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)
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
Name of each exchange on which registered
Class A common
shares, par value $0.001 per share
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
39,292,765
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. 2018
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
88
Item 12.
Description of securities other than equity securities
88
A. Debt
securities
88
B.
Warrants and rights
88
C.
Other securities
88
D.
American depositary shares
88
Part
II
89
Item 13. Defaults,
dividend arrearages and delinquencies
89
A.
Defaults
89
B.
Arrears and delinquencies
89
Item 14. Material
modifications to the rights of security holders and use of
proceeds
89
A.
Material modifications to instruments
89
B.
Material modifications to rights
89
C.
Withdrawal or substitution of assets
89
D.
Change in trustees or paying agents
89
E.
Use of proceeds
89
Item 15. Controls
and procedures
89
A.
Disclosure controls and procedures
89
B.
Management’s annual report on internal control over financial
reporting
89
C.
Remediation efforts to address material weakness
90
D.
Attestation report of the registered public accounting
firm
90
E.
Changes in internal control over financial reporting
90
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 Group,” 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.
References to “our financial statements” prior to the
Reorganization Transactions are to the combined financial
statements of Hudson Group, 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.
All references in
this annual report to “U.S. dollars,”“U.S.$,”“$” and “USD” refer to
the currency of the United States of America.
Financial Statements
This annual report
includes our audited consolidated financial statements as of
December 31, 2018 and 2017 and for each of the years ended December31, 2018, 2017 and 2016 (hereinafter “Consolidated Financial
Statements”).
Our Consolidated
Financial Statements are presented in U.S.$ 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 2018,” 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 the Hudson Group 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:
–
events
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;
–
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 Group, 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 Group’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, 2018, 2017 and 2016
and selected consolidated statements of financial position data as
of December 31, 2018 and 2017 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.
4
We prepare our
Consolidated Financial Statements in accordance with IFRS as issued
by IASB.
IN MILLIONS OF USD
2018
2017
2016
Turnover
1,924.2
1,802.5
1,687.2
Cost of
sales
(698.5)
(680.3)
(645.3)
Gross
profit
1,225.7
1,122.2
1,041.9
Selling
expenses
(445.3)
(421.2)
(395.7)
Personnel
expenses
(411.1)
(371.3)
(337.4)
General
expenses
(131.4)
(156.9)
(151.9)
Share of result of
associates
0.1
(0.3)
(0.7)
Depreciation,
amortization and impairment
(128.9)
(108.7)
(103.7)
Other operational
result
(10.9)
(3.7)
(9.3)
Operating
profit
98.2
60.1
43.2
Interest
expenses
(31.0)
(30.2)
(29.8)
Interest
income
2.5
1.9
2.1
Foreign exchange
gain / (loss)
(0.9)
0.5
-
Profit
before tax
68.8
32.3
15.5
Income
tax
(3.0)
(42.9)
34.3
Net
profit / (loss)
65.8
(10.6)
49.8
NET
PROFIT / (LOSS) ATTRIBUTABLE TO
Equity holders of
the parent
29.5
(40.4)
23.5
Non-controlling
interests1
36.3
29.8
26.3
1
Net profit/(loss)
to non-controlling interests excludes expenses payable by us which
are not attributable to non-controlling interests (which primarily
consists of 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.
IN MILLIONS OF USD
31.12.2018
31.12.2017
Summary
of consolidated statements of financial position
Non-current
assets
977.4
1,069.0
Current
assets
473.8
388.8
Total
assets
1,451.2
1,457.8
Non-current
liabilities
533.6
571.4
Current
liabilities
280.7
314.0
Total
liabilities
814.3
885.4
Net
assets
636.9
572.4
5
IN MILLIONS OF USD
2018
2017
2016
Other
Data
Operating
Metrics
Number of
stores1
1,028
996
948
Total square feet
of stores (thousands)2
1,089.9
1,069.8
1,010.5
Financial
Metrics
Net sales
growth
6.8%
6.7%
20.5%
Like-for-like
growth3
3.7%
4.8%
3.9%
Like-for-like
growth on a constant currency basis4
3.7%
4.4%
4.3%
Organic
growth5
7.0%
8.8%
5.4%
Net profit / (loss)
in millions of USD
65.8
(10.6)
49.8
Net profit / (loss)
growth
720.8%
(121.3%)
172.1%
Net profit
margin6
3.4%
(0.6%)
3.0%
Adjusted EBITDA
(millions of USD)7
238.0
172.5
156.2
Adjusted EBITDA
growth
38.0%
10.4%
16.1%
Adjusted EBITDA
margin8
12.4%
9.6%
9.3%
Net profit / (loss)
attributable to equity holders of the parent
29.5
(40.4)
23.5
Net profit / (loss)
attributable to equity holders of the parent growth
173.0%
N/A
N/A
Net profit / (loss)
attributable to equity holders of the parent margin9
1.5%
(2.2%)
1.4%
Adjusted net profit
attributable to equity holders of the parent (millions of
USD)10
76.9
1.1
67.6
Adjusted net profit
attributable to equity holders of the parent growth
6,890.9%
N/A
163.0%
Adjusted net profit
attributable to equity holders of the parent margin11
4.0%
0.1%
4.0%
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) 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) 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 Adjusted EBITDA as net
earnings adjusted for the items set forth in the table below.
Adjusted EBITDA is a non-IFRS measure and is not a uniformly or
legally defined financial measure. Adjusted EBITDA is not a
substitute for IFRS measures in assessing our overall financial
performance. Because Adjusted EBITDA is not determined in
accordance with IFRS, and is susceptible to varying calculations,
Adjusted EBITDA may not be comparable to other similarly titled
measures presented by other companies. Adjusted EBITDA is included
in this annual report because it is a measure of our operating
performance and we believe that Adjusted EBITDA is useful to
investors because it is frequently used by securities analysts,
investors and other interested parties in their evaluation of the
operating performance of companies in industries similar to ours.
We also believe Adjusted EBITDA is useful to investors as a measure
of comparative operating performance from period to period as it is
reflective of changes in pricing decisions, cost controls and other
factors that affect operating performance, and it removes the
effect of our capital structure (primarily interest expense), asset
base (depreciation and amortization) and non-recurring
transactions, impairments of financial assets and changes in
provisions (primarily relating to costs associated with the closing
or restructuring of our operations). Our management also uses
Adjusted EBITDA for planning purposes, including financial
projections. Adjusted EBITDA has limitations as an analytical tool,
and you should not consider it in isolation, or as a substitute for
an analysis of our results as reported under IFRS as issued by
IASB.
8
We define Adjusted EBITDA margin as
Adjusted EBITDA divided by turnover.
9
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.
10
We define Adjusted net profit
attributable to equity holders of the parent as net profit
attributable to equity holders of the parent adjusted for the items
set forth in the table below. Adjusted net profit attributable to
equity holders of the parent is a non-IFRS measure and is not a
uniformly or legally defined financial measure. Adjusted net profit
attributable to equity holders of the parent is not a substitute
for IFRS measures in assessing our overall operating performance.
Because Adjusted net profit attributable to equity holders of the
parent is not determined in accordance with IFRS, and is
susceptible to varying calculations, Adjusted net profit
attributable to equity holders of the parent may not be comparable
to other similarly titled measures presented by other companies.
Adjusted net profit attributable to equity holders of the parent is
included in this annual report because it is a measure of our
operating performance and we believe that Adjusted net profit
attributable to equity holders of the parent is useful to investors
because it is frequently used by securities analysts, investors and
other interested parties in their evaluation of the operating
performance of companies in industries similar to ours. We also
believe Adjusted net profit attributable to equity holders of the
parent is useful to investors as a measure of comparative operating
performance from period to period as it removes the effects of
purchase accounting for acquired intangible assets (primarily
concessions), non-recurring transactions, impairments of financial
assets and changes in provisions (primarily relating to costs
associated with the closing or restructuring of our operations).
Management does not consider such costs for the purpose of
evaluating the performance of the business and as a result uses
Adjusted net profit attributable to equity holders of the parent
for planning purposes. Adjusted net profit attributable to equity
holders of the parent has limitations as an analytical tool, and
you should not consider it in isolation, or as a substitute for an
analysis of our results as reported under IFRS as issued by
IASB.
11
We
define Adjusted net profit margin attributable to equity holders of
the parent as Adjusted net profit attributable to equity holders of
the parent divided by
turnover.
6
The following is a
reconciliation of Adjusted EBITDA to net profit / (loss) for the
periods presented:
IN MILLIONS OF USD
2018
2017
2016
Net
profit / (loss)
65.8
(10.6)
49.8
Income tax
expense
3.0
42.9
(34.3)
Profit
before tax
68.8
32.3
15.5
Foreign exchange
gain (loss)
0.9
(0.5)
-
Interest
income
(2.5)
(1.9)
(2.1)
Interest
expenses
31.0
30.2
29.8
Operating
profit
98.2
60.1
43.2
Depreciation,
amortization and impairment
128.9
108.7
103.7
Other operational
resulta
10.9
3.7
9.3
Adjusted
EBITDA
238.0
172.5
156.2
a
For the year ended December 31,2018, other operational result consisted of $3.5 million of
restructuring expenses, $2.8 million of litigation reserve, $1.9
million of uncollected receivables, $1.5 million of asset
write-offs related to conversions and store closings, $0.7 million
of IPO transaction costs and $0.5 million of
other expenses and non-recurring items.
For the year ended
December 31, 2017, other operational result consisted of $9.4
million of other operating income resulting from a related party
loan waiver due to Dufry, offset by other operating expenses
including $3.4 million of audit and consulting costs related to
preparatory work in connection with our initial public offering,
$4.1 million of restructuring expenses associated with the World
Duty Free Group acquisition and $5.5 million of other operating
expenses including restructuring and non-recurring
items.
For the year ended
December 31, 2016, other operational result consisted of $8.3
million of restructuring expenses associated with the World Duty
Free Group acquisition and $1.0 million of other expenses and
non-recurring items.
The following is a
reconciliation of Adjusted net profit attributable to equity
holders of the parent to net profit / (loss) attributable to equity
holders of the parent for the periods presented:
IN MILLIONS OF
USD
2018
2017
2016
Net
profit / (loss) attributable to equity holders of the
parent
29.5
(40.4)
23.5
Amortization
related to acquisitionsa
39.4
39.2
38.4
Other operational
resultb
10.9
3.7
9.3
Income tax
adjustmentc
(2.9)
(1.4)
(3.6)
Adjusted
net profit attributable to equity holders of the
parent
76.9
1.1
67.6
a
Although the values
assigned to the concession rights during the purchase price
allocation are fair values, we believe that their additional
amortization doesn't allow a fair comparison with our existing
business previous to the business combination, as the costs of
self-generated intangible assets have been
incurred.
b
For the year ended December 31,2018, other operational result consisted of $3.5 million of
restructuring expenses, $2.8 million of litigation reserve, $1.9
million of uncollected receivables, $1.5 million of asset
write-offs related to conversions and store closings, $0.7 million
of IPO transaction costs and $0.5 million of other expenses and
non-recurring items.
c
Income tax
adjustment represents the impact in income taxes we actually
accrued during the applicable period attributable to other
operational result. This assumption uses an income tax rate of
26.77 % for the adjustment. Amortization expenses related to
acquisitions did not reduce the amount of taxes we paid during the
applicable periods, and therefore there are no corresponding income
tax adjustments in respect of the amortization expense
adjustment.
B.
Capitalization and indebtedness
Not
applicable.
C.
Reasons for the offer and use of proceeds
Not
applicable.
7
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, such as the Zika or Ebola crises, 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.
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.
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.
8
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 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.
9
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.
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.
10
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 excellent 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 184 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 may 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.
11
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 News Group, which includes The News Group L. P.
and TNG, which is a division of Great Pacific Enterprises Inc., 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 –
12
B. Related party
transactions – Transactions with entities controlled 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 2018, 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 2018.
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 2018. Our
duty-free concessions in Vancouver and Toronto generated the
significant majority of our net sales at each location in
2018.
13
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.
14
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.
15
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 a material weakness in our internal control over
financial reporting as part of management’s assessment. If we
are unable to remediate this material weakness, 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.
As part
of management’s assessment of its internal control over
financial reporting for the fiscal year ending December 31, 2018,
management identified a material weakness 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 weakness
identified relates specifically to the procure to pay process and
the related internal controls supporting this area. The
material weakness specifically related to issues around, (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, and review and approval of invoices for payment. The
material weakness did not result in a restatement of our prior year
financial statements. See “Item 15. Controls and
Procedures” for more information.
We
have initiated remedial measures and are taking additional measures
to remediate this material weakness. First, we are continuing to
roll out an enhanced purchase order process to additional key
locations 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. Second, we are
implementing accounts payable software designed to automate and
streamline invoice processing, review and approval workflows for
merchandising and non-merchandising invoices. Third, we implemented
a new invoice payment approval matrix that became operational at
the end of Q4 2018, which is also integrated in the accounts
payable automation software described above. Fourth, we also intend
to strengthen our controls over the vendor set up and maintenance
process by implementing additional controls relating to the
appropriate segregation of duties between vendor set-up and invoice
processing, and by requiring independent review of information
entered into the accounts payable system.
