Annual Report by a Foreign Non-Canadian Issuer — Form 20-F — Sect. 13 / 15(d) – SEA’34 Filing Table of Contents
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‘20-F’ — Annual Report by a Foreign Non-Canadian Issuer
(Exact
name of Registrant as specified in its charter)
Not
Applicable
(Translation
of Registrant’s name into English)
Bermuda
(Jurisdiction
of incorporation or organization)
4 NEW SQUARE BEDFONT LAKES
FELTHAM, MIDDLESEX TW14 8HA UNITED KINGDOM
+ 44 (0) 208 624 4300
(Address
of principal executive offices)
(Name,
Telephone, E-mail and/ or Facsimile number and Address of Company
Contact Person)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
Title of each class
Trading Symbol
Name of each exchange on which
registered
Class
A common shares, par value $0.001 per share
HUD
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
i
C:
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.
Title of Class
Number of Shares Outstanding
Class
A common shares, par value $0.001 per share
39,279,571
Class
B common shares, par value $0.001 per share
53,093,315
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.
Yes
☐
No ☒
If
this report is an annual or transition report, indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934.
Yes
☐
No ☒
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.*
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes
☒
No ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See 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 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 ☒
ii
HUDSON LTD. 2019
TABLE
OF CONTENTS
Presentation of financial and other information
1
Forward-looking statements
2
Part I
3
Item 1. Identity of directors, senior management and
advisers
Item 11. Quantitative and qualitative disclosures about market
risk
85
Item 12. Description of securities other than equity
securities
85
A.
Debt securities
85
B.
Warrants and rights
85
C.
Other securities
85
D.
American depositary shares
85
Part II
86
Item 13. Defaults, dividend arrearages and
delinquencies
86
A.
Defaults
86
B.
Arrears and delinquencies
86
Item 14. Material modifications to the rights of security holders
and use of proceeds
86
A.
Material modifications to instruments
86
B.
Material modifications to rights
86
C.
Withdrawal or substitution of assets
86
D.
Change in trustees or paying agents
86
E. Use
of proceeds
86
Item 15. Controls and procedures
86
A.
Disclosure controls and procedures
86
B.
Management’s annual report on internal control over financial
reporting
86
C.
Remediation efforts to address material weakness
88
D.
Attestation report of the registered public accounting
firm
89
E.
Changes in internal control over financial reporting
91
Item 16. Reserved
91
Item 16a. Audit committee financial expert
91
Item 16b. Code of ethics
91
Item 16c. Principal accountant fees and services
91
Item 16d. Exemptions from the listing standards for audit
committees
92
Item 16e. Purchases of equity securities by the issuer and
affiliated purchasers
92
Item 16f. Change in registrant’s certifying
accountant
92
Item 16g. Corporate governance
92
Item 16h. Mine safety disclosure
93
Part III
94
Item 17. Financial statements
94
Item 18. Financial statements
94
Item 19. Exhibits
94
iv
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
Unless
otherwise indicated or the context otherwise requires, all
references in this annual report on Form 20-F to “Hudson
Ltd.,”“the Issuer,”“we,”“us,”“our,”“Hudson,” and
“the Company” refer to Hudson Ltd., an exempted company
limited by shares incorporated in Bermuda, and its consolidated
subsidiaries, giving effect to the Reorganization Transactions (as
defined below), unless context otherwise requires. Hudson Ltd. and
its consolidated subsidiaries consists of all entities and
operations directly or indirectly owned by Dufry AG that carry on
Dufry AG’s duty-free and duty-paid travel retail operations
in the continental United States and Canada that were transferred
to Hudson Ltd. in connection with our initial public offering in
2018. References to “our financial statements” prior to
the Reorganization Transactions are to the combined financial
statements of Hudson, unless context otherwise requires. All
references to “Dufry,”“Dufry Group,”“Dufry AG” and “our controlling
shareholder” are to Dufry AG, a Swiss stock corporation, and
its consolidated subsidiaries (other than Hudson Ltd.). All
references to “Dufry International AG” are to Dufry
International AG, a Swiss stock corporation, which is a
wholly-owned subsidiary of Dufry AG and our direct controlling
shareholder.
All
references in this annual report to “U. S. dollars,”“U. S.$,”“$” and “USD” refer
to the currency of the United States of America.
Financial Statements
This
annual report includes our audited consolidated financial
statements as of December 31, 2019 and 2018 and for each of the
years ended December 31, 2019, 2018 and 2017 (hereinafter
“Consolidated Financial Statements”).
Our
Consolidated Financial Statements are presented in USD and have
been prepared in accordance with International Financial Reporting
Standards (“IFRS”), as issued by the International
Accounting Standards Board (“IASB”).
Our
fiscal year ends December 31. References in this annual report to a
fiscal year, such as “fiscal year 2019,” relate to our
fiscal year ended on December 31 of that calendar
year.
The Reorganization Transactions
In
connection with the completion of our initial public offering, as
part of a series of reorganization transactions, Dufry caused all
of the equity interests of the entities that constitute Hudson to
be contributed to Hudson Ltd. in exchange for common shares of
Hudson Ltd. As a result of these reorganization transactions, which
occurred on February 1, 2018, our business is conducted through
Hudson Ltd. and its subsidiaries. In this annual report, we refer
to all of these events as the “Reorganization
Transactions.” Prior to the Reorganization Transactions,
Hudson Ltd., which was incorporated on May 30, 2017, had no
operations, nominal assets and no liabilities or
contingencies.
Market Share and Other Information
Market
data, other statistical information, information regarding certain
industry forecast data used in this annual report were obtained
from internal reports and studies, where appropriate, as well as
estimates, market research, publicly available information and
industry publications. Industry publications generally state that
the information they include has been obtained from sources
believed to be reliable, but that the accuracy and completeness of
such information is not guaranteed. Similarly, internal reports and
studies, estimates and market research, which we believe to be
reliable and accurately extracted by us for use in this annual
report, have not been independently verified. However, we believe
such data is accurate and agree that we are responsible for the
accurate extraction of such information from such sources and its
correct reproduction in this annual report.
Rounding
We
have made rounding adjustments to some of the figures included
elsewhere in this annual report. Accordingly, numerical figures
shown as totals in some tables may not be an arithmetic aggregation
of the figures that precede them.
1
FORWARD-LOOKING STATEMENTS
This
annual report on Form 20-F contains “forward-looking
statements.” Forward-looking statements are based on our
beliefs and assumptions and on information currently available to
us, and include, without limitation, statements regarding our
business, financial condition, strategy, results of operations,
certain of our plans, objectives, assumptions, expectations,
prospects and beliefs and statements regarding other future events
or prospects. Forward-looking statements include all statements
that are not historical facts and can be identified by the use of
forward-looking terminology such as the words
“believe,”“expect,”“plan,”“intend,”“seek,”“anticipate,”“estimate,”“predict,”“potential,”“assume,”“continue,”“may,”“will,”“should,”“could,”“shall,”“risk” or the negative of these terms or similar
expressions that are predictions of or indicate future events and
future trends.
By
their nature, forward-looking statements involve risks and
uncertainties because they relate to events and depend on
circumstances that may or may not occur in the future. We caution
you that forward-looking statements are not guarantees of future
performance and that our actual results of operations, financial
condition and liquidity, the development of the industry in which
we operate and the effect of acquisitions on us may differ
materially from those made in or suggested by the forward-looking
statements contained in this annual report. In addition, even if
our results of operations, financial condition and liquidity, the
development of the industry in which we operate and the effect of
acquisitions on us are consistent with the forward-looking
statements contained in this annual report, those results or
developments may not be indicative of results or developments in
subsequent periods.
Factors that may
cause our actual results to differ materially from those expressed
or implied by the forward-looking statements in this annual report
include, but are not limited to the risks described under
“Item 3. Key Information – D. Risk factors.” For
example, factors that could cause actual results to vary from
projected results include, but are not limited to:
–
factors outside
our control that cause a reduction in airline passenger traffic,
including but not limited to terrorist attacks and natural
disasters;
–
changes in general
economic and market conditions;
–
competition among
participants in the travel retail market;
–
loss of and
competition to obtain and renew concessions;
–
changes by airport
authorities or airlines that lower the number of passengers in the
terminals in which we have concessions;
–
ability to execute
our growth strategy effectively to integrate successfully any new
concessions or future acquisitions into our business and to remodel
existing concessions;
–
ability to
successfully expand into the food and beverage concession
industry;
–
dependence on our
controlling shareholder to provide us with key services and to
finance our operations;
–
dependence on our
local partners;
–
changes in the
taxation of goods or duty-free regulations in the markets in which
we operate;
–
adverse impacts of
compliance or legal matters;
–
restrictions on
the duty-free sale of tobacco products and on smoking in general
that affect our tobacco product sales;
–
changes in
customer preferences or demands;
–
the future travel
habits of our customers and potential changes in transportation
safety requirements;
–
reliance on a
limited number of suppliers;
–
disruption in our
supply chain;
–
information
technology systems failure or disruption;
–
ability to attract
and retain qualified personnel;
–
litigation;
–
material
weaknesses in our internal control over financial reporting, if we
are unable to remediate such material weakness;
–
the concentration
of our operations in New York and other metropolitan
areas;
–
ability to borrow
from banks or raise funds in the capital markets;
–
our controlling
shareholder’s control over us; and
–
other risk factors
discussed under “Item 3. Key Information – D. Risk
factors.”
Forward-looking
statements speak only as of the date they are made, and we do not
undertake any obligation to update them in light of new information
or future developments or to release publicly any revisions to
these statements in order to reflect later events or circumstances
or to reflect the occurrence of unanticipated events.
2
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS
A. Directors and senior management
Not
applicable.
B. Advisers
Not
applicable.
C. Auditors
Not
applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
A. Offer statistics
Not
applicable.
B. Method and expected timetable
Not
applicable.
3
ITEM 3. KEY INFORMATION
A. Selected financial data
You
should read the following selected financial data together with
“Item 5. Operating and Financial Review and Prospects”
and our Consolidated Financial Statements and the related notes
appearing elsewhere in this annual report.
Our
historical financial statements present the results of Hudson,
which comprises all entities and operations that were transferred
to Hudson Ltd. pursuant to the Reorganization Transactions. Prior
to our initial public offering, Hudson Ltd. was a newly formed
holding company with nominal assets and no liabilities or
contingencies, and did not conduct any operations. Following the
Reorganization Transactions and our initial public offering, our
financial statements present the results of operations of Hudson
Ltd. and its consolidated subsidiaries. Hudson Ltd.’s
financial statements are the same as Hudson’s financial
statements prior to our initial public offering, as adjusted for
the Reorganization Transactions. See “Presentation of
Financial and Other Information – The Reorganization
Transactions.”
The
selected financial data are not intended to replace the
Consolidated Financial Statements and are qualified in their
entirety by reference to the Consolidated Financial Statements and
related notes appearing elsewhere in this annual report. The
selected consolidated statements of comprehensive income and other
financial data for the fiscal years ended December 31, 2019, 2018
and 2017 and selected consolidated statements of financial position
data as of December 31, 2019 and 2018 were derived from our audited
Consolidated Financial Statements included elsewhere in this annual
report. Our historical results are not necessarily indicative of
the results expected for any future period.
We
prepare our Consolidated Financial Statements in accordance with
IFRS as issued by IASB.
IN MILLIONS OF
USD (EXCEPT PER SHARE AMOUNTS)
2019
2018
2017
Turnover
1,953.7
1,924.2
1,802.5
Cost of
sales
(699.4)
(698.5)
(680.3)
Gross
profit
1,254.3
1,225.7
1,122.2
Lease
expenses
(131.2)
(428.6)
(402.4)
Personnel
expenses
(445.3)
(411.1)
(371.3)
Other
expenses
(166.9)
(158.9)
(179.7)
Depreciation,
amortization and impairment
(363.5)
(128.9)
(108.7)
Operating
profit
147.4
98.2
60.1
Finance
income
4.7
2.5
1.9
Finance
expenses
(91.6)
(31.0)
(30.2)
Foreign exchange
gain / (loss)
0.3
(0.9)
0.5
Profit
/ (loss) before tax
60.8
68.8
32.3
Income tax benefit
/ (expense)
(14.5)
(3.0)
(42.9)
Net
profit / (loss)
46.3
65.8
(10.6)
NET
PROFIT / (LOSS) ATTRIBUTABLE TO
Non-controlling
interests1
33.6
36.3
29.8
Equity holders of
the parent
12.7
29.5
(40.4)
1
The net
profit/(loss) attributable to non-controlling interests is composed
of the respective results of Hudson’s JV or subsidiaries
before income tax. However at Hudson parent entity level, the Group
recognized expenses in relation to a) Dufry (see note 37 related
parties), b) amortizations related to acquisitions, and c) accrued
income taxes due by Hudson, which have no impact on the net
profit/(loss) attributable to non-controlling
interests.
4
IN MILLIONS OF
USD
31.12.2019
31.12.2018
Summary
of consolidated statements of financial position
Non-current
assets
2,286.4
977.4
Current
assets
560.4
473.8
Total
assets
2,846.8
1,451.2
Non-current
liabilities
1,641.8
533.6
Current
liabilities
546.2
280.7
Total
liabilities
2,188.0
814.3
Net
assets
658.8
636.9
IN MILLIONS OF
USD
2019
2018
2017
Other
Data
Operating
Metrics
Number of
stores1
1,013
1,028
996
Total square feet
of stores (thousands)2
1,083.4
1,089.9
1,069.8
Financial
Metrics
Net sales
growth
1.6%
6.8%
6.7%
Like-for-like
growth3
0.6%
3.7%
4.8%
Like-for-like
growth on a constant currency basis4
1.1%
3.7%
4.4%
Organic
growth5
1.4%
7.0%
8.8%
Net profit / (loss)
in millions of USD
46.3
65.8
(10.6)
Net profit / (loss)
growth
(29.6%)
720.8%
(121.3%
Net profit
margin6
2.4%
3.4%
(0.6%)
Net profit / (loss)
attributable to equity holders of the parent
12.7
29.5
(40.4)
Net profit / (loss)
attributable to equity holders of the parent growth
(56.9%)
173.0%
N/A
Net profit / (loss)
attributable to equity holders of the parent margin7
0.7%
1.5%
(2.2%)
1
Represents number
of stores open at the end of the applicable period.
2
Represents gross
square footage of all stores open at the end of the applicable
period.
3
Like-for-like net
sales growth represents the growth in aggregate monthly net sales
in the applicable period at stores that have been operating for at
least 12 months. Like-for-like growth during the applicable period
excludes growth attributable to (i) net new stores and expansions
until such stores have been part of our business for at least 12
months, (ii) acquired stores until such stores have been part of
our business for at least 12 months and (iii) in 2018 and 2017,
eight stores acquired in the 2014 acquisition of Nuance and 46
stores acquired in the 2015 acquisition of World Duty Free Group
that management expected, at the time of the applicable
acquisition, to wind down. For more information see “Item 5.
Operating and Financial Review and Prospects - A. Operating results
- Principal factors affecting our results of operations -
Turnover".
4
Like-for-like net
sales growth on a constant currency basis is calculated by keeping
exchange rates constant for each month being compared from period
to period. We believe that the presentation of like-for-like growth
on a constant currency basis assists investors in comparing period
to period operating results as it removes the effect of
fluctuations in foreign exchange rates.
5
Organic
net sales growth represents the combination of growth from (i)
like-for-like growth and (ii) net new stores and expansions.
Organic growth excludes growth attributable to (i) acquired stores
until such stores have been part of our business for at least 12
months and (ii) in 2018 and 2017, eight stores acquired in the 2014
acquisition of Nuance and 46 stores acquired in the 2015
acquisition of World Duty Free Group that management expected, at
the time of the applicable acquisition, to wind down. For more
information see “Item 5. Operating and Financial Review and
Prospects - A. Operating results - Principal factors affecting our
results of operations - Turnover - Organic Growth".
6
We
define net profit margin as net profit/(loss) divided by
turnover.
7
We
define net profit attributable to equity holders of the parent
margin as net profit attributable to equity holders of the parent
divided by turnover.
B. Capitalization and indebtedness
Not
applicable.
C. Reasons for the offer and use of proceeds
Not
applicable.
5
D. Risk factors
Risks relating to our business
Factors outside our control that cause a reduction in airline
passenger traffic, including terrorist attacks and natural
disasters, could adversely affect our business and our turnover
growth.
We
derive substantially all of our turnover from, and therefore our
business is primarily dependent upon sales to airline passengers.
The occurrence of any one of a number of events that are outside
our control such as terrorist attacks (including cyber-attacks),
severe weather, ash clouds, airport closures, pandemics, outbreaks
of contagious diseases, natural disasters, strikes or accidents may
lead to a reduction in the number of airline passengers. Any of
these events, or any other event of a similar nature, even if not
directly affecting the airline industry, may lead to a significant
reduction in the number of airline passengers.
In
January 2020, a novel Coronavirus disease (COVID-19), a highly
contagious virus, was reported to have originated in Wuhan, China.
COVID-19 is reported to have spread widely throughout China and
other countries in Asia, and cases have been reported in North
America, the Middle East and Europe. To date, a number of major
commercial airlines have suspended service to and from mainland
China. The actual or feared spread of COVID-19 could materially and
negatively impact the demand for worldwide air travel, and in turn
have a material adverse effect on our business and results of
operations. At this point, we cannot predict the effect that
COVID-19 and the resulting impact on travel will have on our
business and revenues from travelers, including uncertainties
relating to the ultimate geographic spread of the virus, the
duration of the outbreak and travel restrictions and business
closures imposed by the Chinese and other governments, including
the U.S. and Canada.
Further, any
disruption to or suspension of services provided by airlines and
the travel industry as a result of financial difficulties, labor
disputes, construction work, increased security, changes to
regulations governing airlines, mergers and acquisitions in the
airline industry and challenging economic conditions causing
airlines to reduce flight schedules or increase the price of
airline tickets could negatively affect the number of airline
passengers.
Moreover,
increases in oil prices, for example as a result of global
political and economic instabilities, may increase airline ticket
prices through fuel surcharges, which may result in a significant
reduction of airline passengers.
Additionally, the
threat of terrorism and governmental measures in response thereto,
such as increased security measures, recent executive orders in the
United States impacting entry into the United States and changing
attitudes towards the environmental impacts of air travel may in
each case reduce demand for air travel and, as a result, decrease
airline passenger traffic at airports.
The
effect that these factors would have on our business depends on
their magnitude and duration, and a reduction in airline passenger
numbers will result in a decrease in our sales and may have a
materially adverse impact on our business, financial condition and
results of operations.
General economic and market conditions may adversely affect our
results.
Our
success is dependent on consumer spending, which is sensitive to
economic downturns, inflation and any associated rise in
unemployment, decline in consumer confidence, adverse changes in
exchange rates, increase in interest rates, increase in the price
of oil, deflation, direct or indirect taxes or increase in consumer
debt levels. As a result, economic downturns may have a material
adverse impact on our business, financial condition and result of
operations. Economic conditions have in the past created pressure
on us and similar retailers to increase promotions and discounts,
particularly at our duty-free concessions, which can have a
negative impact on our business, financial condition and results of
operations. These promotions may continue even after economic
growth returns.
6
The market to obtain and renew concessions continues to be highly
competitive.
We
compete with travel retailers, managers/ operators and,
increasingly, master concessionaires, to obtain and renew
concessions at airports and at other travel facilities such as
railway stations. Obtaining and renewing concessions at airports is
particularly competitive, as there are a limited number of airports
in the continental United States and Canada that meet our minimum
operating criteria, which include that an airport has a sufficient
number of airline passengers to support our retail operations. Our
competitors often have strong financial support or pre-existing
relationships with airport authorities that benefit those
competitors when competing for concessions. Certain of our
competitors have been and may in the future be able and willing to
outbid us for concession agreements, accept a lower profit margin
or expend more capital in order to obtain or retain
business.
There
is no guarantee that we will be able to renew existing concessions
or obtain new concessions. If we do renew a concession, there is no
guarantee that it will be on similar economic terms. The failure to
obtain or renew a concession means that we will not be able to
enter or continue operating in the market represented by such
concession. If we were to fail to renew major concessions or fail
to obtain further concessions, our business, financial condition,
results of operations and future growth could be materially
adversely affected.
Our concessions are operated under concession agreements that are
subject to revocation or modification and the loss of concessions
could negatively affect our business, financial condition and
results of operations.
We
conduct our business primarily through concessions in airport
terminals. The airport authorities and landlords with whom we
contract are generally able to revoke them at will by terminating
the applicable concession agreement. Our concessions may also be
terminated by annulment, which may be declared by the airport
authorities or by courts where the grant or the terms of the
concession do not comply with applicable legal requirements, such
as procurement, antitrust or similar regulations. Our concessions
may also be terminated early by airport authorities or landlords in
certain default scenarios, including, among others:
–
assignment,
transfer or sub-lease to third parties, in whole or in part, of the
rights or obligations provided in the applicable concession
agreement without the consent of airport authorities or landlords,
to the extent required;
–
failure to comply
with any of the provisions of the concession
agreement;
–
use of the
concession area for a purpose other than the object of the
agreement;
–
entering into an
agreement with a third-party with respect to the concession area or
services without prior approval of the applicable airport
authorities or landlord;
–
making certain
modifications to the facilities without prior approval from the
applicable airport authorities or landlord;
–
default on payment
of the fees for a period provided in the relevant agreement;
or
–
not providing the
services to an adequate quality level or the failure to obtain the
necessary equipment for the satisfactory rendering of such
services.
The
loss or modification of our concessions could have a material
adverse impact on our business, financial condition and results of
operations.
Our profitability depends on the number of airline passengers in
the terminals in which we have concessions. Changes by airport
authorities or airlines that lower the number of airline passengers
in any of these terminals could affect our business, financial
condition and results of operations.
The
number of airline passengers that visit the terminals in which we
have concessions depends, in part, on decisions made by airlines
and airport authorities relating to flight arrivals and departures.
A decrease in the number of flights and resulting decrease in
airline passengers could result in fewer sales, which could lower
our profitability and negatively impact our business, financial
condition and results of operations. Concession agreements
generally provide for a minimum annual guaranteed rent payment, or
a “MAG,” payable to the airport authority or landlord
regardless of the amount of sales at the concession. Currently, the
majority of our concession agreements provide for a MAG that is
either a fixed dollar amount or an amount that is variable based
upon the number of travelers using the airport or other location,
retail space used, estimated sales, past results or other metrics.
If there are fewer airline passengers than expected or if there is
a decline in the sales per airline passenger
7
at
these facilities, we will nonetheless be required to pay the MAG or
fixed rent and our business, financial condition and results of
operations may be materially adversely affected.
Furthermore, the
exit of an airline from a market or the bankruptcy of an airline
could reduce the number of airline passengers in a terminal or
airport where we operate and have a material adverse impact on our
business, financial condition and results of
operations.
We may not be able to execute our growth strategy to expand and
integrate new concessions or future acquisitions into our business
or remodel existing concessions. Any new concessions, future
acquisitions or remodeling of existing concessions may divert
management resources, result in unanticipated costs, or dilute
holders of our Class A common shares.
Part
of our growth strategy is to expand and remodel our existing
facilities and to seek new concessions through tenders, direct
negotiations or other acquisition opportunities. In this regard,
our future growth will depend upon a number of factors, such as our
ability to identify any such opportunities, structure a competitive
proposal and obtain required financing and consummate an offer.
Execution of our growth strategy will also depend on factors that
may not be within our control, such as the timing of any concession
or acquisition opportunity.
We
must also strategically identify which airport terminals and
concession agreements to target based on numerous factors, such as
airline passenger numbers, airport size, the type, location and
quality of available concession space, level of anticipated
competition within the terminal, potential future growth within the
airport and terminal, rental structure, financial return and
regulatory requirements. We cannot assure you that this strategy
will be successful.
In
addition, we may encounter difficulties integrating and
successfully operating expanded or new concessions or any
acquisitions. Such expanded or new concessions or acquisitions may
not achieve anticipated turnover and earnings growth or synergies
and cost savings. Delays in the commencement of new projects and
the refurbishment of concessions can also affect our business. In
addition, we will expend resources to remodel our concessions and
may not be able to recoup these investments. A failure to grow
successfully may materially adversely affect our business,
financial condition and results of operations.
In
particular, new concessions and acquisitions, and in some cases
future expansions and remodeling of existing concessions, could
pose numerous risks to our operations, including that we
may:
–
have difficulty
integrating operations or personnel;
experience
unexpected construction and development costs and project
delays;
–
face difficulties
associated with securing required governmental approvals, permits
and licenses (including construction permits and liquor licenses,
if applicable) in a timely manner and responding effectively to any
changes in local, state or federal laws and regulations that
adversely affect our costs or ability to open new
concessions;
–
have challenges
identifying and engaging local business partners to meet Airport
Concession Disadvantaged Business Enterprise (“ACDBE”)
requirements in concession agreements;
–
not be able to
obtain construction materials or labor at acceptable
costs;
–
face engineering
or environmental problems associated with our new and existing
facilities;
–
experience
significant diversion of management attention and financial
resources from our existing operations in order to integrate
expanded, new or acquired businesses, which could disrupt our
ongoing business;
–
lose key
employees, particularly with respect to acquired or new
operations;
–
have difficulty
retaining or developing acquired or new businesses’
customers;
–
impair our
existing business relationships with suppliers or other third
parties as a result of acquisitions;
–
fail to realize
the potential cost savings or other financial benefits and/ or the
strategic benefits of acquisitions, new concessions or remodeling;
and
–
incur liabilities
from the acquired businesses and we may not be successful in
seeking indemnification for such liabilities.
8
In
connection with acquisitions or other similar investments, we could
incur debt or amortization expenses related to intangible assets,
suffer asset impairments, assume liabilities or issue stock that
would dilute the percentage of ownership of our then-current
holders of Class A common shares. We may not be able to complete
acquisitions or integrate the operations, products, technologies or
personnel gained through any such acquisition, which may have a
material adverse impact on our business, financial condition and
results of operations.
If we are unable to implement our growth strategy to expand into
the food and beverage market, our business, financial condition and
results of operations could be negatively impacted.
We
have limited experience in the food and beverage concession market.
Expansion into the food and beverage concession market increases
the complexity of our business and could divert the attention of
our management and personnel from our existing activities, placing
strain on our operations and financial resources. We may be
unfamiliar with certain laws, regulations and administrative
procedures in new markets, including the procurement of food
permits and liquor licenses, which could delay the build-out and
operation of new concessions and prevent us from achieving our
operational goals on a timely basis. Our efforts to expand into the
food and beverage concession market may not succeed. Furthermore,
we will incur expenses and expend resources to develop, acquire and
set up food and beverage concessions and we may not recoup our
investment if we are unable to deliver consistent food quality,
service, convenience or ambiance, or if we fail to deliver a
consistently positive experience to our customers.
The
profitability of any food and beverage concession we acquire or
operate is dependent on numerous factors, including our ability
to:
–
adapt to consumer
tastes and appeal to a broad range of consumers whose preferences
cannot be predicted with certainty;
–
partner with
nationally recognized brands;
–
create and
implement an effective marketing/ advertising
strategy;
–
hire, train and
retain qualified food and concession managers and
staff;
–
manage costs and
prudently allocate capital resources; and
–
obtain and
maintain necessary food and liquor licenses and
permits.
In
addition, profitability, if any, of our food and beverage
concessions may be lower than in our existing activities, and we
may not be successful enough in this line of business to execute
our food and beverage growth strategy. If we are unable to grow in
the food and beverage concession market, our reputation could be
damaged. If any of the risks identified above were to occur, it
could limit our growth and have a material adverse impact on our
business, financial condition and results of
operations.
We are dependent on our local partners.
Our
retail operations are carried on through approximately 196
operating districts in the continental United States and Canada.
Our local partners, including our ACDBE partners, maintain
ownership interests in the vast majority of these partnerships and
other operating entities, some of which operate major concessions.
Our participation in these operating entities differs from market
to market. While the precise terms of each relationship vary, our
local partners typically have control over certain portions of the
operations of these concessions. Our local partners oversee the
operations of certain stores that, in the aggregate, are
responsible for a significant portion of our turnover. The stores
are operated pursuant to the applicable joint venture agreement
governing the relationship between us and our local partner.
Generally, these agreements also provide that strategic decisions
are to be made by a committee comprised of us and our local
partner, and we typically encourage our local partners to follow
Hudson operating parameters. These concessions involve risks that
are different from the risks involved in operating a concession
independently, and include the possibility that our local
partners:
–
are in a position
to take action contrary to our instructions, our requests, our
policies, our objectives or applicable laws;
–
take actions that
reduce our return on investment;
–
go bankrupt or are
otherwise unable to meet their capital contribution
obligations;
–
have economic or
business interests or goals that are or become inconsistent with
our business interests or goals; or
–
take actions that
harm our reputation or restrict our ability to run our
business.
9
In
some cases, and within limits recommended by the Federal Aviation
Administration (the “FAA”), we may loan money to our
ACDBE partners in connection with concession agreements in order to
help fund their initial capital investment in a concession
opportunity. If our partners are unable to repay these loans, we
will record a write-down and our net income will decrease. For
these and other reasons, it could be more difficult for us to
successfully operate these concessions and to respond to market
conditions, which could adversely affect our business, financial
condition and results of operations.
We have experienced net losses in the past, and we may continue to
experience net losses in the future.
We
experienced a net loss attributable to equity holders of the parent
of $40.4 million for the year ended December 31, 2017. We cannot
assure you that we will achieve profitability in future
periods.
The retail business is highly competitive.
We
also compete to attract retail customers and compete with other,
non-airport retailers, such as traditional Main Street retailers or
Internet retailers. Some of our retail competitors may have greater
financial resources, greater purchasing economies of scale or lower
cost bases, any of which may give them a competitive advantage over
us. If we were to lose market share to competitors, our turnover
would decline and our business, financial condition and results of
operations would be adversely affected.
If the estimates and assumptions we use to determine the size of
our market are inaccurate, our future growth rate may be
impacted.
Market
opportunity estimates and growth forecasts are subject to
uncertainty and are based on assumptions and estimates that may not
prove to be accurate. The estimates and forecasts in this annual
report relating to the size and expected growth of the travel
retail market may prove to be inaccurate. Even if the market in
which we compete meets our size estimates and forecasted growth,
our business could fail to grow at similar rates, if at all. The
principal assumptions relating to our market opportunity include
projected growth in the travel retail market and our share of the
market in the continental United States and Canada. If these
assumptions prove inaccurate, our business, financial condition and
results of operations could be adversely affected.
We may not be able to predict accurately or fulfill customer
preferences or demands.
We
derive a significant amount of our turnover from the sale of
fashion-related, cosmetic and luxury products which are subject to
rapidly changing customer tastes, as well as from merchandise
associated with national or local one-time events. The availability
of new products and changes in customer preferences has made it
more difficult to predict sales demand for these types of products
accurately. Our success depends in part on our ability to predict
and respond to quickly changing consumer demands and preferences,
and to translate market trends into appropriate merchandise
offerings. Additionally, due to our limited sales space relative to
other retailers, the proper selection of salable merchandise is an
important factor in turnover generation. We cannot assure you that
our merchandise selection will correspond to actual sales demand.
If we are unable to predict or rapidly respond to sales demand,
including demand generated by one-time events, or to changing
styles or trends, or if we experience inventory shortfalls on
popular merchandise, our turnover may be lower, which could have a
material adverse impact on our business, financial condition and
results of operations.
We rely on a limited number of distributors and suppliers for
certain of our products, and events outside our control may disrupt
our supply chain, which could result in an inability to perform our
obligations under our concession agreements and ultimately cause us
to lose our concessions.
Although we have a
diversified portfolio of suppliers across most of our product
categories, we rely on a small number of suppliers for certain of
our products. For example, the distributors responsible for
supplying magazines and periodicals to virtually all of our
concessions are The American News Company, formerly The News Group,
and Hudson News Distributors, which includes Hudson News
Distributors, LLC and Hudson RPM Distributors, LLC. Mr. James
Cohen, who is a member of our board of directors, controls Hudson
News Distributors. See “Item 7. Major Shareholders and
Related Party Transactions – B. Related party transactions
– Transactions with entities con-
10
trolled by Mr.
James Cohen.” Mr. Cohen became a member of our board of
directors upon consummation of our initial public offering. We do
not have a long-term distribution contract with Hudson News
Distributors, but we expect to continue purchasing magazines and
other periodicals from them. Future amalgamation may reduce the
number of distributors even further. As a result, these
distributors may have increased bargaining power and we may be
required to accept less favorable purchasing terms. In the event of
a dispute with a supplier or distributor, the delivery of a
significant amount of merchandise may be delayed or cancelled, or
we may be forced to purchase merchandise from other suppliers on
less favorable terms. Such events could cause turnover to fall or
costs to increase, adversely affecting our business, financial
condition and results of operations. In particular, if we have a
dispute with any of the distributors that delivers magazines and
periodicals to our concessions, we may be unable to secure an
alternative supply of magazines and periodicals, which could lead
to fewer customers entering our stores and may have a material
adverse impact on our business, financial condition and results of
operations. Additionally, some of our concessions in airports
require that we sell magazines and periodicals. If supply of these
products were disrupted, we could lose one or more of these
concessions, which would have a material adverse impact on our
business, financial condition and results of operations. Moreover,
Hudson Media, which is controlled by Mr. Cohen, is a co-owner of
COMAG Marketing Group, LLC a national wholesale distributor in the
periodical distribution channel. The other co-owner of COMAG
Marketing Group, LLC is The Jim Pattison Group, which also controls
The News Group, another major wholesale distributor in the
periodical distribution channel and one of our suppliers. Mr. Cohen
is also a member of the board of directors of COMAG Marketing
Group, LLC. As such, Mr. Cohen and his business partners play a
major role in the wholesale distribution of periodicals in our
markets and his interests and those of his business partners may
not always align with our interests.
In
addition, affiliates of the Dufry Group have been our exclusive
suppliers of certain categories of products. We are obligated, at
Dufry’s option, to continue purchasing these products from
such affiliates pursuant to the Master Relationship Agreement that
we entered into in connection with our initial public offering. See
“Item 7. Major Shareholders and Related Party Transactions
– B. Related party transactions – Transactions with
Dufry – Other agreements with Dufry – Master
relationship agreement.” The prices we pay to Dufry for these
products will be determined by Dufry in its sole discretion in
accordance with its transfer pricing policy in effect for all
members of the Dufry Group. We cannot assure you that the transfer
pricing policy will not be amended in a manner adverse to us, which
could result in us paying higher prices for certain products than
we currently pay. The Master Relationship Agreement will terminate
on the date when there are no issued and outstanding Class B common
shares. Also, Dufry may terminate the Master Relationship Agreement
without cause upon six months’ notice to us. If the Master
Relationship Agreement is terminated, we may not be able to obtain
an alternate supplier of such products on favorable terms, if at
all, which could have a material adverse impact on our business,
financial condition and results of operations.
Further, damage or
disruption to our supply chain due to any of the following could
impair our ability to sell our products: adverse weather conditions
or natural disaster, government action, fire, terrorism,
cyber-attacks, the outbreak or escalation of armed hostilities,
pandemic, industrial accidents or other occupational health and
safety issues, strikes and other labor disputes, customs or import
restrictions or other reasons beyond our control or the control of
our suppliers and business partners. Failure to take adequate steps
to mitigate the likelihood or potential impact of such events, or
to effectively manage such events if they occur, could adversely
affect our business, financial condition and results of operations,
as well as require additional resources to restore our supply
chain.
Certain concessions or groups of concessions in metropolitan areas
generate a meaningful portion of our net sales.
Though
none of our individual concessions was responsible for 10% or more
of our net sales in 2019, certain travel retail locations or groups
of locations in a metropolitan area were responsible for meaningful
amounts of our net sales. Concessions located in the New York
metropolitan area, including John F. Kennedy, LaGuardia and Newark
airports, in the aggregate generated 13% of our net sales in 2019.
Concessions located around Chicago, Las Vegas, Los Angeles,
Seattle, Toronto and Vancouver airports generated in the aggregate
at each location between 5% and 10% of our net sales in 2019. Our
duty-free concessions in Vancouver and Toronto generated the
significant majority of our net sales at each location in
2019.
11
Any
disruption to activities at these locations or groups of locations
could have a material adverse impact on our turnover and results of
operations. Moreover, any serious dispute between us and the
operator or concession landlords at such travel retail locations or
group of locations that could threaten the continuity or renewal of
concessions at such locations, which could have a material adverse
impact on our turnover and results of operations.
Our expansion into new airports may present increased risks due to
our unfamiliarity with those areas.
Our
growth strategy depends upon expanding into select markets that
meet our minimum operating criteria. Airports that meet our
criteria may be in locations where we have little or no meaningful
operating experience. In addition, these locations may be
characterized by demographic characteristics, consumer tastes and
discretionary spending patterns that are different from those in
the markets where our existing operations are located. As a result,
new airport terminal operations may be less successful than our
current airport terminal concessions. We may not be able to
identify new markets that meet our minimum operating criteria, and
even if we do, we may find it more difficult in these markets to
hire, motivate and keep qualified employees. Operations in new
markets may be less successful than those in markets where we
currently operate and may not reach expected sales and profit
levels, which could negatively impact our business, financial
condition and results of operations.
We rely on our customers spending a significant amount of time in
the airports where we operate, and a change in customer habits or
changes in transportation safety requirements and procedures could
have a material adverse impact on our business, financial condition
and results of operations.
Since
most of our concessions are situated beyond the security
checkpoints at airports, we rely on our customers spending a
significant amount of time in the areas of the airport terminals
where we have concessions. Changes in airline passengers’
travel habits prior to departure, including an increase in the
availability or popularity of airline or private lounges, or
changes in the efficiency of ticketing, transportation safety
procedures and air traffic control systems, could reduce the amount
of time that our customers spend at locations where we have
concessions. A reduction in the time that customers spend in
airports near our concessions could have a material adverse impact
on our business, financial condition and results of
operations.
Failure to timely obtain and maintain required licenses and permits
could lead to the loss or suspension of licenses relating to the
sale of liquor.
The
laws in the United States and Canada, including in each state and
province in which we operate, require that any concession at which
we sell alcohol be properly licensed. Alcohol control laws and
regulations impact numerous aspects of operations of our
concessions, such as hours of operation, advertising, trade
practices, wholesale purchasing, relationships with alcohol
manufacturers and distributors, inventory control and the handling
and storage of alcohol. These laws and regulations also generally
require us to supervise and control the conduct of all persons on
our licensed premises and may assign liability to us for certain
actions of our customers while in our concessions. In addition,
obtaining liquor licenses for multiple concessions or that cover
large areas often requires overcoming regulatory obstacles and can
be time consuming and expensive. Any failure to comply with these
regulations or to timely obtain and maintain liquor licenses could
adversely affect our results of operations.
Failure to comply with ACDBE participation goals and requirements
could lead to lost business opportunities or the loss of existing
business.
Many
of our concessions in the continental United States contain minimum
ACDBE participation requirements, and bidding on or submitting
proposals for new concessions often requires that we meet or use
good faith efforts to meet minimum ACDBE participation goals. Due
to various factors, the process of identifying and contracting with
ACDBEs can be challenging. The rules and regulations governing the
certification and counting of ACDBE participation in airport
concessions are complex, and ensuring ongoing compliance is costly
and time consuming. If we fail to comply with the minimum ACDBE
participation requirements, we may be held responsible for breach
of contract, which could result in the termination of a concession
or monetary damages and could adversely affect our ability to bid
on or obtain future concessions. To the extent we fail to comply
with the minimum ACDBE participation goals, there could be a
material adverse impact on our business, financial condition and
results of operations.
12
Information technology system failures or disruptions, or changes
to information technology related to payment systems, could impact
our day-to-day operations.
Our
information technology systems are used to record and process
transactions at our point of sale interfaces and to manage our
operations. These systems provide information regarding most
aspects of our financial and operational performance, statistical
data about our customers, our sales transactions and our inventory
management. Fire, natural disasters, power loss, telecommunications
failure, break-ins, terrorist attacks (including cyberattacks),
computer viruses, electronic intrusion attempts from both external
and internal sources and similar events or disruptions may damage
or impact our information technology systems at any time. These
events could cause system interruption, delays or loss of critical
data and could disrupt our acceptance and fulfillment of customer
orders, as well as disrupt our operations and management. For
example, although our point-of-sales systems are programmed to
operate and process customer orders independently from the
availability of our central data systems and even of the network,
if a problem were to disable electronic payment systems in our
stores, credit card payments would need to be processed manually,
which could result in fewer transactions. Significant disruption to
systems could have a material adverse impact on our business,
financial condition and results of operations.
We
also continually enhance or modify the technology used in our
operations. We cannot be sure that any enhancements or other
modifications we make to our operations will achieve the intended
results or otherwise be of value to our customers. Future
enhancements and modifications to our technology could consume
considerable resources. We may be required to enhance our payment
systems with new technology, which could require significant
expenditures. If we are unable to maintain and enhance our
technology to process transactions, we may experience a material
adverse impact on our business, financial condition and results of
operations.
If we are unable to protect our customers’ credit card data
and other personal information, we could be exposed to data loss,
litigation and liability, and our reputation could be significantly
impacted.
The
use of electronic payment methods and collection of other personal
information, including sales history, travel history and other
preferences, exposes us to increased risks, including the risk of
security breaches. In connection with credit or debit card
transactions, we collect and transmit confidential information by
way of secure private retail networks. Additionally, we collect and
store personal information from individuals, including our
customers and employees.
As a
retail company, we have been and will be subject to the risk of
security breaches and cyber-attacks in which credit and debit card
information is stolen. Although we use secure networks to transmit
confidential information, the techniques used to obtain
unauthorized access, disable or degrade service, or sabotage
systems change frequently and may be difficult to detect for long
periods of time, and as a result we may be unable to anticipate
these techniques or implement adequate preventive measures. Third
parties with whom we do business may attempt to circumvent our
security measures in order to misappropriate such information, and
may purposefully or inadvertently cause a breach involving such
information. In addition, hardware, software, or applications we
develop or procure from third parties may contain defects in design
or manufacture or lack sufficient controls that could unexpectedly
compromise information security. Unauthorized parties may also
attempt to gain access to our systems or facilities, or those of
third parties with whom we do business, through fraud, trickery or
other forms of deceiving our team members, contractors, vendors and
temporary staff.
We may
become subject to claims for purportedly fraudulent transactions
arising out of actual or alleged theft of credit or debit card
information, and we may also be subject to lawsuits or other
proceedings relating to these types of incidents. Any such claim or
proceeding could cause us to incur significant unplanned expenses
and divert resources, which could have a material adverse impact on
our business, financial condition and results of operations.
Further, adverse publicity resulting from these allegations could
significantly impact our reputation and have a material adverse
impact on our business, financial condition and results of
operations.
13
Additionally,
government officials, regulators, privacy advocates and class
action attorneys are increasingly scrutinizing how companies
collect, process, use, store, share and transmit personal data. We
must continually monitor the development and adoption of new and
emerging laws and regulations, such as the California Consumer
Privacy Act (“CCPA”) that took effect on January 1,2020. The CCPA, among other things, contains new disclosure
obligations for businesses that collect personal information about
California residents and affords those individuals new rights
relating to their personal information that can expand the scope of
our potential liability. We must commit substantial time and
resources toward compliance with the CCPA and similar laws and
regulations, which could subject us to regulatory enforcement,
private litigation, public criticism, business disruption, and
could cause us to lose customers, incur additional costs and legal
liability, damage our reputation, and otherwise harm our
business.
Our results of operations fluctuate due to seasonality and other
factors that impact the airline industry.
The
third quarter of each calendar year, which is when passenger
numbers are typically highest, has historically represented the
largest percentage of our turnover for the year, and the first
quarter has historically represented the smallest percentage, as
passenger numbers are typically lower. The results of operations of
our concessions generally reflect this seasonality, and therefore,
our quarterly operating results are not necessarily indicative of
operating results for an entire year. We increase our working
capital prior to peak sales periods, so as to carry higher levels
of merchandise and add temporary personnel to the sales team to
meet the expected higher demand. Our results of operations would be
adversely affected by any significant reduction in sales during the
traditional peak sales period.
We are exposed to fluctuations in currency exchange rates, which
could negatively impact our financial condition and results of
operations.
We are
impacted by the purchasing power of both the U. S. and Canadian
dollar relative to other currencies. When the U. S. or Canadian
dollar appreciates in value relative to other currencies, our
products become more expensive for international airline passengers
whose home currency has less relative purchasing power. In
addition, the increased purchasing power of the U. S. or Canadian
dollar, as the functional currency of our stores, could also cause
domestic airline passengers to purchase products abroad. The
exchange rate fluctuations in either such currency could have an
adverse effect on our business, financial condition and results of
operations.
Our success depends on our ability to attract and retain qualified
personnel, including executive officers and
management.
Our
success depends, to a significant extent, on the performance and
expertise of executive officers, top management and other key
employees. There is competition for skilled, experienced personnel
in the fields in which we operate and, as a result, the retention
of such personnel cannot be guaranteed. The loss or incapacitation
of our executive officers, senior management or any other key
employees or the failure to attract new highly qualified employees
could have a material adverse impact on our business, financial
condition and results of operations. Our continuing ability to
recruit and retain skilled personnel will be an important element
of our future success.
We identified material weaknesses in our internal control over
financial reporting as part of management’s assessment. If we
are unable to remediate the remaining material weaknesses, or if we
identify additional material weaknesses in the future or otherwise
fail to maintain an effective application of internal controls, we
may not be able to accurately or timely report our financial
results, or prevent fraud, and investor confidence in our company
and the market price of our shares may be adversely
affected.
As
part of management’s assessment of its internal control over
financial reporting for the fiscal year ending December 31, 2019,
management identified material weaknesses as defined under the
Exchange Act and by the U.S. Public Company Accounting Oversight
Board, or PCAOB, in our internal control over financial reporting.
