As filed with the U.S. Securities and Exchange Commission on February 12, 2021.

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

 

☒	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

☐	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended                     

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

☐	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:

 

 

Ferguson plc

(Exact name of registrant as specified in its charter)

 

 

N/A

(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)

Kevin Murphy

Group Chief Executive Officer

Ferguson plc

c/o 1020 Eskdale Road, Winnersh Triangle, Wokingham,

Berkshire, RG41 5TS. United Kingdom +44 (0) 118 927 3800

investor@fergusonplc.com

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Copies to:

Sophia Hudson, P.C.

Aaron M. Schleicher

Kirkland & Ellis LLP

601 Lexington Avenue

New York, New York 10022

(212) 446-4800

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		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 the date of this registration statement, the Registrant had 225,048,626 ordinary shares issued and outstanding.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐  No  ☒

If this 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

 

				Page
PART I					1
Item 1.		Identity of Directors, Senior Management and Advisers			1
Item 2.		Offer Statistics and Expected Timetable			2
Item 3.		Key Information			2
Item 4.		Information on the Company			24
Item 4A.		Unresolved Staff Comments			29
Item 5.		Operating and Financial Review and Prospects			29
Item 6.		Directors, Senior Management and Employees			47
Item 7.		Major Shareholders and Related Party Transactions			63
Item 8.		Financial Information			64
Item 9.		The Offer and Listing			65
Item 10.		Additional Information			66
Item 11.		Quantitative and Qualitative Disclosures about Market Risk			85
Item 12.		Description of Securities Other Than Equity Securities			85
PART II					85
Item 13.		Defaults, Dividend Arrearages and Delinquencies			85
Item 14.		Material Modifications to the Rights of Security Holders and Use of Proceeds			85
Item 15.		Controls and Procedures			85
Item 16.		[Reserved]			86
Item 16A.		Audit Committee Financial Expert			86
Item 16B.		Code of Ethics			86
Item 16C.		Principal Accountant Fees and Services			86
Item 16D.		Exemptions from the Listing Standards for Audit Committees			86
Item 16E.		Purchase of Equity Securities by Issuer & Affiliated Purchasers			86
Item 16F.		Change in Registrant’s Certifying Accountant			86
Item 16G.		Corporate Governance			86
Item 16H.		Mine Safety Disclosure			86
PART III					86
Item 17.		Financial Statements			86
Item 18.		Financial Statements			87
Item 19.		Exhibits			87

 

i

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

General

We have included in this registration statement the Group’s audited consolidated financial statements as of July 31, 2020 and 2019, and for the years ended July 31, 2020, 2019 and 2018. The Group’s audited consolidated financial statements included herein and the accompanying notes thereto have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). We end our fiscal year on July 31. References to fiscal 2020, fiscal 2019 and fiscal 2018 refer to the years ended July 31, 2020, 2019 and 2018, respectively.

Segments

As of July 31, 2020, the Group has three reportable segments: United States of America (“United States”), United Kingdom 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 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. For the years ended July 31, 2019 and 2018, Canada and Central Europe were combined and disclosed as Canada and Central Europe as individually they did not meet the operating segments quantitative thresholds set out in IFRS 8 “Operating Segments.” References to Canada for fiscal 2019 and 2018 refer to Canada and Central Europe.

On January 30, 2019, the Group disposed of Wasco (its Netherlands B2B business), which was the last of its Central European businesses. Due to its size, Wasco does not meet the criteria in IFRS 5 to be classified as a discontinued operation and is therefore included in the results of the continuing operations for all periods presented in this registration statement through the date of disposition. On January 29, 2021, the Group sold its United Kingdom operations for net cash consideration of approximately $420 million. Accordingly, the Group’s United Kingdom operations will be presented in the Group’s historical financial statements as a discontinued operation in accordance with IFRS 5, and the Group now operates two segments: the United States and Canada. In connection with the sale, the Group retained future responsibility for the United Kingdom defined benefit pension scheme, the Group’s main defined benefit plan in the United Kingdom, which is referred to throughout this registration statement as the “United Kingdom Plan.”

Certain References

References in this registration statement to “Ferguson,” “Group,” “we,” “us” and “our” each refer to Ferguson plc and its subsidiaries. References to the “Company” are to Ferguson plc.

 

ii

FORWARD-LOOKING STATEMENTS

Certain information included in this registration statement is forward-looking 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, our future operating or financial results, global and regional economic and political conditions, 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,” “plans,” “projects,” “goal,” “target,” “aim,” “may,” “will,” “would,” “could” or “should” or, in each case, their negative or other variations or comparable terminology. Forward-looking statements are not guarantees of future performance. All forward-looking statements in this registration statement are based upon information known to us on the date of this registration statement. Accordingly, no assurance can be given that any particular expectation will be met and readers are cautioned not to place undue reliance on forward-looking statements, which speak only at their respective dates. Although we believe that the forward-looking statements contained in this registration statement 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, for example caused by the COVID-19 virus pandemic, potential tariffs or a global trade war;

 

•

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;

 

•

a failure of a key information technology system or process as well as exposure to fraud or theft resulting from payment-related risks;

 

•

privacy and protection of user data failures;

 

•

fluctuations in foreign currency and inflation, fluctuating commodity prices, unexpected product shortages as well as ineffectiveness of or disruption to our domestic or international supply chain or the fulfillment network;

 

•

inherent risks associated with acquisitions, partnerships, joint ventures, demergers and other business combinations, dispositions or strategic transactions and unsuccessful execution of our operational strategies;

 

•

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;

 

•

exposure of associates, contractors, customers, suppliers and other individuals to health and safety risks;

 

•

legal proceedings as well as failure to comply with domestic and foreign laws and regulations or the occurrence of unforeseen developments such as litigation;

 

•

failure to attract, retain and motivate key associates;

 

•

changes in, or interpretations of, tax legislation in the United States, the United Kingdom, Switzerland or Canada;

 

•

inability to renew leases on favorable terms or at all as well as any obligation under the applicable lease;

 

iii

•

funding risks related to our defined benefit pension schemes; and

 

•

our indebtedness and changes in our credit ratings and outlook.

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.

 

iv

PART I

 

Item 1.

Identity of Directors, Senior Management and Advisers

 

A

Directors and Senior Management

Directors

The following table sets forth the names and positions of the members of our Board as of the date of this registration statement. The business address of all directors is: 1020 Eskdale Road, Winnersh Triangle, Wokingham, Berkshire. RG41 5TS. United Kingdom.

 

Name		Position
Geoff Drabble		Chairman
Kevin Murphy		Group Chief Executive and Executive Director
Bill Brundage		Group Chief Financial Officer and Executive Director
Alan Murray		Senior 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

Senior Management

The following table sets forth the names and positions of members of our senior management team as of the date of this registration statement. The business address for all members of senior management is: 1020 Eskdale Road, Winnersh Triangle, Wokingham, Berkshire. RG41 5TS. United Kingdom.

 

Name		Position
Kevin Murphy		Group Chief Executive
Bill Brundage		Group Chief Financial Officer
Ian Graham		Group General Counsel
Sammie Long		Chief Human Resources Officer
Mike Sajor		Group Chief Information Officer

 

B

Advisors

Our external legal advisers are Kirkland & Ellis LLP, Freshfields Bruckhaus Deringer LLP and Carey Olsen Jersey LLP.

Kirkland & Ellis LLP’s address is 601 Lexington Ave, New York, NY 10022.

Freshfields Bruckhaus Deringer LLP’s address is 100 Bishopsgate, London EC2P 2SR, United Kingdom.

Carey Olsen Jersey LLP’s address is 47 Esplanade, St. Helier, Jersey JE1 0BD, Channel Islands.

 

C

Auditors

The Group’s auditor is Deloitte LLP (“Deloitte”), with its registered office at 1 New Street Square, London EC4A 3HQ, United Kingdom. Deloitte is an independent registered public accounting firm, registered with the Public Company Accounting Oversight Board (United States).

 

1

Item 2.

Offer Statistics and Expected Timetable

Not applicable.

 

Item 3.

Key Information

 

A

Selected Financial Data

The following tables present selected historical financial data for the Group. The balance sheet financial data as at July 31, 2020 and 2019, and the income statement financial data for the years ended July 31, 2020, 2019 and 2018, in each case as set forth below, has been derived from the Group’s audited consolidated financial statements included by reference in this registration statement. The balance sheet financial data as at July 31, 2018, as set forth below, has been derived from the Group’s unaudited consolidated financial statements, not included in this registration statement and have been prepared on the same basis as our audited consolidated financial statements. The financial data as at and for the years ended July 31, 2017 and 2016, as set forth below, has been derived from the Group’s unaudited accounting records not included in this registration statement.

Income Statement

 

		Year ended July 31,
		2020				2019				2018				Restated(1) 2017				Restated(1) 2016
		$ millions (except per share amounts)
Revenue			21,819				22,010				20,752				19,284				18,325
Operating profit			1,422				1,402				1,360				1,478				1,050
Profit from continuing operations			954				1,061				841				1,053				672
Profit for the year attributable to shareholders of the Company			961				1,108				1,267				920				831
Basic earnings per share from continuing operations			4.24				4.61				3.42				4.19				2.65
Diluted earnings per share from continuing operations(2)			4.20				4.58				3.40				4.16				2.63
Basic earnings per share from continuing and discontinued operations			4.28				4.81				5.16				3.66				3.28
Diluted earnings per share from continuing and discontinued operations			4.24				4.78				5.12				3.64				3.26
Weighted average number of ordinary shares, in millions			224.8				230.2				245.7				251.3				253.5
Diluted weighted average number of ordinary shares, in millions(2)			226.9				231.9				247.5				253.1				255.1
Ordinary dividend per share			2.08				2.08				1.89				1.56				1.32

Balance Sheet

 

		Year ended July 31,
		2020				2019				2018				Restated(1) 2017				Restated(1) 2016
		$ millions
Total assets			13,456				11,386				10,149				12,557				10,781
Net assets			4,371				4,350				4,057				4,540				3,837
Working capital(3)			3,308				3,013				2,437				2,301				2,169
Equity attributable to shareholders of the Company			4,371				4,350				4,058				4,543				3,840

 

(1)	The financial data as at and for the years ended July 31, 2017 and 2016 have been restated as a result of a change in the Group’s presentation currency from pounds sterling to U.S. dollars.

 

2

(2)	The weighted average number of ordinary shares in issue during the year, excluding those held by Employee Benefit Trusts and those held by the Company as Treasury Shares. Adjusted for the impact of all potentially dilutive share options on weighted average number of ordinary shares.

(3)	Working capital is defined as current assets less current liabilities.

 

B

Capitalization and Indebtedness

The following table presents the Group’s cash and cash equivalents and capitalization as at July 31, 2020.

 

		At July 31, 2020
		$ millions
Cash and cash equivalents(1)			2,115
Borrowings:
Bank loans and overdrafts(2)			3,166
Total borrowings			3,166
Equity:
Share capital			30
Share premium			9
Reserves			4,332
Total Equity			4,371
Total capitalization			7,537

 

(1)	Cash and cash equivalents at December 31, 2020 was $2,422 million.

(2)	Bank loans and overdrafts at December 31, 2020 was $3,823 million.

Except as indicated above regarding cash and cash equivalents and bank loans and overdrafts, no material changes have occurred with respect to the Group’s cash and cash equivalents and capitalizations since July 31, 2020.

 

C

Reasons for the Offer and Use of Proceeds

Not applicable.

 

D

Risk Factors

In addition to the other information contained in this registration statement, 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 Group. If any of the possible events described below were to occur, the business, financial condition and results of operations of the Group 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 registration statement 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 registration statement.

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

 

3

in gross domestic product in the geographic markets in which we operate, particularly in the United States where we generated 86% of our revenue for fiscal 2020. Following completion of the sale of our United Kingdom operations on January 29, 2021, our exposure to the United States markets has further increased. 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 delay purchasing decisions or construction contracts, 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, including mortgages, home equity loans and consumer credit, changes in tax laws affecting the real estate industry, weather, cyber-based attacks or network security breaches, natural disasters, acts of terrorism, global pandemics, such as the COVID-19 pandemic, and international trade tensions, could have a material adverse effect on our business, financial condition, results of operations and/or prospects.

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 under-performing branches and/or showrooms from time to time as warranted by general economic conditions and/or weakness in the industries in which we operate. Such closures could have a material adverse effect on our business, financial condition, results of operations and/or prospects.

The COVID-19 pandemic has had an adverse impact 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. The COVID-19 virus has spread from China to many other countries including the United States and Canada, with the number of reported cases and related deaths increasing daily and, in many countries, at a very rapid pace.

Many governments, including in the United States and Canada, imposed stringent restrictions to seek to mitigate, or slow down, 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.” The duration of such measures is highly uncertain, but could be prolonged, and stricter measures may still be put in place or reintroduced in areas where such measures have very recently started to be gradually eased.