16
However, the
implementation of the measures described above and other measures
we take may not fully address this material weakness in our
internal controls over financial reporting, and therefore we might
not be able to conclude that it has been fully remedied. We believe
it is possible that, had our independent registered public
accounting firm performed an audit of our internal control over
financial reporting in accordance with PCAOB standards, additional
control deficiencies may have been identified. If we fail to
correct this material weakness or if we experience 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 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 system and hiring additional personnel. Any such
action could negatively affect our results of operation 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
Dufry, Hudson, 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.
17
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 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. On December 13,2018, the US tax authority issued draft regulations in relation to
the new law. However, a number of uncertainties remain as to the
interpretation and application of the provisions in the Tax Reform
Legislation and draft 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 draft 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 31,2018, we had federal net operating loss carryforwards of $175.1
million and state net operating loss carryforwards of $99.1
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.
18
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 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 3.0% of our net sales for the year
ended December 31, 2018. 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 31,2018, 42 % 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.
19
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 $83.7 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 4.50 % Senior Notes due 2023 and 2.50 % Senior Notes
due 2024, 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.
20
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, 2018,
we had $492.6 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 7,2019, 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.
21
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.
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 400 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.
22
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, 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 and 2016 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.
23
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.
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.
24
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 7, 2019, we have 39,379,571 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.
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.
25
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.
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, 2019.
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.
26
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.
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 Group,
anchored by our iconic Hudson brand, is committed to enhancing the
travel experience 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. Today we operate in airports, commuter terminals, hotels
and some of the most visited landmarks and tourist destinations in
the world, including the Empire State Building, Space Center
Houston, and United Nations Headquarters. The Company is guided by
a core purpose: to be “The Traveler’s Best
Friend.” We aim to achieve this purpose by serving the needs
and catering to the ever-evolving preferences of travelers through
our product offerings and store concepts. Through our commitment 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 31,2018, we had a diversified portfolio of over 200 concession
agreements, through which we operated 1,028 stores across 88
different transportation terminals and destinations, including
concessions in 24 of the 25 top airports in the continental 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 2,300 stores in 65 countries on six
continents, and we continue to benefit from Dufry’s expertise
and scale in the travel retail market.
We operate travel
essentials and convenience stores, bookstores, duty-free stores,
proprietary and branded specialty stores, electronics stores,
themed stores and quick-service food and beverage outlets under
proprietary and third-party brands. Our proprietary brands
include:
We offer our
customers a broad assortment of products through our duty-paid and
duty-free operations. Within our duty-paid operations, we offer
products in the following categories: media (including books and
magazines), food and beverage (including grab and go, snacks and
confectionary), essentials (including travel accessories,
electronics, health and beauty accessories), destination (including
souvenir, apparel and gifts) and fashion (including apparel,
watches, jewelry, accessories, leather and baggage). Within our
duty-free retail operations, our product categories include perfume
and cosmetics, wine and spirits, confectionary, fashion (including
watches, jewelry, accessories, leather and baggage) and
tobacco.
28
B.
Business overview
For the year ended
December 31, 2018, 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 Group as 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 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, ranging from 200 square-foot retail walls
to 10,000 square-foot stores. Our stores are well organized and
designed to be comfortable and easy-to-shop, and are tailored to
meet the unique specifications of each airport or travel facility.
Additionally, our stores utilize innovative and highly-customized
designs to draw attention to impulse items and maximize sales. As
an example, in 2013 we introduced the new Hudson format, which
brings modern visuals, a different layout and new allocation to
product categories, such as increased space allocation to beverages
and snacks, and reflects the evolving needs and preferences of the
travelers. 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.
29
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
With nearly half
of our stores bearing the Hudson brand and our 30-year heritage in
travel retail, Hudson is one of North America’s leading
travel essentials brands. We believe that we have built a
reputation among travelers as a reliable destination to meet their
needs and preferences 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 personal items, 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, Papyrus, 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 facility, also provides an
attractive retail proposition for our landlords.
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 merchandise that targets regional tastes
and includes city-specific branding and logos. 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.
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Extensive experience and superior scale in our
industry
We believe that
other operators cannot match our over 30 years of industry
experience, 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 and scale reflect our strong credibility with landlords
and other business partners and our knowledge of airport retail
operations and travel concessions.
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 we serve and concession
models we manage. 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, themed stores such as Tech on the Go, Kids
Works and 5th and Sunset, as well as food and beverage outlets such
as Dunkin’ Donuts. As of December 31, 2018, we sold products
in 1,028 stores across 88 locations.
Our concessions
also benefit from multi-year contract terms. For the year ended
December 31, 2018, 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’ needs and preferences. 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 product mix every
season and allows them to be nimble in their approach, including
testing new concepts.
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 team has an average of 21
years of experience at Hudson Group/Dufry. 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
employees 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. 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 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.
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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.
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 and 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 2017 – 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 centers, 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. For example, in 2017, we announced the
opening of five new stores at Hard Rock Hotel & Casino in Las
Vegas, which incorporate our specialty and travel essentials retail
concepts. 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 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 $5.3 billion of passenger spending in 2017.
This market generated sales of approximately 1.4x the combined
airport sales of specialty, news and gifts and duty-free products
in 2017. 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
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.
Pursue accretive acquisitions
We believe that we
have demonstrated our ability to create value by acquiring and
integrating companies into Hudson Group. 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.
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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 December31, 2018, 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 42 international airports
by performance in the United States and Canada were approximately
$9.1 billion for the year ended December 31, 2017. Based on the ARN
Fact Book, as a breakdown of sales at these airports for the year
ended December 31, 2017, food and beverage contributed $5.3 billion
in sales while specialty, news and gifts and duty-free contributed
$1.3 billion, $1.4 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.
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.”
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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 wants
and needs. Increased security encourages travelers to arrive well
before their flights depart, which creates the opportunity and time
for shopping, meals and other activities. 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 2010 and 2017, total passenger traffic in North America
grew at a compound annual growth rate of 3 %. Looking to the
future, ACI projects that annual North American passenger volumes
will surpass 2.0 billion by 2019, and grow at a 3 % compound annual
growth rate between 2018 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.
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.
34
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
Group. 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.
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.
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 Hudson, our
travel essentials and convenience stores offer a wide assortment of
products to the travelling public, including newspapers, magazines
and books, sundries, health and beauty aids, food, snacks and
beverages, souvenirs, electronics and travel accessories. These
shops are operated as stand-alone stores or, in some cases,
together with a coffee take-out concept, such as Dunkin’
Donuts 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.
35
–
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 and Tumi. These stores, which are operated by our
employees, 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.
–
Themed Stores. These stores offer a
broad product range relating to a special theme rather than a
specific product category. Examples include “Kids
Works” shops offering a wide selection of toys, dolls, games,
books and apparel for children, the “$10/$15 boutique”
store concept offering fashion accessories at value prices and
“Discover” stores showcasing local gifts and souvenirs
to promote the local market.
–
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.
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, 2018, 2017 and 2016:
As of December 31,2018, we had over 200 concession agreements and operated 1,028
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
(representing 95 % of our stores), five commuter terminals
(representing 3% of our stores) and six other locations
(representing 2 % of our stores), as illustrated
below:
For the years
ended December 31, 2018, 2017 and 2016, sales in the continental
United States represented 81 %, 81 % and 82 % of our net sales,
respectively, with the balance of our sales generated in
Canada.
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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 December 31, 2018, 2017 and
2016, duty-paid stores represented 76 %, 76 % and 78 % of our net
sales, respectively and duty-free stores represented 24 %, 24 % and
22 % 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, train stations 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, railway stations
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.
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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, 2018, we had 113 associations and
other partnerships with 95 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 News Group, which
includes The News Group L. P. and TNG, which is a division of Great
Pacific Enterprises Inc., 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 and DFS, as well as regional
airport concession operators such as Duty Free America and Stellar
Partners.
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.
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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.
Airport authorities
in the United States frequently require that our airport
concessions meet minimum ACDBE participation requirements. The
Department of Transportation’s (“DOT”)
Disadvantaged Business Enterprise program is implemented by
recipients of DOT Federal Financial Assistance, including airport
agencies that receive federal funding. The ACDBE program is
administered by the FAA, state and local ACDBE certifying agencies
and individual airports. 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 a
disadvantaged business enterprise. 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.
41
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 Group, 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, 2018, we employed 10,094
people, including both full-time and part-time employees. Of these
employees, 8,499 were full-time employees and 1,595 were part time
employees. As of December 31, 2018, 4,276 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 1,028 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.
42
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 selling expenses (including our
concession fees and rents), personnel expenses, general 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) 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.
Net sales
generated by acquired wind-down stores for the years ended December31, 2018, 2017 and 2016 was $1.2 million, $4.8
million and $36.7 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 2010 and
2017, total passenger traffic in North America grew at a compound
annual growth rate of 3 %. Annual North American passenger volumes
were greater than 1.8 billion for the year ended December 31, 2017,
and ACI projects that annual North American passenger volumes will
grow at a 3 % compound annual growth rate between 2018 and 2026,
surpassing 2.0 billion by 2019.
–
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. In the past, we have sought 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.
43
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 are scheduled to expire in 2019 represent
approximately 11 % of our net sales for the year ended December 31,2018.
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.
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.
44
The following
table sets forth certain data for each of the eight fiscal quarters
from January 1, 2017 through December 31, 2018. 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) 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) 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 selling expenses, personnel expenses,
general expenses and other periodic expenses associated with our
operations.
Selling Expenses
Concession fees
and rents represent the substantial majority of our selling
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 selling expenses. 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. Where the
minimum payment is adjusted based on prior year total rents, it
usually represents between 80 – 90 % of prior year total
concession expense. 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.
45
Selling expenses
also include 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
concession and rental income and commercial services and other
selling income. At certain of our concessions, we sublease a
portion of our retail space, and we receive concession and rental
income from subtenants, which we record as concession and rental
income.
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. 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.”
General expenses
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 $15.2 million,
$50.6 million and $50.1 million for the years ended December 31,2018, 2017 and 2016, 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 January1, 2016, we would have been charged the lower amounts of
$14.1
million instead of $50.6 million and $13.6 million instead of $50.1
million for the years ended December 31, 2017 and 2016,
respectively, which would have resulted in higher earnings before
taxes in each period.
General and
administrative expenses also include repairs and maintenance,
professional fees, office and warehouse rent 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 general and
administrative expenses have increased as we hired more personnel
and engaged outside consultants.
46
Depreciation, amortization and impairment
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.
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.
Interest expense
Interest expense
primarily consists of expenses related to borrowings from Dufry. As
of December 31, 2018, we had $492.6 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.”
Income tax
Income tax
expenses are 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 31,2018, we had deferred tax assets of $43.2 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, 2018, compared to the year ended December 31,2017:
FOR THE YEAR
ENDED
DECEMBER
31,
PERCENTAGE
CHANGE
IN MILLIONS OF USD
2018
2017
in
%
Turnover
1,924.2
1,802.5
6.8
Cost of
sales
(698.5)
(680.3)
2.7
Gross
profit
1,225.7
1,122.2
9.2
Selling
expenses
(445.3)
(421.2)
5.7
Personnel
expenses
(411.1)
(371.3)
10.7
General
expenses
(131.4)
(156.9)
(16.3)
Share of result of
associates
0.1
(0.3)
133.3
Depreciation,
amortization and impairment
(128.9)
(108.7)
18.6
Other operational
result
(10.9)
(3.7)
194.6
Operating
profit
98.2
60.1
63.4
Interest
expenses
(31.0)
(30.2)
2.6
Interest
income
2.5
1.9
31.6
Foreign exchange
gain / (loss)
(0.9)
0.5
(280.0)
Profit
before tax
68.8
32.3
113.0
Income
tax
(3.0)
(42.9)
(93.0)
Net
profit / (loss)
65.8
(10.6)
720.8
NET
PROFIT / (LOSS) ATTRIBUTABLE TO
Equity holders of
the parent
29.5
(40.4)
173.0
Non-controlling
interests1
36.3
29.8
21.8
1
Net profit/(loss)
to non-controlling interests excludes expenses payable by us which
are not attributable to non-controlling interests (which primarily
consists of 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.
Turnover
Turnover increased
by 6.8 % to $1,924.2 million for the year ended December 31, 2018
compared to $1,802.5 million in 2017. Net sales represented 97.7 %
of turnover for 2018, with advertising income representing the
remainder. Net sales increased by $119.1 million, or 6.8 %, to
$1,879.9 million.
Organic net sales
growth was 7.0 % for the year ended December 31, 2018 and
contributed $122.8 million of the increase in net sales.
Like-for-like growth was 3.7 % and contributed $60.8 million of the
increase in net sales. On a constant currency basis, like-for-like
growth was 3.7 %. The increase in like-for-like growth was
primarily the result of increases in the overall number of
transactions, as well as average sales per transaction. Net new
stores and expansions growth contributed $62.0 million of the
increase in net sales, primarily as a result of opening new stores.
This growth was partially offset by a decrease of $3.6 million in
net sales of acquired wind-down stores.
Gross profit
Gross profit
reached $1,225.7 million for the year ended December 31, 2018 from
$1,122.2 million for the prior year. Our gross profit margin
increased to 63.7 % for 2018 compared to 62.3 % in 2017, primarily
due to improved vendor terms and sales mix shift to higher margin
categories. The improved vendor terms included benefits from (i)
improved product pricing and (ii) a change in the form of vendor
allowances, in which vendor support now comes in the form of a
reduction in cost of sales, instead of advertising
income.