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of the company’s annual financial statements will not be
prevented or detected on a timely basis. The material weaknesses
identified relate specifically to, (1) the procure to pay process
and the related internal controls supporting this area, (2)
management’s application
14
of
internal controls for information technology, and (3) the
implementation of the new lease accounting standard IFRS 16
(remediated as of December 31, 2019). The material weaknesses did
not result in a restatement of our prior year financial statements.
See “Item 15. Controls and Procedures” for more
information. As previously disclosed in the September 30, 2019
Interim Report, furnished on November 4, 2019, the Company
determined that adjustments to certain of its previously issued
interim financial statements were necessary, and the published
March 31, 2019 and June 30, 2019 interim financial statements could
no longer be relied upon. The adjustments related to the
implementation of the new accounting standard adopted upon
transition to IFRS 16.
Significant
progress was made in remediating the material weakness from fiscal
year 2018 related to the procure to pay process; however, the
control deficiencies are not yet fully remediated. The deficiencies
specifically related to a lack of: (1) appropriate controls over
the design and operating effectiveness of the purchasing process,
including lack of proper segregation of duties; (2) formal policies
and procedures related to invoice payment authorization; and (3)
adequate review over certain accounts payable functions, including
vendor setup and maintenance. During fiscal year 2019, we have
initiated remedial measures and are taking additional measures to
fully remediate the procure to pay process material weakness.
First, we implemented and continue to roll out an enhanced purchase
order process for merchandise purchases which are designed to
ensure that (i) appropriate levels of management approve each
purchase order with tiered thresholds, and (ii) duties related to
the approval of purchase orders, receipt of goods, and invoice
management are appropriately segregated. In fiscal year 2019, this
enhanced process was rolled out to locations representing
approximately 40% of sales. In our assessment of the effectiveness
of internal controls over financial reporting as of December 31,2019, the internal controls of this enhanced process were
implemented effectively at these locations. We began the
implementation of a new enterprise resource planning software,
expected to be fully rolled out over the next two years, which will
further expand the coverage from the roll out of an enhanced
purchase order process. Second, we implemented accounts payable
software designed to automate and streamline invoice processing,
review and approval workflows for non-merchandising invoices.
Third, a new invoice approval matrix was fully implemented in
fiscal year 2019, which was also integrated in the accounts payable
automation software described above. Fourth, new controls were
implemented to strengthen the vendor set-up and maintenance
process, including controls relating to the appropriate segregation
of duties between vendor set-up and invoice processing, and by
requiring a separate reviewer of information entered into the
accounts payable system. Fifth, new controls over the review and
approval of invoices for payment were implemented. In fiscal year
2020, we plan on remediating existing system limitations on select
data fields and completing a role redesign in the current
enterprise resource planning software to enforce segregation of
duties. While we believe efforts made in fiscal year 2019 reduced
the risk of material misstatement, this material weakness was not
fully remediated.
The
material weakness related to information technology general
controls (“ITGCs”) was in the areas of: (1) access to
applications and data, (2) program change-management and (3)
information technology operations and backups for applications
supporting substantially all of the Company’s internal
control processes. As a result of the pervasive impact of the
ineffective ITGCs on the IT applications, internal controls related
to business processes (automated and IT dependent manual) and
information produced by those IT applications that are dependent on
effective ITGCs are also deemed ineffective. We believe that these
control deficiencies were the result of a combination of factors
including limitations of older legacy applications and information
technology control processes lacking sufficient documentation and
monitoring. In fiscal 2020, we plan to enhance application user
access provisioning and termination controls and segregation of
duties analyses. In addition, we plan to enhance monitoring to
strengthen application change, configuration, and back-up
management controls. Lastly, we plan to provide enhanced training
to information technology personnel on the importance of
information technology general controls over financial
reporting.
During
the quarter ended September 30, 2019, a material weakness was
identified in the IFRS 16 implementation process, and specifically
as it relates to the execution of the controls over the application
of the accounting standard literature regarding the determination
of in-substance fixed payments. We have determined that this
deficiency in our internal control over financial reporting
originated in 2019 interim periods prior to December 31, 2019. In
our assessment of the effectiveness of internal controls over
financial reporting as of December 31, 2019, the internal control
deficiency relating to the implementation of the new lease
accounting standard IFRS 16 was fully remediated.
15
The
implementation of the remediation measures described above and
other remediation measures we take may not fully address the
material weaknesses in our internal controls over financial
reporting, and therefore we might not be able to conclude that they
have been fully remediated in the future. If we fail to correct
these material weaknesses or if we experience additional material
weaknesses in the future or otherwise fail to maintain an effective
application of internal controls, we may not be able to accurately
or timely report our financial statements and such failure could
also impair our ability to comply with applicable financial
reporting requirements and make related regulatory filings on a
timely basis. This could result in a negative reaction in the
financial markets due to a loss of confidence in the reliability of
our financial statements, which could negatively affect the market
price of our shares. In addition, we may be required to incur
additional costs in connection with improving our internal control
application and hiring additional personnel. Any such action could
negatively affect our results of operations and cash
flows.
Damage to our reputation or lack of acceptance or recognition of
our retail concepts or the brands we license from Dufry, including
Hudson, Dufry, Nuance and World Duty Free, could negatively impact
our business, financial condition and results of
operations.
We
believe we have built a strong reputation for the quality and
breadth of our concessions. Any incident that erodes consumer
affinity for our retail concepts or brand value could significantly
damage our business. If customers perceive or experience a
reduction in quality, service or convenience at our concessions
carrying the brands we license from Dufry or in any way believe we
fail to deliver a consistently positive experience, our business
may be adversely affected. In addition, Dufry uses the brands that
we license from them outside of the continental United States and
Canada. If Dufry takes actions that result in adverse publicity
surrounding the quality, service or convenience of these brands,
our business may be adversely impacted. Additionally, other travel
retailers or brands with similar names to our brands may be the
subject of negative publicity, which is outside of our control, and
which may arise from time to time and could cause confusion among
consumers, who could lose confidence in the products and services
we offer. Any such negative publicity, regardless of its veracity
as it relates to our brands, may have a material adverse impact on
our business, financial condition and results of
operations.
Furthermore, our
ability to successfully develop concessions in new markets may be
adversely affected by a lack of awareness or acceptance of our
retail concepts and brands. To the extent that we are unable to
foster name recognition and affinity for our concessions in new
markets or are unable to anticipate and react to shifts in consumer
preferences away from certain retail options, our growth may be
significantly delayed or impaired.
Our or Dufry’s failure or inability to protect the trademarks
or other proprietary rights we use, or claims of infringement by us
of rights of third parties, could adversely affect our competitive
position or the value of our brands.
We
believe that our trademarks and other proprietary rights are
important to our success and our competitive position. However, any
actions that we or Dufry take to protect the intellectual property
we use may not prevent unauthorized use or imitation by others,
which could have an adverse impact on our image, brand or
competitive position. If we commence litigation to protect our
interests or enforce our rights, we could incur significant legal
fees. We also cannot assure you that third parties will not claim
infringement by us of their proprietary rights. Any such claim,
whether or not it has merit, could be time consuming and
distracting for our management, result in costly litigation, cause
changes to existing retail concepts or delays in introducing retail
concepts, or require us to enter into royalty or licensing
agreements. As a result, any such claim could have a material
adverse impact on our business, financial condition and results of
operations.
Taxation of goods policies in the United States or Canada may
change.
A
substantial part of our turnover is derived from our sale of
duty-free products, such as perfumes, luxury products, spirits and
tobacco. Governmental authorities in the United States or Canada
may alter or eliminate the duty-free status of certain products or
otherwise change import or tax laws. For example, sales and excise
taxes on products sold at traditional retail locations situated
outside airports or online may be lowered in the future, partly
removing our competitive advantage with respect to duty-free
product pricing. If we lose the ability to sell duty-free products
generally or in any of our major duty-free markets or if we lose
market share to traditional or
16
online
retailers as a result of a reduction in sales and excise taxes, our
turnover may decrease significantly and our business, financial
condition and results of operations may be materially adversely
affected.
Future changes in effective tax rates or adverse outcomes resulting
from examination of our income or other tax returns could adversely
affect our operating results and financial condition.
We are
subject to income taxes in the U. K., United States and Canada, and
our tax liabilities will be subject to the allocation of expenses
in differing jurisdictions and provinces. Our future effective tax
rates could be subject to volatility or adversely affected by a
number of factors, including:
–
changes in the
valuation of our deferred tax assets and liabilities;
–
expected timing
and amount of the release of any tax valuation
allowances;
–
tax effects of
stock-based compensation;
–
costs related to
intercompany restructurings; or
–
changes in tax
laws, regulations or interpretations thereof.
On
December 22, 2017, the United States enacted a reform of the tax
legislation that, among other elements, reduces the corporate
federal income tax (CIT) rate from 35% to 21% and imposes in
addition a “base erosion and anti-abuse tax”
(“BEAT”) on domestic corporations for payments done to
foreign related persons in connection with tax deductible expenses.
The US tax authority has issued proposed and final regulations in
relation to many aspects of the new law. However, a number of
uncertainties remain as to the interpretation and application of
the provisions in the Tax Reform Legislation and related
regulations. In the absence of final guidance and clearer
interpretation by the regulators on these issues, we will use what
we believe are reasonable interpretations and assumptions in
interpreting and applying the Tax Reform Legislation and related
regulations for purposes of determining our income tax payable and
results of operations, which may change as we receive additional
clarification and implementation guidance. It is also possible that
the Internal Revenue Service could issue subsequent guidance or
take positions on audit that differ from the interpretations and
assumptions that we previously made, which could have a material
adverse effect on our cash tax liabilities, results of operations
and financial condition.
In
addition, we may be subject to audits of our income, sales and
other transaction taxes by U. K. tax authorities,
U. S.
federal and state authorities and Canadian national and provincial
authorities. Outcomes from these audits could have an adverse
impact on our operating results and financial
condition.
Our ability to use our net operating loss carryforwards and certain
other tax attributes will be limited.
As of
December 31, 2019, we had federal net operating loss carryforwards
of $178.1 million and state net operating loss carryforwards of
$112.4 million. Under Sections 382 and 383 of the Internal Revenue
Code of 1986, as amended (the “Code”), if a corporation
undergoes an “ownership change,” its ability to use its
pre-change NOLs and other pre-change tax attributes to offset its
post-change income may be limited. In general, an “ownership
change” generally occurs if there is a cumulative change in
our ownership by “5-percent shareholders” that exceeds
50 percentage points over a rolling three-year period. Similar
rules may apply under state tax laws. We have experienced ownership
changes in the past and our initial public offering resulted in
another ownership change. As a result, if we earn net taxable
income, our ability to use our federal and state NOLs, or other tax
attributes, to offset U. S. federal and state taxable income will
be subject to limitations. However we do not believe that these
limitations will materially affect our ability to utilize our
existing NOLs or other tax attributes to offset our current and
future federal and state taxable income. In addition, we may
experience additional ownership changes in the future as a result
of future transactions in our common stock (including any future
dispositions by Dufry), some of which may be outside our control,
and could result in additional limitations which could
significantly limit our ability to utilize our existing or future
NOLs or other tax attributes.
We may be adversely impacted by litigation.
We and
our third-party business partners are defendants in a number of
court, arbitration and administrative proceedings, and, in some
instances, are plaintiffs in similar proceedings. Actions,
including class action lawsuits, filed against us from time to time
include commercial, tort, customer, employment (such as wage and
hour and discrimination), tax, administrative, customs and other
claims, and the remedies sought in these claims can be for material
amounts and also include class action lawsuits. In addition, we may
be impacted by litigation trends
17
including class
action lawsuits involving consumers, shareholders and employees,
which could have a material adverse impact on our business,
financial condition and results of operations.
Restrictions on the sale of tobacco products and on smoking in
general may affect our tobacco product sales.
The
sale of tobacco products represented 2.8% of our net sales for the
year ended December 31, 2019. As part of the campaign to highlight
the negative effects of smoking, international health organizations
and the anti-smoking lobby continue to seek restrictions on the
sale of tobacco products, including duty-free sales. More
generally, an increasing number of national, state and local
governments have prohibited, or are proposing to prohibit, smoking
in certain public places. If we were to lose our ability to sell
tobacco products, or if the increasing number of smoking
prohibitions caused a reduction in our sales of tobacco products,
our business, financial condition and results of operations could
be materially adversely affected.
We may experience increased labor costs, including for employee
health care benefits.
Various labor and
healthcare laws and regulations in the United States and Canada
impact our relationships with our employees and affect operating
costs. These laws include employee classifications as exempt or
non-exempt, minimum wage requirements, unemployment tax rates,
workers’ compensation rates, overtime, family and sick leave,
safety standards, payroll taxes, citizenship requirements and other
wage and benefit requirements for employees classified as
non-exempt, including requirements related to health care and
insurance. As our store level employees are paid at rates set at,
or in relation to, the applicable minimum wage, further increases
in the minimum wage could increase our labor costs. Significant
additional government regulation could materially affect our
business, financial condition and results of
operations.
Our business is subject to various laws and regulations, and
changes in such laws and regulations, or failure to comply with
existing or future laws and regulations, could adversely affect
us.
We are
subject to various laws and regulations in the United States and
Canada, as well as international treaties, that affect the
operation of our concessions. The impact of current laws and
regulations, the effect of changes in laws or regulations that
impose additional requirements and the consequences of litigation
relating to current or future laws and regulations, or our
inability to respond effectively to significant regulatory or
public policy issues, could increase our compliance and other costs
of doing business and therefore have an adverse impact on our
results of operations.
Failure to comply
with the laws and regulatory requirements of governmental
authorities could result in, among other things, revocation of
required licenses, administrative enforcement actions, fines and
civil and criminal liability. In addition, certain laws may require
us to expend significant funds to make modifications to our
concessions in order to comply with applicable standards.
Compliance with such laws and regulations can be costly and can
increase our exposure to litigation or governmental investigations
or proceedings.
We are subject to the risk of union disputes and work stoppages at
our concessions, which could have a material adverse impact on our
business, financial condition and results of
operations.
As of
December 31, 2019, 43% of our employees were covered by collective
bargaining agreements, some of which have since expired. We are
also often subject to airport “labor harmony” policies,
which require (or effectively require) that we employ unionized
workers. In addition, negotiating labor agreements, either for new
concessions or to replace expiring agreements, is time consuming
and may not be accomplished on a timely basis. If we are unable to
satisfactorily negotiate those labor agreements on terms acceptable
to us, we may face a strike or work stoppage that could have a
material adverse impact on our business, financial condition and
results of operations. In addition, existing labor agreements may
not prevent a strike or work stoppage.
18
Our business requires substantial capital expenditures and we may
not have access to the capital required to maintain and grow our
operations.
Maintaining and
expanding our operations in our existing and new retail locations
is capital intensive. Specifically, the construction, redesign and
maintenance of our retail space in airport terminals where we
operate, technology costs and compliance with applicable laws and
regulations require substantial capital expenditures. We may
require additional capital in the future to:
–
fund our
operations;
–
respond to
potential strategic opportunities, such as investments,
acquisitions and expansions; and
–
service or
refinance our indebtedness.
We
must continue to invest capital to maintain or to improve the
success of our concessions and to meet refurbishment requirements
in our concessions. Decisions to expand into new terminals could
also affect our capital needs. The average annual capital
expenditure for the last three fiscal years has been $76.7 million.
Our actual capital expenditures in any year will vary depending on,
among other things, the extent to which we are successful in
renewing existing concessions and winning additional concession
agreements.
Over
the longer term, we will need to make additional investments in
order to significantly grow our footprint in new airports and
terminals, expand in other travel retail channels and increase our
presence in the food and beverage concession market. Additional
financing may not be available on terms favorable to us or at all
due to several factors, including the terms of our existing
indebtedness, our relationship with our controlling shareholder,
who has historically provided us with financing, and trends in the
global capital and credit markets. We are also subject to certain
covenants in Dufry’s 2.50% Senior Notes due 2024 and 2.00%
Senior Notes due 2027, including restrictions on the amount of debt
we may be able to incur from third parties and on our ability to
grant liens on our assets. In addition, we are also subject to
certain of the covenants contained in Dufry’s existing credit
facilities, including restrictions on the amount of third-party
debt we may incur, on our ability to grant liens on our assets and
to provide guarantees and on our ability to enter into certain
acquisitions, investments, mergers and asset sales. See “Item
5. Operating and Financial Review and Prospects – B.
Liquidity and capital resources – Indebtedness –
Restrictions on our indebtedness.” We may in the future be
subject to other restrictions that limit our ability to incur
indebtedness. The terms of available financing may also restrict
our financial and operating flexibility. If adequate funds are not
available on acceptable terms, we may be forced to reduce our
operations or delay, limit or abandon expansion opportunities. We
cannot assure you that we will be able to maintain our operating
performance or generate sufficient cash flow, or that we will have
access to sufficient financing, to continue our operations and
development activities at or above our present levels, and we may
be required to defer all or a portion of our capital expenditures.
Our business, financial condition and results of operations may be
materially adversely affected if we cannot make such capital
expenditures.
Risks relating to our structure
Our controlling shareholder, Dufry, provides us with certain key
franchise services for our business and loans to finance our
operations. If Dufry fails to perform its obligations to us or
provide financing to us, and we do not find appropriate replacement
services or financing sources, we may be unable to perform these
services or finance our operations, or may not be able to secure
substitute arrangements on a timely and cost-effective basis on
terms favorable to us.
Prior
to our initial public offering and the related Reorganization
Transactions, we operated as a business unit of Dufry. We
historically relied on franchise services provided by Dufry,
including centralized support services such as treasury, audit and
other similar services. In addition, we have licensed all of our
proprietary brands, including Dufry, Hudson, Nuance and World Duty
Free, from Dufry. Dufry has also been one of our largest
merchandise suppliers. In connection with our initial public
offering, we entered into a series of new agreements with Dufry,
including the Master Relationship Agreement. See “Item 7.
Major Shareholders and Related Party Transactions – B.
Related party transactions – Transactions with Dufry –
Other agreements with Dufry.” The services provided under the
Master Relationship Agreement include financing and treasury
operations, the supply of duty-free products for sale, IT services
and tax services, among others.
19
Our
agreements with Dufry also include various franchise agreements
pursuant to which Dufry licenses our use of the Dufry, Nuance and
World Duty Free trademarks. Each of these franchise agreements is
terminable without cause by Dufry upon six months’ notice.
Separate from the franchise agreements, Dufry has granted us a
seven year license to use the Hudson brand and trademark within the
continental United States, Hawaii and Canada. If Dufry were to
decide to terminate, or to not renew, any of these agreements, our
business, financial condition and results of operations would be
materially adversely affected.
The
services provided under the agreements with Dufry may not be
sufficient to meet our needs and we may not be able to obtain other
needed services on favorable terms, if at all. If Dufry were to
encounter financial difficulties that impact its ability to provide
services to us, our business, financial condition and results of
operations could be materially impacted. Any failure of, or
significant downtime in, our own financial or administrative
systems or in Dufry’s financial or administrative systems and
any difficulty establishing our systems or integrating newly
acquired assets into our business could result in unexpected costs,
impact our results or prevent us from paying our suppliers and
employees and performing other administrative services on a timely
basis, which could have a material adverse impact on our business,
financial condition and results of operations.
In
addition, we have historically been an integral part of
Dufry’s global treasury and cash management operations and we
expect to continue to be an integral part of such operations. As of
December 31, 2019, we had $503.1 million of long-term financial
loans (excluding current portion) due to Dufry. To the extent that
the terms of our existing or future indebtedness to Dufry are
unfavorable compared to other financing opportunities, our
financial condition could be adversely affected.
The two-class structure of our common shares has the effect of
concentrating voting control with Dufry and its affiliates. Because
of its significant share ownership, Dufry exerts control over us,
including with respect to our business, policies and other
significant corporate decisions. This limits or precludes your
ability to influence corporate matters, including the election of
directors, amendments to our organizational documents and any
merger, amalgamation, sale of all or substantially all of our
assets or other major corporate transaction requiring shareholder
approval.
As of
March 5, 2020, the shares owned by our controlling shareholder
represent 93.1% of the voting power of our issued and outstanding
share capital. Each Class A common share is entitled to one vote
per share and is not convertible into any other shares of our share
capital. Each Class B common share is entitled to 10 votes per
share and is convertible into one Class A common share at any time.
In addition, each Class B common share will automatically convert
into one Class A common share upon any transfer thereof to a person
or entity that is not an affiliate of the holder of such Class B
common share. Further, all of our Class B common shares will
automatically convert into Class A common shares upon the date when
all holders of Class B common shares cease to hold Class B common
shares representing, in the aggregate, 10% or more of the total
number of Class A and Class B common shares issued and outstanding.
Any Class B common shares that are converted into Class A common
shares may not be reissued. The disparate voting rights of our
Class B common shares will not change upon transfer unless such
Class B common shares are first converted into our Class A common
shares. See “Item 10. Additional Information – B.
Memorandum of association and bye-laws.”
As a
result, our controlling shareholder has the ability to determine
the outcome of all matters submitted to our shareholders for
approval, including the election and removal of directors and any
amalgamation, merger or sale of all or substantially all of our
assets. Dufry has significant power to control our operations, and
may impose group-level policies on us that are based on the
interests of the Dufry Group as a whole. Group-level policies may
not align with our interests and could change the way we conduct
our business, which could have a material adverse impact on our
business, financial condition and results of
operations.
The
interests of our controlling shareholder might not coincide with
the interests of the other holders of our share capital. This
concentration of ownership may have an adverse impact on the value
of our Class A common shares by:
–
delaying,
deferring or preventing a change in control of us;
–
impeding an
amalgamation, merger, takeover or other business combination
involving us; or
–
causing us to
enter into transactions or agreements that are not in the best
interests of all shareholders.
20
Our controlling shareholder, Dufry, could engage in business and
other activities that compete with us.
Dufry
and its controlled affiliates (other than us) have informed us that
they will not, subject to certain exceptions, pursue opportunities
in the continental United States, Hawaii or Canada in the following
areas: retail or food and beverage concessions; leases at airports
or train stations; master concessionaire roles at airports; or any
other Dufry, Hudson, Nuance or World Duty Free branded retail
operations, except that Dufry may continue to pursue travel retail
operations, using any of the aforementioned brands, on board cruise
lines that visit the continental United States or Canada or at
ports in the continental United States or Canada visited by cruise
lines. Except as described above and subject to any contract that
we may enter into with Dufry, Dufry will have no obligation to
refrain from:
–
engaging in the
same or similar business activities or lines of business as us;
or
–
doing business
with any of our partners, customers or vendors.
Dufry
is a diversified travel retailer with significant operations
outside of the continental United States, Hawaii and Canada,
including in six continents, covering 65 countries and over 420
locations. Dufry continues to engage in these businesses, including
use of the Hudson brand outside the continental United States,
Hawaii and Canada. To the extent that Dufry engages in the same or
similar business activities or lines of business as us, or engages
in business with any of our partners, customers or vendors, our
ability to successfully operate and expand our business may be
hampered.
Conflicts of interest may arise between us and our controlling
shareholder, Dufry, which could be resolved in a manner unfavorable
to us.
Questions relating
to conflicts of interest may arise between us and Dufry in a number
of areas relating to our past and ongoing relationships. Our chief
executive officer is a member of the Global Executive Committee of
Dufry. Our directors and officers may own Dufry stock and options
to purchase Dufry stock. Ownership interests of our directors or
officers in Dufry stock, or service as a director of our Company
and a director, officer and/ or employee of Dufry, could give rise
to potential conflicts of interest when a director or officer is
faced with a decision that could have different implications for
the two companies. These potential conflicts could arise, for
example, over matters such as business opportunities that may be
attractive to both Dufry and us, the desirability of changes to our
business and operations, funding and capital matters, regulatory
matters, matters arising with respect to agreements with Dufry,
employee retention or recruiting, labor, tax, employee benefit,
indemnification and other matters relating to our restructuring or
our dividend policy.
The
corporate opportunity policy set forth in our bye-laws addresses
certain potential conflicts of interest between our Company, on the
one hand, and Dufry and its officers who are directors of our
Company, on the other hand. By purchasing Class A common shares,
you will be deemed to have notice of and have consented to the
provisions of our bye-laws, including the corporate opportunity
policy. See “Item 10. Additional Information – B.
Memorandum of association and bye-laws.” Although these
provisions are designed to resolve certain conflicts between us and
Dufry fairly, we cannot assure you that any conflicts will be so
resolved.
As a foreign private issuer and “controlled company”
within the meaning of the New York Stock Exchange’s corporate
governance rules, we are permitted to, and we will, rely on
exemptions from certain of the New York Stock Exchange corporate
governance standards, including the requirement that a majority of
our board of directors consist of independent directors. Our
reliance on such exemptions may afford less protection to holders
of our Class A common shares.
The
New York Stock Exchange’s corporate governance rules require
listed companies to have, among other things, a majority of
independent directors and independent director oversight of
executive compensation, nomination of directors and corporate
governance matters. As a foreign private issuer, we are permitted
to, and we will, follow home country practice in lieu of the above
requirements. As long as we rely on the foreign private issuer
exemption to certain of the New York Stock Exchange corporate
governance standards, a majority of the directors on our board of
directors are not required to be independent directors, and we are
not required to maintain a compensation committee or a nominating
and corporate governance committee. Therefore, our board of
directors’ approach to governance may be different from that
of a board of directors consisting of a majority of independent
directors,
21
and,
as a result, the management oversight of our company may be more
limited than if we were subject to all of the New York Stock
Exchange corporate governance standards.
In the
event we no longer qualify as a foreign private issuer, we intend
to rely on the “controlled company” exemption under the
New York Stock Exchange corporate governance rules. A
“controlled company” under the New York Stock Exchange
corporate governance rules is a company of which more than 50% of
the voting power is held by an individual, group or another
company. Our controlling shareholder controls a majority of the
combined voting power of our outstanding common shares, making us a
“controlled company” within the meaning of the New York
Stock Exchange corporate governance rules. As a controlled company,
we are eligible to, and, in the event we no longer qualify as a
foreign private issuer, we intend to elect not to comply with
certain of the New York Stock Exchange corporate governance
standards, including the requirement that a majority of directors
on our board of directors are independent directors and the
requirement that our nomination and remuneration committee consist
entirely of independent directors.
Accordingly, our
shareholders will not have the same protection afforded to
shareholders of companies that are subject to all of the New York
Stock Exchange corporate governance standards, and the ability of
our independent directors to influence our business policies and
affairs may be reduced.
Our financial information included in this annual report may not be
representative of our financial condition and results of operations
if we had been operating as a stand-alone company.
Prior
to our initial public offering and the related Reorganization
Transactions, the travel retail business of Dufry in the
continental United States and Canada was carried out by various
subsidiaries of Dufry. Since we and the subsidiaries of Dufry that
operated our business were under common control of Dufry, our
Consolidated Financial Statements include the assets, liabilities,
turnover, expenses and cash flows that were directly attributable
to our business for all periods presented. In particular, our
consolidated statement of financial position as of December 31,2017 includes those assets and liabilities that are specifically
identifiable to our business; and our consolidated statements of
comprehensive income for 2017 include all costs and expenses
related to us, including certain costs and expenses allocated from
Dufry to us. We made numerous estimates, assumptions and
allocations in our historical financial statements because we did
not operate as a stand-alone company prior to the Reorganization
Transactions. Although our management believes that the assumptions
underlying our historical financial statements and the above
allocations are reasonable, our historical financial statements may
not necessarily reflect our results of operations, financial
position and cash flows as if we had operated as a stand-alone
company during those periods. See “Item 7. Major Shareholders
and Related Party Transactions” for our arrangements with
Dufry and “Item 5. Operating and Financial Review and
Prospects” and the notes to our Consolidated Financial
Statements included elsewhere in this annual report for our
historical cost allocation. Therefore, our historical results may
not necessarily be indicative of our future
performance.
Risks Relating to the Ownership of Our Class A Common
Shares
The price of our Class A common shares might fluctuate
significantly, and you could lose all or part of your
investment.
Volatility in the
market price of our Class A common shares may prevent you from
being able to sell our Class A common shares at or above the price
you paid for such shares. The trading price of our Class A common
shares may be volatile and subject to wide price fluctuations in
response to various factors, including:
–
market conditions
in the broader stock market in general, or in our industry in
particular;
–
actual or
anticipated fluctuations in our quarterly financial and operating
results;
–
introduction of
new products and services by us or our competitors;
–
issuance of new or
changed securities analysts’ reports or
recommendations;
–
sales of large
blocks of our shares;
–
additions or
departures of key personnel;
–
regulatory
developments; and
–
litigation and
governmental investigations.
22
These
and other factors may cause the market price and demand for our
Class A common shares to fluctuate substantially, which may limit
or prevent investors from readily selling Class A common shares and
may otherwise negatively affect the liquidity of our Class A common
shares. In addition, in the past, when the market price of a stock
has been volatile, holders of that stock have often instituted
securities class action litigation against the company that issued
the stock. If any of our shareholders brought a lawsuit against us,
we could incur substantial costs defending the lawsuit. Such a
lawsuit could also divert the time and attention of our management
from our business.
The obligations associated with being a public company require
significant resources and management attention.
As a
public company in the United States, we have incurred and will
continue to incur legal, accounting and other expenses that we did
not previously incur. We are subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and the Sarbanes-Oxley Act, the
listing requirements of the New York Stock Exchange and other
applicable securities rules and regulations. The Exchange Act
requires that we file annual and current 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 over financial reporting.
We have made, and will continue to make, changes to our internal
controls and procedures for financial reporting and accounting
systems in order to meet our reporting obligations as a public
company. 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.
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 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
turnover-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.
Future sales of our Class A common shares, or the perception in the
public markets that these sales may occur, may depress our share
price.
Sales
of substantial amounts of our Class A common shares in the public
market, or the perception that these sales could occur, could
adversely affect the price of our Class A common shares and could
impair our ability to raise capital through the sale of additional
shares. As of March 5, 2020, we have 39,344,699 Class A common
shares outstanding. The Class A common shares offered in our
initial public offering are freely tradable without restriction
under the Securities Act of 1933 (the “Securities
Act”), except for any shares that may be held or acquired by
our directors, executive officers or other affiliates, as that term
is defined in the Securities Act, which will be restricted
securities under the Securities Act. Restricted securities may not
be sold in the public market unless the sale is registered under
the Securities Act or an exemption from registration is available.
We have filed a registration statement under the Securities Act
registering our Class A common shares reserved for issuance under
our equity incentive plans, and we have entered into the
Registration Rights Agreement pursuant to which we have granted
demand and piggyback registration rights to Dufry.
23
In the
future, we may also issue our securities if we need to raise
capital in connection with a capital raise or acquisition. The
amount of our Class A common shares issued in connection with a
capital raise or acquisition could constitute a material portion of
our then-outstanding share capital.
We do not currently intend to pay dividends on our Class A common
shares, and, consequently, your ability to achieve a return on your
investment will depend on appreciation in the price of our Class A
common shares.
We do
not currently intend to pay any cash dividends on our Class A
common shares for the foreseeable future. The payment of any future
dividends will be determined by the board of directors in light of
conditions then existing, including our turnover, financial
condition and capital requirements, business conditions, corporate
law requirements and other factors.
Our ability to pay dividends is subject to our results of
operations, distributable reserves and solvency requirements; we
are not required to pay dividends on our Class A common shares and
holders of our Class A common shares have no recourse if dividends
are not paid.
Any
determination to pay dividends in the future will be at the
discretion of our board of directors and will depend upon our
results of operations, financial condition, distributable reserves,
contractual restrictions, restrictions imposed by applicable law
and other factors our board of directors deems relevant. We are not
required to pay dividends on our Class A common shares, and holders
of our Class A common shares have no recourse if dividends are not
declared. Our ability to pay dividends may be further restricted by
the terms of any of our future debt or preferred securities (see
also “Item 10. Additional Information – Memorandum of
association and bye-laws”). Additionally, because we are a
holding company, our ability to pay dividends on our Class A common
shares is limited by restrictions on the ability of our
subsidiaries to pay dividends or make distributions to us,
including restrictions under the terms of the agreements governing
our indebtedness.
If securities or industry analysts do not continue to publish
research or reports or publish unfavorable research about our
business, the price and trading volume of our Class A common shares
could decline.
The
trading market for our Class A common shares will depend in part on
the research and reports that securities or industry analysts
publish about us, our business or our industry. We have limited
research coverage by securities and industry analysts. If no
additional securities or industry analysts commence coverage of us,
the trading price for our shares could be negatively affected. In
the event we obtain additional securities or industry analyst
coverage, if one or more of the analysts who covers us downgrades
our Class A common shares, their price will likely decline. If one
or more of these analysts, or those who currently cover us, ceases
to cover us or fails to publish regular reports on us, interest in
the purchase of our shares could decrease, which could cause the
price or trading volume of our Class A common shares to
decline.
We are a Bermuda company and it may be difficult for you to enforce
judgments against us or our directors and executive
officers.
We are
a Bermuda exempted company. As a result, the rights of holders of
our common shares are governed by Bermuda law and our memorandum of
association and bye-laws. The rights of shareholders under Bermuda
law may differ from the rights of shareholders of companies
incorporated in other jurisdictions. A number of our directors and
some of the named experts referred to in this annual report are not
residents of the United States, and a substantial portion of our
assets are located outside the United States. As a result, it may
be difficult for investors to effect service of process on those
persons in the United States or to enforce in the United States
judgments obtained in U. S. courts against us or those persons
based on the civil liability provisions of the U. S. securities
laws. It is doubtful whether courts in Bermuda will enforce
judgments obtained in other jurisdictions, including the United
States, against us or our directors or officers under the
securities laws of those jurisdictions or entertain actions in
Bermuda against us or our directors or officers under the
securities laws of other jurisdictions.
24
Our bye-laws restrict shareholders from bringing legal action
against our officers and directors.
Our
bye-laws contain a broad waiver by our shareholders of any claim or
right of action, both individually and on our behalf, against any
of our officers or directors. Subject to Section 14 of the
Securities Act, which renders void any purported waiver of the
provisions of the Securities Act, the waiver applies to any action
taken by an officer or director, or the failure of an officer or
director to take any action, in the performance of his or her
duties, except with respect to any matter involving any fraud or
dishonesty on the part of the officer or director. This waiver
limits the right of shareholders to assert claims against our
officers and directors unless the act or failure to act involves
fraud or dishonesty.
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,” as such term is defined in
Rule 405 under the Securities Act, and therefore, we are not
required to comply with the periodic disclosure and current
reporting requirements of the Exchange Act, and related rules and
regulations, that apply to U. S. domestic issuers. Under Rule 405,
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 of June 30, 2020.
In the
future, we could lose our foreign private issuer status if, for
example, a majority of our voting power were held by U. S. citizens
or residents and we fail to meet additional requirements necessary
to avoid loss of foreign private issuer status. The regulatory and
compliance costs to us under U. S. 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 U. S. domestic issuer forms with the U.
S. Securities and Exchange Commission (the “SEC”),
which are more detailed and extensive than the forms available to a
foreign private issuer. For example, the annual report on Form 10-K
requires domestic issuers to disclose executive compensation
information on an individual basis with specific disclosure
regarding the domestic compensation philosophy, objectives, annual
total compensation (base salary, bonus, equity compensation) and
potential payments in connection with change in control,
retirement, death or disability, while the annual report on Form
20-F permits foreign private issuers to disclose compensation
information on an aggregate basis. We would also be required to
comply with U. S. 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 U. S. 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 U. S. stock exchanges that are available to foreign private
issuers.
Bermuda law differs from the laws in effect in the United States
and may afford less protection to holders of our common
shares.
We are
incorporated under the laws of Bermuda. As a result, our corporate
affairs are governed by the Companies Act, which differs in some
material respects from laws typically applicable to U. S.
corporations and shareholders, including the provisions relating to
interested directors, amalgamations, mergers and acquisitions,
takeovers, shareholder lawsuits and indemnification of directors.
Generally, the duties of directors and officers of a Bermuda
company are owed to the company only. Shareholders of Bermuda
companies may only take action against directors or officers of the
company in limited circumstances. The circumstances in which
derivative actions may be available under Bermuda law are
substantially more proscribed and less clear than they would be to
shareholders of U. S. corporations. The Bermuda courts, however,
would ordinarily be expected to permit a shareholder to commence an
action in the name of a company to remedy a wrong to the company
where the act complained of is alleged to be beyond the corporate
power of the company or illegal, or would result in the violation
of the company’s memorandum of association or bye-laws.
Furthermore, consideration would be given by a Bermuda court to
acts that are alleged to constitute a fraud against the minority
shareholders or, for instance, where an act requires the approval
of a greater percentage of the company’s shareholders than
that which actually approved it.
25
When
the affairs of a company are being conducted in a manner that is
oppressive or prejudicial to the interests of some shareholders,
one or more shareholders may apply to the Supreme Court of Bermuda,
which may make such order as it sees fit, including an order
regulating the conduct of the company’s affairs in the future
or ordering the purchase of the shares of any shareholders by other
shareholders or by the company. In addition, the rights of holders
of our common shares and the fiduciary responsibilities of our
directors under Bermuda law are not as clearly established as under
statutes or judicial precedent in existence in jurisdictions in the
United States, particularly the State of Delaware. Therefore,
holders of our common shares may have more difficulty protecting
their interests than would shareholders of a corporation
incorporated in a jurisdiction within the United
States.
We have anti-takeover provisions in our bye-laws that may
discourage a change of control.
Our
bye-laws contain provisions that could make it more difficult for a
third-party to acquire us without the consent of our board of
directors. These provisions provide for:
–
a classified board
of directors with staggered three-year terms;
–
restrictions on
the time period during which directors may be
nominated;
–
the ability of our
board of directors to determine the powers, preferences and rights
of preference shares and to cause us to issue the preference shares
without shareholder approval; and
–
a two-class common
share structure, as a result of which Dufry generally will be able
to control the outcome of all matters requiring shareholder
approval, including the election of directors and significant
corporate transactions, such as a merger or other sale of our
company or its assets.
These
provisions could make it more difficult for a third-party to
acquire us, even if the third-party’s offer may be considered
beneficial by many shareholders. As a result, shareholders may be
limited in their ability to obtain a premium for their Class A
common shares. See “Item 10. Additional Information –
B. Memorandum of association and bye-laws” for a discussion
of these provisions.
Hudson, anchored
by our iconic Hudson brand, is a travel experience leader committed
to enhancing the travel journey for over 300,000 travelers every
day in the continental United States and Canada. Our first
concession opened in 1987 with five Hudson News stores in a single
airport in New York City and today, our reach expands to airports,
commuter hubs, and some of the most visited landmarks and tourist
destinations in the world. In everything we do, we are guided by a
unifying core purpose: to be “The Traveler’s Best
Friend.” It is this guiding purpose that has allowed us to
meet the evolving needs of the traveler through product offerings
and store concepts centered on the four pillars of our business:
travel convenience, specialty retail, duty-free, and food and
beverage. Through our unwavering dedication to this purpose, as
part of the global Dufry Group, we have become one of the largest
travel concession operators in the continental United States and
Canada.
As of
December 31, 2019, we had a diversified portfolio of over 200
concession agreements, which allowed us to operate 1,013 stores
across 88 different transportation terminals and destinations,
including concessions in 24 of the 25 top airports in the
continental United States and Canada. Our recent announcement to
acquire a controlling stake in the assets of OHM Concession Group,
a leading F&B concessions operator in North America, emphasize
our commitment to growing the Hudson brand and is expected to
expand our portfolio to over 100 quick service and café
concepts, full-service, sports restaurants and fine dining
locations across the United States and Canada. We have over one
million square feet of commercial space and conduct over 125
million transactions annually. From 2008 to our initial public
offering in 2018, we were a wholly-owned subsidiary of Dufry, a
leading global travel retailer operating over 2,400 stores in 65
countries on six continents, and we continue to benefit from
Dufry’s expertise and scale in the travel retail
industry.
We
operate local and iconic brand concepts that span the four pillars
of our business. In addition, our proprietary specialty concepts
allow us to build loyalty with customers and develop a sense of
place during the travel journey. Our proprietary brands
include:
We
pride ourselves on our concepts and product assortment satisfying
travelers’ appetites and indulging their curiosities. Our
travel convenience concepts provide travelers with a wide variety
of go-to travel necessities, including locally curated souvenirs,
portable electronics, reading materials, grab-and-go snacks, and
more. At our specialty branded concepts, travelers can experience
some of the world’s most prestigious luxury brands, including
Tumi, Coach, Michael Kors, FAO Schwarz, and most recently,
Brookstone. Throughout our walkthrough duty-free concepts, we offer
a wide selection of perfumes and cosmetics, wine and spirits,
fashion, and tobacco. Within our food & beverage category, we
offer our consumers healthy and fresh quick service food &
beverage outlets under franchise names including Dunkin’,
Baskin Robbins, Pinkberry, Jason’s Deli, and Joe & The
Juice. Our recent announcement to acquire a controlling stake in
the assets of OHM will add approximately 60 units to our existing
food concessions base with a portfolio of well-known concepts such
as &pizza, the Kitchen by Wolfgang Puck, the Bracket Room
Sports Lounge, Chick-fil-A, Currito, Jamba Juice, and Einstein
Bros.
27
B. Business overview
For the
year ended December 31, 2019, our net sales were broken down as
follows:
As a
travel concession operator, we operate primarily in airports and
other locations where concessions are awarded by landlords, which
include airlines, airport authorities, cities, counties,
developers, master concessionaires, port authorities and states.
Our success has been driven by our ability to provide
differentiated retail concepts and customized concession programs
to address the complex requirements of our landlords and the
characteristics of the market that each location serves. This
capability is key to our strong relationships with
landlords.
In
2018, Siegel+Gale conducted interviews with airport directors
across several small, medium and large hub airports. These
directors identified Hudson as a leader in delivering operational
excellence. Specifically, we were recognized as an operator that
excelled at delivering key criteria for winning and extending
contracts, including proven revenue generation, ability to tailor
offering to local travelers and markets, commitment to landlord
partnerships and responsive local teams.
Operational
flexibility and the ability to reinvent the airport landscape is
key to our success. To promote and sustain our flexibility, we have
established integrated and collaborative processes to drive
coordinated operations across real estate management, store
operations, marketing, merchandising and store concept design and
planning. Our flexibility enables us to operate multiple retail
concepts, generally ranging from 200 square-foot retail walls to
10,000 square-foot stores. We also have a number of shop-in-shop
combination stores that enables us to leverage travel convenience
or proprietary book concepts with global brands such as
Dunkin’, creating a unique experience for
travelers.
28
Our
stores are designed to draw travelers in, and are tailored to meet
the unique specifications of each airport or travel destination.
Additionally, our stores showcase innovative and highly-customized
designs to draw attention to impulse items, maximizing sales. As an
example, we recently announced our next generation store design for
2020, which positions Hudson for future growth and continues to
enhance the travel experience. The new store format will offer
digital displays, an interchangeable store design emphasizing
seasonality, and self-checkout stations to reflect the evolving
needs of the traveler. Over the past three years, we have invested
over $200 million in new store buildouts, store upgrades and
expansions to improve the overall shopping experience at our
stores, as well as other capital investments in our business to
support our stores.
Through our
customized merchandising approach, we provide curated assortments
to each market to take advantage of traffic flow, seasonality,
landlord preferences, local tastes, large-scale regional events and
traveler spending habits. We merchandise our stores with both
necessity-driven and on-trend discretionary products and we provide
discretion to our local general managers to make choices regarding
product mix for the stores they manage. Our merchandising team is
committed to continuously sourcing new products to stay ahead of
trends, getting the right product at the right price, to the right
place at the right time. Both our and Dufry’s tenured
relationships with a diversified set of suppliers support our
successful merchandise-sourcing approach.
We
remain an integrated part of the global Dufry Group. In addition to
Dufry being our controlling shareholder, a number of the members of
our board of directors are affiliated with Dufry and our business
continues to benefit from Dufry’s global expertise and best
practices across all major functions. Moreover, we expect that
Dufry will continue to be one of our largest suppliers, extend
intercompany financing to us and provide us with other support and
services. See “Item 7. Major Shareholders and Related Party
Transactions – B. Related party
transactions.”
Our strengths
Hudson is an iconic brand in North American travel
retail
Our
company’s evolution from a few newsstands in LaGuardia
Airport to an all-encompassing travel experience partner spans more
than three decades. With roots tied in travel convenience, we have
earned clients’ and travelers’ trust by remaining true
to our values while redefining the travel experience. Hudson has
kept travelers top-of-mind by evolving with their needs,
championing brands and delivering experiences through strong
partnerships and friendly services that help turn a world of travel
into a world of opportunity. We believe that we have built a
reputation among travelers as a reliable and go-to destination to
meet their needs when traveling. According to an Ipsos Market
Research survey conducted in 2017, more travelers who shop at
airports would prefer to shop at Hudson stores than at any other
travel news, gift and convenience retail store. Our customers look
for Hudson stores for travel necessities, gifts for loved ones or a
convenient stop for food and beverages. We have also leveraged the
strength of the Hudson brand to become one of the leading airport
retailers in the United States for many international consumer
brands such as Godiva Chocolates, SwissGear, Sony and Belkin. We
believe the iconic Hudson brand anchors our proposals for
concessions and provides us with a competitive
advantage.
Customized and Local Approach Delivers Compelling Traveler
Experience
Our
customized and local approach to creating our concession portfolio
and to the design, layout and merchandising of our stores produces
a compelling retail experience for travelers. We believe that our
ability to operate multiple proprietary and third-party-branded
retail concepts, while simultaneously meeting the unique
specifications of each airport or travel destination, also provides
an attractive retail proposition for our landlords and other
constituents.