The COVID-19 pandemic may negatively impact our supply chain. In China, which is a key market for the sourcing of own-brand products, the government imposed stringent restrictions to businesses in February 2020 to slow down the spread of COVID-19, including restrictions on travel, participation in business meetings and the closure of shops. While the Chinese government has in the interim tentatively permitted some businesses to reopen, ongoing lockdowns in other regions, such as the United States and Canada, may continue to negatively impact our supply chain. Furthermore, we are adversely impacted by production lags and low inventory replenishment expectations of manufacturers resulting from the closures and overall economic slowdown, as well as uncertainty of potential future closures due to political pressure or decisions, or if the pandemic does not continue to ease.

 

4

The COVID-19 pandemic and related counter-measures have had and may continue to have an adverse effect on the Group’s results of operations. For example, our operations for the second half of fiscal 2020 were affected by the COVID-19 pandemic and the counter measures taken globally. The duration and extent of the counter measures taken in response to the COVID-19 pandemic, especially in the United States, will affect the extent of the future impact on our operating results.

As a result of government measures, the Group was required to close a number of showrooms in the United States, as they did not, in certain states, qualify as providing essential services. In addition, with the continued spread of the COVID-19 virus, we voluntarily closed showrooms in other locations and have moved to virtual consultation with our customers. Our counter locations remain open, as they have been deemed to provide essential services, but we have also shifted to a model where customers submit orders online or via telephone and visit our stores for pick up. In certain locations, we have closed stores due to a decrease in demand, and we have had to shift certain store support operations to remote or virtual. We may deem it appropriate or advisable to take further similar or additional actions in the future. Our distribution centers have not been affected by closures to date, but any change in the approach in respect of the government measures could result in the Group having to close distribution centers as well and could result in a decline of revenue. We re-opened showrooms by mid-June and are allowing customers back into our locations with appropriate protective measures in place as government measures are eased. However, the process of reopening will be a phased approach and implementing social distancing to keep employee and customer density down in our stores and other spaces may adversely affect sales volumes.

The COVID-19 pandemic has also negatively affected our workforce. Due to measures implemented by the Group and the governments in the Group’s most significant markets to protect the health and safety of employees, whom we call associates, some of our associates may in the future become unavailable, which may disrupt our operations. In order to protect our liquidity and cashflow, we have implemented a hiring freeze, a reduction in associate hours, overtime and the use of temporary staff, as well as temporary lay-offs in the worst hit regions in response to the COVID-19 virus. Globally, consumer behavior has also been affected by the COVID-19 virus, resulting in decreased customer demand, delayed payments by customers and increased impairments of receivables.

The spread of COVID-19 also caused us to modify other business practices to preserve our liquidity and cash flow position. For example, we paused current merger and acquisition activity, withdrew the interim dividend due for payment in April 2020 and suspended our $500 million share buyback program announced in February 2020. We have since reinstated our merger and acquisition activity and declared a final dividend for the year ended July 31, 2020 of 208.2 cents, which effectively reinstates the previously withdrawn interim dividend and is in line with last year’s total dividend. However, in light of continued economic uncertainty, the share buyback program remains suspended and will continue to be assessed as we gain further clarity on economic conditions.

In late February 2020, the COVID-19 pandemic caused financial markets globally to experience significant decline and volatility. In March 2020, the COVID-19 pandemic, coupled with a sharp material decline in oil prices, caused financial markets globally to experience further material declines and elevated volatility, signaling a likely economic downturn and adverse impact on Gross Domestic Product (“GDP”), as well as broader economic conditions, including in the United States. There is no assurance that the responses from central banks (which include reductions in interest rates and liquidity support) and financial support and fiscal spending by certain governments will be sufficient to support the United States or other economies or that financial markets will return to normal. The effects of the COVID-19 pandemic on the financial markets may materially and adversely affect our access to capital, cost of capital and credit ratings. In that event, there is no guarantee that debt or equity financings will be available in the future to fund our obligations, or that they will be available on terms consistent with our expectations.

There is significant uncertainty relating to the potential effect of the COVID-19 pandemic on our business. In addition to the factors mentioned above, the COVID-19 pandemic may also give rise to disruptions to our

 

5

information technology system, increased cyber-attacks, higher volatility in foreign currency and inflation and changes in relevant tax laws. 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 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 Group’s subsidiaries. Any of the factors above could have a material adverse effect on the Group’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 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, results of operations and/or prospects. In addition, such competitors may use aggressive pricing and marketing tactics and devote substantially more financial resources to website and system development (as well as to paid search marketing) 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 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 consolidation could cause the industries to become more competitive as greater economies of scale are achieved by competitors, or as competitors with new lower cost transactional business models are able to operate with lower prices. 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. To this end, we have embedded a dedicated team and increased resources for the purpose of the exploration and incubation of new business models and new technologies, as well as having acquired a number of online businesses over the last several years. 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

 

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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 also need to 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. Our corporate venture capital and strategic partnering arm, Ferguson Ventures, is continuing to help discover, invest in and partner with technology companies and start-ups to, among other things, help address industry problems, including the shortage of skilled trade professionals and the need for improved construction productivity.

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, or the initiatives might fail altogether, each of which could adversely impact our competitive position and our financial condition, results of operations, or 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. For example, for fiscal 2020, the Group’s businesses operating in the RMI markets in the United States, United Kingdom and Canada generated 59%, 64% and 57% of the total revenue for each segment.

In addition, economic weakness 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. As a result of the COVID-19 pandemic, LIRA projections for fiscal 2021 are expected to grow modestly, but decelerate through the year. 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

 

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index score above 50 indicates growth. While the AIA Billings Index averaged above 50 throughout fiscal 2019, dipping below 50 in only two months during that year, the index score has dipped below 50 for 11 out of the last 17 months since July 2019, with the most recent reading of 42.6 in December 2020.

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; cyber-attacks, 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.

If we are unable to protect our information systems against data corruption, cyber-attacks 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. Cyber-attacks and security breaches may include, but are not limited to, attempts to access information, computer viruses, 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 cyber-attacks such as DNS attacks, wireless network attacks, viruses and worms, malicious software, 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 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

 

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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 the Group’s 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, results of operations and/or prospects.

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, 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. The COVID-19 pandemic may also cause an extended period of remote work arrangements which 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 liquidity, financial condition and the operating results of our business.

Fluctuating commodity prices, as well as unexpected product shortages, may adversely affect the Group’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. Volatility in prices has increased in recent months 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 such fluctuations may often depend on market conditions, our fixed costs and other factors. In the event circumstances require us to adapt our product prices and operational strategies to reflect fluctuating commodity prices, there can be no assurance that such adaptations will be effective and a failure to successfully adapt could, for example, result in write-downs of inventories which could have a material adverse effect on our business, financial condition, results of operations and/or prospects.

Acquisitions, partnerships, joint ventures, demergers, 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 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 2020, 2019 and 2018, we completed a total of 6, 15 and 13 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

 

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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 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 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.

Execution of our operational strategies could prove unsuccessful, which could have a material adverse effect on our business, financial condition, results of operations and/or prospects.

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 significant adverse effect on our business.

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 39,000 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 restraints, 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

 

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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, results of operations and/or prospects.

The recent 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, have impacted and may continue to impact suppliers and manufacturers of certain of our products. This may make 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.

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.

Fluctuations in foreign currency and inflation may have an adverse effect on reported results of operations.

Our exposure to fluctuations in foreign currency rates results primarily from the translation exposure associated with the preparation of the Group’s financial statements, as well as from transaction exposure associated with transactions in currencies other than an entity’s functional currency. Up until the end of our 2017 fiscal year, the Group reported its results in pounds sterling and its main currency exposure arose on the translation of the U.S. dollar and, to a lesser extent, Canadian dollar earnings into pounds sterling. From the beginning of fiscal 2018 onwards, the Group has presented its audited consolidated financial statements in U.S. dollars and, as the majority of revenue is generated in U.S. dollars, the impact of foreign exchange rate movements has been reduced. For the 2020 fiscal year, we received 86% of our revenue in U.S. dollars and the remaining 14% in other currencies, which we then translated into U.S. dollars for financial reporting purposes.

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 prior to the sale of our United Kingdom operations, pounds sterling), 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. Following the completion of the sale of our United Kingdom operations, 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 has increased in recent months due in part to the impact of the COVID-19 pandemic on the global economy. Fluctuations in foreign currency exchange rates could affect the Group’s results of operations and impact reported net sales and net earnings.

 

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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 revenue 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.

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), which can lead to loss of life or severe injuries. 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 employer 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 $72 million on our balance sheet as at July 31, 2020. 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

 

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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 Group’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 Group’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 Group’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 product liability 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, results of operations and/or prospects.

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.

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. 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.

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 Group to raise capital on acceptable terms, impact the ability to obtain adequate financing and result in higher interest costs on future financings.

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 Group develops new business models and new ways of working, it needs to develop suitable skill sets within the organization. Furthermore, as the Group continues to execute strategic change programs, including corporate migrations, it is important that existing skill sets and talent are retained. Failure to do so could delay the execution of strategic change programs, result in loss of institutional knowledge and reduce the Group’s supply of future management skill.

 

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We customarily negotiate 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 Group’s business, financial condition and/or results of operations.

Furthermore, the Group’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. We face significant competition in attracting and retaining skilled personnel, such as personnel with technical skills, so we may be unsuccessful in attracting and retaining the personnel required to conduct and expand our operations and, in particular, develop our technology and grow our online presence, which could have a negative effect on our business, financial condition, results of operations and/or prospects.

Our workforce constitutes a significant proportion of our cost base. Any inflationary pressures, as well as changes in applicable laws and regulations or other factors resulting in increased labor costs, could have a material adverse effect on our business, financial condition, results of operations and/or prospects.

As a result of the outbreak of the COVID-19 pandemic, several governments around the world have imposed restrictions to help avoid, or slow down, the spread of COVID-19, including restrictions on international and local travel, public gatherings and participation in business meetings, as well as closures of universities, schools, stores and restaurants. These restrictions could negatively impact our workforce. 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.

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, South Korea and Vietnam. 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 cyber security 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

 

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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 financial condition, results of operations and cash flows.

Regulation in the areas of privacy and protection of user data could harm our business.

In the course of our business, we receive and store a large volume of personal information. This information is increasingly subject to legislation and regulations related to privacy, data protection, and information security in numerous jurisdictions around the world. For example, in the United States, due to the absence of overarching federal law, there is a patchwork of privacy legislation formed by individual state laws. Illustrative of this point is the California Consumer Privacy Act 2018 (the “CCPA”), which came into effect in January 2020 with an enforcement date of July 1, 2020. The CCPA 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 duties (including certain notice obligations). Businesses 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.

Similarly, the European Union’s General Data Protection Regulation (the “GDPR”) came into effect on May 25, 2018. The GDPR was implemented into laws enforceable in the UK by the Data Protection Act 2018. The UK formally left the EU on January 31, 2020 and following the end of the UK’s transition period from the EU, the GDPR (as it existed on December 31, 2020) has been retained in UK law (“UK GDPR”), which applies in the UK from January 1, 2021.Although the UK GDPR/GDPR have limited impact on our business they notably have a greater extra-territorial reach and have a significant impact on data controllers and data processors either with an establishment in the UK/EU (as applicable), or which offer goods or services to UK or European Union data subjects, or which monitor UK or European Union data subjects’ behavior within the UK or European Union (as applicable). The regime imposes more stringent operational requirements on both data controllers and data processors, and introduces significant penalties for non-compliance with fines of up to €20 million or up to 4% of the annual global revenues of the infringing business, whichever is greater, depending on the type and severity of the breach.

These data privacy and data protection laws and regulations are typically intended to protect the privacy of personal information that is collected, processed, and transmitted 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 us and our subsidiaries, including associate information. While we have invested and continue to invest significant resources to comply with data privacy regulations, including the GDPR, UK GDPR and CCPA, many of these regulations are new, complex, and subject to interpretation. Non-compliance 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.

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/or prospects.

The wider macro political and economic situation is uncertain in many of the territories in which we operate and policy changes could affect our future tax rate. A combination of growing international trade pressures, rising debt levels and the impact of the COVID-19 pandemic is creating economic and political uncertainty which could lead to changes to the prevailing tax regime and adversely impact the Group’s results.

Our future results could also be adversely affected by changes in the effective tax rate as a result of fluctuations in our overall profitability and changes in the mix of earnings in countries with differing statutory

 

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tax rates, changes in tax legislation, the results of the examination of previously filed tax returns and continuing assessment of our tax exposures any of which could have a material adverse effect on our business, financial condition, results of operations and/or prospects.

Any future change in taxation legislation or the interpretation of tax legislation in the United States, the United Kingdom, Switzerland or Canada could materially affect our results of operations.