Selling expenses
Selling expenses
were $445.3 million for the year ended December 31, 2018, compared
to $421.2 million for 2017. Concession and other periodic fees paid
to airport authorities and other travel facility landlords in
connection with our retail operations made up 92.2 % of the selling
expenses for the year ended December 31, 2018. Selling expenses declined
to 23.1 % of turnover for the year ended December 31, 2018,
compared to 23.4 % for the prior year, primarily due to a rent
reduction in one of our concession contracts. For the year ended
December 31, 2018, concession and rental income amounted to $12.5
million compared to $11.6 million for
2017.
48
Personnel expenses
Personnel expenses
increased to $411.1 million for the year ended December 31, 2018
from $371.3 million in 2017. As a percentage of turnover, personnel
expenses increased to 21.4% for 2018 compared to 20.6 % for 2017.
The increase in personnel expenses was primarily attributable to
the opening of new locations, wage increases and additional
personnel expense upon becoming a public company.
General expenses
General expenses
decreased to $131.4 million for the year ended December 31, 2018
compared to $156.9 million in the prior year. As a percentage of
turnover, general expenses decreased to 6.8 % in 2018 from 8.7 % in
2017. Our general expenses declined mainly due to lower franchise
fees as a result of the amended franchise fee structure with Dufry
Group, which was effective from January 1, 2018. Partially
offsetting the decline was an increase in professional fees upon
becoming a public company.
Depreciation, amortization and impairment
Depreciation,
amortization and impairment increased to $128.9 million for the
year ended December 31, 2018 compared to $108.7 million for 2017.
Depreciation reached $69.2 million for the year ended December 31,2018, compared to $64.5 million for the prior year. Amortization
increased to $45.1 million for the year ended December 31, 2018
compared to $44.0 million for 2017. We recorded net impairments of
$14.6 million in 2018, compared to $0.2 million in the prior year,
which primarily related to a non-core hotel location that was
performing below expectations. See note 14 to our audited
Consolidated Financial Statements for further details. The higher
depreciation charge in 2018 was primarily due to capital
investments in 2017 relating to renovating existing locations and
opening new locations.
Other operational result
Other operational
result was $10.9 million of expense for the year ended December 31,2018, compared to $3.7 million of expense in 2017. The increase in
expense was primarily due to a prior year $9.4 million benefit from
the forgiveness of certain intercompany payables due to Dufry. This
was partially offset by a $2.7 million decrease in IPO preparation
and transaction costs.
Interest expenses
Interest expenses
increased slightly to $31.0 million for the year ended December 31,2018 compared to $30.2 million for 2017.
Income tax benefit/ expense
Income taxes for
the year ended December 31, 2018 amounted to expense of $3.0
million compared to $42.9 million for 2017. The main components of
this change were (i) the $10.3 million release of valuation
allowance against net operating losses, (ii) offset by additional
tax related to U.S. Base Erosion Anti-Abuse Tax
(“BEAT”) of $2.3 million and (iii) the $40.2 million of
expense in 2017 as a result of the reduction in the U.S. federal
corporate income tax rate as part of U.S. tax reform. The total tax
expense for the year ended December 31, 2018 consisted of $9.8
million of current income tax expense incurred mainly in connection
with our Canadian business, partially offset by $6.8 million of
deferred tax benefit principally due to the release of valuation
allowance offset by utilization of NOLs.
The following
table summarizes changes in financial performance for the year
ended December 31, 2017, compared to the year ended December 31,2016:
FOR THE YEAR
ENDED
DECEMBER
31,
PERCENTAGE
CHANGE
IN MILLIONS OF USD
2017
2016
in
%
Turnover
1,802.5
1,687.2
6.8
Cost of
sales
(680.3)
(645.3)
5.4
Gross
profit
1,122.2
1,041.9
7.7
Selling
expenses
(421.2)
(395.7)
6.4
Personnel
expenses
(371.3)
(337.4)
10.0
General
expenses
(156.9)
(151.9)
3.3
Share of result of
associates
(0.3)
(0.7)
(57.1)
Depreciation,
amortization and impairment
(108.7)
(103.7)
4.8
Other operational
result
(3.7)
(9.3)
(60.2)
Operating
profit
60.1
43.2
39.1
Interest
expenses
(30.2)
(29.8)
1.3
Interest
income
1.9
2.1
(9.5)
Foreign exchange
gain / (loss)
0.5
-
-
Profit
before tax
32.3
15.5
108.4
Income
tax
(42.9)
34.3
(225.1)
Net
profit / (loss)
(10.6)
49.8
(121.3)
NET
PROFIT / (LOSS) ATTRIBUTABLE TO
Equity holders of
the parent
(40.4)
23.5
(271.9)
Non-controlling
interests1
29.8
26.3
13.3
1
Net profit/(loss)
to non-controlling interests excludes expenses payable by us which
are not attributable to non-controlling interests (which primarily
consists of 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.
Turnover
Turnover increased
by 6.8 % to $1,802.5 million for the year ended December 31, 2017
compared to $1,687.2 million in 2016. Net sales represented 97.7 %
of turnover for the 2017 period, with advertising income
representing the remainder. Net sales increased by $110.7 million,
or 6.7 %, to $1,760.8 million.
Organic growth was
8.8 % for the year ended December 31, 2017 and contributed $142.6
million of the increase in net sales. Like-for-like growth was 4.8
% and contributed $72.6 million of the increase in net sales. On a
constant currency basis, like-for-like growth was 4.4 %. The
increase in like-for-like growth was primarily the result of
increases in average sales per transaction, with the remainder
attributable to an increase in the overall number of transactions.
Net new stores and expansions growth contributed $70 million of the
increase in net sales, primarily as a result of opening new stores.
This growth was partially offset by a decrease of $31.9 million in
net sales of acquired wind-down stores.
Gross profit
Gross profit
reached $1,122.2 million for the year ended December 31, 2017 from
$1,041.9 million for the prior year. Our gross profit margin
increased to 62.3 % for 2017 compared to 61.8 % in 2016, primarily
due to sales mix shift from lower margin categories to higher
margin categories, and gross margin synergies related to our
implementation in 2016 of the Hudson supply chain at the acquired
World Duty Free stores, most of which are duty-paid stores. Our
gross profit margin for our duty-paid sales was only slightly
higher than the gross profit margin for duty-free sales during
these periods which modestly impacted our gross profit margin for
the year ended December 31, 2017, as both margins increased
slightly and duty-paid sales and duty-free sales represented 75.8 %
and 24.2 % of our net sales, respectively, for the same
period.
50
Selling expenses
Selling expenses
reached $421.2 million for the year ended December 31, 2017,
compared to $395.7 million for 2016. Concession and other periodic
fees paid to airport authorities and other travel facility
landlords in connection with our retail operations made up 92 % of
the selling expenses for the year ended December 31, 2017. Selling
expenses amounted to 23.4 % of turnover for the year ended December31, 2017, compared to 23.5 % for the prior year. Our selling
expenses as a percentage of turnover were lower for the year ended
December 31, 2017 due to a $0.7 million reversal of provision
related to the acquisition of Nuance. In addition, we consolidated
our credit card processors which contributed to lower credit card
commission costs as a percentage of net sales. For the year ended
December 31, 2017, concession and rental income amounted to $11.6
million compared to $11.9 million for 2016.
Personnel expenses
Personnel expenses
increased to $371.3 million for the year ended December 31, 2017
from $337.4 million in 2016. As a percentage of turnover, personnel
expenses increased to 20.6 % for 2017 compared to 20.0 % for 2016.
The increase in personnel expenses in absolute terms was primarily
attributable to opening of new locations and the increase as a
percentage of turnover was primarily due to medical benefits and
wage increases for hourly paid employees.
General expenses
General expenses
increased to $156.9 million for the year ended December 31, 2017
compared to $151.9 million in the prior year. As a percentage of
turnover, general expenses decreased to 8.7 % in 2017 from 9.0 % in
2016. Our general expenses as a percentage of turnover were lower
for the year ended December 31, 2017 mainly due to lower franchise
fees due to an affiliate of Dufry following the integration of the
acquired World Duty Free Group into the Dufry franchise fee
structure.
Depreciation, amortization and impairment
Depreciation,
amortization and impairment increased to $108.7 million for the
year ended December 31, 2017 compared to $103.7 million for 2016.
Depreciation reached $64.5 million for the year ended December 31,2017, compared to $61.4 million for the year ended December 31,2016. Amortization increased to $44.0 million for the year ended
December 31, 2017 compared to $42.3 million for the prior year.
There was $0.2 million impairment for the year ended December 31,2017 and no impairment for the year ended December 31, 2016. The
higher depreciation charge in 2017 was primarily due to higher than
historical average capital investments in 2016 relating to
renovating existing locations, opening new locations and expansions
to our offices in New Jersey.
Other operational result
Other operational
result decreased to $3.7 million for the year ended December 31,2017 compared to $9.3 million in 2016. These expenses primarily
related to $3.4 million of audit and consulting costs related to
preparatory work in connection with our initial public offering,
$4.1 million of restructuring expenses associated with the World
Duty Free Group acquisition and $5.5 million of other operating
expenses including restructuring and non-recurring items, and were
offset by $9.4 million of other operating income resulting from a
related party loan waiver due to Dufry.
Interest expenses
Interest expenses
increased slightly to $30.2 million for the year ended December 31,2017 compared to $29.8 million for 2016.
Income tax benefit/ expense
Income taxes for
the year ended December 31, 2017 amounted to an expense of $42.9
million compared to a benefit of $34.3 million for 2016. The main
components of this change were (i) a $40.2 million expense as a
result of the reduction in the U.S. federal corporate income tax
rate as part of U.S. tax reform and (ii) a non-recurring tax
benefit for 2016 from a reduction of the valuation allowance
against deferred tax assets related to the U.S. operations of World
Duty Free Group. The total tax expense of the year ended December31, 2017 consisted of $8.5 million current income tax expense
incurred mainly in connection with our Canadian business and $34.4
million deferred tax expense principally due to the impact of the
U.S. tax reform.
51
B.
Liquidity and capital resources
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, 2018
and 2017 was $492.6 million and $520.4 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 do not
anticipate entering into additional third-party credit facilities
for our working capital, and expect any future working capital
requirements to be funded by 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, 2018, we had a deposit of $61.2 million compared to an
overdraft of $13.1 million at December 31, 2017, in the cash pool
accounts. The deposit was mainly a result of $60.1 million of
pre-IPO restructuring proceeds from the sale of our ownership
interest in Dufry America Inc. to the Dufry Group. 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 June 28, 2018,
Hudson Ltd. granted awards in the form of restricted share units
(“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 expects to deliver shares in connection with such awards
with 50 % being delivered in first quarter 2019 and 50 % being
delivered in first quarter 2020. The Company purchased Class A
common shares in the market to settle the first tranche of awards
under the RSU Plan.
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 newly created
Hudson Ltd. Long-Term Incentive Plan (“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 cash 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.
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 and occasional upfront payments
upon the granting of new concessions which are capitalized as
intangible assets and amortized over the life of the concession
unless otherwise impaired.
52
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
2018
2017
2016
Tangible capital
expenditures
65.1
79.6
88.3
Intangible capital
expenditures
4.2
8.2
5.7
Total
69.3
87.8
94.0
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
2018
2017
2016
Net cash flows from
operating activities
232.7
130.8
169.8
Net cash flows used
in investing activities
(69.1)
(86.1)
(92.4)
Net cash flows used
in financing activities
(64.8)
(95.8)
(51.3)
Currency
translation
(2.0)
0.9
1.1
Increase
/ (decrease) in cash and cash equivalents
96.8
(50.2)
27.2
Cash at the
beginning of period
137.4
187.6
160.4
Cash at the end of
period
234.2
137.4
187.6
Cash flows from operating activities
Net cash flows
from operating activities were $232.7 million for the year ended
December 31, 2018, an increase of $101.9 million
compared to the prior year period. The increase in net cash flows
from operating activities mainly resulted from an improvement in
operating performance and a decrease in franchise payments made to
Dufry due to timing.
Net cash flows
from operating activities were $130.8 million for the year ended
December 31, 2017, a decrease of $39.0 million
compared to 2016. The decrease in net cash flows provided from
operating activities mainly resulted from paying an outstanding
balance of franchise fees to Dufry.
Cash flows used in investment activities
Net cash used in
investing activities decreased to $69.1 million for the year ended
December 31, 2018, as compared to $86.1 million for 2017. The
decrease was primarily due to lower capital
expenditures.
Net cash used in
investing activities decreased to $86.1 million in 2017, as
compared to $92.4 million for 2016, primarily due to lower capital
expenditures.
Cash flows used in financing activities
Net cash used in
financing activities decreased by $31.0 million for the year ended
December 31, 2018, to $64.8 million compared to $95.8 million in
2017. This decrease in cash used was primarily due to the $60.1
million pre-IPO restructuring proceeds from an affiliated entity
within the Dufry Group, partially offset by an increase in
financial debt repayments to Dufry.
