapidly identify or effectively respond to consumer wants, expectations or trends, which could adversely affect our relationship with customers, our reputation, the demand for our products and our market share.
The success of our business depends in part on our ability to identify and respond promptly to evolving trends in demographics, as well as customer wants, preferences and expectations, while also managing appropriate inventory levels and maintaining our focus on delivering an excellent customer experience. For example, our customers are currently facing challenges in the form of a shortage of skilled trade professionals and a need for improved construction productivity. It is also difficult to successfully predict the products and services that customers will require. In addition, each of the primary end markets we serve has different needs and expectations, many of which evolve as the demographics in a particular market change.
We offer more localized assortments of our products to appeal to needs within each end market. If we do not successfully evolve and differentiate to meet the individual needs and expectations of, or within, a particular end market, we may lose market share.
We are continuing to invest in our e-commerce and omni-channel capabilities and other technology solutions, including investments in significant upgrades to our enterprise-wide resource planning systems, to simplify our customer propositions and to optimize the supply chain and branch network to deliver a more efficient business.
The cost and potential problems and interruptions associated with these initiatives could disrupt or reduce the efficiency of our online and in-store operations in the near term, lead to product availability issues and negatively affect our relationship with our customers. Furthermore, accomplishing these initiatives will require a substantial investment in additional information technology associates and other specialized associates. We may face significant competition in the market for these resources and may not be successful in our hiring efforts. Failure to choose the right investments and implement them in the right manner and at the right pace could adversely affect our relationship with customers, our reputation, the demand for our products and services, and our market share. In addition, our branch and omni-channel initiatives, enhanced supply chain, and new or upgraded information technology systems might not provide the anticipated benefits. It might take longer than expected to realize the anticipated benefits, cost more than budgeted, or the initiatives might fail altogether, each of which could adversely impact our competitive position and our business, financial condition, results of operations and cash flows.
We could be adversely impacted by declines in the residential and non-residential RMI markets, as well as the new construction market.
Our end markets focusing on the residential and non-residential RMI and new construction markets are dependent, in part, upon certain macroeconomic trends in these markets. In fiscal 2021, the Company’s businesses operating in the RMI markets generated approximately 60% of total revenue from continuing operations.
Economic weakness, for example, a slowdown in the housing market caused by inflation, higher interest rates or other issues in the market, may cause unanticipated shifts in our end market preferences and purchasing practices and in the business models and strategies of our customers. Such shifts may alter the nature and prices of products demanded by the end consumer and, in turn, our customers and could adversely affect our operating performance.
Management monitors the activity levels of these markets through various indicators of home improvement and repair spending and commercial/industrial construction spending. For example, one of the indicators we use in the residential RMI market is the Leading Indicator of Remodeling Activity (“LIRA”), which provides a short-term outlook of national home improvement and repair spending to owner-occupied homes in the United States. LIRA projections for fiscal 2022 are expected to grow from fiscal 2021 levels. In our commercial and civil/infrastructure markets, management uses the American Institute of Architects Billings Index—Commercial/Industrial (“AIA Billings Index”), which is a leading economic indicator of construction activity and is widely seen as reflecting prospective construction spending. Any score below 50 indicates a decline in the business activity across the architecture profession, whereas an index score above 50 indicates growth. While the AIA Billings Index averaged below 50 for 7 of 12 months in fiscal 2020, and for the first six months of fiscal 2021, the index score has now risen above 50 from February 2021 through August 2021, with the most recent reading of 55.6 in August 2021.
A failure of a key information technology system or process could adversely affect the operations of our business.
Technology systems and data are fundamental to the future growth and success of our business. In managing our business, we rely on the integrity and security of, and consistent access to, data from these systems such as sales, customer data, merchandise ordering, inventory replenishment and order fulfillment. A major disruption of the information technology systems and their backup mechanisms may cause us to incur significant costs to repair the systems, experience a critical loss of data and/or result in business interruptions.
For these information technology systems and processes to operate effectively, we or our service providers must periodically maintain and update them. In addition, our systems and the third-party systems on which we rely are subject to damage or interruption from a number of causes, including: power outages; computer and telecommunications failures; computer viruses; security breaches; cybersecurity incidents, including the use of ransomware; catastrophic events such as fires, floods, earthquakes, tornadoes, or hurricanes; a pandemic outbreak or recurrence; acts of war or terrorism; and design or usage errors by our associates, contractors or third-party service providers. Although we and our third-party service providers seek to maintain our respective systems effectively and to successfully address the risk of compromise of the integrity, security and consistent operations of these systems, such efforts may not be successful.
We rely on data centers and other technologies and services provided by third parties in order to manage our cloud-based infrastructure and operate our business. If any of these services becomes unavailable or otherwise is unable to serve our requirements due to extended outages, interruptions, facility closure, or because it is no longer available on commercially reasonable terms, expenses could increase and our operations could be disrupted or otherwise impacted until appropriate substitute services, if available, are identified, obtained, and implemented which could have a material adverse effect on our business, financial condition and results of operations.
If we are unable to protect our sensitive data and information systems against data corruption, cybersecurity incidents or network security breaches, or if we are unable to provide adequate security in the electronic transmission of sensitive data, it could adversely affect the operations of our business.
We may face global cybersecurity threats, which may range from uncoordinated individual attempts to sophisticated and targeted measures, known as advanced persistent threats, directed at us and our customers, suppliers, and vendors. Cybersecurity incidents and network security breaches may include, but are not limited to, attempts to access information, computer viruses, ransomware, denial of service and other electronic security breaches. Cyber-attacks from computer hackers and cyber criminals and other malicious Internet-based activity continue to increase generally, and our services and systems, including the systems of our outsourced service providers, have been and may in the future continue to be the target of various forms of cybersecurity incidents such as DNS attacks, wireless network attacks, viruses and worms, malicious software, ransomware, application centric attacks, peer-to-peer attacks, phishing attempts, backdoor trojans and distributed denial of service attacks. The techniques used by computer hackers and cyber criminals to obtain unauthorized access to data or to sabotage computer systems change frequently and these new techniques generally are not detected until after an incident has occurred.
While we have instituted safeguards for the protection of our information systems and believe we use reputable third-party providers, during the normal course of business, we have experienced and expect to continue to experience attempts to breach our information systems, and we may be unable to protect sensitive data and/or the integrity of our information systems. A cybersecurity incident could be caused by malicious third parties using sophisticated methods to circumvent firewalls, encryption and other security defenses. Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target. Accordingly, we may be unable to anticipate these techniques or implement adequate preventative measures.
As a result, we or our service providers could experience errors, interruptions, delays, or cessations of service in key portions of our information technology infrastructure, which could significantly disrupt our operations and be costly, time consuming and resource-intensive to remedy. As a result, we could forego revenue or profit margins if we are unable to operate. Furthermore, if critical information systems fail or otherwise become unavailable, our ability to process orders, maintain proper levels of inventories, collect accounts receivable and disburse funds could be adversely affected. Any such interruption of our information systems could also subject us to additional costs. Loss of customer, supplier, associate, or other business information could disrupt operations, damage our reputation, and expose us to claims from customers, suppliers, financial institutions, regulators, payment card associations, associates, and others, any of which could have a material adverse effect on our business, financial condition and results of operations.
Since the beginning of the COVID-19 pandemic, cyber-attacks targeting companies have increased in frequency, scope, and potential harm. Cybercriminals are seeking to use the COVID-19 pandemic for commercial gain by deploying a variety of ransomware and other malware, including phishing, using the subject of coronavirus or COVID-19 as a lure, registering new domain names containing wording related to coronavirus or COVID-19, and attacking newly deployed remote access and teleworking infrastructure. As a result, a continuation of remote work arrangements could strain our business continuity plans, introduce operational risk, including but not limited to, cybersecurity risks, and impair our ability to manage our business. As these strategies continue to evolve, we may not be able to successfully protect our operational and information technology systems and platforms against such threats and we may incur significant costs in the attempt to modify or enhance our protective measures or investigate or remediate any vulnerability, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
If our domestic or international supply chain or our fulfillment network for our products is ineffective or disrupted for any reason, or if these operations are subject to trade policy changes, our business, financial condition and results of operations could be adversely affected.
We source, distribute and sell products from domestic and international suppliers, and their ability to reliably and efficiently fulfill our orders is critical to our business success. We purchase from approximately 34,000 suppliers located in various countries around the world.
Financial instability among key suppliers, political instability and labor unrest in source countries or elsewhere in our supply chain, changes in the total costs in our supply chain (also reflecting changes in fuel, labor and currency exchange rates), port labor disputes and security, the outbreak of pandemics, including COVID-19, weather-related events, natural disasters, work stoppages, shipping capacity constraints, changes in trade policy, retaliatory trade restrictions imposed by either the United States, Europe, China or another major source country, tariffs or duties, fluctuations in currency exchange rates and transport availability, capacity and costs are all beyond our control and could negatively impact our business if they seriously disrupted the movement of products through our supply chain or increased their costs. Additionally, as we add fulfillment capabilities or pursue strategies with different fulfillment requirements, our fulfillment network becomes increasingly complex and operating it becomes more challenging. If our fulfillment network does not operate properly or if a supplier fails to deliver on its commitments, we could experience delays in inventory, increased delivery costs or lack of availability, any of which could lead to lower revenue and decreased customer confidence, and adversely affect our results of operations. Furthermore, our existing suppliers may decide to supply products directly to end users that are our existing or potential customers, which would have a detrimental effect on our ability to keep and procure customers, and maintain and win business, thereby having a material adverse effect on our business, financial condition and results of operations.
The COVID-19 pandemic has led to work and travel restrictions within, to, and out of a number of countries, resulting in supply chain disruptions and delays. These restrictions and delays, which may expand depending on the progression of the COVID-19 pandemic and related variants, have impacted and may continue to impact suppliers and manufacturers of certain of our products. This has made it difficult for our suppliers to source and manufacture products in, and to export our products from, affected areas. As a result, we have faced and may continue to face supply chain disruptions and delays, which could negatively affect our business and financial results. Even if we are able to find alternative sources for such products, they may cost more, which could adversely impact our profitability and financial condition.
Execution of our operational strategies could prove unsuccessful, which could have a material adverse effect on our business, financial condition and results of operations.
To achieve our key priorities, we must drive profitable growth across our operational businesses by fulfilling customer wants, capitalizing on attractive growth opportunities and achieving excellent execution. Fulfilling customer wants through differentiated service offerings that support our customers’ projects is a key part of our strategy to drive profitable growth. If service levels were to significantly decrease, customers might purchase from our competitors instead, resulting in reduced revenue, lower operating margins, reduced profitability, loss of market share and/or diminished brand recognition.
Development of our operating model is a key part of driving profitable growth. There is a risk that we are not sufficiently agile in adapting our operating model and therefore cannot adapt to changing customer wants and/or are unable to flex our cost base when required. Any failure to appropriately address some or all of these risks could damage our reputation and have a material adverse effect on our business, financial condition and results of operations.
In order to compete, we must attract, retain and motivate key associates, and the failure to do so could have an adverse effect on our business, results of operations and financial condition.
We depend on our executive officers and senior management to run our businesses. As the Company develops new business models and new ways of working, it needs to develop suitable skill sets within the organization. Furthermore, as the Company continues to execute strategic change programs, including corporate migrations, it is important that existing skill sets, talent and culture are retained. Failure to do so could delay the execution of strategic change programs, result in loss of institutional knowledge and reduce the Company’s supply of future management skill.
The Company customarily negotiates employment agreements and non-competition agreements with key personnel of the companies we acquire in order to maintain key customer relationships and manage the transition of the acquired business. The loss of senior management and other key personnel, or the inability to hire and retain qualified replacements, both generally and in connection with the execution of key business strategies, including corporate migrations, could adversely affect the Company’s business, financial condition and results of operations.
Furthermore, the Company’s ability to provide high-quality products, advice and services on a timely basis depends, to a significant extent, on having an adequate number of qualified associates, including those in managerial, technical, sales, marketing and support positions. Accordingly, our ability to increase productivity and profitability and support our growth strategies may be limited by our ability to employ, train, motivate and retain skilled personnel, which in turn may be hindered by any present or future restructurings and cost savings initiatives. Due to the current tight labor market, we face significant competition in attracting and retaining skilled personnel, such as personnel with specialized skills and hourly workers, and our recruiting cycle may be longer as a result. While our retention rates have not changed materially, we have experienced, and may continue to experience, extended lead times in backfilling our more transient roles. If the tight labor market persists, this may increase our costs to maintain our workforce.
Our workforce constitutes a significant proportion of our cost base. Current wage inflation, as well as potential changes in applicable laws and regulations or other factors, such as labor union activity, resulting in increased labor costs, could have a material adverse effect on our business, financial condition and results of operations.
Fluctuating product prices may adversely affect the Company’s business, financial condition and results of operations.
Some of our products contain significant amounts of commodity-priced materials, predominantly plastic, copper and steel, and other components which are subject to price changes based upon fluctuations in the commodities market. To a lesser extent, fluctuations in the price of fuel could affect transportation costs. In addition, shipping capacity constraints and related fluctuations in shipping rates and space availability further impact the product cost. Prices have increased due in part to the impact of the COVID-19 pandemic on the global economy. Our ability to adjust prices in a timely manner to account for price fluctuations may often depend on market conditions, our fixed costs and other factors. In the event circumstances require us to adjust our product prices and operational strategies to reflect fluctuating prices (inflation / deflation), there can be no assurance that such adjustments will be effective, which could have a material adverse effect on our business, financial condition and results of operations. For example, we increased inventory levels during the year to maintain product availability and our inability to pass on all or a portion of product price inflation to our customers in a timely manner could reduce our profit margins. Moreover, our efforts to monitor for signs of moderation or deflation, which would present risk that we may not be able to totally mitigate, may be ineffective and result in write-downs of inventories.
Acquisitions, partnerships, joint ventures, dispositions and other business combinations or strategic transactions involve a number of inherent risks, any of which could result in the benefits anticipated not being realized and could have an adverse effect on our business, financial condition and results of operations.
Acquisitions are an important part of our growth model and we regularly consider and enter into strategic transactions, including mergers, acquisitions, investments and other growth, market and geographic expansion strategies, with the expectation that these transactions will result in increases in sales, cost savings, synergies and various other benefits.