Potential tariffs, 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 escalated in 2018 generally, and have continued to remain elevated in 2019 and 2020. 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, however, 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. It remains unclear what additional actions, if any, will be taken by the United States 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 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 our competitiveness of our products and our business, liquidity, financial condition and results of operations. At this point in time, it remains to be seen what effects the new United States Presidential administration, if any, 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 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 and distribution centers 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 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.

 

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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 and operating results could be adversely affected.

Also, certain of the Group’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 Group has sought to extend best practice with a number of processes and controls to minimize opportunities for fraud. If the Group 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 Group’s business, financial condition, results of operations and/or prospects.

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.

We have funding risks related to our defined benefit pension schemes.

Our pension fund liabilities are partially matched 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, the Group’s main defined benefit plan in the United Kingdom, which is closed to future service accrual, also 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 a discount rate assessed by reference to corporate bond yields, which can also vary significantly between reporting periods. As of July 31, 2020, we had recognized on our balance sheet a net pension liability of $61 million in respect of defined benefit schemes, a decrease of $214 million from a net pension asset of $153 million recognized as of July 31, 2019. The Group’s pension plan liabilities are measured on a technical basis using actuarial valuations. As required by United Kingdom pensions regulation, the United Kingdom Plan went through its triennial actuarial valuation exercise 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 amounting to contributions totaling £30 million in the period to August 2021. As of the date of this registration statement, the contributions totaling £30 million have been paid in full. Following completion of the sale of our United Kingdom operations 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 United Kingdom operations in January 2021. Although we do not expect additional one-off contributions, 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 schemes 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.

 

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The Group’s strategy could be materially adversely affected by its indebtedness.

As of July 31, 2020, we had total borrowings of $3.2 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.

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.

IFRS 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.

Specifically, changes to financial accounting standards require operating leases to be recognized on our balance sheet. We have significant obligations relating to our current operating leases. The IASB released IFRS 16 “Leases” (“IFRS 16”) replacing International Accounting Standard 17 (“IAS 17”) “Leases,” which the Group adopted on August 1, 2019. The standard makes changes to the treatment of leases in the Group’s financial statements, requiring the use of a single model to recognize a lease liability and a right of use asset for all leases, including those classified as operating leases under IAS 17 (the previously applicable standard), unless the underlying asset has a low value or the lease term is 12 months or less. Rental charges in the income statement previously recorded under IAS 17 are replaced with depreciation and interest charges under IFRS 16, and right of use assets will be subject to impairment reviews in accordance with IAS 36 “Impairment of Assets,” replacing the previous requirement to recognize a provision for onerous lease contracts. The new standard is effective for annual periods beginning on or after January 1, 2019 and, accordingly, was effective for the Group for fiscal 2020.

Risks Relating to Our Registration with the United States Securities and Exchange Commission and Ownership of Our Ordinary Shares

The obligations associated with being a public company in the United States will require significant resources and management attention.

As a public company in the United States, we will incur legal, accounting and other expenses that we did not previously incur. We will become 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 New York Stock Exchange (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 need to establish the corporate infrastructure demanded of a United States public company may divert management’s

 

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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 United States public company. However, the measures we take may not be sufficient to satisfy these obligations. In addition, compliance with these rules and regulations will increase our legal and financial compliance costs and will make some activities more time consuming and costly. For example, we expect these rules and regulations to make it more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage. These additional obligations could 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 and public disclosure are creating uncertainty for United States public companies, 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 intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative 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.

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

 

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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 Jersey Companies Law, 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 form alleging a violation of federal securities laws in the United States.

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.

We are a holding company with no business operations of our own and depend on our subsidiaries for cash, including in order to pay dividends.

We are a group holding company with no independent operations and are dependent on earnings and distributions of funds from our operating subsidiaries for cash, including in order to pay dividends to our shareholders. Our ability to pay dividends to our shareholders therefore depends on the ability of our subsidiaries to distribute profits or pay dividends to us, general economic conditions and other factors that the directors deem significant from time to time. Our distributable reserves can be affected by reductions in profitability, impairment of assets and severe market turbulence.

 

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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 currently anticipate that 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.

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.

In connection with the preparation of our fiscal 2020 consolidated financial statements, we and our independent registered public accounting firm identified a material weakness related to: (i) a lack of segregation of duties associated with an employee having administrator access to our consolidation system while also having the ability to prepare and post manual journal entries without independent review; and (ii) a lack of precision in and evidence of the review of consolidation and related journal entries. While there were no misstatements to the fiscal 2020 consolidated financial statements as a result of this material weakness, subsequent to our issuance of our fiscal 2020 consolidated financial statements, we have partially addressed this specific material weakness by removing the administrator access from the employee and will enhance 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.

In addition, we and our independent registered public accounting firm identified a material weakness related to the presentation of deferred tax assets and deferred tax liabilities. Specifically, in connection with the preparation of our fiscal 2020 consolidated financial statements, we and our independent registered public accounting firm identified that our U.S. deferred tax assets and U.S. deferred tax liabilities associated with our accounting for leases in accordance with IFRS 16 “Leases”, were presented within the consolidated balance sheet on a gross basis as opposed to a net basis in accordance with IAS 12, “Income Taxes”. This presentation error was corrected prior to the issuance of our fiscal 2020 consolidated financial statements. To address this material weakness, we will enhance our review of the presentation of deferred taxes within our consolidated financial statements.

We plan to continue to take measures to design and implement an effective control environment. However, we cannot assure you that the measures we have taken to date, and are continuing to implement, will be sufficient to remediate such material weaknesses or prevent future material weaknesses. If we are unable to successfully maintain internal control over financial reporting, or identify any additional material weaknesses, the accuracy and timing of our financial reporting may be adversely affected. 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.

 

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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 will 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 liability for insiders who profit from trades made in a short period of time and (iii) the rules under the Exchange Act requiring the filing with 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, and we will, 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 will be 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 intend to follow home country corporate governance practices, see “Item 6. Directors, Senior Management and Employees—C. Board Practices—NYSE corporate governance exemptions.”

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 London Stock Exchange (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 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 significant 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

 

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foreign private issuer status. The regulatory and compliance costs to us under United States securities laws as a domestic issuer may be significantly 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 United States Securities and Exchange Commission (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.

We have begun to evaluate a transition from IFRS to report our financial statements under U.S. generally accepted accounting principles, or “U.S. GAAP,” which would be required, for example, if we were to lose our status as a foreign private issuer. In connection with this transition, we have invested an amount of resources and time to convert historical financial statements prepared under IFRS from prior fiscal years into U.S. GAAP financial statements. If we were to lose our status as a foreign private issuer, we would be required to invest additional resources in this transition to comply with the current rules of the SEC that would require us to report our financial statements under U.S. GAAP on a timely basis. We expect that we would incur significant additional legal, accounting and other expenses in connection with this transition, which may negatively impact our results of operations. Furthermore, if we were to lose our status as a foreign private issuer, there is no guarantee that we would be able to complete the timely transition to U.S. GAAP in order to meet our disclosure obligations under the Exchange Act, and failure to do so could result in delayed reporting and in delisting, and could otherwise adversely affect our business and operating results.

There have been and there may in the future be certain significant differences between U.S. GAAP and IFRS, including differences related to revenue recognition, lease accounting, share-based compensation expense, income tax and the accounting for preferred shares and earnings per share. 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 were prepared in accordance with U.S. GAAP. Consequently, if we were required to 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.

An active and liquid market for our ordinary shares may not develop or be sustained.

Prior to the effectiveness of this registration statement and successful listing of the ordinary shares on the NYSE, our ordinary shares have traded only on the LSE and there has been no established trading market for those shares in the United States. We have applied to list our ordinary shares on the NYSE and we expect that our ordinary shares will then trade on both the NYSE and the LSE. Active, liquid trading markets generally result in lower bid ask spreads and more efficient execution of buy and sell orders for market participants. If an active trading market for our ordinary shares does not develop in the United States, the price of the ordinary shares may be more volatile and it may be more difficult and time consuming to complete a transaction in our ordinary shares, which could have an adverse effect on the realized price of the ordinary shares. When our ordinary shares commence trading on the NYSE, we expect the initial listing price of our ordinary shares to be set by designated market makers and will likely be based on the current trading price of our ordinary shares on the LSE. However, we cannot predict the price at which our ordinary shares will trade and cannot guarantee that investors can sell their shares at any particular price. There is no assurance that an active and liquid trading market for our ordinary shares will develop or be sustained in the United States or maintained in the United Kingdom.

 

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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 United Kingdom operations to Clayton, Dubilier & Rice, a global private investment firm, for net cash consideration of approximately $420 million. Accordingly, the Group’s United Kingdom operations will be presented in the Group’s historical financial statements as a discontinued operation in accordance with IFRS 5, and the Group now operates two segments: the United States and Canada. As part of the transaction, the Group retained future responsibility for the United Kingdom Plan.

We will update shareholders on the use of proceeds of the sale following its completion. Currently, we intend to make a return of substantially all of the net cash proceeds of the sale to shareholders by way of a special dividend.

The disposition did not result in significant management relocation efforts, as the majority of our senior management team, including our Chief Executive Officer and Chief Financial Officer, are located in the United States. Certain of our personnel, including our Company Secretary, remain in the United Kingdom. Additionally, after our secondary listing on the NYSE is completed, we plan to consult with shareholders to determine whether adequate support exists to approve moving the NYSE to a primary listing. Pending the outcome of such consultation, we would finalize a timeline to effect the primary listing on the NYSE.

 

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Company Information

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 Companies (Jersey) Law 1991 (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 United Kingdom Corporate Governance Code 2018 (the “United Kingdom 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. The Company’s website is www.fergusonplc.com.

 

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.

There has been no public takeover offer as of the date of this registration statement by third parties in respect of the Group’s shares or by the Group in respect of other companies’ shares which have occurred during the last and current financial year, other than in respect of acquisitions by the Group in the ordinary course pursuant to its business strategy.

Upon the effectiveness of this registration statement, the Company will become subject to the information requirements of the Exchange Act, except that as a foreign private issuer, the Company will not be subject to the proxy rules or the short-swing profit disclosure rules of the Exchange Act. In accordance with these statutory requirements, the Company will file or furnish reports and other information with the SEC. The SEC maintains an Internet website that contains reports and other information about issuers that file electronically with the SEC. The address of that website is www.sec.gov.

 

B

Business Overview

We are a value added distributor of plumbing and heating products. We serve customers principally in North America, predominantly within the RMI sector as well as new residential construction. We have over 39,000 suppliers that give us access to a diverse and broad range of quality products. We serve our customers through a network of 15 distribution centers, 5,700 fleet vehicles, 2,194 branches and approximately 34,000 associates, in each case, as at July 31, 2020. Prior to the sale of our United Kingdom operations, our reportable segments were the United States, the United Kingdom and Canada.

United States

The United States segment contributed 86%, 83% and 80% of total consolidated revenue in fiscal 2020, fiscal 2019 and fiscal 2018 respectively.

 

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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 54%, 52% and 52% of total United States segment revenue in fiscal 2020, fiscal 2019 and fiscal 2018, 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 32%, 33% and 33% of total United States segment revenue in fiscal 2020, fiscal 2019 and fiscal 2018, respectively), focuses on new construction and RMI across the majority of non-residential sectors such as education, health care, government facilities, lodging and offices. Commercial provides commercial plumbing and mechanical contractors with products and services, 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 2020, fiscal 2019 and fiscal 2018), 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, jobsite delivery, logistics and advanced metering infrastructure.

The industrial end market (representing 7%, 8% and 8% of total United States segment revenue in fiscal 2020, fiscal 2019 and fiscal 2018, 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 19% of total United States segment revenue in fiscal 2020.

Our United States business operates 1,442 branches serving all 50 states with approximately 27,000 associates, in each case, as at July 31, 2020. The branches are served by 10 national distribution centers, providing same-day and next-day product availability, which we believe to be a competitive advantage and an important requirement for customers.

United Kingdom

The United Kingdom segment contributed 9%, 10% and 12% of total consolidated revenue in fiscal 2020, fiscal 2019 and fiscal 2018, respectively.

On January 29, 2021, we sold our United Kingdom operations. See “Item 4—Information on the Company—A. History and Development.” Prior to the sale, our United Kingdom segment principally operated under the Wolseley brand mainly serving the trade RMI market through 542 branches, four distribution centers and approximately 5,000 associates, in each case, as at July 31, 2020. Branches provide same-day and next-day

 

26

product availability, a key service offering to our customers. The segment provided plumbing and heating products and the associated PVFs to customers operating in the residential sector, air conditioning and refrigeration products to customers in the commercial sector and specialist below ground drainage products to the civil infrastructure and utilities sectors.

Canada

The Canada segment contributed 5%, 6% and 7% of total consolidated revenue in fiscal 2020, fiscal 2019 and fiscal 2018 respectively.

The Canada segment predominantly serves trade customers across the residential, commercial and industrial sectors in both RMI and new construction. The business operates 210 branches with one distribution center and approximately 2,000 associates, in each case, as at July 31, 2020. 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.