Net cash used in
financing activities increased by $44.5 million for the year ended
December 31, 2017, to $95.8 million compared to $51.3 million in
2016. This increase in cash used was primarily due to repayment of
financial debt to Dufry.
53
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, 2018,
management identified a material weakness in our internal control
over financial reporting, as defined in the SEC guidelines for
public companies. The material weakness identified relates
specifically to the procure to pay process and the related internal
controls supporting this area. 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 this material
weakness. See “Item 3. Key Information – D. Risk
factors – Risks relating to our business – We have
identified a material weakness in our internal control over
financial reporting as part of management’s assessment. If we
are unable to remediate this material weakness, 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 31,2018 and 2017, we owed $492.6 million and $520.4 million,
respectively, to Dufry pursuant to long-term financial loans
(excluding current portion). We were charged $30.2 million, $29.5
million and $29.1 million in each of the years ended December 31,2018, 2017 and 2016, respectively, in interest to Dufry. The
weighted-average interest rate on our loans from Dufry for each of
the years ended December 31, 2018, 2017 and 2016 was 5.7%, 5.7 %
and 5.9 %, respectively.
Our indebtedness
owed to Dufry at December 31, 2018 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.
3.6600%
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 Group, 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
%.
54
Restrictions on our indebtedness
We are subject to
certain of the covenants contained in Dufry’s 4.50 % Senior
Notes due 2023 (the “2023 Dufry Notes”) and 2.50 %
Senior Notes due 2024 (the “2024 Dufry Notes,” and
together with the 2023 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 $50.0 million in the case of the 2023 Dufry
Notes, or $75.0 million in the case of the 2024 Dufry Notes, then
we or our subsidiaries will be required to guarantee such notes;
provided however, that in the case of the 2024 Dufry Notes, 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. In addition, the amount of debt that we may be able to
incur from third parties is limited by the terms of the 2023 Dufry
Notes. 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, 2018,
$37.1 million was outstanding (including letters of credit) and
$7.9 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, 2018, $32.6 million was outstanding (including letters of
credit) and $7.4 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 operating and
capital lease obligations as of December 31, 2018:
PAYMENTS DUE BY
PERIOD
IN MILLIONS OF
USD
TOTAL
LESS THAN 1 YEAR
1 – 3
YEARS
4 – 5
YEARS
THEREAFTER
Long-term debt obligations 1
660.3
39.2
59.5
466.5
95.1
Operating and capital lease obligations
2
1,260.9
216.9
389.2
296.3
358.5
TOTAL
1,921.2
256.1
448.7
762.8
453.6
1
Includes aggregate
principal amounts of financial debt outstanding to Dufry at
December 31, 2018, and interest payable
thereon.
2
Represents
management estimates of future fixed MAG payments under our
concession agreements as of December 31, 2018, as well as fixed
storage, office and warehouse rents. For the fiscal years ended
December 31, 2018, 2017, and 2016, we recorded concession fees of
$423.1 million, $399.1 million and $375.3 million, respectively, of
which $129.7 million, $136.7 million and $168.7 million,
respectively, consisted of variable rent.
Notwithstanding
the maturity date of the existing financial debt outstanding to
Dufry, we intend to make repayments of $32.0 million, $67.7 million
and $355.7 million within the next year, one to three year period
and four to five year period, respectively.
55
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, 2018. 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.
56
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.
57
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
Effective for the
annual period beginning January 1, 2019, the new accounting
standard, IFRS 16, replaces existing guidance and eliminates the
current dual accounting model for lessees, which distinguishes
between on-balance sheet finance leases and off-balance sheet
operating leases, and introduces a single, on-balance sheet
accounting model. While we currently treat operating leases, such
as concession or rental agreements, as selling expenses or general
expenses, under IFRS 16 substantially all leases will become
on-balance sheet right-of-use assets with corresponding lease
liabilities on the statement of financial position. As a result, we
will be recording the fair value of the fixed or minimum payment
commitments for concessions and rents owed until the end of the
respective agreement as a lease obligation, while a corresponding
right-of-use asset will be capitalized in the same amount as the
lease liability. We expect the adoption of IFRS 16 will materially
increase the assets and liabilities on our statement of financial
position and affect our results of operations. In addition, there
will be presentation changes in the statement of cash flows,
however there is no impact on our actual cash flows.
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.
58
F.
Tabular disclosure of contractual obligations
The following
table presents our long-term debt obligations and operating and
capital lease obligations as of December 31, 2018:
PAYMENTS DUE BY
PERIOD
IN MILLIONS OF
USD
TOTAL
LESS THAN 1 YEAR
1 – 3
YEARS
4 – 5
YEARS
THEREAFTER
Long-term debt obligations 1
660.3
39.2
59.5
466.5
95.1
Operating and capital lease obligations
2
1,260.9
216.9
389.2
296.3
358.5
TOTAL
1,921.2
256.1
448.7
762.8
453.6
1
Includes aggregate
principal amounts of financial debt outstanding to Dufry at
December 31, 2018, and interest payable
thereon.
2
Represents
management estimates of future fixed MAG payments under our
concession agreements as of December 31, 2018, as well as fixed
storage, office and warehouse rents. For the fiscal years ended
December 31, 2018, 2017, and 2016, we recorded concession fees of
$423.1 million, $399.1 million and $375.3 million, respectively, of
which $129.7 million, $136.7 million and $168.7 million,
respectively, consisted of variable rent.
Notwithstanding
the maturity date of the existing financial debt outstanding to
Dufry, we intend to make repayments of $32.0 million, $67.7 million
and $355.7 million within the next year, one to three year period
and four to five year period, respectively.
G.
Safe harbor
See
“Forward-Looking Statements.”
59
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
69
Chairman of the
Board of Directors
2017
Class
III
(term expires in
2021)
Julián
Díaz González
60
Deputy Chairman
of the
Board of Directors
2017
Class
III
(term expires in
2021)
James
Cohen
60
Deputy Chairman
of the
Board of Directors
2018
Class
II
(term expires in
2019)
Roger
Fordyce
63
Chief Executive
Officer and Director
2019
Class
III
(term expires in
2021)
Mary J. Steele
Guilfoile
64
Director
2018
Class
II
(term expires in
2019
Heekyung (Jo)
Min
60
Director
2018
Class
I
(term expires in
2020)
Joaquín
Moya-Angeler Cabrera
69
Director
2018
Class
I
(term expires in
2020)
James E.
Skinner
65
Director
2018
Class
II
(term expires in
2019)
Eugenia M.
Ulasewicz
65
Director
2018
Class
I
(term expires in
2020
Adrian
Bartella
43
Chief Financial
Officer
2017
–
Brian
Quinn
60
Executive Vice
President and Chief Operating Officer
2017
–
Hope
Remoundos
64
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).
60
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 Group 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 Group 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 Group in 1990. Prior to joining Hudson Group 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 audit committee, The Interpublic Group of Companies,
Inc. since 2007, currently serving as the chair of the compensation
and governance committees, 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.
Heekyung (Jo) Min
is a Director of the Company. Ms. Min has been a member of the
Dufry AG board of directors since 2016, and has been serving as
Executive Vice President at CJ Cheiljedang Corporation, focusing on
Corporate Social Responsibility and Sustainability, for a
publicly-listed Korean conglomerate since 2011. Ms. Min previously
served as Director General of Incheon Free Economic Zone in Korea
from 2007 to 2010, as Country Advisor of Global Resolutions in
Korea in 2006 and as Executive Vice President of Prudential
Investment and Securities Co., Korea from 2004 to 2005. Ms. Min
holds an undergraduate degree from Seoul National University and a
master’s degree in business administration from Columbia
Business School. Ms. Min is a member of the Board of Directors of
CJ Welfare Foundation and a member of Honorary Advisory Board of
Asia New Zealand Foundation.
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 since 1989, Avalon Private Equity since 1999 and
Corporación Tecnológica Andalucia since 2005. Mr.
Moya-Angeler Cabrera is currently a member of the board of
directors of La Quinta Group (chairman), Palamon Capital Partners,
Board of Trustees University of Almeria (chairman), Fundación
Mediterránea (chairman), Redsa S.A., Inmoan SL, Avalon Private
Equity, 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.
61
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.,
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
and Ares Commercial Real Estate Corporation since 2016. 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, Signet Jewelers Ltd. since 2013
and Vince Holding Corporation since 2014. Ms. Ulasewicz holds a
bachelor’s degree from the University of Massachusetts,
Amherst.
Adrian Bartella is
the Chief Financial Officer. Mr. Bartella has over 13 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 Group 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 Group from
1992 to 1996. Prior to that, he was General Manager of Hudson
Group’s LaGuardia Airport operations. Prior to joining Hudson
Group 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 Group from 2000 to 2016, and held positions as Director and
Vice President in Sales and Marketing from 1992 to 2000. Prior to
joining Hudson Group 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 Group 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 Group 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.
62
Board of Directors
Our bye-laws
provide that our board of directors shall consist of nine
directors. We have nine directors, three 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 2018 was $17.0 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 2018. Total amount of compensation earned and
benefits in kind provided to our non-employee directors for the
fiscal year 2018 was $1.4 million.
Changes to our remuneration structure in 2018
New 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 award shares in February 2019
out of treasury shares and the remaining 50 % will be delivered in
first quarter 2020. The Company intends to issue new shares or
purchase Class A common shares in the market to settle the
remaining awards under the RSU Plan.
New 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 cash 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.
Certain members of
our senior management were granted PSU awards from Dufry in each of
the years ended December 31, 2017 and 2016. Should these Dufry PSU
awards vest, they will entitle the holders to receive shares of
Dufry.
63
C. Board
practices
Audit committee
The audit
committee, which consists of Ms. Guilfoile, Mr. Skinner and Ms.
Ulasewicz, 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 and Ms. Ulasewicz 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 and Ms. Ulasewicz 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 and Mr. Moya-Angeler Cabrera,
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.
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.
64
D. Employees
We are responsible
for hiring, training and management of employees at each of our
retail locations. As of December 31, 2018, we employed 10,094
people, including both full-time and part-time employees (as
compared to 9,641 at December 31, 2017). Of these employees, 8,499
were full-time employees and 1,595 were part-time employees. As of
December 31, 2018, 4,276 of our employees were subject to
collective bargaining agreements.
E. Share ownership
As of March 7,2019, members of our board of directors and our senior management
held as a group 57,724 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 7, 2019.
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
POWER
1
EXECUTIVE OFFICERS
AND DIRECTORS:
Juan Carlos Torres
Carretero
–
–
–
–
–
Julián
Díaz González
–
–
–
–
–
James
Cohen
–
–
–
–
–
Roger
Fordyce
*
*
–
–
*
Mary J. Steele
Guilfoile
–
–
–
–
–
Heekyung (Jo)
Min
*
*
–
–
*
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.”
65
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 March 7,2019:
SHARES
BENEFICIALLY OWNED
NAME OF BENEFICIAL
OWNER
CLASS A COMMON
SHARES
%
CLASS B COMMON
SHARES
%
PERCENTAGE OF TOTAL VOTING
POWER 1
Dufry AG 2
-
-
53,093,315
100.00
93.1
Clearbridge Capital Management
3
3,462,846
8.79
-
-
0.6
Baron Capital Management
4
3,250,000
8.25
-
-
0.6
Brown Advisory
5
3,169,773
8.05
-
-
0.6
JPMorgan Chase & Co.
6
3,123,707
7.93
-
-
0.5
Neuberger Berman Investment Advisers, LLC 7
3,121,490
7.93
-
-
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 with the SEC on February 14, 2019. 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, 2019,
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 3,250,000 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.
5
As
reported on Form 13G filed with the SEC on February 11, 2019,
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 3,169,773 Class A common shares, BALLC may be
deemed to beneficially own 3,135,683 Class A common shares and
BIATC may be deemed to beneficially own 34,090 Class A common
shares. The address for each of BAI, BIATC, and BALLC is 901 South
Bond Street, Suite #400, Baltimore, Maryland21231.
6
As
reported on Form 13G with the SEC on January 10, 2019. The address
of JP Morgan Chase & Co is 270 Park Avenue, New York, NY10017.
7
As
reported on Form 13G filed with the SEC on February 14, 2019,
consists of Class A common shares owned by Neuberger Berman Group
LLC ("NBG"), Neuberger Berman Investment Advisers LLC ("NBIA"),
Neuberger Berman Alternative Funds ("NBAF"), and Neuberger Berman
Long Short Fund ("NBLSF"). Each of NBG and NBIA may be deemed to
beneficially own 3,121,490 Class A common shares. Each of NBAF and
NBLSF may be deemed to beneficially own 1,220,000 Class A common
shares. The address for each of NBG, NBIA, NBAF, and NBLSF is 1290
Avenue of the Americas, New York, NY10104.
66
As of March 7,2019, we had 2 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
39,417,765 of our Class A common shares, representing approximately
42.6 % 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.
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, 2018, 2017
and 2016, $82.5 million, $67.4 million and $64.5 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 $15.2
million, $50.6 million and $50.1 million in net expenses for all
such services, respectively, for the years ended December 31, 2018,
2017 and 2016.