During fiscal 2021, 2020 and 2019, we completed a total of 7, 6, and 15 acquisitions, respectively. We may not realize any anticipated benefits from such transactions or partnerships, or any future ones, we may be exposed to additional liabilities of any acquired business or joint venture and we may be exposed to litigation in connection with any transaction. Furthermore, we may have trouble identifying suitable acquisition targets in the future. Our ability to deliver the expected benefits from any strategic transactions that we do complete is subject to numerous uncertainties and risks, including our acquisition assumptions; our ability to integrate personnel, labor models, financial, supply chain and logistics, IT and other systems successfully; disruption of our ongoing business and distraction of management; hiring additional management and other critical personnel; and increasing the scope, geographic diversity and complexity of our operations.
Effective internal controls are necessary to provide reliable and accurate financial reports, and the integration of businesses may create complexity in our financial systems and internal controls and make them more difficult to manage. Integration of businesses into our internal control system could cause us to fail to meet our financial reporting obligations. Additionally, any impairment of goodwill or other assets acquired in a strategic transaction or charges to earnings associated with any strategic transaction, may materially reduce our profitability. Following integration, an acquired business may not produce the expected margins or cash flows. Our shareholders, vendors or customers may react unfavorably to substantial strategic transactions. Furthermore, we may finance these strategic transactions by incurring additional debt or raising equity, which could increase leverage or impact our ability to access capital in the future.
Our own brand products subject us to certain increased risks such as regulatory, product liability and reputational risks that could have an adverse effect on our business, results of operations and financial condition.
As we expand our own brand product offerings organically and through acquisitions, we may become subject to increased risks due to our greater role in the design, marketing and sale of those products. The risks include greater responsibility to administer and comply with applicable regulatory requirements, increased potential product liability and product recall exposure, and increased potential reputational risks related to the responsible sourcing of those products. To effectively execute on our “own brand” product differentiation strategy, we must also be able to successfully protect our proprietary rights and successfully navigate and avoid claims related to the proprietary rights of third parties. In addition, an increase in sales of our own brand products may adversely affect sales of our suppliers’ products, which in turn could adversely affect our relationships with certain of our suppliers. Any failure to appropriately address some or all of these risks could damage our reputation and have an adverse effect on our business, results of operations and financial condition.
Failure to achieve and maintain a high level of product quality as a result of our suppliers’ or manufacturers’ mistakes or inefficiencies could damage our reputation and negatively impact our business, financial condition and results of operations.
To continue to be successful, we must continue to preserve, grow and leverage the value of our brand in the marketplace. Reputational value is based in large part on perceptions of subjective qualities. Even an isolated incident, such as a high-profile product recall, or the aggregate effect of individually insignificant incidents, can erode trust and confidence, particularly if such incident or incidents result in adverse publicity, governmental investigations or litigation, and as a result, could tarnish our brand and lead to adverse effects on our business.
In particular, product quality issues as a result of our suppliers’ or manufacturers’ acts or omissions could negatively impact customer confidence in our brands and our products. As we do not have direct control over the quality of the products manufactured or supplied by such third-party suppliers, we are exposed to risks relating to the quality of the products we distribute. If our product offerings do not meet applicable safety standards or customers’ expectations regarding safety or quality, or are alleged to have quality issues or to have caused personal injury or other damage, we could experience lower revenue and increased costs and be exposed to legal, financial and reputational risks, as well as governmental enforcement actions. In addition, actual, potential or perceived product safety concerns could result in costly product recalls.
We seek to enter into contracts with suppliers which provide for indemnification from any costs associated with the provision of defective products. However, there can be no assurance that such contractual rights will be obtained or adequate, or that related indemnification claims will be successfully asserted by us.
If we fail to qualify for supplier rebates or are unable to maintain or adequately renegotiate our rebate arrangements, our results of operations could be materially adversely affected.
Many of our products are purchased pursuant to rebate arrangements that entitle us to receive a rebate based on specified purchases. Some arrangements require us to purchase minimum quantities and result in higher rebates with increased quantities of purchases. These rebates effectively reduce the costs of our products, and we manage our business to take advantage of these programs. Rebate arrangements are subject to renegotiation with our suppliers from time to time. In addition, consolidation of suppliers may result in the reduction or elimination of rebate programs in which we participate. If we are unable to qualify for these rebates, are unable to renew rebate programs on desirable terms, or a supplier materially reduces or stops offering rebates, our costs could materially increase, and our gross margins and income could be materially adversely affected.
Potential regional or global barriers to trade or a global trade war could increase the cost of our products, which could adversely impact the competitiveness of our products and our financial results.
Trade tensions between the United States and China have escalated over the past several years. Between July 2018 and December 2019, the United States government imposed tariffs on a variety of imports from China with rates ranging from 10% to 25% and the Chinese government retaliated with tariffs ranging from 5% to 10% on United States imports. On December 13, 2019, the United States and China each confirmed that the two countries had reached a “Phase One” deal in the ongoing trade war, resulting in the signing of economic and trade agreement on December 15, 2019 between the United States and China, which went into effect in January 2020. Most of the elevated tariffs imposed at the height of the U.S.-China trade war have remained in place, and the current U.S. presidential administration has not taken action to roll these back. Moreover, the current administration had suggested that it is open to using tariffs to fight China’s unfair trade practices. It remains unclear what additional, new, or different actions, if any, will be taken by the United States, China, or other governments with respect to international trade agreements, the imposition of tariffs on goods imported into the United States, the erection of barriers to
trade, tax policy related to international commerce, or other trade matters. The potential removal of some of the tariffs and trade actions and the respective deflationary impact could have an effect on our business, financial condition and results of operations. The current United States tariffs on China-origin goods and the related geopolitical uncertainty between the United States and China, which is a key market for the sourcing of our products, and between the United States and the European Union, have caused, and may continue to cause, our product costs to increase, which could have a material adverse effect on the competitiveness of our products and our business, financial condition, results of operations and cash flows. At this point in time, it remains to be seen what effects, if any, the current administration will have on a long-term comprehensive agreement on tariffs between the United States and China or on trade tensions between the United States and the European Union.
We are subject to various risks related to the local and international nature of our business, including domestic and foreign laws, regulations and standards. Failure to comply with such laws and regulations or the occurrence of unforeseen developments such as litigation could adversely affect our business.
Our business operates in the United States and Canada, and is subject to specific risks of conducting business in different jurisdictions across these countries and other parts of the world, including China, Taiwan, India, Thailand, Vietnam and Italy. Our business is subject to a wide array of domestic and international laws, regulations and standards in jurisdictions where we operate, including advertising and marketing regulations, anti-bribery and corruption/money laundering laws, anti-competition regulations, data protection (including payment card industry data security standards) and cybersecurity requirements (including protection of information and incident responses), environmental protection laws, foreign exchange controls and cash repatriation restrictions, government business regulations applicable to us as a government contractor selling to federal, state and local government entities, import and export requirements, intellectual property laws, labor laws, product compliance laws, supplier regulations regarding the sources of supplies or products, tax laws, zoning laws, unclaimed property laws and laws, regulations and standards applicable to other commercial matters. In particular, occupational health and safety or consumer product safety regulation may require that we take appropriate corrective action, including but not limited to product recall, in respect of products that we have distributed. Managing a product recall or other corrective action can be expensive and can divert the attention of management and other personnel for significant time periods. Moreover, we are also subject to audits and inquiries by government agencies in the normal course of business.
Failure to comply with any of these laws, regulations and standards could result in civil, criminal, monetary and non-monetary penalties as well as potential damage to the Company’s reputation. Changes in these laws, regulations and standards, or in their interpretation, could increase the cost of doing business, including, among other factors, as a result of increased investments in technology and the development of new operational processes. Furthermore, while we have implemented policies and procedures designed to facilitate compliance with these laws, regulations and standards, there can be no assurance that associates, contractors or agents will not violate such laws, regulations and standards or our policies. Any product recall or other corrective action may negatively affect customer confidence in the relevant Group member’s products and the Group itself, regardless of whether it is successfully implemented. Any such failure to comply or violation could individually or in the aggregate materially adversely affect our business, financial condition, results of operations and cash flows.
Changes in, or interpretations of United States, United Kingdom, Swiss or Canadian tax laws could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are subject to tax in the United States, the United Kingdom, Switzerland and Canada, and increases to U.S. federal income tax rates and tax rates in other jurisdictions in which we operate or changes to the global tax framework could have an adverse effect on our business, financial condition and results of operations. Tax laws, regulations and administrative practices in various jurisdictions may be subject to significant change, with or without advance notice, due to economic, political and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes.
Our effective tax rates could be affected by numerous factors, such as changes in tax laws, regulations, administrative practices, principles and interpretations, the mix and level of earnings in a given taxing jurisdiction or our ownership or capital structures. Proposed changes to the tax rules that apply to corporations, including an increase in the corporate income tax rate, a minimum tax on book income and changes that generally would increase the tax rates applicable to a U.S. corporation’s international income, could materially affect our tax obligations and effective tax rate. In addition, a higher UK tax rate in 2023 has been announced, higher U.S. federal tax rates have been proposed and the Organisation for Economic Co-operation and Development (OECD) has achieved widespread political agreement to work towards the implementation of a global minimum tax. As a result, it is possible that the Group’s consolidated effective tax rate will increase in the short term. It is difficult to predict whether and when tax law changes will be enacted that would have a material adverse effect on our business, financial condition, results of operations and cash flows.
The application of tax law is subject to interpretation and is subject to audit by taxing authorities. Additionally, administrative guidance can be incomplete or vary from legislative intent, and therefore the application of the tax law is uncertain. While we believe the positions reported by the Company comply with relevant tax laws and regulations, taxing authorities could interpret our application of certain laws and regulations differently. Future tax controversy matters may result in previously unrecorded tax expenses, higher future tax expenses or the assessment of interest and penalties.
We are required to maintain the privacy and security of personal information in compliance with privacy and data protection regulations worldwide. Failure to meet the requirements could harm our business and damage our reputation with customers, suppliers, and associates.
We rely on IT systems, networks, products, and services, some of which are managed by third-party service providers to protect our information. Increased information security threats and more sophisticated threat actors pose a risk to our information security program. Additionally, we collect, store, and process personal information relating to our customers, suppliers, and associates. This information is increasingly subject to a variety of U.S. and international laws and regulations, such as the General Data Protection Regulation, as enacted in the European Union and the United Kingdom, Canada’s Personal Information Protection and Electronic Documents Act, the California Consumer Privacy Act (the “CCPA”), Virginia’s Consumer Data Protection Act and other emerging privacy and cybersecurity laws internationally and across various U.S. states, which may carry significant potential penalties for noncompliance. Illustrative of this point, in the United States the CCPA, which came into effect in January 2020 has given California consumers more control over the personal information that businesses collect about them. The law created new data privacy rights for California consumers and requires certain businesses who collect personal information from California consumers to comply with various data protection requirements. Businesses like ours that are subject to the CCPA who fail to comply with the CCPA may be subject to class action lawsuits and fines per incident of noncompliance.
These data privacy and data protection laws and regulations are typically intended to protect the privacy of personal information that is collected, processed, transmitted, and stored in or from the governing jurisdiction. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between a company and its subsidiaries, including associate information. While we have invested and continue to invest significant resources to comply with data privacy regulations, many of these regulations are new, complex, and subject to interpretation. Noncompliance with these laws could result in negative publicity, damage to our reputation, penalties, or significant legal liability. We could be adversely affected if legislation or regulations are expanded to require changes in our business practices or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business.
Corporate responsibility, specifically related to environmental, social and governance (“ESG”) matters, may impose additional costs and expose us to new risks.
Public ESG and sustainability reporting is becoming more broadly expected by investors, shareholders and other third parties. Certain organizations that provide corporate governance and other corporate risk information to investors and shareholders have developed, and others may in the future develop, scores and ratings to evaluate companies and investment funds based upon ESG or “sustainability” metrics. Many investment funds focus on positive ESG business practices and sustainability scores when making investments and may consider a company’s ESG or sustainability scores as a reputational or other factor in making an investment decision. In addition, investors, particularly institutional investors, use these scores to benchmark companies against their peers and if a company is perceived as lagging, these investors may engage with such company to improve ESG disclosure or performance and may also make voting decisions, or take other actions, to hold these corporations and their boards of directors accountable. Board diversity is an ESG topic that is, in particular, receiving heightened attention by investors, shareholders, lawmakers and listing exchanges. We may face reputational damage in the event our corporate responsibility initiatives or objectives, including with respect to board diversity, do not meet the standards set by our investors, shareholders, lawmakers, listing exchanges or other constituencies, or if we are unable to achieve an acceptable ESG or sustainability rating from third-party rating services. A low ESG or sustainability rating by a third-party rating service could also result in the exclusion of our ordinary shares from consideration by certain investors who may elect to invest with our competition instead. Ongoing focus on corporate responsibility matters by investors and other parties as described above may impose additional costs or expose us to new risks.
The nature of our operations may expose our associates, contractors, customers, suppliers and other individuals to health and safety risks and we may incur property, casualty or other losses not covered by our insurance policies.
The nature of our operations can expose our associates, contractors, customers, suppliers and other individuals to health and safety risks (including potential exposure to COVID-19 and related variants), which can lead to loss of life or severe injuries or illness. Such risks also include exposure to the potential for litigation from third parties. In the United States, in particular, the risk of litigation is generally higher than in other parts of our business in areas such as workers’ compensation, general liability and environmental and asbestos litigation.
For example, as a result of our past business activities, we are exposed, principally through indemnification claims, to various claims related to asbestos, for which we recognized environmental and legal provisions amounting to $64 million on our balance sheet as at July 31, 2021. In future periods, we could be subject to cash costs or non-cash charges to earnings if any of these litigation matters are resolved on unfavorable terms, or if our estimates regarding legal provisions accounting are incorrect. Factors which could cause actual results to differ from these estimates include: (i) increases in the number of, or adverse trends in, asbestos claims filed against any of the Company’s subsidiaries; (ii) increases in the cost of resolving current and future asbestos claims as a result of adverse trends relating to settlement costs, dismissal rates, legal fees and/or judgment sizes; (iii) decreases in the amount of insurance available to cover asbestos claims as a result of adverse changes in the interpretation of insurance policies or the insolvency of insurers; (iv) the emergence of new trends or legal theories that enlarge the scope of potential claimants and/or new procedural mechanisms that facilitate their claims; (v) the impact of bankruptcies of other companies whose share of liability may be imposed on the Company’s subsidiaries under state, federal or national liability laws; (vi) unpredictable aspects of the litigation process; (vii) adverse changes in the mix of asbestos related diseases with respect to which asbestos claims are made against the Company’s subsidiaries; (viii) potential legislative changes; and (ix) changes in the discount rate used to determine the discounted liability.