We
believe customers find our stores to be well-organized, comfortable
and easy-to-shop. Our stores are merchandised to deliver both
necessity-driven and on-trend products, while also displaying
products that travelers may have forgotten to pack. We have
unrivaled access to travelers, which enables us to understand their
mindsets and behaviors and informs the evolution of our
merchandising strategies and product mix. For example, we have
merchandised our stores to take advantage of recent trends in
traveler tastes, resulting in an increase in the share of our
duty-paid sales mix attributable to electronic accessories, snacks
and beverages. In addition, we serve customers’ needs and
preferences by offering eclectic merchandise that targets regional
tastes and local fan-favorite brands. Our
merchandising approach benefits from Dufry’s expertise in
duty-free retail and access to strong global brands, which
complements our portfolio of concepts for our airports and
customers.
29
Extensive experience and superior scale in our
industry
We
believe Hudson is distinguished from other operators by our 30
years of industry experience and unparalleled scale of over 200
concession agreements under which we operate over one million
square feet of commercial space in the continental United States
and Canada. We believe this experience, knowledge and scale reflect
our strong credibility with landlords and other business partners
within the travel retail industry.
Additionally, we
believe the expertise and operational track record required to bid
successfully on new concessions combined with our ability to offer
a broad range of retail concepts and customize each opportunity
regardless of landlord structure or concession model are advantages
when competing for new concessions. Our expertise also allows us to
successfully manage the myriad of legal, regulatory and logistical
complexities involved in operating a business in complex and highly
regulated environments.
Diversified and Dynamic Business Model
Our
business model is diversified in terms of the customers and
communities we serve, and the concession models we manage. Under
our portfolio, we operate a mix of concession programs and retail
concepts under both proprietary and third-party brands, including
travel essentials stores and bookstores under the Hudson brand,
specialty branded retail stores such as Coach, Estée Lauder,
Kate Spade and Tumi, duty-free shops under Dufry, World Duty Free
and Nuance, as well as food and beverage outlets such as
Dunkin’ Donuts. As of December 31, 2019, we sold products in
1,013 stores across 88 locations.
Our
concessions also benefit from multi-year contract terms. For the
year ended December 31, 2019, no single concession accounted for
more than 10% of our sales. The long average residual duration of
our concession portfolio and diversification across contracts
provide us with a high degree of sales visibility.
In
addition, our strategy emphasizes continuously improving formats
and adjusting our store concepts and product mix to meet and exceed
travelers’ expectations. Due to our merchandising
flexibility, our local general managers can tailor their purchasing
to address regional preferences. This approach enables our local
general managers to update store concepts and prioritize
seasonality, allowing them to be nimble in their
approach.
Service-driven, cohesive management team
Together with our
global parent, Dufry, our talented and dedicated senior management
team has guided our organization through its expansion and
positioned us for continued growth. Our executive team has an
average of 22 years of experience at Hudson/ Dufry and are backed
with deep industry and operational insight. Additionally, our
management team possesses extensive experience across a broad range
of disciplines, including merchandising, marketing, real estate,
finance, legal and regulatory and supply chain management. Our
management team embraces our core purpose to be “The
Traveler’s Best Friend” and embodies our passionate,
dedicated and service-oriented culture, which is shared by our team
members throughout the entire organization. We believe this results
in a cohesive team focused on sustainable long-term
growth.
Our strategies
Increase sales at existing concessions
Continue Innovation in Store Formats and Merchandise
At
Hudson, every square foot matters. We aim to increase sales per
transaction and overall sales by maintaining our emphasis on
merchandising and refining operations to continuously provide
travelers with an array of in-demand products. We seek innovative
ways to increase potential selling space within existing locations,
and through continuous refinement, we optimize our concession
configurations to maximize sales for our landlord and product
vendor partners. We also constantly evolve our merchandizing mix to
stay relevant and on-trend, as well as to
30
continue driving
sales by serving travelers’ enthusiasm for large-scale
regional events, including music festivals, trade shows and
sporting events, such as the Super Bowl and the World Series. We
also will continue to leverage technology to enhance the customer
experience through mobile pre-ordering applications, self-checkout
capabilities, digital marketing and other evolving
technologies.
Refurbish and Convert Existing Stores
We
intend to improve sales and profitability within current concession
agreements by focusing capital investments on refurbishing or
converting existing stores, including when we pursue contract
extensions. For example, we will continue converting our existing
Hudson News stores into our updated and reinvigorated Hudson retail
concept, as well as unveil the next-generation store concepts in
2020.
Expand concession portfolio
Continue to win airport concessions
We
intend to grow by securing new concessions at the airports in which
we currently operate and at additional airports in the continental
United States and Canada, while maintaining a high renewal rate for
our existing concessions. Airport authorities are dedicating more
commercial space to concession opportunities, aiming to develop a
sense of place within the airport, and are adopting a more
comprehensive approach to its development.
According to the
Airports Council International – North America (ACI-NA),
airports will need to spend an estimated $130 billion on
infrastructure between 2019 – 2021 to accommodate growth in
passenger and cargo activity, rehabilitate existing facilities, and
support aircraft innovation. This activity supports the growing
whitespace opportunity in our industry with additional space for
retail and dining concessions in order to enhance the travel
experience for passengers and offset the cost of
development.
We
believe we are well-positioned to succeed in this competitive
environment due to our experience and reputation with comprehensive
retail concession opportunities, our integrated and collaborative
approach, and the proven economics of our concession model. For
investments in new concessions, expansions and renewals, we have
defined a hurdle rate of a low double-digit internal rate of return
over the lifetime of the concession and we typically target a
payback period between two and five years, depending on the length
of the contract.
Continue expansion into non-traditional locations
We
intend to leverage Hudson’s consumer brand awareness and
retail expertise to capture customer spending at travel hubs,
tourist destinations, hotels and other non-airport locations. These
venues share similar retail characteristics with airports, such as
higher foot traffic and customers with above-average purchasing
power and greater time to shop. Our ability to deploy our
successful turnover maximizing capabilities outside of airports has
led to a number of wins in such locations. We will
opportunistically pursue avenues for growth across the continental
United States and Canada in these non-traditional
locations.
Grow food and beverage platform
We
know that our travelers are looking for fresh and healthy options
as they travel, so we intend to pursue growth opportunities in the
large and expanding travel food and beverage market in the
continental United States and Canada. Based on market data from the
ARN Fact Book and our estimates, the airport food and beverage
market in the United States and Canada generated in excess of $5.6
billion of passenger spending in 2018. This market generated sales
of approximately 1.4x the combined airport sales of specialty, news
and gifts and duty-free products in 2018. The travel food and
beverage market is highly fragmented and there is an increasing
overlap between travel food and beverage and travel retail, such as
packaged food and “grab-and-go” concepts. We intend to
pursue these growth opportunities both organically and through
acquisitions. In October 2019, we announced an agreement to acquire
a controlling stake in the assets of OHM Concession Group LLC, an
award winning food and beverage concessions operator in North
America. The addition of OHM adds notable food and beverage options
to Hudson’s existing concessions catalog and complements
Hudson’s existing footprint in the Quick Service Restaurant
space. In addition, we believe that growing our food and beverage
expertise and track record will strengthen our ability to compete
for master-concessionaire contracts and drive sales, gross margin
and cost synergies with our existing retail concepts.
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Pursue accretive acquisitions
We
believe that we have demonstrated our ability to create value by
acquiring and integrating companies into our business. During the
last several years, we have successfully integrated the North
American operations of Nuance and World Duty Free Group. By
deploying our customized and collaborative approach to store
operations and merchandising, we have been able to drive sales and
advertising income growth at acquired locations and achieve
significant cost synergies. Our management team will approach
potential acquisitions in a disciplined manner with a focus on
strengthening our offerings for travelers and driving additional
procurement and cost synergies. We actively maintain a pipeline of
potential acquisition opportunities across retail and food and
beverage, as highlighted by the recent Brookstone and OHM
transactions.
Target improved profitability by leveraging our fixed costs and
investments
We
plan to continue to improve our operating results by leveraging our
scale, partnerships and operational excellence. The strength of our
market position in the continental United States and Canada,
combined with Dufry’s global presence, enables us to
negotiate favorable terms with our business partners. Additionally,
as we continue to increase sales under new and existing concession
agreements, we will seek to improve our profitability as general
corporate overhead and fixed costs shrink as a percentage of sales.
Further, we have invested in our sourcing and distribution network
and integrated information technology systems. We intend to
leverage these investments to grow our sales and
profitability.
Our market
We
operate in the travel concession market in the continental United
States and Canada, which we consider to consist of concessions
located in airports, ports, bus and railways stations, tourist
destinations, hotels and highway rest stops, as well as sales
onboard aircrafts, ferries and cruise liners. We plan to continue
to expand across store formats and into non-airport locations as we
grow our operations. See “– Our strategies –
Expand concession portfolio.”
The
majority of our sales are derived from airports. For the year ended
December 31, 2019, 95% of our net sales were generated at airports
in the continental United States and Canada. According to the ARN
Fact Book, airport concession sales at the top 44 international
airports by performance in the United States and Canada were
approximately $9.5 billion for the year ended December 31, 2018.
Based on the ARN Fact Book, as a breakdown of sales at these
airports for the year ended December 31, 2018, food and beverage
contributed $5.6 billion in sales while specialty, news and gifts
and duty-free contributed $1.3 billion, $1.5 billion and $1.1
billion in sales, respectively.
The airport concession market
Airport
concessions are comprised of a variety of retail, food and beverage
and commercial service concepts. The terms of an agreement between
an airport concession operator and the relevant airport landlord
are generally set forth in a concession agreement. Concessions are
generally awarded through either a public tender process or
pursuant to direct negotiations. Landlords generally determine the
number and type of concessions to be awarded, and terms for
individual concessions may vary considerably from facility to
facility.
Concession
agreements may permit an airport concessionaire to sell a
particular assortment of goods (for example, general duty-free
shops may sell wine and spirits, tobacco, perfumes and cosmetics
while specialty stores may sell one specific product category, such
as sunglasses) or operate in a specified physical location (for
example, an allocation of space within a terminal or the right to
operate an entire terminal). The concession operator may also
obtain the right to allocate concession space within all or a
portion of the facility, subject to the approval of the landlord.
The duration of a concession agreement typically ranges from five
to ten years, depending on the location and type of
facility.
32
Each
landlord has needs and requirements that differ depending on a
number of factors. Certain landlords may prefer to develop
commercial operations from idea conception through to completion,
and therefore will partner with an experienced travel concession
operator to assist with overall development of airport concessions.
Other landlords may be more involved in the management and
allocation of commercial space and therefore may be more focused on
maximizing returns at a given location, with pricing terms being
more important. Most airport landlords determine rent by reference
to metrics such as gross sales or the number of passengers
traveling through an airport. Concession agreements typically
provide for rent that generally is based on a variable component
and in addition includes a MAG. See “– Concession
agreements.”
Airport retailers
Airport retailers
differ significantly from traditional retailers. Unlike traditional
retailers, airport retailers benefit from a steady and largely
predictable flow of traffic from a constantly changing customer
base. Airport retailers also benefit from “dwell time,”
the period after travelers have passed through airport security and
before they board an aircraft. Airports often offer fewer shopping
alternatives compared to the traditional channel, including limited
competition from Internet retailers, which leads to necessity and
impulse-driven purchases being made from available airport
retailers.
Airport retail
customers differ from traditional retail customers in their needs,
wants and expectations. Increased security encourages travelers to
arrive well before their flights depart, which creates the
opportunity and time for shopping, meals and other experiences.
Enhanced security checks and the need to reach a departure gate on
time may also add to overall travel anxiety and drive impulse
purchases. In general, airport retail customers are relatively more
affluent than traditional retail customers, and travelers who are
on holiday may be more inclined to spend money at the
airport.
Trends
Recent
trends affecting the airport concession market in North America
include:
Growth in passenger numbers
In the
past decade, there has been a significant increase in both domestic
and international air travel due largely to improvements in, and
greater accessibility of, air transport, as well as increased
disposable income and business professionals needing to travel due
to the internationalization of many industries. According to ACI,
between 2011 and 2018, total passenger traffic in North America
grew at a compound annual growth rate of 3.1%. Looking to the
future, ACI projects that annual North American passenger volumes
will surpass 2.1 billion by 2021, and grow at a 2.4% compound
annual growth rate between 2019 and 2026. The North American
airport retail market’s overall exposure to passengers is
much more heavily weighted towards passengers traveling
domestically.
The
chart below presents historical and projected North American
passenger volumes.
33
Increased “dwell time” and propensity to
spend
Travel
industry dynamics continue to evolve. Lengthy security procedures
and transportation delays have led to earlier airport arrival times
and increased passenger dwell time, with medium and large U. S.
airports averaging approximately 90 minute dwell times, according
to the 2017 Airport Council International-North America
(“ACI-NA”) Concessions Benchmarking Survey.
Additionally, airlines have eliminated many complementary services,
such as in-flight meals, headphones and other amenities to reduce
costs. Further, travelers have demonstrated a willingness to spend
more at airports when presented with better quality products,
convenience and a greater product selection.
Airport expansion and focus on new revenue streams
Air
travel is a critical and central aspect of the United States
economic infrastructure with long-term resiliency to external
pressures. Airports and governments are focused on redevelopment of
terminal concession programs and additional space is being
dedicated to new opportunities to develop retail and other new
sales streams. As each travel location is unique, each airport
operator works to find the optimal mix of formats and products best
suited to that region or location in order to maximize turnover and
profit.
Our history
Our
business started in 1987 with a concession for five Hudson News
stores in a single airport. Over time, we expanded our operations
and successfully bid for concessions in other major travel hubs,
including at John F. Kennedy International Airport, Boston Logan
International and Washington Dulles International Airport. We
acquired the WH Smith North American airport operations in 2003,
adding 150 stores at 22 airports. In 2008, Dufry acquired Hudson.
Since then, we have expanded our operations as an integrated
division of the global Dufry Group. Dufry acquired Nuance in 2014
and World Duty Free Group in 2015 and we now operate Nuance and
World Duty Free Group’s respective operations in the
continental United States and Canada. In 2019, we announced the
agreements to acquire assets related to Brookstone airport
operations as well as OHM Concession Group LLC, an award-winning
food and beverage concessions operator. Our tenured and storied
history signifies our evolution from travel retail pioneer to a
travel experience expert
Our relationship with Dufry
Prior
to our initial public offering, we were wholly-owned by Dufry.
Following our initial public offering, Dufry is our controlling
shareholder, the majority of the members of our board of directors
are affiliated with Dufry, and, as an integrated part of the global
Dufry Group, our business continues to benefit from the strength of
Dufry’s position in the global travel retail market.
Moreover, Dufry continues to be one of our largest suppliers,
extends financing to us and provides us with other important
support and services, including a license to use the Dufry, Hudson,
World Duty Free and Nuance brands and associated brands that are
owned by Dufry. See “Item 7. Major Shareholders and Related
Party Transactions.”
Dufry
has informed us that it does not intend to pursue opportunities in
the continental United States, Hawaii or Canada in the following
areas: retail or food and beverage concessions; leases at airports
or train stations; master concessionaire roles at airports; or any
other Dufry, Hudson, Nuance or World Duty Free-branded retail
operations, except that Dufry may continue to pursue travel retail
operations, using any of the aforementioned brands, on board cruise
lines that visit the United States or Canada or at ports in the
United States or Canada visited by cruise lines. Dufry will also
continue to operate its duty-free and duty-paid stores in Puerto
Rico and maintain and operate its international distribution
facilities in the United States. Dufry has also informed us that it
intends to pursue opportunities outside the continental United
States, Hawaii and Canada using the Hudson brand and other
associated brands used by us in the continental United States and
Canada. We do not intend to operate outside of the continental
United States, Hawaii and Canada.
34
Our retail concepts and products
We
operate a number of retail concepts across our retail locations,
including:
–
Travel
Essentials and Convenience Stores. Under a variety of
brands, including our iconic flagship brand Hudson, our travel
essentials and convenience stores offer a wide assortment of
products to the travelling public, including portable electronics,
reading materials, souvenirs, grab-and-go snacks and beverages, and
travel necessities. These shops are operated as stand-alone stores
or, in some cases, together with a coffee-take-out concept, such as
Dunkin’ or Euro Café.
–
Duty-Free
Stores. Under the brands Dufry, World Duty Free and Nuance,
we offer a wide range of traditional retail products for travelers
on a duty-free and duty-paid basis, as applicable, including
perfumes and cosmetics, food, jewelry and watches, accessories,
wines and spirits and tobacco. Many of these stores are so-called
“walk-through” stores, which are designed to direct the
entire passenger flow through the store. This innovative concept
allows travelers to explore the products we sell without needing to
deviate from their way to the boarding gate.
–
Electronics
Stores. Our electronics stores, operated under the brand
Tech on The Go, offer products from a range of popular electronics
and electronics accessory brands, including Sony, Bose, Belkin and
Moshi.
–
Bookstores.
Our bookstores offer a broad array of bestsellers and new releases,
as well as a large selection of hard cover, paperback, trade and
children’s books. Our bookstores are operated under brands
such as Hudson Booksellers and Ink by Hudson, as well as local and
regional bookstore brands such as Tattered Cover and Book Soup,
which we operate pursuant to licenses with the owners of the
brands.
–
Specialty
Branded Stores. We operate branded specialty stores,
offering a range of products from a single well-known global or
national brand, including Coach, Estée Lauder, Kate Spade,
Michael Kors, Kiehl’s, FAO Schwarz, Tumi and now Brookstone.
These stores, which are operated by our team members, provide
travelers with the same experience as shoppers at the primary
locations of the brands and appeal to both customers and suppliers
alike: customers can use their waiting time to shop for their
favorite brands and suppliers have a highly visible showcase to
display their products. We operate specialty branded stores
directly, although the brand owner or supplier may provide
financial support.
–
Quick-Service
Food Outlets. In addition to our travel convenience and
quick-service coffee combination stores, we operate stand-alone
quick service food and beverage outlets, such as Dunkin’
Donuts, Jason’s Deli and Pinkberry. We operate these stores
under franchise agreements. Our agreement to acquire OHM Concession
Group further will further solidify F&B as one of our key
pillars. OHM’s portfolio of well-known concepts includes
&pizza, the Kitchen by Wolfgang Puck, the Bracket Room Sports
Lounge, Chick-fil-A, Currito, Dunkin’ , Jamba Juice and
Einstein Bros.
The
following table sets forth the distribution of our net sales by
product category as a percentage of our total net sales, and the
total value of our net sales by product category, for the years
ended December 31, 2019, 2018 and 2017:
As of December 31, 2019, we had over
200 concession agreements and operated 1,013 stores across 88
retail locations in the continental United States and Canada,
totaling over one million square feet of commercial space. Our
locations are distributed across 77 airports, five commuter
terminals and six tourist/landmark destinations, as illustrated
below:
For
the years ended December 31, 2019, 2018 and 2017, sales in the
continental United States represented 82%, 81% and 81% of our net
sales, respectively, with the balance of our sales generated in
Canada.
37
Duty-paid and duty-free operations
We
operate both duty-paid and duty-free stores throughout the
continental United States and Canada. For the years ended December31, 2019, 2018 and 2017, duty-paid stores represented 78%, 76% and
76% of our net sales, respectively and duty-free stores represented
22%, 24% and 24% of our net sales, respectively.
Duty-paid shops
target domestic and international travelers. Standard duties and
other taxes apply to sales in these shops. They are located in both
international and domestic airport terminals, commuter hubs and
other locations.
Duty-free shops
are located in airports and generally offer goods to both
international and domestic travelers, with international travelers
exempt from duties and excise and other taxes on certain goods,
such as tobacco and liquor.
Concession agreements
We
enter into concession agreements with landlords of airports,
commuter hubs and other locations to operate our stores. Concession
agreements often cover a number of stores in a single location, and
we often have multiple concession agreements per
location.
These
concession agreements typically define the:
–
term of our
operations;
–
rent and other
amounts payable;
–
permitted uses and
product categories to be sold; and
–
location of our
stores and exterior appearance.
Concessions may be
awarded in a public or private bidding process or in a negotiated
transaction. Our landlords who award contracts through a bidding
process typically consider some, if not all, of the following
factors when reviewing concession bids: their relationship with the
concession operator and the concession operator’s experience
in a particular region, the concession operator’s operational
track record, and its ability to respond to the needs of the
landlord for planning and design advice and operational ability.
Price is also an important competitive factor, as a concession may
be awarded in a tender based upon the highest concession fee
offered. Landlords also often consider the brands included in a
proposal and ACDBE partnerships, if applicable, among other things.
Our concession agreements often require us to perform initial
renovations of the stores, as well as refurbishment to the stores
over the term of the arrangement.
In
return for the right to operate our concession, we pay rent to the
airport authority or other landlord that is typically determined on
a variable basis by reference to factors such as gross or net sales
or the number of travelers using the airport or other location.
Where rent is based on our sales, concession agreements generally
also provide for a minimum annual guaranteed payment, or MAG, that
is either a fixed dollar amount or an amount that is variable based
upon the number of travelers using the airport or other location,
retail space used, estimated sales, past results or other metrics.
A limited number of our concession agreements contain fixed
rents.
Many
of our concession agreements at airports contain requirements to
use good faith efforts to achieve an ACDBE participation goal,
which we meet in different ways depending on the terms of the
concession agreement. A failure to comply with such requirements
may constitute a default under a concession agreement, which could
result in the termination of the concession agreement and monetary
damages. See “– Regulation.” Generally, our
concession agreements are terminable at will by our
landlords.
38
Local partners
We
operate most of our stores located at airports in cooperation with
local partners. We partner with many of these entities through the
ACDBE program operated by the FAA. See “–
Regulation.” We also may partner with other third parties to
win and maintain new business opportunities. Consequently, our
business model contemplates the involvement of local partners and
we typically operate these concessions as associations and
partnerships. The net earnings from these operating subsidiaries
attributed to us are reduced to reflect the applicable ownership
structure.
We
generally structure our store operations through associations and
partnerships. As of December 31, 2019, we had 121 associations and
other partnerships with 98 local partners.
Our suppliers
We are
supplied both directly from manufacturers and through
distributors.
Our
principal travel essentials suppliers are Core-Mark and Resnick
Distributors. Our principal duty-free products supplier is Dufry.
Our principal beverages supplier is The Coca-Cola Company. Our
principal book supplier is Readerlink Distribution Services. Our
principal magazines and periodicals suppliers are The American News
Company, formerly known as The News Group, and Hudson News
Distributors, which includes Hudson News Distributors, LLC and
Hudson RPM Distributors, LLC. For more information on our supply
arrangement with Hudson News Distributors, LLC and Hudson RPM
Distributors, LLC, see “Item 7. Major Shareholders and
Related Party Transactions – B. Related party transactions
– Transactions with entities controlled by Mr. James
Cohen.”
As our
largest duty-free products supplier, Dufry has historically
supplied us with perfumes and cosmetics, as well as, in the United
States, liquor and tobacco, for our duty-free stores. We expect
that Dufry will continue to supply us with such products. See
“Item 7. Major Shareholders and Related Party
Transactions.”
Competition
We
face two different forms of competition in the travel retail market
in the continental United States and Canada.
First,
we compete for concessions at airports and other transportation
terminals and destinations with a number of other global, national
and regional travel concession operators. Travel concession
operators compete primarily on the basis of their experience and
reputation in travel retailing, including their relationships with
airport authorities and other landlords, their experience in a
particular region, their ability to respond to the needs of an
airport authority or other landlords for planning and design
advice, as well as operational ability. Price is also a significant
competitive factor, as a concession may be awarded in a tender
based upon the highest concession fee offered. Our main competitors
for airport concessions are Paradies Lagardere, HMS Host, WH Smith,
Duty Free America and DFS.
Second, we also
compete for customers directly with other travel retailers in some
locations, and, as our range of products increases, we also become
an indirect competitor of traditional Main Street and Internet
retailers. The level of competition varies greatly among the
different locations where we operate. For example, in a number of
airport terminals, we are the sole concession operator, while in
some locations we compete with other retailers.
39
Regulation
Our
operations are subject to a range of laws and regulations adopted
by national, regional and local authorities from the various
jurisdictions in which we operate, including those relating to,
among others, public health and safety and fire codes. Failure to
obtain or retain required licenses and approvals, including those
related to food service and public health and safety, would
adversely affect our operations. Although we have not experienced,
and do not anticipate, significant problems obtaining required
licenses, permits or approvals, any difficulties, delays or
failures in obtaining such licenses, permits or approvals could
delay or prevent the opening, or adversely impact the viability, of
our operations.
The
FAA oversees the ACDBE program pursuant to U.S. Federal
Regulations. Airports in the U.S. require concession agreements to
have set minimum ACDBE participation and ownership The ACDBE
program is designed to help ensure that small firms owned and
controlled by socially and economically disadvantaged individuals
can compete for airport contracting and concession opportunities in
domestic passenger service airports. The ACDBE regulations require
that airport concession recipients establish annual ACDBE
participation goals, review the scope of anticipated large prime
contracts throughout the year, and establish contract-specific
ACDBE participation goals. We generally meet the contract specific
goals through an agreement providing for co-ownership of the retail
location with an ACDBE. Frequently, and within the guidelines
issued by the FAA, we may lend money to ACDBEs in connection with
concession agreements in order to help the ACDBE fund the capital
investment required under a concession agreement. The rules and
regulations governing the certification of ACDBE participation in
airport concession agreements are complex, and ensuring ongoing
compliance is costly and time consuming. Further, if we fail to
comply with the minimum ACDBE participation requirements in our
concession agreements, we may be held responsible for breach of
contract, which could result in the termination of a concession
agreement and monetary damages. See “Item 3. Key Information
– D. Risk factors – Risks relating to our business
– Failure to comply with ACDBE participation goals and
requirements could lead to lost business opportunities or the loss
of existing business.”
We
derive a portion of our net sales from the sale of alcoholic
beverages. Alcoholic beverage control laws and regulations require
that we obtain liquor licenses for each of our concessions where
alcoholic beverages are served and consumed. Liquor licenses are
issued by governmental authorities (either state, municipal or
provincial, depending on the jurisdiction) and must be renewed
annually. Alcoholic beverage control laws and regulations impact
the operations of our concessions in various ways relating to the
minimum age of patrons and employees, hours of operation,
advertising, wholesale purchasing, other relationships with alcohol
manufacturers, distributors, inventory control and handling,
storage and dispensing of alcoholic beverages, as well as the
conduct of various activities on licensed premises including
contests, games and similar forms of entertainment.
We are
subject to the Fair Labor Standards Act, the Immigration Reform and
Control Act of 1986, the Occupational Safety and Health Act and
various federal and state laws governing such matters as minimum
wages, overtime, unemployment tax rates, workers’
compensation rates, citizenship requirements and other working
conditions. We are also subject to the Americans with Disabilities
Act, which prohibits discrimination on the basis of disability in
public accommodations and employment, which may require us to
design or modify our concession locations to make reasonable
accommodations for disabled persons.
In the
United States, duty-free stores are considered an extension of
“bonded warehouses” by U. S. Customs and Border
Protection, and in Canada duty-free stores are part of a Duty Free
Shop Program with the Canadian Border Service Agency, which avoids
our customers from having to pay special taxes, such as value-added
and duty, when they purchase goods while in international transit.
This special status subjects us to bonded warehouse regulations
that require, for example, that any bonded merchandise shall not be
commingled with local merchandise or other non-bonded merchandise
and requires us to ensure that such bonded merchandise is only sold
to passengers leaving the respective country on a non-stop
flight.
We are
also subject to certain truth-in-advertising, general customs,
consumer and data protection, product safety, workers’ health
and safety and public health rules that govern retailers in
general, as well as the merchandise sold within the various
jurisdictions in which we operate.
40
Intellectual property
In the
United States and Canada, Dufry or one of its subsidiaries (other
than us) holds all of the trademarks for our proprietary brands,
including Dufry, Hudson, Nuance and World Duty Free, or the
respective applications for trademark registration that are being
processed by Dufry. Dufry licenses such trademarks to us. See
“Item 7. Major Shareholders and Related Party
Transactions.”
Employees
We are
responsible for hiring, training and management of employees at
each of our retail locations. As of December 31, 2019, we employed
10,140 people, including both full-time and part-time employees. Of
these employees, 8,568 were full-time employees and 1,572 were
part-time employees. As of December 31, 2019, 4,319 of our
employees are subject to collective bargaining
agreements.
Legal proceedings
We
have extensive operations, and are defendants in a number of court,
arbitration and administrative proceedings, and, in some instances,
are plaintiffs in similar proceedings. Actions, including class
action lawsuits, filed against us from time to time include
commercial, tort, customer, employment (such as wage and hour and
discrimination), tax, administrative, customs and other claims, and
the remedies sought in these claims can be for material
amounts.
C. Organizational structure
Hudson
Ltd. was incorporated in Bermuda on May 30, 2017 as an exempted
company limited by shares under the Companies Act 1981 of Bermuda
as amended (the “Companies Act”). Dufry AG, through its
wholly-owned subsidiary Dufry International AG, is our controlling
shareholder as of the date of this annual report.
Our
principal executive office is located at 4 New Square, Bedfont
Lakes, Feltham, Middlesex, United Kingdom and our telephone number
is + 44 (0) 208 624 4300. Our website is www.hudsongroup.com. The
information on our website is not incorporated by reference into
this annual report, and you should not consider information
contained on our website to be a part of this annual report or in
deciding whether to purchase our Class A common
shares.
We
lease office space in East Rutherford, New Jersey, which consists
of 93,000 square feet in a commercial office building. In addition,
pursuant to our concession agreements, we operate 1,013 stores
across 88 different transportation terminals and destinations
throughout the United States and Canada. We also lease 37 warehouse
facilities. See “– B. Business overview – Our
locations” and “– B. Business overview –
Concession agreements.”
We do
not own any real estate.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not
applicable.
41
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating results
Principal factors affecting our results of operations
General
Our
business is impacted by fluctuations in economic activity primarily
in the continental United States and Canada and, to a lesser
extent, economic activity outside these areas. Our turnover is
generated by travel-related retail and food and beverage sales and
income from advertising activities. Apart from the cost of sales,
our operating expense structure consists of lease expenses,
personnel expenses and other expenses associated with our retail
operations.
Turnover
Historically, our
turnover growth has been primarily driven by the combination of
organic growth and acquisitions.
Organic Net Sales Growth
Organic net sales
growth (“Organic growth”) represents the combination of
growth in aggregate monthly net sales from (i) like-for-like net
sales growth and (ii) net new stores and expansions.
Like-for-like net
sales growth (“Like-for-like growth”) represents the
growth in aggregate monthly net sales in the applicable period at
stores that have been operating for at least 12 months.
Like-for-like growth excludes growth attributable to (i) net new
stores and expansions until such stores have been part of our
business for at least 12 months, (ii) acquired stores until such
stores have been part of our business for at least 12 months and
(iii) prior to 2019: acquired wind-down stores, consisting of eight
stores acquired in the 2014 acquisition of Nuance and 46 stores
acquired in the 2015 acquisition of World Duty Free Group that
management expected, at the time of the applicable acquisition, to
wind-down.
Net
new stores and expansions consists of growth from (i) changes in
the total number of our stores (other than acquired stores), (ii)
changes in the retail space of our existing stores and (iii)
modification of store retail concepts through
rebranding.
Net
new stores and expansions excludes growth attributable to (i)
acquired stores until such stores have been part of our business
for at least 12 months and (ii) acquired wind-down stores (prior to
2019). Net sales generated by acquired stores from the acquisition
date of October 10, 2019 through December 31, 2019 was $3.0 million
and net sales generated by acquired wind-down stores for the years
ended December 31, 2018 and 2017 was $1.2 million and $4.8 million,
respectively.
Like-for-like
growth is influenced by:
–
Passenger Flows:
The number of passengers passing through the concessions where we
operate is the principal factor influencing sales. Between 2011 and
2018, total passenger traffic in North America grew at a compound
annual growth rate of 3.1%. Annual North American passenger volumes
were greater than 1.9 billion for the year ended December 31, 2018,
and ACI projects that annual North American passenger volumes will
grow at a 2.4% compound annual growth rate between 2019 and 2027,
surpassing 2.1 billion by 2021.
–
Product Pricing:
Our concession agreements typically allow a maximum mark-up above
prices at certain comparable Main Street stores to offset the
additional cost of operating within the airport environment, and
some of our duty-free concession agreements benchmark our prices
against those in duty-free stores in other airports. In order to
drive our organic growth, our pricing strategy reflects positioning
and continuous monitoring of prices, including the pricing policies
of our suppliers, and targeted marketing of specific products in
certain concessions.
–
Net Sales
Productivity: Productivity may be improved through increased
penetration (i. e., the number of travelers who actually buy
products compared to total travelers the concession is exposed to)
and average spend per customer. We work to influence both measures
to improve net sales, through infrastructure changes, such as
improving the layout, location and accessibility of our shops, and
marketing and promotional activities, such as signposting inside
and outside the stores and special offers, product variety, active
selling by our sales staff and improved customer
service.
42
We
also present like-for-like growth on a constant currency basis by
keeping exchange rates constant for each month being compared to
remove fluctuations in foreign exchange rates during such
respective periods.
Net
new stores and expansions growth is impacted by the modification of
store retail concepts and the addition of new stores to our
portfolio. We accomplish this by negotiating expansions into
additional retail space with our landlords, to replace other travel
industry retailers at existing concessions as their contracts
expire and by expanding into newly created retail “white
space.” We also expand into new markets and regularly submit
proposals and respond to requests for proposals or directly
negotiate with potential landlords for new concessions. In
addition, net new stores and expansions growth is also impacted by
concession agreements that expire and our ability to renew such
agreements. Concessions that have expired or are scheduled to
expire by the end of 2020 represent approximately 11% of our net
sales for the year ended December 31, 2019.
Acquisitions
Due to
the fragmentation of the travel retail industry, acquisitions have
been an important source of growth. We have played a leading role
in consolidation of the travel retail industry in the continental
United States and Canada. In 2014, Dufry acquired Nuance. The
operations of Nuance in the continental United States and Canada
have been included in our financial statements from September 2014.
Similarly, in 2015, Dufry acquired World Duty Free Group and the
operations of World Duty Free Group in the continental United
States and Canada have been included in our financial statements
from August 2015. We acquired 28 stores as part of the acquisition
of Nuance (eight of which management expected, at the time of the
acquisition, to wind-down) and 248 stores as part of the
acquisition of World Duty Free Group (46 of which management
expected, at the time of the acquisition, to wind-down).
Acquisition growth represents growth in aggregate monthly net sales
attributable to acquired stores that management did not expect, at
the time of the applicable acquisition, to wind-down.
In
2019, Hudson obtained the right to acquire assets related to the
operation of Brookstone stores in U.S. airports from Apex Digital,
Inc. Hudson also obtained the right to be the exclusive airport
retailer to operate Brookstone stores in the United States and
Canada through a license agreement with BKST Brand Holdings LLC,
owner of the Brookstone brand and trademarks. The net sales from
acquired Brookstone stores is excluded from Like-for-like growth
and net new store growth.
Advertising income
Our
significant presence in the continental United States and Canada
and our large number of concessions allow us to offer attractive
promotional opportunities for our vendor partners, from which we
generate advertising income that positively affects our gross
margin.
Quarterly trends and seasonality
Our
sales are also affected by seasonal factors. The third quarter of
each calendar year, which is when passenger numbers are typically
higher, has historically represented the largest percentage of our
turnover for the year, and the first quarter has historically
represented the smallest percentage, as passenger numbers are
typically lower. We increase our working capital prior to peak
sales periods, so as to carry higher levels of merchandise and add
temporary personnel to the sales team to meet the expected higher
demand.
43
The
following table sets forth certain data for each of the eight
fiscal quarters from January 1, 2018 through December 31, 2019. Our
historical results are not necessarily indicative of the results
that may be expected in the future. The following quarterly
financial data should be read in conjunction with our consolidated
financial statements and the related notes included elsewhere in
this annual report.
Like-for-like
growth represents the growth in aggregate monthly net sales in the
applicable period at stores that have been operating for at least
12 months. Like-for-like growth during the applicable period
excludes growth attributable to (i) net new stores and expansions
until such stores have been part of our business for at least 12
months, (ii) acquired stores until such stores have been part of
our business for at least 12 months and (iii)in 2018, eight stores
acquired in the 2014 acquisition of Nuance and 46 stores acquired
in the 2015 acquisition of World Duty Free Group that management
expected, at the time of the applicable acquisition, to wind down.
For more information see "- Turnover".
2
Organic
growth represents the combination of growth from (i) like-for-like
growth and (ii) net new stores and expansions. Organic growth
excludes growth attributable to (i) acquired stores until such
stores have been part of our business for at least 12 months and
(ii) in 2018, eight stores acquired in the 2014 acquisition of
Nuance and 46 stores acquired in the 2015 acquisition of World Duty
Free Group that management expected, at the time of the applicable
acquisition, to wind down. For more information see "-
Turnover".
Cost of sales and gross margin
Our
cost of sales is a function of our purchasing terms for merchandise
and is positively influenced by our strategy of negotiating with
our suppliers on a centralized basis at Dufry and Hudson. Moreover,
as a member of the Dufry Group, we purchase certain products from
Dufry for our duty-free stores and benefit from the economies of
scale and enhanced purchasing power provided by Dufry.
Our
pricing and product mix policy at any given store also affects the
gross margin at such store.
Operating expense structure
Our
principal operating expenses are lease expenses, personnel expenses
and other expenses associated with our operations.
Lease Expenses
The
lease expenses caption was added in 2019 to comply with the
presentation requirements of IFRS 16 (see note 2.5 to the
consolidated financial statements) and is composed of lease
payments that are variable in nature, short duration under one year
or a low dollar value. Concession fees and rents represent the
substantial majority of our lease expenses. In return for having
the right to operate our concession, we pay rent to the airport
authorities or other landlords that is typically determined on a
variable basis by reference to factors such as gross or net sales
or the number of travelers using the airport or other location,
which we record as concession fees and rents under lease
expenses.
When
rent is based on our sales, concession agreements generally also
provide for a minimum annual guaranteed payment, or
“MAG,” that is either a fixed dollar amount or an
amount that is variable based upon the number of travelers using
the airport or other location, retail space used, estimated sales,
past results or other metrics. Where the minimum payment is
adjusted based on prior year total rents, it usually represents
between 80 – 90% of prior year total concession fees. With
the adoption of IFRS 16, fixed concession fees and other rent
payments, which were previously recognized as lease expense, are
now capitalized and expensed as depreciation and finance expenses
over the lease term.
44
As a
result, our profitability may be adversely affected if sales
decrease at concessions where the MAG is higher than the variable
concession fee. A limited number of our concession agreements
contain fixed rents. We have periodically been required to make MAG
payments to our landlords at certain of our locations. While the
majority of our MAG payments are not material to our overall
business, occasional decreases in net sales result in a higher
concession fees to net sales ratio, which has impacted our net
earnings. We cannot guarantee that any future MAG payments will not
be materially adverse to our results of operations. See also
“Risk factors – Our profitability depends on the number
of airline passengers in the terminals in which we have
concessions.” Changes by airport authorities or airlines that
lower the number of airline passengers in any of these terminals
could affect our business, financial condition and results of
operations.
Personnel expenses
Our
personnel expenses, which represent a significant cost, include
wages, benefits and cash bonuses. We expect personnel expense to
grow proportionately with net sales. Factors that influence
personnel expense include the terms of collective bargaining
agreements, local minimum wage laws, the frequency and severity of
workers’ compensation claims and health care costs. Personnel
expenses are comprised of fixed and variable components, such as
bonuses, which are based on the performance of the business and/ or
personal goals.
In
connection with our initial public offering, we adopted equity
incentive award plans (the “Plans”) and granted awards
during 2018 and 2019. See “Item 6. Directors, Senior
Management and Employees – B. Compensation – Changes to
our remuneration structure following the consummation of our
initial public offering – New equity incentive award
plan.”
Other expenses
The
other expenses caption was added in 2019 to present all remaining
operating expenses (see note 2.4 to the consolidated financial
statements).
We
have historically been charged by subsidiaries of Dufry franchise
fees to license brands owned by Dufry or its subsidiaries,
including the Dufry, Hudson, Nuance and World Duty Free brands, as
well as for ancillary franchise services, including centralized
support services such as treasury, audit and similar services. This
amounted to $17.6 million, $15.2 million and $50.6 million for the
years ended December 31, 2019, 2018 and 2017, respectively. In
connection with our initial public offering, we entered into new
agreements with Dufry pursuant to which the franchise fees we are
charged were reduced. See “Item 7. Major Shareholders and
Related Party Transactions – B. related party transactions –
Transactions with Dufry – Other agreements with
Dufry-Franchise agreements.” If these agreements had been in
place on January 1, 2017, we would have been charged the lower
amount of $14.1 million instead of $50.6 million for the year ended
December 31, 2017, which would have resulted in higher earnings
before taxes.
Other
expenses also include repairs and maintenance, professional fees
and general administration. These expenses are not impacted in the
short term by variations in sales. We have, in the past,
implemented a number of measures to control and reduce our costs in
an economic downturn.
Furthermore, in
connection with becoming a public company, our other expenses have
increased as we hired more personnel and engaged outside
consultants.
Beginning in 2019,
other expenses also includes selling expenses which includes credit
card commissions and packaging materials, marketing and other
expenses. Credit card commissions are typically calculated as a
percentage of credit card sales.
Selling expenses
are presented net of selling income. Selling income includes
commercial services and other selling income.
45
Depreciation, amortization and impairment
The
most significant component of depreciation expense is generated by
our concession and other lease right-of-use assets. With the
adoption of IFRS 16, we have capitalized the present value of
future lease payments as a lease obligation and an asset, which is
depreciated on a straight-line basis over the lease
term.
Our
leases and concessions generally require us to invest in our
premises to build, renovate or remodel them, often before we
commence business. These capital expenditures are generally
capitalized as property, plant and equipment (“PPE”) on
our balance sheet. See “– B. Liquidity and capital
resources – Capital expenditures.” We depreciate PPE
using the straight-line method over the useful life of the assets,
for example, five years for furniture and up to ten years for
leasehold improvements, but in any case not longer than the
remaining life of the relevant concession term. With the
implementation of IFRS 16, previously expensed fixed MAG payments
are now capitalized and depreciated over the remaining life of the
lease.
Our
principal intangible assets are concession rights, all of which
have definite life spans. Intangible assets with a finite lifespan
are amortized over their economic useful life and are tested for
impairment whenever there is an indication that the book value of
the intangible asset may not be recoverable. Goodwill is not
amortized, but tested for impairment annually.
Finance expenses
Finance expenses
primarily consists of interest expense on IFRS 16 lease obligations
and expenses related to borrowings from Dufry. As of December 31,2019, we had $503.1 million in long-term financial debt outstanding
(excluding current portion), with a weighted-average interest rate
of 5.7%. From time to time, we enter into loans with our
affiliates. See “– B. Liquidity and capital resources
– Indebtedness.”
Interest expense
on IFRS 16 lease obligations typically creates a
“front-loading” of total expense related to leases
during the early years of the lease. As we apply monthly fixed
lease payments to the lease obligation, the declining liability
balance results in lower interest expense recognized over time.
Though total lease-related expenses decrease over the life of the
lease, we often negotiate early contract extensions on our
concessions. This generally results in additional liabilities
capitalized, thus increasing depreciation and interest expense upon
an extension. Due to the adoption of IFRS 16, our results in prior
years may not be indicative of future performance, due to the
payment terms of our concession agreements and the timing of
contract extensions.
Income tax benefit/(expense)
Income
tax benefit / (expense) is based on our taxable results of
operations after financial result and non-controlling interests.
Tax losses carried from one tax period to the next may also
influence our deferred tax expenses.
As of
December 31, 2019, we had deferred tax assets of $45.2 million in
relation to net operating loss carryforwards, which begin to expire
in 2028. Utilization of our U. S. net operating loss carryforwards
is subject to annual limitations provided by the Internal Revenue
Code and similar state provisions. Such annual limitations could
result in the expiration of some portion of the net operating
losses and the implied tax credit before their
utilization.
Non-controlling interests
Airport
authorities in the United States frequently require us to partner
with an ACDBE. We also may partner with other third parties to win
and maintain new business opportunities. Consequently, our business
model contemplates the involvement of local partners. The net
earnings from these operating subsidiaries attributed to us reflect
the applicable ownership structure, and as a result net earnings
attributable to non-controlling interests excludes expenses payable
by us which are not attributable to our operating partners, such as
franchise fees and interest expense payable to Dufry and its
subsidiaries, income taxes and amortization on fair value step-ups
from acquisitions.
The
following table summarizes changes in financial performance for the
year ended December 31, 2019, compared to the year ended December31, 2018:
FOR THE YEAR
ENDED DECEMBER 31,
PERCENTAGE
CHANGE
IN MILLIONS OF
USD (EXCEPT PER SHARE AMOUNTS)
2019
2018
in
%
Turnover
1,953.7
1,924.2
1.5
Cost of
sales
(699.4)
(698.5)
0.1
Gross
profit
1,254.3
1,225.7
2.3
Lease
expenses
(131.2)
(428.6)
(69.4)
Personnel
expenses
(445.3)
(411.1)
8.3
Other
expenses
(166.9)
(158.9)
5.0
Depreciation,
amortization and impairment
(363.5)
(128.9)
182.0
Operating
profit
147.4
98.2
50.1
Finance
income
4.7
2.5
88.0
Finance
expenses
(91.6)
(31.0)
195.5
Foreign exchange
gain / (loss)
0.3
(0.9)
(133.3)
Profit
/ (loss) before tax
60.8
68.8
(11.6)
Income tax benefit
/ (expense)
(14.5)
(3.0)
383.3
Net
profit / (loss)
46.3
65.8
(29.6)
NET
PROFIT / (LOSS) ATTRIBUTABLE TO
Non-controlling
interests1
33.6
36.3
(7.4)
Equity holders of
the parent
12.7
29.5
(56.9)
1
The net
profit/(loss) attributable to non-controlling interests is composed
of the respective results of Hudson’s JV or subsidiaries
before income tax. However at Hudson parent entity level, the Group
recognized expenses in relation to a) Dufry (see note 37 to the
consolidated financial statements), b) amortizations related to
acquisitions, and c) accrued income taxes due by Hudson, which have
no impact on the net profit/(loss) attributable to non-controlling
interests.