Treasury operations
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. 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 31,2018, 2017 and 2016, we owed $492.6 million, $520.4 million and
$475.2 million, respectively, to Dufry pursuant to long-term
financial loans (excluding current portion). We were charged $30.2
million, $29.5 million and $29.1 million in each of the years ended
December 31, 2018, 2017 and 2016, respectively, in interest to
Dufry. The weighted-average annual interest rate on our loans from
Dufry for the years ended December 31, 2018, 2017 and 2016 was 5.7
%, 5.7 % and 5.9 %, respectively per year. For further details, see
“Item 5. Operating and Financial Review and Prospects –
B. Liquidity and capital resources –
Indebtedness.”
We expect to
continue to 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.”
67
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.
68
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, 2018, 2017 and 2016, we paid $18.9 million,
$20.7 million and $20.6 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 20 % 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
69
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.
70
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.”
71
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 which were effected in connection with the completion
of our initial public offering. 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 with the SEC as exhibits to the
registration statement filed in connection with our initial public
offering.
72
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 7, 2019, there were issued and outstanding 39,379,571 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 7, 2019, 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.
73
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.
74
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.
75
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.
76
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.
77
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.
78
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.
79
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.
80
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.
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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.
82
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.
83
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 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.
84
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 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.
85
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, 2018 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 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.
86
In addition, if we
were a PFIC or, with respect to 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, under proposed regulations,
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.
87
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.
88
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, 2018, 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, 2018, our disclosure
controls and procedures were not effective due to the material
weakness in our internal control over financial reporting
identified in the procure to pay process as 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
Our 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.
89
Our
management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2018. 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, 2018, our internal control over financial reporting was not
effective due to the identified material weakness, 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 a material weakness in internal control over financial
reporting as of December 31, 2018 over the procure to pay process
and the related internal controls supporting this area. The
material weakness related to issues around: (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, and review and approval of invoices for payment. The
material weakness did not result in a restatement of our prior year
financial statements.
C.
Remediation Efforts to Address Material Weakness
To remediate the
material weakness in our internal controls over financial reporting
described above, we have initiated remedial measures and are taking
additional measures to remediate this material weakness. First, we
are continuing to roll out an enhanced purchase order process to
additional key locations 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
invoices are appropriately segregated. Second, we are implementing
accounts payable software designed to automate and streamline the
invoice processing, review and approval workflows for merchandising
and non-merchandising invoices. Third, we implemented a new invoice
payment approval matrix that became operational at the end of Q4
2018, which is also integrated in the accounts payable automation
software described above. Fourth, we also intend to strengthen our
controls over the vendor set up and maintenance process by
implementing additional controls relating to the appropriate
segregation of duties between vendor set-up and invoice processing,
and by requiring independent review of information entered into the
accounts payable system.
D.
Attestation report of the
registered public accounting firm
Not required
because the Company is not an “accelerated filer” or a
“large accelerated filer” as defined in 17
CFR §240.12b-2.
E.
Changes in internal control over financial reporting
We
have taken various measures to remediate the previously identified
material weakness reported on our Form 20-F for the period ending
December 31, 2017, related to the presentation of a business
combination transaction in the December 31, 2014 statement of cash
flows. Such measures taken include, (1) hiring personnel with
technical accounting and reporting expertise;(2) designing
additional controls around identification, documentation and
application of technical accounting guidance, including, additional
management review controls over business combinations accounting
and presentation; (3) continuing to educate review control owners
regarding review procedures performed over estimates and
assumptions;(4) implementation of additional supervision and review
activities by qualified personnel over preparation and approval of
financial statements and disclosures including the statement of
cash flows; (5) and the development and use of checklists and
research tools to assist in compliance with IFRS and SEC
regulations.
90
The
Company did not have specific transactions that qualified for
business combination accounting during the fiscal year 2018. The
remediation efforts were primarily focused on the overall
strengthening of the technical accounting capabilities to
facilitate the application of appropriate accounting guidance over
complex accounting issues including potential business
combinations. We completed the implementation of our remediation
plan during the fiscal year 2018. The newly implemented controls
have been operating for a sufficient period of time and were
determined to be operating effectively.
As a
result of the remediation activities and controls in place as of
December 31, 2018 described above, we have remediated the material
weakness that was disclosed in our Form 20-F for the period ending
December 31, 2017.
Except
as disclosed above, and, in the remediation efforts to address the
material weakness over the procure to pay process, there have been
no changes in internal control over financial reporting during the
year ended December 31, 2018 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 and Ms. Ulasewicz. 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 and Ms. Ulasewicz 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 and Ms. Ulasewicz 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 2018 and
2017.
IN MILLIONS OF
USD
2018
2017
Audit fees
1.9
1.8
Audit-related
fees
0.9
3.1
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 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.
91
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.
Tax fees
Tax fees are fees
billed for professional services for tax compliance, tax advice and
tax planning. There were no tax fees in 2018 or 2017.
All other fees
There were no
other fees in 2018 or 2017.
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.
92
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.
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-65 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 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 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, 2018 and
2017, 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, 2018, 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, 2018 and 2017, and the
results of its operations and its cash flows for each of the three
years in the period ended December 31, 2018, in conformity with
International Financial Reporting Standards as issued by the
International Accounting Standards Board.
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 Public Company
Accounting Oversight Board (United States) (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.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express
no such opinion.
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, 2018, 2017 and 2016
IN MILLIONS OF
USD (EXCEPT PER SHARE AMOUNTS)
NOTE
2018
2017
2016
Turnover
6
1,924.2
1,802.5
1,687.2
Cost of
sales
(698.5)
(680.3)
(645.3)
Gross
profit
1,225.7
1,122.2
1,041.9
Selling
expenses
7
(445.3)
(421.2)
(395.7)
Personnel
expenses
8
(411.1)
(371.3)
(337.4)
General
expenses
9
(131.4)
(156.9)
(151.9)
Share of result of
associates
16
0.1
(0.3)
(0.7)
Depreciation,
amortization and impairment
10
(128.9)
(108.7)
(103.7)
Other operational
result
11
(10.9)
(3.7)
(9.3)
Operating
profit
98.2
60.1
43.2
Interest
expenses
12
(31.0)
(30.2)
(29.8)
Interest
income
12
2.5
1.9
2.1
Foreign exchange
gain / (loss)
(0.9)
0.5
-
Profit
before tax
68.8
32.3
15.5
Income
tax
13
(3.0)
(42.9)
34.3
Net
profit / (loss)
65.8
(10.6)
49.8
OTHER
COMPREHENSIVE INCOME
Exchange
differences on translating foreign operations
(20.1)
26.8
12.9
Total
other comprehensive income / (loss) that may be reclassified to
profit or loss in subsequent periods, net of tax
(20.1)
26.8
12.9
Total
other comprehensive income / (loss), net of tax
(20.1)
26.8
12.9
Total
comprehensive income / (loss), net of tax
45.7
16.2
62.7
NET
PROFIT / (LOSS) ATTRIBUTABLE TO
Equity holders of
the parent
29.5
(40.4)
23.5
Non-controlling
interests
36.3
29.8
26.3
TOTAL
COMPREHENSIVE INCOME ATTRIBUTABLE TO
Equity holders of
the parent
9.4
(13.6)
36.4
Non-controlling
interests
36.3
29.8
26.3
EARNINGS
PER SHARE ATTRIBUTABLE TO EQUITY HOLDERS OF THE
PARENT*
Basic earnings /
(loss) per share in USD
21.4
0.32
(0.44)
0.25
Diluted earnings /
(loss) per share in USD
21.4
0.32
(0.44)
0.25
* For
the calculation of Earnings per Share (EPS), the weighted average
number of outstanding shares for 2017 and 2016 has been assumed to
be equal to the shares issued for the IPO.
F-3
HUDSON GROUP
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
at
December 31, 2018 and 2017
IN
MILLIONS OF USD
NOTE
31.12.2018
31.12.2017
ASSETS
Property, plant and
equipment
14
243.0
264.9
Intangible
assets
15
301.6
354.6
Goodwill
15
315.0
331.2
Investments in
associates
16
6.5
3.1
Deferred tax
assets
26
83.9
90.3
Other non-current
assets
17
27.4
24.9
Non-current
assets
977.4
1,069.0
Inventories
18
190.7
186.0
Trade
receivables
19
1.3
4.6
Other accounts
receivable
20
46.8
59.4
Income tax
receivables
0.8
1.4
Cash and cash
equivalents
234.2
137.4
Current
assets
473.8
388.8
Total
assets
1,451.2
1,457.8
LIABILITIES AND
SHAREHOLDERS’ EQUITY
Equity attributable
to equity holders of the parent
21
552.1
493.7
Non-controlling
interests
22
84.8
78.7
Total
equity
636.9
572.4
Financial
debt
23
492.6
520.4
Deferred tax
liabilities
26
40.0
50.1
Post-employment
benefit obligations
27
1.0
0.9
Non-current
liabilities
533.6
571.4
Trade
payables
105.5
97.1
Financial
debt
23
51.4
80.7
Income tax
payables
2.3
4.1
Other
liabilities
25
121.5
132.1
Current
liabilities
280.7
314.0
Total
liabilities
814.3
885.4
Total
liabilities and shareholders’ equity
1,451.2
1,457.8
F-4
HUDSON GROUP
CONSOLIDATED STATEMENTS OF CHANGES IN
EQUITY
for the years
ended December 31, 2018, 2017 and 2016
2018
IN MILLIONS OF
USD
NOTE
SHARE
CAPITAL
TREASURY
SHARES
TRANSLATION
RESERVES
RETAINED
EARNINGS
SHARE-
HOLDERS'
EQUITY
NON-
CONTROLLING
INTERESTS
TOTAL
EQUITY
Balance at
January 1*
0.1
-
20.5
473.1
493.7
78.7
572.4
Net profit /
(loss)
-
-
-
29.5
29.5
36.3
65.8
Other comprehensive income /
(loss)
-
-
(20.1)
-
(20.1)
-
(20.1)
Total
comprehensive income / (loss) for the period
-
-
(20.1)
29.5
9.4
36.3
45.7
TRANSACTIONS WITH OR DISTRIBUTIONS
TO SHAREHOLDERS
Dividends to non-controlling
interests
-
-
-
-
-
(45.7)
(45.7)
Purchase of treasury
shares
21.2
-
(2.0)
-
-
(2.0)
-
(2.0)
Proceeds from
restructuring
1a
-
-
-
60.1
60.1
-
60.1
Transaction costs for equity
instruments
-
-
-
(15.4)
(15.4)
-
(15.4)
Share-based payment
transactions
21.3
-
-
-
12.7
12.7
-
12.7
Tax effect on equity
transactions
-
-
-
(6.4)
(6.4)
-
(6.4)
Total
transactions with or distributions to owners
Changes in participation of
non-controlling interests
22
-
-
-
-
-
15.5
15.5
Balance at
December 31
0.1
(2.0)
0.4
553.6
552.1
84.8
636.9
* Although
the restructuring of Hudson took place on February 1, 2018, the
respective consolidated statements of changes in equity is
presented as of January 1, 2018.
F-5
HUDSON GROUP
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(CONTINUED)
for
the years ended December 31, 2018, 2017 and 2016
2017
IN MILLIONS OF
USD
NOTE
SHAREHOLDERS'
EQUITY
NON-CONTROLLING
INTERESTS
TOTAL
EQUITY
Balance at
January 1
658.2
72.2
730.4
Net profit /
(loss)
(40.4)
29.8
(10.6)
Other comprehensive income /
(loss)
26.8
-
26.8
Total
comprehensive income / (loss) for the period
(13.6)
29.8
16.2
TRANSACTIONS WITH OR DISTRIBUTIONS
TO SHAREHOLDERS
Dividends to non-controlling
interests
-
(34.3)
(34.3)
Common control
transaction
24
(154.7)
-
(154.7)
Share-based payment
transactions
21.3
4.6
-
4.6
Tax effect on equity
transactions
(0.2)
-
(0.2)
Total
transactions with or distributions to owners
Changes in participation of
non-controlling interests
22
-
5.5
5.5
Balance at
December 31
658.2
72.2
730.4
F-6
HUDSON
GROUP
CONSOLIDATED
STATEMENTS OF CASH FLOWS
for
the years ended December 31, 2018, 2017 and
2016
IN
MILLIONS OF USD
NOTE
2018
2017
2016
CASH FLOWS FROM
OPERATING ACTIVITIES
Profit
before tax
68.8
32.3
15.5
ADJUSTMENTS
FOR
Depreciation,
amortization and impairment
10
128.9
108.7
103.7
Loss / (gain) on
sale of non-current assets
1.5
3.3
1.9
Increase /
(decrease) in allowances and provisions
5.2
5.0
(2.0)
Loss / (gain) on
foreign exchange differences
0.7
(0.5)
6.4
Other non-cash
items
3.6
4.6
1.2
Share of result of
associates
16
(0.1)
0.3
0.7
Interest
expenses
12
31.0
30.2
29.8
Interest
income
12
(2.5)
(1.9)
(2.1)
Cash
flows before working capital changes
237.1
182.0
155.1
Decrease /
(increase) in trade and other accounts receivable
22.8
6.2
(9.1)
Decrease /
(increase) in inventories
18
(12.0)
(26.9)
(14.2)
Increase /
(decrease) in trade and other accounts payable
(8.4)
(26.9)
41.3
Dividends received
from associates
16
-
-
0.2
Cash
generated from operations
239.5
134.4
173.3
Income taxes
paid*
(6.8)
(3.6)
(3.5)
Net
cash flows from operating activities
232.7
130.8
169.8
CASH FLOWS USED IN
INVESTING ACTIVITIES
Purchase of
property, plant and equipment
14.1
(65.1)
(79.6)
(88.3)
Purchase of
intangible assets
(4.2)
(8.2)
(5.7)
Purchase of
interest in associates
16
(3.3)
(1.0)
-
Proceeds from sale
of property, plant and equipment
0.3
0.6
0.4
Interest
received
3.2
2.1
1.2
Net
cash flows used in investing activities
(69.1)
(86.1)
(92.4)
CASH FLOWS USED IN
FINANCING ACTIVITIES
Proceeds from
restructuring
1a
60.1
-
-
Repayment of
financial debt
24
(48.3)
(28.0)
(7.3)
Repayments of /
(granted) 3rd party loans receivable
1.5
(3.3)
12.8
Transaction costs
paid for the listing of equity instruments
(6.3)
-
-
Dividends paid to
non-controlling interests
(39.1)
(34.3)
(27.4)
Purchase of
treasury shares
(2.0)
-
-
Contributions from
/ (purchase of) non-controlling interests
7.0
-
(0.1)
Interest
paid
(37.7)
(30.2)
(29.3)
Net
cash flows used in financing activities
(64.8)
(95.8)
(51.3)
Currency
translation on cash
(2.0)
0.9
1.1
Increase
/ (decrease) in cash and cash equivalents
96.8
(50.2)
27.2
CASH AND CASH
EQUIVALENTS AT THE
- beginning of the
period
137.4
187.6
160.4
- end of the
period
234.2
137.4
187.6
* In
2016 and 2017 the amounts for Income taxes paid only include
payments made on behalf of companies in the scope of these
consolidated financial statements as described in note
1.