Although we maintain insurance we believe to be sufficient to cover estimated health and safety risks including product liability, health and safety in our operations, and vehicle and driver related claims and other types of claims in various jurisdictions, there can be no assurance that such insurance will provide adequate coverage against potential claims. If we do not have adequate contractual indemnification or insurance available, such claims could have a material adverse effect on our business, financial condition and results of operations.
We are and may continue to be involved in legal proceedings in the course of our business, and while we cannot predict the outcomes of those proceedings and other contingencies with certainty, some of these outcomes may adversely impact our business, financial condition, results of operations and cash flows.
We are and may continue to be involved in legal proceedings such as consumer and employment and other litigation that arises from time to time in the course of our business. Litigation is inherently unpredictable, and the outcome of some of these proceedings and other contingencies could require us to take or refrain from taking actions which could adversely impact the business or could result in excessive verdicts. Any such outcome could have an adverse effect on our business, financial condition, results of operations and cash flows. Additionally, involvement in these lawsuits and related inquiries and other proceedings may involve significant expense, divert management’s attention and resources from other matters, and negatively affect our reputation.
Fluctuations in foreign currency may have an adverse effect on reported results of operations.
We are exposed to foreign currency exchange rate risk with respect to the U.S. dollar relative to the local currencies of our international subsidiaries, predominantly the Canadian dollar, and also the Pound Sterling (“GBP”), arising from transactions in the normal course of business, such as sales and loans to wholly owned subsidiaries, sales to third-party customers, purchases from suppliers and bank loans and lines of credit denominated in foreign currencies. Our only significant foreign exchange exposure from a revenue perspective is Canadian dollars. We also have foreign currency exposure to the extent receipts and expenditures are not denominated in the subsidiary’s functional currency, which could impact sales, costs and cash flows. Volatility arising from movements of the value of the U.S. dollar relative to the Canadian dollar and GBP has increased due in part to the impact of the COVID-19 pandemic on the global economy. Fluctuations in foreign currency exchange rates could affect the Company’s results of operations and impact reported net sales and net earnings.
We have funding risks related to our defined benefit pension plans.
The Group operates a variety of pension plans, including funded and unfunded defined benefit schemes in Canada and the United Kingdom. Our pension trustees and plan sponsors aim to match the liabilities with a portfolio of assets, comprising equity and debt securities alongside diversified growth assets and further investments designed to hedge the underlying interest and inflation risk inherent in the associated liabilities. The United Kingdom Plan (as defined below), the Group’s largest defined benefit plan, is closed to future service accrual and, has a buy-in insurance policy which covers a large proportion of the existing pensioner population. The market value of these assets can rise and fall over time which impact the funding position of the plan.
On an accounting basis, the liabilities of the Group’s pension plans are measured using discount rates assessed by reference to corporate bond yields, which can also vary significantly between reporting periods. As of July 31, 2021, we had recognized on our balance sheet a net pension asset of $108 million compared to a net pension liability of $27 million as of July 31, 2020 as it relates to the United Kingdom Plan. As it relates to our Canadian defined benefit plans, we had recognized on our balance sheet a net pension liability of $12 million and $34 million, respectively, as of July 31, 2021 and 2020. As required by United Kingdom pensions regulation, the United Kingdom Plan went through its triennial actuarial valuation exercise, which was measured on a technical basis, based on the United Kingdom Plan’s financial position as of April 30, 2019. As a result of this exercise, in July 2020, the Group agreed with the trustees of the United Kingdom Plan to a deficit reduction plan and paid contributions totaling £30 million (£10 million in the year to July 31, 2020 and £20 million in the year to July 31, 2021). Following the completion of the Group’s disposal of its shares in Wolseley UK Limited (“UK business”) on January 29, 2021, the Group retained future responsibility for the United Kingdom Plan, as the ongoing liabilities were not transferred to the purchaser.
Following the disposal of the Group’s business operations in the Nordic region in March 2018, the Group made a one-off contribution of $94 million to the United Kingdom Plan. The Group also elected to make an additional one-off contribution of $26 million into the United Kingdom Plan following the disposal of the UK business in January 2021. There are no further deficit reduction contributions due to be made, however a new deficit reduction plan will be agreed, if required, after the next triennial actuarial valuation in April 2022. Any requirement to pay such additional sums, due to factors such as a deterioration in economic conditions or changes in actuarial assumptions, could have an adverse effect on our financial condition. In addition, actions by the Pensions Regulator or the trustees of our pension plans or any material revisions to the existing pension legislation could result in us being required to incur significant additional costs immediately or in short timeframes. Such costs, in turn, could have an adverse effect on our financial condition.
Changes in our credit ratings and outlook may reduce access to capital and increase borrowing costs.
The Company’s credit ratings are based on a number of factors, including our financial strength and factors outside of our control, such as conditions affecting our industry generally or the introduction of new rating practices and methodologies. The COVID-19 pandemic could negatively impact our credit ratings and thereby adversely affect our access to capital and cost of capital. We cannot provide assurances that our current credit ratings will remain in effect or that the ratings will not be lowered, suspended or withdrawn entirely by the rating agencies. If rating agencies lower, suspend or withdraw the ratings, the market price or marketability of our securities may be adversely affected. Pressure on the ratings could also arise from higher shareholder payouts or larger acquisitions than we have currently planned that result in increased leverage, or in a deterioration in the metrics used by the rating agencies to assess creditworthiness. In addition, any change in ratings could make it more difficult for the Company to raise capital on acceptable terms, impact the ability to obtain adequate financing and result in higher interest costs on future financings.
We occupy most of our facilities under short-term non-cancelable leases. We may be unable to renew leases on favorable terms or at all. Also, if we close a facility, we may remain obligated under the applicable lease.
Most of our branches are located in leased premises. Many of our current leases are non-cancelable and typically have terms of around five years, with options to renew for specified periods of time. There can be no assurance that we will be able to renew our current or future leases on favorable terms or at all which could have an adverse effect on our ability to operate our business and on our results of operations. In addition, if we close or cease to use a facility, we generally remain committed to perform our obligations under the applicable lease, which include, among other things, payment of the base rent for the balance of the lease term.
We have risks related to the management and protection of our facilities and inventory.
We have office, showroom, counter, warehouse and distribution facilities located in all regions in which we operate which may be subject to a risk for crimes that could impact our operations, financial performance or reputation. No security or audit program is 100% effective, and there is a risk that our security programs will not prevent the occurrences of crimes of break-ins, theft, property damage, and workplace violence. In the current climate of geopolitical uncertainty and social unrest, a security compromise could result in significant facility damage or loss, loss of inventory or personal injury to customers, suppliers or associates. There is a risk that inventory controls and facility security will fail resulting in inventory shrinkage or loss due to inadequate inventory tracking or misconduct of associates, customers, vendors or other third parties. Moreover, our inventory is located across the Company’s distribution facilities and branches and the disaggregated nature of our inventory could result in a failure to accurately record the existence and condition of our inventory. Security incidents, inventory loss or failure to maintain accurate records related to our inventory could have a negative effect on our business, financial condition, results of operations or reputation.
We are subject to payment-related risks that could increase our operating costs, expose us to fraud or theft, subject us to potential liability, and potentially disrupt our business.
We accept payments using a variety of methods, including trade credit, cash, checks, credit and debit cards, PayPal and gift cards, and we may offer new payment options over time. Acceptance of these payment options subjects us to rules, regulations, contractual obligations and compliance requirements, including payment network rules and operating guidelines, data security standards and certification requirements, and rules governing electronic funds transfers. These requirements may change over time or be reinterpreted, making compliance more difficult or costly. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, and other forms of electronic payment. If these companies become unable to provide these services to us, or if their systems are compromised, it could potentially disrupt our business.
The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data is compromised due to a breach or misuse of data, we may be liable for costs incurred by payment card issuing banks and other third parties or be subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. In addition, our customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs. As a result, our business, financial condition and results of operations could be adversely affected.
Also, certain of the Company’s customers or suppliers or other third parties may seek to obtain products fraudulently from, or submit fraudulent invoices to, any member of the Group. The Company has sought to extend best practice with a number of processes and controls to minimize opportunities for fraud. If the Company is unsuccessful in detecting fraudulent activities, it could suffer loss directly and/or lose the confidence of its customers and/or suppliers, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
In addition, our operations are working capital intensive, and our inventories, accounts receivable and accounts payable are significant components of our net asset base. We manage our inventories and accounts payable through our purchasing policies and our accounts receivable through our customer credit policies. If we fail to adequately manage our product purchasing or customer credit policies, our working capital and financial condition may be adversely affected.
Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters, could significantly affect our financial results or financial condition.
Accounting standards, including both IFRS for our fiscal 2021 and prior fiscal years and U.S. GAAP for periods beginning on and after August 1, 2021, and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition, asset impairment, impairment of goodwill and other intangible assets, inventories, lease obligations, self-insurance, tax matters, pensions and litigation, are complex and involve many subjective assumptions, estimates and judgments. Changes in accounting standards or their interpretation or changes in underlying assumptions and estimates or judgments could significantly change our reported or expected financial performance or financial condition.
The Company’s strategy could be materially adversely affected by its indebtedness.
As of July 31, 2021, we had total borrowings of $2.7 billion. We may incur substantial additional indebtedness in the future, in particular in connection with future acquisitions which remain a core part of our strategy, some of which may be secured by some or all of our assets. Our overall level of indebtedness from time to time may have an adverse effect on our strategy, including requiring us to dedicate portions of our cash flow to payments on our debt, thereby reducing funds available for reinvestment in the business; restricting us from securing the financing, if necessary, to pursue acquisition opportunities; limiting our flexibility in planning for, or reacting to, changes in our business and industry; and placing us at a competitive disadvantage compared to our competitors that have lower levels of indebtedness.
We may need to refinance some or all of our debt upon maturity either on terms which could potentially be less favorable than the existing terms or under unfavorable market conditions, which may also have an adverse effect on our strategy.
Risks Relating to Our Status as a Publicly Listed Company in the United States and Ownership of Our Ordinary Shares
We expect to seek shareholder approval to relocate our primary listing to the United States, which could cause volatility in our share price and shareholder base.
We currently maintain a premium listing on the London Stock Exchange (the “LSE”) and are a member of the FTSE 100 index of listed companies and maintain an additional listing on the New York Stock Exchange (the “NYSE”). As previously announced, we expect to seek shareholder approval to relocate our primary listing to the United States. If we are unable to achieve the required shareholder approval to change the primary listing to the United States, this could cause volatility in our share price.
In contrast, if we do achieve the required shareholder approval, and move to a primary listing in the United States and a standard listing on the LSE, we will no longer be a member of the FTSE 100. In addition, once we move to a primary listing on the NYSE, we will not necessarily be eligible for inclusion in certain U.S. indices in the near term until we achieve certain trading volume thresholds on the NYSE. Moreover, we cannot guarantee that, once eligible, we will be included in any index in the United States.
As a result, we anticipate that, if we obtain the required shareholder approval to relocate our primary listing to the United States and transition to a primary listing on the NYSE, certain institutional holders of our ordinary shares may no longer be permitted to hold our ordinary shares (pursuant to their internal investment mandate, for example relating to FTSE 100 status and LSE premium listing status), and certain similarly situated U.S. investors may not immediately be able to invest in our ordinary shares (pursuant to their investment mandates, for example due to our lack of inclusion in U.S.-centric indices). Any such mismatch between supply and demand could cause the price of our ordinary shares to become more volatile and could impact our ability to meet certain criteria for inclusion on U.S. indices.
We will transition to the financial reporting standards that we apply to our financial statements from IFRS to U.S. generally accepted accounting principles, or “U.S. GAAP,” for periods beginning on and after August 1, 2021 and, as a result, some of our financial data may not be easily comparable to historical financial results.
We will transition from IFRS to U.S. GAAP and will report our financial statements under U.S. GAAP for periods beginning on and after August 1, 2021. In connection with this transition, we have invested significant resources and time to convert historical financial statements prepared under IFRS from prior fiscal years into U.S. GAAP financial statements. We have incurred, and expect that we may further incur, significant additional legal, accounting and other expenses in connection with this transition, which may negatively impact our results of operations.
There have been and there may in the future be certain significant differences between U.S. GAAP and IFRS, including differences related to lease accounting, share-based compensation expense, pension costs, goodwill and income tax. As a result, our financial information and reported earnings for future periods within a fiscal year or any interim period could be significantly different if they are prepared in accordance with U.S. GAAP. Consequently, when we begin reporting in U.S. GAAP, you may not be able to meaningfully compare our financial statements under U.S. GAAP with our historical financial statements under IFRS.
The obligations associated with being a public company in the United States require significant resources and management attention, and changing laws, regulations and standards are creating uncertainty for United States public companies.
As a public company with a recent additional U.S. listing of our ordinary shares in the United States, we continue to incur legal, accounting and other expenses that we did not previously incur. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), the listing requirements of the NYSE, and other applicable securities rules and regulations. The Exchange Act requires that we file annual and other reports with respect to our business, financial condition and results of operations. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. Furthermore, the establishment and the maintenance of the corporate infrastructure demanded of a United States public company may, in certain circumstances, divert management’s attention from implementing our growth strategy, which could prevent us from improving our business, financial condition and results of operations. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems in order to meet our reporting obligations as a public company in the United States. However, the measures we take may not be sufficient to satisfy these obligations. In addition, compliance with these rules and regulations have increased our legal and financial compliance costs and have made some activities more time consuming and costly. These additional obligations may have a material adverse impact on our business, financial condition, results of operations and cash flow.
In addition, changing laws, regulations and standards relating to corporate governance, ESG matters, and public disclosure are creating uncertainty for public companies in the United States, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We have invested, and expect to continue to invest, resources to comply with evolving laws, regulations and standards, and this investment may result in increased operating expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business, financial condition, results of operations and cash flow could be adversely affected.