Competitive Conditions

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 39,000 suppliers that give us access to a diverse and broad range of quality products. We serve our customers through a network of 15 distribution centers, 5,700 fleet vehicles, 2,194 branches and approximately 34,000 associates, in each case, as at July 31, 2020. 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.

Value-Added Distributor

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.

 

27

Intellectual Property

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 39,000 suppliers located in various countries around the world. These 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 10% 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.

Regulatory Landscape

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, 2020.

 

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 UK Holdings Limited(2)		Investment company		England and Wales		100%
Wolseley Capital, Inc.(1)		Financing company		United States		100%
Wolseley UK Limited(3)		Operating company		England and Wales		100%

 

(1)	Ownership held in common stock.

(2)	Ownership held in ordinary shares and ordinary A shares.

(3)	This company was subsequently sold out of the Group on January 29, 2021 in connection with the disposal of our United Kingdom operations.

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.

 

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D

Property, Plant and Equipment

As at July 31, 2020, we operated a total of 2,194 branches, of which 1,442 were located in the United States, 542 were located in the United Kingdom and 210 were located in Canada. As at July 31, 2020, approximately 19% of our United States branches, approximately 6% of our United Kingdom branches and approximately 26% of our Canada branches were owned facilities, and the remainder of our United States, United Kingdom and Canada facilities were leased.

The following tables summarizes our United States national distribution centers and United Kingdom and Canada distribution centers as at July 31, 2020:

United States:

 

Location		Square Feet				Leased/Owned
Fort Payne, AL			643,000			Owned
Stockton, CA (land)			—			Leased
Stockton, CA (building)			648,200			Owned
Perris, CA			1,039,898			Owned
Frostproof, FL			521,122			Owned
Waterloo, IA			608,800			Owned
Celina, OH			676,320			Owned
Coxsackie, NY			465,000			Owned
McGregor, TX			542,000			Owned
Front Royal, VA			753,880			Leased
Richland, WA			643,477			Owned

United Kingdom:

 

Location		Square Feet				Leased/Owned
Worcester(1)			229,650			Owned
Melmerby			142,000			Leased
Marston Gate			223,401			Leased
Measham			215,194			Owned

 

(1)	Worcester distribution center was sold on August 21, 2020.

All of our remaining United Kingdom distribution centers were sold to the purchaser in connection with the disposal of our United Kingdom operations in January 2021.

Canada:

 

Location		Square Feet				Leased/Owned
Milton, ON			292,395			Leased

 

Item 4A.

Unresolved Staff Comments

Not applicable.

 

Item 5.

Operating and Financial Review and Prospects

Management Overview

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

 

29

with IFRS. We intend this disclosure to assist readers in understanding and interpreting the audited consolidated financial statements included in this registration statement. 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 registration statement, particularly under “Forward-Looking Statements” and “Item 3. Key Information—D. Risk Factors.”

Segments

As at July 31, 2020, the Group had three reportable segments: the United States, the United Kingdom 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 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.

On January 29, 2021, we sold our United Kingdom operations for net cash consideration of approximately $420 million. Accordingly, the Group’s United Kingdom operations will be presented in the Group’s historical financial statements as a discontinued operation in accordance with IFRS 5, and the Group now operates two segments: the United States and Canada. See “Item 4. Information on the Company—A. History and Development.”

 

A

Operating Results

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.

COVID-19 response

The impact of the COVID-19 pandemic on our business in the second half of fiscal 2020 was significant and a summary of our approach to navigate the business through the pandemic is set out below:

Our approach to managing the business focuses on three key areas: (1) protecting the health and wellbeing of our associates; (2) continuing to serve our customers during the crisis phase of the virus—a critical time of need; and (3) protecting and preserving the strength of our businesses for the long-term.

To safeguard the wellbeing of our associates and support our customers we immediately moved to operating our business in adherence with the recommended Center for Disease Control (CDC) guidelines. Cleaning protocols at all sites were put into operation alongside appropriate social distancing measures. In the early weeks of the pandemic our branches moved to pick-up and delivery only with customers encouraged to order ahead with pick-up in store or at the curbside. Showrooms moved to virtual appointments only and we also implemented new processes and protocols to keep our drivers safe including touchless signature at the point of delivery or pick-up location. At the peak of the pandemic about 14,000 associates in the United States (over 50%) were working remotely supported by technology.

Ferguson provides a critical function in the supply of essential products and services. In March 2020, we took decisive steps to ensure our key services were authorized as ‘essential’ which included Government and

 

30

state level liaison across our key geographies. This allowed our associates to continue to serve customers, including supermarkets, hospitals, schools, public utilities, food producers and other manufacturers.

Ferguson has an agile business model and as short-term revenue pressure impacted the business during the second half of fiscal 2020, a key priority was the preservation of the cash flow of the business. We therefore identified significant cost and cash savings and these measures, some of which were temporary, have enabled us to remain cash generative in the second half of the year. We also took decisive action to ensure the business is appropriately sized for the post COVID-19 operating environment. Cash savings included suspension of the $500 million share buy back program, withdrawal of the interim dividend payment, a pause in our merger and acquisition program and control over capital expenditure. The Board decided to propose a final dividend for the year ended July 31, 2020, which effectively reinstated the previously withdrawn interim dividend. We have also resumed our focused merger and acquisition program, funding selective bolt-on acquisitions. The $500 million share buy back program remains suspended and will continue to be assessed as we gain further clarity on economic conditions. Further details of the financial performance and market conditions in the Group’s segments are discussed in the “Segment Results of Operations for Fiscal 2020 and Fiscal 2019” section herein.

Acquisitions and disposals

The Group has historically generated growth organically and through selective acquisitions. During fiscal 2020, fiscal 2019 and fiscal 2018, the Group completed a total of 6, 15, and 13 acquisitions, respectively, investing $351 million, $657 million, and $416 million, respectively, in these acquisitions (which includes consideration for prior year’s acquisitions in each case). Acquisitions are reflected in the Group’s audited consolidated financial statements from the date of each acquisition.

Since 2010, we have completed a number of disposals in order to focus our business on North America. During fiscal 2020, fiscal 2019 and fiscal 2018, the Group received net sales proceeds of $7 million, $201 million and $1.3 billion, respectively, from completed disposals, representing 0.1%, 1.8% and 13.0%, respectively, of the Group’s total assets.

On May 6, 2020, the Group completed the sale of its remaining 28.875% non-controlling holding in Meier Tobler AG for $31 million completing the exit of all trading operations in Continental Europe. This is in line with our strategy to focus the Group’s activities on North American markets.

Fiscal 2020 acquisitions are detailed in Note 25 to the Group’s audited consolidated financial statements.

On January 29, 2021, the Group sold its United Kingdom operations to Clayton, Dubilier & Rice, a global private investment firm, for net cash consideration of approximately $420 million. The Group’s historical financial statements have not been retrospectively revised to give effect to the sale of the United Kingdom operations, which represent the entire UK reportable segment and, accordingly, the following discussion covers the Group’s entire consolidated business during the periods indicated, without giving effect (pro forma or otherwise) to the sale of the United Kingdom operations. As of and for the year ended July 31, 2020, the United Kingdom operations represented 9% of Group revenue and 8% of Group total assets and recorded underlying trading profit of $8 million.

The United Kingdom operations will be presented in the Group’s historical financial statements as a discontinued operation in its financial reporting period for the half year ending January 31, 2021 in accordance with IFRS 5, and the Group now operates two segments: the United States and Canada. As part of the transaction, the Group retained future responsibility for the United Kingdom Plan. At July 31, 2020, the net pension liability was $27 million.

The Group does not anticipate that the sale of its United Kingdom operations will have a material effect on its liquidity or cash flow position.

 

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Revenue and underlying trading profit from acquisitions is measured until their one-year anniversary. Revenue and underlying trading profit attributable to disposals is measured from the disposal date.

Results of Operations

The following is a discussion of the Group’s results of operations during fiscal 2020, fiscal 2019 and fiscal 2018. 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, as well as how certain accounting principles affect our audited consolidated financial statements.

Accounting developments and changes

On August 1, 2019, the Group adopted IFRS 16 “Leases”. The standard makes changes to the treatment of leases in the financial statements, requiring the use of a single model to recognize a lease liability and a right of use asset for all leases, including those classified as operating under IAS 17 “Leases”, unless the underlying asset has a low value or the lease term is 12 months or less. Rental charges in the income statement previously recorded under IAS 17 are replaced with depreciation and interest charges under IFRS 16 and right of use assets are subject to impairment reviews in accordance with IAS 36 “Impairment of Assets” replacing the previous requirement to recognize a provision for onerous lease contracts.

The Group has applied the modified retrospective transition method and has not restated comparatives for the year ended July 31, 2019. For the majority of leases, the right of use asset on transition has been measured as if IFRS 16 had been applied since the commencement of the lease, discounted using the Group’s incremental borrowing rate as at August 1, 2019, with the difference between the right of use asset and the lease liability taken to retained earnings. For the remaining leases which relate to the Group’s US fleet, where sufficient historic information has not been available, the right of use asset has been measured as equal to the lease liability on transition. The US fleet represented $252 million of the lease liability on transition. See Note 1 to the Group’s audited consolidated financial statements included in this registration statement for further details.

The impact of the adoption of IFRS 16 on the income statement in the year ended July 31, 2020 was to decrease rental costs by $337 million, increase depreciation by $268 million and increase finance costs by $53 million. The impact on the cash flow statement was to increase cash generated from operations by $348 million, increase interest paid by $53 million and increase lease liability capital payments by $295 million. There was no impact on cash, cash equivalents and bank overdrafts.

The impact of the adoption of IFRS 16 on the opening balance sheet at August 1, 2019 and a reconciliation of the operating lease commitments for the year ended July 31, 2019 to the lease liability at August 1, 2019 under IFRS 16, are detailed in Note 1 to the Group’s audited consolidated financial statements included in this registration statement.

 

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Group Results of Operations for Fiscal 2020 and Fiscal 2019

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 2020 audited consolidated financial statements and notes thereto, which are included in this registration statement.

 

		Year ended July 31,
		2020				2019
		$ million
Revenue			21,819				22,010
Cost of sales			(15,398	)			(15,552	)
Gross profit			6,421				6,458
Operating costs			(4,999	)			(5,056	)
Operating profit			1,422				1,402
Finance costs			(151	)			(86	)
Finance income			7				12
Share of (loss)/profit after tax of associate			(2	)			2
Gain on disposal of interests in associates and financial assets			7				3
Impairment of interests in associates			(22	)			(9	)
Profit before tax			1,261				1,324
Tax			(307	)			(263	)
Profit from continuing operations			954				1,061
Profit from discontinued operations			7				47
Profit for the year			961				1,108

Revenue was $21.8 billion in fiscal 2020, a decrease of $191 million, or 0.9%, compared to the prior year period. The decline in revenue was attributed to lower sales volume of $458 million, due in part to the COVID-19 pandemic, $71 million from foreign currency translation and $233 million from business disposals. These declines were partially offset by sales price inflation of $84 million, revenue from acquisitions of $395 million and $92 million from the impact of one additional trading day in 2020.

Cost of sales was $15.4 billion for fiscal 2020, a decrease of $154 million, or 1.0% compared to the prior year period. The decline in cost of sales was primarily due to the decline in sales as noted above.

Gross profit was $6.4 billion in fiscal 2020, a decrease of $37 million, or 0.6%, compared to the prior year period. The gross profit margin of 29.4% increased 10 basis points from 29.3% in fiscal 2019, predominantly due a more favorable sales mix of higher margin products.

Operating costs were $5.0 billion for fiscal 2020, a decrease of $57 million, or 1.1%, from the prior year period. This decrease was primarily due to lower overall labor costs from lower headcount due to the COVID-19 pandemic, which impacted the business in the second half of the year.

Finance costs were $151 million for fiscal 2020, an increase of $65 million, or 75.6%, compared to the prior year period. This increase was primarily due to the adoption of the new lease accounting standard, IFRS 16, which increased finance costs by $53 million, as well as a higher level of average debt in fiscal 2020.

Impairment of interests in associates was $22 million for fiscal 2020, an increase of $13 million, or 144.4%, compared to the prior year period.

 

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Tax was $307 million for fiscal 2020, an increase of $44 million, or 16.7%, compared to the prior year period. The Company’s effective tax rate attributable to continuing operations was 24.3% for fiscal 2020 compared to 19.9% for fiscal 2019. The increase of 4.4% was primarily due to Swiss tax reform.

Profit from continuing operations for fiscal 2020 was $954 million, a decrease of $107 million, or 10.1%, compared to the prior year period. This decrease was primarily a result of revenue decline as noted above, partially offset by lower operating costs.

Profit from discontinued operations for fiscal 2020 was $7 million, a decrease of $40 million, or 85.1%, compared to the prior year period. This decrease was primarily due to the disposal of the remainder of the Nordic business in fiscal 2019, which was classified as a discontinued operation.