F-7
HUDSON GROUP
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.
CORPORATE INFORMATION
Hudson
Ltd. and its subsidiaries (“Hudson Group” or
“Hudson”) are Travel Retailers specialized in Duty Paid
and Duty Free markets operating 1,028 stores in 88 locations
throughout the continental United States and Canada. The parent
company is Hudson Ltd., an exempt company limited by shares
incorporated in Bermuda. The registered office is 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,” as part of the initial public
offering (IPO).
Hudson
Ltd. was incorporated on May 30, 2017 in Hamilton, Bermuda as a
wholly owned subsidiary of Dufry International AG (Dufry), the
world’s leading travel retail company which is headquartered
in Basel, Switzerland. Hudson Group business comprises of legal
entities and operations which were contributed to Hudson Ltd. by
Dufry International AG prior to the IPO.
The
financial statements for periods presented prior to the 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 AG. 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
Group.
These
consolidated financial statements of Hudson Ltd. are a continuation
of the combined financial statements 2016 – 2017 prepared for
Hudson Group.
The
restructuring steps, prior to the IPO of Hudson have
been:
a)
Dufry America
Holding, Inc. (DAH), (an entity of Dufry’s Division North
America), sold 100 % of the shares of Dufry America, Inc., Dufry
Cruise Services, Inc. and International Operations and Services
(USA), LLC to another entity of the Dufry Group for a net
consideration of USD 60.1 million. These three subsidiaries of
Dufry have not been active in the retail business in the U.S. or
Canada and consequently are not reflected in the consolidated
financial statements of Hudson Group, so that this disposal has
been reflected in the consolidated financial statements as
follows:
The
net consideration received in cash was partially used to reduce
financial debt and the remaining has been presented as cash. This
transaction generated income tax charges at DAH of USD 9.8 million,
which have been off-set against net operating losses. The
consideration net of tax of USD 50.3 million is presented as
reserves in equity.
F-8
b)
Dufry
International AG (Switzerland) contributed 100 % of the shares of
Dufry America Holding Inc., the parent entity of the Hudson Group
in the continental USA and Canada, as well as 100 % of the shares
of The Nuance Group (Canada) Inc., the parent entity of WDFG
Vancouver LP to Hudson Ltd.
As a
result, the Hudson business includes substantially all of the
historical North America Division business reported by Dufry Group.
The contribution of the North America Division business by Dufry to
Hudson Ltd. was treated for accounting purposes as a reorganization
of entities under common control. As a result, Hudson is
retrospectively presenting the combined financial position and
results of operations of Hudson Ltd. and its subsidiaries for all
periods presented prior to the IPO. The financial statements are
presented on a consolidated basis for all periods after the IPO and
include the accounts of the Company and its controlled
subsidiaries.
After
the IPO the Dufry Group retained control of Hudson Ltd. as the
shares offered through the IPO represented less than 50 % of the
total in terms of shares or voting rights.
2.
ACCOUNTING POLICIES
2.1
BASIS OF
PREPARATION
These
consolidated financial statements have been prepared in accordance
with International Financial Reporting Standards (IFRS) as issued
by the International Accounting Standard 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.
For
the purpose of these consolidated financial statements, income
taxes have been calculated using the separate return
method.
The
consolidated financial statements were authorized for public
disclosure on March 5, 2019 by the board of directors of
Hudson Ltd. The consolidated financial statements of Hudson Ltd.
were authorized for issuance on March 14, 2019.
F-9
2.2
BASIS OF
CONSOLIDATION
Subsidiaries
are fully consolidated from the date of acquisition, being the date
on which we obtained control, and continue to be consolidated until
the date when such control is lost. An entity of Hudson Group
controls another entity when it 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 other
entity. All intra-group balances, transactions, unrealized gains or
losses resulting from intra-group transactions and dividends are
eliminated in full.
Transactions
with subsidiaries of Dufry outside the scope of consolidation of
Hudson Group 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 Group 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.
For
the accounting treatment of associated companies refer to note
2.3.
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 fair value on the acquisition date and the amount of
any non-controlling interest in the acquiree. For each business
combination, Hudson selects whether it measures the non-controlling
interests 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 operational result. 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 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 the group of cash generating units
of Hudson that is expected to benefit from the
combination.
F-10
Where
goodwill forms part of a group of cash-generating units 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) Turnover
Turnover
is comprised of sales and advertising income and is recognized from
contracts with customers. Sales are measured at the fair value of
the consideration received in cash or credit cards for the goods,
net of sales taxes or duties. Retail sales are recognized at the
time when the goods are transferred. Advertising income is
recognized over time when the services have been rendered (for the
adoption of IFRS 15, refer to note 2.4).
c) 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 arrived at our warehouse, i. e. import duties, transport,
purchase discounts (price-offs) as well as inventory valuation
adjustments and inventory losses.
d) Personnel expenses
These
expenses comprise the net compensation to employees of
Hudson.
e) 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 transaction in the
functional currency using the exchange rate on 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. Deferred taxes related to unrealized FX
are accounted accordingly. Non-monetary items are measured at
historical cost in the respective functional currency.
F-11
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.
Intangible
assets, goodwill 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
2018
2017
2016
31.12.2018
31.12.2017
31.12.2016
1 CAD
0.7720
0.7714
0.7552
0.7333
0.7951
0.7446
f) Other operational result
The
transactions included in these accounts are generally non-recurring
and not related to the ongoing key business 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 taxes, 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.
F-12
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 payment 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.
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 other comprehensive income.
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
F-13
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.
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 realized. 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 jurisdiction.
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) Intangible assets
These
assets mainly comprise of concession rights and brands. Usually
these as-sets are capitalized at cost, but when identified as part
of a business combination, these assets are capitalized at fair
value as at the date of acquisition. The useful lives of these
intangible assets are assessed to be either finite or indefinite.
Following initial recognition, the cost model is applied to
intangible assets. Intangible assets with finite lives are
amortized over the useful economic life. Software is valued at amortized
historical cost, or in case of internal developments
by the sum of costs incurred
and amortized over useful lives (analyzed case by
case).
F-14
n) Impairment of non-financial assets
Tangible
and intangible 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 or 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). Goodwill and
intangible assets with indefinite useful lives are not subject to
amortization and are tested annually for
impairment.
o) 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 investor’s share of the net profit and share
of other comprehensive income of the investee 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 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 where appropriate.
Hudson
determines at each reporting date whether there is any objective
evidence that the investments in associates are 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 statement of comprehensive
income.
Profits
and losses resulting from upstream and downstream transactions
between Hudson and its associate are recognized in Hudson’s
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.
F-15
p) Inventories
Inventories
are valued at the lower of historical cost or net realizable value.
The historical costs are determined using the weighted average
method. Historical cost includes expenses incurred in bringing the
inventories to their present location and condition. This includes
mainly import duties. Purchase discounts and rebates are deducted
in determining the cost of inventories. 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
stock. Expired items are fully written off.
q) Trade receivables
This
account includes receivables related to the sale of
merchandise.
r) 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.
s) 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 amortization recognized in accordance with IFRS 15
Revenue from contracts with customers.
Lawsuits and
duties
Provisions
for lawsuits and duties are recognized to account for uncertainties
dependent on the outcome of ongoing lawsuits.
F-16
t) Investments and other financial assets
(i) Classification
From
January 1, 2018, Hudson classifies its financial assets in the
following measurement categories:
–
those to be
measured subsequently at fair value (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).
For
assets measured at amortized cost, depreciation, amortization and
loss allowances will be recorded through profit or
loss.
(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 (FVTPL),
transaction costs that are directly attributable to the acquisition
of the financial asset. Transaction costs
of financial assets carried at FVTPL 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 collections 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 and presented in the
financial result together with foreign exchange gains and losses or
interest income and expenses respectively. Impairment losses are
presented in the other operational result.
F-17
–
FVOCI: Assets that
are held for collection of contractual cash flows and for selling
the financial assets, where the assets’ 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 and recognized in foreign exchange gain / (loss).
These
financial assets are measured using the effective interest rate
method.
–
FVTPL: Assets that
do not meet the criteria for amortized cost or FVOCI are measured
at FVTPL. A gain or loss on
a debt investment that is subsequently measured at FVTPL is
recognized in profit or loss and presented net within interest
income / expenses in the period in which it
arises.
(iv) Impairment of financial assets
From
January 1, 2018, 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 and receivables for
refund from suppliers and related services, Hudson applies
the simplified
approach permitted by IFRS 9, 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 method, less any
impairment.
Hudson
has applied IFRS 9 by using the retrospective method, but has
elected not to restate comparative information. As a result, the
comparative information provided continues to be accounted for in
accordance with Hudson’s previous accounting
policy.
F-18
Classification
Until
December 31, 2017, Hudson classified its financial assets in the
following categories:
–
financial assets
at fair value through profit or loss,
–
loans and
receivables,
–
held-to-maturity
investments (not applicable to Hudson at this date),
and
–
available-for-sale
financial assets (not applicable to Hudson at this
date).
The
classification depended on the purpose for which the investments
were acquired. Management determined the classification of its
investments at initial recognition. There were no reclassifications
between categories during 2017.
Subsequent measurement
The
measurement at initial recognition did not change on adoption of
IFRS 9, see description above. Subsequent to the initial
recognition, loans and receivables were carried at amortized cost
using the effective interest method. Financial assets at FVTPL were
subsequently carried at fair value. Gains or losses arising from
changes in the fair value were recognized in profit or loss within
the financial result. Details on how the fair value of financial
instruments is determined are disclosed in note 29.
Impairment of financial assets
Hudson
assessed at the end of each reporting period whether there was
objective evidence that a financial asset or group of financial
assets was impaired. A financial asset or a group of financial
assets was impaired and impairment losses were incurred only if
there was objective evidence of impairment as a result of one or
more events that occurred after the initial recognition of the
asset (a ‘loss event’) and that loss event (or events)
had an impact on the estimated future cash flows of the financial
asset or group of financial assets that could be reliably
estimated.
Assets carried at amortized cost
For
loans and receivables, the amount of the loss was measured as the
difference between the asset’s carrying amount and the
present value of estimated future cash flows (excluding future
credit losses that had not been incurred) discounted at the
financial asset’s original effective interest rate. The
carrying amount of the asset was reduced and the amount of the loss
was recognized in profit or loss. If a loan had a variable interest
rate, the discount rate for measuring any impairment loss was the
current effective interest rate determined under the contract. As a
practical expedient, Hudson could measure impairment on the basis
of an instrument’s fair value using an observable market
price. If, in a subsequent period, the amount of the impairment
loss decreased and the decrease could be related objectively to an
event occurring after the impairment was recognized (such as an
improvement in the debtor’s credit rating), the reversal of
the previously recognized impairment loss was recognized in profit
or loss. Impairment testing of trade receivables is described in
note 19.
F-19
u) Financial liabilities
i) Financial liabilities at FVTPL
These
are stated at fair value, with any gains or losses arising on
re-measurement recognized in the consolidated statements of
comprehensive income. The net gain or loss recognized in the
consolidated statements of comprehensive income incorporates any
interest paid on the financial liability and is included in
interest income / 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.
2.4
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 revised Standards and the
Interpretations adopted in these financial
statements (effective January 1, 2018).
IFRS 9
Financial Instruments
IFRS 9
addresses the classification, measurement and derecognition of
financial assets and financial liabilities, introduces new rules
for hedge accounting and a new impairment model for financial
assets.