We have not yet completed our evaluation of our internal control over financial reporting in compliance with Section 404 of the Sarbanes-Oxley Act.
We will be required to comply with the internal control evaluation and certification requirements of Section 404 of the Sarbanes-Oxley Act by the end of our 2022 fiscal year. We have not yet completed our evaluation as to whether our current internal control over financial reporting is broadly compliant with Section 404. We may not be compliant and may not be able to meet the Section 404 requirements in a timely manner. If it is determined that we are not in compliance with Section 404, we may be required to implement new internal control procedures and re-evaluate our financial reporting. We may also experience higher than anticipated operating expenses during the implementation of these changes and thereafter, should we need to hire additional qualified personnel to help us become compliant with Section 404. If we fail, for any reason, to implement these changes effectively or efficiently, such failure could harm our reputation, operations, financial reporting or financial results and could result in our conclusion that our internal control over financial reporting is not effective.
In connection with the preparation of our fiscal 2020 consolidated financial statements, two material weaknesses in our internal control over financial reporting were identified. Our failure to establish and maintain effective internal control over financial reporting could result in our failure to accurately and timely meet our reporting obligations, which may adversely affect investor confidence in us and, as result, the value of our ordinary shares.
In connection with the preparation of our fiscal 2020 consolidated financial statements, we and our independent registered public accounting firm identified two material weaknesses. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. The material weaknesses related to: (i) a lack of segregation of duties associated with an associate having administrator access to our consolidation system while also having the ability to prepare and post manual journal entries without independent review as well as a lack of precision in and evidence of the review of consolidation and related journal entries and (ii) the presentation of deferred tax assets and deferred tax liabilities.
We have remediated these material weaknesses by: (a) removing the administrator access from the associate; (b) enhancing our review of manual journal entries with the appropriate level of precision and retention of evidence of review by an independent reviewer who does not have the ability to prepare and post manual journal entries; and (c) enhancing our review of the presentation of deferred taxes within our consolidated financial statements.
We have taken measures to design and implement an effective control environment and, while we believe we have fully remediated the material weaknesses in our internal controls, if we are unable to successfully maintain internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected. Further, we cannot assure you that the measures we have taken to date, and are continuing to implement, will be sufficient to prevent the occurrence of material weaknesses in the future. In addition, if we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, when required, investor confidence in us may be adversely affected and, as a result, the value of our ordinary shares may decline.
Our ordinary shares are subject to market price volatility and the market price may decline disproportionately in response to developments that are unrelated to our operating performance.
The market price of our ordinary shares has been and may in the future be volatile and subject to wide fluctuations. The market price of our ordinary shares may fluctuate as a result of a variety of factors including, but not limited to, general economic conditions, period to period variations in operating results or changes in revenue or profit estimates by us, industry participants or financial analysts. The market price could also be adversely affected by developments unrelated to our operating performance, such as the operating and share price performance of other companies that investors may consider comparable to us, speculation about us in the press or the investment community, unfavorable press, strategic actions by competitors (including acquisitions and restructurings), changes in market conditions, regulatory changes and broader market volatility and movements. Any or all of these factors could result in material fluctuations in the price of our ordinary shares, which could lead to investors getting back less than they invested or a total loss of their investment.
The rights afforded to our shareholders are governed by Jersey law. Not all rights available to shareholders under United States law will be available to holders of our ordinary shares.
The rights of holders of our ordinary shares are governed by Jersey law and our memorandum of association and articles of association (the “Articles”), which may not provide the level of legal certainty and transparency afforded by incorporation in a United States state.
The Company is organized under the laws of Jersey, Channel Islands, a British crown dependency that is an island located off the coast of Normandy, France. Jersey is not a member of the European Union. Jersey legislation regarding companies is largely based on English corporate law principles. However, there can be no assurance that Jersey law will not change in the future or that it will serve to protect investors in a similar fashion afforded under corporate law principles in the United States, which could adversely affect the rights of investors.
Rights afforded to shareholders under Jersey law differ in certain respects from the rights of shareholders in typical United States companies. In particular, Jersey law currently significantly limits the circumstances in which the shareholders of Jersey companies may bring derivative actions (i.e., legal actions brought by a shareholder on behalf of a company against a third party). Under Jersey law, in most cases, only the Company may be the proper plaintiff for the purposes of maintaining proceedings in respect of wrongful acts committed against us (including breaches of directors’ duties) and, generally, neither an individual shareholder, nor any group of shareholders, has any right of action in such circumstances. There are a number of judicially accepted exceptions to this general rule, including what is known as “fraud on the minority”, being where there is a prima facie case of equitable fraud on the part of the prospective defendant and the alleged wrongdoers themselves were in control of the company and improperly preventing it from bringing proceedings.
Under Article 141 of the Companies (Jersey) Law 1991, as amended, (“Jersey Companies Law”), a shareholder may however apply to court for relief on the grounds that the conduct of our affairs, including a proposed or actual act or omission by us, is “unfairly prejudicial” to the interests of our shareholders generally or of some part of our shareholders, including at least the shareholder making the application. Under Article 143 of the Jersey Companies Law (which sets out the types of relief a court may grant in relation to an action brought under Article 141 of the Jersey Companies Law), the court may make an order regulating the affairs of a company, requiring a company to refrain from doing or continuing to do an act complained of, authorizing civil proceedings or providing for the purchase of shares by a company or by any of its other shareholders. In addition, Jersey law does not afford appraisal rights to dissenting shareholders in the form typically available to shareholders in a United States company.
Jersey law does not preclude a shareholder from alleging a violation of federal securities laws in the United States.
We are a foreign private issuer and, as a result, are not subject to United States proxy rules but are subject to Exchange Act reporting obligations that, to some extent, are more lenient and less frequent than those of a United States issuer.
We currently report under the Exchange Act as a non-United States company with “foreign private issuer” status, as such term is defined in Rule 3b-4 under the Exchange Act. Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the Exchange Act that are applicable to United States public companies, including: (i) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act, (ii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and to return any profit from trades made in a short period of time and (iii) the rules under the Exchange Act requiring the filing with the United States Securities and Exchange Commission (the “SEC”) of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events. Foreign private issuers are required to file their annual report on Form 20-F within 120 days after the end of each fiscal year, while United States domestic issuers that are non-accelerated filers are required to file their annual report on Form 10-K within 90 days after the end of each fiscal year. Foreign private issuers are also exempt from Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information. As a result of the above, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers.
As a foreign private issuer, we are permitted to follow certain home country corporate governance practices in lieu of certain requirements applicable to United States issuers. This may afford less protection to holders of our ordinary shares.
As a foreign private issuer listed on the NYSE, we are permitted to follow certain home country corporate governance practices in lieu of certain NYSE requirements. For more information regarding the corporate governance requirements in lieu of which we may follow home country corporate governance practices, see “Item 16G. Corporate Governance.”
A foreign private issuer must disclose in its annual reports filed with the SEC, each NYSE requirement with which it does not comply followed by a description of its applicable home country practice. As a company incorporated in Jersey and which is listed on the main market of the LSE, we may follow our home country practice with respect to, among other things, the NYSE rules requiring shareholders to approve equity compensation plans and material revisions thereto. Unlike the requirements of the NYSE, the corporate governance practice and requirements in Jersey and the United Kingdom do not generally require us to obtain shareholder approval for equity compensation plans and material revisions thereto, except under certain restricted circumstances.
These and other home country practices may afford less protection to holders of our ordinary shares than would be available to the shareholders of a United States corporation.
We may lose our foreign private issuer status in the future, which could result in additional costs and expenses.
We are a foreign private issuer and, therefore, are not required to comply with the same periodic disclosure and current reporting requirements of the Exchange Act and related rules and regulations that apply to United States domestic issuers. Under Rule 3b-4 of the Exchange Act, the determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter and, accordingly, we will make the next determination with respect to our foreign private issuer status based on information as at January 31, 2022.
In the future, we could lose our foreign private issuer status if, for example, a majority of our voting power was held by United States citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. The regulatory and compliance costs to us under United States securities laws as a domestic issuer may be higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on United States domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We will also be required to comply with United States federal proxy requirements, and our officers, directors and controlling shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. We may also be required to modify certain of our policies to comply with good governance practices associated with United States domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on United States stock exchanges that are available to foreign private issuers.
Our ability to pay dividends or effect other returns of capital in the future depends, among other things, on our financial performance.
There can be no guarantee that our historical performance will be repeated in the future, particularly given the competitive nature of the industry in which we operate, and our revenue, profit and cash flow may significantly underperform market expectations. If our cash flow underperforms market expectations, then our capacity to pay a dividend or effect other returns of capital (including, without limitation, share repurchases) may be negatively impacted. Any decision to declare and pay dividends or to effect other returns of capital will be made at the discretion of the Board and will depend on, among other things, applicable law, regulation, restrictions (if any) on the payment of dividends and/or capital returns in our financing arrangements, our financial position, retained earnings/profits, working capital requirements, finance costs, general economic conditions and other factors that the Board deems significant from time to time.
The issuance of additional ordinary shares in connection with future acquisitions, any share incentive or share option plan or otherwise may dilute all other shareholdings.
We may seek to raise financing to fund future acquisitions and other growth opportunities. We may, for these and other purposes, issue additional equity or convertible equity securities. As a result, our shareholders may suffer dilution to their percentage ownership of the Company, or the market price of the ordinary shares may be adversely affected.
The Company is a holding company with no business operations of its own and depends on its subsidiaries for cash, including in order to pay dividends.
The Company is a group holding company with no independent operations and is dependent on earnings and distributions of funds from its operating subsidiaries for cash, including in order to pay dividends to its shareholders. Its ability to pay dividends to its shareholders therefore depends on the ability of its subsidiaries to distribute profits or pay dividends to the Company, general economic conditions and other factors that the directors deem significant from time to time. Its distributable reserves can be affected by reductions in profitability, impairment of assets and severe market turbulence.
Item 4. Information on the Company
A History and Development
General History and Development
The Group was founded in 1887 when Frederick York Wolseley launched the Wolseley Sheep Shearing Machine Company. In 1979, the Group sold its manufacturing companies to focus solely on distribution. Beginning in 1980, the Group expanded its businesses through organic growth and acquisitions in the United States, Canada and Europe, including the acquisition in 1982 of Ferguson Enterprises, LLC (formerly, Ferguson Enterprises Inc.). On April 14, 1986, the Group was listed on the LSE and the then ultimate holding company of the Group changed its name to Wolseley plc.
From the 1990s to the mid-2000s, the Group continued to expand across Europe, including into the Netherlands, Switzerland, Ireland, Belgium and the Nordic region, and across the United States and Canada. In 2009, as a result of the financial crisis, the Group implemented a comprehensive restructuring program across its businesses to reduce fixed costs and close underperforming branches. During this period, the Group focused its resources on those businesses capable of generating the highest returns for shareholders and, in particular, on the core plumbing and heating markets. This strategy resulted in the disposal of a number of the Group’s businesses.
On July 31, 2017, Wolseley plc changed its name to Ferguson plc to better align the name of the Group with its largest subsidiary in the United States.
In March 2018, the Group sold Stark Group, its Nordic business, as a result of a lack of synergies with the rest of the Group’s plumbing and heating activities. Due to the Group’s strong funding position, the majority of the proceeds from the sale were subsequently distributed to shareholders.
On January 30, 2019, the Group disposed of Wasco (its Netherlands B2B business), its last remaining Central European business.
On May 10, 2019, following shareholder approval, the Group consummated a corporate restructuring and moved its headquarters and the tax residence of its holding company from Switzerland to the United Kingdom. The transaction was
undertaken to simplify the Group’s corporate structure. As a result of the restructuring, the Company became the Group’s ultimate holding company, and all of the ordinary shares of the former holding company were exchanged on a one-for-one basis for ordinary shares of the Company.
On January 29, 2021, the Group sold its UK business to enable Ferguson to be wholly focused on serving customers in North America. As part of the transaction, the Group retained future responsibility for the United Kingdom defined benefit pension plan, the Group’s main defined benefit plan in the United Kingdom (the “United Kingdom Plan”).
The disposition did not result in significant management relocation efforts, as the majority of the Company’s senior management team, including its Chief Executive Officer and Chief Financial Officer, are located in the United States. Certain of the Company’s personnel, including the Company Secretary, remain in the United Kingdom.
On March 8, 2021 the additional U.S. listing of the Company’s ordinary shares became effective and such shares began trading on the NYSE. As a result of the additional U.S. listing, also effective March 8, 2021, the Company’s American Depository Receipt (ADR) program was terminated. The Group currently retains its premium listing on the London Stock Exchange and is included in the FTSE 100 index. Investors can trade on both exchanges under the ticker symbol: FERG.
On May 11, 2021, the Group returned substantially all of the net cash proceeds of the sale of the UK business to shareholders by way of a special dividend.
The Company’s legal name is Ferguson plc. The Company is tax resident in the United Kingdom. The Company was incorporated and registered in Jersey on March 8, 2019 under the Jersey Companies Law, as a private limited company under the name Alpha JCo Limited with company number 128484. The Company converted its status to a public limited company and changed its name to Ferguson Newco plc on March 26, 2019. The Company then changed its name to Ferguson plc on May 10, 2019. The principal legislation under which the Company operates is the Jersey Companies Law and regulations made thereunder. Although the Company (being Jersey incorporated) is not subject to the United Kingdom Companies Act 2006 (“CA 2006”), the Company retains the CA 2006 standards of governance and corporate responsibility as if it were subject to CA 2006 and adheres to the UK Corporate Governance Code.
The Company’s registered office address is: 13 Castle Street St Helier, Jersey JE1 1ES Channel Islands, and the Company’s corporate headquarters address is 1020 Eskdale Road, Winnersh Triangle, Wokingham, Berkshire. RG41 5TS and its telephone number is +44 (0) 118 927 3800. The Company is also registered in the United Kingdom as Ferguson Group Holdings, UK Establishment No. BR021199.
In the United States, the business operates primarily under the Ferguson brand. In Canada, the business operates primarily under the Wolseley brand. See “Item 4. Information on the Company—B. Business Overview” for information regarding our principal business segments in our geographic markets.
See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Debt Facilities—Capital expenditure” for a description of our capital expenditures.