Turnover
Turnover increased
by 1.5% to $1,953.7 million for the year ended December 31, 2019
compared to $1,924.2 million in 2018. Net sales represented 97.8%
of turnover for 2019, with advertising income representing the
remainder. Net sales increased by $30.1 million, or 1.6%, to
$1,910.0 million.
Organic net sales
growth was 1.4% for the year ended December 31, 2019 and
contributed $27.0 million of the increase in net sales.
Like-for-like growth was 0.6% and contributed $10.9 million of the
increase in net sales. On a constant currency basis, like-for-like
growth was 1.1%. The increase in like-for-like growth was primarily
the result of increases in the overall number of transactions. Net
new stores and expansions growth contributed
$16.2
million of the increase in net sales, primarily as a result of
opening new stores.
The
acquisition of Brookstone stores during the fourth quarter
contributed an additional $3.0 million to net sales.
Gross profit
Gross
profit reached $1,254.3 million for the year ended December 31,2019 from $1,225.7 million for the prior year. Our gross profit
margin increased to 64.2% for 2019 compared to 63.7% in 2018,
primarily due to improved vendor terms and sales mix shift from
lower margin products to higher margin products.
47
Lease expenses
Lease
expenses were $131.2 million for the year ended December 31, 2019,
compared to $428.6 million for 2018. Lease expenses declined to
6.7% of turnover for the year ended December 31, 2019, compared to
22.3% for the prior year. The decrease in lease expense was
primarily attributable to the adoption of IFRS 16 requiring the
capitalization of fixed concession fees and other rent payments
beginning on January 1, 2019. For the year ended December 31, 2019,
concession and rental income amounted to $6.4 million compared to
$12.5 million for 2018.
Personnel expenses
Personnel expenses
increased to $445.3 million for the year ended December 31, 2019
from $411.1 million in 2018. As a percentage of turnover, personnel
expenses increased to 22.8% for 2019 compared to 21.4% for 2018.
The increase in personnel expenses was primarily attributable to
wage increases, executive separation expenses recorded in the first
quarter 2019, the opening of new locations and additional expense
upon becoming a public company.
Other expenses
Other
expenses increased to $166.9 million for the year ended December31, 2019 compared to $158.9 million in the prior year. As a
percentage of turnover, other expenses increased to 8.5% in 2019
from 8.3% in 2018.
Depreciation, amortization and impairment
Depreciation,
amortization and impairment increased to $363.5 million for the
year ended December 31, 2019 compared to $128.9 million for 2018.
Depreciation reached $316.5 million for the year ended December 31,2019, compared to $69.2 million for the prior year. Amortization
decreased to $42.9 million for the year ended December 31, 2019
compared to $45.1 million for 2018. We recorded net impairments of
$4.1 million in 2019, compared to $14.6 million in the prior year.
The decrease primarily related to a non-core hotel location that
was performing below expectations and impaired in 2018. See note 13
to our audited Consolidated Financial Statements for further
details. The higher depreciation expense was due to the
right-of-use assets capitalized in 2019 in accordance with IFRS
16.
Finance expenses
Finance expenses
increased to $91.6 million for the year ended December 31, 2019
compared to $31.0 million for 2018. This was primarily attributable
to an increase in interest expenses resulting from the
implementation of IFRS 16.
Income tax expense
Income
tax expense for the year ended December 31, 2019 amounted to $14.5
million compared to $3.0 million for 2018. The main components of
this increase were (i) additional tax related to U.S. Base Erosion
Anti Avoidance Tax (“BEAT”), (ii) nondeductible
compensation, (iii) the release of valuation allowance against
certain deferred tax assets in the prior year, partially offset by
a decrease in pretax income (attributable to shareholders of the
parent) of $5.3 million. The total tax expense for the year ended
December 31, 2019 consisted of $11.3 million of current income tax
expense incurred primarily from our Canadian operations, and $3.2
million of deferred tax expense principally due to utilization of
net operating losses in the U.S., partially offset by deferred
taxes associated with the amortization of concession
rights.
Our
primary funding sources historically have included cash from
operations, and financial debt arrangements with Dufry. The balance
outstanding on our long-term debt obligations with Dufry at
December 31, 2019 and 2018 was $503.1 million and $492.6 million,
respectively.
We
believe existing cash balances, operating cash flows and our
long-term financing arrangements with Dufry will provide us with
adequate funds to support our current operating plan, make planned
capital expenditures and fulfill our debt service requirements for
the foreseeable future.
If our
cash flows and capital resources are insufficient to fund our
working capital, we could face substantial liquidity problems and
may be forced to reduce or delay investments and capital
expenditures. We currently fund our working capital requirements
through facilities with Dufry. As a result, our financing
arrangements and relationship with our controlling shareholder are
material to our business. Nonetheless, when appropriate, we may
borrow cash from third-party sources, and may also raise funds by
issuing debt or equity securities, including to fund
acquisitions.
Dufry Group cash pooling
For
the efficient management of its short term cash and overdraft
positions, Hudson participates in Dufry’s notional cash pool
arrangements. At December 31, 2019, we had a deposit of $155.2
million compared to a deposit of $61.2 million at December 31,2018, in the cash pool accounts. The increase is mainly due to
working capital changes and no repayments of borrowings in 2019.
The cash pool arrangement is structured such that the assets and
liabilities remain in the name of the corresponding participant, i.
e. no physical cash concentration occurs for the day-to-day
operations. We, along with other participants in the cash pool,
have pledged the cash we have each placed in the cash pool to the
bank managing the cash pool as collateral to support the aggregate
obligations of cash pool participants.
Share-based payments
On
September 10, 2019, Hudson Ltd. granted to selected members of its
senior management the Hudson Long-Term Incentive Plan (“LTI
Plan”) 2019 award consisting of 405,674 Performance Share
Units (“PSUs”) and 135,243 Restricted Share Units
(“RSUs”, and collectively the “LTIP
Units”). All LTIP Units have a service-vesting requirement
through May 1, 2022, subject to certain acceleration provisions for
selected participants. The PSUs are also subject to
performance-vesting requirements based on the Company’s
achievement of sales, EBITDA and adjusted EPS performance metrics.
At grant date, the fair value of one PSU or RSU 2019 award
represents the market value for one Hudson share at that date (USD
12.64), adjusted by the probability that participants comply with
the ongoing contractual relationship clauses.
On
October 31, 2018, Hudson Ltd. granted awards in the form of LTIP
Units pursuant to the newly created Hudson Ltd. LTI Plan to
selected members of senior management. The LTIP Units are composed
of 25% RSUs and 75% PSUs and have a service-vesting requirement
through May 1, 2021. At target, the LTIP Units represent the right
to receive 580,599 Class A common shares of the Company in the
aggregate. Hudson expects to deliver shares in connection with such
vested and achieved awards in second quarter 2021.
On
June 28, 2018, Hudson Ltd. granted awards in the form of RSUs
pursuant to the Hudson Ltd. Restricted Share Unit Plan (“RSU
Plan”) to certain of its employees. The RSUs were vested at
grant and, in the aggregate, represent the right to receive 526,313
Class A common shares of the Company. Hudson delivered 50% of the
shares in connection with such awards in first quarter 2019 and 50%
in first quarter 2020. The Company purchased Class A common shares
in the market to settle the awards under the RSU Plan.
49
Capital expenditures
Capital
expenditures are our primary investing activity, and we divide them
into two main categories: tangible and intangible capital
expenditures. Tangible capital expenditures consists of spending on
the renovation and maintenance of existing stores and the fitting
out of new stores. Intangible capital expenditures consists of
investments in computer software.
When
contemplating investments in new concessions, we focus on
profitable growth as its key investment criterion. In addition to
fitting out new concessions, we expect to invest in renovation and
maintenance of our existing stores, including undertaking some
major refurbishment projects each year.
Our
capital expenditures (on the cash basis) are presented for each of
the periods below:
FOR THE YEAR
ENDED DECEMBER, 31
IN MILLIONS OF
USD
2019
2018
2017
Tangible capital
expenditures
57.6
65.1
79.6
Intangible capital
expenditures
15.3
4.2
8.2
Total
72.9
69.3
87.8
Cash flows
The
following table summarizes the cash flow for each of the periods
below:
FOR THE YEAR
ENDED DECEMBER, 31
IN MILLIONS OF
USD
2019
2018
2017
Net cash flows from
operating activities
532.3
232.7
130.8
Net cash flows used
in investing activities
(74.1)
(67.6)
(89.4)
Net cash flows from
/ (used in) financing activities
(376.2)
(66.3)
(92.5)
Currency
translation
1.8
(2.0)
0.9
Increase
/ (decrease) in cash and cash equivalents
83.8
96.8
(50.2)
Cash at the
beginning of period
234.2
137.4
187.6
Cash at the end of
period
318.0
234.2
137.4
Cash flows from operating activities
Net
cash flows from operating activities were $532.3 million for the
year ended December 31, 2019, an increase of $299.6 million
compared to the prior year period. The increase in net cash flows
from operating activities mainly resulted from the reclassification
of net capitalized lease payments from operating activities to
financing activities required by IFRS 16.
Cash flows used in investing activities
Net
cash used in investing activities increased to $74.1 million for
the year ended December 31, 2019, as compared to $67.6 million for
2018. The increase was primarily due to an increase in capital
expenditures from the purchase of intangible assets.
Cash flows used in financing activities
Net
cash used in financing activities increased by $309.9 million for
the year ended December 31, 2019, to $376.2 million compared to
$66.3 million in 2018. The increase in cash used in financing
activities was primarily attributable to the reclassification of
capitalized lease payments under IFRS 16.
50
Internal control over financial reporting
As
part of management’s assessment of its internal control over
financial reporting for the fiscal year ending December 31, 2019,
management identified material weaknesses in our internal controls
over financial reporting, as defined in the SEC guidelines for
public companies. The material weaknesses identified relate
specifically to, (1) the procure to pay process and the related
internal controls supporting this area, (2) management’s
system of internal controls for information technology, and (3) the
implementation of the new lease accounting standard IFRS 16
(remediated as of December 31, 2019). As a result, there is a
reasonable possibility that a material misstatement of our
consolidated financial statements will not be prevented or detected
on a timely basis. We have initiated remedial measures and plan to
continue to take additional measures to remediate these material
weaknesses. See “Item 3. Key Information – D. Risk
factors – Risks relating to our business – We have
identified material weaknesses in our internal control over
financial reporting as part of management’s assessment. If we
are unable to remediate these material weaknesses, or if we
identify additional material weaknesses in the future or otherwise
fail to maintain an effective system of internal controls, we may
not be able to accurately or timely report our financial results,
or prevent fraud, and investor confidence in our Company and the
market price of our shares may be adversely
affected.”
Indebtedness
Existing debt with Dufry
At
December 31, 2019 and 2018, we owed $503.1 million and $492.6
million, respectively, to Dufry pursuant to long-term financial
loans (excluding current portion). We were charged $29.2 million,
$30.2 million and $29.5 million in each of the years ended December31, 2019, 2018 and 2017, respectively, in interest to Dufry. The
weighted-average interest rate on our loans from Dufry for each of
the years ended December 31, 2019, 2018 and 2017 was 5.7%, 5.7% and
5.7%, respectively.
Our
indebtedness owed to Dufry at December 31, 2019 consisted of 17
intercompany loans with affiliates of Dufry (the
“intercompany loans”), which are all on substantially
similar terms and most of which are due on October 15, 2022. The
following table summarizes certain information regarding the
intercompany loans:
Loan Agreement between
Dufry Finances SNC and Dufry Newark Inc.
5.9589%
0.3
Loan Agreement between
Dufry Finances SNC and Dufry Newark Inc.
5.9589%
0.6
Loan Agreement between
Dufry Finances SNC and Dufry Newark Inc.
5.9589%
0.8
Loan Agreement between
Dufry Finances SNC and Dufry Newark Inc.
5.9589%
2.8
Loan Agreement between
Dufry International and Dufry Houston DF & Retail
Part.
2.7800%
3.0
Loan Agreement between
Dufry Finances SNC and Hudson Group Inc.
5.9589%
5.9
Loan Agreement between
Dufry Finances SNC and Hudson Group Inc.
5.9589%
7.7
Loan Agreement between
Dufry Finances SNC and Hudson Group Inc.
5.9589%
16.0
Loan Agreement between
Dufry Finances SNC and Hudson Group Inc.
5.9589%
21.0
Loan Agreement between
Dufry Finances SNC and Dufry North America LLC
5.9589%
39.7
Loan Agreement between
Dufry Finances SNC and WDFG North America LLC
5.9589%
50.0
Loan Agreement between
Dufry Finances SNC and Hudson Group Inc.
5.9589%
49.4
Loan Agreement between
Dufry Finances SNC and Hudson Group Inc.
5.9589%
63.2
Loan Agreement between
Dufry Finances SNC and Hudson Group Inc.
5.9589%
82.3
Loan Agreement between
Dufry Finances SNC and Hudson Group Inc. 1
5.9589%
102.3
Loan Agreement between
Dufry Financial Services B.V. and The Nuance Group (Canada) Inc.
2
Interest-bearing portion
2
3.8900%
CAD 65.0
Non-interest bearing
portion 2
–
CAD 55.7
Loan Agreement between
Dufry Financial Services B.V. and Hudson Group Canada
Inc.
3.6585%
CAD 14.3
1
This
loan agreement has been filed as an exhibit to this annual report.
All intercompany loans are on substantially the same terms, except
as noted above.
2
In
connection with the Reorganization Transactions, on August 1, 2017,
one of our affiliates, The Nuance Group (Canada) Inc.
(“Nuance Group Canada”), a member of Hudson, entered
into a CAD$195.0 million loan agreement with another affiliate of
Dufry. The loan consists of a non-interest bearing portion for
CAD$130.0 million and a 3.8900% portion for CAD$65.0 million.
Nuance Group Canada repaid CAD$45.0 million of the non-interest
bearing portion on August 1, 2017. The balance outstanding on the
loan is CAD$150.0 million, of which CAD$65.0 million bears interest
at 3.8900%.
51
Restrictions on our indebtedness
We are
subject to certain of the covenants contained in Dufry’s
2.50% Senior Notes due 2024 (the “2024 Dufry Notes”),
and 2.00% Senior Notes due 2027 (the “2027 Dufry
Notes,” and together with the 2024 Dufry Notes, the
“Dufry Notes”). We are not a guarantor under any of the
Dufry Notes. However, if we or any of our subsidiaries guarantee
any bank debt or public debt of Dufry in excess of $75.0 million,
then we or our subsidiaries will be required to guarantee such
notes; provided however, that we or our subsidiaries will only be
required to guarantee such notes if, after giving effect to the
guarantee of the bank debt or public debt, the aggregate principal
amount of bank debt or public debt guaranteed by non-guarantor
subsidiaries of Dufry exceeds EUR 500 million. Subject to certain
exceptions, we are also not permitted to grant liens on any of our
assets, absent certain exceptions, unless we grant a lien to secure
the repayment of the Dufry Notes.
We are
also subject to certain of the covenants contained in Dufry’s
existing credit facilities (the “Dufry Credit
Facilities”). We are not a guarantor under any of the Dufry
Credit Facilities. The amount of third-party debt that we may incur
is limited by the terms of the Dufry Credit Facilities. We are not
permitted to grant liens on our assets, absent certain exceptions.
Under the Dufry Credit Facilities, there are also restrictions on
our ability to provide certain guarantees to third parties. In
addition, our ability to enter into certain acquisitions,
investments, mergers and asset sales is limited by the terms of the
Dufry Credit Facilities.
Uncommitted letters of credit facilities
In
addition to our debt-financing arrangements with Dufry, we have
local credit facilities with each of Bank of America N. A. and
Credit Agricole, which we use to obtain letters of credit. We use
letters of credit to secure concession fee obligations pursuant to
certain of our concession agreements. On October 30, 2014 we
entered into a $45 million Amended and Restated Uncommitted Letter
of Credit and Loan Facility Agreement with Bank of America N. A.
(as amended, the “BofA Credit Facilities”). As of
December 31, 2019, $38.3 million was outstanding (including letters
of credit) and $6.7 million was available for borrowing under this
facility. Direct advances under the BofA Credit Facilities bear
interest at the U. S. prime rate. Letters of credit under the BofA
Credit Facilities are subject to an annual fee of 0.75% of the
amount borrowed. On October 3, 2013 and subsequently amended, we
entered into a $40 million Uncommitted Line of Credit Agreement
with Credit Agricole Corporate and Investment Bank (as amended, the
“Credit Agricole Credit Facilities”). As of December31, 2019, $35.2 million was outstanding (including letters of
credit) and $4.8 million was available for borrowing under this
facility. Under the Credit Agricole Credit Facilities, we are
required to pay a fee at a rate not to exceed 0.75% of the amount
borrowed. Lenders under the BofA Credit Facilities and the Credit
Agricole Credit Facilities may in their discretion decline to fund
our borrowing requests thereunder.
Contractual obligations and commitments
The
following table presents our long-term debt obligations and lease
obligations as of December 31, 2019:
PAYMENTS DUE BY PERIOD
IN MILLIONS OF
USD
TOTAL
LESS THAN
1 YEAR
1 – 3
YEARS
4 – 5
YEARS
THEREAFTE
Long-term debt obligations
1
638.2
31.8
504.5
3.9
98.0
Lease obligations 2
1,563.1
296.6
660.2
287.0
319.3
Total
2,201.3
328.4
1,164.7
290.9
417.3
1
Includes aggregate
principal amounts of financial debt outstanding to Dufry at
December 31, 2019, and interest payable
thereon.
2
Represents
management estimates of future fixed lease payments capitalized
under IFRS 16, mainly consisting of MAG payments under our
concession agreements, as well as fixed storage, office and
warehouse rents. For the fiscal years ended December 31, 2019, 2018
and 2017, we recorded variable rent of $136.6 million, $129.7
million, and $136.7 million, while also recording concession fees
for the years ended December 31, 2018 and 2017 of $423.1 million
and $399.1 million, respectively.
52
Off-Balance sheet arrangements
We
have no off-balance sheet arrangements that have or are materially
likely to have a current or future material effect on our financial
condition, changes in financial condition, sales or expenses,
results of operations, liquidity, capital expenditures or capital
resources.
Quantitative and qualitative disclosures about market
risk
We are
exposed to market risks associated with foreign exchange rates,
interest rates, commodity prices and inflation. In accordance with
our policies, we seek to manage our exposure to these various
market-based risks.
Foreign exchange risk
We are
exposed to foreign exchange risk through our Canadian operations.
Our Canadian sales are denominated in Canadian dollars, while
expenses relating to certain products we sell in Canada are
denominated in U. S. dollars. We also make a limited amount of
purchases from foreign sources, which subjects us to minimal
foreign currency transaction risk. As a result, our exposure to
foreign exchange risk is primarily related to fluctuations between
the Canadian dollar and the U. S. dollar. We are also exposed to
foreign exchange fluctuations on the translation of our Canadian
operating results into U. S. dollars for reporting purposes, which
can affect the comparability quarter-over-quarter and
year-over-year of our results. We generally benefit from natural
hedging and therefore do not currently engage in material forward
foreign exchange hedging.
Interest rate risk
We
have a significant amount of interest-bearing liabilities related
to our long term financing arrangements with Dufry, at a weighted
average interest rate of 5.7% as of December 31, 2019. We do not
have any material floating rate financial instruments and as such
are not currently exposed to significant interest rate
risk.
Commodity price risk
Our
profitability is dependent on, among other things, our ability to
anticipate and react to changes in the costs of the food and
beverages we sell. Cost increases may result from a number of
factors, including market conditions, shortages or interruptions in
supply due to weather or other conditions beyond our control,
governmental regulations and inflation. Substantial increases in
the cost of the food and beverages we sell could impact our
operating results to the extent that such increases cannot be
offset by price increases.
Impact of inflation
Inflation has an
impact on the cost of retail products, food and beverage,
construction, utilities, labor and benefits and selling, general
and administrative expenses, all of which can materially impact our
operations. While we have been able to partially offset inflation
by gradually increasing prices, coupled with more efficient
practices, productivity improvements and greater economies of
scale, we cannot assure you that we will be able to continue to do
so in the future, and macroeconomic conditions could make price
increases impractical or impact our sales. We cannot assure you
that future cost increases can be offset by increased prices or
that increased prices will be fully absorbed by our customers
without any resulting change to their purchasing
patterns.
Critical accounting estimates
The
preparation of our financial statements in conformity with IFRS
requires management to make judgments, estimates and assumptions
that affect the reported amounts of income, expenses, assets and
liabilities at the reporting date. The key assumptions concerning
the future and other key sources of estimation include
uncertainties at the reporting date, which include a risk of
causing a material adjustment to the carrying amounts of assets or
liabilities within the next financial periods. We discuss these
estimates and assumptions below. Also, see Note 2.3 “Summary
of Significant Accounting Policies” to our audited
Consolidated Financial Statements included elsewhere in this annual
report, which presents the significant accounting policies
applicable to our financial statements.
53
Concession rights
Concession rights
identified in a business combination are measured at fair value as
at the date of acquisition and amortized over the contract
duration. Hudson assesses concession rights for impairment
indications whenever events or circumstances indicate that the
carrying amount may not be recoverable.
Goodwill
Goodwill is
subject to impairment testing each year. The recoverable amount of
the cash generating unit is determined based on value-in-use
calculations which require the use of assumptions, including those
relating to pre- and post-tax discount rates and growth rates for
net sales. The calculation uses cash flow projections based on
financial forecasts approved by Hudson’s management covering
a five-year period. Cash flows beyond the five-year period are
extrapolated using a steady growth rate that does not exceed the
long-term average growth rate for the respective market and is
consistent with forecasted passenger growth included in the travel
related retail industry reports.
Taxes
Income
tax expense represents the sum of the current income tax and
deferred tax. Income tax positions not relating to items recognized
in the income statement, are recognized in correlation to the
underlying transaction either in other comprehensive income or
equity. Hudson is subject to income taxes in numerous
jurisdictions. Significant judgment is required in determining the
provision for income taxes. There are many transactions and
calculations for which the ultimate tax assessment is uncertain.
Hudson recognizes liabilities for tax audit issues based on
estimates of whether additional taxes will be payable. Where the
final tax outcome is different from the amounts that were initially
recorded, such differences will impact the income tax or deferred
tax provisions in the period in which such assessment is
made.
Current income tax
Income
tax receivables or payables are measured at the amount expected to
be recovered from or paid to the tax authorities. The tax rates and
tax laws used to compute the amount are those that are enacted or
substantially enacted at the reporting date in the countries or
states where Hudson operates and generates taxable income. Income
tax relating to items recognized in other comprehensive income is
recognized in the same statement.
Deferred tax
Deferred tax is
provided using the liability method on temporary differences
between the tax basis of assets or liabilities and their carrying
amounts for financial reporting purposes at the reporting date.
Deferred tax liabilities are recognized for all taxable temporary
differences, except:
–
when
the deferred tax liability arises from the initial recognition of
goodwill or an asset or liability in a transaction that is not a
business combination and, at the time of the transaction, affects
neither the accounting profit nor taxable profit or loss;
or
–
in
respect of taxable temporary differences associated with
investments in subsidiaries, when the timing of the reversal of the
temporary differences can be controlled and it is probable that the
temporary differences will not be reversed in the foreseeable
future.
54
Deferred tax
assets are recognized for all deductible temporary differences, the
carry forward of unused tax credits or tax losses. Management
judgment is required to determine the amount of deferred tax assets
that can be recognized, based upon the likely timing and level of
future taxable profits. Deferred tax assets are recognized to the
extent that it is probable that taxable profit will be available,
against which the deductible temporary differences and the carry
forward of unused tax credits and unused tax losses can be
utilized, except:
–
when
the deferred tax asset relating to the deductible temporary
difference arises from the initial recognition of an asset or
liability in a transaction that is not a business combination and,
at the time of the transaction, affects neither the accounting
profit nor taxable profit or loss; or
–
in
respect of deductible temporary differences associated with
investments in subsidiaries, in which case deferred tax assets are
recognized only to the extent that it is probable that the
temporary differences will be reversed in the foreseeable future
and taxable profit will be available against which the temporary
differences can be utilized.
–
The
carrying amount of deferred tax assets is reviewed at each
reporting date and reduced to the extent that it is no longer
probable that sufficient taxable profit will be available to allow
the deferred tax asset to be utilized. Unrecognized deferred tax
assets are reassessed at each reporting date and are recognized to
the extent that it has become probable that future taxable profits
will allow the deferred tax asset to be recovered.
–
Deferred tax
assets and liabilities are measured at the tax rates that are
expected to apply in the year when the asset is realized or the
liability is settled, based on tax rates (and tax laws) that have
been enacted or substantially enacted at the reporting date
applicable for each respective company.
Recent accounting pronouncements
There
are no recent accounting pronouncements that are expected to have a
material effect on our results of operations.
See
Note 4 of our Consolidated Financial Statements for further details
and a description of other recent accounting
pronouncements.
C. Research and development, patents and licenses,
etc.
We do
not conduct research and development activities.
D. Trend information
For a
discussion of Trend information, see “– A. Operating
results – Principal factors affecting our results of
operations,”“– A. Operating results –
Results of operations” and “Item 4. Information on the
Company – B. Business overview – Our
strategies.”
E. Off-balance sheet arrangements
We
have no off-balance sheet arrangements that have or are materially
likely to have a current or future material effect on our financial
condition, changes in financial condition, sales or expenses,
results of operations, liquidity, capital expenditures or capital
resources.
55
F. Tabular disclosure of contractual obligations
See
“Item 5. Operating and Financial Review and Prospects –
B. Liquidity and capital resources – Contractual obligations
and commitments.”
G. Safe harbor
See
“Forward-Looking Statements.”
56
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and senior management
Board of directors and senior management
The
following table lists each of our current executive officers and
directors and their respective ages and positions as of the date of
this annual report. Unless otherwise stated, the business address
for our directors and executive officers is that of our principal
executive offices at 4 New Square, Bedfont Lakes, Feltham,
Middlesex, United Kingdom.
NAME
AGE
POSITION
INITIAL YEAR OF
APPOINTMENT
DIRECTOR
OF
CLASS
Juan
Carlos Torres Carretero
71
Chairman
of the Board of Directors
2017
Class
III
(term
expires in 2021)
Julián
Díaz González
61
Deputy
Chairman of the Board of Directors
2017
Class
III
(term
expires in 2021)
James
Cohen
61
Deputy
Chairman of the Board of Directors
2018
Class
II
(term
expires in 2022)
Roger
Fordyce
64
Chief
Executive Officer and Director
2019
Class
III
(term
expires in 2021)
Mary
J. Steele Guilfoile
65
Director
2018
Class
II
(term
expires in 2022)
Andrés
Holzer Neumann
69
Director
2019
Class
I
(term
expires in 2020)
Joaquín
Moya-Angeler Cabrera
70
Director
2018
Class
I
(term
expires in 2020)
James
E. Skinner
66
Director
2018
Class
II
(term
expires in 2022)
Eugenia
M. Ulasewicz
66
Director
2018
Class
I
(term
expires in 2020)
Adrian
Bartella
44
Chief
Financial Officer
2017
–
Brian
Quinn
62
Executive
Vice President and Chief Operating Officer
2017
–
Hope
Remoundos
65
Executive
Vice President and Chief Marketing Officer
The
following is a brief biography of each of our directors and
executive officers:
Juan Carlos Torres
Carretero is the Chairman of the board of directors of the
Company. He was appointed to our board of directors on September15, 2017, and has served as the Chairman of Dufry AG since 2003.
Mr. Torres Carretero was a Partner at Advent International in
Madrid from 1991 to 1995, and served as Managing Director and
Senior Partner in charge of Advent International
Corporation’s investment activities in Latin America from
1995 to 2016. He holds a MS in physics from Universidad Complutense
de Madrid and a MS in management from MIT’s Sloan School of
Management. Mr. Torres Carretero also serves on the board of
directors of TCP Participações S. A. and Moncler
S.p.A.
Julián Díaz
González is the Deputy Chairman of the board of
directors of the Company. He was appointed to our board of
directors on September 15, 2017, and has served as a board member
and the Chief Executive Officer of Dufry AG since 2004. Mr.
Díaz González held various managerial and business
positions at Aeroboutiques de Mexico, S. A. de C. V. and Deor, S.
A. de C. V. from 1997 to 2000, and was General Manager of
Latinoamericana DutyFree, S. A. de C. V. from 2000 to 2003. He
holds a degree in business administration from Universidad
Pontificia Comillas I.C.A.D.E., de Madrid. Mr. Díaz
González also serves on the board of directors of
Distribuidora Internacional de Alimentacion, S. A.
(DIA).
57
James S. Cohen is
the Deputy Chairman of the board of directors and Chairman of its
Nomination and Remuneration Committee. Mr. Cohen served as a member
of the board of directors of Dufry AG from 2009 to 2016. In 1980,
he joined his family’s wholesale magazine distribution
business, Hudson County News Company. In 1984, he founded the
Hudson News travel retail business; he has been the President and
Chief Executive Officer of Hudson Media Inc. since 1994. Hudson
Media Inc. continues today as Hudson News Distributors, the leading
magazine distributor in the Eastern United States. In addition, Mr.
Cohen is the Chairman and Chief Executive Officer of Hudson Capital
Properties, an owner and developer of multi-family rental
properties located predominantly in the Southeastern and Midwestern
United States, and serves on the board of directors of COMAG
Marketing Group, LLC. Mr. Cohen holds a bachelor’s degree in
economics from the Wharton School of the University of
Pennsylvania.
Roger Fordyce is
the Chief Executive Officer and a Director of the Company. He was
appointed to our board of directors on January 10, 2019, and serves
as a member of the Global Executive Committee of Dufry AG. Mr.
Fordyce has served in a variety of roles at Hudson over the past 30
years, including as Executive Vice President and Chief Operating
Officer from 2008 to 2019. Mr. Fordyce was also Senior Vice
President of Operations at Hudson from 1996 to 2008. Previously, he
was Vice President of Operations from 1992 to 1996. Prior to that,
he served as District Manager overseeing operations in LaGuardia,
Penn Station and Grand Central Station, which were acquired by
Hudson in 1990. Prior to joining Hudson in 1988, Mr. Fordyce held
positions as manager at Dobbs/ Aeroplex, WH Smith, and Greenman
Bros. Mr. Fordyce received a bachelor of arts in psychology from
SUNY Stony Brook in 1977.
Mary J. Steele
Guilfoile is a Director of the Company and is the Chairwoman
of its Audit Committee. Ms. Guilfoile is currently Chairman of MG
Advisors, Inc., a privately owned financial services merger and
acquisitions advisory and consulting firm, and is a Partner of The
Beacon Group, LP, a private investment group. Ms. Guilfoile served
as Executive Vice President and Corporate Treasurer at JPMorgan
Chase & Co. and as Chief Administrative Officer of its
investment bank from 2000 through 2002, and previously served as a
Partner, CFO and COO of The Beacon Group, LLC, a private equity,
strategic advisory and wealth management partnership, from 1996
through 2000. She has been a member of the boards of directors of
C. H. Robinson Worldwide, Inc. since 2012, currently serving as a
member of the compensation and governance committees, The
Interpublic Group of Companies, Inc. since 2007, currently serving
as the chair of the audit committee, and as a member of the
executive and corporate governance committees and Pitney Bowes
Inc., since 2018, currently serving as a member of the audit and
finance committees. Ms. Guilfoile holds a bachelor’s degree
in accounting from Boston College Carroll School of Management and
a master’s degree in business administration from Columbia
Business School, and is a certified public accountant.
Andrés Holzer
Neumann is a director of the Company and also currently
serves as a director of Dufry AG, Arrendadora SOHO City Center, and
Altum Capital. Previously, Mr. Holzer sat on the boards of Banco
Mercantil de México, the predecessor of BBVA Bancomer, from
1982 to 1999, and Latin American Airport Holdings from 2008 to
2016. Additionally, he spent most of his professional career, from
1973 to 2018, as President and CEO of Grupo Industrial Omega, S.A.
de C.V., the holding company of a number of Mexican entities
operating in the real estate, retail and luxury goods industries in
Latin America. Mr. Holzer holds a bachelor’s degree from
Boston University and an
M.B.A.
from Columbia University.
Joaquín Moya-Angeler
Cabrera is a Director of the Company. Mr. Moya-Angeler
Cabrera has served as member of the board of directors of Redsa S.
A. since 1997, Hildebrando since 2003, La Quinta Real Estate since
2003, Inmoan SL since 1989, Avalon Private Equity since 1999 and
Corporación Tecnológica Andalucia since 2005. Mr.
Moya-Angeler Cabrera is also currently a member of the board of
directors of Palamon Capital Partners, Board of Trustees University
of Almeria (chairman), Fundación Mediterránea (chairman),
Spanish Association of Universities Governing Bodies (chairman) and
Corporation Group Leche Pascual (Vice Chairman). Mr. Moya-Angeler
Cabrera holds a master’s degree in Mathematics from the
University of Madrid, a degree in economics and forecasting from
the London School of Economics and Political Science and an MS in
management from MIT’s Sloan School of
Management.
James E. Skinner is
a Director of the Company. Mr. Skinner served as Vice Chairman of
The Neiman Marcus Group LLC from July 2015 until his retirement in
February 2016. Mr. Skinner previously held a variety of positions
at The Neiman Marcus Group LLC from 2001, including Executive Vice
President, Chief Operating Officer and Chief Financial Officer. In
2000, Mr. Skinner served as Senior Vice President and Chief
Financial Officer of CapRock Communications Corporation. From 1991
to 2000, Mr. Skinner served in several positions with CompUSA
Inc.
58
including
Executive Vice President and Chief Financial Officer beginning in
1994. Mr. Skinner also served as a partner with Ernst & Young
LLP from 1987 until 1991. Mr. Skinner has served as a member of the
board of directors of Fossil Group, Inc. since 2007, currently
serving as a member of the compensation committee, Ares Commercial
Real Estate Corporation since 2016, currently serving as a member
of the audit committee and chairman of the compensation committee,
and Acamar Partners Acquisition Corp. since 2020, currently serving
as a member of the audit and compensation committees. Mr. Skinner
holds a bachelor’s degree in business administration and
accounting from Texas Tech University and is a certified public
accountant in Texas.
Eugenia M.
Ulasewicz is a Director of the Company. Ms. Ulasewicz most
recently served as President of the Americas division for Burberry
Ltd. from 1998 to 2013. She has been a member of the boards of
directors of Bunzl PLC since 2011, serving as a member of the
audit, nomination and remuneration committees, Signet Jewelers Ltd.
since 2013, serving as a member of compensation committee, and
Vince Holding Corporation since 2014, serving as a member of the
audit committee and the chair of the compensation committee, and
will become a member of the board of directors of Asos plc in April
2020. Ms. Ulasewicz holds a bachelor’s degree from the
University of Massachusetts, Amherst.
Adrian Bartella is
the Chief Financial Officer. Mr. Bartella has over 14 years of
international finance experience. He joined Dufry AG in 2005 and
has served in various positions in its Finance, Mergers and
Acquisitions and Treasury before being named Global Head of
Investment Control, Mergers and Acquisitions in 2010. He has served
as Chief Financial Officer of Hudson since 2012. Mr. Bartella holds
a degree in business administration from the European University
Viadrina in Frankfurt, Germany.
Brian Quinn is an
Executive Vice President and Chief Operating Officer. He is
responsible for the day-to-day general management of the company.
Mr. Quinn was Vice President of Operations at Hudson from 1992 to
1996. Prior to that, he was General Manager of Hudson’s
LaGuardia Airport operations. Prior to joining Hudson in 1991, Mr.
Quinn held positions as Regional Vice President at the Rite-Aid
Corporation, Regional Vice President at Faber Coe & Gregg, and
General Manager of WH Smith New York City operations. Mr. Quinn
attended St. John’s University, majoring in political
science.
Hope Remoundos is
an Executive Vice President and the Chief Marketing Officer. Ms.
Remoundos served as Senior Vice President, Sales and Marketing at
Hudson from 2000 to 2016, and held positions as Director and Vice
President in Sales and Marketing from 1992 to 2000. Prior to
joining Hudson in 1992, Ms. Remoundos worked for over 20 years in
general management, circulation and consulting roles within the
publishing and advertising industry. She served as a consultant
with McNamee Consulting, and was General Manager and Circulation
Manager for Egg Magazine (a division of Forbes) for three years.
She was also associated with Select Magazines (five years), Curtis
Circulation (three years), International Musician & Recording
World, and Book Digest. Ms. Remoundos graduated with honors from
Fairleigh Dickinson University in 1976, receiving a bachelor of
science in marketing.
Michael Mullaney is
the Executive Vice President, Corporate Strategy & Business
Development. Prior to joining Hudson in 2004, Mr. Mullaney served
as Manager in Commercial and Business Development for the
Cincinnati/ Northern Kentucky International Airport. Mr. Mullaney
was previously a senior consultant with Aviation Planning
Associates and TransPlan, and a member of the Florida Department of
Transportation’s Multimodal System Planning Bureau. Mr.
Mullaney received a bachelor of science in aviation management/
flight technology from Florida Institute of Technology in
1988.
Jordi
Martin-Consuegra is an Executive Vice President, Chief
Administrative Officer and Deputy Chief Executive Officer. Prior to
joining Hudson in August 2018, Mr. Martin-Consuegra served in a
variety of positions for Dufry AG, including Chief Resources
Director from 2017 to 2018, Global Resources Director from 2012 to
2016, Global Organization and Human Resources Director from 2009 to
2012, Global Integration Director from 2008 to 2009, and Global
Information Technology Director from 2005 to 2008. Mr.
Martin-Consuegra holds an Executive MBA from Instituto de Empresa,
Madrid, and has also received a degree in economics from
Universidad Complutense de Madrid and a Bachelor of Arts in
Combined Studies from University of Wolverhampton, UK.
59
Board of Directors
Our
bye-laws provide that our board of directors shall consist of nine
directors. We have nine directors, four of whom are independent
directors. A director may be removed by the shareholders, in
accordance with the Company’s bye-laws. See “Item 10.
Additional Information – B. Memorandum of association and
bye-laws.” Our board is divided into three classes that are,
as nearly as possible, of equal size. Each class of directors is
elected for a three-year term of office, but the terms are
staggered so that the term of only one class of directors expires
at each annual general meeting.
Our
board of directors established an audit committee and a nomination
and remuneration committee prior to the consummation of our initial
public offering.
B. Compensation
The
compensation for each member of our executive management is
comprised of the following elements: base salary, bonus, equity
awards, contractual benefits, and pension contributions. Total
amount of compensation earned and benefits in kind provided to our
executive management for the fiscal year 2019 was $15.8 million,
which includes compensation for Joseph DiDomizio, the former Chief
Executive Officer, who left the company in January 2019. We do not
currently maintain any bonus or profit-sharing plan for the benefit
of the members of our executive management; however, certain
members of our executive management are eligible to receive annual
bonuses pursuant to the terms of their service agreements. No
amount was set aside or accrued by us to provide pension,
retirement or similar benefits to our executive management
employees with respect to the fiscal year 2019. Total amount of
compensation earned and benefits in kind provided to our
non-employee directors for the fiscal year 2019 was $1.6
million.
Stock-based compensation
Restricted Share Unit award equity compensation plan
Following our
initial public offering, our Board approved the Hudson Ltd.
Restricted Share Unit Plan (“RSU Plan”). The principal
purpose of the RSU Plan is to motivate and reward selected
employees for the Company’s successful IPO of Hudson Ltd.
through the granting of share-based awards. On June 28, 2018,
Hudson Ltd. granted awards in the form of Restricted Share Units
(“RSUs”) pursuant to the RSU Plan to certain of its
employees. The RSUs were vested at grant and, in the aggregate,
represent the right to receive 526,313 Class A common shares of the
Company. Hudson delivered 50% of the shares in connection with such
awards in first quarter 2019 and 50% in first quarter 2020. The
Company purchased Class A common shares in the market to settle the
awards under the RSU Plan.
Long-Term Incentive and equity compensation plan
During
2018, our Board approved the Hudson Ltd. Long-Term Incentive Plan
(“LTI Plan”). The principal purpose of the LTI Plan is
to attract, retain and motivate selected members of senior
management through the granting of share-based compensation awards.
On October 31, 2018, Hudson Ltd. granted awards in the form of RSUs
and Performance Share Units (“PSUs”, and together with
the RSUs, the “LTIP Units”) pursuant to the LTI Plan to
selected members of senior management. The LTIP Units are composed
of 25% RSUs and 75% PSUs. All LTIP Units have a service-vesting
requirement through May 1, 2021, subject to certain acceleration
provisions for selected participants. The PSUs are also subject to
performance-vesting requirements based on the Company’s
achievement of sales, EBITDA and adjusted EPS performance metrics.
At target, the LTIP Units represent the right to receive 580,599
Class A common shares of the Company in the aggregate. Hudson
expects to deliver shares in connection with such vested and
achieved awards in second quarter 2021.
60
On
September 10, 2019, Hudson Ltd. granted to selected members of its
senior management the Hudson LTI Plan 2019 award consisting of
405,674 PSUs and 135,243 RSUs. The plan has a contractual life of
32 months and will vest on May 1, 2022. The 2019 award has
substantially the same structure of service-vesting and
performance-vesting requirements as the LTI Plan awards granted in
2018. Hudson expects to deliver shares in connection with such
vested and achieved awards in second quarter 2022.
Certain members of
our senior management were granted PSU awards from Dufry in 2017.
Should these Dufry PSU awards vest, they will entitle the holders
to receive shares of Dufry.
C. Board practices Audit
committee
The
audit committee, which consists of Ms. Guilfoile, Mr. Skinner, Ms.
Ulasewicz and Mr. Moya-Angeler Cabrera, assists the board in
overseeing our accounting, financial reporting and related internal
controls processes and the audits of our financial statements. In
addition, the audit committee is directly responsible for the
appointment, compensation, retention and oversight of the work of
our independent registered public accounting firm. The audit
committee is also responsible for reviewing and determining whether
to approve certain transactions with related parties. See
“Item 7. Major Shareholders and Related Party Transactions
– B. Related party transactions – Related person
transaction policy.” The board of directors has determined
that each of Ms. Guilfoile, Mr. Skinner, Ms. Ulasewicz and Mr.
Moya-Angeler Cabrera qualifies as an “audit committee
financial expert,” as such term is defined in the rules of
the SEC, and that each of Ms. Guilfoile, Mr. Skinner, Ms. Ulasewicz
and Mr. Moya-Angeler Cabrera is independent, as independence is
defined under the rules of the SEC and NYSE applicable to foreign
private issuers. Ms. Guilfoile was appointed to act as chairman of
our audit committee.
Nomination and remuneration committee
The
nomination and remuneration committee, which consists of Mr. Torres
Carretero, Mr. Díaz González, Mr. Cohen, Mr. Moya-Angeler
Cabrera, and Mr. Holzer Neumann assists the board in overseeing the
long-term planning of appropriate appointments to the position of
Chief Executive Officer, as well as establishing criteria for the
selection of candidates for executive officer positions, including
the position of Chief Executive Officer, and reviewing candidates
to fill vacancies for executive officer positions. In addition, the
nomination and remuneration committee identifies, reviews and
approves corporate goals and objectives relevant to the
compensation of the Chief Executive Officer and other executive
officers, evaluate executive officers’ performance in light
of such goals and objectives and determine each executive
officer’s compensation based on such evaluation and will
determine any long-term incentive component of each executive
officer’s compensation. Mr. Cohen was appointed to act as
chairman of our nomination and remuneration committee.
Code of business conduct and ethics
We
have adopted a code of business conduct and ethics that applies to
all of our employees, officers and directors, including those
officers responsible for financial reporting. Our code of business
conduct and ethics addresses, among other things, competition and
fair dealing, conflicts of interest, financial matters and external
reporting, company funds and assets, confidentiality and corporate
opportunity requirements and the process for reporting violations
of the code of business conduct and ethics, employee misconduct,
conflicts of interest or other violations. Our code of business
conduct and ethics is attached as an exhibit to this annual
report.
Duties of directors
Under
Bermuda common law, members of the board of directors of a Bermuda
company owe a fiduciary duty to the company to act in good faith in
their dealings with or on behalf of the company and exercise their
powers and fulfill the duties of their office honestly. This duty
includes the following essential elements:
–
a duty
to act in good faith in the best interests of the
company;
–
a duty
not to make a personal profit from opportunities that arise from
the office of director;
–
a duty
to avoid conflicts of interest; and
–
a duty
to exercise powers for the purpose for which such powers were
intended.
61
The
Companies Act imposes a duty on directors of a Bermuda company to
act honestly and in good faith with a view to the best interests of
the company, and to exercise the care, diligence and skill that a
reasonably prudent person would exercise in comparable
circumstances. In addition, the Companies Act imposes various
duties on directors and officers of a company with respect to
certain matters of management and administration of the company.
Directors and officers generally owe fiduciary duties to the
company, and not to the company’s individual shareholders.
Our shareholders may not have a direct cause of action against our
directors.
D. Employees
We are
responsible for hiring, training and management of employees at
each of our retail locations. As of December 31, 2019, we employed
10,140 people, including both full-time and part-time employees (as
compared to 10,094 at December 31, 2018). Of these employees, 8,568
were full-time employees and 1,572 were part-time employees. As of
December 31, 2019, 4,319 of our employees were subject to
collective bargaining agreements.
E. Share ownership
As of
March 5, 2020, members of our board of directors and our senior
management held as a group 96,992 of our Class A common
shares.
The
following table shows the beneficial ownership of each member of
our board of directors and senior management as of March 5,2020.
Beneficial
ownership is determined in accordance with the rules of the SEC and
includes voting or investment power with respect to the securities.
Class A common shares that may be acquired by an individual or
group within 60 days after the date of this annual report, pursuant
to the exercise of options, warrants or other rights, are deemed to
be outstanding for the purpose of computing the percentage
ownership of such individual or group, but are not deemed to be
outstanding for the purpose of computing the percentage ownership
of any other person shown in the table.