Phase 1: Classification and measurement – determines
how financial assets and financial liabilities are accounted for
and measured on an ongoing basis.
At January 1,2018, Hudson had no financial assets classified as available for
sale, held-to-maturity or at fair value through OCI (FVOCI). The
financial assets and liabilities are classified as fair value
through profit or loss (FVTPL) and meet the criteria for this
category as these do not include any non-derivative components.
Hence there have not been any change to the accounting
classification for Hudson’s assets and
liabilities.
F-20
Phase 2: Impairment – a new single expected loss
impairment model is introduced that will require more timely
recognition of expected credit losses.
The
new impairment model requires the recognition of impairment
provisions based on expected credit losses (ECL) rather than only
incurred credit losses as was the case under the previous guidance.
It applies to financial assets classified at amortized cost, debt
instruments measured at FVOCI, contract assets under IFRS 15
Revenue from Contracts with Customers, lease receivables, loan
commitments and certain financial guarantee contracts. Based on the
assessments, no significant change in the allowances were
identified, as the company has measured the credit risk in the past
based on expected future losses.
Phase 3: Hedge accounting – the new model aligns the
accounting treatment with risk management activities. Users of the
financial statements will be provided with better information about
risk management and the effect of hedge accounting on the financial
statements.
Based
on IFRS 9, more hedge relationships might be eligible for hedge
accounting, as the standard introduces a more principles-based
approach. Hudson’s current hedge relationships qualify as
continuing hedges upon the adoption of IFRS 9. In addition, Hudson
started to designate the intrinsic value of foreign currency option
contracts as hedging instruments going forward, which until
December 31, 2017 have been accounted as derivatives at FVTPL.
Changes in the fair value of foreign exchange forward contracts
attributable to forward points, and in the time value of the option
contracts, will in this case be deferred in new costs of hedging
reserve OCI. Thereafter, the deferred amounts will be recycled
against the related hedged transaction when it occurs.
Hudson
has not utilized hedges in relation to changes in the fair value of
foreign exchange forward contracts attributable to forward points
at December 31, 2017.
Hudson
did not identify any cases where the new classifications and
measurements of financial assets and financial liabilities as
introduced by IFRS 9 had any material impact on the current
consolidated financial statements. The previous valuation and
presentation of hedges were aligned with the requirements of IFRS
9. Furthermore the allowances for trade receivables have not
increased due to the adoption of IFRS 9.
IFRS
15 addresses revenue recognition and establishes principles for
reporting useful information to users of financial statements about
the nature, amount, timing and uncertainty of revenue and cash
flows arising from an entity’s contracts with customers.
Revenue is recognized when a customer obtains control of goods or
services and thus has the ability to direct the use and obtain the
benefits from the goods or services.
The
standard replaces IAS 18 Revenue and IAS 11 Construction Contracts
and related interpretations. Hudson has analyzed the impact of the
standard and has not identified any need for material changes to
the revenue recognition approach.
F-21
Hudson
considered the following aspects:
Turnover
Hudson
Group recognizes net sales, and the related cost of goods sold, at
the time when it sells and hands over directly at the stores to the
traveler consumables or fashion products manufactured by third
parties. The sale has to be settled in cash or credit card on
delivery. Net sales are presented net of customary discounts or
sales taxes. Credit card receivables have different contractual
terms, but most of them are collectable within 4 days and
consequently these are presented as cash equivalents. There are
very limited returns of goods sold. Hudson’s advertising
income results from several distinctive marketing support
activities, not affecting the costs of the goods. The income is
recognized over time when the advertising services have been
rendered.
There
has been no impact on retained earnings as of January 1, 2018 after
the adoption of IFRS 15.
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 current
financial period, are discussed below.
Impairment test of assets
Hudson annually tests for impairment goodwill and intangible assets
with indefinite useful lives and assesses those tangible or
intangible assets with finite lives for impairment indications or
when events arise which could indicate impairment. 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 comments and
assumptions used for goodwill testing are disclosed in note
15.1.
Concession rights
Concession
rights acquired in a business combination are measured at fair
value as at the date of acquisition. The useful lives of operating
concessions are assessed to be either finite or indefinite based on
individual circumstances and are considering potential extensions.
The useful lives of operating concessions are reviewed annually to
determine whether the useful life assessment for those concessions
continues to be sustainable.
Income taxes
Hudson
is subject to income taxes in the United States, United Kingdom and
Canada. Significant judgment is required in determining the
worldwide provision for income taxes. There are many transactions
and calculations for which the ultimate tax assessment is
uncertain. Hudson recognizes liabilities for tax audit
uncertainties 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 provisions in the period in which such assessment is
made. Further details are given in notes 13 and 26.
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.
On December 13, 2018 the US tax authority issued draft regulations
in relation to the new law. However, a number of uncertainties
remain as to the interpretation and application of the provisions
in the Tax Reform Legislation and draft regulations. In the absence
of final guidance and clearer interpretation by the regulators on
these issues, we used what we believe are reasonable
interpretations and assumptions in interpreting and applying the
tax reform legislation and draft 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 income 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 the United Kingdom tax
authorities, United States 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.
F-23
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 losses can be
utilized. Management’s 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. 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 requires 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
assumptions and models used are disclosed in note
21.3.
Purchase price allocation
The
determination of the fair values of the identifiable assets
(especially the concession rights) and the assumed liabilities,
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.
Consolidation of entities where Hudson has control, but holding
only minority voting rights
Hudson
effectively controls 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.
F-24
4.
NEW AND REVISED STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET
ADOPTED / EFFECTIVE
The
standards and interpretations described below are expected to have
an impact on Hudson’s financial position, performance,
and / or disclosures. Hudson intends to adopt these
standards when they become effective.
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, and increases the disclosure
requirements for lessees and lessors compared to IAS 17. IFRS 16
introduces a single lessee accounting model and requires a lessee
to recognize right-of-use assets and lease liabilities for certain
lease contracts.
To be
considered as right-of-use asset, a lease agreement has to convey
the right to control the use of an identified asset throughout the
period of use in exchange for consideration 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. Right-of-use
assets are generally capitalized at a value equivalent to the lease
obligation at inception and depreciated over the useful life of the
asset, except for leases with a useful life of less than 12 months
and leases of low value assets.
The
lease liability represents the net present value of lease payments
over the lease term. The implied interest charge is presented as
interest expense. Where these lease agreements do not specify a
discount rate and as these subsidiaries are financed internally,
Hudson uses a discount rate based on a risk free rates for the
respective currency and lease terms, increased by individual
company spread. The company made an assessment where the lease
contains options to extend or terminate the lease. Initial direct
costs for contracts signed in the past will not be recognized as
part of the right-of-use asset at the date of initial
application.
Short
term leases with a duration of less than 12 months and low value
leases, as well as those lease elements, partially or totally not
complying with the principles of recognition defined by IFRS 16
will continue to be treated as operating leases i.e. recognized
through the consolidated statements of comprehensive income when
accrued.
The
standard will mainly affect the accounting of:
a) Concession leases
Hudson
enters into concession agreements with operators of airports,
railway stations, etc. to operate retail stores, which in substance
can be considered leases. These concession lease agreements contain
complex features, which can include variable payment components
(e.g. based on sales) and minimum annual guarantee payments (MAG),
which can be fixed or variable depending on the contract terms.
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. Management 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 purchase option
based on a residual value guarantee. In some cases, parts of the
lease obligations are secured with bank guarantees. Hudson will
capitalize all elements of these lease contracts in accordance with
IFRS 16 when, at the commencement of the agreement, such
commitments are fixed in the respective contractual terms or these
commitments depend on an index or rate that can be estimated
reliably. Payment obligations that cannot be reasonably projected,
such as percentage of sales, will continue to be presented as
variable lease expense. Hudson has identified a number of
agreements in its portfolio which do not qualify for 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 or a percentage of
previous year’s total lease payments. Such leases will
continue to be presented similar to operating lease
expense.
Additionally,
we have concession subleases in which we act as lessor for a
portion of our leased retail space to third party operators.
Generally, the term of the sublease is the same duration as the
main concession agreement. Therefore, we will recognize a lease
receivable related to the fixed minimum payments due from the
subtenant as a reduction of the initial right-of-use
asset.
F-25
b) Building leases
Rental
agreements for offices or warehouse buildings will usually qualify
under IFRS 16 capitalization rules.
c) Other leases
Hudson
may also enter into other lease agreements for other assets, which
in accordance with IFRS 16 may qualify for capitalization of
leases.
On
January 1, 2019, Hudson adopted IFRS 16 and recognized USD 1,067
million in right-of-use assets, USD 9 million in sublease
receivables and USD 1,075 million in lease liabilities. The
right-of-use asset amount includes the existing prepaid concession
fees and accrued lease expense. The capitalized fixed lease
payments represent approximately 50% of the expected total payments
under the leases, including variable rent. Compared to IAS 17,
mainly concession fees and premises expense will be reduced by USD
234 million, which will be compensated by increases in depreciation
of right-of-use assets and interest expense of USD 258 million
resulting in an overall negative impact on net profit of USD 19
million for the year ended 2018. The operating cash flow would have
increased and the financing cash flow would decreased as the
payment of the lease obligation of USD 234 million would have been
classified as cash flow used in financing activities.
In
2018, Hudson recognized lease expenses of USD 423 (2017: USD 399)
million as concession fees and rents (selling expenses) and USD 18
(2017: USD 15) million as premise expenses (general expenses), as
well as concession fee rental income of USD 13 (2017: USD 12)
million, in the consolidated statements of comprehensive
income.
Unless
specified in the respective contract, Hudson uses discount rates
based on duration and currencies, of which the weighted average at
January 1, 2019 was approximately 4.58 %.
Amendments
that are considered to be insignificant:
F-26
Sale or Contribution of Assets between an Investor and its
Associate or Joint
venture (proposed amendments to IFRS 10 and IAS
28)
(effective
date not yet defined by IASB)
The
gain or loss resulting from the sale to or contribution from an
associate of assets that constitute a business as defined in IFRS 3
is recognized in full. The gain or loss resulting from the sale to
or contribution from a subsidiary that does not constitute a
business as defined in IFRS 3 (i. e. not a group of assets
conforming a business) to an associate is recognized only to the
extent of unrelated investors’ interests in the
associate.
IFRIC Interpretation 23 - Uncertainty over Income Tax
Treatments
The
interpretation is to be applied to the determination of taxable
profit (tax loss), tax bases, unused tax losses, unused tax credits
and tax rates, when there is uncertainty over income tax treatments
under IAS 12.
–
An entity is
required to use judgment to determine whether each tax treatment
should be considered independently or whether some tax treatments
should be considered together. The decision should be based on
which approach provides better predictions of the resolution of the
uncertainty.
–
An entity is to
assume that a taxation authority with the right to examine any
amounts reported to it will examine those amounts and will have
full knowledge of all relevant information when doing
so.
–
An entity has to
consider whether it is probable that the relevant authority will
accept each tax treatment, or group of tax treatments, that it used
or plans to use in its income tax filing. If the entity concludes
that it is probable that a particular tax treatment is accepted,
the entity has to determine taxable profit (tax loss), tax bases,
unused tax losses, unused tax credits or tax rates consistently
with the tax treatment included in its income tax filings. If the
entity concludes that it is not probable that a particular tax
treatment is accepted, the entity has to use the most likely amount
or the expected value of the tax treatment when determining taxable
profit (tax loss), tax bases, unused tax losses, unused tax credits
and tax rates. The decision should be based on which method
provides better predictions of the resolution of the
uncertainty.
Amendments to IFRS 9 - Prepayment Features with Negative
Compensation
This
refers to the classification and measurement of a debt instrument
if the borrower was permitted to prepay the instrument at an amount
less than the unpaid principal and interest owed. The amendment to
IFRS 9 enables companies to measure some prepayable financial
assets at amortized cost.
Amendments to IAS 28 - Long-term interests in Associates and Joint
Ventures
Clarification
that IFRS 9, including its impairment requirements, applies to
long-term interests in an associate or joint venture that form part
of the net investment in the associate or joint venture, if the
equity method is not applied.
F-27
Amendments to IAS 19 - Plan Amendment, Curtailment or
Settlement
If a plan
amendment, curtailment or settlement occurs, it is now mandatory
that the current service cost and the net interest for the period
after the remeasurement are determined using the assumptions used
for the remeasurement.
–
Clarification of
the effect of a plan amendment, curtailment or settlement on the
requirements regarding the asset ceiling.
Annual Improvements to IFRS Standards 2015–2017 Cycle issued
December 2017
IFRS 3 Business Combinations and IFRS 11 Joint
Arrangements
The
amendments to IFRS 3 clarify that when an entity obtains control of
a business that is a joint operation, it remeasures previously held
interests in that business. The amendments to IFRS 11 clarify that
when an entity obtains joint control of a business that is a joint
operation, the entity does not remeasure previously held interests
in that business.
–
IAS 12 Income Taxes
The
amendments clarify that the requirements in the former paragraph
52B (to recognise the income tax consequences of dividends where
the transactions or events that generated distributable profits are
recognised) apply to all income tax consequences of dividends by
moving the paragraph away from paragraph 52A that only deals with
situations where there are different tax rates for distributed and
undistributed profits.