The Company is subject to the informational requirements of the Exchange Act. In accordance with these requirements, the Company files reports and other information with the SEC. The SEC maintains an internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The reports and other information the Company files or furnishes with the SEC are also available on the Company’s website, www.fergusonplc.com.
B Business Overview
We are a value-added distributor of plumbing and heating products and solutions delivered through specialist sales associates, showroom consultants and e-commerce. We serve customers principally in North America, predominantly within the RMI sector as well as new residential construction. We have over 34,000 suppliers that give us access to a diverse and broad range of quality products. We serve our customers through a network of 11 distribution centers, 5,300 fleet vehicles, 1,679 branches and approximately 31,000 associates, in each case, as at July 31, 2021.The Group operates in two reportable segments: the United States and Canada.
The United States segment contributed 94 percent, 95 percent and 93 percent of total consolidated revenue from continuing operations in fiscal 2021, 2020 and 2019, respectively.
The United States segment operates primarily under the Ferguson brand, providing a broad range of plumbing and heating products and solutions delivered through a common network of distribution centers, branches and specialist sales associates, counter service, showroom consultants and e-commerce. It operates nationally, serving the residential, commercial, civil/infrastructure and industrial end markets.
The residential end market (representing 56%, 54% and 52% of total United States segment revenue in fiscal 2021, 2020 and 2019, respectively), focuses on both new construction and RMI across single and multifamily homes. Sales are typically made to trade contractors, builders and remodeling contractors across both RMI and new construction, with our products consisting of plumbing supplies, water heaters, pipe, valves and fittings, kitchen and bathroom fixtures, appliances, HVAC units and supplies and our services including consultation, advice and project management, online tools, pro pick-up and delivery.
The commercial end market (representing 31%, 32% and 33% of total United States segment revenue in fiscal 2021, fiscal 2020 and fiscal 2019, respectively), focuses on new construction and RMI across the majority of non-residential sectors such as education, health care, government facilities, warehousing, data centers, lodging and offices. Sales are typically made to commercial plumbing and mechanical contractors with our products including plumbing parts and supplies, pipe, valves and fittings, fire sprinkler systems, hangers, struts and fasteners, and our services consisting of quotation services, jobsite delivery and logistics, project management and fabrication.
The civil/infrastructure end market (representing 7% of total United States segment revenue in fiscal 2021, fiscal 2020 and fiscal 2019), focuses on public and private water authorities, utility contractors, public works/line contractors and heavy highway contractors. Our products include pipe, valves and fittings, water meters and automation, irrigation and drainage, geosynthetics and stormwater management products and our services include digitally enhanced estimation, project management and design services, job site delivery, logistics and advanced metering infrastructure.
The industrial end market (representing 6%, 7% and 8% of total United States segment revenue in fiscal 2021, fiscal 2020 and fiscal 2019, respectively), focuses on new construction, repairs and maintenance in a variety of sectors such as chemical, energy, food and beverage, mining and pulp and paper. Our products include pipe, fittings and flanges, general industrial maintenance repair and operations products, high density polyethylene products and fabrication and our services consist of supply chain services, equipment rental and valves and automation services.
Across all of our end markets, we offer our products online, including, but not limited to, plumbing supplies, pipe, valves and fittings, kitchen and bathroom fixtures, appliances, HVAC units and supplies, hangers, struts, fasteners and water heaters. Sales from e-commerce represented 21% and 19% of total United States segment revenue in fiscal 2021 and 2020, respectively.
Our United States business operates 1,470 branches serving all 50 states with approximately 28,000 associates, in each case, as at July 31, 2021. The branches are served by 10 distribution centers, providing same-day and next-day product availability, which we believe to be a competitive advantage and an important requirement for customers. In addition, the Company is developing market distribution centers (“MDC”) in certain major metropolitan areas for final mile distribution. We opened our first MDC in late-fiscal 2021 in Denver, Colorado.
The Canada segment contributed 6%, 5% and 7% of total consolidated revenue from continuing operations in fiscal 2021, 2020 and 2019, respectively.
The Canada segment predominantly serves trade customers across the residential, commercial and industrial sectors in both RMI and new construction. The business operates 209 branches with one distribution center and approximately 3,000 associates, in each case, as at July 31, 2021. The Canada segment operates primarily under the Wolseley brand and supplies plumbing, heating, ventilation, air conditioning and refrigeration products to residential and commercial contractors. It also supplies specialist water and wastewater treatment products to residential, commercial and infrastructure contractors, and supplies PVF solutions to industrial customers.
We believe we are well-equipped to win new customers and make attractive returns. We have leading positions in the residential and commercial end markets based on revenue as a percentage of overall market size. The markets we serve are highly fragmented with very few large competitors and a higher number of mid-size regional distributors as well as small and local distributors. While our market positions can be expanded through growth of our existing business, acquisitions also remain a core part of our growth strategy and will focus on acquisitions that bolt-on to our existing branch network as well as acquisitions that provide further capabilities to serve our customers. We believe there is a significant opportunity for strong growth and continued consolidation within each of these large, fragmented markets. Many customer projects require a range of products and services from across our businesses and we leverage our scale and expertise across the organization for the benefit of our customers. Specifically, we believe our network of suppliers, associates and the number of branches and distribution centers provides us with the scale and expertise to serve our customers better than our competitors do, as many of these competitors operate only locally. We have over 34,000 suppliers that give us access to a diverse and broad range of quality products. We serve our customers through a network of 11 distribution centers, 5,300 fleet vehicles, 1,679 branches and approximately 31,000 associates, in each case, as at July 31, 2021. We believe these factors enable continued growth in revenue as well as growth in cash flow and, therefore, may better enable us to provide investment returns to shareholders. In addition, we also benefit from significant synergies to help lower operating costs and improve margins. We have chosen to operate in each of these markets because we believe we can generate strong growth, solid gross and net margins and good returns on capital.
Our purpose is to act as a trusted supplier and partner to our customers, providing innovative products and solutions to make their projects better. We offer excellent service, advice and a broad range of specialist plumbing and heating products delivered where and when our customers need them. The emergence of COVID-19 has demonstrated more than ever how our customers rely on us every day to help them deliver critical infrastructure spanning almost every stage of residential, commercial, industrial and civil/infrastructure. Whatever the future challenges, we will continue to partner with our customers to keep millions of homes and businesses operating while helping them to run their business more efficiently.
Customer Base, Contractual Relationships and Seasonality
Our customer base is highly diversified, with no individually significant customer. We are not dependent on any material licenses (other than as described below under “—Intellectual Property”), industrial, commercial or financial contracts (including contracts with customers and suppliers) or new manufacturing processes. Our business is not highly seasonal.
We rely on a combination of intellectual property laws, confidentiality procedures and contractual provisions to protect our proprietary assets and our brand. We have registered or applied for registration of trademarks, service marks, copyrights and internet domain names, both domestically and internationally.
Raw Materials and Commodities
We source, distribute and sell products from domestic and international suppliers. We purchase from over 34,000 suppliers. Over 95% of the products sold in the United States are sourced from U.S.-based suppliers. Our raw materials are generally available from several sources and are not generally subject to supply constraints in normal market conditions. In the United States, approximately 12% of revenues are derived from basic products containing significant amounts of commodity-priced materials, predominantly plastic, copper and steel, and other components which can be subject to volatile price changes based upon fluctuations in the commodities market. To a lesser extent, fluctuations in the price of fuel could affect transportation costs. In general, increases in such prices increase the Group’s operating costs and negatively impact its operating profit to the extent that such increase cannot be passed on to customers. Conversely, if competitive pressures allow the Group to hold prices despite relevant raw material prices falling, profitability can increase.
The Company’s operations are affected by various statutes, regulations and standards in the countries and markets in which it operates, including the United States and Canada. The amount of such regulation and the penalties for any breaches can vary. While the Group is not engaged in a highly regulated industry, it is subject to the laws governing businesses generally, including laws relating to competition, product safety, timber sourcing, data protection, labor and employment practices,
accounting and tax standards, international trade, fraud, bribery and corruption, land usage, the environment, health and safety, transportation, payment terms and other matters.
C Organizational Structure
The Company is the ultimate holding company of the Group and its subsidiaries. The table below lists the Group’s significant subsidiaries as at July 31, 2021.
|Company Name||Principal Activity||Country of Incorporation||Ownership Interest|
Ferguson Enterprises, LLC(1)
|Operating company||United States||100%|
|Ferguson Finance (Switzerland) AG||Financing company||Switzerland||100%|
|Ferguson Group Holdco Limited||Investment company||England and Wales||100%|
|Ferguson Holdings Limited||Holding company||Jersey||100%|
|Ferguson Holdings (Switzerland) AG||Investment company||Switzerland||100%|
|Ferguson Swiss Holdings Limited||Investment company||England and Wales||100%|
|Ferguson Overseas Limited||Investment company||England and Wales||100%|
Ferguson UK Holdings Limited(2)
|Investment company||England and Wales||100%|
Ferguson U.S. Holdings, Inc.(3)
|Investment company||United States||100%|
(1)Ownership held in membership interests.
(2)Ownership held in ordinary shares and ordinary A shares.
(3)Ownership held in common stock.
Unless otherwise stated, the subsidiaries as listed have share capital consisting solely of ordinary shares, which are held directly or indirectly by the Company and the proportion of ownership interest held is equal to the voting rights held by the Company.
D Property, Plants and Equipment
As at July 31, 2021, we operated a total of 1,679 branches, of which 1,470 were located in the United States and 209 were located in Canada. As at July 31, 2021, approximately 18% of our United States branches and approximately 24% of our Canada branches were owned facilities, and the remainder of our United States and Canada facilities were leased.
The following tables summarize the United States distribution centers, as well as the distribution center in Canada as at July 31, 2021:
|Fort Payne, AL||643,000||Owned|
|Stockton, CA (land)||—||Leased|
|Stockton, CA (building)||648,200||Owned|
|Front Royal, VA||753,880||Leased|
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
The following discussion of our financial condition and results of operations is intended to convey management’s perspective on our operational performance and financial performance as measured in accordance with IFRS. We intend this disclosure to assist readers in understanding and interpreting the audited consolidated financial statements included in this annual report. This section is based on, and should be read in conjunction with, those audited consolidated financial statements and the notes thereto.
The following discussion also contains trend information and forward-looking statements. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this annual report, particularly under “Forward-Looking Statements” and “Item 3. Key Information—D. Risk Factors.”
On January 29, 2021, the Group sold its UK business. Accordingly, the Group’s UK business has been presented in the Group’s financial statements as a discontinued operation in accordance with IFRS 5. See “Item 4. Information on the Company—A. History and Development.”
Following the sale of the UK business, the Group has two reportable segments at July 31, 2021: the United States and Canada. The Group’s reportable segments are established on the basis of the operating businesses overseen by distinct divisional management teams responsible for their performance. These operating businesses are managed on a geographical basis and are regularly reviewed by the chief operating decision maker, which is determined to be the Group Chief Executive and the Group Chief Financial Officer, in deciding how to allocate resources and assess the performance of the businesses. All reportable segments derive their revenue from a single business activity, the distribution of plumbing and heating products. Revenue is attributed to a country based on the location of the Group company reporting the revenue.
Key Factors Affecting Results of Operations
Our results of operations have been affected, and are expected to continue to be affected, by the following principal factors relating to our business.
Our fiscal 2021 began in the early stages of the economy reopening after COVID-19-related lockdowns which extended through the spring and early summer of 2021. Our first half performance was strong, and from February onwards the pace of our recovery accelerated sharply. This presented us with different challenges, including reduced product availability, supply chain disruption and price inflation. In addition, the wider macro-economic environment led to a tightening labor market and increased labor costs.
Our approach to managing the business during the COVID-19 pandemic continues to focus on three key areas: (1) protecting the health and well-being of our associates; (2) continuing to serve our customers during a critical time of need; and (3) protecting and preserving the strength of our business for the long-term. In response to the COVID-19 operating environment, we invested in inventory during the year to maintain product availability for customers. We expect to manage
through supply chain, product availability and other ongoing challenges and continue to monitor for business disruption due to a resurgence of COVID-19 or other macro-economic developments.
Uncertainty in the wider economic situation could also impact the Group’s future tax rate. Government responses to the COVID-19 pandemic are creating political and regulatory uncertainty which is leading to changes to prevailing tax regimes and greater international cooperation on tax affairs. Following the announcement of a higher UK tax rate in 2023, proposals for a higher U.S. federal tax rate and international cooperation on global minimum taxation, there is a possibility that the Group’s consolidated effective tax rate could increase in the short term.
Further details of the financial performance and market conditions in the Group’s segments are discussed in the “Segment Results of Operations for Fiscal 2021 and Fiscal 2020” section herein.
Acquisitions and disposals
The Group has historically generated growth organically and through selective acquisitions. During fiscal years 2021, 2020 and 2019, the Group completed a total of 7, 6, and 15 acquisitions, respectively, investing $335 million, $351 million, and $657 million, respectively, (which includes consideration for prior year’s acquisitions in each case).
In addition, the Group completed a number of disposals, including the sale of its UK business on January 29, 2021, in order to focus our business on North America. The Group received net cash proceeds of $380 million, $7 million and $201 million during fiscal years 2021, 2020, and 2019, respectively.
Further information of the Group’s acquisitions and disposals are detailed in notes 25 and 26, respectively, to the Group’s audited consolidated financial statements.
Results of Operations
The following is a discussion of the Group’s results of operations on a continuing operations basis during fiscal 2021, 2020 and 2019. The following provides the reader with information that will assist in understanding our audited consolidated financial statements, the changes in certain key items in those audited consolidated financial statements from year to year, and the primary factors that accounted for those changes.
The Group disposed of its UK business on January 29, 2021. The UK results have been reclassified to discontinued operations and the prior year comparative impact to operating results have been restated throughout the following discussion of the Group’s operating results.
Accounting developments and changes
Refer to Note 1 in the audited consolidated financial statements for a discussion of new accounting pronouncements.