Except
as indicated in footnotes to this table, we believe that the
shareholders named in this table have sole voting and investment
power with respect to all common shares shown to be beneficially
owned by them, based on information provided to us by such
shareholders. The address for each director and executive officer
listed is 4 New Square, Bedfont Lakes, Feltham, Middlesex, United
Kingdom.
SHARES BENEFICIALLY
OWNED
NAME OF BENEFICIAL OWNER
CLASS A COMMON
SHARES
%
CLASS B COMMON
SHARES
%
PERCENTAGE OF TOTAL
VOTING
POWER1
EXECUTIVE OFFICERS AND
DIRECTORS:
Juan Carlos Torres
Carretero
–
–
–
–
–
Julián Díaz
González
–
–
–
–
–
James Cohen
–
–
–
–
–
Roger
Fordyce
*
*
–
–
*
Mary J. Steele
Guilfoile
–
–
–
–
–
Andrés Holzer
Neumann
–
–
–
–
–
Joaquín
Moya-Angeler Cabrera
–
–
–
–
–
James E.
Skinner
*
*
–
–
*
Eugenia M.
Ulasewicz
*
*
–
–
*
Adrian
Bartella
*
*
–
–
*
Brian Quinn
*
*
–
–
*
Hope
Remoundos
*
*
–
–
*
Michael
Mullaney
*
*
–
–
*
Jordi
Martin-Consuegra
–
–
–
–
–
*
Indicates
ownership of less than 1% of outstanding Class A common shares and
less than 1% of the total voting power of all outstanding common
shares.
1
Percentage of total voting power represents
voting power with respect to all of our Class A and Class B common
shares, as a single class. The holders of our Class B common shares
are entitled to 10 votes per share, and holders of our Class A
common shares are entitled to one vote per share. For more
information about the voting rights of our Class A and Class B
common shares, see “Item 10. Additional Information –
B. Memorandum of association and bye-laws – Common shares
– Voting rights.”
62
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS
A. Major shareholders
Beneficial
ownership is determined in accordance with the rules of the SEC and
includes voting or investment power with respect to the securities.
Class A common shares that may be acquired by an individual or
group within 60 days after the date of this annual report pursuant
to the exercise of options, warrants or other rights, are deemed to
be outstanding for the purpose of computing the percentage
ownership of such individual or group, but are not deemed to be
outstanding for the purpose of computing the percentage ownership
of any other person shown in the table.
Except
as indicated in footnotes to this table, we believe that the
shareholders named in this table have sole voting and investment
power with respect to all common shares shown to be beneficially
owned by them, based on information provided to us by such
shareholders. The address for Dufry is Brunngässlein 12, CH
– 4010 Basel, Switzerland.
Except
as indicated in footnotes to this table, the following table
presents the beneficial ownership of our common shares as of March5, 2020:
SHARES BENEFICIALLY
OWNED
NAME OF BENEFICIAL
OWNER
CLASS
A COMMON SHARES
%
CLASS
B COMMON SHARES
%
PERCENTAGE OF TOTAL
VOTING
POWER1
Dufry AG 2
–
-
53,093,315
100.00
93.1
Clearbridge
Investments, LLC 3
4,083,003
10.38
-
-
0.7
Brown Advisory,
Incorporated4
3,554,305
9.03
-
-
0.6
JPMorgan Chase
& Co. 5
3,464,998
8.81
-
-
0.6
Baron Capital Management, Inc.
6
3,000,000
7.62
-
-
0.5
TimesSquare Capital Management, LLC
7
2,724,870
6.93
-
-
0.5
1
Percentage of total voting power
represents voting power with respect to all of our Class A and
Class B common shares, as a single class. The holders of our Class
B common shares are entitled to 10 votes per share, and holders of
our Class A common shares are entitled to one vote per share. For
more information about the voting rights of our Class A and Class B
common shares, see “Item 10. Additional Information –
B. Memorandum of association and bye-laws – Common shares
– Voting rights.”
2
Represents Class B common shares
held by Dufry International AG. For additional information relating
to our controlling shareholder, see “Item 10. Additional
Information – B. Memorandum of association and
bye-laws” and “Item 3. Key Information – D. Risk
factors”. The two-class structure of our common shares has
the effect of concentrating voting control with Dufry and its
affiliates. Because of its significant share ownership, Dufry
exerts control over us, including with respect to our business,
policies and other significant corporate decisions. This limits or
precludes the ability of Class A shareholders to influence
corporate matters, including the election of directors, amendments
to our organizational documents and any merger, amalgamation, sale
of all or substantially all of our assets or other major corporate
transaction requiring shareholder approval.
3
As reported on Form 13G filed with
the SEC on February 14, 2020. The address of ClearBridge
Investments, LLC is 620 8th Avenue, New York, NY10018.
4
As reported on Form 13G filed with
the SEC on February 14, 2020, consists of Class A common shares
owned by Brown Advisory Incorporated (“BAI”), Brown
Investment Advisory & Trust Company (“BIATC”) and
Brown Advisory LLC (“BALLC”). BAI may be deemed to
beneficially own 3,554,305 Class A common shares, BALLC may be
deemed to beneficially own 3,516,156 Class A common shares and
BIATC may be deemed to beneficially own 38,149 Class A common
shares. The address for each of BAI, BIATC, and BALLC is 901 South
Bond Street, Suite #400, Baltimore, Maryland21231.
5
As reported on Form 13G filed with
the SEC on January 15, 2020. The address of JP Morgan Chase &
Co is 383 Madison Avenue, New York, NY10017.
6
As reported on Form 13G filed with
the SEC on February 14, 2020, consists of Class A common shares
owned by Baron Capital Group, Inc. (“BCG”), BAMCO, Inc.
(“BAMCO”), Ronald Baron and Baron Small Cap Fund
(“BSC”). Each of BCG, BAMCO, and Mr. Baron may be
deemed to beneficially own 3,000,000 Class A common shares. BSC may
be deemed to beneficially own 3,000,000 Class A common shares. The
address for each of BCG, BAMCO, Mr. Baron, and BSC is 767 Fifth
Avenue, 49th Floor, New York, NY10153.
7
As reported on Form
13G filed with the SEC on February 14, 2020. The address of
TimesSquare Capital Management, LLC is 7 Times Square, 42nd Floor,
New York, NY10036.
As of
March5, 2020, we had 4 shareholders of record. One record holder, CEDE
& CO., a nominee of The Depository Trust Company, was a
resident of the United States, which held an aggregate of
39,284,149 of our Class A common shares, representing approximately
42.5% of our outstanding common shares. Since some of the shares
are held by nominees, the number of shareholders may not be
representative of the number of beneficial
owners.
63
B. Related party
transactions
Transactions
with Dufry Supply
Dufry
is one of our largest suppliers of products. In particular, Dufry
is the largest supplier of products for our duty free operations,
including liquors and perfumes. For the years ended December 31,2019, 2018 and 2017, $88.0 million, $82.5 million and $67.4
million, respectively, of cost of goods sold was attributable to
purchases of products from Dufry. We expect Dufry to continue to
supply us with products as contemplated by the Master Relationship
Agreement entered into in connection with our initial public
offering. See “– Other agreements with Dufry –
Master relationship agreement.”
Franchise and other services
We
have historically paid a franchise fee to Dufry to license brands
owned by Dufry or its subsidiaries, including the Dufry, Hudson,
Nuance and World Duty Free brands, and to receive ancillary
franchise services from Dufry including centralized support
services, such as treasury, internal audit and other similar
services. We expect Dufry or its subsidiaries to continue to
license these brands to us and provide us with ancillary franchise
services pursuant to the terms of the agreements entered into in
connection with our initial public offering. See “–
Other agreements with Dufry – Franchise agreements” and
“– Other agreements with Dufry – Trademark
license agreement.”
We
have historically received a fee from Dufry for our provision of
consultation services to Dufry to assist Dufry in store concept and
design, primarily for duty-paid stores outside the continental
United States and Canada and in connection with the development,
enhancement, maintenance, protection and exploitation of the Hudson
brand. We expect to continue to provide Dufry with consultation
services pursuant to the terms of new franchise agreements, all as
contemplated by the Master Relationship Agreement entered into in
connection with our initial public offering. See “Other
agreements with Dufry – Master relationship
agreement”.
We
recorded $15.1 million, $15.2 million and $50.6 million in net
expenses for all such services, respectively, for the years ended
December 31, 2019, 2018 and 2017.
Treasury operations
We
have historically been an integral part of Dufry’s global
treasury and cash management operations. We also participate in
Dufry Group’s cash pooling arrangement. See “Item 5.
Operating and Financial Review and Prospects – B. Liquidity
and capital resources – Dufry group cash
pooling.”
At
December 31, 2019, 2018 and 2017, we owed $503.1 million, $492.6
million and $520.4 million, respectively, to Dufry pursuant to
long-term financial loans (excluding current portion). We were
charged $29.2 million, $30.2 million and $29.5 million in each of
the years ended December 31, 2019, 2018 and 2017, respectively, in
interest to Dufry. The weighted-average annual interest rate on our
loans from Dufry for the years ended December 31, 2019, 2018 and
2017 was 5.7%, 5.7% and 5.7%, respectively per year. For further
details, see “Item 5. Operating and Financial Review and
Prospects – B. Liquidity and capital resources –
Indebtedness.”
We
currently borrow from Dufry, engage in cash pooling with other
Dufry entities and receive other treasury services from Dufry, in
each case as contemplated by the Master Relationship Agreement
entered into in connection with our initial public offering. See
“– Other agreements with Dufry – Master
relationship agreement.”
64
Other agreements with Dufry
In
connection with our initial public offering, we entered into a
series of agreements with Dufry. Most importantly, we entered into
the following:
Master relationship agreement
This
agreement governs the general commercial relationship between us
and other members of the Dufry Group. Recognizing our position as
an integral part of the Dufry Group, the agreement provides, among
other things, that:
–
we
will provide information concerning our business to Dufry upon
request;
–
subject to
applicable law, we will not publish press releases concerning our
business, results of operations or financial condition, reports,
notices, proxy or information statements, registration statements
or prospectuses without Dufry’s consent;
–
we
will cooperate with Dufry with respect to various matters,
including the preparation of its public reports;
–
unless
we obtain Dufry’s consent, we will borrow funds only pursuant
to facilities provided by members of the Dufry Group, and any such
borrowing will be on substantially the same terms as our
outstanding borrowings from members of the Dufry Group at the date
of our initial public offering, provided that the principal amount,
interest rate (which may be fixed or floating) and term of future
borrowings may vary from facility to facility, and the interest
rate that Dufry charges us will correspond to Dufry’s
weighted average cost of debt funding in the currency of our
borrowings at the time that we borrow or refinance any such debt
or, if a floating rate of interest is applied, Dufry’s
weighted average cost of debt funding at each interest reset date,
in each case plus an administration fee to reflect the cost to
Dufry of providing the service;
–
unless
we obtain Dufry’s consent, we will execute foreign exchange
transactions only through members of the Dufry Group, and if Dufry
executes such foreign exchange transactions for us, it may execute
them either with a third person on our behalf at the best quoted
price or directly with us at the best price quoted by a third
person, in each case as reasonably determined by Dufry, plus an
administration fee to reflect the cost to Dufry of providing the
service;
–
Dufry
may direct us to deposit cash in any Dufry Group cash pooling
arrangement up to the aggregate principal amount of borrowings by
us from Dufry then outstanding, and such cash deposited by us may
be used to secure any credit positions in the cash pooling
arrangements, either of us or our subsidiaries, or other Dufry
Group members, and with Dufry’s consent, we may borrow from
any cash pool at the then-prevailing market rate applicable to
borrowings by similar borrowers from the bank operating the cash
pooling arrangement, as reasonably determined by Dufry, plus an
administration fee to reflect the cost to Dufry of providing the
service; the agreement also provides that in the event of the
insolvency, bankruptcy, receivership or other similar status of
Dufry, the amount of any borrowing by us from Dufry should be set
off against any amount deposited by us in any cash pooling
arrangement that is not returned to us;
–
at
Dufry’s option, we will purchase certain categories of
products for sale, either directly from Dufry or through a third
person with which Dufry has a supply arrangement, at prices to be
determined by Dufry in accordance with its transfer pricing policy
as then in effect for all members of the Dufry Group;
–
we
will do all things necessary to comply with Dufry Group’s
policies in effect from time to time;
–
we
will support the Dufry Group in its global sales and marketing
strategy and take any action requested by Dufry in furtherance
thereof that does not materially adversely affect us;
–
we
will use, apply and implement any information technology system,
application or software required by Dufry, and we will be
responsible to Dufry for the costs of any such system, application
or software, as well as any support services provided by Dufry, on
the basis of the cost to the Dufry Group (including the cost of
Dufry Group employees) for such product or service plus an
administration fee to reflect the cost to Dufry of providing the
service;
–
we
will reimburse the Dufry Group for all costs incurred by the Dufry
Group in connection with the granting and vesting of any awards to
our employees of the Company Group, either before or after our
initial public offering, pursuant to the Dufry PSU Plan;
and
–
at
Dufry’s option, we will participate in any insurance policy
or arrangement that Dufry effects for the members of the Dufry
Group, and we will be responsible for any costs (incurred by Dufry
or otherwise) associated with effecting or maintaining such policy
or arrangement, as determined by Dufry in its sole
discretion.
65
The
agreement will terminate on the date when there are no issued and
outstanding Class B common shares. Also, Dufry may terminate the
agreement without cause upon six months’ notice to us. The
agreement is governed by the Laws of Switzerland and if any dispute
is not settled by mediation, it will be finally resolved by
arbitration in accordance with the Swiss Rules of International
Arbitration of the Swiss Chambers’ Arbitration
Institution.
Franchise agreements
As
contemplated by the Master Relationship Agreement, certain of our
subsidiaries will maintain various franchise agreements with the
Dufry Group. The franchise agreements provide us with access
to:
–
franchise
intellectual property (such as trademarks), including guidance and
training on its use;
–
franchise business
concepts;
–
franchise global
distribution center tools;
–
franchise
supporting knowhow, such as marketing and promotion knowhow and
training; and
–
ancillary
franchise services, such as centralized support services including
treasury, internal audit, legal, tax and other services to support
the franchise.
In
exchange for these access rights and support services, we pay
members of the Dufry Group franchise fees, which vary depending on
the trademark under which sales were made. We pay franchise fees
equal to:
–
3% of
net sales for duty-free sales under the Dufry, Nuance and World
Duty Free trademarks;
–
2% of
net sales for duty-free sales not under any such trademark;
and
–
0.35%
of net sales for duty-paid sales.
Each
franchise agreement may be terminated by Dufry without cause upon
six months’ notice. Upon failure to cure a default under a
franchise agreement within ten days of receiving notice of such
default, the non-defaulting party may terminate the agreement. The
agreements will also terminate on the date that the Master
Relationship Agreement terminates. The franchise agreements are
governed by Swiss law. The other franchise agreements are on
substantially the same terms as the Hudson brand franchise
agreement.
Trademark license agreement
Separate to the
franchise agreements, Dufry has granted us a seven-year license to
use the Hudson brand and trademark within the continental United
States, Hawaii and Canada. We will not pay Dufry any fee for such
license.
Upon
failure to cure a default under the trademark license agreement
within ten days of receiving notice of such default, the
non-defaulting party may terminate the agreement. The agreement
will also terminate on the date that the Master Relationship
Agreement terminates. The trademark license agreement is governed
by Swiss law.
In
connection with our initial public offering, we have entered into a
registration rights agreement with Dufry International AG. The
registration rights agreement grants Dufry International AG and its
designees specified registration rights in connection with any
transfer of Class A common shares issuable to us or our affiliates
upon conversion of any Class B common shares. See “Item 10.
Additional Information – B. Memorandum of association and
bye-laws – Common shares – Conversion.” As a
result, Dufry International AG may require us to use reasonable
best efforts to effect the registration under the Securities Act of
our Class A common shares that they or their affiliates own, in
each case at our own expense. The registration rights agreement
also provides that we will indemnify Dufry International AG in
connection with the registration of our Class A common
shares.
Transactions with entities controlled by Mr. James
Cohen
During
the years ended December 31, 2019, 2018 and 2017, we paid $16.5
million, $18.9 million and $20.7 million, respectively, to Hudson
News Distributors, LLC and Hudson RPM Distributors, LLC, which are
entities controlled by Mr. James Cohen, for the supply of magazines
and other periodicals. We do not have a long-term distribution
contract with these entities, but we expect to continue purchasing
magazines and other periodicals from them. Mr. Cohen is the former
controlling shareholder of our business, is a current shareholder
of Dufry and a member of a group of shareholders that hold or
control approximately 15% of Dufry’s issued and outstanding
shares, and was a member of Dufry’s board of directors from
2009 until April 2016. Mr. Cohen is invited to attend meetings
of
66
Dufry’s
board of directors as a guest of the chairman from time to time.
Mr. Cohen is a Deputy Chairman of the board of directors of the
Company.
Through August
2018, we subleased to Hudson Media, Inc., a company controlled by
Mr. Cohen and his family, approximately 2,000 usable square feet,
and provide office services, at our offices in East Rutherford, New
Jersey, pursuant to an agreement entered into between Hudson Group
Holdings, Inc. and Hudson Media, Inc. prior to our acquisition by
Dufry. In connection therewith, Hudson Media, Inc. paid
approximately $16,800 annually in rent to us for the use of such
space. In addition, Hudson Media, Inc. occupied an additional area
of approximately 2,000 usable square feet at no additional charge.
In August 2018, Hudson Media, Inc. vacated all such space in our
offices and the sublease terminated.
In
addition, in connection with the sale of their interests in our
business, entities affiliated with Mr. Cohen entered into a
Trademark Co-Existence Agreement (the “TCEA”) with us
in 2008 (prior to Dufry’s acquisition of us later that year).
The TCEA granted us the exclusive ownership of certain trademarks
(Hudson News, Hudson Group, Hudson Booksellers, Hudson Group Retail
Specialists, Hudson, the “Retail Marks”), which we have
subsequently transferred to Dufry, and the entities affiliated with
Mr. Cohen exclusive ownership of certain other marks (Hudson News
Distributors, Hudson RPM Distributors, Magazine Distributors, the
“Wholesale Marks”). We may not use the Wholesale Marks
in connection with any distribution business, and the entities
affiliated with Mr. Cohen may not use the Wholesale Marks in
connection with any retail business. However, entities affiliated
with Mr. Cohen may use other names and marks containing the terms
“Hudson” or “Hudson News” in conjunction
with the word or words “distributors,”“distribution,”“wholesale” and/ or other
words that clearly identify or reference the distribution business.
Each party also agreed not to apply for any related mark in the
other’s sphere of operations. The term of the TCEA is
indefinite and runs until terminated by mutual written
agreement.
Related person transaction policy
In
connection with our initial public offering, we adopted a policy
regarding approval by the audit committee, subject to certain
exceptions, of certain transactions between us and a related person
(as defined below). Transactions subject to the policy include the
following transactions in which a related person has or will have a
direct or indirect material interest:
–
any
transaction or series of transactions with a related person that is
material to us or the related person, or
–
any
transactions that are unusual in their nature or conditions,
involving goods, services, or tangible or intangible assets, to
which we are a party.
For
purposes of the policy, “related person”
means:
–
any
director or executive officer of (i) the Company or (ii) an
affiliated entity of the Company (including directors and members
of the Global Executive Committee of Dufry and the Divisional
Executive Committee of Dufry);
–
any
immediate family member of a director or executive officer of (i)
the Company or (ii) an affiliated entity of the Company (including
directors and members of the Global Executive Committee of Dufry
and the Divisional Executive Committee of Dufry);
–
any
nominee for director of (i) the Company or (ii) an affiliated
entity of the Company (including Dufry) and the immediate family
members of such nominee;
–
a 10%
beneficial owner of the Company’s voting securities or any
immediate family member of such owner; and
–
enterprises in
which a substantial interest in the voting power is owned, directly
or indirectly by a person described in any of the immediately
preceding four bullet points or over which such a person is able to
exercise significant influence.
Arrangements with
related parties existing at the date of our initial public offering
and new arrangements with related parties that were entered into in
connection with our initial public offering, in each case (i) that
were described in the prospectus for our initial public offering,
(ii) including any subsequent amendment to any such arrangement
that is not material to the Company and (iii) any ancillary
services provided in connection therewith, will not require review,
approval or ratification pursuant to the policy.
C. Interests of experts and counsel
Not
applicable.
67
ITEM 8. FINANCIAL INFORMATION
A. Consolidated statements and other financial
information
Financial statements
See
“Item 18. Financial Statements,” which contains our
audited consolidated financial statements prepared in accordance
with IFRS as issued by IASB.
Legal proceedings
We
have extensive operations, and are defendants in a number of court,
arbitration and administrative proceedings, and, in some instances,
are plaintiffs in similar proceedings. Actions, including class
action lawsuits, filed against us from time to time include
commercial, tort, customer, employment (such as wage and hour and
discrimination), tax, administrative, customs and other claims, and
the remedies sought in these claims can be for material
amounts.
Dividends and dividend policy
We do
not currently intend to pay cash dividends on our common shares in
the foreseeable future. Any future determination to pay cash
dividends will be subject to the discretion of our board of
directors in accordance with applicable law and dependent on a
variety of factors including our financial condition, earnings,
results of operations, current and anticipated cash needs, plans
for growth, level of indebtedness, legal requirements, general
business conditions and other factors that the board of directors
deems relevant. Any payment of dividends will be at the discretion
of our board of directors and we cannot assure you that we will pay
any dividends to holders of our common shares, or as to the amount
of any such dividends if our board of directors determines to do
so.
Under
Bermuda law, a company may not declare or pay a dividend if there
are reasonable grounds to believe that:
(i) the company
is, or would after the payment be, unable to pay its liabilities as
they become due, or (ii) the realizable value of its assets would
thereby be less than its liabilities. Under our bye-laws, each
Class A and Class B common share will be entitled to dividends if,
as and when dividends are declared by our board of directors,
subject to any preferred dividend right of the holders of any
preference shares.
Any
dividends we declare on our common shares will be in respect of our
Class A and Class B common shares, and will be distributed such
that a holder of one of our Class B common shares will receive the
same amount of the dividends that are received by a holder of one
of our Class A common shares. We will not declare any dividend with
respect to the Class A common shares without declaring a dividend
on the Class B common shares, and vice versa.
We are
a holding company and have no material assets other than our direct
and indirect ownership of our operating subsidiaries. If we were to
distribute a dividend at some point in the future, we would cause
the operating subsidiaries to make distributions to us in an amount
sufficient to cover any such dividends to the extent permitted by
our subsidiaries’ financing agreements, if any.
B. Significant changes
A
discussion of the significant changes in our business can be found
under “Item 4. Information on the Company– B. Business
overview.”
68
ITEM 9. THE OFFER AND LISTING
A. Offering and listing details
Not
applicable.
B. Plan of distribution
Not
applicable.
C. Markets
On
February 5, 2018, we completed our initial public offering and
listed our common shares on the New York Stock Exchange (the
“NYSE”).
Our
common shares have been listed on the NYSE under the symbol
“HUD” since February 1, 2018.
D. Selling shareholders
Not
applicable.
E. Dilution
Not
applicable.
F. Expenses of the issue
Not
applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share capital
Not
applicable.
B. Memorandum of association and bye-laws
The
following is a description of the material terms of our bye-laws
and memorandum of association. The following description may not
contain all of the information that is important to you and we
therefore refer you to our bye-laws and memorandum of association,
copies of which are filed as exhibits to this annual report on Form
20-F.
69
General
We are
a Bermuda exempted company with limited liability. We are
registered with the Registrar of Companies in Bermuda under
registration number 52620. We were incorporated on May 30, 2017
under the name Hudson Ltd. Our registered office is located at 2
Church Street, Hamilton HM11, Bermuda. Our affairs are governed by
our memorandum of association and bye-laws and the Companies Act
1981 of Bermuda (the “Companies Act”).
The
objects of our business are unrestricted, and the company has the
capacity of a natural person. We can therefore undertake activities
without restriction on our capacity.
A
register of holders of the common shares is maintained by Conyers
Corporate Services (Bermuda) Limited in Bermuda, and a branch
register will be maintained in the United States by Computershare
Trust Company, N. A., who serves as branch registrar and transfer
agent. As of March 5, 2020, there were issued and outstanding
39,344,699 Class A common shares, par value $0.001 per share, and
53,093,315 Class B common shares, par value $0.001 per share.
As of March 5, 2020, our authorized share capital consisted of
2,000,000,000 Class A common shares, par value $0.001 per share,
1,000,000,000 Class B common shares, par value $0.001 per share,
and 100,000,000 undesignated preference shares, par value $0.001
per share.
Pursuant to our
bye-laws, subject to any resolution of the shareholders to the
contrary, our board of directors is authorized to issue any of our
authorized but unissued shares. There are no limitations on the
right of non-Bermudians or non-residents of Bermuda to hold or vote
our shares.
Common Shares
General
All of
our issued and outstanding common shares are fully paid and
non-assessable. Certificates representing our issued and
outstanding common shares are generally not issued and legal title
to our issued shares is recorded in registered form in the register
of members. Our issued and outstanding common shares consist of
Class A and Class B common shares. Holders of Class A and Class B
common shares have the same rights other than with respect to
voting and conversion rights. Holders of our common shares have no
preemptive, redemption, conversion or sinking fund rights (except
as described below under the heading “–
Conversion”). If we issue any preference shares, the rights,
preferences and privileges of holders of our Class A and Class B
common shares will be subject to, and may be adversely affected by,
the rights of the holders of such preference shares.
Dividends
The
holders of our common shares will be entitled to such dividends as
may be declared by our board of directors, subject to the Companies
Act and our bye-laws. Dividends and other distributions on issued
and outstanding shares may be paid out of the funds of the Company
lawfully available for such purpose, subject to any preference of
any issued and outstanding preference shares. Dividends and other
distributions will be distributed among the holders of our common
shares on a pro rata basis.
Under
Bermuda law, we may not declare or pay any dividends if there are
reasonable grounds for believing that (i) we are, or after the
payment of such dividends would be, unable to pay our liabilities
as they become due, or (ii) the realizable value of our assets
would thereby be less than our liabilities. There are no
restrictions on our ability to transfer funds (other than funds
denominated in Bermuda dollars) in and out of Bermuda or to pay
dividends to
U. S.
residents who are holders of our common shares.
Voting Rights
Each
Class A common share is entitled to one vote, and each Class B
common share is entitled to 10 votes, on all matters upon which the
shares are entitled to vote.
70
The
quorum required for a general meeting of shareholders to consider
any resolution or take any action, including with respect to any
meeting convened to consider or adopt a resolution required for an
amalgamation or merger of the Company, is one or more persons
present and representing in person or by proxy at least 15% of the
votes eligible to be cast at any such general meeting, provided
that for so long as there are any Class B common shares issued and
outstanding, at least one holder of Class B common shares shall be
required to be present in person or by proxy to constitute a
quorum.
To be
passed at a general meeting of the Company, a resolution (including
a resolution required for an amalgamation or merger of the Company)
requires the affirmative vote of at least a majority of the votes
cast at such meeting.
Subject to the
Companies Act, at any general meeting of the Company a resolution
put to the vote of the meeting shall be voted upon in such manner
as the chairman of the meeting shall decide. The chairman of the
meeting shall direct the manner in which the shareholders
participating in such meeting may cast their votes. A poll may be
demanded by (i) the chairman of the meeting; (ii) at least three
shareholders present or voting by proxy or (iii) one or more
shareholders present or represented by proxy holding not less than
one-tenth of the total voting rights of the shareholders holding
all of the issued and outstanding Class A and Class B common shares
and any other shares of the Company or not less than one-tenth of
the aggregate sum paid up on all issued and outstanding Class A and
Class B common shares and any other shares of the Company having
the right to attend and vote.
Conversion
Each
Class B common share is convertible into one Class A common share
at any time at the option of the holder of such Class B common
share. Any Class B common shares that are converted into Class A
common shares may not be reissued. The disparate voting rights of
our Class B common shares will not change upon transfer unless such
Class B common shares are first converted into our Class A common
shares. Further, each Class B common share will automatically
convert into one Class A common share upon any transfer thereof to
a person or entity that is not an affiliate of the holder of such
Class B common shares. Further, all of our Class B common shares
will automatically convert into Class A common shares upon the date
when all holders of Class B common shares together cease to hold
Class B common shares representing, in the aggregate, 10% or more
of the total number of Class A and Class B common shares issued and
outstanding.
Variation of rights
As a
matter of Bermuda law, the holders of one class of shares may not
vary the voting rights of such class of shares relative to another
class of shares, without the approval of the holders of each other
class of our voting shares then in issue. As such, if at any time
we have more than one class of shares, the rights attaching to any
class, unless otherwise provided for by the terms of issue of the
relevant class, may be varied either: (i) with the consent in
writing of the holders of a majority of the issued shares of that
class; or (ii) with the sanction of a resolution passed by a
majority of the votes cast at a general meeting of the relevant
class of shareholders at which a quorum consisting of shareholders
representing 10% of the issued shares of the relevant class is
present. In addition, as the rights attaching to any class of
shares are set forth in our bye-laws, a resolution of a general
meeting of the Company is required to be passed to amend the
bye-laws to vary such rights. For purposes of the Class A or Class
B common shares, the only rights specifically attaching to such
shares that may be varied as described in this paragraph are the
voting, dividend and liquidation rights.
Our
bye-laws specify that the creation or issue of shares ranking
equally with existing shares will not, unless expressly provided by
the terms of issue of existing shares, vary the rights attached to
existing shares. In addition, the creation or issue of preference
shares ranking prior to common shares will not be deemed to vary
the rights attached to common shares or, subject to the terms of
any other series of preference shares, to vary the rights attached
to any other series of preference shares.
Further, our Class
B common shares will automatically convert into Class A common
shares on the date when all holders of Class B common shares
together cease to hold Class B common shares representing, in the
aggregate, 10% or more of the total number of Class A and Class B
common shares issued and outstanding.
71
Transfer of shares
Our
board of directors may in its absolute discretion and without
assigning any reason refuse to register the transfer of a share
that is not fully paid. Our board of directors may also refuse to
recognize an instrument of transfer of a share unless it is
accompanied by the relevant share certificate and such other
evidence of the transferor’s right to make the transfer as
our board of directors shall reasonably require. Subject to these
restrictions, a holder of common shares may transfer the title to
all or any of its common shares by completing a form of transfer in
the form set out in our bye-laws (or as near thereto as
circumstances admit) or in such other common form as the board may
accept. The instrument of transfer must be signed by the transferor
and transferee, although in the case of a fully paid share our
board of directors may accept the instrument signed only by the
transferor.
Liquidation
In the
event of our liquidation, dissolution or winding up, the holders of
our Class A and Class B common shares are entitled to share equally
and ratably in our assets, if any, remaining after the payment of
all of our debts and liabilities, subject to any liquidation
preference on any issued and outstanding preference
shares.
Election and removal of directors
Our
bye-laws provide that our board shall consist of nine directors.
Our board is divided into three classes that are, as nearly as
possible, of equal size. Each class of directors is elected for a
three-year term of office, but the terms are staggered so that the
term of only one class of directors expires at each annual general
meeting.
Our
bye-laws provide that the number of shareholders necessary to
nominate a director is either (i) any number of shareholders
representing at least 5% of the votes eligible to be cast at any
general meeting of the Company by shareholders holding all of the
issued and outstanding Class A and Class B common shares and any
other shares of the Company having the right to vote; or (ii) not
less than 100 shareholders of the Company. Any such eligible group
of shareholders wishing to propose for election as a director
someone who is not an existing director or is not proposed by our
board must give notice of the intention to propose the person for
election. Such notice must be given to the secretary or the
chairman of the Company at any time between January 1, and March 1,
of the year the general meeting to vote on such proposal will be
held.
Our
bye-laws provide that, at any time, a director may be removed by
either (i) an affirmative vote of at least a majority of the votes
cast at a general meeting of the Company; or (ii) the written
consent of any number of holders of common shares representing at
least a majority of the votes eligible to be cast at a general
meeting.
Proceedings of board of directors
Our
bye-laws provide that our business is to be managed and conducted
by our board of directors. Bermuda law permits individual and
corporate directors and there is no requirement in our bye-laws or
Bermuda law that directors hold any of our shares.
The
remuneration of our directors is determined by our board of
directors, and there is no requirement that a specified number or
percentage of “independent” directors must approve any
such determination. Our directors may also be paid all travel,
hotel and other expenses properly incurred by them in connection
with our business or their duties as directors.
Provided a
director discloses a direct or indirect interest in any contract or
arrangement with us as required by Bermuda law, such director is
entitled to vote in respect of any such contract or arrangement in
which he or she is interested unless he or she is disqualified from
voting by the chairman of the relevant board meeting.
72
Indemnity of directors and officers
We
have adopted provisions in our bye-laws that provide that we shall
indemnify our officers and directors in respect of their actions
and omissions, except in respect of their fraud or dishonesty.
Subject to Section 14 of the Securities Act, which renders void any
waiver of the provisions of the Securities Act, our bye-laws
provide that the shareholders waive all claims or rights of action
that they might have, individually or in right of the company,
against any of the company’s directors or officers for any
act or failure to act in the performance of such director’s
or officer’s duties, except in respect of any fraud or
dishonesty of such director or officer. Section 98A of the
Companies Act permits us to purchase and maintain insurance for the
benefit of any officer or director in respect of any loss or
liability attaching to him in respect of any negligence, default,
breach of duty or breach of trust, whether or not we may otherwise
indemnify such officer or director. We have purchased and maintain
a directors’ and officers’ liability policy for such a
purpose.
Corporate opportunities
Our
bye-laws will provide that, to the fullest extent permitted by
applicable law, we, on our behalf and on behalf of our
subsidiaries, renounce any interest or expectancy in, or in being
offered an opportunity to participate in, any corporate
opportunities, that are from time to time presented to Dufry or any
of its officers, directors, employees, agents, shareholders,
members, partners, affiliates or subsidiaries (other than us and
our subsidiaries), even if the opportunity is one that we or our
subsidiaries might reasonably be deemed to have pursued or had the
ability or desire to pursue if granted the opportunity to do so.
Neither Dufry nor its officers, directors, employees, agents,
shareholders, members, partners, affiliates or subsidiaries will
generally be liable to us or any of our subsidiaries for breach of
any fiduciary or other duty, as a director or otherwise, by reason
of the fact that such person pursues or acquires such corporate
opportunity, directs such corporate opportunity to another person
or fails to present such corporate opportunity, or information
regarding such corporate opportunity, to us or our subsidiaries. In
the case of any such person who is a director or officer of the
Company and who is expressly offered such corporate opportunity in
writing solely in his or her capacity as a director or officer of
the Company, such director or officer shall be obligated to
communicate such opportunity to the Company. Existing and new
shareholders will be deemed to have notice of and to have consented
to the provisions of our bye-laws, including the corporate
opportunity policy.
Preference shares
Pursuant to
Bermuda law and our bye-laws, our board of directors may establish
by resolution one or more series of preference shares in such
number and with such designations, dividend rates, relative voting
rights, conversion or exchange rights, redemption rights,
liquidation rights and other relative participation, optional or
other special rights, qualifications, limitations or restrictions
as may be fixed by the board without any further shareholder
approval. Such rights, preferences, powers and limitations could
have the effect of discouraging an attempt to obtain control of the
Company.
Capitalization of profits and reserves
Pursuant to our
bye-laws, our board of directors may (i) capitalize any part of the
amount of our share premium or other reserve accounts or any amount
credited to our profit and loss account or otherwise available for
distribution by applying such sum in paying up unissued shares to
be allotted as fully paid bonus shares pro rata (except in
connection with the conversion of shares) to the shareholders; or
(ii) capitalize any sum standing to the credit of a reserve account
or sums otherwise available for dividend or distribution by paying
up in full, partly paid or nil paid shares of those shareholders
who would have been entitled to such sums if they were distributed
by way of dividend or distribution.
73
Meetings of shareholders
Under
Bermuda law, a company is required to convene at least one general
meeting of shareholders each calendar year (the “annual
general meeting”). However, the shareholders may by
resolution waive this requirement, either for a specific year or
period of time, or indefinitely. When the requirement has been so
waived, any shareholder may, on notice to the company, terminate
the waiver, in which case an annual general meeting must be
called.
Bermuda law
provides that a special general meeting of shareholders may be
called by the board of directors of a company and must be called
upon the request of shareholders holding not less than 10% of the
paid-up capital of the company carrying the right to vote at
general meetings. Bermuda law also requires that shareholders be
given at least five days’ advance notice of a general
meeting, but the accidental omission to give notice to any person
does not invalidate the proceedings at a meeting. Our bye-laws
provide that the chairman of the board or our board of directors
may convene an annual general meeting or a special general meeting.
Under our bye-laws, at least fourteen days’ notice of an
annual general meeting or a special general meeting must be given
to each shareholder entitled to vote at such meeting. This notice
requirement is subject to the ability to hold such meetings on
shorter notice if such notice is agreed: (i) in the case of an
annual general meeting by all of the shareholders entitled to
attend and vote at such meeting; or (ii) in the case of a special
general meeting by a majority in number of the shareholders
entitled to attend and vote at the meeting holding not less than
95% in nominal value of the shares entitled to vote at such
meeting.
The
quorum required for a general meeting of shareholders to consider
any resolution or take any action, including with respect to any
meeting convened to consider or adopt a resolution required for an
amalgamation or merger of the Company, is one or more persons
present and representing in person or by proxy common shares
representing at least 15% of the votes eligible to be cast at any
such general meeting, provided that for so long as there are any
Class B common shares issued and outstanding, at least one holder
of Class B common shares shall be required to be present in person
or by proxy to constitute a quorum.
Certain provisions of Bermuda law
We
have been designated by the Bermuda Monetary Authority as a
non-resident for Bermuda exchange control purposes. This
designation allows us to engage in transactions in currencies other
than the Bermuda dollar, and there are no restrictions on our
ability to transfer funds (other than funds denominated in Bermuda
dollars) in and out of Bermuda or to pay dividends to United States
residents who are holders of our common shares.
Consent under the
Exchange Control Act 1972 (and its related regulations) has been
received from the Bermuda Monetary Authority for the issue and
transfer of our Class A common shares to and between non-residents
of Bermuda for exchange control purposes provided our Class A
common shares remain listed on an appointed stock exchange, which
includes the New York Stock Exchange. Approvals or permissions
given by the Bermuda Monetary Authority do not constitute a
guarantee by the Bermuda Monetary Authority as to our performance
or our creditworthiness. Accordingly, in giving such consent or
permissions, the Bermuda Monetary Authority shall not be liable for
the financial soundness, performance or default of our business or
for the correctness of any opinions or statements expressed in this
annual report. Certain issues and transfers of common shares
involving persons deemed resident in Bermuda for exchange control
purposes require the specific consent of the Bermuda Monetary
Authority.
In
accordance with Bermuda law, share certificates are only issued in
the names of companies, partnerships or individuals. In the case of
a shareholder acting in a special capacity (for example as a
trustee), certificates may, at the request of the shareholder,
record the capacity in which the shareholder is acting.
Notwithstanding such recording of any special capacity, we are not
bound to investigate or see to the execution of any such trust. We
will take no notice of any trust applicable to any of our shares,
whether or not we have been notified of such trust.
74
Comparison of Bermuda Corporate Law and U. S. Corporate
Law
You
should be aware that the Companies Act, which applies to us,
differs in certain material respects from laws generally applicable
to Delaware corporations and their stockholders. In order to
highlight these differences, set forth below is a summary of
certain significant provisions of the Companies Act (including
modifications adopted pursuant to our bye-laws) and Bermuda common
law applicable to us that differ in certain respects from
provisions of the General Corporation Law of the State of Delaware.
Because the following statements are summaries, they do not address
all aspects of Bermuda law that may be relevant to us and you or
all aspects of Delaware law that may differ from Bermuda
law.
Duties of directors
Our
bye-laws provide that our business is to be managed and conducted
by our board of directors. Under Bermuda common law, members of the
board of directors of a Bermuda company owe a fiduciary duty to the
company to act in good faith in their dealings with or on behalf of
the company and exercise their powers and fulfill the duties of
their office honestly. This duty includes the following essential
elements:
–
a duty
to act in good faith in the best interests of the
company;
–
a duty
not to make a personal profit from opportunities that arise from
the office of director;
–
a duty
to avoid conflicts of interest; and
–
a duty
to exercise powers for the purpose for which such powers were
intended.
The
Companies Act imposes a duty on directors and officers of a Bermuda
company to act honestly and in good faith with a view to the best
interests of the company, and to exercise the care, diligence and
skill that a reasonably prudent person would exercise in comparable
circumstances. In addition, the Companies Act imposes various
duties on directors and officers of a company with respect to
certain matters of management and administration of the company.
Directors and officers generally owe fiduciary duties to the
company, and not to the company’s individual shareholders.
Our shareholders may not have a direct cause of action against our
directors.
Under
Delaware law, the business and affairs of a corporation are managed
by or under the direction of its board of directors. In exercising
their powers, directors are charged with a fiduciary duty of care
to protect the interests of the corporation and a fiduciary duty of
loyalty to act in the best interests of its stockholders. The duty
of care requires that directors act in an informed and deliberative
manner and inform themselves, prior to making a business decision,
of all material information reasonably available to them. The duty
of care also requires that directors exercise care in overseeing
and investigating the conduct of corporate employees. The duty of
loyalty may be summarized as the duty to act in good faith, not out
of self-interest, and in a manner that the director reasonably
believes to be in the best interests of the
stockholders.
Delaware law
provides that a party challenging the propriety of a decision of a
board of directors bears the burden of rebutting the applicability
of the presumptions afforded to directors by the “business
judgment rule.” The business judgment rule is a presumption
that in making a business decision, directors acted on an informed
basis and that the action taken was in the best interests of the
company and its stockholders, and accordingly, unless the
presumption is rebutted, a board’s decision will be upheld
unless there can be no rational business purpose for the action or
the action constitutes corporate waste. If the presumption is not
rebutted, the business judgment rule attaches to protect the
directors and their decisions, and their business judgments will
not be second guessed. Where, however, the presumption is rebutted,
the directors bear the burden of demonstrating the entire fairness
of the relevant transaction. Notwithstanding the foregoing,
Delaware courts may subject directors’ conduct to enhanced
scrutiny in respect of defensive actions taken in response to a
threat to corporate control or the approval of a transaction
resulting in a sale of control of the corporation.
75
Interested directors
Bermuda law and
our bye-laws provide that if a director has an interest in a
material transaction or proposed material transaction with us or
any of our subsidiaries or has a material interest in any person
that is a party to such a transaction, the director must disclose
the nature of that interest at the first opportunity either at a
meeting of directors or in writing to the directors. Our bye-laws
provide that, after a director has made such a declaration of
interest, he is allowed to be counted for purposes of determining
whether a quorum is present and to vote on a transaction in which
he has an interest, unless disqualified from doing so by the
chairman of the relevant board meeting.
Under
Delaware law, such transaction would not be voidable if (i) the
material facts as to such interested director’s relationship
or interests are disclosed or are known to the board of directors
and the board in good faith authorizes the transaction by the
affirmative vote of a majority of the disinterested directors, (ii)
such material facts are disclosed or are known to the stockholders
entitled to vote on such transaction and the transaction is
specifically approved in good faith by vote of the majority of
shares entitled to vote thereon or (iii) the transaction is fair as
to the company as of the time it is authorized, approved or
ratified. Under Delaware law, such interested director could be
held liable for a transaction in which such director derived an
improper personal benefit.
Voting rights and Quorum requirements
Under
Bermuda law, the voting rights of our shareholders are regulated by
our bye-laws and, in certain circumstances, the Companies Act.
Under our bye-laws, the quorum required for a general meeting of
shareholders to consider any resolution or take any action,
including with respect to any meeting convened to consider or adopt
a resolution required for an amalgamation or merger of the Company,
is one or more persons present and representing in person or by
proxy at least 15% of the votes eligible to be cast at any such
general meeting, provided that for so long as there are any Class B
common shares issued and outstanding, at least one holder of Class
B common shares shall be required to be present in person or by
proxy to constitute a quorum.
Any
individual who is our shareholder and who is present at a meeting
and entitled to vote at such meeting, may vote in person, as may
any corporate shareholder that is represented by a duly authorized
representative at a meeting of shareholders. Our bye-laws also
permit attendance at general meetings by proxy, provided the
instrument appointing the proxy is in the form specified in the
bye-laws or such other form as the board may determine. Under our
bye-laws, each holder of Class A common shares is entitled to one
vote per Class A common share held and each holder of Class B
common shares is entitled to 10 votes per Class B common share
held. Under Delaware law, unless otherwise provided in a
company’s certificate of incorporation, each stockholder is
entitled to one vote for each share of stock held by the
stockholder. Delaware law provides that unless otherwise provided
in a company’s certificate of incorporation or by-laws, a
majority of the shares entitled to vote, present in person or
represented by proxy, constitutes a quorum at a meeting of
stockholders. In matters other than the election of directors, with
the exception of special voting requirements related to
extraordinary transactions, and unless otherwise provided in a
company’s certificate of incorporation or by-laws, the
affirmative vote of a majority of shares present in person or
represented by proxy at the meeting entitled to vote is required
for stockholder action, and the affirmative vote of a plurality of
shares is required for the election of directors.
Dividend rights
Under
Bermuda law, a company may not declare or pay dividends if there
are reasonable grounds for believing that: (i) the company is, or
after the payment of such dividends would be, unable to pay its
liabilities as they become due, or (ii) the realizable value of its
assets would thereby be less than its liabilities. Under our
bye-laws, each Class A and Class B common share is entitled to
dividends if, as and when dividends are declared by our board of
directors on such classes, subject to any preferred dividend right
of the holders of any preference shares. See “– Common
Shares – Dividends” above.