Segment Results of Operations for Fiscal 2020 and Fiscal 2019

United States

 

		Year Ended July 31,
		2020				2019
		$ 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 registration statement 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 revenue Fiscal 2020				United States segment revenue growth Fiscal 2020
Residential			~54				5	%
Commercial			~32				1	%
Civil/Infrastructure			~7				9	%
Industrial			~7				(10	)%
Total							2.7	%

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.

 

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United Kingdom

 

		Year Ended July 31,
		2020				2019
		$ million
Revenue			1,879				2,281
Underlying trading profit(1)			8				65

 

(1)	See Note 2 to the Group’s audited consolidated financial statements included in this registration statement for additional information.

Revenue for the United Kingdom segment was $1.9 billion in fiscal 2020, a decrease of $402 million, or 17.6%, compared to the prior year period. The decline in revenue was attributed to lower sales volume of $357 million driven by reduced sales to the repairs, maintenance and improvement sector, due in part to the COVID-19 pandemic and a $58 million decline from the disposal of a small non-core online consumer business. The remainder of the change in revenue was from foreign currency translation and acquisitions.

Underlying trading profit for the United Kingdom segment was $8 million in fiscal 2020, a decrease of $57 million, or 87.7%, compared to the prior year period. This decrease was principally a result of sales volume decline due in part to the COVD-19 pandemic.

Canada

 

		Year Ended July 31,
		2020				2019
		$ 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 registration statement 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.

 

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Group Results of Operations for Fiscal 2019 and Fiscal 2018

The table below summarizes our income statement and certain other measures for the periods indicated and should be read in conjunction with, and is qualified in its entirety by reference to, the 2019 audited consolidated financial statements and notes thereto, which are included in this registration statement.

 

		Year Ended July 31,
		2019				2018
		$ million
Revenue			22,010				20,752
Cost of sales			(15,552	)			(14,708	)
Gross profit			6,458				6,044
Operating costs			(5,056	)			(4,684	)
Operating profit			1,402				1,360
Finance costs			(86	)			(61	)
Finance income			12				8
Share of profit after tax of associate			2				2
Gain on disposal of interests in associates			3				—
Impairment of interests in associates			(9	)			(122	)
Profit before tax			1,324				1,187
Tax			(263	)			(346	)
Profit from continuing operations			1,061				841
Profit from discontinued operations			47				426
Profit for the period			1,108				1,267

Revenue was $22.0 billion in fiscal 2019, an increase of $1.3 billion, or 6.1%, compared to the prior year period. This increase was primarily due to an increase of $302 million from higher sales volume, driven by the residential and commercial end markets, $609 million from sales price inflation and $760 million from acquisitions, partially offset by a decrease of $52 million due to the impact of one fewer trading day in fiscal 2019, $187 million from the disposal of businesses and $174 million from foreign currency translation.

Cost of sales was $15.6 billion for fiscal 2019, an increase of $844 million, or 5.7%, compared to the prior year period. This increase was primarily a result of the factors discussed above.

Gross profit was $6.5 billion in fiscal 2019, an increase of $414 million, or 6.8%, compared to the prior year period. This increase was primarily a result of the factors discussed above. The gross profit margin of 29.3% increased 20 basis points from 29.1% in fiscal 2018, predominantly due to the favorable mix impact of acquisitions, driving margins higher.

Operating costs were $5.1 billion for fiscal 2019, an increase of $372 million, or 7.9%, compared to the prior year period. This increase was primarily due to $250 million in staff cost increases reflecting a 5.5% increase in the average number of associates, wage inflation and an increase in commissions and bonuses. The remaining increase in operating costs was primarily due to the increase in sales volume during fiscal 2019 discussed above.

Finance costs were $86 million for fiscal 2019, an increase of $25 million, or 41.0%, compared to the prior year period. This increase was primarily due to a higher level of average debt, including the issuance of $750 million aggregate principal amount of 4.5% notes due 2028.

Impairment of interests in associates was $9 million for fiscal 2019, a decrease of $113 million, or 92.6%, compared to the prior year period. The decrease was due to the impairment of the interest held in Meier Tobler

 

36

AG in fiscal 2018 due to difficult trading conditions for the Meier Tobler Group, an investment in which the Company had a 28.875% minority holding.

Tax was $263 million for fiscal 2019, a decrease of $83 million, or 24.0%, compared to the prior year period. The Company’s effective tax rate attributable to continuing operations was 19.9% for fiscal 2019 compared to 29.1% for fiscal 2018. The decrease of 9.2% was primarily driven by a reduction in the United States federal tax rate from 35% to 21%.

Profit from continuing operations for fiscal 2019 was $1.1 billion, an increase of $220 million, or 26.2%, compared to the prior year period. This increase was primarily due to the above factors.

Profit from discontinued operations for fiscal 2019 was $47 million, a decrease of $379 million, or 89.0%, compared to the prior year period. This decrease was primarily due to the disposal of the Nordic business in fiscal 2018, which was classified as a discontinued operation.

Segment Results of Operations for Fiscal 2019 and Fiscal 2018

United States

 

		Year Ended July 31,
		2019				2018
		$ million
Revenue			18,358				16,670
Underlying trading profit(1)			1,508				1,406

 

(1)	See Note 2 to the Group’s audited consolidated financial statements included in this registration statement for additional information.

Revenue for the United States segment was $18.4 billion in fiscal 2019, an increase of $1.7 billion, or 10.1%, compared to the prior year period. This increase was primarily due to an increase of $510 million from higher sales volume, driven by the residential and commercial end markets, and $531 million from sales price inflation, as well as $703 million from acquisitions, partially offset by a decrease of $56 million due to the impact of one fewer trading day in fiscal 2019.

The following table illustrates revenue growth by end market:

 

		% of United States segment revenue Fiscal 2019				United States segment revenue growth Fiscal 2019
Residential			~52				10	%
Commercial			~33				10	%
Civil/Infrastructure			~7				7	%
Industrial			~8				11	%
Total							10.1	%

In fiscal 2019, revenue from the residential and commercial end markets grew 10% and 10% respectively, primarily driven by increased sales volume of core plumbing, HVAC and own brand products. Revenue from the civil/infrastructure end market grew 7%, primarily driven by increased sales volume of water management related products and services. Revenue from the industrial end market grew 11%, primarily from increased product sales of pipe, valves and fittings.

Underlying trading profit for the United States segment was $1.5 billion, an increase of $102 million, or 7.3%, compared to the prior year period. This increase was primarily due to $74 million growth from sales volume and sales price inflation due to the above factors. The remainder of underlying trading profit growth was due to acquisitions, partly offset by the impact of one fewer trading day in fiscal 2019.

 

37

United Kingdom

 

		Year Ended July 31,
		2019				2018
		$ million
Revenue			2,281				2,568
Underlying trading profit(1)			65				73

 

(1)	See Note 2 to the Group’s audited consolidated financial statements included in this registration statement for additional information.

Revenue for the United Kingdom segment was $2.3 billion in fiscal 2019, a decrease of $287 million, or 11.2%, compared to the prior year period. This decrease was principally due to $159 million from the closure of branches and low margin wholesale distribution businesses as part of the restructuring program in 2018 and sales volume declines driven by reduced sales to the repairs, maintenance and improvement sector. The remainder of the decrease was due to $113 million of foreign currency translation and the disposal of a small non-core online consumer business.

Underlying trading profit for the United Kingdom segment was $65 million, a decrease of $8 million, or 11.0%, compared to the prior year period. This decrease was principally a result of sales volume decline due to the above factors as well as foreign currency translation.

Canada

 

		Year Ended July 31,
		2019				2018
		$ million
Revenue			1,371				1,514
Underlying trading profit(1)			76				83

 

(1)	See Note 2 to the Group’s audited consolidated financial statements included in this registration statement for additional information.

Revenue for the Canada segment was $1.4 billion in fiscal 2019, a decrease of $143 million, or 9.4%, compared to the prior year period. This decrease was primarily due to the disposal of Wasco, a Dutch plumbing and heating business, which reduced revenue by $150 million and the impact of foreign currency translation, which reduced revenue by $61 million. The remainder of the change in revenue was due to revenue from acquisitions of $57 million, fully offsetting lower sales volume in the residential markets.

Underlying trading profit for the Canada segment was $76 million, a decrease of $7 million, or 8.4%, compared to the prior year period. This decrease was primarily the result of the disposal of Wasco, as well as sales volume decline due to the above factors and foreign currency translation, fully offsetting underlying trading profit from acquisitions.

 

B

Liquidity and Capital Resources

Overview

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 working capital available to the Group is sufficient for the Group’s present requirements, that is, for at least the next 12 months following the date of this registration statement.

 

38

As at July 31, 2020, the Company’s borrowings (excluding bank overdrafts) were $2.9 billion, and the Group had $4.1 billion of available liquidity (comprising readily available cash of $1.9 billion and $2.2 billion of undrawn facilities). The Group anticipates that it will be able to meet its debt obligations as they become due.

Capital resources

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 were $3.2 billion and $2.3 billion as at July 31, 2020 and 2019, respectively, and includes:

 

		As at July 31,
		2020				2019
		$ million
Bank overdrafts			248				47
Bank and other loans			—				—
Senior unsecured loan notes			2,918				2,297
Total borrowings			3,166				2,344

Debt Facilities

The following section summarizes certain material provisions of our material debt. The following description is only a summary of the material provisions of the Multicurrency Revolving Credit Facility, Bilateral loan, Trade Receivables Securitization Arrangements, 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 2025. 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. 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 Wolseley Limited (now known as Ferguson UK Holdings 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.

 

39

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, 2020, no borrowings were outstanding under the Multicurrency Revolving Credit Facility.

Bilateral Loan

In March 2020, the Company and Wolseley Limited (now known as Ferguson UK Holdings Limited), as original borrowers and original guarantors, entered into a $500 million bilateral loan agreement with Sumitomo Mitsui Banking Corporation (“SMBC”) which expires on March 31, 2021 (the “Sumitomo Bilateral Loan Agreement”). The Sumitomo 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, 2020, no borrowings were outstanding under the Sumitomo Bilateral Loan Agreement.

Trade Receivables Securitization Arrangements

Our Trade Receivables Securitization Arrangements are governed by: (i) the Receivables Purchase Agreement, dated as at July 31, 2013, as further amended, supplemented and restated, among the Company, Ferguson Receivables, LLC (“Ferguson Receivables”) as seller, Ferguson Enterprises, LLC (“Ferguson Enterprises”) as servicer, the originators, the lenders as conduit purchasers and committed purchasers, letters of credit banks, facility agents, administrative agent and co-administrative agent 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 Arrangements consist of trade receivables funding for up to $600 million, terminating in December 2021. 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 Arrangements are recorded on the balance sheet of the Group.

Fees are payable under the Trade Receivables Securitization Arrangements at a rate equal to LIBOR plus an applicable margin, determined based on our leverage ratio, which is defined as the ratio of net debt to Adjusted EBITDA (each as defined therein).

The Trade Receivables Securitization Arrangements contain 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.

In addition, subject to certain exceptions, the Trade Receivables Securitization Arrangements require us to maintain a leverage ratio, the level of which determines the value we receive for our pledged collateral and the extent of our financial reporting obligations. The Trade Receivables Securitization Arrangements also contain certain customary events of default and cross-default provisions. The Trade Receivables Securitization Arrangements also require 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, 2020, no drawdowns had been advanced under the Trade Receivables Securitization Arrangements.

 

40

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 2015, Wolseley Capital privately placed $800 million aggregated principal private placement notes (collectively, the “2015 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” and together with the 2017 Private Placement Notes and 2015 Private Placement Notes, the “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 is 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 Wolseley Limited (now known as 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

 

41

basis by the Company and Wolseley Limited (now known as Ferguson UK Holdings 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 Wolseley Limited (now known as 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”) fully and unconditionally guaranteed on a direct, unsubordinated and unsecured senior basis by the Company and Wolseley Limited (now known as Ferguson UK Holdings Limited). Interest is payable semi-annually on June 2 and December 2, until the 2030 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 Wolseley Limited (now known as 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, 2020, the maturity profile of the Group’s borrowings and undrawn facilities were as follows:

 

		As at July 31, 2020
		Current				Non-current				Total
		$ million
Bank overdrafts			248				—				248
Senior unsecured loan notes			283				2,635				2,918
Total			531				2,635				3,166

Bank overdrafts at July 31, 2020 of $248 million is 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.

 

42

Non-current loans at July 31, 2020 are repayable as follows:

 

		As at July 31, 2020
		$ million
Due in one to two years			—
Due in two to three years			250
Due in three to four years			150
Due in four to five years			150
Due in over five years			2,085
Total			2,635

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.