Group Results of Operations for Fiscal 2021 and Fiscal 2020
The table below summarizes our income statement for the periods indicated and should be read in conjunction with, and is qualified in its entirety by reference to, the fiscal 2021 audited consolidated financial statements and notes thereto, which are included in this annual report.
| ||Year ended July 31,|
| ||$ million|
|Revenue||22,792 ||19,940 |
|Cost of sales||(15,812)||(13,957)|
|Gross profit||6,980 ||5,983 |
|Operating profit||2,034 ||1,449 |
|Finance income||1 ||7 |
|Share of profit/(loss) after tax of associate||1 ||(2)|
|Gain on disposal of interests in associates and other investments||— ||7 |
|Impairment of interests in associates||— ||(22)|
|Profit before tax||1,891 ||1,292 |
|Profit from continuing operations||1,650 ||975 |
|Loss from discontinued operations||(142)||(14)|
|Profit for the year||1,508 ||961 |
Revenue was $22.8 billion in fiscal 2021, an increase of $2.9 billion, or 14.3%, compared with the prior year. The increase in revenue attributed to higher sales volume and price inflation totaled $2.6 billion, due principally to strong growth in residential markets compared with fiscal 2020, revenue from acquisitions of $290 million and $60 million from foreign currency translation. These increases were partially offset by $92 million due to the impact of one less trading day in 2021 compared with 2020. The impact of price inflation was approximately 3% in fiscal 2021.
Cost of sales was $15.8 billion for fiscal 2021, an increase of $1.9 billion, or 13.3% compared with the prior year. The increase in cost of sales was primarily due to the increase in sales.
Gross profit was $7.0 billion in fiscal 2021, an increase of $1.0 billion, or 16.7%, compared with the prior year. The gross profit margin of 30.6% increased 60 basis points from 30.0% in fiscal 2020 primarily due to managing price inflation, reflecting the strength of the Group’s supply chain.
Operating costs were $4.9 billion for fiscal 2021, an increase of $412 million, or 9.1%, compared with the prior year. This increase was driven by higher sales volumes and was primarily due to higher overall variable labor and other costs compared to fiscal 2020. While the Group incurred higher variable costs, operating cost growth of 9.1% was below revenue growth of 14.3% compared with fiscal 2020, generating strong operating cost leverage.
Finance costs were $145 million for fiscal 2021, and remain about even with fiscal 2020.
No impairments were recorded in connection with interests in associates in fiscal 2021, while $22 million in impairments were recorded in the prior year.
Tax expense was $241 million for fiscal 2021, a decrease of $76 million, or 24.0%, compared with fiscal 2020. The Company’s effective tax rate attributable to continuing operations was 12.7% for fiscal 2021 compared with 24.5% for fiscal 2020. The decrease in the effective tax rate was primarily due to a release of provisions against uncertain tax positions following the closure of tax authority audits and the lapsing of the statute of limitations periods. The impact of these items was partially offset by the tax effect of the increase in pre-tax earnings.
Profit from continuing operations for fiscal 2021 was $1.7 billion, an increase of $675 million, or 69.2%, compared with the prior year. This increase was primarily a result of revenue growth and gross margin expansion while improving operating cost leverage.
Losses in connection with discontinued operations for fiscal 2021 were $142 million, primarily reflecting the sale of the UK business during the first half of fiscal 2021. See note 6 to the consolidated financial statements for further details.
Segment Results of Operations for Fiscal 2021 and Fiscal 2020
| ||Year Ended July 31,|
| ||$ million|
|Revenue||21,478 ||18,857 |
Underlying trading profit(1)
|2,073 ||1,587 |
(1)See note 2 to the Group’s audited consolidated financial statements included in this annual report for additional information.
Revenue for the United States segment was $21.5 billion in fiscal 2021, an increase of $2.6 billion, or 13.9%, compared with the prior year. The increase in revenue attributed to higher sales volume and price inflation totaled $2.4 billion, due principally to strong growth in residential markets compared to fiscal 2020, and revenue from acquisitions of $290 million. These increases were partially offset by $81 million due to the impact of one less trading day in 2021 compared with 2020. The impact of price inflation was approximately 3% in fiscal 2021.
The following table illustrates revenue growth by end market:
|% of United States segment|
|United States segment|
|Residential||~56 ||19 ||%|
|Commercial||~31 ||9 ||%|
|Civil/Infrastructure||~7 ||15 ||%|
|Industrial||~6 ||(1 ||%)|
In fiscal 2021, revenue from the residential end market grew 19% compared to fiscal 2020 driven by increases in residential new housing starts and permits as well as growth in residential RMI, particularly during the second half of fiscal 2021 as the project minded consumer and light decorative pro continued to drive increased e-commerce revenue. Within our non-residential end markets, commercial and civil/infrastructure related revenue grew 9% and 15%, respectively, compared with fiscal 2020 primarily driven by growth in the second half of fiscal 2021 as project related work increased with more U.S. markets reopening following the prior year impacts from the COVID-19 pandemic. Industrial revenue declined by 1% compared to fiscal 2020 primarily due to a more pronounced impact in the first half of fiscal 2021 of decreases in project related work in light of the COVID-19 pandemic, partially offset by modest growth during the second half of fiscal 2021.
Underlying trading profit for the United States segment was $2.1 billion for fiscal 2021, an increase of $486 million, or 30.6%, compared with the prior year. This increase was primarily due to revenue growth in residential markets, as well as overall gross margin expansion while improving operating cost leverage.
| ||Year Ended July 31,|
| ||$ million|
|Revenue||1,314 ||1,083 |
Underlying trading profit(1)
|76 ||43 |
(1)See note 2 to the Group’s audited consolidated financial statements included in this annual report for additional information.
Revenue for the Canada segment was $1.3 billion in fiscal 2021, an increase of $231 million, or 21.3%, compared with prior year. The increase in revenue was primarily due to higher sales volume and sales price inflation of $182 million driven by improved sales in the residential markets, as well as $60 million due to the impact of foreign currency translation. These increases were partially offset by $11 million due to one less trading day. The impact of price inflation was approximately 4% in fiscal 2021.
Underlying trading profit for the Canada segment was $76 million in fiscal 2021, an increase of $33 million, or 76.7%, compared with the prior year period. This increase was primarily due to revenue growth in residential markets and overall gross margin expansion while maintaining operating cost leverage.
Segment Results of Operations for Fiscal 2020 and Fiscal 2019
| ||Year Ended July 31,|
| ||$ million|
|Revenue||18,857 ||18,358 |
Underlying trading profit(1)
|1,587 ||1,508 |
(1)See note 2 to the Group’s audited consolidated financial statements included in this annual report for additional information.
Revenue for the United States segment was $18.9 billion in fiscal 2020, an increase of $499 million, or 2.7%, compared to the prior year period. This increase was primarily due to $355 million from acquisitions, $76 million from one additional trading day in fiscal 2020 and to a lesser extent, sales volume growth within the residential and civil/infrastructure end markets.
The following table illustrates revenue growth by end market:
% of United States segment
|United States segment|
In fiscal 2020, revenue from the residential and commercial end markets grew 5% and 1%, respectively, primarily driven by increased sales volume of core plumbing, HVAC and own brand products. Revenue from the civil/infrastructure end market grew 9%, primarily driven by increased sales volume of water management related products and services. Revenue from the industrial end market declined 10% due to lower sales volume across all major product categories.
Underlying trading profit for the United States segment was $1.6 billion for fiscal 2020, an increase of $79 million, or 5.2%, compared to the prior year period. This increase was primarily the result of sales volume growth within the residential and civil/infrastructure end markets. The remainder of underlying trading profit growth was due to acquisitions and the impact of one additional trading day in fiscal 2020.
| ||Year Ended July 31,|
| ||$ million|
|Revenue||1,083 ||1,371 |
Underlying trading profit(1)
|43 ||76 |
(1)See note 2 to the Group’s audited consolidated financial statements included in this annual report for additional information.
Revenue for the Canada segment was $1.1 billion in fiscal 2020, a decrease of $288 million, or 21.0%, compared to the prior year period. The decline in revenue was attributed to lower sales volume of $123 million driven by reduced sales to the residential markets, due in part to the COVID-19 pandemic. The disposal of Wasco, a Dutch plumbing and heating business, reduced revenue by $175 million. The remainder of the decrease was due to foreign currency translation.
Underlying trading profit for the Canada segment was $43 million in fiscal 2020, a decrease of $33 million, or 43.4%, compared to the prior year period. This decrease was primarily a result of sales volume decline due in part to the COVID-19 pandemic.
BLiquidity and Capital Resources
The Group relies on continued access to funding in order to meet its operating obligations, to support investment in the organic growth of the business and to make acquisitions when opportunities arise. Its sources of funding include cash flows generated by operations and borrowings from banks and other financial institutions. The Company believes that the available working capital is sufficient for the Group’s present requirements, that is, for at least the next 12 months following the date of this annual report.
As at July 31, 2021, the Company’s borrowings (excluding bank overdrafts) were $2.5 billion, and the Group had $3.4 billion of available liquidity (comprising readily available cash of $1.2 billion, excluding cash of $95 million used to collateralize letters of credit on behalf of Ferguson Insurance Limited, and $2.2 billion of undrawn facilities). The Group anticipates that it will be able to meet its debt obligations as they become due.
The Group seeks a balance between certainty of funding and a flexible, cost-effective borrowings structure. The Group maintains a policy of ensuring sufficient borrowing headroom to finance all investment and anticipated bolt-on acquisitions for the following financial year with an additional contingent safety margin.
The Group’s total borrowings as at July 31, 2021 and 2020 include:
| ||As at July 31,|
| ||$ million|
|Bank overdrafts||183 ||248 |
|Senior unsecured loan notes||2,528 ||2,918 |
|Total borrowings||2,711 ||3,166 |
The following section summarizes certain material provisions of our debt facilities, which were undrawn as at July 31, 2021. The following description is only a summary of the material provisions of the Multicurrency Revolving Credit Facility, Bilateral loan, Trade Receivables Securitization Facility, Private Placements Notes, 2018 4.5% Notes, and 2020 3.25% Notes, and does not purport to be complete and is qualified in its entirety by reference to the documents governing such indebtedness.
Multicurrency Revolving Credit Facility
Our Multicurrency Revolving Credit Facility is governed by the Multicurrency Revolving Credit Facility Agreement, dated as at March 10, 2020, among the Company and Wolseley Limited (now known as Ferguson UK Holdings Limited), as original borrowers and original guarantors, the lenders and arrangers party thereto, and the agent.
The Multicurrency Revolving Credit Facility consists of a $1.1 billion unsecured, multicurrency revolving loan facility, which terminates in March 2026. The Multicurrency Revolving Credit Facility contains the ability for the original borrowers and original guarantors to apply to the lenders requesting they grant a further one-year extension to the then maturity date on both the first and second anniversary of the facility being signed. During the period the Group successfully requested the first one-year extension, taking the maturity to March 2026. Borrowings are available to each of the borrowers under the Multicurrency Revolving Credit Facility, including future subsidiaries that accede as borrowers under the Multicurrency Revolving Credit Facility, and bear interest at a rate equal to the sum of LIBOR, or in relation to any loan in Canadian dollars, CDOR, plus an applicable margin determined based on our public credit ratings. We are required to pay a quarterly commitment fee and utilization fee in certain circumstances.
The borrowers under the Multicurrency Revolving Credit Facility are permitted to prepay and re-borrow amounts outstanding under the Multicurrency Revolving Credit Facility, in whole or in part, at any time. All obligations under our Multicurrency Revolving Credit Facility are unconditionally guaranteed by the Company and Ferguson UK Holdings Limited (formerly known as Wolseley Limited), to the extent each entity is not the borrower. In certain circumstances, the Multicurrency Revolving Credit Facility provides that outstanding amounts drawn must be prepaid by the borrowers.
The Multicurrency Revolving Credit Facility contains certain customary affirmative covenants, as well as certain customary negative covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its subsidiaries to incur indebtedness, grant liens on present or future assets and revenues, sell assets, or engage in acquisitions, mergers or consolidations. The Multicurrency Revolving Credit Facility also contains certain events of default and cross-default provisions. As at July 31, 2021, no borrowings were outstanding under the Multicurrency Revolving Credit Facility.
In March 2020, the Company and Ferguson UK Holdings Limited (formerly known as Wolseley Limited), as original borrowers and original guarantors, entered into a $500 million bilateral loan agreement with Sumitomo Mitsui Banking Corporation (“SMBC”) which expires in March 2022 (the “Bilateral Loan Agreement”). The Bilateral Loan Agreement contains commercial terms similar to those of the Multicurrency Revolving Credit Facility, and the Company has the ability to request that SMBC, at their option, extend this agreement for a further 364 days. As at July 31, 2021, no borrowings were outstanding under the Bilateral Loan Agreement.
Trade Receivables Securitization Facility
Our Trade Receivables Securitization Facility is governed by: (i) the Receivables Purchase Agreement, dated as at July 31, 2013, as further amended, supplemented and restated, among Ferguson Enterprises, LLC (“Ferguson Enterprises”) as servicer, Ferguson Receivables, LLC (“Ferguson Receivables”) a wholly owned bankruptcy remote special purpose entity as seller, the lenders as conduit purchasers and committed purchasers, letters of credit banks, facility agents, administrative agent and party each thereto; and (ii) the Purchase and Contribution Agreement, dated as at July 31, 2013, as further amended, supplemented and restated, among Ferguson Enterprises and its various subsidiaries party thereto as originators and Ferguson Receivables as purchaser.
The Trade Receivables Securitization Facility consists of trade receivables funding for up to $600 million, terminating in May 2024. The Company has available to it an accordion feature whereby the commitment on the Trade Receivables Securitization Facility may be increased up to $800 million, subject to lender approval. Such arrangements provide for purchases of undivided ownership interests in a revolving pool of certain of the Group’s trade receivables and related security generated by the originators, transferred to the seller which are, in turn, securitized against lending advances made by the conduit purchasers and committed purchasers. At all times all borrowings under the Trade Receivables Securitization Facility are recorded on the balance sheet of the Group.
Fees are payable under the Trade Receivables Securitization Facility at a rate equal to LIBOR or the commercial paper rates of the conduit purchasers plus an applicable margin. The Company pays customary fees regarding unused amounts to maintain the availability under the Trade Receivables Securitization Facility.
The Trade Receivables Securitization Facility contains certain customary affirmative covenants, as well as certain customary negative covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its subsidiaries party thereto from incurring indebtedness, granting additional liens on the receivables and selling assets or engaging in acquisitions, mergers or consolidations.