76
Under
Delaware law, subject to any restrictions contained in the
company’s certificate of incorporation, a company may pay
dividends out of surplus or, if there is no surplus, out of net
profits for the fiscal year in which the dividend is declared and
for the preceding fiscal year. Delaware law also provides that
dividends may not be paid out of net profits if, after the payment
of the dividend, capital is less than the capital represented by
the outstanding stock of all classes having a preference upon the
distribution of assets.
Amalgamations and mergers
The
amalgamation or merger of a Bermuda company with another company or
corporation requires the amalgamation or merger agreement to be
approved by the company’s board of directors and by its
shareholders. Our bye-laws provide that any amalgamation or merger
must be approved by the affirmative vote of at least a majority of
the votes cast at a general meeting of the Company.
Under
Bermuda law, in the event of an amalgamation or merger of a Bermuda
company with another company or corporation, a shareholder of the
Bermuda company who did not vote in favor of the amalgamation or
merger and is not satisfied that fair value has been offered for
such shareholder’s shares may, within one month of notice of
the shareholders meeting, apply to the Supreme Court of Bermuda to
appraise the fair value of those shares.
Under
Delaware law, with certain exceptions, a merger, consolidation or
sale of all or substantially all the assets of a corporation must
be approved by the board of directors and a majority of the issued
and outstanding shares entitled to vote thereon. Under Delaware
law, a stockholder of a corporation participating in certain major
corporate transactions may, under certain circumstances, be
entitled to appraisal rights pursuant to which such stockholder may
receive cash in the amount of the fair value of the shares held by
such stockholder (as determined by a court) in lieu of the
consideration such stockholder would otherwise receive in the
transaction.
Compulsory acquisition of shares held by minority
holders
An
acquiring party is generally able to acquire compulsorily the
common shares of minority holders of a Bermuda company in the
following ways:
–
By a
procedure under the Companies Act known as a “scheme of
arrangement.” A scheme of arrangement could be effected by
obtaining the agreement of the company and of holders of common
shares, representing in the aggregate a majority in number and at
least 75% in value of the common shareholders present and voting at
a court ordered meeting held to consider the scheme of arrangement.
The scheme of arrangement must then be sanctioned by the Bermuda
Supreme Court. If a scheme of arrangement receives all necessary
agreements and sanctions, upon the filing of the court order with
the Registrar of Companies in Bermuda, all holders of common shares
could be compelled to sell their common shares under the terms of
the scheme of arrangement.
–
If the
acquiring party is a company it may compulsorily acquire all the
shares of the target company, by acquiring pursuant to a tender
offer 90% of the shares or class of shares not already owned by, or
by a nominee for, the acquiring party (the offeror), or any of its
subsidiaries. If an offeror has, within four months after the
making of an offer for all the shares or class of shares not owned
by, or by a nominee for, the offeror, or any of its subsidiaries,
obtained the approval of the holders of 90% or more of all the
shares to which the offer relates, the offeror may, at any time
within two months beginning with the date on which the approval was
obtained, require by notice any nontendering shareholder to
transfer its shares on the same terms as the original offer. In
those circumstances, nontendering shareholders will be compelled to
sell their shares unless the Supreme Court of Bermuda (on
application made within a one-month period from the date of the
offeror’s notice of its intention to acquire such shares)
orders otherwise.
–
Where
the acquiring party or parties hold not less than 95% of the shares
or a class of shares of the company, such holder(s) may, pursuant
to a notice given to the remaining shareholders or class of
shareholders, acquire the shares of such remaining shareholders or
class of shareholders. When this notice is given, the acquiring
party is entitled and bound to acquire the shares of the remaining
shareholders on the terms set out in the notice, unless a remaining
shareholder, within one month of receiving such notice, applies to
the Supreme Court of Bermuda for an appraisal of the value of their
shares. This provision only applies where the acquiring party
offers the same terms to all holders of shares whose shares are
being acquired.
77
Delaware law
provides that a parent corporation, by resolution of its board of
directors and without any stockholder vote, may merge with any
subsidiary of which it owns at least 90% of each class of its
capital stock. Upon any such merger, dissenting stockholders of the
subsidiary would have appraisal rights.
Shareholders’ suits
Class
actions and derivative actions are generally not available to
shareholders under Bermuda law. The Bermuda courts would, however,
permit a shareholder to commence an action in the name of a company
to remedy a wrong to the company where the act complained of is
alleged to be beyond the corporate power of the company or illegal,
or would result in the violation of the company’s memorandum
of association or bye-laws. Furthermore, consideration would be
given by a Bermuda court to acts that are alleged to constitute a
fraud against the minority shareholders or, for instance, where an
act requires the approval of a greater percentage of the
company’s shareholders than that which actually approved
it.
When
the affairs of a company are being conducted in a manner that is
oppressive or prejudicial to the interests of some part of the
shareholders, one or more shareholders may apply to the Supreme
Court of Bermuda, which may make such order as it sees fit,
including an order regulating the conduct of the company’s
affairs in the future or ordering the purchase of the shares of any
shareholders by other shareholders or by the company.
Subject to Section
14 of the Securities Act, which renders void any waiver of the
provisions of the Securities Act, our bye-laws contain a provision
by virtue of which our shareholders waive any claim or right of
action that they have, both individually and on our behalf, against
any director or officer in relation to any action or failure to
take action by such director or officer, except in respect of any
fraud or dishonesty of such director or officer. The operation of
this provision as a waiver of the right to sue for violations of
federal securities laws may be unenforceable in U. S.
courts.
Class
actions and derivative actions generally are available to
shareholders under Delaware law for, among other things, breach of
fiduciary duty, corporate waste and actions not taken in accordance
with applicable law. In such actions, the court generally has
discretion to permit the winning party to recover attorneys’
fees incurred in connection with such action.
Indemnification of directors and officers
Section 98 of the
Companies Act provides generally that a Bermuda company may
indemnify its directors, officers and auditors against any
liability which by virtue of any rule of law would otherwise be
imposed on them in respect of any negligence, default, breach of
duty or breach of trust, except in cases where such liability
arises from fraud or dishonesty of which such director, officer or
auditor may be guilty in relation to the company.
Section 98 further
provides that a Bermuda company may indemnify its directors,
officers and auditors against any liability incurred by them in
defending any proceedings, whether civil or criminal, in which
judgment is awarded in their favor or in which they are acquitted
or granted relief by the Supreme Court of Bermuda pursuant to
section 281 of the Companies Act.
We
have adopted provisions in our bye-laws that provide that we shall
indemnify our officers and directors in respect of their actions
and omissions, except in respect of their fraud or dishonesty. We
also have entered into directors’ service agreements with our
directors, pursuant to which we have agreed to indemnify them
against any liability brought against them by reason of their
service as directors, except in cases where such liability arises
from fraud, dishonesty, bad faith, gross negligence, willful
default or willful misfeasance. Subject to Section 14 of the
Securities Act, which renders void any waiver of the provisions of
the Securities Act, our bye-laws provide that our shareholders
waive all claims or rights of action that they might have,
individually or in right of the company, against any of our
directors or officers for any act or failure to act in the
performance of such director’s or officer’s duties,
except in respect of any fraud or dishonesty of such director or
officer. Section 98A of the Companies Act permits us to purchase
and maintain insurance for the benefit of any officer or director
in respect of any loss or liability attaching to him in respect of
any negligence, default, breach of duty or breach of trust, whether
or not we may otherwise indemnify such officer or director. We have
purchased and maintain a directors’ and officers’
liability policy for such a purpose.
78
Under
Delaware law, a corporation may indemnify a director or officer of
the corporation against expenses (including attorneys’ fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred in defense of an action, suit or proceeding by
reason of such position if (i) such director or officer acted in
good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and (ii) with
respect to any criminal action or proceeding, such director or
officer had no reasonable cause to believe his conduct was
unlawful.
Access to books and records and dissemination of
information
Members of the
general public have a right to inspect the public documents of a
company available at the office of the Registrar of Companies in
Bermuda. These documents include the company’s memorandum of
association, including its objects and powers, and certain
alterations to the memorandum of association. The shareholders have
the additional right to inspect the bye-laws of the company,
minutes of general meetings and the company’s audited
financial statements, which must be presented to the annual general
meeting. The register of members of a company is also open to
inspection by shareholders and by members of the general public
without charge. The register of members is required to be open for
inspection for not less than two hours in any business day (subject
to the ability of a company to close the register of members for
not more than thirty days in a year). A company is required to
maintain its share register in Bermuda but may, subject to the
provisions of the Companies Act, establish a branch register
outside of Bermuda. A company is required to keep at its registered
office a register of directors and officers that is open for
inspection for not less than two hours in any business day by
members of the public without charge. A company is also required to
file with the Registrar of Companies in Bermuda a list of its
directors to be maintained on a register, which register will be
available for public inspection subject to such conditions as the
Registrar may impose and on payment of such fee as may be
prescribed. Bermuda law does not, however, provide a general right
for shareholders to inspect or obtain copies of any other corporate
records.
Delaware law
permits any stockholder to inspect or obtain copies of a
corporation’s stockholder list and its other books and
records for any purpose reasonably related to such person’s
interest as a stockholder.
Shareholder proposals
Under Bermuda law,
shareholders may, as set forth below and at their own expense
(unless the company otherwise resolves), require the company to:
(i) give notice to all shareholders entitled to receive notice of
the annual general meeting of any resolution that the shareholders
may properly move at the next annual general meeting; and/ or (ii)
circulate to all shareholders entitled to receive notice of any
general meeting a statement (of not more than one thousand words)
in respect of any matter referred to in the proposed resolution or
any business to be conducted at such general meeting. The number of
shareholders necessary for such a requisition is either: (i) any
number of shareholders representing not less than 10% of the total
voting rights of all shareholders entitled to vote at the meeting
to which the requisition relates; or (ii) not less than 100
shareholders.
Delaware law
provides that stockholders have the right to put any proposal
before the annual meeting of stockholders, provided it complies
with the notice provisions in the governing documents. A special
meeting may be called by the board of directors or any other person
authorized to do so in the governing documents, but stockholders
may be precluded from calling special meetings.
Calling of special shareholders’ meetings
Under
our bye-laws, a special general meeting may be called by the
chairman of the board or by a majority of our board of directors.
Bermuda law also provides that a special general meeting must be
called upon the request of shareholders holding not less than 10%
of the paid-up capital of the company carrying the right to vote at
general meetings.
Delaware law
permits the board of directors or any person who is authorized
under a corporation’s certificate of incorporation or
bye-laws to call a special meeting of stockholders.
79
Amendment of memorandum of association and bye-laws
Under
our bye-laws, the memorandum of association may be amended by a
resolution passed at a general meeting of the Company. Our bye-laws
provide that no bye-law shall be rescinded, altered or amended, and
no new bye-law shall be made, unless it shall have been approved by
a resolution of our board of directors and by a resolution of our
shareholders at a general meeting of the Company.
Under
Bermuda law, the holders of an aggregate of not less than 20% in
par value of a company’s issued share capital or any class
thereof have the right to apply to the Supreme Court of Bermuda for
an annulment of any amendment of the memorandum of association
adopted by shareholders at any general meeting, other than an
amendment that alters or reduces a company’s share capital as
provided in the Companies Act. Where such an application is made,
the amendment becomes effective only to the extent that it is
confirmed by the Bermuda court. An application for an annulment of
an amendment of the memorandum of association must be made within
21 days after the date on which the resolution altering the
company’s memorandum of association is passed and may be made
on behalf of persons entitled to make the application by one or
more of their number as such holders may appoint in writing for
such purpose. No application may be made by the shareholders voting
in favor of the amendment.
Under
Delaware law, amendment of the certificate of incorporation, which
is the equivalent of a memorandum of association, of a company must
be made by a resolution of the board of directors setting forth the
amendment, declaring its advisability, and either calling a special
meeting of the stockholders entitled to vote or directing that the
proposed amendment be considered at the next annual meeting of the
stockholders. Delaware law requires that, unless a different
percentage is provided for in the certificate of incorporation, a
majority of the voting power of the corporation is required to
approve the amendment of the certificate of incorporation at the
stockholders meeting. If the amendment would alter the number of
authorized shares or par value or otherwise adversely affect the
rights or preference of any class of a company’s stock, the
holders of the issued and outstanding shares of such affected
class, regardless of whether such holders are entitled to vote by
the certificate of incorporation, are entitled to vote as a class
upon the proposed amendment. However, the number of authorized
shares of any class may be increased or decreased, to the extent
not falling below the number of shares then issued and outstanding,
by the affirmative vote of the holders of a majority of the stock
entitled to vote, if so provided in the company’s certificate
of incorporation that was authorized by the affirmative vote of the
holders of a majority of such class or classes of
stock.
Under
Delaware law, unless the certificate of incorporation or by-laws
provide for a different vote, holders of a majority of the voting
power of a corporation and, if so provided in the certificate of
incorporation, the directors of the corporation have the power to
adopt, amend and repeal the by-laws of a corporation. Those by-laws
dealing with the election of directors, classes of directors and
the term of office of directors may only be rescinded, altered or
amended upon approval by a resolution of the directors and by a
resolution of shareholders carrying not less than a majority of all
shares entitled to vote on the resolution.
See
“Item 5. Operating and Financial Review and Prospects –
B. Liquidity and capital resources – Indebtedness” and
“Item 7. Major Shareholders and Related Party Transactions
– B. Related party transactions – Other agreements with
Dufry.”
D. Exchange controls
Consent under the
Exchange Control Act 1972 (and its related regulations) has been
received from the Bermuda Monetary Authority for the issue and
transfer of our Class A common shares to and between non-residents
of Bermuda for exchange control purposes provided our Class A
common shares remain listed on an appointed stock exchange, which
includes the New York Stock Exchange. In granting such consent the
Bermuda Monetary Authority accepts no responsibility for our
financial soundness or the correctness of any of the statements
made or opinions expressed in this annual report.
80
E. Taxation
U. K. Tax considerations
The
following is a general summary of material U. K. tax considerations
relating to the ownership and disposal of Class A common shares.
The comments set out below are based on current U. K. tax law as
applied in England and Wales, and our understanding of HM Revenue
& Customs (“HMRC”) practice (which may not be
binding on HMRC) as at the date of this summary, both of which are
subject to change, possibly with retrospective effect. They are
intended as a general guide and apply to you only if you are a
“U. S. Holder” (as defined in the section entitled
“Material U. S. federal income tax considerations”).
This summary only applies to you if you are not resident in
the U. K. for U. K.
tax purposes and do not hold Class A common shares for the purposes
of a trade, profession, or vocation that you carry on in the U. K.
through a branch, agency, or permanent establishment in the U. K.
and if you hold Class A common shares as an investment for U. K.
tax purposes and are not subject to special rules.
This
summary does not address all possible tax consequences relating to
an investment in Class A common shares. In particular it does not
cover the U. K. inheritance tax consequences of holding Class A
common shares. This summary is for general information only and is
not intended to be, nor should it be considered to be, legal or tax
advice to any particular investor. Holders of Class A common shares
are strongly urged to consult their tax advisers in connection with
the U. K. tax consequences of their investment in Class A common
shares.
U. K. tax residence
We
intend to continue to centrally manage and control our affairs from
the U. K., such that we are resident for tax purposes solely in the
U. K.
U. K. taxation of dividends
We
will not be required to withhold amounts on account of U. K. tax at
source when paying a dividend in respect of Class A common
shares.
U. S.
Holders who hold their Class A common shares as an investment and
not in connection with any trade carried on by them should not be
subject to U. K. tax in respect of any dividends.
U. K. taxation of capital gains
An
individual holder who is a U. S. Holder should generally not be
liable to U. K. capital gains tax on capital gains realized on the
disposal of his or her Class A common shares unless such holder
carries on a trade, profession or vocation in the U. K. through a
branch or agency in the U. K. to which the Class A common shares
are attributable and subject to the below exception.
An
individual holder of Class A common shares who is temporarily
non-resident for U. K. tax purposes will, in certain circumstances,
become liable to U. K. tax on capital gains in respect of gains
realized while he or she was not resident in the U. K.
A
corporate holder of Class A common shares that is a U. S. Holder
should not be liable for U. K. corporation tax on chargeable gains
realized on the disposal of Class A common shares unless it carries
on a trade in the U. K. through a permanent establishment to which
the Class A common shares are attributable.
Stamp duty and stamp duty reserve tax
No
stamp duty reserve tax should be payable on any agreement to
transfer Class A common shares, provided that Class A common shares
are not registered in a register kept on our behalf in the U. K.
and that Class A common shares are not paired with shares issued by
a U. K. incorporated company. It is not intended that such a
register will be kept in the U. K. or that Class A common shares
will be paired with shares issued by a U. K. incorporated
company.
81
No
stamp duty should be payable on a transfer of Class A common shares
by electronic book-entry through the facilities of DTC without an
instrument of transfer. No stamp duty should be payable on a
transfer of Class A common shares by way of an instrument of
transfer provided that (i) any instrument of transfer is not
executed in the U. K. and (ii) such instrument of transfer does not
relate to any property situated, or any matter or thing done or to
be done, in the U. K.
Material U. S. federal income tax considerations
The
following is a description of the material U. S. federal income tax
consequences to the U. S. Holders, as defined below, of owning and
disposing our common shares. It does not describe all tax
considerations that may be relevant to a particular person’s
decision to acquire common shares.
This
discussion applies only to a U. S. Holder that holds common shares
as capital assets for U. S. federal income tax purposes. In
addition, it does not describe all of the U. S. federal income tax
consequences that may be relevant in light of the U. S.
Holder’s particular circumstances, including alternative
minimum tax consequences, the potential application of the
provisions of the Code known as the Medicare contribution tax and
tax consequences applicable to U. S. Holders subject to special
rules, such as:
–
certain financial
institutions;
–
dealers or traders
in securities who use a mark-to-market method of tax
accounting;
–
persons holding
common shares as part of a hedging transaction, straddle, wash
sale, conversion transaction or other integrated transaction or
persons entering into a constructive sale with respect to the
common shares;
–
persons whose
functional currency for U. S. federal income tax purposes is not
the U. S. dollar;
–
entities
classified as partnerships for U. S. federal income tax
purposes;
–
tax-exempt
entities, including an “individual retirement account”
or “Roth IRA”;
–
persons that own
or are deemed to own ten percent or more of our shares, by vote or
value; or
–
persons holding
common shares in connection with a trade or business conducted
outside of the United States.
If an
entity that is classified as a partnership for U. S. federal income
tax purposes holds common shares, the U. S. federal income tax
treatment of a partner will generally depend on the status of the
partner and the activities of the partnership. Partnerships holding
common shares and partners in such partnerships should consult
their tax advisers as to the particular U. S. federal income tax
consequences of owning and disposing of the common
shares.
This
discussion is based on the Code, administrative pronouncements,
judicial decisions, final, temporary and proposed Treasury
regulations, and the income tax treaty between the U. K. and the
United States (the “Treaty”) all as of the date hereof,
any of which is subject to change or differing interpretations,
possibly with retroactive effect.
–
A
“U. S. Holder” is a holder who, for U. S. federal
income tax purposes, is a beneficial owner of common shares, who is
eligible for the benefits of the Treaty and who is:
–
an
individual that is a citizen or resident of the United
States;
–
a
corporation, or other entity taxable as a corporation, created or
organized in or under the laws of the United States, any state
therein or the District of Columbia; or
–
an
estate or trust the income of which is subject to U. S. federal
income taxation regardless of its source.
U. S.
Holders should consult their tax advisers concerning the U. S.
federal, state, local and non-U. S. tax consequences of owning and
disposing of common shares in their particular
circumstances.
This
discussion assumes that we are not, and will not become, a passive
foreign investment company (a “PFIC”), as described
below.
Taxation of distributions
Distributions paid
on common shares, other than certain pro rata distributions of
common shares, will generally be treated as dividends to the extent
paid out of our current or accumulated earnings and profits (as
determined under U. S. federal income tax principles). Because we
do not maintain calculations of our earnings and profits under U.
S. federal income tax principles, we expect that distributions
generally will be reported to U. S. Holders as dividends. For so
long as our common shares are listed on the NYSE or we are eligible
for benefits under the Treaty, dividends paid to certain
non-corporate U. S. Holders will be eligible for taxation as
“qualified dividend
82
income” and
therefore, subject to applicable limitations, will be taxable at
rates not in excess of the long-term capital gain rate applicable
to such U. S. Holder. U. S. Holders should consult their tax
advisers regarding the availability of the reduced tax rate on
dividends in their particular circumstances. The amount of a
dividend will include any amounts withheld by us in respect of U.
K. income taxes. The amount of the dividend will be treated as
foreign-source dividend income to U. S. Holders and will not be
eligible for the dividends-received deduction generally available
to U. S. corporations under the Code. Dividends will be included in
a U. S. Holder’s income on the date of the U. S.
Holder’s receipt of the dividend. The amount of any dividend
income paid in euros will be the U. S. dollar amount calculated by
reference to the exchange rate in effect on the date of actual or
constructive receipt, regardless of whether the payment is in fact
converted into U. S. dollars at that time. If the dividend is
converted into U. S. dollars on the date of receipt, a U. S. Holder
should not be required to recognize foreign currency gain or loss
in respect of the dividend income. A U. S. Holder may have foreign
currency gain or loss if the dividend is converted into U. S.
dollars after the date of receipt.
Subject to
applicable limitations, some of which vary depending upon the U. S.
Holder’s particular circumstances,
U. K.
income taxes withheld from dividends on common shares at a rate not
exceeding the rate provided by the Treaty will be creditable
against the U. S. Holder’s U. S. federal income tax
liability. The rules governing foreign tax credits are complex and
U. S. Holders should consult their tax advisers regarding the
creditability of foreign taxes in their particular circumstances.
In lieu of claiming a foreign tax credit, U. S. Holders may, at
their election, deduct foreign taxes, including any U. K. income
tax, in computing their taxable income, subject to generally
applicable limitations under U. S. law. An election to deduct
foreign taxes instead of claiming foreign tax credits applies to
all foreign taxes paid or accrued in the taxable year.
Sale or other disposition of common shares
For U.
S. federal income tax purposes, gain or loss realized on the sale
or other disposition of common shares will be capital gain or loss,
and will be long-term capital gain or loss if the U. S. Holder held
the common shares for more than one year. The amount of the gain or
loss will equal the difference between the U. S. Holder’s tax
basis in the common shares disposed of and the amount realized on
the disposition, in each case as determined in U. S. dollars. This
gain or loss will generally be U. S.-source gain or loss for
foreign tax credit purposes. The deductibility of capital losses is
subject to various limitations.
Passive foreign investment company rules
Under
the Code, we will be a PFIC for any taxable year in which, after
the application of certain “look through” rules with
respect to subsidiaries, either (i) 75% or more of our gross income
consists of “passive income,” or (ii) 50% or more of
the average quarterly value of our assets consist of assets that
produce, or are held for the production of, “passive
income.”
Based
on our current operations, income, assets and certain estimates and
projections, including as to the relative values of our assets, we
believe that we were not a PFIC for U. S. federal income tax
purposes for our taxable year ending December 31, 2019 and do not
expect to become a PFIC in the foreseeable future. If we were a
PFIC for any year during which a U. S. Holder holds common shares,
we generally would continue to be treated as a PFIC with respect to
that U. S. Holder for all succeeding years during which the U. S.
Holder holds common shares, even if we ceased to meet the threshold
requirements for PFIC status.
If we
were a PFIC for any taxable year during which a U. S. Holder held
common shares (assuming such U. S. Holder has not made a timely
election described below), gain recognized by a U. S. Holder on a
sale or other disposition (including certain pledges) of the common
shares would be allocated ratably over the U. S. Holder’s
holding period for the common shares. The amounts allocated to the
taxable year of the sale or other disposition and to any year
before we became a PFIC would be taxed as ordinary income. The
amount allocated to each other taxable year would be subject to tax
at the highest rate in effect for individuals or corporations, as
appropriate, for that taxable year, and an interest charge would be
imposed on the tax on such amount. Further, to the extent that any
distribution received by a U. S. Holder on its common shares
exceeds 125% of the average of the annual distributions on the
common shares received during the preceding three years or the U.
S. Holder’s holding period, whichever is shorter, that
distribution would be subject to taxation in the same manner as
gain, described immediately above. If we were
83
a
PFIC, certain elections may be available that would result in
alternative tax consequences (such as mark-to-market treatment) of
owning and disposing the common shares. U. S. Holders should
consult their tax advisers to determine whether any of these
elections would be available and, if so, what the consequences of
the alternative treatments would be in their particular
circumstances.
In
addition, if we were a PFIC or, with respect to a particular U. S.
Holder, were treated as a PFIC for the taxable year in which we
paid a dividend or for the prior taxable year, the preferential
dividend rates discussed above with respect to dividends paid to
certain non-corporate U. S. Holders would not apply.
If a
U. S. Holder owns common shares during any year in which we are a
PFIC, the holder generally must file annual reports containing such
information as the U. S. Treasury may require on IRS Form 8621 (or
any successor form) with respect to us, generally with the
holder’s federal income tax return for that
year.
U. S.
Holders should consult their tax advisers concerning our potential
PFIC status and the potential application of the PFIC
rules.
Information reporting and backup withholding
Payments of
dividends and sales proceeds that are made within the United States
or through certain U. S.-related financial intermediaries generally
are subject to information reporting, and may be subject to backup
withholding, unless (i) the U. S. Holder is a corporation or other
exempt recipient or (ii) in the case of backup withholding,
the
U. S.
Holder provides a correct taxpayer identification number and
certifies that it is not subject to backup
withholding.
The
amount of any backup withholding from a payment to a U. S. Holder
will be allowed as a credit against the holder’s U. S.
federal income tax liability and may entitle it to a refund,
provided that the required information is timely furnished to the
IRS.
Information with respect to foreign financial assets
Certain U. S.
Holders who are individuals (and certain entities) may be required
to report information on their U. S. federal income tax returns
relating to an interest in our common shares, subject to certain
exceptions (including an exception for common shares held in
accounts maintained by certain U. S. financial institutions). U. S.
Holders should consult their tax advisers regarding the effect, if
any, of this legislation on their ownership and disposition of the
common shares.
Bermudian tax considerations
We are
incorporated under the laws of Bermuda. At the present time, there
is no Bermuda income or profits tax, withholding tax, capital gains
tax, capital transfer tax, estate duty or inheritance tax payable
by us or by our shareholders in respect of our shares. We have
obtained an assurance from the Minister of Finance of Bermuda under
the Exempted Undertakings Tax Protection Act 1966 that, in the
event that any legislation is enacted in Bermuda imposing any tax
computed on profits or income, or computed on any capital asset,
gain or appreciation or any tax in the nature of estate duty or
inheritance tax, such tax shall not, until March 31, 2035, be
applicable to us or to any of our operations or to our shares,
debentures or other obligations except insofar as such tax applies
to persons ordinarily resident in Bermuda or is payable by us in
respect of real property owned or leased by us in
Bermuda.
F. Dividends and paying agents
Not
applicable.
G. Statement by experts
Not
applicable.
84
H. Documents on display
We are
subject to the informational requirements of the Exchange Act.
Accordingly, we are required to file reports and other information
with the SEC, including annual reports on Form 20-F and reports on
Form 6-K. The SEC maintains an Internet website that contains
reports and other information about issuers, like us, that file
electronically with the SEC. The address of that website is
www.sec.gov.
I. Subsidiary information
Not
applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We are
exposed to market risks associated with foreign exchange rates,
interest rates, commodity prices and inflation. In accordance with
our policies, we seek to manage our exposure to these various
market-based risks.
For
further information on our market risks, please see Note 33 to our
Consolidated Financial Statements.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES
A. Debt securities
Not
applicable.
B. Warrants and rights
Not
applicable.
C. Other securities
Not
applicable.
D. American depositary shares
Not
applicable.
85
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND
DELINQUENCIES
A. Defaults
No
matters to report.
B. Arrears and delinquencies
No
matters to report.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS
A. Material modifications to instruments
Not
applicable.
B. Material modifications to rights
Not
applicable.
C. Withdrawal or substitution of assets
Not
applicable.
D. Change in trustees or paying agents
Not
applicable.
E. Use of proceeds
Not
applicable.
ITEM 15. CONTROLS AND PROCEDURES
A. Disclosure controls and procedures
As of
December 31, 2019, under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief
Financial Officer, we performed an evaluation of the effectiveness
of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Exchange Act). There are inherent limitations
to the effectiveness of any disclosure controls and procedures
system, including the possibility of human error and circumventing
or overriding them. Even if effective, disclosure controls and
procedures can provide only reasonable assurance of achieving their
control objectives.
Based
on such evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of December 31, 2019, our disclosure
controls and procedures were not effective due to the material
weaknesses in our internal control over financial reporting
identified in the (1) the procure to pay process and the related
internal controls supporting this area and (2) management’s
application of internal controls for information technology. In
addition, management identified and remediated as of December 31,2019, a material weakness in our internal control over financial
reporting in the implementation of the new lease accounting
standard IFRS 16. These material weaknesses are described below and
in “Item 5. Operating and Financial Review and Prospects
– B. Liquidity and capital resources – Internal control
over financial reporting.”
B. Management’s annual report on internal control over
financial reporting
Management is
responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of consolidated financial
statements in accordance with international financial reporting
standards (“IFRS”). Such internal control over
financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
the assets; (ii) provide reasonable assurance (A) that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with IFRS and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors; and (B) regarding
prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements.
86
Management
assessed the effectiveness of our internal control over financial
reporting as of December 31, 2019. In making this assessment, it
used the criteria set forth in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO), the 2013 Framework.
Based
on this evaluation, our management concluded that, as of December31, 2019, our internal control over financial reporting was not
effective due to the identified material weaknesses, as described
below and in “Item 5. Operating and Financial Review and
Prospects – B. Liquidity and capital resources –
Internal control over financial reporting.” A material
weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the
Company’s annual or interim financial statements will not be
prevented or detected on a timely basis.
Management
identified material weaknesses in internal control over financial
reporting as of December 31, 2019 over the (1) the procure to pay
process and the related internal controls supporting this area, (2)
management’s system of internal controls for information
technology. In addition, management identified and remediated as of
December 31, 2019, a material weakness in our internal control over
financial reporting in the implementation of the new lease
accounting standard IFRS 16.
Significant
progress was made in remediating the material weakness from fiscal
year 2018 related to the procure to pay process but was not fully
remediated. Issues specifically related to, (1) a lack of
appropriate controls over the design and operating effectiveness of
the purchasing process, including lack of proper segregation of
duties;
(2) a
lack of formal policies and procedures related to invoice payment
authorization; (3) and a lack of adequate review over certain
accounts payable functions, including vendor setup and
maintenance.
The
material weakness related to information technology general
controls (“ITGCs”) was in the areas of (1) access to
applications and data, (2) program change-management and (3)
information technology operations and backups for applications
supporting substantially all of the Company’s internal
control processes. As a result of the pervasive impact of the
ineffective ITGCs on the IT applications, internal controls related
to business processes (automated and IT dependent manual) and
information produced by those IT applications that are dependent on
effective ITGCs are also deemed ineffective. We believe that these
control deficiencies were the result of a combination of factors
including limitations of older legacy applications and information
technology control processes lacking sufficient documentation and
monitoring.
The
material weakness in the IFRS 16 implementation process, and
specifically as it relates to the execution of the controls over
the application of the accounting standard literature regarding the
determination of the in-substance fixed payments, originated in
2019 interim periods prior to December 31, 2019. In our assessment
of the effectiveness of internal controls over financial reporting
as of December 31, 2019, the deficiency in our internal controls
relating to the implementation of the new lease accounting standard
IFRS 16 was fully remediated.
The
material weaknesses did not result in a restatement of our prior
year financial statements. As previously disclosed in the September30, 2019 Interim Report, furnished on November 4, 2019, the Company
determined that adjustments to certain of its previously issued
interim financial statements were necessary, and the published
March 31, 2019 and June 30, 2019 interim financial statements could
no longer be relied upon. The adjustments related to the
implementation of the new accounting standard adopted upon
transition to IFRS 16.
87
C. Remediation Efforts to Address Material
Weakness
To
remediate the material weaknesses in our internal controls over
financial reporting described above, we have initiated remedial
measures in 2019 and are taking additional measures to remediate
these material weaknesses.
For
the procure to pay process material weakness, first, we implemented
and are continue to roll out an enhanced purchase order process for
merchandise purchases which are designed to ensure that (i)
appropriate levels of management approve each purchase order with
tiered thresholds, and (ii) duties related to the approval of
purchase orders, receipt of goods, and invoice management are
appropriately segregated. In fiscal year 2019, this enhanced
process was rolled out to locations representing approximately 40%
of sales. In our assessment of the effectiveness of internal
controls over financial reporting as of December 31, 2019, the
internal controls of this enhanced process were implemented
effectively at these locations. We began the implementation of a
new enterprise resource planning software, expected to be fully
rolled out over the next two years, which will further expand the
coverage from the roll out of an enhanced purchase order process.
Second, we implemented accounts payable software designed to
automate and streamline invoice processing, review and approval
workflows for non-merchandising invoices. Third, a new invoice
approval matrix was fully implemented in fiscal year 2019, which
was also integrated in the accounts payable automation software
described above. Fourth, new controls were implemented to
strengthen the vendor set up and maintenance process, including
controls relating to the appropriate segregation of duties between
vendor set-up and invoice processing, and by requiring a separate
reviewer of information entered into the accounts payable system.
Fifth, new controls over the review and approval of invoices for
payment were implemented. In fiscal year 2020, we plan on
remediating existing system limitations on select data fields and
completing a role redesign in the current enterprise resource
planning software to enforce segregation of duties. While we
believe efforts made in fiscal year 2019 reduced the risk of
material misstatement, this material weakness was not fully
remediated.
In
fiscal year 2020, for the material weakness related to information
technology general controls (“ITGCs”) supporting
substantially all of the Company’s internal control processes
including internal controls related to business processes
(automated and IT dependent manual) and information produced by
those IT applications that are dependent on effective ITGCs, we
plan to enhance application user access provisioning and
termination controls and segregation of duties analyses. In
addition, we plan to enhance monitoring to strengthen application
change, configuration, and back-up management controls. Lastly, we
plan to provide enhanced training to information technology
personnel on the importance of information technology general
controls over financial reporting.
The
internal control deficiency relating to the implementation of the
new lease accounting standard IFRS 16 was fully remediated, in our
assessment of the effectiveness of internal controls over financial
reporting as of December 31, 2019.
88
D. Attestation Report of the Registered Public Accounting
Firm
To the
Shareholders and Board of Directors of Hudson Ltd.
Opinion on Internal Control Over Financial Reporting
We
have audited Hudson Ltd.’s (the Company) internal control
over financial reporting as of December 31, 2019, based on criteria
established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion,
because of the effect of the material weaknesses described below on
the achievement of the objectives of the control criteria, Hudson
Ltd. has not maintained effective internal control over financial
reporting as of December 31, 2019, based on the COSO
criteria.
A
material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of the company’s annual or interim financial statements will
not be prevented or detected on a timely basis. The following
material weaknesses have been identified and included in
management’s assessment.
(i)
Ineffective
information technology general controls (“ITGCs”) in
the areas of access to applications and data, program
change-management and information technology operations and back up
for applications supporting substantially all of the
Company’s internal control processes. As a result of the
pervasive impact of the ineffective ITGCs on the IT applications,
internal controls related to business processes (automated and IT
dependent manual) and information produced by those IT applications
that are dependent on effective ITGCs are also deemed ineffective
due to the potential adverse impact of the ineffective
ITGCs.
(ii)
Ineffective
controls related to the procure to pay process, including a lack of
(1) appropriate controls over the design and operating
effectiveness of the purchasing process, including lack of proper
segregation of duties; (2) formal policies and procedures related
to invoice payment authorization; (3) adequate review over certain
accounts payable functions, including vendor setup and
maintenance.
We
also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) (PCAOB), the
consolidated statements of financial position of the Company as of
December 31, 2019 and 2018, and the related consolidated statements
of comprehensive income, changes in equity and cash flows for each
of the three years in the period ended December 31, 2019, and the
related notes (collectively referred to as the “consolidated
financial statements”). These material weaknesses were
considered in determining the nature, timing and extent of audit
tests applied in our audit of the 2019 consolidated financial
statements, and this report does not affect our report dated March11, 2020, which expressed an unqualified opinion
thereon.
Basis for Opinion
The
Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting
included in the accompanying Management’s Assessment of
Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting
firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material
respects.
Our
audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
89
Definition and Limitation of Internal Control over Financial
Reporting
A
company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with
authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its
inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
/s/
Ernst & Young AG
We
have served as the Company’s auditor since 2017.
E. Changes in internal control over financial
reporting
Except
as disclosed above in the remediation efforts to address the
material weaknesses, there have been no changes in internal control
over financial reporting during the year ended December 31, 2019
that have materially affected, or reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 16. RESERVED
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The
audit committee is chaired by Ms. Guilfoile and includes Mr.
Skinner, Ms. Ulasewicz and Mr. Moya-Angeler Cabrera. The Audit
committee assists the board in overseeing our accounting and
financial reporting processes and the audits of our financial
statements. In addition, the audit committee is directly
responsible for the appointment, compensation, retention and
oversight of the work of our independent registered public
accounting firm. The audit committee is also responsible for
reviewing and determining whether to approve certain transactions
with related parties. See “Item 7. Major Shareholders and
Related Party Transactions – B. Related party transactions
– Related person transaction policy.” Our board has
determined that each of Ms. Guilfoile, Mr. Skinner, Ms. Ulasewicz
and Mr. Moya-Angeler Cabrera is independent within the meaning of
the independence requirements contemplated by Rule 10A-3 under the
Exchange Act and NYSE and SEC rules applicable to foreign private
issuers. Our board of directors has further determined that each of
Ms. Guilfoile, Mr. Skinner, Ms. Ulasewicz and Mr. Moya-Angeler
Cabrera has the professional experience and knowledge to qualify as
“audit committee financial experts” as defined by SEC
rules.
ITEM 16B. CODE OF ETHICS
We
adopted a code of business conduct and ethics applicable to the
board of directors and all employees. Since its effective date on
September 28, 2017, we have not waived compliance with or amended
the code of conduct.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
following table describes the amounts we incurred from Ernst &
Young AG, an independent registered public accounting firm, for
audit and other services performed in fiscal years 2019 and
2018.
IN MILLIONS OF USD
2019
2018
Audit fees
1.9
1.9
Audit-related
fees
0.4
0.9
Tax fees
N/A
N/A
All other
fees
N/A
N/A
Audit fees
Audit
fees are fees billed for professional services rendered by the
principal accountant for the audit of the registrant’s annual
consolidated financial statements or services that are normally
provided by the accountant in connection with statutory and
regulatory filings or engagements for those fiscal years. It
includes the audit of our Consolidated Financial Statements and
other services that generally only the independent accountant
reasonably can provide, such as comfort letters, statutory audits,
consents and assistance with and review of documents filed with the
SEC.
Audit-related fees
Audit-related fees
are fees billed for assurance and related services that are
reasonably related to the performance of the audit or review of our
Consolidated Financial Statements and not reported under the
previous category. These services would include, among others:
interim reviews, accounting consultations and audits in connection
with acquisitions, internal control reviews, attest services that
are not required by statue or regulation and consultation
concerning financial accounting and reporting
standards.
91
Tax fees
Tax
fees are fees billed for professional services for tax compliance,
tax advice and tax planning. There were no tax fees in 2019 or
2018.
All other fees
There
were no other fees in 2019 or 2018.
Pre-approval policies and procedures
The
Audit Committee is responsible for the appointment, replacement,
compensation, evaluation and oversight of the work of the
independent auditors. As part of this responsibility, the Audit
Committee pre-approves all audit and non-audit services performed
by the independent auditors in order to assure that they do not
impair the auditor’s independence from the
Company.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES
Not
applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS
None.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING
ACCOUNTANT
Not
applicable.
ITEM 16G. CORPORATE GOVERNANCE
In
general, under the NYSE corporate governance standards, foreign
private issuers, as defined under the Exchange Act, are permitted
to follow home country corporate governance practices instead of
the corporate governance practices of the New York Stock Exchange.
Accordingly, we follow certain corporate governance practices of
our home country, Bermuda, in lieu of certain of the corporate
governance requirements of the New York Stock Exchange.
Specifically, we do not have a board of directors composed of a
majority of independent directors or a nomination and remuneration
committee composed entirely of independent directors.
In the
event we no longer qualify as a foreign private issuer, we intend
to rely on the “controlled company” exemption under the
New York Stock Exchange corporate governance rules. A
“controlled company” under the New York Stock Exchange
corporate governance rules is a company of which more than 50% of
the voting power is held by an individual, group or another
company. Our controlling shareholder controls a majority of the
combined voting power of our outstanding common shares, and our
controlling shareholder is able to nominate a majority of directors
for election to our board of directors. Accordingly, we would be
eligible to, and, in the event we no longer qualify as a foreign
private issuer, we intend to, take advantage of certain exemptions
under the NYSE corporate governance rules, including exemptions
from the requirement that a majority of the directors on our board
of directors be independent and the requirement that our nomination
and remuneration committee consist entirely of independent
directors.
The
foreign private issuer exemption and the “controlled
company” exemption do not modify the independence
requirements for the audit committee, and we intend to comply with
the requirements of the Sarbanes-Oxley Act and the New York Stock
Exchange rules, which require that our audit committee be composed
of at least three directors, all of whom are
independent.
92
If at
any time we cease to be a “controlled company” or a
“foreign private issuer” under the rules of the New
York Stock Exchange and the Exchange Act, as applicable, our board
of directors will take all action necessary to comply with the New
York Stock Exchange corporate governance rules.
Due to our status
as a foreign private issuer and our intent to follow certain home
country corporate governance practices, our shareholders will not
have the same protections afforded to shareholders of companies
that are subject to all the New York Stock Exchange corporate
governance standards. See “Item 10. Additional Information
– B. Memorandum of association and
bye-laws.”
ITEM 16H. MINE SAFETY DISCLOSURE
Not
applicable.
93
PART III
ITEM 17. FINANCIAL STATEMENTS
We
have responded to Item 18 in lieu of this item.
ITEM 18. FINANCIAL STATEMENTS
Financial
Statements are filed as part of this annual report, see pages F-1
to F-61 to this annual report.
ITEM 19. EXHIBITS
The
following documents are filed as part of this annual
report:
Amended
and Restated Bye-laws, dated August 2, 2018 (incorporated herein by
reference to Exhibit 99.2 to the Company’s Report on Form 6-K
(File No. 001-38378) filed with the SEC on August 6,2018).
Loan
Agreement between Dufry Finances SNC and Hudson Group Inc.,
effective October 30, 2012 for $123,204,207.74 (incorporated herein
by reference to Exhibit 10.3 to the Company’s Registration
Statement on Form F-1 (File No. 333-221547) filed with the SEC on
November 14, 2017).
Loan
Agreement between Dufry Financial Services B. V. and the Nuance
Group (Canada) Inc., effective August 1, 2017 for CAD$195,030,000
(incorporated herein by reference to Exhibit 10.4 to the
Company’s Registration Statement on Form F-1 (File No.
333-221547) filed with the SEC on November 14, 2017).
Hudson
Trademark License Agreement between Dufry International AG and
Hudson Group (HG), Inc., dated February 1, 2018 (incorporated
herein by reference to Exhibit 4.4 to the Company’s Annual
Report on Form 20-F filed with the SEC on March 15,2018).
The
registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized
the undersigned to sign this annual report on its
behalf.
Report
of Independent Registered Public Accounting Firm
To the
Shareholders and the Board of Directors of Hudson Ltd.
Opinion on the Financial Statements
We
have audited the accompanying consolidated statements of financial
position of Hudson Ltd. (the Company) as of December 31, 2019 and
2018, the related consolidated statements of comprehensive income,
changes in equity and cash flows for each of the three years in the
period ended December 31, 2019, and the related notes (collectively
referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial
position of the Company at December 31, 2019 and 2018, and the
results of its operations and its cash flows for each of the three
years in the period ended December 31, 2019, in conformity with
International Financial Reporting Standards as issued by the
International Accounting Standards Board.
We
also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as of
December 31, 2019, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework), and our
report dated March 11, 2020 expressed an adverse opinion
thereon.
Adoption of New Accounting Standard
As
discussed in Note 2.5 to the consolidated financial statements, the
Company changed its method for accounting for leases in
2019.