Capital expenditure

Our strategy of investing in the development of the Group’s business models is supported by capital expenditure. Capital expenditure totaled $653 million, $1.1 billion and $715 million in fiscal 2020, fiscal 2019 and fiscal 2018, 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,
		2020				2019				2018
Capital Expenditure		$ million
Acquisition of businesses (net of cash acquired)			351				657				416
Purchases of property, plant and equipment			215				382				265
Purchases of intangible assets			87				36				34
Total			653				1,075				715

Total capital expenditure as at December 31, 2020 for fiscal 2021 was $204 million, of which $96 million was for acquisitions and $108 million for purchases of property, plant and equipment and intangible assets, primarily in the United States. This was principally financed through operating cash flows.

Contractual obligations

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, 2020.

 

		As at July 31, 2020
		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Contractual Obligations		$ million
Debt including lease liabilities(a)			4,235				561				798				631				2,245
Interest on debt(b)			876				148				248				195				285
Trade(c) and other payables(d)			3,183				2,889				54				29				211
Total			8,294				3,598				1,100				855				2,741

 

(a)	See Note 20 to our audited consolidated financial statements for further detail related to debt.

 

43

(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. See Notes 5, 21 and 22 respectively, to our audited consolidated financial statements for further details.

Cash Flow

The table below summarizes the Group’s cash flow for fiscal 2020, fiscal 2019 and fiscal 2018.

 

		Year ended July 31,
		2020				2019				2018
		$ million
Net cash generated from operating activities			1,868				1,290				1,036
Net cash (used in)/generated from investing activities			(606	)			(783	)			700
Net cash (used in)/generated from financing activities			(485	)			131				(1,857	)
Net cash generated/(used)			777				638				(121	)
Cash, cash equivalents and bank overdrafts at the beginning of the year			1,086				458				586
Effects of exchange rate changes			4				(10	)			(7	)
Cash, cash equivalents and bank overdrafts at the end of the year			1,867				1,086				458

Cash flows from operating activities

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.

Net cash generated from operating activities was $1.3 billion in fiscal 2019 and $1.0 billion in fiscal 2018. The $254 million, or 24.5%, increase in cash flow from operating activities in fiscal 2019, compared to fiscal 2018, was principally a result of strong performance in the United States segment for fiscal 2019 and additional pension plan contributions of $99 million in fiscal 2018.

Cash flows from investing activities

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.

Net cash used in investing activities was $783 million in fiscal 2019 compared to net cash generated from investing activities of $700 million in fiscal 2018. The $1.5 billion, or 211.9%, decrease in cash flow from investing activities was principally a result of the disposal proceeds from the Nordic business of $1.3 billion in fiscal 2018 and an increase in acquisitions of $241 million in fiscal 2019.

Cash flows from financing activities

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.

 

44

Net cash generated from financing activities was $131 million in fiscal 2019 compared to net cash used in financing activities of $1.9 billion in fiscal 2018. The $2.0 billion increase in cash provided from financing activities was primarily driven by a reduction in purchase of Treasury shares of $525 million, a reduction in dividends paid to shareholders of $914 million, resulting from a special dividend paid to shareholders of $969 million in fiscal 2018, and an increase in proceeds from long term debt and short term debt of $298 million in fiscal 2019.

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 2020, fiscal 2019 and fiscal 2018. 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 consolidated audited financial statements, included in this registration statement.

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 $1.9 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 financial year.

Management has exercised judgment in evaluating the impact of COVID-19 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 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.

 

45

•

Pensions and other post-retirement benefits: the selection of the bonds to include when determining the discount rate.

Internal Control Over Financial Reporting

In connection with the preparation of our fiscal 2020 consolidated financial statements, we and our independent registered public accounting firm identified a material weakness related to: (i) a lack of segregation of duties associated with an employee having administrator access to our consolidation system while also having the ability to prepare and post manual journal entries without independent review; and (ii) lack of precision in and evidence of the review of consolidation and related journal entries. While there were no misstatements to the fiscal 2020 consolidated financial statements as a result of this material weakness, subsequent to our issuance of our fiscal 2020 consolidated financial statements, we have partially addressed this specific material weakness by removing the administrator access from the employee and will enhance 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.

In addition, we and our independent registered public accounting firm identified a material weakness related to the presentation of deferred tax assets and deferred tax liabilities. Specifically, in connection with the preparation of our fiscal 2020 consolidated financial statements, we and our independent registered public accounting firm identified that our U.S. deferred tax assets and U.S. deferred tax liabilities associated with our accounting for leases in accordance with IFRS 16 “Leases”, were presented within the consolidated balance sheet on a gross basis as opposed to a net basis in accordance with IAS 12, “Income Taxes”. This presentation error was corrected prior to the issuance of our fiscal 2020 consolidated financial statements. To address this material weakness, we will enhance our review of the presentation of deferred taxes within our consolidated financial statements.

We plan to continue to take measures to design and implement an effective control environment. However, we cannot assure you that the measures we have taken to date, and are continuing to implement, will be sufficient to remediate such material weaknesses or prevent future material weaknesses. If we are unable to successfully maintain internal control over financial reporting, or identify any additional material weaknesses, the accuracy and timing of our financial reporting may be adversely affected. 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.

 

C

Research and Development, Patents and Licenses, Etc.

Not applicable.

 

D

Trend Information

For a discussion of trend information, see “—A. Operating Results—Key factors affecting results of operations.”

 

E

Off-Balance Sheet Arrangements

None.

 

F

Tabular Disclosure of Contractual Obligations

For a discussion of contractual obligations, see “—B. Liquidity and Capital Resources—Contractual obligations.”

 

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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.

 

Name		Position
Geoff Drabble		Chairman
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
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 is a non-executive director and 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, 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 had 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 knowledge. Mr. Brundage is a certified public accountant with extensive Company 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 US 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 and as Senior Independent

 

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Non-Executive Director in October 2013. 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 of O-I Glass, Inc.

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 consultant at Spencer Stuart.

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. Currently, Ms. Halligan serves as non-executive director at FLIR Systems, 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. Currently, Mr. May serves as a non-executive director at United Utilities Group PLC and 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.

 

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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.

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, Tultex Corporation and Ashtead Group plc. 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:

 

Name		Position
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 Bell Laboratories and Lucent Technologies.

 

49

The business address for each of our directors and senior management is 1020 Eskdale Road, Winnersh Triangle, Wokingham, Berkshire. RG41 5TS.

 

B

Compensation

For fiscal 2020, the total compensation paid to the Company’s non-executive directors, executive directors and senior management as a group was $17.4 million. The total amounts set aside or accrued by the Company to provide pension, retirement or similar benefits for this group was $0.7 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 2020 is as follows:

 

		2019/20 (£000)(1)(2)
Chairman’s Fee			402.0
Non-Executive Director Base Fee			70.0
Additional Fees:
Senior Independent Director			20.5
Chair of Audit Committee			20.5
Chair of Remuneration Committee			20.5
Employee Engagement Director			10.0

 

Notes:

(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, except for the Senior Independent Director whose fee was increased above this rate in order to reflect the significant increase in workload and responsibilities associated with the role.

(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 2020:

 

		Fees (£000) 2019/20				Benefits(1) (£000) 2019/20
Chairman and Non-Executive Directors(2)
Gareth Davis(3)			201.0				11.5
Geoff Drabble(4)			302.2				10.8
Tessa Bamford			70.0				6.8
Cathy Halligan			70.0				27.7
Alan Murray			114.2				21.2
Tom Schmitt			70.0				23.6
Darren Shapland(5)			27.7				2.1
Nadia Shouraboura			70.0				16.1
Jacky Simmonds			90.5				10.5

 

Notes:

(1)	The taxable benefits for the Non Executive Directors (including the Chairman) relate to (i) UK taxable benefits and (ii) a travel allowance of £2,500 (each way), where there is a need for intercontinental flight in

 

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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 individual per annum. This allowance was introduced in November 2018.

(2)	Neither the Chairman nor the Non-Executive Directors participate in any of the Group’s employee share schemes or received any bonuses or share-based awards for fiscal 2020.

(3)	Gareth Davis remained on the Board through January 31, 2020 to provide support to Geoff Drabble who replaced him as Chairman of the Board. Gareth Davis stepped down in January 2020 and the remuneration shown above is to the date of cessation.

(4)	Geoff Drabble was appointed to the Board on May 22, 2019 and he replaced Gareth Davis as Chairman of the Board on January 31, 2020. The fees reflect that he was a Non Executive Director for part of the financial year before taking over the role of Chairman.

(5)	Darren Shapland stepped down in November 2019 and the remuneration shown above is to the date of cessation.

The Chairman and Non-Executive Directors are not entitled to receive any compensation upon the termination of their appointment and no fees will be payable in respect of any unserved portion of the term of their appointment. Further, Non-Executive Directors are not entitled to participate in the Group’s share, bonus or pension schemes. The Chairman and each Non-Executive Director is entitled to reimbursement from the Company for reasonable expenses incurred in the performance of their duties. The Chairman and Non-Executive Directors may, in certain circumstances and at the Company’s expense, obtain independent professional advice in the furtherance of their duties as directors.

Remuneration of Executive Directors/Senior Management

The aggregate amount of remuneration paid by the Company to the Executive Directors/Senior Management in fiscal 2020 was approximately $15.9 million. This amount comprises salary, annual bonus, car allowance, pension contributions and private medical insurance, and the incentive share options and award granted to the Executive Directors/Senior Management, during fiscal 2020. The table below reflects the amount of compensation paid and benefits in kind granted, to the Executive Directors, during fiscal 2020.

 

		Salary (000)				Benefits(1) (000)				Bonuses(2) (000)				Share-Based Awards(3) (000)
Executive Directors
Kevin Murphy		$	1,062.8			$	128.5			$	1,141.5			£	2,940.8
Mike Powell(4)		£	595.0			£	20.9			£	471.3			£	1,785.1
John Martin(5)		£	275.2			£	27.8			£	206.3			£	—

 

(1)

Benefits include (i) pre-tax figures for private health insurance premiums, car benefit (car allowance and/or car), and healthcare benefits. For Kevin Murphy, this also included life insurance premium contributions. For John Martin, until he stepped down as an Executive Director, this included the provision of a driver and associated tax gross up arrangement; (ii) shares in all-employee share plans granted during the year (Kevin Murphy entered into a one-year ESPP savings contract and Mike Powell entered into a three-year UK Sharesave savings contract), the value of which represents the gain, calculated by determining the difference between the option price and the share price at the date the option price was set on the maximum number of shares granted; and (iii) pension benefits (Kevin Murphy participates in the defined contribution pension arrangements of Ferguson Enterprises, receiving contributions of 16% of base salary from Ferguson Enterprises; during fiscal 2020, John Martin and Mike Powell received salary supplements in lieu of Group pension scheme membership).

(2)	Includes bonuses earned during the financial year ended July 31, 2020.

(3)

During fiscal 2020, conditional awards over 43,625 shares and nil-cost options over 26,481 shares were granted to Kevin Murphy and Mike Powell, respectively, on December 5, 2019 under the LTIP (as defined below). The share price used to calculate the face value of those awards was 6,741 pence, which was the average share price over a 10 dealing day period immediately preceding the date of grant.

 

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(4)	Mike Powell stepped down on October 31, 2020.

(5)	John Martin stepped down in November 2019.

Bonuses

The Executive Directors are generally eligible to receive an annual bonus based on an assessment of financial and personal performance during the relevant financial year. The annual bonus earned up to the target level of payout by an Executive Director will be paid in cash, and if shareholding guidelines have been met at the time the bonus is awarded, any amounts of the annual bonus earned in excess of target will also be paid in cash. Alternatively, if shareholding guidelines have not been met at the time the bonus is awarded, amounts earned in excess of target by an Executive Director will be deferred into shares and held subject to the terms of the Deferred Bonus Plan (as described below), and subject to forfeiture for three years (or such other period as our Remuneration Committee considers appropriate) from the date the bonus is awarded. The maximum annual bonus opportunity for an Executive Director who is recruited from or based in the United States is up to 200% of base salary; and for an Executive Director who is recruited from and based in any other geography is up to 150% of base salary. All bonus payments are determined by the Remuneration Committee. The threshold, target and maximum bonus opportunities for each Executive Director for fiscal 2020 were as follows:

 

		Threshold				Target				Maximum
		as a % of salary
Kevin Murphy(1) (August 1 to November 18, 2019)			56	%			110	%			140	%
Kevin Murphy(1) (November 19, 2019 to July 31, 2020)			49	%			110	%			150	%
Mike Powell			49	%			90	%			110	%
John Martin(2)			56	%			100	%			120	%

 

(1)	Kevin Murphy’s bonus opportunity was measured on Group and USA business targets and the salary for the relevant period while he was Chief Executive Officer, USA and measured on Group targets and the salary for the relevant period as Group Chief Executive.

(2)	John Martin received a pro-rated bonus payment for the period August 1 to November 19, 2019.