The Trade Receivables Securitization Facility also contains certain customary events of default and cross-default provisions. The Trade Receivables Securitization Facility also requires that our performance in relation to trade receivables remains at set levels (specifically relating to timely payments being received from debtors and in relation to the amount of debt written off as bad debt) and that a required level of trade receivables be generated and available to support the borrowings under the arrangements. As at July 31, 2021, no borrowings were outstanding under the Trade Receivables Securitization Facility.
Private Placement Notes
In November 2017, Wolseley Capital, Inc. (“Wolseley Capital”) privately placed $450 million aggregate principal private placement notes (collectively, the “2017 Private Placement Notes”) guaranteed by the Company pursuant to a note and guarantee agreement dated as at November 30, 2017. The 2017 Private Placement Notes consist of $55 million of 3.30% Series L Guaranteed Senior Notes due November 30, 2023 (the “3.30% Series L Notes”), $150 million of 3.44% Series M Guaranteed Senior Notes due November 30, 2024 (the “3.44% Series M Notes”), $150 million of 3.51% Series N Guaranteed Senior Notes due November 30, 2026 (the “3.51% Series N Notes” and, together with the 3.30% Series L Notes and 3.44% Series M Notes, the “Fixed Rate 2017 Private Placement Notes”) and $95 million of Floating Rate Series O Guaranteed Senior Notes due November 30, 2023 (the “Floating Rate 2017 Private Placement Notes”). In June 2021, Wolseley Capital Inc. repaid at par the Floating Rate 2017 Private Placement Notes originally due November 30, 2023.
In June 2015, Wolseley Capital privately placed $800 million aggregated principal private placement notes (collectively, the “2015 Private Placement Notes” and, together with the 2017 Private Placement Notes, the “Private Placement Notes”) guaranteed by the Company pursuant to a note and guarantee agreement dated as at June 25, 2015. The 2015 Private Placement Notes consist of $250 million of 3.43% Series I Guaranteed Senior Notes due September 1, 2022, $400 million of 3.73% Series J Guaranteed Senior Notes due September 1, 2025 and $150 million of 3.83% Series K Guaranteed Senior Notes due September 1, 2027.
In November 2005, Wolseley Capital, privately placed $281 million of 5.32% Series F Guaranteed Senior Notes due November 2020 (the “2005 Private Placement Notes”) guaranteed by the Company pursuant to a note and guarantee agreement dated as at November 16, 2005. The 2005 Private Placement Notes matured on November 16, 2020.
Interest on the Fixed Rate 2017 Private Placement Notes is payable semi-annually on May and November 30 of each year. Interest on the Floating Rate 2017 Private Placement Notes was payable quarterly on February 28, May 30, August 30 and November 30 of each year. Interest on the 2015 Private Placement Notes is payable semi-annually on March and September 1 of each year. Interest on the 2005 Private Placement Notes was payable semi-annually on May and November 15 of each year.
Wolseley Capital’s obligations under the note and guarantee agreements are unconditionally guaranteed by the Company and Ferguson UK Holdings Limited. Wolseley Capital may repay the outstanding Private Placement Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid plus a “make-whole” prepayment premium. Wolseley Capital is also required to consult with noteholders upon a change of control and any consequent proposed amendments to the terms of the outstanding Private Placement Notes and, if no agreement is reached regarding any proposed changes, offer to repurchase the notes at a price equal to 100% of their principal amount plus accrued interest.
The note purchase agreements contain certain customary affirmative covenants, as well as certain customary negative covenants that, among other things, restrict, subject to certain exceptions, the Company’s non-guarantor subsidiaries’ ability to incur indebtedness and the Group’s ability to enter into affiliate transactions, grant liens on its assets, sell assets, or engage in acquisitions, mergers or consolidations. In addition, subject to certain exceptions, the note purchase agreements require us to maintain a leverage ratio as described above.
The outstanding Private Placement Notes contain customary events of default. Upon an event of default and an acceleration of the Private Placement Notes, the Company must repay the outstanding Private Placement Notes plus a make-whole premium and accrued and unpaid interest.
2018 4.5% Notes
In October 2018, Ferguson Finance plc (“Ferguson Finance”) issued $750 million of 4.5% Notes due 2028 (the “2018 4.5% Notes”) fully and unconditionally guaranteed on a direct, unsubordinated and unsecured senior basis by the Company and Ferguson UK Holdings Limited (formerly known as Wolseley Limited). Interest is payable semi-annually on April 24 and October 24, until the 2018 4.5% Notes mature on October 24, 2028. Ferguson Finance may redeem, in whole or in part, the 2018 4.5% Notes (i) at 100% of the principal amount on the notes being redeemed plus a “make-whole” prepayment premium at any time prior to three months before the October 24, 2028 maturity date (the “2018 4.5% Notes Par Call Date”) or (ii) after the 2018 4.5% Notes Par Call Date at 100% of the principal amount of the notes being redeemed plus accrued and unpaid interest on the principal being redeemed. Ferguson Finance, the Company and Ferguson UK Holdings Limited have agreed to covenants, subject to certain exceptions, which include limitations on the granting of liens and on mergers and acquisitions. The 2018 4.5% Notes contain customary events of default and upon an event of default and failure by Ferguson Finance to cure such default or secure a waiver of the default and rescission of acceleration from holders of a majority of the aggregate principal of the 2018 4.5% Notes then outstanding, it must repay the 2018 4.5% Notes plus accrued and unpaid interest.
2020 3.25% Notes
In June 2020, Ferguson Finance issued $600 million of 3.25% Notes due 2030 (the “2020 3.25% Notes” and, together with the 2018 4.5% Notes, the “144A Bonds”) fully and unconditionally guaranteed on a direct, unsubordinated and unsecured senior basis by the Company and Ferguson UK Holdings Limited (formerly known as Wolseley Limited). Interest is payable semi-annually on June 2 and December 2, until the 2020 3.25% Notes mature on June 2, 2030. Ferguson Finance may redeem, in whole or in part, the 2020 3.25% Notes (i) at 100% of the principal amount on the notes being redeemed plus a “make-whole” prepayment premium at any time prior to three months before the June 2, 2030 maturity date (the “2020 3.25% Notes Par Call Date”) or (ii) after the 2020 3.25% Notes Par Call Date at 100% of the principal amount of the notes being redeemed plus accrued and unpaid interest on the principal being redeemed. Ferguson Finance, the Company and Ferguson UK Holdings Limited have agreed to covenants, subject to certain exceptions, which include limitations on the granting of liens and on mergers and acquisitions. The 2020 3.25% Notes contain customary events of default and upon an event of default and failure by Ferguson Finance to cure such default or secure a waiver of the default and rescission of acceleration from holders of a majority of the aggregate principal of the 2020 3.25% Notes then outstanding, it must repay the 2020 3.25% Notes plus accrued and unpaid interest.
As at July 31, 2021, the Group’s borrowings were as follows:
| ||As at July 31, 2021|
| ||$ million|
|Bank overdrafts||183 ||— ||183 |
|Senior unsecured loan notes||— ||2,528 ||2,528 |
|Total||183 ||2,528 ||2,711 |
Bank overdrafts at July 31, 2021 were $183 million. Of this amount, $36 million were part of the Group’s cash pooling arrangements where there is an equal and opposite balance included within cash and cash equivalents. These amounts are subject to a master netting arrangement.
The non-current loan as at July 31, 2021, of $2.5 billion includes a fair value adjustment of $23 million. See note 19 in the consolidated financial statements for further details.
Non-current loans at July 31, 2021 are repayable as follows:
| ||As at July 31,|
| ||$ million|
|Due in one to two years||250 |
|Due in two to three years||55 |
|Due in three to four years||150 |
|Due in four to five years||400 |
|Due in over five years||1,673 |
There have been no significant changes during the year to the Group’s policies on accounting for, valuing and managing the risk of financial instruments.
Our strategy of investing in the development of the Group’s business models is supported by capital expenditure. Capital expenditure totaled $581 million, $653 million and $1.1 billion in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. These investments were primarily for acquisitions and strategic projects to support future growth, such as new distribution centers, distribution hubs, technology, processes and network infrastructure.
| ||Year Ended July 31,|
|Capital Expenditure||$ million|
|Acquisition of businesses (net of cash acquired)||335 ||351 ||657 |
|Purchases of property, plant and equipment||174 ||215 ||382 |
|Purchases of intangible assets||72 ||87 ||36 |
|Total||581 ||653 ||1,075 |
The table below sets forth the Group’s anticipated contractual cash outflows (excluding interest income and income from derivatives), including interest payable in respect of its trade and other payables and bank borrowings on an undiscounted basis as at July 31, 2021.
| ||As at July 31, 2021|
| ||Total||Less than|
|1-3 years||3-5 years||More|
|Contractual Obligations||$ million|
Debt including lease liabilities(a)
|3,595 ||263 ||764 ||786 ||1,782 |
Interest on debt(b)
|728 ||130 ||219 ||172 ||207 |
Trade(c) and other payables(d)
|3,525 ||3,188 ||56 ||37 ||244 |
|Total||7,848 ||3,581 ||1,039 ||995 ||2,233 |
(a)See note 20 to our audited consolidated financial statements for further detail related to debt.
(b)Interest on debt is calculated using the prevailing interest rate at the balance sheet date.
(c)Trade payables are entered into with various vendors in the normal course of business to meet operating needs.
(d)Other payables represent future payments for income taxes, provisions and retirement benefit plans.
The table below summarizes the Group’s cash flow for fiscal 2021, fiscal 2020 and fiscal 2019.
| ||Year ended July 31,|
| ||$ million|
|Net cash generated from operating activities||1,541 ||1,868 ||1,290 |
|Net cash used in investing activities||(172)||(606)||(783)|
|Net cash (used in)/generated from financing activities||(2,085)||(485)||131 |
|Net cash (used)/generated||(716)||777 ||638 |
|Effects of exchange rate changes||1 ||4 ||(10)|
|Cash, cash equivalents and bank overdrafts at the beginning of the year||1,867 ||1,086 ||458 |
|Cash, cash equivalents and bank overdrafts at the end of the year||1,152 ||1,867 ||1,086 |
Cash flows from operating activities
Net cash generated from operating activities was $1.5 billion in fiscal 2021 and $1.9 billion in fiscal 2020. The $327 million, or 17.5%, decrease in cash flow from operating activities in fiscal 2021, compared to fiscal 2020, was principally due to investment in working capital, specifically inventory, to maintain product availability to service our customers during a time of industry supply chain disruption. These decreases were partially offset by an increase in trade payables of $1.0 billion, primarily driven by the current investment in inventory.
Net cash generated from operating activities was $1.9 billion in fiscal 2020 and $1.3 billion in fiscal 2019. The $578 million, or 44.8%, increase in cash flow from operating activities in fiscal 2020, compared to fiscal 2019 was principally a result of the change in presentation of rental costs due to IFRS 16, increasing cash generated from operating activities by $348 million.
Cash flows from investing activities
Net cash used in investing activities was $172 million in fiscal 2021 and $606 million in fiscal 2020. The $434 million, or 71.6%, decrease in cash outflow from investing activities in fiscal 2021, compared to fiscal 2020, was primarily a result of the increased cash from the disposal of businesses of $373 million, primarily due to the sale of the UK business, and reduced spend on purchases of property, plant and equipment of $41 million due to timing of projects.
Net cash used in investing activities was $606 million in fiscal 2020 and $783 million in fiscal 2019. The $177 million, or 22.6%, decrease in cash outflow from investing activities in fiscal 2020, compared to fiscal 2019, was primarily a result of fewer acquisitions, a reduction in cash used of $306 million, and reduced spend on purchases of property, plant and equipment, a reduction in cash used of $167 million, fully offsetting a reduction in cash generated from the disposals of businesses of $194 million.
Cash flows from financing activities
Net cash used in financing activities was $2.1 billion in fiscal 2021 compared to $485 million in fiscal 2020. The $1.6 billion increase in cash used in financing activities was primarily driven by higher dividends paid in fiscal 2021 due to suspension of the interim dividend in fiscal 2020 in light of the COVID-19 pandemic, as well as the special dividend paid in fiscal 2021 in connection with the sale of the UK business. In addition, the Company had $1.2 billion in lower net proceeds from borrowings in 2021, as well as $400 million in share repurchases.
Net cash used in financing activities was $485 million in fiscal 2020 compared to net cash generated from financing activities of $131 million in fiscal 2019. The $616 million decrease in cash provided from financing activities was primarily driven by an increase in Treasury share purchases of $301 million and the change in presentation of lease liability capital payments of $295 million as a result of IFRS 16.
In September 2021, the Company’s Board authorized a program to repurchase up to $1 billion of shares with the aim of completing the purchases within 12 months.
Transfer of Funds to the Company
There are no legal or economic restrictions, including under the agreements governing the Multicurrency Revolving Credit Facility, Trade Receivables Securitization Arrangements, outstanding Private Placement Notes, Bilateral Loan, 2018 4.5% Notes and 2020 3.25% Notes that would limit the ability of subsidiaries to transfer funds to the Company in the form of cash dividends, loans or advances.
Financial Risk Management Policies and Hedging Activities
The Group is exposed to market risks arising from its international operations and the financial instruments which fund them. The main risks arising from the Group’s financial instruments are foreign currency risk, interest rate risk and liquidity risk. The Group has well-defined policies for the management of foreign currency risk, interest rate risk, liquidity risk and counterparty exposures, which have been consistently applied during fiscal 2021, 2020 and 2019. By the nature of its business, the Group also has trade credit and commodity price exposures, the management of which is delegated to the operating businesses. There has been no change since the previous year in the major financial risks faced by the Group.
For a description of our key policies, please refer to note 20 to the audited consolidated financial statements, included in this annual report.
The Group has cash balances deposited for short periods with financial institutions and enters into certain contracts (such as interest rate swaps) which entitle the Group to receive future cash flows from financial institutions. These transactions give rise to credit risk on amounts due from counterparties with a maximum exposure of $1.2 billion. This risk is managed by setting credit and settlement limits for a panel of approved counterparties. The limits are approved by our treasury committee and ratings are monitored regularly.
Critical Accounting Estimates
In applying the Group’s accounting policies, various transactions and balances are valued using estimates or assumptions. Should these estimates or assumptions prove incorrect there may be an impact on the following year’s financial statements. Management believes that the estimates and assumptions that have been applied would not give rise to a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next fiscal year.