Basis for Opinion
These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/
Ernst & Young AG
We
have served as the Company’s auditor since 2017.
for
the years ended December 31, 2019, 2018 and 2017
IN MILLIONS OF USD (EXCEPT PER SHARE
AMOUNTS)
NOTE
2019
RECLASSIFIED
2018*
RECLASSIFIED
2017*
Turnover
7
1,953.7
1,924.2
1,802.5
Cost of
sales
(699.4)
(698.5)
(680.3)
Gross
profit
1,254.3
1,225.7
1,122.2
Lease
expenses
8
(131.2)
(428.6)
(402.4)
Personnel
expenses
(445.3)
(411.1)
(371.3)
Other
expenses
9
(166.9)
(158.9)
(179.7)
Depreciation,
amortization and impairment
10
(363.5)
(128.9)
(108.7)
Operating
profit
147.4
98.2
60.1
Finance
income
11
4.7
2.5
1.9
Finance
expenses
11
(91.6)
(31.0)
(30.2)
Foreign exchange
gain / (loss)
0.3
(0.9)
0.5
Profit / (loss)
before tax
60.8
68.8
32.3
Income tax
benefit / (expense)
12
(14.5)
(3.0)
(42.9)
Net
profit / (loss)
46.3
65.8
(10.6)
OTHER COMPREHENSIVE
INCOME
Exchange
differences on translating foreign operations
14.6
(20.1)
26.8
Total
other comprehensive income / (loss) that may be
reclassified to profit or loss in subsequent periods, net of
tax
14.6
(20.1)
26.8
Total
other comprehensive income / (loss), net of
tax
14.6
(20.1)
26.8
Total
comprehensive income / (loss), net of tax
60.9
45.7
16.2
NET
PROFIT / (LOSS) ATTRIBUTABLE TO
Non-controlling
interests
33.6
36.3
29.8
Equity holders of
the parent
12.7
29.5
(40.4)
TOTAL COMPREHENSIVE
INCOME / (LOSS) ATTRIBUTABLE TO
Non-controlling
interests
33.6
36.3
29.8
Equity holders of
the parent
27.3
9.4
(13.6)
EARNINGS PER SHARE
ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT
Basic
earnings / (loss) per share in USD
20.4
0.14
0.32
(0.44)
Diluted
earnings / (loss) per share in USD
20.4
0.14
0.32
(0.44)
*
In
conjunction with the implementation of IFRS 16, Hudson adopted a
new structure for the consolidated statements of comprehensive
income. The comparative figures were reclassified accordingly (see
note 2.4)
F-3
HUDSON
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
at
December 31, 2019 and 2018
IN MILLIONS OF USD
NOTE
31.12.2019
31.12.2018
ASSETS
Property, plant and
equipment
13
227.3
243.0
Right-of-use
assets*
14
1,330.2
–
Intangible
assets
15
283.9
301.6
Goodwill
15
324.7
315.0
Investments in
associates
16
6.5
6.5
Deferred tax
assets
26
79.9
83.9
Other non-current
assets
17
33.9
27.4
Non-current
assets
2,286.4
977.4
Inventories
18
185.2
190.7
Trade
receivables
0.5
1.3
Other accounts
receivable
19
54.0
46.8
Income tax
receivables
2.7
0.8
Cash and cash
equivalents
318.0
234.2
Current
assets
560.4
473.8
Total
assets
2,846.8
1,451.2
LIABILITIES AND
SHAREHOLDERS’ EQUITY
Equity attributable
to equity holders of the parent
20
579.6
552.1
Non-controlling
interests
21
79.2
84.8
Total
equity
658.8
636.9
Borrowings
22, 24
503.1
492.6
Lease
obligations*
23, 24
1,098.1
–
Deferred tax
liabilities
26
38.4
40.0
Post-employment
benefit obligations
27
1.5
1.0
Other non-current
liabilities
25
0.7
–
Non-current
liabilities
1,641.8
533.6
Trade
payables
124.6
105.5
Borrowings
22, 24
45.9
51.4
Lease
obligations*
23, 24
245.8
–
Income tax
payables
1.4
2.3
Other
liabilities
25
128.5
121.5
Current
liabilities
546.2
280.7
Total
liabilities
2,188.0
814.3
Total
liabilities and shareholders’ equity
2,846.8
1,451.2
*
Hudson
adopted the new lease standard IFRS 16 as of January 1, 2019. The
non-current and current lease obligations represent the present
value of Hudson's remaining lease payments from concession and
other lease agreements. At the same time, Hudson recognized a
right-of-use asset, which as of January 1, 2019, equaled the lease
obligations less accrued lease expense and which will be
depreciated over the remaining lease term. For additional
information please refer to notes 2, 14 and 24.
F-4
HUDSON
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
for
the years ended December 31, 2019, 2018 and 2017
Although the restructuring of Hudson took place
on February 1, 2018, the respective opening balances of the interim
consolidated statement of changes in equity are presented as if
these transactions took place before January 1,2018.
for
the years ended December 31, 2019, 2018 and 2017
IN MILLIONS OF USD
NOTE
2019
2018
2017
CASH FLOWS FROM
OPERATING ACTIVITIES
Profit / (loss)
before tax
60.8
68.8
32.3
ADJUSTMENTS
FOR
Depreciation,
amortization and impairment
10
363.5
128.9
108.7
Loss / (gain)
on sale of non-current assets
2.6
1.5
3.3
Increase / (decrease)
in allowances and provisions
0.7
5.2
5.0
Loss / (gain)
on foreign exchange differences
(0.3)
0.7
(0.5)
Other non-cash
items
8.6
3.6
4.6
Finance
income
11
(4.7)
(2.6)
(1.6)
Finance
expenses
11
91.6
31.0
30.2
Cash
flows before working capital changes
522.8
237.1
182.0
Decrease / (increase)
in trade and other accounts receivable
(8.5)
22.8
6.2
Decrease / (increase)
in inventories
18
8.3
(12.0)
(26.9)
Increase / (decrease)
in trade and other accounts payable
24.2
(8.4)
(26.9)
Cash
generated from operations
546.8
239.5
134.4
Income tax expense
paid
(14.5)
(6.8)
(3.6)
Net
cash flows from operating activities
532.3
232.7
130.8
CASH FLOWS USED IN
INVESTING ACTIVITIES
Purchase of
property, plant and equipment
13
(57.6)
(65.1)
(79.6)
Purchase of
intangible assets
15
(15.3)
(4.2)
(8.2)
Contributions to
associates
16
(2.5)
(3.3)
(1.0)
Proceeds from sale
of property, plant and equipment
0.4
0.3
0.6
Interest
received
1.9
3.2
2.1
Repayments
of / (granted) loans receivable from non-controlling
interest holders 1
0.3
1.5
(3.3)
Proceeds from
sublease receivables
5.9
–
–
Business
combinations, net of cash
6
(7.2)
–
–
Net
cash flows used in investing activities
(74.1)
(67.6)
(89.4)
CASH FLOWS
FROM / (USED IN) FINANCING ACTIVITIES
Lease
payments
24
(308.9)
–
–
Dividends paid to
non-controlling interests
(36.6)
(39.1)
(34.3)
Proceeds from
restructuring
–
60.1
–
Repayment of
borrowings
24
–
(48.3)
(28.0)
Transaction costs
paid for the listing of equity instruments
–
(6.3)
–
Purchase of
treasury shares
(2.7)
(2.0)
–
Contributions
from / (purchase of) non-controlling
interests
0.8
7.0
–
Interest
paid
(28.8)
(37.7)
(30.2)
Net
cash flows from / (used in) financing
activities
(376.2)
(66.3)
(92.5)
Currency
translation on cash
1.8
(2.0)
0.9
Increase / (decrease)
in cash and cash equivalents
83.8
96.8
(50.2)
CASH AND CASH
EQUIVALENTS AT THE
– beginning
of the period
234.2
137.4
187.6
– end of the
period
318.0
234.2
137.4
1
The 2018 and 2017
amounts have been reclassified from Cash flows from / (used) in
financing activities.
F-7
HUDSON
NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
1. CORPORATE
INFORMATION
Hudson and its subsidiaries
(“Hudson” or “the Company”) is a travel
experience leader operating 1,013 stores in 88 locations in
airports, commuter hubs and tourist destinations throughout the
continental United States and Canada, under the travel convenience,
specialty retail, duty-free and food and beverage
concepts.
Hudson Ltd., the parent company
which is an exempt company limited by shares, was incorporated on
May 30, 2017 in Hamilton, Bermuda with registered office at 2
Church Street, Hamilton HM11, Bermuda. Our Class A common shares
began trading on the New York Stock Exchange on February 1, 2018,
under the ticker symbol “HUD”. Hudson Ltd. is
controlled by a subsidiary of Dufry AG (Dufry), the world’s
leading travel retail company headquartered in Basel,
Switzerland.
The financial statements for
periods presented prior to the initial public offering (IPO), were
prepared as if Hudson had operated on a stand-alone basis and
included the historical results of operations, financial position
and cash flows of the North America Division of Dufry, derived from
the consolidated financial statements and accounting records of
Dufry. For periods prior to the IPO, the financial statements
include the recognition of certain assets and liabilities that were
recorded at corporate level but which were specifically
identifiable or otherwise attributable to
Hudson.
The
consolidated financial statements were authorized for issuance on
March 11, 2020 by the Board of Directors of Hudson.
2. ACCOUNTING
POLICIES
2.1 BASIS OF
PREPARATION
The
consolidated financial statements of Hudson and its subsidiaries
have been prepared in accordance with International Financial
Reporting Standards (IFRS), as issued by the International
Accounting Standards Board (IASB).
The
consolidated financial statements have been prepared on the
historical cost basis, except for certain financial assets,
liabilities and defined benefit plan assets, that are measured at
fair value, as explained in the accounting policies below.
Historical cost is generally based on the fair value of the
consideration given in exchange for assets. The consolidated
financial statements are presented in millions of US Dollars (USD).
All values are rounded to the nearest one hundred thousand, except
when indicated otherwise.
2.2 BASIS OF
CONSOLIDATION
The
consolidated financial statements of Hudson comprise all entities
directly or indirectly controlled by Hudson (its subsidiaries) as
at December 31, 2019 and the respective comparative
information.
F-8
Subsidiaries
are fully consolidated from the date of acquisition, being the date
on which Hudson obtains control, and continue to be consolidated
until the date when such control is lost. The Company controls an
entity when Hudson is exposed to, or has rights to, variable
returns from its involvement with the entity and has the ability to
affect those returns through its power over the entity. All
intragroup balances, transactions, unrealized gains or losses and
dividends, resulting from intragroup transactions, are eliminated
in full. Transactions with subsidiaries of Dufry outside the scope
of the consolidation of Hudson have not been eliminated and are
reported as related party transactions, refer to note
37.
A
change in the ownership interest of a subsidiary, without a loss of
control, is accounted for as an equity transaction.
If
Hudson loses control over a subsidiary, it:
-
derecognizes the
assets (including goodwill) and liabilities of the subsidiary,
derecognizes the carrying amount of any non-controlling interest as
well as derecognizes the cumulative translation differences
recorded in equity;
-
recognizes the
fair value of the consideration received, recognizes the fair value
of any investment retained as well as recognizes any surplus or
deficit in the consolidated statements of comprehensive
income.
2.3 SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
a) Business combinations and Goodwill
Business
combinations are accounted for using the acquisition method. The
cost of an acquisition is measured as the aggregate of the
consideration transferred, measured at acquisition date fair value
and the amount of any non-controlling interest in the acquiree. For
each business combination, Hudson selects whether it measures the
non-controlling interest in the acquiree either at fair value or at
the proportionate share of the acquiree’s identifiable net
assets. Acquisition related transaction costs are expensed and
presented in other expenses. When Hudson acquires a business, it
assesses the financial assets and liabilities assumed for
appropriate classification and designation in accordance with the
contractual terms, economic circumstances and pertinent conditions
as at the acquisition date.
Any
contingent consideration to be transferred by the acquirer will be
recognized at fair value at the acquisition date. Thereafter any
change in the fair value of the contingent consideration not
classified as equity will be recognized through the consolidated
statements of comprehensive income.
Hudson
measures goodwill at the acquisition date as:
-
The fair value of
the consideration transferred;
-
plus the
recognized amount of any non-controlling interests in the
acquiree;
-
plus, if the
business combination is achieved in stages, the fair value of the
pre-existing equity interest in the acquiree;
-
less the net
recognized amount of the identifiable assets acquired and
liabilities assumed.
When
the excess is negative, a bargain purchase gain is recognized
immediately in the consolidated statements of comprehensive
income.
After
initial recognition, goodwill is measured at cost less any
accumulated impairment losses. For the purpose of impairment
testing, goodwill acquired in a business combination is, from the
acquisition date, allocated to each of Hudson’s group of
cash-generating units that are expected to benefit from the
combination.
F-9
Where
goodwill forms part of a cash-generating unit and an operation
within is disposed of, the goodwill associated with the operation
disposed of is included in the carrying amount of the operation
when determining the gain or loss on disposal of the operation.
Goodwill disposed of in this circumstance is measured based on the
relative values of the operation disposed of and the portion of the
cash-generating unit retained, unless there are specific
allocations.
b) Foreign currency translation
Each
subsidiary in Hudson uses its corresponding functional currency.
Items included in the financial statements of each entity are
measured using that functional currency. Transactions in foreign
currencies are recorded at the date of the trans-action in the
functional currency using the exchange rate of such
date.
Monetary
assets and liabilities denominated in foreign currencies are
re-measured using the functional currency exchange rate at the
reporting date and the difference is recorded as unrealized foreign
exchange gains / losses. Exchange differences arising on the
settlement or on the translation of derivative financial
instruments are recognized through the consolidated statements of
comprehensive income, except where the hedges on net investments
allow the recognition through other comprehensive income, until the
respective investments are disposed of. Deferred tax related to
unrealized FX is accounted accordingly. Non-monetary items are
measured at historical cost in the respective functional
currency.
At the
reporting date, the assets and liabilities of all subsidiaries
reporting in foreign currency are translated into the presentation
currency of Hudson (USD) using the exchange rate at the reporting
date. The consolidated statements of comprehensive income of the
subsidiaries are translated using the average exchange rates of the
respective month in which the transactions occurred. The net
translation differences are recognized in other comprehensive
income. On disposal of a foreign entity or when control is lost,
the deferred cumulative translation difference recognized within
equity relating to that particular operation is recognized in the
consolidated statements of comprehensive income as gain or loss on
sale of subsidiaries.
Goodwill,
intangible assets and fair value adjustments identified during a
business combination (purchase price allocation) are treated as
assets and liabilities in the functional currency of such
operation.
Principal
foreign exchange rates applied for valuation and
translation:
AVERAGE RATE
CLOSING RATE
IN USD
2019
2018
2017
31.12.2019
31.12.2018
31.12.2017
1 CAD
0.7540
0.7720
0.7714
0.7701
0.7333
0.7951
c) Net sales
Turnover
is comprised of net sales and advertising income and is recognized
from contracts with customers. Hudson recognizes revenue from
retail sales and the related cost of goods sold at a point in time
when it sells and hands over products directly to the customer in
our stores. These transactions have to be settled by cash or credit
card on delivery. Revenue from customers is measured at fair value
of the consideration received in cash for the goods sold, excluding
discounts and sales taxes.
F-10
d) Advertising income
Hudson's
advertising income is resulting from several distinctive marketing
support activities, not affecting the retail price, performed by
Hudson after having been developed and coordinated together with
our suppliers. The income is recognized in the period the
advertising is performed. The compensation will be received on
contractual terms. Usually Hudson is not entitled to offset the
income with trade payables related with the same supplier. An
allowance on these advertising receivables is recognized to reflect
the risks and uncertainties in relation with the final achievements
of incentives based on thresholds, to be confirmed after the end of
the respective program.
e) Cost of sales
Cost
of sales are recognized when the company sells the products and
comprise the purchase price and the cost incurred until the
products arrive at the warehouse, i. e. import duties, transport,
purchase discounts (price-offs) as well as inventory valuation
adjustments and inventory losses.
f) Personnel expenses
These
expenses include all expenses related to the employees of
Hudson.
g) Equity instruments
An
equity instrument is any contract that evidences a residual
interest in the assets of an entity after deducting all of its
liabilities. Equity instruments issued by Hudson are recognized at
the proceeds received, net of direct transaction costs. Repurchase
of Hudson’s own equity instruments is recognized and deducted
directly in equity. No gain or loss is recognized in the
consolidated statements of comprehensive income on the purchase,
sale, issue or cancellation of Hudson’s own equity
instruments.
h) Share
capital
Ordinary
shares are classified as equity. Costs directly attributable to the
issuance of shares or options are shown in the statement of changes
in equity as transaction costs for equity instruments, net of
tax.
For
treasury shares purchased by Hudson Ltd. or any subsidiary,
the consideration paid, including any directly attributable
expenses, net of income taxes, is deducted from equity until the
shares are cancelled, assigned or sold. Where such ordinary shares
are subsequently sold, any consideration received, net of any
direct transaction expenses and income tax, is included in
equity.
i) Pension and other post-employment benefit
obligations
Hudson
provides retirement benefits through defined contribution pension
plans which are funded by regular contributions made by the
employer and the employees to a third-party.
j) Share-based payments
Equity
settled share based payments to employees and other third parties
providing services are measured at the fair value of the equity
instruments at grant date. The fair value determined at grant date
of the equity-settled share-based payments is expensed on a pro
rata basis over the vesting period, based on the estimated number
of equity instruments that will eventually vest. At the end of each
reporting period, Hudson revises its estimate of the number of
equity instruments expected to vest. The impact of the revision of
the original estimates, if any, is recognized in the consolidated
statements of comprehensive income such that the cumulative expense
reflects the revised estimate.
F-11
Where
the terms of an equity settled award are modified, the minimum
expense recognized is the expense as if the terms had not been
modified. An additional expense is recognized for any modification,
which increases the total fair value of the share-based payment
arrangement, or is otherwise beneficial to the holder of the option
as measured at the date of modification.
k) Taxation
Income
tax expense represents the sum of the current income tax and
deferred tax. Where the functional currency is not the local
currency, the position includes the effects of foreign exchange
translation on deferred tax assets or deferred tax
liabilities.
Income
tax positions not relating to items recognized in the consolidated
statements of comprehensive income, are recognized in correlation
to the underlying transaction either in other comprehensive income
or equity.
Current income tax
Income
tax receivables or payables are measured at the amount expected to
be recovered from or paid to the tax authorities. The tax rates and
tax laws used to compute the amount are those that are enacted or
substantially enacted at the reporting date in the countries or
states where Hudson operates and generates taxable
income.
Income
tax related to items recognized in other comprehensive income is
recognized in the same statement.
Deferred tax
Deferred
tax is provided using the liability method on temporary differences
between the tax basis of assets or liabilities and their carrying
amounts for financial reporting purposes at the reporting
date.
Deferred
tax liabilities are recognized for all taxable temporary
differences, except:
-
When the deferred
tax liability arises from the initial recognition of goodwill or an
asset or liability in a transaction that is not a business
combination and, at the time of the transaction, affects neither
the accounting profit nor taxable profit or loss
-
In respect of
taxable temporary differences associated with investments in
subsidiaries, when the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary
differences will not reverse in the foreseeable future
Deferred
tax assets are recognized for all deductible temporary differences,
the carry forward of unused tax credits or tax losses. Deferred tax
assets are recognized to the extent that it is probable that
taxable profit will be available, against which the deductible
temporary differences and the carry forward of unused tax credits
and unused tax losses can be utilized, except:
-
When the deferred
tax asset relating to the deductible temporary difference arises
from the initial recognition of an asset or liability in a
transaction that is not a business combination and, at the time of
the transaction, affects neither the accounting profit nor taxable
profit or loss
-
In respect of
deductible temporary differences associated with investments in
subsidiaries, deferred tax assets are recognized only to the extent
that it is probable that the temporary differences will reverse in
the foreseeable future and taxable profit will be available against
which the temporary differences can be utilized.
F-12
The
carrying amount of deferred tax assets is reviewed at each
reporting date and reduced to the extent that it is no longer
probable that sufficient taxable profit will be available to allow
the deferred tax asset to be utilized. Unrecognized deferred tax
assets are reassessed at each reporting date and are recognized to
the extent that it has become probable that future taxable profits
will allow the deferred tax asset to be recovered.
Deferred
tax assets and liabilities are measured at the tax rates that are
expected to apply in the year when the asset is realized or the
liability is settled, based on tax rates (and tax laws) that have
been enacted or substantially enacted at the reporting date
applicable for each respective company.
l) Property, plant and equipment
These
are stated at cost less accumulated depreciation and any impairment
in fair value. Depreciation is computed on a straight-line basis
over the shorter of the estimated useful life of the asset or the
lease term. The useful lives applied are as follows:
-
Real estate
(buildings) 20 to 40 years
-
Leasehold
improvements the shorter of the lease term or 10 years
-
Furniture and
fixtures the shorter of the lease term or 5 years
-
Motor vehicles the
shorter of the lease term or 5 years
-
Computer hardware
the shorter of the lease term or 5 years
m) Right-of-use assets
Hudson
recognizes right-of-use assets at the commencement date of the
lease (i.e., the date the underlying asset is available for use).
Right-of-use assets are measured at cost, less any accumulated
depreciation and impairment losses, and adjusted for any
re-measurement of lease obligations. The cost of right-of-use
assets includes the amount of lease obligations recognized, initial
direct costs incurred, and lease payments made at or before the
commencement date, less any lease incentives received. Unless
Hudson is reasonably certain to obtain ownership of the leased
asset at the end of the lease term, the recognized right-of-use
assets are depreciated on a straight-line basis over the shorter of
its estimated useful life and the lease term. Right-of-use assets
are subject to impairment. The contractual term of right-of-use
assets is up to 40 years.
To
contain a lease, an agreement has to convey the right to control
the use of an identified asset through out the period of use in
exchange for consideration, so that the lessee has the right to
obtain substantially all of the economic benefits from the use of
the identified asset and direct the use of the identified asset (i.
e. direct how and for what purpose the asset is used). The lease
term corresponds to the non-cancellable period of each contract,
except in cases where Hudson is reasonably certain of exercising
renewal options contractually foreseen.
F-13
IFRS
16 affects the accounting of:
Stores
Hudson
enters into concession agreements with operators of airports,
railway stations etc. to operate retail shops which in-substance
are considered leases. These concession lease agreements contain
complex features, which include variable payments, based on sales,
which cannot be lower than a minimum threshold (MAG). The MAG can
be fixed or variable depending on certain parameters. The MAG
amounts may: a) be fixed by the concession agreement or b) be
calculated based on a percentage of fees expensed in the previous
year, or c) be adjusted based on an index. In these cases, the
unavoidable portions of the fees are considered as in-substance
fixed payments, despite having a variable component. Such payment
features are often determined on the basis of the individual
circumstances of the parties to the contract and are unique to the
particular contract. Hudson signs and renews a significant number
of agreements every year with a typical duration of 5 to 10 years.
These agreements do not contain a residual value guarantee. In some
cases, the current portion of the lease obligations are secured
with bank guarantees in case Hudson would not fulfill its
contractual commitments.
Hudson
capitalized all elements of the lease contracts in accordance with
IFRS 16 when at the commencement of the agreement such commitments
are in-substance fixed. Payment obligations that do not have a
fixed or in-substance fixed commitment, will continue to be
presented as variable lease expense. Hudson has identified a number
of agreements in its portfolio which are not fulfilling the
principles of recognition defined by IFRS 16, i.e. they have
minimum guaranteed payments based on non-predictable parameters or
variables, such as actual number of passengers, which continue to
be presented fully as variable lease expense.
Additionally,
Hudson has concession subleases in which Hudson acts as lessor for
a portion of leased retail space to third party operators.
Generally, the term of the sublease is the same duration as the
main concession agreement. Therefore, Hudson recognizes a lease
receivable related to the fixed minimum payments due from the
subtenant as a reduction of the initial right-of-use
asset.
Other buildings
Rental
agreements for offices or warehouse buildings usually qualify for
capitalization under IFRS 16.
n) Short-term leases and leases of low-value assets
Hudson
applies the short-term lease recognition exemption to its
short-term leases (i.e., those leases that have a lease term of 12
months or less from the commencement date and do not contain a
purchase option). It also applies the lease of low-value assets
recognition exemption to leases of office equipment that are
considered of low value. Lease payments on short-term leases and
leases of low-value assets are recognized as expense on a
straight-line basis over the lease term.
F-14
o) Intangible
assets
These
assets mainly comprise of concession rights and brands. Usually
these assets are capitalized at cost, but when identified as part
of a business combination, these assets are capitalized at fair
value as of the date of acquisition. The useful lives of these
intangible assets are assessed to be either finite or indefinite.
Hudson may consider that brands have indefinite useful lives when
the company considers to use them for the future. Following initial
recognition, the cost model is applied to intangible assets.
Intangible assets with finite lives are amortized over the useful
economic life. Intangible assets with an indefinite useful life are
reviewed annually to determine whether the indefinite life
assessment continues to be supportable. If not, any changes are
made on a prospective basis. Brand assets have indefinite useful
life, whereas the concession rights have a useful life based on
lease term, which can be up to 40 years.
p)
Software
Software
is valued at amortized historical cost, or in case of internal
developments by the sum of costs incurred less
amortization.
q) Impairment of
non-financial assets
Goodwill
and intangible assets with indefinite useful life are not subject
to amortization and are tested annually for impairment. Assets that
are subject to depreciation and amortization are reviewed for
impairment whenever events or circumstances indicate that the
carrying amount may not be recoverable. An impairment loss is
recognized when the carrying amount of an asset or cash generating
unit exceeds its recoverable amount. The recoverable amount is the
higher of an asset’s fair value less cost of disposal and its
value in use. For the purpose of assessing impairment, assets are
grouped at the lowest levels for which there are separately
identifiable cash inflows (cash generating units).
r) Associates
Associates
are all entities over which Hudson has significant influence but
not control, generally accompanying a shareholding interest of more
than 20% of the voting rights. Investments in associates are
accounted for using the equity method of accounting. Under the
equity method, the investment is initially recognized at cost. The
carrying amount is increased or decreased to recognize the changes
in Hudson’s share of net assets of the associate after the
date of acquisition and decreased by dividends declared.
Hudson’s investment in associates includes goodwill
identified on acquisition.
Hudson’s
share of post-acquisition net profit / (loss) and its share of
post-acquisition movements in other comprehensive income are
recognized in the consolidated statements of comprehensive income
with a corresponding adjustment to the carrying amount of the
investment. When Hudson’s share of losses in an associate
equals or exceeds its interest in the associate, Hudson does not
recognize further losses, unless it has incurred legal or
constructive obligations or made payments on behalf of the
associate. If the ownership interest in an associate is reduced but
significant influence is retained, only a proportionate share of
the amounts previously recognized in other comprehensive income is
reclassified to net profit / (loss) where appropriate.
F-15
Hudson
determines at each reporting date whether there is any objective
evidence that the investment in the associate is impaired. If this
is the case, Hudson calculates the amount of impairment as the
difference between the recoverable amount of the associate and its
carrying value and recognizes the amount within the share of result
of associates in the consolidated statements of comprehensive
income.
Profits
and losses resulting from upstream and downstream transactions
between Hudson and its associate are recognized in the consolidated
financial statements only to the extent of unrelated
investor’s interests in the associates. Unrealized losses are
eliminated unless the transaction provides evidence of an
impairment of the asset transferred. Accounting policies of
associates have been changed where necessary to ensure consistency
with the policies adopted by Hudson.
Dilution
gains and losses arising in investments in associates are
recognized in the consolidated statements of comprehensive
income.
s) Inventories
Inventories are valued at the lower of historical cost or net
realizable value. The historical costs are determined using the
weighted average cost method. Historical cost includes expenses
incurred in bringing the inventories to their present location and
condition. Beside the purchase price of the goods less the
discounts or rebates obtained, this includes mainly import duties
and transport cost. The net realizable value is the estimated
selling price in the ordinary course of business less the estimated
costs necessary to make the sale. Inventory allowances are set up
in the case of slow moving and obsolete inventories. Expired items
are fully written off.
t) Trade receivables
This
account includes receivables related to the sale of
merchandise.
u) Cash and cash equivalents
Cash
and cash equivalents consist of cash on hand or current bank
accounts as well as short-term deposits at banks with initial
maturity below 91 days. Credit card receivables with a maturity of
up to 4 days are included as cash in transit. Short-term
investments are included in this position if they are highly
liquid, readily convertible into known amounts of cash and subject
to insignificant risk of changes in value.
v) Lease obligations
At the
commencement date of the lease, Hudson recognizes lease obligations
measured at the present value of lease payments to be made over the
lease term. The lease payments include fixed payments (including
in-substance fixed payments), variable lease payments that depend
on an index or a rate, and amounts expected to be paid for residual
value guarantees, less any lease incentives receivable. Lease
payments also include the exercise price of a purchase option
reasonably certain to be exercised by Hudson and payments of
penalties for terminating a lease, if the lease term reflects
Hudson exercising the option to terminate. The variable lease
payments that do not depend on an index or a rate are recognized as
expense in the period in which the event or condition that triggers
the payment occurs.
Most
of our lease contracts for stores require us to pay variable lease
expense as a percentage of sales, with a minimum annual guarantee
(“MAG”) that can fluctuate each year based on the
variable rent payments of the previous year. The fixed or
in-substance fixed MAG payments are included in the measurement of
lease obligations, while the additional lease payments up to the
full amount based on the percentage of sales, are presented as
lease expense.
F-16
In
calculating the present value of lease payments, Hudson uses the
incremental borrowing rate at the lease commencement date if the
interest rate implicit in the lease is not readily determinable.
The implied interest charge is presented as interest expenses on
lease obligation. Where a lease agreement does not specify a
discount rate and as the subsidiaries are financed internally,
Hudson uses a discount rate which is the aggregation of the risk
free rate for the respective currency and lease duration, increased
by individual company risk factors. After the commencement date,
the amount of lease obligations is increased to reflect the
accretion of interest and reduced for the lease payments made. In
addition, the carrying amount of lease obligations is re-measured
if there is a modification, a change in the lease term, a change in
the in-substance fixed lease payments or a change in the assessment
to purchase the underlying asset.
w) Provisions
Provisions
are recognized when Hudson has a present obligation (legal or
constructive) as a result of a past event, it is probable that
Hudson will be required to settle the obligation and a reliable
estimate can be made of the amount of the obligation. The amount
recognized as a provision is the best estimate at the end of the
reporting period of the consideration required to settle the
present obligation, taking into account the risks and uncertainties
surrounding the obligation. When a provision is measured using the
cash flows estimated to settle the present obligation, its carrying
amount is the present value of those cash flows (where the effect
of the time value of money is material).
When
some or all of the economic benefits required to settle a provision
are expected to be recovered from a third party, a receivable is
recognized as an asset if it is virtually certain that the
reimbursement will be received and the amount of the receivable can
be measured reliably.
Contingent liabilities acquired in a business
combination
Contingent
liabilities acquired in a business combination are initially
measured at fair value at the acquisition date. At the end of
subsequent reporting periods, such contingent liabilities are
measured at the higher of the amount that would be recognized in
accordance with IAS 37 Provisions, contingent liabilities and
contingent assets and the amount initially recognized less
cumulative income recognized in accordance with IFRS 15 Revenue
from contracts with customers.
Lawsuits and duties
Lawsuits
and duties provision is recognized to cover uncertainties dependent
on the outcome of ongoing lawsuits.
x) Investments and other financial assets
(i) Classification
Hudson
classifies its financial assets in the following measurement
categories:
-
those to be
measured subsequently at fair value (either through the
consolidated statements of comprehensive income), and
-
those to be
measured at amortized cost.
The
classification depends on the entity’s business model for
managing the financial assets and the contractual terms of the cash
flows. For assets measured at fair value, gains and losses will
either be recorded in profit or loss or other comprehensive income
(OCI). For investments in equity instruments that are not held for
trading, this will depend on whether Hudson has made an irrevocable
election at the time of initial recognition to account for the
equity investment at fair value through other comprehensive income
(FVOCI).
F-17
(ii) Recognition and derecognition
Regular
purchases and sales of financial assets are recognized on
trade-date, the date on which Hudson commits to purchase or sell
the asset. Financial assets are derecognized when the rights to
receive cash flows from the financial assets have expired or have
been transferred and Hudson has transferred substantially all the
risks and rewards of ownership.
(iii) Measurement
At
initial recognition, Hudson measures a financial asset at its fair
value plus, in the case of a financial asset not at fair value
through profit or loss (FVPL), transaction costs that are directly
attributable to the acquisition of the financial asset. Transaction
costs of financial assets carried at FVPL are expensed in profit or
loss.
Financial
assets with embedded derivatives are considered in their entirety
when determining whether their cash flows are solely payment of
principal and interest.
Debt
instruments
Subsequent
measurement of debt instruments depends on Hudson’s business
model for managing the asset and the cash flow characteristics of
the asset. There are three measurement categories into which Hudson
classifies its debt instruments:
-
Amortized cost:
Assets that are held for collection of contractual cash flows where
those cash flows represent solely payments of principal and
interest are measured at amortized cost. Interest income from these
financial assets is included in finance income using the effective
interest rate method. Any gain or loss arising on derecognition is
recognized directly in profit or loss. Impairment losses are
presented in other expenses.
-
FVOCI: Assets that
are held for collection of contractual cash flows and for selling
the financial assets, where the asset’s cash flows represent
solely payments of principal and interest, are measured at FVOCI.
Movements in the carrying amount are taken through OCI, except for
the recognition of impairment gains or losses, interest income and
foreign exchange gains and losses which are recognized in profit or
loss. When the financial asset is derecognized, the cumulative gain
or loss previously recognized in OCI is reclassified from equity to
profit or loss. Interest income from these financial assets is
included in finance income using the effective interest rate
method. Impairment expenses are presented in other
expenses.
-
FVPL: Assets that
do not meet the criteria for amortized cost or FVOCI are measured
at FVPL. A gain or loss on a debt investment that is subsequently
measured at FVPL is recognized in profit or loss and presented as
net in the period in which it arises.
Equity instruments
Hudson
subsequently measures all equity investments at fair value. Where
management has elected to present fair value gains and losses on
equity investments in OCI, there is no subsequent reclassification
of fair value gains and losses to profit or loss following the
derecognition of the investment. Dividends from such investments
continue to be recognized in profit or loss as other income when
Hudson’s right to receive payments is
established.
Changes
in the fair value of financial assets at FVPL are recognized in
finance income or finance expenses in the consolidated statements
of comprehensive income as applicable.
F-18
(iv) Impairment of financial assets
Hudson
assesses on a forward looking basis the expected credit losses
associated with its debt instruments carried at amortized cost and
FVOCI. The impairment methodology applied depends on whether there
has been a significant increase in credit risk. For trade
receivables, receivables for refund from suppliers and related
services, Hudson applies the simplified approach, which requires
expected lifetime losses to be recognized from initial recognition
of the receivables, see note 19 for further details.
(v) Trade, other accounts receivable and cash and cash
equivalents
Trade
and other receivables (including credit cards receivables, other
accounts receivable, cash and cash equivalents) are measured at
amortized cost using the effective interest.
y) Financial liabilities
i) Financial liabilities at FVPL
These
are stated at fair value, with any gains or losses arising on
re-measurement recognized in the income statement. The net gain or
loss recognized in the consolidated statement of profit or loss
incorporates any interest paid on the financial liability and is
included in finance income or finance expenses in the consolidated
statements of comprehensive income. Fair value is determined in the
manner described in note 29.
ii) Other financial liabilities
Other
financial liabilities (including borrowings) are subsequently
measured at amortized cost using the effective interest
method.
iii) Derecognition of financial liabilities
Hudson
derecognizes financial liabilities only when the obligations are
discharged, cancelled or expired. The difference between the
carrying amount of the financial liability derecognized and the
consideration paid or payable is recognized in the consolidated
statements of comprehensive income.
iv) Offsetting of financial instruments
Financial
assets and financial liabilities are offset and the net amount is
reported in the consolidated statement of financial position if
there is a currently enforceable legal right to offset the
recognized amounts and there is an intention to settle on a net
basis, to realize the assets and settle the liabilities
simultaneously.
F-19
2.4 NEW
STATEMENT OF COMPREHENSIVE INCOME, CHANGE IN ACCOUNTING
POLICIES
Hudson
reclassified the statements of comprehensive income and changed its
accounting policies in order to better reflect the performance of
the Company. The comparative figures for 2018 and 2017 are
presented accordingly to reflect the changes.
The
following table reflects the reclassification within the new chart
of accounts for the years ended December 31, 2018 and
2017.
IN MILLIONS OF USD
FOOTNOTE
PUBLISHED
2018
RECLASSIFICATION
RECLASSIFIED
2018
Turnover
1,924.2
–
1,924.2
Cost of
sales
(698.5)
–
(698.5)
Gross
profit
1,225.7
–
1,225.7
Lease expenses
(Selling expenses in 2018)
1a, 2a
(445.3)
16.7
(428.6)
Personnel
expenses
(411.1)
–
(411.1)
Other expenses
(General expenses in 2018)
1b, 2b, 3
(131.4)
(27.5)
(158.9)
Share of result of
associates
0.1
(0.1)
–
Depreciation,
amortization and impairment
(128.9)
–
(128.9)
Other operational
result (moved to Other expenses)
3
(10.9)
10.9
–
Operating
profit
98.2
–
98.2
Finance income
(Interest income in 2018)
2.5
–
2.5
Finance expenses
(Interest expenses in 2018)
(31.0)
–
(31.0)
Foreign exchange
gain / (loss)
(0.9)
–
(0.9)
Profit / (loss)
before tax
68.8
–
68.8
Income tax
benefit / (expense)
(3.0)
–
(3.0)
Net
profit / (loss)
65.8
–
65.8
Net profit
attributable to non-controlling interests
36.3
–
36.3
Net
profit attributable to equity holders of the parent
29.5
–
29.5
Footnote
CONCEPT
RECLASSIFICATION FROM
RECLASSIFICATION TO
IN
MILLIONS OF USD
1a
Sales related expenses
Lease
expenses (Selling expenses in 2018)
Other
expenses
34.7
2a
Premises expenses
Other
expenses
Lease
expenses
(18.0)
1b
Sales related expenses
Lease
expenses (Selling expenses in 2018)
Other
expenses
(34.7)
2b
Premises expenses
Other
expenses
Lease
expenses
18.0
3
Other operational income / (expenses)
Other
operational result
Other
expenses
(10.9)
F-20
IN MILLIONS OF USD
FOOTNOTE
PUBLISHED
2017
RECLASSIFICATION
RECLASSIFIED
2017
Turnover
1,802.5
–
1,802.5
Cost of
sales
(680.3)
–
(680.3)
Gross
profit
1,122.2
–
1,122.2
Lease expenses
(Selling expenses in 2017)
1a, 2a
(421.2)
18.8
(402.4)
Personnel
expenses
(371.3)
–
(371.3)
Other expenses
(General expenses in 2017)
1b, 2b, 3
(156.9)
(22.8)
(179.7)
Share of result of
associates
(0.3)
0.3
–
Depreciation,
amortization and impairment
(108.7)
–
(108.7)
Other operational
result (moved to Other expenses)
3
(3.7)
3.7
–
Operating
profit
60.1
–
60.1
Finance income
(Interest income in 2017)
1.9
–
1.9
Finance expenses
(Interest expenses in 2017)
(30.2)
–
(30.2)
Foreign exchange
gain / (loss)
0.5
–
0.5
Profit / (loss)
before tax
32.3
–
32.3
Income tax
benefit / (expense)
(42.9)
–
(42.9)
Net
profit / (loss)
(10.6)
–
(10.6)
Net profit
attributable to non-controlling interests
29.8
–
29.8
Net
profit attributable to equity holders of the parent
(40.4)
–
(40.4)
Footnote
CONCEPT
RECLASSIFICATION FROM
RECLASSIFICATION TO
IN
MILLIONS OF USD
1a
Sales related expenses
Lease
expenses (Selling expenses in 2017)
Other
expenses
33.7
2a
Premises expenses
Other
expenses
Lease
expenses
(14.9)
1b
Sales related expenses
Lease
expenses (Selling expenses in 2017)
Other
expenses
(33.7)
2b
Premises expenses
Other
expenses
Lease
expenses
14.9
3
Other operational income / (expenses)
Other
operational result
Other
expenses
(3.7)
2.5 CHANGES IN
ACCOUNTING POLICY AND DISCLOSURES
New and amended Standards and Interpretations
The
accounting policies adopted are consistent with those of the
previous financial year, except for the following new standards and
the interpretations adopted in these consolidated financial
statements (effective January 1, 2019).
IFRS 16 Leases
Hudson
adopted the standard as of January 1, 2019 under the modified
retrospective approach. IFRS 16 replaces IAS 17 and sets the
principles for recognition, measurement, presentation of leases,
specifying the requirements for disclosures of lessees and lessors
more extensive than under IAS 17. The main difference in the
consolidated financial statements is that IFRS 16 introduces a
single lessee accounting model and requires a lessee to recognize
right-of-use assets (refer to notes 2.3 and 14) and lease
obligations (refer to notes 2.3 and 24) for all lease
contracts.
Hudson
adopted IFRS 16 as of January 1, 2019, resulting in changes in our
accounting policies. In accordance with the modified retrospective
approach, the comparative figures were not restated. The following
table presents the effects of the adoption of IFRS 16 on the
consolidated statements of financial position:
F-21
IN MILLIONS OF USD
AS PREVIOUSLY
PUBLISHED
31.12.2018
IFRS 16
IMPLEMENTATION
*
RESTATED
01.01.2019
ASSETS
Property, plant and
equipment
243.0
–
243.0
Right-of-use
assets
–
1,261.3
1,261.3
Intangible
assets
301.6
(3.7)a
297.9
Goodwill
315.0
–
315.0
Investments in
associates
6.5
–
6.5
Deferred tax
assets
83.9
–
83.9
Other non-current
assets
27.4
5.6b
33.0
Non-current
assets
977.4
1,263.2
2,240.6
Inventories
190.7
–
190.7
Trade
receivables
1.3
–
1.3
Other accounts
receivable
46.8
2.4b
49.2
Income tax
receivables
0.8
–
0.8
Cash and cash
equivalents
234.2
–
234.2
Current
assets
473.8
2.4
476.2
Total
assets
1,451.2
1,265.6
2,716.8
LIABILITIES AND
SHAREHOLDERS’ EQUITY
Equity attributable
to equity holders of the parent
552.1
–
552.1
Non-controlling
interests
84.8
–
84.8
Total
equity
636.9
–
636.9
Borrowings
492.6
–
492.6
Lease
obligations
–
1,031.7
1,031.7
Deferred tax
liabilities
40.0
–
40.0
Post-employment
benefit obligations
1.0
–
1.0
Non-current
liabilities
533.6
1,031.7
1,565.3
Trade
payables
105.5
–
105.5
Borrowings
51.4
–
51.4
Lease
obligations
–
237.0
237.0
Income tax
payables
2.3
–
2.3
Other
liabilities
121.5
(3.1)c
118.4
Current
liabilities
280.7
233.9
514.6
–
Total
liabilities
814.3
1,265.6
2,079.9
Total
liabilities and shareholders’ equity
1,451.2
1,265.6
2,716.8
*
The amounts
presented differ from the preliminary impact assessment presented
in the consolidated financial statements for the year ended
December 31, 2018 and the information reported in the interim
consolidated financial statements for the periods ended March 31,2019 and June 30, 2019. For details please refer to Hudson's
interim consolidated financial statements for the nine months ended
September 30, 2019 (note 2.2).
a
Prepaid and
capitalized concession rights
b
Sublease
receivables
c
Concession fee
payables
The
weighted average incremental borrowing rate (IBR) applied to the
lease obligations at the date of initial application was 4.48%. The
IBR for 5 year leases and for 10 year leases for USD was 4.48% and
4.59%, respectively, and 4.13% and 4.29% for CAD,
respectively.
Other amendments and interpretations
Other
amendments and interpretations applicable for the first time in
2019 have no material impact on the consolidated financial
statements of Hudson.
F-22
3. CRITICAL
ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION
UNCERTAINTY
The
preparation of Hudson’s consolidated financial statements
requires management to make judgments, estimates and assumptions
that affect the reported amounts of income, expenses, assets and
liabilities, and the disclosure of contingent liabilities, at the
reporting date.
KEY
SOURCES OF ESTIMATION UNCERTAINTY
The
key assumptions concerning the future and other key sources of
estimation include uncertainties at the reporting date, which may
have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next
financial periods, are discussed below.
Impairment test of assets
Hudson
annually tests goodwill and intangible assets with indefinite
useful lives and assesses other non-financial assets with finite
lives for impairment indicators. Where required, the company
performs impairment tests which are based on the discounted value
models of future cash flows. The underlying calculation requires
the use of estimates. The estimates and assumptions used are
disclosed in note 15.1.
Income taxes
Hudson
is subject to income taxes in the United States, United Kingdom and
Canada. Significant judgment is required in determining the
taxability of certain transactions based on the local tax
regulations. There are uncertainties for some transactions in
relation with the correct tax treatment. Further details are given
in notes 12 and 26.
Deferred tax assets
Deferred
tax assets are recognized for unused tax losses and deductible
temporary differences to the extent that it is probable that
taxable profit will be available against which the credits can be
utilized. Management judgment is required to determine the amount
of future taxable profits that can be generated in the same
jurisdiction, and the limitations in use of these tax credits to
calculate the amount of deferred tax assets that can be recognized.
Further details are given in note 26.
Share-based payments
Hudson
measures the cost of equity settled transactions with employees by
reference to the fair value of the equity instruments at the grant
date. Estimating such fair values may require determining the most
appropriate valuation model for a grant of equity instruments,
which depends on the terms and conditions of the grant, as well as
the most appropriate inputs to the valuation model including the
expected probability that the triggering clauses will be met. The
result will be the expected quantity of shares to be assigned. The
assumptions and models used are disclosed in note
20.3.
F-23
Purchase price allocation
The
determination of the fair values of the identifiable assets
(especially the concession rights) and the assumed liabilities
(especially the contingent liabilities recognized as provisions),
resulting from business combinations, is based on valuation
techniques such as the discounted cash flow model. Some of the
inputs to this model are partially based on assumptions and
judgments and any changes thereof would affect the carrying
values..
Consolidation of entities where Hudson has control, but holds only
minority voting rights
Hudson
considers controlling certain entities, even when it holds less
than the majority of the voting rights, when it is exposed to or
has the rights to variable returns from the involvements with the
investee and has the ability to affect those returns through its
power over the entity. These indicators are evaluated at the time
of first consolidation and reviewed when there are changes in the
statutes or composition of the executive board of these entities.
Further details on non-controlling interests are disclosed in note
21 as well as in the annex List of subsidiaries.
4. NEW
AND REVISED STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET
ADOPTED/EFFECTIVE
Certain
new accounting standards and interpretations were issued that are
not effective for 2019. Hudson will adopt these when they become
effective. Hudson does not expect these new standards to have a
material impact in future reporting periods.
F-24
5. SEGMENT
INFORMATION
Hudson
consists of one operating segment “Travel Retail
Operations” for which reports are submitted to the Group
Executive Committee, being the Chief Operating Decision Maker
(CODM). These reports form the basis for the evaluation of
performance and allocation of resources.
Hudson
generates turnover from selling a wide range of products in its
duty-paid or duty-free stores that are mainly located at airports,
commuter terminals, hotels, landmarks or tourist destinations.