Group Pensions

The Group operates a variety of pension schemes, including funded and unfunded defined benefit schemes in the United Kingdom and overseas. During fiscal 2020, the Group paid an aggregate amount of approximately $0.7 million to Executive Directors/Senior Management under the Group’s pension schemes.

Employee Share Schemes

The following is a summary of the main provisions of the Company Employee Share Plans that have been adopted by the Company. Participation in the schemes by the Executive Directors/Senior Management will be on terms that are consistent with the Company’s remuneration policy from time to time.

The Company maintains the following share schemes for associates: the Deferred Bonus Plan 2019 (“DBP”); the Employee Share Purchase Plan 2019 (“ESPP”); the International Sharesave Plan 2019 (“ISP”); the Long Term Incentive Plan 2019 (“LTIP”); the Ordinary Share Plan 2019 (“OSP”); and the Performance Ordinary Share Plan 2019 (“POSP”) (collectively, the “Company Employee Share Plans”). The following terms are common to each of the Company Employee Share Plans:

Dilution Limits

Newly issued ordinary shares or treasury shares of the Company may be issued to satisfy options and awards granted under any of the Company Employee Share Plans, except for the DBP, OSP and POSP.

 

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No option or award may be granted under any of the Company Employee Share Plans (excluding the DBP, OSP and POSP), if it would cause the number of ordinary shares that have been issued pursuant to awards or options granted in the preceding 10 years, under all of the Company Employee Share Plans and under certain other historic share plans, to exceed 10% of the Company’s issued ordinary share capital at the proposed date of grant. In addition, no option or award may be granted under the executive share plans of the Company Employee Share Plans (excluding the DBP, OSP and POSP) operated by the Company if it would cause the number of ordinary shares that have been issued or may be issued pursuant to awards and options granted in the preceding 10 years under such plans and under certain other historic executive share plans to exceed 5% of the Company’s issued ordinary share capital at the proposed date of grant. These limits do not include options or awards that have lapsed and do not relate to ordinary shares purchased in the market unless they are held in treasury.

Exercise Period

Vested options may be exercised during the earlier of the applicable post-termination dates set forth in the terms of the applicable plan document and/or award agreements and the scheduled expiration date of the options (which is 10 years from the option grant date under the LTIP, 90 days from the option vest date under the POSP and OSP and six months from the option vest date under the ISP and on the date of automatic exercise under the ESPP).

Timing of Grants

Awards and options under the Company Employee Share Plans may normally only be granted within 42 days after the announcement of the Company’s results for any period, although they may be granted at other times if our Remuneration Committee considers that there are exceptional circumstances justifying a grant.

Variations of Share Capital

Options and awards under the Company Employee Share Plans may be adjusted if there is a variation in the Company’s share capital (including a rights issue or any subdivision or consolidation of the share capital) or in the event of a demerger, or payment of a special dividend or similar event that materially affects the market price of the ordinary shares.

Amendments; Termination or Suspension

The Board or, where appropriate, our Remuneration Committee, may amend the Company Employee Share Plans provided that (other than in respect of the DBP, OSP and POSP) the prior approval of Company Shareholders in a general meeting is obtained to any amendments that provide an advantage to participants and that relate to eligibility, the number of ordinary shares that may be issued under the relevant scheme, the individual limit on participation, the terms on the vesting of options or awards, the rights attaching to the ordinary shares or the adjustment of options or awards. The Shareholders’ approval is not required for minor amendments to benefit the administration of a scheme to take account of a change in legislation or to obtain or maintain favorable tax, exchange control or regulatory treatment for participants or the Company. The Company Employee Share Plans may be terminated or suspended at any time but any termination will not affect participants’ subsisting rights.

Other Provisions

Options and awards granted under the Company Employee Share Plans are personal to the participant and may not be transferred except on death, and such options and awards are not pensionable.

 

53

Deferred Bonus Plan 2019

Our Remuneration Committee may grant an award under the DBP to any associate (including an Executive Director/Senior Manager) who was a participant in any annual bonus plan operated by the Group during the financial year immediately preceding the proposed date of grant as a means of deferring part of that associate’s annual bonus into ordinary shares.

Our Remuneration Committee will decide whether the award will be granted in the form of an option, a conditional award or a phantom award, or any combination of these awards. No consideration will be payable for the grant of such awards. An award will be over such number of ordinary shares as have a value equal to the amount of a participant’s annual bonus which they are required to defer. The vesting date of an award will be the third anniversary of the last day of the financial year immediately preceding the proposed date of grant, or such other date as our Remuneration Committee considers appropriate.

If, before an award has vested, a participant ceases to be an associate of the Group then the award shall continue on its original vesting timetable, except that (i) awards will lapse on the date of cessation if a participant ceases to be an associate of the Group by reason of misconduct and (ii) subject to our Remuneration Committee’s discretion, awards may vest on the date of death of an associate or on cessation of employment in other exceptional circumstances.

In the event of a takeover or scheme of arrangement of the Company, awards will vest automatically, subject to our Remuneration Committee’s discretion to determine that they will be rolled-over into awards over shares in the acquiring company.

Employee Share Purchase Plan 2019

The ESPP is designed to qualify as a share purchase plan for the purposes of the Internal Revenue Code of 1986, as amended (the “Code”). Under the ESPP, eligible associates of participating companies in the Group may be invited to apply for options to acquire ordinary shares at an exercise price fixed at the date of grant. An associate (including an Executive Director/Senior Manager) of a participating company in the Group will be eligible to participate in the ESPP if they have been continuously employed for at least one year prior to the date of grant and customarily work more than twenty hours per week and more than five months in a calendar year.

A participant is required to make savings from pay in U.S. dollars with a minimum contribution of $25 (or, in Canada, the Canadian Dollar equivalent) and a maximum contribution that reflects the maximum sterling amount permitted under the ISP (as defined below). The savings may be used to exercise the related option at the end of the relevant option period. The exercise price per ordinary share payable on exercise of an option may not be less than 85% of the market value of an ordinary share on the date of grant. The number of ordinary shares over which an option is granted will be such that the total exercise price payable will correspond to the total savings payable from the savings arrangement at the end of the one-year savings period.

An option will be exercised automatically on the exercise date specified by the Board at the time of grant, which may be no later than 60 days following the first anniversary of the date of grant unless the participant has left employment or withdrawn from the ESPP before that date.

Options normally lapse if a participant leaves employment. However, if the employment ends no more than three months prior to the normal exercise date by reason of redundancy, injury or disability, retirement, death, the sale of the company or business in which they work or any other reason in the Board’s discretion, the participant (or executor or heir) may retain the option until the earlier of the normal exercise date and three months from the date of termination (although the participant may not make any further savings contributions) and his or her options may be exercised over such number of ordinary shares at the exercise price using the savings made up to the date of death or cessation of employment.

 

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Options will, subject to the discretion of our Remuneration Committee to require roll-over, be automatically exercised following a takeover, scheme of arrangement or winding-up of the Company over the lower of (i) such number of ordinary shares at the exercise price with the savings made up to the date of the relevant event and (ii) the number of ordinary shares over which the option was granted.

International Sharesave Plan 2019

Under the ISP, eligible associates may be invited to apply for options to acquire ordinary shares at the end of a fixed option period, which will not normally be fewer than three years from the date of grant of an option at an exercise price fixed at the date of grant. The ISP includes a United Kingdom Sharesave Plan under which eligible associates in the United Kingdom shall benefit from favorable tax treatment in respect of options granted to them (the “UK Sharesave”). An associate of a participating subsidiary in the Group will be eligible to participate in the ISP if, at the date of invitation, they have been employed for such continuous period as the Board may determine (not exceeding one year, or five years in the case of the UK Sharesave).

A participant is required to enter into a savings contract with a nominated bank or savings carrier under which he or she may choose to make monthly savings from pay of between £10 and such amount as may be determined by the Board but not exceeding £500 (or such greater amount as is permitted under the UK Sharesave in accordance with applicable tax legislation) over the relevant savings period. The minimum and maximum savings amounts for participants outside the United Kingdom are the local currency equivalent of the Sterling amounts set out above. The savings may be used to exercise the related option at the end of the relevant option period. The exercise price per ordinary share payable on exercise of an option may not be less than 80% of the market value of an ordinary share on the date of grant. The number of ordinary shares over which an option is granted will be such that the total exercise price payable will correspond to the total savings payable from the savings arrangement at the end of the savings period.

Options will be exercisable for a period of six months after the end of the option period. Options normally lapse if a participant leaves employment. However, if the employment ends by reason of retirement, disability, injury, redundancy, the sale of the company or business in which they work or any other reason at the Board’s discretion, options may be exercised for up to six months after leaving over such number of ordinary shares as may be acquired at the exercise price together with the savings that have accrued up to the date of exercise, after which they will lapse. If the employment ends by reason of death, such options may be exercised for up to 12 months after the date of death (if the death occurred before the date of maturity) or for up to 12 months after the date of maturity (if the death occurred within six months following the date of maturity).

Subject to the discretion of our remuneration committee to require (or, in the case of the UK Sharesave, permit) rollover, options will be exercisable for a period of six months following a takeover, scheme of arrangement or winding-up of the Company over the lower of (i) such number of ordinary shares as may be acquired at the exercise price with the savings made up to the date of the relevant event, and (ii) the number of ordinary shares over which the option was granted.

Long Term Incentive Plan 2019

All associates of the Group, including Executive Directors/Senior Managers, are eligible to participate in the LTIP at the discretion of our Remuneration Committee. Our Remuneration Committee will decide whether an award under the LTIP will take the form of an option, a restricted share award, a conditional award or a phantom award, or any combination of these awards. Awards under the LTIP will entitle participants to acquire ordinary shares for no consideration to the extent that specified performance targets have been satisfied over a three-year performance period. Beginning with the financial year ending July 31, 2020, a United States associate may not be granted an award over ordinary shares with a market value at the date of

 

55

grant in excess of five times the associate’s salary (which was previously three and a half times), and an associate based in any other geography may not be granted an award over ordinary shares with a market value at the date of grant in excess of three and a half times the associate’s salary.

An award will vest on the third anniversary of the date of grant, to the extent that the performance condition has been satisfied, conditional on the participant remaining in employment (except in certain specified circumstances). Where it is impractical for legal or regulatory reasons to deliver ordinary shares following the vesting of an award, the Company may pay, or procure the payment of, an equivalent cash amount, subject to all necessary deductions.

The Company’s shareholding guidelines require Executive Directors/Senior Managers to retain vested shares (after taking into account any shares sold to pay tax, social security or similar liabilities) received from awards made under the LTIP for two years from the vesting date (except in exceptional circumstances and with the approval of our Remuneration Committee). For awards granted as options, it will be sufficient to hold the vested but unexercised nil cost options for this period.

Awards will normally be forfeited if a participant leaves employment. However, if the employment ends by reason of injury, ill health, disability, redundancy, the sale of a participant’s employing company or the business in which he or she works or any other reason at the discretion of our Remuneration Committee, awards will vest on the original vesting date to the extent the performance condition has been met at such date, unless our Remuneration Committee determines that it should vest on the date of cessation to the extent that the performance condition has been met at such date. In the case of death, an award will vest immediately to the extent the performance condition has been met at such date. Vested awards will be subject to time prorating, unless our Remuneration Committee determines otherwise.

Awards may also vest early in the event of a takeover, scheme of arrangement or winding-up of the Company to the extent that the performance condition has been satisfied up to the date of the relevant event.

Ordinary Share Plan 2019

Any associates of the Group, excluding Executive Directors/Senior Managers of the Company, will be eligible to participate in the OSP at the discretion of our Remuneration Committee. Our Remuneration Committee shall decide whether an award under the OSP will take the form of an option, a restricted share award, a conditional award or a phantom award, or any combination of these awards. Options and awards may be over ordinary shares. No consideration is payable for the grant of such awards.

In respect of any financial year, the maximum total market value of ordinary shares over which an award is granted to a participant may not exceed 100% of the participant’s salary (subject to the discretion of our Remuneration Committee to determine otherwise). Our Remuneration Committee will determine the vesting date, which will not (unless it determines otherwise) be earlier than the third anniversary of the date of grant. Where it is impractical for legal or regulatory reasons to deliver ordinary shares following the vesting of an award, the Company may pay, or procure the payment of, an equivalent cash amount, subject to all necessary deductions.

Awards will normally be forfeited if a participant leaves employment. However, if the employment ends by reason of redundancy, death, injury or disability, retirement, the sale of a participant’s employing company or the business in which he or she works or any other reason at the discretion of our Remuneration Committee, awards will vest on the date of cessation.

In the event of a takeover, scheme of arrangement or winding up of the Company, subject to the discretion of our Remuneration Committee to require roll-over, all outstanding awards will automatically vest and awards granted in the form of an option will be automatically exercised provided that any exercise price payable by the participant on exercise is no more than the offer price or consideration.