Management has exercised judgment in evaluating the impact of the COVID-19 pandemic on the financial statements. Management assessed areas relevant for the Group which had the potential to be impacted such as: expected credit losses; inventory impairment; goodwill; intangible and tangible asset impairment; and deferred tax asset recognition. Management have concluded there was no material negative impact in these areas and no new sources of estimation uncertainty.
Our most significant accounting policies, including Revenue Recognition and Inventories, are described in note 1 “Accounting policies” to the audited consolidated financial statements. Some of those significant accounting policies require management to make difficult, subjective, or complex judgments, or estimates. Our most critical accounting estimates, include the following:
•Leases: the determination of whether extension and termination options are reasonably certain to be exercised.
•Pensions and other post-retirement benefits: the selection of the bonds to include when determining the discount rate.
CResearch and Development, Patents and Licenses, Etc.
For a discussion of trend information, see “A. Operating Results—Key factors affecting results of operations.”
We will transition from IFRS to U.S. GAAP and will report our consolidated financial statements under U.S. GAAP for the periods beginning on and after August 1, 2021. There have been and there may in the future be certain significant differences between U.S. GAAP and IFRS, including differences related to lease accounting, share-based compensation expense, pension costs, goodwill and income tax. As a result, our financial information and reported earnings for future periods within a fiscal year or any interim period could be significantly different when prepared in accordance with U.S. GAAP.
See “Item 3. Key Information - D. Risk Factors” related to risks of this transition, as well as the ability to compare financial data reported under U.S. GAAP with historical data reported under IFRS.
EOff-Balance Sheet Arrangements
FTabular Disclosure of Contractual Obligations
For a discussion of contractual obligations, see “—B. Liquidity and Capital Resources—Contractual obligations.”
Item 6. Directors, Senior Management and Employees
A Directors and Senior Management
The following table lists the names and positions of each member of the Board.
|Kevin Murphy||Group Chief Executive and Executive Director|
|Bill Brundage||Group Chief Financial Officer and Executive Director|
|Alan Murray||Senior Independent Non-Executive Director and Employee Engagement Director|
|Kelly Baker||Independent Non-Executive Director|
|Tessa Bamford||Independent Non-Executive Director|
|Cathy Halligan||Independent Non-Executive Director|
|Brian May||Independent Non-Executive Director|
|Tom Schmitt||Independent Non-Executive Director|
|Nadia Shouraboura||Independent Non-Executive Director|
|Jacky Simmonds||Independent Non-Executive Director|
|Suzanne Wood||Independent Non-Executive Director|
Biographical information for each member of the Board is set forth below.
Geoff Drabble, Chairman. Mr. Drabble was appointed as Non-Executive Director in May 2019 and as Chairman in November 2019. Mr. Drabble has extensive leadership experience in the distribution, technology and manufacturing sectors, and has a deep knowledge of United States markets and operating conditions. He served as Chief Executive of Ashtead Group plc, a FTSE 100 industrial equipment rental company, for 12 years during which he presided over a period of unprecedented growth in the business and was instrumental in creating a strong culture. He was previously an executive director of The Laird Group plc, where he was responsible for its Building Products division, and held a number of senior management positions at Black & Decker. Mr. Drabble currently serves as non-executive director at Howden Joinery Group plc and as Chairman at DS Smith Plc.
Kevin Murphy, Group Chief Executive and Executive Director. Mr. Murphy was appointed as Executive Director in August 2017 and Group Chief Executive in November 2019. Mr. Murphy is a culture champion with strong executive leadership skills, and has deep Group and industry knowledge and strategic operational experience. Mr. Murphy has significant experience in strategic development and delivering operational performance improvements. Mr. Murphy joined Ferguson in 1999 as an operations manager following the acquisition of his family’s business, Midwest Pipe and Supply. Prior to his appointment as Group Chief Executive, he held a number of leadership positions in the Group’s Waterworks division and was Chief Operating Officer of Ferguson Enterprises from 2007 to 2017. He was Chief Executive Officer, USA from 2017 until his appointment as Group Chief Executive in 2019. Since Mr. Murphy’s appointment to the Board in 2017, the business has generated strong, profitable growth and continued to take market share under his leadership.
Bill Brundage, Group Chief Financial Officer and Executive Director. Mr. Brundage was appointed Group Chief Financial Officer and Executive Director in November 2020. Mr. Brundage has considerable financial management and operational experience and significant Group and industry knowledge. Mr. Brundage is a certified public accountant with extensive Group experience. Mr. Brundage joined Ferguson in 2003 as manager of Finance and was promoted to Corporate Controller two years later. In 2008, he was promoted to Vice President of Finance, a position he held until his promotion to Senior Vice President of Finance in 2016. Mr. Brundage was then appointed as Chief Financial Officer for Ferguson Enterprises, the U.S. business, in 2017. Previously, Mr. Brundage spent five years at PricewaterhouseCoopers in the United States as a senior associate.
Alan Murray, Senior Independent Non-Executive Director and Employee Engagement Director. Mr. Murray was appointed as Independent Non-Executive Director in January 2013, as Senior Independent Non-Executive Director in October 2013 and as Employee Engagement Director in March 2019. Mr. Murray has considerable international operational and financial experience and extensive executive management experience within global businesses. He is a qualified chartered management accountant with extensive business leadership skills, executive and board experience and global business and financial reporting expertise. From 2002 to 2007, Mr. Murray served as Group Chief Executive of Hanson plc, where he had previously served as Finance Director and Chief Executive of Hanson Building Materials America. He served on the Management Board and Supervisory Board of HeidelbergCement AG and as a non-executive director of International Power plc. Currently, Mr. Murray serves as non-executive director at O-I Glass, Inc.
Kelly Baker, Independent Non-Executive Director. Ms. Baker was appointed as Independent Non-Executive Director in May 2021. Ms. Baker has extensive human resources and operational experience, as well as wide-ranging international business and functional experience. She has led the people, organizational and cultural development across a number of U.S. based, global public companies. Ms. Baker spent over 20 years with General Mills Inc., in a variety of roles including Vice President (“VP”) of HR U.S. Retail and Marketing, VP of HR Corporate Groups and VP of Diversity and Inclusion. She served as Executive Vice President and Chief Human Resources Officer at Patterson Companies Inc. between 2016 and 2017 and at Pentair plc from 2017 to 2021. Currently Ms. Baker is Executive Vice President and Chief Human Resources Officer at Thrivent Financial for Lutherans.
Tessa Bamford, Independent Non-Executive Director. Ms. Bamford was appointed as Independent Non-Executive Director in March 2011. Ms. Bamford has broad business knowledge and extensive boardroom and City of London experience. She has held senior advisory roles in both the United Kingdom and United States across a range of sectors. She held a variety of roles, including corporate finance, at J Henry Schroder & Co and Barclays de Zoete Wedd. She was a founder and director of Cantos Communications and a non-executive director of Barratt Developments plc. Currently, Ms. Bamford is a partner at Spencer Stuart, a leading global search and leadership consulting firm.
Cathy Halligan, Independent Non-Executive Director. Ms. Halligan was appointed as Independent Non-Executive Director in January 2019. Ms. Halligan is an experienced senior executive with extensive board, digital transformation, digital commerce, data analytics and marketing experience. She has a strong track record in the retail, e-commerce and multi-channel arenas, and has served as the Chief Marketing Officer at Walmart.com and the SVP Sales and Marketing at PowerReviews. In addition, Ms. Halligan has held senior marketing and internet roles at retailer Williams-Sonoma Inc., where she was responsible for leading efforts to launch its brands, such as Pottery Barn, on the web. She was an independent director at Wilton Brands from 2016 to 2018 and a non-executive director at FLIR Systems, Inc. from 2014 to 2021. Currently, Ms. Halligan serves as non-executive director at Driven Brands, Inc. and Ulta Beauty, Inc.
Brian May, Independent Non-Executive Director. Mr. May was appointed as Independent Non-Executive Director in January 2021. Mr. May has considerable financial and operational experience and extensive industry expertise. He is a qualified chartered accountant. His career started at KPMG and followed with a 27-year career at Bunzl plc, where he held a number of roles across the Treasury and Internal Audit functions. He was Divisional Finance Director of Bunzl’s UK, Europe and Australasia division for nine years and then served as Chief Financial Officer for 14 years until his retirement in late 2019.
From 2012 to 2021, Mr. May served as non-executive director at United Utilities Group PLC. Currently, Mr. May serves as a non-executive director at ConvaTec Group plc.
Tom Schmitt, Independent Non-Executive Director. Mr. Schmitt was appointed as Independent Non-Executive Director in February 2019. Mr. Schmitt has significant operational experience and extensive knowledge of United States and international logistics and supply chain businesses. He is an experienced Chief Executive Officer with significant first-hand leadership experience of the markets in which the Group operates and a track record of driving accelerated profitable growth and promoting integrity, transparency and values-based leadership. Mr. Schmitt’s career started at BP and McKinsey and has encompassed leadership roles at FedEx, AquaTerra Corporation and Schenker AG. He served as a non-executive director of Zooplus AG from 2013 to 2016. Currently, Mr. Schmitt serves as Chairman and Chief Executive Officer of Forward Air Corporation, Inc.
Nadia Shouraboura, Independent Non-Executive Director. Ms. Shouraboura was appointed as Independent Non-Executive Director in July 2017. Ms. Shouraboura has considerable expertise in running complex logistics and supply chain activities, and has extensive experience of cutting edge technology and e-commerce. She has substantial experience of the consumer and technology sectors. Ms. Shouraboura was a Vice President at Amazon.com, Inc. and held management positions at Exelon Power Team, Diamond Management and Starlight Multimedia Inc. She held board level positions at Hointer Inc. and Cimpress N.V. Currently, Ms. Shouraboura is a member of the Supervisory Board of X5 Retail Group N.V. and serves as a non-executive director at Mobile TeleSystems Public Joint Stock Company and Ocado Group plc.
Jacky Simmonds, Independent Non-Executive Director. Ms. Simmonds was appointed as Independent Non-Executive Director in May 2014. Ms. Simmonds has extensive experience in executive remuneration and human resources within large international businesses, and significant knowledge of talent management and employee engagement. She has experience across a number of sectors. Ms. Simmonds has worked as a HR Director in a number of different consumer facing businesses, including VEON ltd, easyJet plc and TUI Travel plc. She was a member of the Supervisory Board of TUI Deutschland, GmbH and a Director of PEAK Adventure Travel Group Limited. Currently, Ms. Simmonds serves as Chief People Officer of Experian plc.
Suzanne Wood, Independent Non-Executive Director. Ms. Wood was appointed as Independent Non-Executive Director in January 2021. Ms. Wood has significant financial and operational knowledge and extensive public company experience. Ms. Wood is a chartered accountant and an experienced Chief Financial Officer. Ms. Wood’s career started at PriceWaterhouse LLP and has encompassed Chief Financial Officer roles at Oakwood Homes Corporation and Tultex Corporation. Ms. Wood most recently served as Chief Financial Officer of Ashtead Group plc for six years after having joined Ashtead in 2003 as Chief Financial Officer of Sunbelt Rentals, Ashtead’s largest operating brand in the United States. Currently, Ms. Wood is Senior Vice President and Chief Financial Officer of Vulcan Materials Company and serves as a non-executive director at RELX PLC.
The following table lists the names and positions of the Senior Management:
|Kevin Murphy||Group Chief Executive and Executive Director|
|Bill Brundage||Group Chief Financial Officer and Executive Director|
|Ian Graham||Group General Counsel|
|Sammie Long||Chief Human Resources Officer|
|Mike Sajor||Group Chief Information Officer|
Biographical information for each Senior Manager (other than Kevin Murphy and Bill Brundage, our Executive Directors) is set forth below.
Ian Graham, Group General Counsel. Mr. Graham joined the Group as Group General Counsel in May 2019. He was most recently Senior Vice President, General Counsel and Secretary for BAE Systems, Inc. Prior to that he held senior roles at EMCORE Corporation, UUNET Technologies, Jenner & Block LLP and McKenna & Cuneo LLP.
Sammie Long, Chief Human Resources Officer. Ms. Long was appointed Chief Human Resources Officer in 2017. Before joining the Group, Ms. Long was Chief Human Resources Officer for the Kellogg Company. Prior to her 14-year career in human resources at Kellogg, Ms. Long held human resources positions at Sharp Electronics UK Ltd and Fujitsu Services Europe.
Mike Sajor, Group Chief Information Officer. Mr. Sajor joined the Group as Group Chief Information Officer in January 2018. He was most recently Senior Vice President and Global Chief Information Officer for Apollo Education Group. Mr. Sajor has previously led large IT programs for Ann Inc. (parent company of Ann Taylor/Loft), Merck & Company, Bell Laboratories, AT&T and Lucent Technologies.
The business address for each of our directors and senior management is 1020 Eskdale Road, Winnersh Triangle, Wokingham, Berkshire, RG41 5TS United Kingdom.
For fiscal 2021, the total compensation paid to the Company’s non-executive directors, executive directors and senior management as a group was $23.5 million. The total amounts set aside or accrued by the Company to provide pension, retirement or similar benefits for this group was $0.9 million.
Remuneration of Non-Executive Directors
The remuneration of the Company’s Non-Executive Directors is set by the Board with account taken of the time and responsibility involved in each role, including, where applicable, the Chairmanship of Board Committees. A summary of the annualized fees for fiscal 2021 is as follows:
|Non-Executive Director Base Fee||71.5|
|Senior Independent Director||21.0|
|Chair of Audit Committee||21.0|
|Chair of Remuneration Committee||21.0|
|Employee Engagement Director||10.2|
(1)All increases to Non-Executive Director and Chairman fees from the prior financial year were broadly in line with the average salary increase awarded to the general workforce.
(2)The Non-Executive Directors (including the Chairman) also have the benefit of a travel allowance of £2,500 (each way), where there would be a need for intercontinental flight in excess of five hours (one way) based on the home location of the Non-Executive Director or Chairman and the location of the Board (or Committee) meeting, up to a maximum of £30,000 per annum.
The following table sets out the aggregate remuneration received by each Non-Executive Director for fiscal 2021:
|Travel Allowance (£000) 2020/21|
Chairman and Non-Executive Directors(3)