Refer to note 7 for a split of net sales by product category,
market sector and sales channel.
Net Sales by Country
IN MILLIONS OF USD
2019
2018
2017
U.S.
1,567.6
1,523.9
1,420.9
Canada
342.4
356.0
339.9
Total
1,910.0
1,879.9
1,760.8
Non-Current Assets by Country
(excluding
investments in associates and deferred taxes)
IN MILLIONS OF USD
31.12.2019
31.12.2018
U.S.
1,476.7
511.2
Canada
723.3
375.9
Total
2,200.0
887.1
We
refer to the annex List of subsidiaries to identify where each
subsidiary operates.
F-25
6. ACQUSITION
OF BUSINESSES AND TRANSACTIONS WITH NON-CONTROLLING
INTERESTS
2019 TRANSACTIONS
On
October 10, 2019, the Company acquired, through its subsidiary
Hudson Group (HG) Retail, LLC, assets related to the operation of
Brookstone stores in the U.S. airports from Apex Digital, Inc
(“Apex”). Hudson has also obtained the right to be the
exclusive airport retailer to operate Brookstone stores and sell
its products through a license agreement with Bluestar Alliance,
LLC, owner of the Brookstone brand and trademarks. Brookstone is an
established American brand, well known for its unique selection of
innovative products in the travel, wellness, home and entertainment
categories.
The
acquisition of Apex’s airport business meets the criteria of
a business combination according to IFRS 3. The purchase price of
USD 7.4 million included Apex’s outstanding liabilities. In
2019, Hudson paid USD 7.2 million of the purchase price, with the
remaining amount paid in 2020.
Hudson
recognized preliminary the assets acquired at fair value, including
concession rights amounting to USD 5.5 million as a result of the
preliminary purchase price allocation (see note 15).
Since
the acquisition, Brookstone has contributed USD 3.0 million in
turnover and an operating loss of USD 3.9 million, including
transition costs.
The
transaction costs in relation to this acquisition were USD 0.5
million.
On
October 31, 2019, Hudson signed an agreement to acquire a
controlling stake in the assets of
OHM Concession Group LLC (OHM), an award winning food and beverage
concessions operator in North America. The acquisition of OHM
further positions Hudson as
a leader in North America travel concessions by expanding upon its
established quick service and café concepts of which Hudson
operates across the United
States and Canada. At closing this transaction was pending subject
to the completion of customary conditions, expected to occur in the
first half of 2020. In 2019 Hudson incurred in
transaction expenses related to this acquisition of USD 1.2
million.
F-26
7. TURNOVER
IN MILLIONS OF USD
2019
2018
2017
Net
sales
1,910.0
1,879.9
1,760.8
Advertising
income
43.7
44.3
41.7
Turnover
1,953.7
1,924.2
1,802.5
NET SALES BREAKDOWN
Net sales by product category
IN MILLIONS OF USD
2019
2018
2017
Confectionery, Food
and Catering
763.5
709.0
628.0
Perfumes and
Cosmetics
272.2
279.0
258.4
Fashion, Leather
and Baggage
225.3
231.0
220.1
Literature and
Publications
149.5
166.7
175.6
Electronics
106.3
94.6
87.7
Watches, Jewelry
and Accessories
104.7
109.1
115.5
Wine and
Spirits
93.2
92.3
88.0
Tobacco
goods
54.2
56.7
52.2
Other product
categories
141.1
141.5
135.3
Total
1,910.0
1,879.9
1,760.8
Net sales by market sector
IN MILLIONS OF USD
2019
2018
2017
Duty-paid
1,482.3
1,431.8
1,334.4
Duty-free
427.7
448.1
426.4
Total
1,910.0
1,879.9
1,760.8
Net sales by channel
IN MILLIONS OF USD
2019
2018
2017
Airports
1,809.9
1,780.3
1,662.6
Downtown and hotel
shops
50.2
45.8
43.1
Railway stations
and other
49.9
53.8
55.1
Total
1,910.0
1,879.9
1,760.8
F-27
8. LEASE
EXPENSES
IN MILLIONS OF USD
2019
2018
2017
Lease expenses
relating to variable lease payments 1
Future
lease expense payments are uncertain as they are: a) dependent on
future sales levels and primarily reflect the variable rent in
addition to MAG, b) subject to future contract amendments and lease
extensions, c) subject to exchange rates and d) unique for each
agreement. For 2020, Hudson estimates lease expenses to be between
5% and 9% of turnover.
Variable lease
expense approximates the related cash flows due to the short
payment term characteristic of these contracts.
9. OTHER
EXPENSES
IN MILLIONS OF USD
2019
2018
2017
Sales related
expenses
(36.3)
(32.9)
(33.1)
Franchise fees and
commercial services
(29.4)
(29.0)
(63.2)
Professional
advisors
(20.1)
(20.4)
(13.5)
Repairs,
maintenance and utilities
(18.0)
(17.0)
(17.1)
Office and
administration expenses
(13.2)
(14.4)
(16.2)
Taxes, other than
income taxes
(11.7)
(7.9)
(7.1)
Travel, car,
entertainment and representation
(11.3)
(11.8)
(11.7)
Other operational
expenses
(8.7)
(10.9)
(3.7)
IT
expenses
(7.0)
(6.2)
(6.3)
Insurances
(4.7)
(4.0)
(2.2)
Advertising
expenses
(2.3)
(1.7)
(0.5)
Public relations
expenses
(1.8)
(1.8)
(3.2)
Transaction
costs
(1.7)
–
–
Bank
expenses
(0.7)
(0.9)
(1.5)
Commission
expenses
–
–
(0.4)
Total
(166.9)
(158.9)
(179.7)
10. DEPRECIATION,
AMORTIZATION AND IMPAIRMENT
IN MILLIONS OF USD
2019
2018
2017
Depreciation RoU
assets
(250.1)
–
–
Subtotal
(Right-of-Use Assets, see note 14)
(250.1)
–
–
Depreciation
Property, Plant and Equipment
(66.4)
(69.2)
(64.5)
Impairment
Property, Plant and Equipment
(4.1)
(14.6)
(0.2)
Subtotal
(Property, Plant and Equipment, see note 13)
(70.5)
(83.8)
(64.7)
Amortization
Intangible Assets
(42.9)
(45.1)
(44.0)
Subtotal
(Intangible Assets, see note 15)
(42.9)
(45.1)
(44.0)
Total
(363.5)
(128.9)
(108.7)
F-28
11. FINANCE
INCOME AND EXPENSES
IN MILLIONS OF USD
2019
2018
2017
FINANCE
INCOME
Interest income on
bank deposits
3.5
2.5
1.8
Interest on
sublease receivables
0.7
–
–
Other financial
income
0.5
–
0.1
Interest
income on financial assets
4.7
2.5
1.9
Total
finance income
4.7
2.5
1.9
FINANCE
EXPENSES
Interest on
loans
(29.2)
(30.2)
(29.4)
Interest on lease
obligations
(56.2)
–
–
Other financial
expenses
(3.5)
(0.4)
(0.5)
Interest
expense on financial liabilities
(88.9)
(30.6)
(29.9)
Interest
expense
(0.2)
(0.4)
(0.3)
Interest
and other financial expenses
(0.2)
(0.4)
(0.3)
Share
of result of associates
(2.5)
–
–
Total finance expenses
(91.6)
(31.0)
(30.2)
Foreign
exchange gain / (loss)
0.3
(0.9)
0.5
Financial
result
(86.6)
(29.4)
(27.8)
F-29
12. INCOME
TAX
INCOME
TAX RECOGNIZED IN THE CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
IN MILLIONS OF USD
2019
2018
2017
Current income
taxes
(11.3)
(9.8)
(8.5)
of which
corresponding to the current period
(11.3)
(9.8)
(8.5)
Deferred income
taxes
(3.2)
6.8
(34.4)
of which related to
the origination or reversal of temporary differences
(3.6)
(4.9)
5.8
of which
adjustments recognized in relation to prior
years 1
0.6
10.7
–
of which due to
changes in tax rates
(0.2)
1.0
(40.2)
Total
(14.5)
(3.0)
(42.9)
1
In 2018, deferred
income tax in relation to prior years of USD 10.7 million refers
mainly to reversals of allowances on deferred tax assets in
connection with US tax losses carry forward (see note
26).
IN MILLIONS OF USD
2019
2018
2017
Profit before
tax
60.8
68.8
32.3
Expected tax rate
in %
26.8%
26.8%
35.2%
Tax at the expected
rate
(16.3)
(18.4)
(11.3)
EFFECT
OF
Different tax rates
for subsidiaries in other jurisdictions
–
0.2
0.5
Effect of changes
in tax rates on previously recognized deferred tax assets and
liabilities
(0.2)
1.0
(40.2)
Non-deductible
expenses
(2.5)
(2.3)
0.3
Net change of
unrealized tax losses carry forward
–
–
(2.0)
Adjustments
recognized in relation to prior year 1
0.6
10.7
–
Income taxed in
non-controlling interest holders
8.9
9.7
11.2
Other
items 2
(5.0)
(3.9)
(1.4)
Total
(14.5)
(3.0)
(42.9)
1
In
2018, deferred income tax in relation to prior years of USD 10.7
million refers mainly to reversals of allowances on deferred tax
assets in connection with US tax losses carry forward (see note
26).
2
In 2019 and 2018,
other items of USD 5.0 million and USD 3.9 million, respectively,
consist mainly of US state taxes and charges under the new BEAT
regulation.
The
expected corporate income tax rate in % approximates the average
income tax rate of where Hudson is active, weighted by the
operating profit of the respective operations. For 2019, there have
been no significant changes in these income tax rates.
The
2019 tax expense of USD 14.5 million was impacted by a tax expense
of 5.0 million primarily relating to Base Erosion Anti Avoidance
Tax and additional state tax liabilities. In 2018 the tax expense
of USD 3.0 million was impacted by a tax benefit of USD 10.7
million from adjustments in relation to prior years primarily
related to the release of valuation allowance against certain tax
losses carry forward. This was offset by tax expense of USD 3.9
million primarily relating to the Base Erosion Anti Avoidance Tax
and additional state tax liabilities.
15.1 IMPAIRMENT
TEST OF INTANGIBLE ASSETS AND GOODWILL
Goodwill
is subject to impairment testing each year. Concession rights are
tested for impairment whenever events or circumstances indicate
that the carrying amount may not be recoverable.
15.1.1 Impairment
test of goodwill
For
the purpose of impairment testing, goodwill recognized from
business combinations has been allocated to a group of cash
generating units (CGUs) which represents Hudson’s only
operating segment “Travel Retail Operations” and
amounts to USD 324.7 million.
The
recoverable amount of the group of CGUs is determined based on
value-in-use calculations which require the use of assumptions (see
table with key assumptions below). The calculation uses cash flow
projections based on financial forecasts approved by the management
covering a five-year period. Cash flows beyond the five-year period
are extrapolated using a steady growth rate that does not exceed
the long-term average growth rate for the respective market and is
consistent with forecasted growth included in the travel related
retail industry reports.
The
key assumptions (in %) used for determining the recoverable amounts
of goodwill in Hudson are:
POST
TAX DISCOUNT RATES
PRE
TAX DISCOUNT RATES
GROWTH RATES FOR NET SALES
2019
2018
2019
2018
2019
2018
7.59
7.58
9.27
9.39
4.1-8.8
2.9-3.6
As
basis for the calculation of these discount rates, Hudson uses the
weighted average cost of capital, based on risk free interest rates
derived from the past 5 year average of prime 10-year USD
bonds rates: 2.17% (2018: 2.18%).
For
the calculation of the discount rates and WACC (weighted average
cost of capital), Hudson used the following re-levered
beta:
2019
2018
Beta
factor
0.88
0.82
F-35
15.1.2 Key
assumptions used for value-in-use calculations
The
calculation of value-in-use is most sensitive to the following
assumptions:
-
Sales
growth
-
Growth rate used
to extrapolate
-
Gross margin and
suppliers prices
-
Lease expense and
lease payments
-
Discount
rates
Sales growth
Sales
growth is based on statistics published by external experts, such
as ACI (Airports Council International) to estimate the development
of passenger traffic per locations where Hudson is active. For the
budget year, the management also takes into consideration specific
price inflation factors of the country, the cross currency effect
and the expected potential changes to capture clients (penetration)
per business unit.
Growth rates used to extrapolate
For
the period after 5 years, Hudson has used a growth rate of 1.0%
(2018: 1.0%) to extrapolate the cash flow projections.
Gross margins
The
expected gross margins are based on average product assortment
values estimated by the management for the budget 2020. These
values are maintained over the planning period or where specific
actions are planned and have been increased or decreased by up to
1% over the 5 year planning horizon compared to the historical
data. The gross margin is also affected by supplier’s prices.
Estimates are obtained from global negotiations held with the main
suppliers for the products and countries for which products are
sourced, as well as data relating to specific commodities during
the months before the budget.
Lease expense and lease payments
The
company uses a lease database to project future fixed payments and
estimate variable lease payments based on expected sales
developments. Where the contractual terms of certain operations
comes to an end during the budget period, the company has analyzed
the renewal conditions and the market situation and assumed
renewals where the situation / conditions are
favorable.
Discount rates
Several
factors affect the discount rates:
-
For the borrowings
part, the rate is based on the average interest of the past 5 years
of the respective ten-year government bond and is increased by
Hudson’s effective bank spread and adjusted by the effective
tax rate and country risk of the CGU.
-
For the equity
part, a 5% equity risk premium is added to the base rate commented
above and adjusted by the beta of Hudson’s peer
group.
The
same methodology is used by the management to determine the
discount rate used in discounted cash flow (DCF) valuations, which
are a key instrument to assess business potential of new or
additional investment proposals.
Sensitivity to changes in assumptions
Management
believes that any reasonably possible change
(+ / – 1%) in the key assumptions, on which
the recoverable amounts are based, would not cause the respective
recoverable amount to fall below the carrying amount.
F-36
16. INVESTMENTS
IN ASSOCIATES
This
includes Nuance Group (Chicago) LLC which operates four
duty-free stores at O’Hare International Airport of Chicago
in Illinois, USA, and Midway Partnership LLC operating duty paid
stores at Chicago Midway International Airport.
Summarized statement of financial position
IN MILLIONS OF USD
31.12.2019
NUANCE
GROUP
(CHICAGO) LLC
31.12.2019
MIDWAY PART-
NERSHIP LLC
31.12.2019
OTHER
31.12.2019
TOTAL
31.12.2018
NUANCE
GROUP
(CHICAGO) LLC
31.12.2018
MIDWAY PART-
NERSHIP LLC
31.12.2018
TOTAL
Cash and cash
equivalents
3.6
7.7
–
11.3
1.1
1.9
3.0
Other current
assets
4.0
4.0
0.1
8.1
4.6
3.1
7.7
Non-current
assets
–
8.0
–
8.0
2.8
7.2
10.0
Other current
liabilities
(6.4)
(7.5)
(0.5)
(14.4)
(3.9)
(2.4)
(6.3)
Net
assets
1.2
12.2
(0.4)
13.0
4.6
9.8
14.4
Proportion of
Hudson’s ownership
35.0%
50.0%
35.0%
50.0%
Hudson’s
share of the equity
0.4
6.1
–
6.5
1.6
4.9
6.5
Summarized statement of comprehensive income
2019
IN MILLIONS OF USD
NUANCE GROUP
(CHICAGO) LLC
MIDWAY PART-
NERSHIP LLC
OTHER
TOTAL
Turnover
14.0
20.2
0.1
34.3
Depreciation,
amortization and impairment
(0.2)
(0.5)
–
(0.7)
Net
profit / (loss)
0.4
(2.5)
–
(2.1)
Total
comprehensive income
0.4
(2.5)
–
(2.1)
HUDSON'S SHARE IN
PERCENTAGE
35.0
50.0
49.0
Net
profit / (loss)
0.1
(1.2)
–
(1.1)
Impairment of
investment
(1.4)
–
–
(1.4)
Total
comprehensive income
(1.3)
(1.2)
–
(2.5)
2018
IN MILLIONS OF USD
NUANCE GROUP
(CHICAGO) LLC
MIDWAY PART-
NERSHIP LLC
TOTAL
Turnover
19.6
21.7
41.3
Depreciation,
amortization and impairment
(0.1)
–
(0.1)
Net
profit / (loss)
(1.0)
0.9
(0.1)
Total
comprehensive income
(1.0)
0.9
(0.1)
HUDSON'S SHARE IN
PERCENTAGE
35.0
50.0
Net
profit / (loss)
(0.4)
0.5
0.1
Total
comprehensive income
(0.4)
0.5
0.1
2017
IN MILLIONS OF USD
NUANCE GROUP
(CHICAGO) LLC
MIDWAY PART-
NERSHIP LLC
TOTAL
Turnover
18.7
15.1
33.8
Depreciation,
amortization and impairment
(0.1)
–
(0.1)
Net
profit / (loss)
(1.0)
0.2
(0.8)
Total
comprehensive income
(1.0)
0.2
(0.8)
HUDSON'S SHARE IN
PERCENTAGE
35.0
50.0
Net
profit / (loss)
(0.4)
0.1
(0.3)
Total
comprehensive income
(0.4)
0.1
(0.3)
F-37
The
information above reflects the amounts presented in the financial
statements of the associates (other than Hudson’s share of
amounts) adjusted for differences in accounting policies between
the associates and Hudson.
Reconciliation of the carrying amount of investments
Cost
of sales includes inventories written down to net realizable value
and inventory losses of USD 10.7 (2018: USD 6.8)
million.
19. OTHER
ACCOUNTS RECEIVABLE
IN MILLIONS OF USD
31.12.2019
31.12.2018
Receivables for
refund from suppliers and related services
19.5
18.1
Loans
receivable
2.3
4.0
Receivables from
subtenants and business partners
1.4
1.4
Personnel
receivables
0.6
0.4
Accounts
receivables
23.8
23.9
Prepayments of
lease expenses
7.7
5.9
Prepayments of
sales and other taxes
2.7
2.4
Prepayments,
other
4.6
1.7
Prepayments
15.0
10.0
Sublease
receivables
4.9
–
Guarantee
deposits
0.2
0.2
Other
10.7
13.3
Other
receivables
15.8
13.5
Total
54.6
47.4
Allowances
(0.6)
(0.6)
Total
54.0
46.8
MOVEMENT
IN ALLOWANCES FOR DOUBTFUL ACCOUNTS
IN MILLIONS OF USD
2019
2018
Balance
at January 1
(0.6)
–
Creation
(0.4)
(0.6)
Released
0.2
–
Utilized
0.2
–
Balance
at December 31
(0.6)
(0.6)
F-39
20. EQUITY
IN MILLIONS OF USD
31.12.2019
31.12.2018
Share
capital
0.1
0.1
20.1 INITIAL
PUBLIC OFFERING (IPO)
On
January 31, 2018, Hudson Ltd issued 92,511,080 common shares with a
par value of USD 0.001 each which are fully paid by Dufry
International AG. Holders of Class A and Class B common shares have
the same rights other than with respect to voting and conversion
rights. Each Class A common share entitles to one vote and each
Class B common share entitles to 10 votes. Class B common shares
are convertible into one Class A common share at the option of the
holder of such Class B common share holder. Holders of our common
shares have no preemptive, redemption, conversion or sinking fund
rights.
Simultaneously,
the secondary IPO took place in which our main shareholder, Dufry
International AG, offered 39,417,765 Class A common shares of
Hudson Ltd., or approximately 42.6% of the total outstanding Class
A and Class B common shares, at a public offering price of USD
19.00 per share, adding up to total consideration received by Dufry
International AG of USD 714.4 million after underwriting discounts
and commissions, but before other expenses.
The
following table reflects the issued shares as of December 31,2019.
On
September 10, 2019, Hudson Ltd. granted to selected members of its
senior management Hudson LTI Plan award 2019 consisting of 405,674
performance share units (PSU’s) and 135,243 restricted share
units (RSU’s). The plan has a contractual life of 32 months
and will vest on May 1, 2022. At grant date the fair value of one
PSU or RSU award 2019 represents the market value for one Hudson
share at that date, i. e. USD 12.64, adjusted by the probability
that participants comply with the ongoing contractual relationship
clauses. As of December 31, 2019, 1,868 PSUs and 623 RSUs have been
forfeited, resulting in 403,806 PSU and 134,620 RSU Hudson awards
2019 outstanding.
On
October 31, 2018, Hudson Ltd. granted to selected members of its
senior management Hudson LTI Plan award 2018 consisting of 435,449
PSU’s and 145,150 RSU’s. The plan has a contractual
life of 30 months and will vest on May 1, 2021. At grant date the
fair value of one PSU or RSU award 2018 represents the market value
for one Hudson share at that date, i.e. USD 21.14, adjusted by the
probability that participants comply with the ongoing contractual
relationship clauses. In 2019, a contractual provision caused
73,604 PSU and 24,535 RSU awards to vest, which were settled with
the employee out of the Company’s treasury shares. The
performance of the LTI Plan PSU award 2018 was measured against the
target and achieved a pay-out ratio of 1.259 Hudson shares per PSU
award 2018, which led to 117,231 total shares settled, including
RSUs. As of December 31, 2019, 4,142 PSUs and 1,381 RSUs have been
forfeited, resulting in 357,704 PSU and 119,235 RSU Hudson awards
2018 outstanding.
On
June 28, 2018, Hudson Ltd. granted an IPO-award in the form of
restricted share units (RSU’s) to selected members of
management. The IPO-award consists of 526,313 RSU’s in total.
One RSU gives the holder the right to receive free of charge one
Hudson Ltd. Class A common share. At grant date, the fair value of
one RSU award represented the market value for one Hudson Ltd.
share at that date, i.e. USD 17.39. The RSUs were vested on the
grant date and settled 50% in first quarter 2019 and 50% in first
quarter 2020. Hudson settled such awards by purchasing Class A
common shares in the market. Hudson recognized in 2018 USD 9.2
million expenses related to this award through shareholders’
equity as these incentives were provided in connection with the
successful listing of Hudson Ltd. During the first quarter 2020 the
Company assigned 263,156 shares, so that all outstanding RSU's in
relation with the IPO-award have been settled.
The
holders of one PSU award 2019 and 2018 will have the right to
receive free of charge up to two Hudson Ltd Class A common share
based on the cumulative results achieved by Hudson over a three
year period on three performance metrics (PM) against the
respective targets measured in USD and thus as follows: 30% on
Sales of USD 6,135 (2018: USD 5,828) million, 30% on EBITDA of USD
755 (2018: USD 708) million and 40% on adjusted EPS of USD 2.28
(2018: USD 2.22). Whereby the adjusted EPS equals the basic
Earnings per Share adjusted for amortization of intangible assets
identified during business combinations and non-recurring effects.
If at vesting the effective cumulative PM are at target level, each
PSU grants one share. If a cumulative PM is at 150% of the target
(maximum threshold) or above, each
F-41
PSU
will grant at vesting the specific PM weight of two shares, and if
a PM is at 50% of the PM target (minimum threshold) or below, no
share will be granted at vesting. If a PM is between 50% and 150%
of the target, the pay-out ratio will be allocated on a linear
basis. Finally, the number of shares granted for each PSU will be
the sum of the three pay-out ratios. Additionally, the allocation
of shares is subject to an ongoing contractual relationship of the
participant with Hudson throughout the vesting period. Holders of
PSU are not entitled to vote or receive dividends, like
shareholders do. The plans consider different rights in case of
early termination.
The
holders of one RSU award 2019 or 2018 will have the right to
receive free of charge one Hudson share subject to an ongoing
contractual relationship with Hudson through out the vesting period
(award 2019 until May 2, 2022 and award 2018 until May 1, 2021).
Holders of these rights are not entitled to vote or receive
dividends, like shareholders do. The plan considers different
rights in case of early termination.
SHARE
PLAN OF DUFRY AG
On
December 1, 2017, Dufry granted to selected members of
Hudson’s senior management the award 2017, which among
others, assigned 24,474 PSU’s to Hudson employees. The PSU
award 2017 has a contractual life of 29 months and will vest on May4, 2020. At grant date the fair value of one PSU award 2017
represented the market value of one Dufry share at that date, i. e.
USD 143.36 (CHF 140.69), adjusted by the probability that
participants comply with the ongoing contractual relationship
clause. As of December 31, 2019, no PSU award 2017 granted to
Hudson employees forfeited, so that 24,474 PSU award 2017 remain
outstanding.
Holders
of one PSU award 2017 will have the right to receive free of charge
up to two Dufry shares depending on the effective cumulative amount
of cash earnings per share (Cash EPS) reached by Dufry during the
grant year of award and the following two years compared with the
target (2017: USD 25.81 / CHF 24.98). The Cash EPS equals the basic
earnings per share adjusted for amortization of intangible assets
identified during business combinations and non-recurring effects.
As of 2019, the plan administrator adjusted the cash EPS targets
for 2019 by adjusting it also regarding the interest expense on
lease payments. If at vesting the cumulative adjusted Cash EPS is
at target level, each PSU grants one share. If the cumulative
adjusted Cash EPS is at 150% of the target (maximum threshold) or
above, each PSU grants two shares at vesting, and if the adjusted
Cash EPS is at 50% of the target (minimum threshold) or below, no
share will be granted at vesting. If the adjusted Cash EPS is
between 50% and 150% of the target, the number of shares granted
for each PSU will be allocated on a linear basis. Additionally, the
allocation of shares is subject to an ongoing contractual
relationship of the participant with Dufry through out the vesting
period. Holders of PSU are not entitled to vote or receive
dividends, like shareholders do.
On May3, 2019, the PSU award 2016 vested and the company assigned and
delivered free of charge 28,495 Dufry shares to Hudson employees.
The performance of the PSU award 2016 was measured against the
target Cash EPS of CHF 24.59 and achieved a pay-out ratio of 1.04
Dufry shares per PSU award 2016. On January 3, 2019, holders of
26,530 RSU award 2016 received free of charge one Dufry share per
RSU after fulfilling all the contractual conditions.
On May4, 2020, the PSU-award 2017 will vest and Dufry estimates to assign
and deliver free of charge 23,128 Dufry shares to Hudson employees.
The performance of the PSU award 2017 measured against the target
Cash EPS of CHF 24.98 has achieved a pay-out ratio of 0.945 Dufry
shares per PSU award 2017.
F-42
In
2019, Hudson recognized through profit and loss all these
share-based plan expenses for a total of USD 6.1 (2018: USD 6.2,
2017: USD 4.6) million.
20.4 EARNINGS
PER SHARE
20.4.1 Earnings
per share attributable to equity holders of the parent
Basic
Basic
earnings per share are calculated by dividing the net profit
attributable to equity holders of the parent by the weighted
average number of shares outstanding during the year.
IN MILLIONS OF
USD / QUANTITY
2019
2018
2017
Net profit
attributable to equity holders of the parent
12.7
29.5
(40.4)
Weighted average
number of ordinary shares outstanding
92,408,978
92,509,779
92,511,080
Basic
earnings per share in USD
0.14
0.32
(0.44)
Diluted
Diluted
earnings per share are calculated by dividing the net profit
attributable to equity holders of the parent by the weighted
average number of ordinary shares outstanding during the year plus
the weighted average number of ordinary shares that would be issued
on the conversion of all the dilutive potential ordinary shares
into ordinary shares.
IN MILLIONS OF
USD / QUANTITY
2019
2018
2017
Net profit
attributable to equity holders of the parent
12.7
29.5
(40.4)
Weighted average
number of ordinary shares outstanding
92,927,993
93,181,243
92,511,080
Diluted
earnings per share in USD
0.14
0.32
(0.44)
20.4.2 Weighted
average number of ordinary shares
QUANTITY
2019
2018
2017
Outstanding
shares
92,511,080
92,511,080
92,511,080
Less treasury
shares
(102,102)
(1,301)
–
Used
for calculation of basic earnings per share
92,408,978
92,509,779
92,511,080
EFFECT OF
DILUTION
Share
plans
519,015
671,464
–
Used
for calculation of diluted earnings per share
92,927,993
93,181,243
92,511,080
F-43
21. BREAKDOWN
OF TRANSACTIONS WITH NON-CONTROLLING INTERESTS
The
following table reflects the share of non-controlling interests in
the increase of share capital of the subsidiaries:
21.1 INFORMATION
ON COMPANIES WITH NON-CONTROLLING INTERESTS
The
non-controlling interests (NCI) comprise the portions in equity and
net profit in 121 (Dec. 2019) subsidiaries that are not fully owned
by Hudson.
Our
non-controlling interests consist of partners in either common law
partnerships or LLC’s (collectively,
“NCI’s”). Our partners own percentages of the
subsidiaries and are therefore entitled to distributions of net
profit. While there is some variation among our agreements, it is
generally the case that the Executive Management Committee,
controlled by Hudson’s majority of representatives, is
obligated to distribute, each quarter, the excess of an appropriate
reserve reasonably determined by the committee to be necessary to
meet the current and anticipated needs of the respective
subsidiaries. Such distributions are allocated among the partners,
Hudson included, based on each partner’s percentage interest
in the subsidiary. Distributions are discretionary only to the
extent that reserves are funded as above stated.
Each
subsidiary works as an independent entity. Common services provided
centrally are charged to the subsidiaries based on contractual
terms. No expenses of Hudson are shared with any NCI but Hudson
receives payments for “back office” services
(financial, legal, HR, IT, etc.) that are provided to the
NCI’s by Hudson in amounts typically calculated as a
percentage of the gross revenues of the NCI’s. These amounts
are stated in each NCI agreement and vary by agreement. They are
established at the time of agreement by calculating the internal
cost for the services as a percentage of Hudson’s gross
revenues and that percentage of the NCI’s gross revenue is
inserted in the NCI agreement as Hudson’s
compensation.
Hudson
provides adhoc services to the subsidiaries for tenders, marketing
and other services which are invoiced separately. All these charges
are eliminated during consolidation.
With
the exception of the one presented in the following tables, none of
the subsidiaries have non-controlling interests that represents a
material part of the NCI’s of Hudson.
F-44
Summarized statement of comprehensive income
IN MILLIONS OF USD
2019
2018
2017
Hudson
Las Vegas JV
Turnover
77.0
70.8
67.1
Depreciation,
amortization and impairment
(7.6)
(1.7)
(1.3)
Net
profit for the year
19.1
12.4
10.9
Non-controlling
interest
27%
27%
27%
Non-controlling
interest share of the net profit Hudson Las Vegas
The
loans payable to related parties (refer to note 37) are denominated
in USD or CAD. The weighted average interest rate for USD loans in
2019 was 5.9% (2018: 5.9%). The interest rate for CAD loans in 2019
was 2.3% (2018: 2.3%).
DETAILED
CREDIT FACILITIES
Dufry
negotiates and manages bank key credit facilities centrally and
then provides group internal financing to its subsidiaries. Credit
lines for guarantees are kept at local level. Hudson’s
guarantee lines are with Credit Agricole and Bank of
America.
Deferred
tax assets and liabilities arise from the following
positions:
IN MILLIONS OF USD
31.12.2019
31.12.2018
DEFERRED TAX
ASSETS
Property, plant and
equipment
9.3
5.2
Intangible
assets
26.3
21.5
Inventories
6.7
7.0
Lease
obligations
305.8
–
Other
payables
17.3
11.1
Tax losses carry
forward
45.2
43.2
Other
1.9
11.8
Total
412.5
99.8
DEFERRED TAX
LIABILITIES
Right-of-use
assets
(302.6)
–
Intangible
assets
(65.1)
(55.5)
Other
(3.3)
(0.4)
Total
(371.0)
(55.9)
Deferred
tax assets, net
41.5
43.9
F-47
Deferred
tax balances are presented in the consolidated statements of
financial position as follows:
IN MILLIONS OF USD
31.12.2019
31.12.2018
Deferred tax
assets
79.9
83.9
Deferred tax
liabilities
(38.4)
(40.0)
Balance
at December 31
41.5
43.9
Reconciliation
of movements to the deferred taxes:
IN MILLIONS OF USD
2019
2018
2017
Changes in deferred
tax assets
(4.0)
(6.4)
(62.7)
Changes in deferred
tax liabilities
1.6
10.1
21.7
Currency
translation adjustments
2.2
(3.3)
6.4
Deferred
tax movements (expense)
(0.2)
0.4
(34.6)
THEREOF
Recognized in the
consolidated statements of comprehensive income
(3.2)
6.8
(34.4)
Recognized in
equity
3.0
(6.4)
(0.2)
Tax losses carry forward
The
unrecognized tax losses carry forward by expiry date are as
follows:
IN MILLIONS OF USD
31.12.2019
31.12.2018
Expiring within 1
to 3 years
–
–
Expiring within 4
to 7 years
–
–
Expiring after 7
years
6.7
6.1
Total
6.7
6.1
Unrecognized deferred tax liabilities
Hudson
has not recognized deferred tax liabilities associated with
investments in subsidiaries where Hudson can control the reversal
of the timing differences and where it is not probable that the
temporary differences will reverse in the foreseeable future.
Hudson does not expect that these differences result in taxable
amounts in determining taxable profit (tax loss) of future periods
when the carrying amount of the investment is
recovered.
27. POST-EMPLOYMENT
BENEFIT OBLIGATIONS
Hudson
provides retirement benefits through defined contribution pension
plans which are funded by regular contributions made by the
employer and the employees to a third-party. As of
December 31, 2019, the discretionary credit balance was USD
1.5 million.
F-48
28. COMMITMENTS
GUARANTEE
COMMITMENTS
Some
long-term lease contracts, which Hudson has entered into, include
obligations to fulfill minimal lease payments during the full term
of the agreement. Some of these agreements have been backed with
guarantees provided by Hudson or a financial institution.
During the years 2019, 2018 or 2017, no party has exercised their
right to call upon such guarantees.
29.
FAIR VALUE MEASUREMENT
FAIR
VALUE OF FINANCIAL INSTRUMENTS CARRIED AT AMORTIZED
COST
The
fair value measurement hierarchy of Hudson’s assets and
liabilities, that are measured subsequent to initial recognition at
fair value, are grouped into Levels 1 to 3 based on the degree to
which the fair value is observable:
-
Level 1 fair value measurements are
those derived from quoted prices (unadjusted) in active markets for
identical assets or liabilities.
-
Level 2 fair value measurements are
those derived from inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly (i. e. as prices) or indirectly (i. e. derived
from prices).
-
Level 3 fair value measurements are
those derived from valuation techniques that include inputs for the
asset or liability that are not based on observable market data
(unobservable inputs).
As of
December 31, 2019, Hudson hold financial assets which have
been re-measured at fair value. Hudson’s other financial
assets and liabilities for which fair values are to be disclosed
qualify as Level 2 fair value measurements. Their book values
represent a fair approximation of their fair values. There were no
transfers between Levels 1 and 2 during the period.
F-49
30. FINANCIAL
INSTRUMENTS
Significant
accounting policies are described in note 2, 3, 4 and in the
following notes.
31. CAPITAL
RISK MANAGEMENT
Capital
comprises equity attributable to the equity holders of the parent
adjusted for effects from transactions with non-controlling
interests.
The
primary objective of Hudson’s capital management is to ensure
that it maintains an adequate credit rating and sustainable capital
ratios in order to support its business and maximize shareholder
value.
Hudson
manages its financing structure and makes adjustments to it in
light of its strategy and the long-term opportunities and costs of
each financing source. To maintain or adjust the financing
structure, Hudson may adjust dividend payments to shareholders,
return capital to shareholders, issue new shares or issue
equity-linked instruments or equity-like instruments.
Furthermore,
Hudson monitors the financing structure using a combination of
ratios, including a gearing ratio, cash flow considerations and
profitability ratios. As for the gearing ratio Hudson includes
interest bearing borrowings less cash and cash
equivalents.
31.1 GEARING
RATIO
The
following ratio compares owner’s equity to borrowed
funds:
IN MILLIONS OF USD
31.12.2019
31.12.2018
Cash and cash
equivalents
(318.0)
(234.2)
Borrowings,
current
45.9
51.4
Borrowings,
non-current
503.1
492.6
Borrowings,
net
231.0
309.8
Equity attributable
to equity holders of the parent
579.6
552.1
ADJUSTED
FOR
Effects from
transactions with non-controlling interests 1
1.0
1.0
Total
capital 2
580.6
553.1
Total
net debt and capital
811.6
862.9
Gearing
ratio
28.5%
35.9%
1
Represents the excess paid
(received) above fair value of shares acquired (sold) from
non-controlling interests as long as there is no change in control
(IFRS 10.23).
2
Includes all
capital and reserves that are managed as
capital.
Hudson
did not hold collateral of any kind at the reporting
dates.
Financial assets and financial liabilities at
fair value through profit and loss include FX derivatives (Fair
value Level 2).
2
Non-financial
assets or non-financial liabilities comprise prepaid expenses and
deferred income, which will not generate a cash outflow or inflow
as well as other tax positions.
F-51
31.3 NET
INCOME BY FINANCIAL INSTRUMENTS CATEGORY
Financial Assets at December 31, 2019
IN MILLIONS OF USD
AT AMORTIZED
COST
AT FVTPL
TOTAL
Interest
income
3.5
–
3.5
Lease interest
income
0.7
–
0.7
Other finance
income
0.5
–
0.5
Finance
income
4.7
–
4.7
Foreign exchange
gain / (loss)1
(0.2)
–
(0.2)
Impairments / allowances 2
(2.3)
–
(2.3)
Total
– from subsequent valuation
(2.5)
–
(2.5)
Net
(expense) / income
2.2
–
2.2
Financial Liabilities at December 31, 2019
IN MILLIONS OF USD
AT AMORTIZED
COST
AT FVTPL
TOTAL
Interest
expenses
(29.2)
–
(29.2)
Interest on lease
obligations
(56.2)
–
(56.2)
Other finance
expenses
(0.5)
–
(0.5)
Finance
expenses
(85.9)
–
(85.9)
Foreign exchange
gain / (loss) 1
0.5
–
0.5
Total
– from subsequent valuation
0.5
–
0.5
Net
(expense) / income
(85.4)
–
(85.4)
1
This position
includes the foreign exchange gain / (loss) recognized
on third party and intercompany financial assets and liabilities
through the consolidated statements of comprehensive
income.
2
This position
includes net income / (expense) from released
impairments, allowances or recoveries during the period less the
increase of impairments or allowances.
F-52
Financial Assets at December 31, 2018
IN MILLIONS OF USD
AT AMORTIZED
COST
AT FVTPL
TOTAL
Interest
income
2.5
–
2.5
Finance
income
2.5
–
2.5
Impairments / allowances 2
(0.2)
–
(0.2)
Total
– from subsequent valuation
(0.2)
–
(0.2)
Net
(expense) / income
2.3
–
2.3
Financial Liabilities at December 31, 2018
IN MILLIONS OF USD
AT AMORTIZED
COST
AT FVTPL
TOTAL
Interest
expenses
(30.2)
–
(30.2)
Other finance
expenses
(0.4)
–
(0.4)
Finance
expenses
(30.6)
–
(30.6)
Foreign exchange
gain / (loss) 1
(0.9)
–
(0.9)
Total
– from subsequent valuation
(0.9)
–
(0.9)
Net
(expense) / income
(31.5)
–
(31.5)
1
This position
includes the foreign exchange gain / (loss) recognized
on third party and intercompany financial assets and liabilities
through the consolidated statements of comprehensive
income.
2
This position
includes net income / (expense) from released
impairments, allowances or recoveries during the period less the
increase of impairments or allowances.
32. FINANCIAL
RISK MANAGEMENT OBJECTIVES
As a
retailer, Hudson has activities which are financed in different
currencies and are consequently affected by fluctuations of foreign
exchange and interest rates. Hudson’s treasury manages the
financing of the operations through centralized credit facilities
to ensure an adequate allocation of these resources and
simultaneously minimize the potential currency and financial risk
impacts.
Hudson
continuously monitors the market risk, such as risks related to
foreign currency, interest rate, credit, liquidity and capital.
Hudson seeks to minimize the currency exposure and interest rates
risk using appropriate transaction structures or alternatively,
using derivative financial instruments to hedge the exposure to
these risks. The treasury policy forbids entering or trading
financial instruments for speculative purposes.
F-53
33. MARKET
RISK
Hudson’s
financial assets and liabilities are mainly exposed to market risk
in foreign currency exchange and interest rates. Hudson’s
objective is to minimize the impact on the consolidated statements
of comprehensive income and to reduce fluctuations in cash flows
through structuring the respective transactions to minimize market
risks. In cases, where the associated risk cannot be hedged
appropriately through a transaction structure, and the evaluation
of market risks indicates a material exposure, Hudson may use
financial instruments to hedge the respective
exposure.
Hudson
may enter into a variety of financial instruments to manage its
exposure to foreign currency risk, including forward foreign
exchange contracts, currency swaps and over the counter plain
vanilla options.
During
the current financial year Hudson has not utilized foreign currency
forward contracts and options for hedging purposes.
33.1 FOREIGN
CURRENCY RISK MANAGEMENT
Hudson
manages the cash flow surplus or deficits in foreign currency of
the operations through FX-transactions in the respective local
currency. Major imbalances in foreign currencies at Company level
may be hedged through foreign exchange forwards
contracts.
33.2 FOREIGN
CURRENCY SENSITIVITY ANALYSIS
Among
various methodologies to analyze and manage risk, Hudson utilizes
a system based on sensitivity analysis. This tool enables
Company treasury to identify the level of risk of each entity.
Sensitivity analysis provides an approximate quantification of the
exposure in the event that certain specified parameters were to be
met under a specific set of assumptions.
The
sensitivity analysis includes all monetary assets and liabilities
held by each Hudson company irrespective of whether the positions
are third party or intercompany.
F-54
The
foreign exchange rate sensitivity is calculated by aggregation of
the net foreign exchange rate exposure of Hudson entities at
December 31 of the respective year. The values and risk
disclosed here are the hedged and not hedged positions assuming a
5% appreciation of the USD against all other currencies. A positive
result indicates a profit, before tax in the consolidated
statements of comprehensive income or in the hedging and
revaluation reserves within other comprehensive income when the USD
strengthens against the relevant currency.
IN MILLIONS OF USD
31.12.2019
31.12.2018
Effect on the
consolidated statements of comprehensive income -
profit / (loss) of USD
0.6
0.3
34. INTEREST
RATE RISK MANAGEMENT
34.1 ALLOCATION
OF FINANCIAL ASSETS AND LIABILITIES TO INTEREST
CLASSES
Credit
risk refers to the risk that counterparty may default on its
contractual obligations resulting in financial loss to
Hudson.
Almost
all Hudson sales are retail sales made against cash or
internationally recognized credit / debit cards. The
remaining credit risk is in relation to refunds from suppliers and
guarantee deposits.
The
credit risk on cash deposits or derivative financial instruments
relates to banks or financial institutions. Hudson monitors the
credit ranking of these institutions and does not expect defaults
from non-performance of these counterparties.
The
main banks where Hudson keeps net assets positions hold a credit
rating of A – or higher.
35.1 MAXIMUM
CREDIT RISK
The
carrying amount of financial assets recorded in the financial
statements, after deduction of any allowances for losses,
represents Hudson’s maximum exposure to credit
risk.
F-56
36. LIQUIDITY
RISK MANAGEMENT
Hudson
evaluates this risk as the ability to settle its financial
liabilities on time and at a reasonable price. Beside its
capability to generate cash through its operations, Hudson, jointly
with Dufry, mitigates liquidity risk by keeping unused credit
facilities with financial institutions.
36.1 REMAINING
MATURITIES FOR NON-DERIVATIVE FINANCIAL ASSESTS AND
LIABILITIES
The
following tables have been drawn up based on the undiscounted cash
flows of financial assets and liabilities (based on the earliest
date on which Hudson can receive or be required to
pay).
The
following tables include principal and interest expected cash
flows.
37. RELATED
PARTIES AND RELATED PARTY TRANSACTIONS
A
party is related to Hudson if the party directly or indirectly
controls, is controlled by, or is under common control with Hudson,
has an interest in the Hudson that gives it significant influence
over the Hudson, has joint control over the Hudson or is an
associate or a joint venture of the Hudson. In addition, members of
the key management personnel of the Hudson or close members of the
family are also considered related parties.
The
following tables reflect related party transactions and
transactions with associates:
Items of
comprehensive income
IN MILLIONS OF USD
2019
2018
2017
PURCHASE OF GOODS
FROM
International
Operation & Services (UY) SA3
(88.0)
(82.5)
(67.4)
Hudson News
Distributors 1
–
(0.3)
(12.2)
Hudson
RPM 1
(16.5)
(18.6)
(8.5)
PURCHASE OF
SERVICES FROM
Dufry International
AG, Interest expenses
(26.8)
(28.2)
(28.6)
Dufry International
AG, Franchise fee expenses
(15.1)
(15.2)
(50.6)
Dufry Financial
Services B.V., Interest expenses
(2.3)
(2.0)
(0.9)
Dufry Management
AG, IT expenses
(1.9)
(1.8)
(1.3)
World Duty Free
Group SA, IT expenses3
–
(0.1)
(0.2)
OTHER OPERATIONAL
INCOME FROM
Dufry International
AG, Debt waiver
–
–
9.4
SALES OF SERVICES
TO
International
Operations & Services (USA), Advertising income3
5.1
5.7
–
Dufry International
AG, Other selling income
3.4
2.8
–
Nuance Group
(Chicago) LLC, Other selling income 2
0.7
0.9
0.9
1
Hudson News
Distributors and Hudson RPM are controlled by James S. Cohen, a
member of Hudson's board of directors.
The
compensation to board members and key executives for the services
provided during the respective years include all forms of
consideration accrued or provided by Hudson, including compensation
in Dufry shares as follows:
IN MILLIONS OF USD
2019
2018
2017
Salaries
6.9
5.8
3.6
Variable
payment
5.6
3.6
2.9
Non-monetary
benefits
0.2
0.2
0.1
Share based
payments
4.7
8.8
4.6
Total
17.4
18.4
11.2
The
board members did not receive any compensation for the year
2017.