 

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On the vesting of an award that takes the form of an option, the participant may exercise the option during the period of 90 days following the vesting date, provided that if the award has vested due to a participant’s death or if the participant dies during the 90-day period, the award may be exercised during the period of 12 months following the date of death.

Performance Ordinary Share Plan 2019

Any associates of the Group, excluding Executive Directors of the Company, will be eligible to participate in the POSP at the discretion of our Remuneration Committee. Our Remuneration Committee shall decide whether an award under the POSP will take the form of an option, a restricted share award, a conditional award or a phantom award, or any combination of these awards. Options and awards may be over ordinary shares. No consideration is payable for the grant of such awards.

Our Remuneration Committee will determine the vesting date, which will not (unless our Remuneration Committee determines otherwise) be earlier than the third anniversary of the date of grant. Vesting is

subject to the satisfaction of performance conditions set by our Remuneration Committee. Where it is impractical for legal or regulatory reasons to deliver ordinary shares following the vesting of an award, the Company may pay, or procure the payment of, an equivalent cash amount, subject to all necessary deductions.

Awards will normally be forfeited if a participant leaves employment. However, if the employment ends by reason of injury, ill health, disability, redundancy, retirement, the sale of a participant’s employing company or the business in which he or she works or any other reason at the discretion of our Remuneration Committee, awards will vest on the original vesting date to the extent the performance condition has been met at such date, unless our Remuneration Committee determines that it should vest on the date of cessation to the extent that the performance condition has been met at such date. In the case of death, an award will vest immediately to the extent the performance condition has been met at such date.

In the event of a takeover, scheme of arrangement or winding up of the Company, subject to the discretion of our Remuneration Committee to require roll-over, all outstanding awards will automatically vest, and awards granted in the form of an option shall be automatically exercised provided that any exercise price payable by the participant on exercise is no more than the offer price or consideration.

On the vesting of an award that takes the form of an option, the participant may exercise the option during the period of 90 days following the vesting date, provided that if the award has vested due to a participant’s death or if the participant dies during the 90-day period, the award may be exercised during the period of 12 months following the date of death.

Employee Benefit Trusts

The Company has established a Jersey trust and a United States trust (collectively, the “Trusts”) in connection with the obligation to satisfy historical and future share awards under certain of the Company Employee Share Plans and other historical share plans. The trustees of each of the Trusts have waived their rights to receive dividends on any shares held by them. As at July 31, 2020, the Jersey trust held 126,229 ordinary shares and $1,308 in cash; and the United States trust held 1,151,118 ordinary shares. The number of shares held by the Trusts represented 0.55% of the Company’s issued share capital as at July 31, 2020.

During fiscal 2020, shares were purchased by the Trusts to ensure that they continue to have sufficient shares to satisfy share awards. No shares were acquired by the Jersey trust during the year. The United States trust purchased 307,345 ordinary shares and paid £19.9 million. The Company provided funds to the Trusts to enable them to make the purchases. The number of shares purchased represented 0.13% of the Company’s issued share capital as at July 31, 2020.

 

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Executive Directors—Incentive Awards

Awards under the DBP were made on October 17, 2019 and awards under the LTIP were made on December 5, 2019. Awards under the LTIP are based on a percentage of salary determined by our Remuneration Committee. The Remuneration Committee considers the size of each grant on an annual basis, which is determined by individual performance, the ability of each individual to contribute to the achievement of the performance conditions, and market levels of remuneration. The maximum vesting is 100% of the award granted. Awards under the DBP are made where an Executive Director has not met their shareholding guidelines target

prior to payment of their bonus and the amount of the bonus in excess of target is deferred into a share award. The scheme interests awarded during fiscal 2020 are summarized below.

 

Name

Award

Type of Award

Number of Shares (#)(1)

Option Expiration Date

Face Value of Award (£000)(2)(3)(4)(5)

Directors

Kevin Murphy

LTIP

Conditional awards

43,625

n/a

2,940.8

Mike Powell

LTIP

Nil-cost options

26,481

December 5, 2029

1,785.1

DBP

(6)

Nil-cost options

85

August 1, 2022

5.4

 

(1)

Kevin Murphy and Mike Powell’s LTIP awards granted during fiscal 2020 were based on a percentage of salary as follows: Kevin Murphy (350%) and Mike Powell (300%). The DBP award granted to Mike Powell during fiscal 2020 was based on the amount of annual bonus earned in 2018/19 that exceeded the target.

(2)

The share price used to calculate the face value of the LTIP share awards granted on December 5, 2019 was 6,741 pence, which was the average share price over a 10 dealing day period immediately preceding the date of grant. The LTIP award made to Mike Powell was in the form of nil cost options. At vesting, the exercise price payable per share will be zero. The LTIP award made to Kevin Murphy was a conditional share award, and there is no exercise price.

(3)

The share price used to calculate the face value of the DBP share award granted on October 17, 2019 was 6,376 pence, which was the average share price over a 10 dealing day period preceding the date of grant. The DBP award made to Mike Powell was in the form of nil-cost options. At vesting, the exercise price per share will be nil.

(4)

Face value is calculated as required by the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, as amended as the maximum number of shares at full vesting multiplied by either the share price at date of grant or the average share price used to determine the number of shares awarded. Dividend equivalents also accrue on the LTIP and DBP awards and the amount which may be due to an Executive Director is not included in the calculation of face value.

(5)	The maximum dilution which may arise through issue of shares to satisfy the entitlement to these LTIP and DBP awards would be 0.03% calculated as at July 31, 2020.

(6)	Mike Powell’s DBP award will vest in August 2022.

Directors’ Service Agreements

The Executive Directors for fiscal 2020 have entered into service agreements, the details of which are described below. Messrs. Powell and Martin are no longer employed by the Group but continued to serve as employees during fiscal 2020.

Kevin Murphy’s Service Agreement

Kevin Murphy is employed by Ferguson Enterprises LLC as the Group Chief Executive pursuant to his employment agreement, dated September 2, 2019 (the “Murphy Employment Agreement”). Mr. Murphy’s annual base salary for the fiscal 2020 was $975,000 through November 19, 2019 as Chief Executive Officer, USA, and $1,100,000 following November 19, 2019 as Group Chief Executive, and he is eligible to receive certain car benefits and participate in a discretionary bonus scheme (which, if earned, may be deferred into

 

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an award under the DBP), a 401(k) retirement savings plan (with company contributions equal to 16% of base salary), a Supplemental Executive Retirement Plan, and the benefit programs offered to senior executives (including short- and long-term disability and healthcare coverage). Mr. Murphy’s eligibility to receive grants of shares and/or options under the Company Employee Share Plans is described in the “—B. Compensation” section above.

The Murphy Employment Agreement is not for a fixed term although it is subject to immediate termination in the event of a termination for cause. Ferguson Enterprises LLC and Mr. Murphy are each permitted to terminate the Murphy Employment Agreement by providing 12 months’ prior written notice; provided, that Ferguson Enterprises LLC has sole discretion to pay Mr. Murphy the following amounts in lieu of notice, subject to his execution of a general release of claims: (i) continued base salary payments in an aggregate amount equal to Mr. Murphy’s base salary (subject to mitigation) and (ii) the cost to Ferguson Enterprises LLC of providing all other benefits for the unexpired notice period (the foregoing notice and termination terms provided in this paragraph, the “Murphy Termination Terms”). Mr. Murphy is also bound by confidentiality, intellectual property, non-competition, non-interference, non-hire, non-solicitation and non-disparagement obligations under the terms of the Murphy Employment Agreement.

Mike Powell’s Service Agreement

Mike Powell was employed by Wolseley Limited (now known as Ferguson UK Holdings Limited) and previously served as the Group Chief Financial Officer pursuant to his service agreement, dated February 28, 2017. His annual base salary for the fiscal 2020 was £595,000 and he received certain car benefits and was eligible to participate in an annual discretionary bonus scheme (with a target amount equal to 90% of Mr. Powell’s annual base salary). To the extent that Mr. Powell did not satisfy the Company’s share ownership guidelines, he was required to defer a portion of his annual bonus payment, if earned, into an award under the DBP. In addition, Mr. Powell was eligible to participate in a defined contribution pension plan, medical and healthcare insurance plans and life assurance, and he received a salary supplement equal to 25% of his annual base salary in lieu of membership of the Group pension scheme. Mr. Powell’s eligibility to receive grants of shares and/or options under the Company Employee Share Plans is described in the “—B. Compensation” section above. Mr. Powell’s service agreement generally had the same terms as the Murphy Termination Terms described above, except that Mr. Powell was required to terminate his service agreement by providing 6 months’ prior written notice. Mr. Powell is bound by confidentiality, intellectual property, non-competition, non-interference, non-hire and non-solicitation obligations.

Mr. Powell had also entered into a director appointment letter, dated March 22, 2019, pursuant to which he was appointed as a director and Group Chief Financial Officer. Mr. Powell did not receive any additional remuneration for such appointment, but was entitled to Company reimbursement for travel business expenses, including expenses incurred for travel to and attendance at Company board and shareholders’ meetings.

Following notification in May 2020 of his intention to resign, Mr. Powell stepped down as Chief Financial Officer and as director on October 31, 2020. He did not receive any payment for loss of office. Mr. Powell received annual base salary, benefits and pension payments up to his date of departure. Mr. Powell was not eligible to participate in the Bonus Plan or receive a LTIP grant for fiscal 2021. All outstanding unvested awards granted under the Company’s 2015 Long Term Incentive Plan and 2019 Long Term Incentive Plan lapsed. His share options under the Company’s International Sharesave Plan 2011 and International Sharesave Plan 2019 lapsed upon cessation of his employment. Mr. Powell’s awards under the Company’s Deferred Bonus Plan 2016 and Deferred Bonus Plan 2019 will continue and vest on their original vesting dates.

 

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John Martin’s Service Agreement

John Martin was employed by Wolseley Limited (now known as Ferguson UK Holdings Limited), and previously served as the Group Chief Executive Officer, pursuant to a service agreement dated August 31, 2016. John Martin’s annual base salary for fiscal 2020 was £917,200, and he received car benefits and was eligible to participate in the Ferguson Group defined contribution pension plan, a permanent health insurance scheme and annual discretionary bonus scheme (with a target performance amount equal to 100% of Mr. Martin’s annual base salary). To the extent that Mr. Martin did not satisfy the Company’s share ownership guidelines, then he was required to defer a portion of any bonus payment, if earned, into an award under the DBP. He received a salary supplement equal to 30% of his annual base salary in lieu of membership of the Group pension scheme. Mr. Martin’s service agreement generally had the same terms as the Murphy Termination Terms described above; except that Mr. Martin was required to terminate his service agreement by providing six months’ prior written notice. Mr. Martin’s eligibility to receive grants of shares and/or options under the Company Employee Share Schemes is described in the “—B Compensation” section above. Mr. Martin is bound by confidentiality, intellectual property, non-competition, non-interference, non-hire and non-solicitation obligations.

Mr. Martin had also entered into director appointment letters, dated August 31, 2016 and March 22, 2019, pursuant to which he was appointed as a director and Group Chief Executive Officer. Mr. Martin did not receive any additional remuneration for such appointment, but was entitled to Company reimbursement for travel business expenses, including expenses incurred for travel to and attendance at Company board and shareholders’ meetings.

Mr. Martin stepped down as Group Chief Executive and as director on November 19, 2019. He did not receive any payment for loss of office and remained an employee through September 3, 2020. During such period, Mr. Martin continued to receive his annual base salary, benefits and pension payments and remained eligible to earn his bonus for fiscal 2020, which was prorated based on the number of calendar days from the beginning of the performance period through November 19, 2019 and subject to an assessment of the relevant performance measures. Mr. Martin was not eligible to receive a LTIP grant for fiscal 2020. However, his (i) outstanding awards granted under the Company’s 2015 Long Term Incentive Plan will receive good leaver termination treatment, (ii) 2017 and 2018 awards were prorated to reflect the number of calendar days in which he was employed during the vesting period prior to his termination date, and (iii) any awards that remain subject to performance measures will continue to vest and become exercisable on their scheduled vesting dates, subject to their relevant terms. His termination will not be treated as a good leaver termination under the Company’s International Sharesave Plan 2011, and he will be entitled to cancel his savings contract at any time or continue to save until September 3, 2020. Mr. Martin’s options will lapse upon the earlier to occur of the cessation of his employment or cancellation of his savings contract.

 

C

Board Practices

For a discussion of director’s service agreements, see “—B. Compensation—Director’s Service Agreements.”

Term of Office

All Non-Executive Directors are appointed for terms of between one and three years. Under the United Kingdom Corporate Governance Code, all directors are subject to a vote for re-election each year at the Annual General Meeting.

Board of Directors and Key Committees

The Board is collectively responsible for the long-term success of the Company. The Board’s primary role is to provide effective and entrepreneurial leadership necessary to enable the Group’s business objectives to be met and to review the overall strategic development of the Group as a whole.

 

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