–
IAS 23 Borrowing Costs
The
amendments clarify that if any specific borrowing remains
outstanding after the related asset is ready for its intended use
or sale, that borrowing becomes part of the funds that an entity
borrows generally when calculating the capitalisation rate on
general borrowings.
The Conceptual Framework for Financial Reporting
(effective January 1,2020)
The
revised Conceptual Framework introduces the following main
improvements:
New
definitions
–
Measurement
Concepts on
measurement, including factors to be considered when selecting a
measurement basis
–
Presentation and
disclosure
Concepts on
presentation and disclosure, including when to classify income and
expenses in other comprehensive income
–
Derecognition
Guidance on when
assets and liabilities are removed from financial
statements
–
Definitions
Definitions of an
asset and a liability
Updated
criteria
–
Recognition
criteria for including assets and liabilities in financial
statements
Clarified items
Prudence,
Stewardship, Measurement, Uncertainty and Substance over
form
Amendments to IFRS 3 – Business Combinations
(effective January 1,2020)
The
amended definition of business assists in whether an acquisition
made is of a business or group of assets.
F-28
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 6 for a split of net sales by product category,
market sector and sales channel.
Net Sales by Country
IN MILLIONS OF
USD
2018
2017
2016
US
1,523.9
1,420.9
1,359.1
Canada
356.0
339.9
291.0
Total
1,879.9
1,760.8
1,650.1
Non-Current Assets by Country
(excluding
investments in associates and deferred taxes)
IN MILLIONS OF
USD
31.12.2018
31.12.2017
US
511.2
558.8
Canada
375.9
416.8
Total
887.1
975.6
We
refer to the annex List of subsidiaries to identify where each
subsidiary operates.
F-29
6.
TURNOVER
IN MILLIONS OF
USD
2018
2017
2016
Net
sales
1,879.9
1,760.8
1,650.1
Advertising
income
44.3
41.7
37.1
Turnover
1,924.2
1,802.5
1,687.2
NET
SALES BREAKDOWN
Net sales by product category
IN MILLIONS OF
USD
2018
2017
2016
Confectionery, Food
and Catering
709.0
628.0
572.3
Perfumes and
Cosmetics
279.0
258.4
226.3
Fashion, Leather
and Baggage
231.0
220.1
183.3
Literature and
Publications
166.7
175.6
192.5
Watches, Jewelry
and Accessories
109.1
115.5
86.2
Electronics
94.6
87.7
78.5
Wine and
Spirits
92.3
88.0
75.3
Tobacco
goods
56.7
52.2
47.4
Other product
categories
141.5
135.3
188.3
Total
1,879.9
1,760.8
1,650.1
Net sales by market sector
IN MILLIONS OF
USD
2018
2017
2016
Duty-paid
1,431.8
1,334.4
1,284.0
Duty-free
448.1
426.4
366.1
Total
1,879.9
1,760.8
1,650.1
Net sales by channel
IN MILLIONS OF
USD
2018
2017
2016
Airports
1,780.3
1,662.6
1,565.9
Downtown and hotel
shops
45.8
43.1
29.5
Railway stations
and other
53.8
55.1
54.7
Total
1,879.9
1,760.8
1,650.1
F-30
7.
SELLING EXPENSES
IN MILLIONS OF
USD
2018
2017
2016
Concession fees and
rents (note 28)
(423.1)
(399.1)
(375.3)
Credit card
commissions
(33.0)
(29.0)
(27.7)
Advertising and
commission expenses
(1.7)
(0.9)
(0.8)
Packaging
materials
(2.2)
(2.5)
(2.3)
Other selling
expenses
(3.0)
(3.3)
(3.4)
Selling
expenses
(463.0)
(434.8)
(409.5)
Concession and
rental income (note 28)
12.5
11.6
11.9
Commercial services
and other selling income
5.2
2.0
1.9
Selling
income
17.7
13.6
13.8
Total
(445.3)
(421.2)
(395.7)
8.
PERSONNEL EXPENSES
IN MILLIONS OF
USD
2018
2017
2016
Salaries and
wages
(329.6)
(298.4)
(270.3)
Social security
expenses
(46.1)
(43.0)
(38.5)
Retirement
benefits
(0.7)
(0.8)
(0.6)
Other personnel
expenses
(34.7)
(29.1)
(28.0)
Total
(411.1)
(371.3)
(337.4)
Full time
equivalents (FTE - unaudited)
9,372
8,894
8,485
9.
GENERAL EXPENSES
IN MILLIONS OF
USD
2018
2017
2016
Franchise fees and
commercial services
(29.0)
(63.2)
(62.5)
Legal, audit and
other fees
(20.4)
(13.5)
(11.7)
Premises
(18.0)
(14.9)
(16.3)
Repairs,
maintenance and utilities
(17.0)
(17.1)
(15.5)
Office and admin
expenses
(14.4)
(16.2)
(14.6)
Travel,
entertainment and representation
(11.8)
(11.7)
(11.6)
Taxes other than
income taxes
(7.9)
(7.1)
(8.4)
IT
expenses
(6.2)
(6.3)
(4.6)
Insurances
(4.0)
(2.2)
(2.2)
PR and
advertising
(1.8)
(3.2)
(2.7)
Bank
expenses
(0.9)
(1.5)
(1.8)
Total
(131.4)
(156.9)
(151.9)
F-31
10.
DEPRECIATION, AMORTIZATION AND IMPAIRMENT
IN MILLIONS OF
USD
2018
2017
2016
Depreciation (note
14)
(69.2)
(64.5)
(61.4)
Impairment1
(note 14)
(14.6)
(0.2)
-
Subtotal
(83.8)
(64.7)
(61.4)
Amortization (note
15)
(45.1)
(44.0)
(42.3)
Subtotal
(45.1)
(44.0)
(42.3)
Total
(128.9)
(108.7)
(103.7)
1
In
2018, Hudson impaired fixed assets related to locations that were
performing below expectations. The aggregate recoverable amount for
affected locations of USD 10.0 million, was based on value in use
and determined at the cash-generating unit level.
11.
OTHER OPERATIONAL RESULT
This
line includes non-recurring transactions, impairments of financial
assets and changes in provisions.
IN MILLIONS OF
USD
2018
2017
2016
Closing or
restructuring of operations
(3.5)
(2.7)
(8.3)
Litigation
reserves
(2.8)
(0.5)
(0.9)
Losses on sale of
non-current assets
(1.5)
(3.3)
(2.0)
Impairment of loans
and other receivables
(1.3)
(0.9)
(1.4)
Project-related
costs
(0.7)
(3.4)
-
Consulting fees,
expenses related to projects and start-up expenses
(0.6)
(0.2)
(0.3)
Other operating
expenses
(2.0)
(3.2)
(1.4)
Other
operational expenses
(12.4)
(14.2)
(14.3)
IN MILLIONS OF
USD
2018
2017
2016
Recovery of write
offs / release of allowances / debt waiver
-
9.4
4.0
Insurance -
compensation for losses
-
0.1
0.1
Gain on sale of
non-current assets
-
-
0.1
Other operating
income
1.5
1.0
0.8
Other
operational income
1.5
10.5
5.0
IN MILLIONS OF
USD
2018
2017
2016
Other operational
expenses
(12.4)
(14.2)
(14.3)
Other operational
income
1.5
10.5
5.0
Other
operational result
(10.9)
(3.7)
(9.3)
F-32
12.
INTEREST
IN MILLIONS OF
USD
2018
2017
2016
EXPENSES ON
FINANCIAL LIABILITIES
Interest
expense
(30.2)
(29.4)
(29.1)
Other financial
expenses
(0.4)
(0.5)
(0.5)
Interest
expense on financial liabilities
(30.6)
(29.9)
(29.6)
EXPENSES ON
NON-FINANCIAL LIABILITIES
Interest
expense
(0.4)
(0.3)
(0.2)
Total
interest expense
(31.0)
(30.2)
(29.8)
INCOME ON FINANCIAL
ASSETS
Interest
income
2.5
1.8
2.0
Other financial
income
-
0.1
0.1
Interest income on financial assets
2.5
1.9
2.1
Total
interest income
2.5
1.9
2.1
13.
INCOME TAXES
INCOME
TAX RECOGNIZED IN THE CONSOLIDATED STATEMENT OF COMPREHENSIVE
INCOME
IN MILLIONS OF
USD
2018
2017
2016
Current income
taxes
(9.8)
(8.5)
(8.4)
of which
corresponding to the current period
(9.8)
(8.5)
(7.3)
of which
adjustments recognized in relation to prior years
-
-
(1.1)
Deferred income
taxes
6.8
(34.4)
42.7
of which related to
the origination or reversal of temporary differences
(4.9)
5.8
10.3
of which
adjustments recognized in relation to prior years1
10.7
-
32.4
of which
adjustments due to change in tax rates
1.0
(40.2)
-
Total
(3.0)
(42.9)
34.3
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).
F-33
IN MILLIONS OF
USD
2018
2017
2016
Profit before
tax
68.8
32.3
15.5
Expected tax rate
in %
26.8%
35.2%
36.2%
Tax at the expected
rate
(18.4)
(11.3)
(5.6)
EFFECT
OF
Different tax rates
for subsidiaries in other jurisdictions
0.2
0.5
(0.2)
Effect of changes
in tax rates on previously recognized deferred tax assets and
liabilities
1.0
(40.2)
-
Non-deductible
expenses
(2.3)
0.3
(0.5)
Net change of
unrealized tax losses cary forward
-
(2.0)
(4.1)
Adjustments
recognized in relation to prior year1
10.7
-
31.3
Income taxed in
non-controlling interest holders
9.7
11.2
10.1
Other
items2
(3.9)
(1.4)
3.3
Total
(3.0)
(42.9)
34.3
1
In
2018, deferred tax income 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.
2
Other
items of USD 3.9 million 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 the where the Group is active, weighted
by the operating profit of the respective operations. For 2018,
there have been no significant changes in these income tax rates and the
change in the expected tax rate is a result of the US tax reform
enacted in 2017. The tax expense of USD 3.3
million in 2018 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. In December 2017, a significant
decrease of the US federal income tax rate was enacted, applicable
for the year 2018 and onwards. The reduction in the U.S. federal
corporate income tax rate from 35 % to 21 % resulted in a net
downward adjustment of USD 40.2 million in relation to deferred
taxes in 2017.
Goodwill
is subject to impairment testing each year. Concession rights with
finite useful lives 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 Group’s only
operating segment “Travel Retail Operations” and
amounts to USD 315.0 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 Group are:
POST TAX
DISCOUNT RATES
PRE TAX DISCOUNT
RATES
GROWTH
RATES
FOR NET
SALES
2018
2017
2018
2017
2018
2017
7.58
7.27
9.39
8.79
2.9-3.6
4.3-5.6
As
basis for the calculation of these discount rates, the Group 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: 2.18 % (2017: 2.23 %).
For the
calculation of the discount rates and WACC (weighted average cost
of capital), the Group used the following re-levered
beta:
2018
2017
Beta
factor
0.82
0.85
F-39
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
–
Concession fee
levels
–
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 country 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 %
(2017: 2.0 %) 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 2019. 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.
Concession fee levels
These
assumptions regarding the concession fee evolution are important
and monitored in the specific market as well as the renewal
conditions and competitor behavior where the CGU is active. For a
CGU subject to a value-in-use calculation, the management expects
the competitive position to remain stable over the budget
period.
Discount rates
Several
factors affect the discount rates:
–
For the financial
debt 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 the Group’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 beta 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-40
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.
Both
investments are accounted for using the equity method.
Summarized statement of financial position
IN MILLIONS OF
USD
31.12.2018
NUANCE GROUP
(CHICAGO) LLC
31.12.2018
MIDWAY PARTNERSHIP LLC
31.12.2018
TOTAL
31.12.2017
NUANCE GROUP (CHICAGO) LLC
31.12.2017
MIDWAY PARTNERSHIP LLC
31.12.2017
TOTAL
Cash and cash
equivalents
1.1
1.9
3.0
2.6
1.4
4.0
Other current
assets
4.6
3.1
7.7
4.0
2.7
6.7
Non-current
assets
2.8
7.2
7.3
3.0
1.0
4.0
Other current
liabilities
(3.9)
(2.4)
(3.6)
(3.9)
(2.9)
(6.8)
Net
assets
4.6
9.8
14.4
5.7
2.2
7.9
Proportion of Hudson’s
ownership
35.0%
50.0%
35.0%
50.0%
Hudson’s
share of the equity
1.6
4.9
6.5
2.0
1.1
3.1
Summarized statement of comprehensive income
2018
IN MILLIONS OF
USD
NUANCE GROUP
(CHICAGO) LLC
MIDWAY
PARTNERSHIP LLC
TOTAL
Turnover
19.6
21.7
41.3
Depreciation,
amortization and impairment
(0.1)
-
(0.1)
Net
profit for the year
(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 for the
year
(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
PARTNERSHIP LLC
TOTAL
Turnover
18.7
15.1
33.8
Depreciation,
amortization and impairment
(0.1)
-
(0.1)
Net
profit for the year
(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 for the
year
(0.4)
0.1
(0.3)
Total
comprehensive income
(0.4)
0.1
(0.3)
2016
IN MILLIONS OF
USD
NUANCE GROUP
(CHICAGO) LLC
MIDWAY
PARTNERSHIP LLC
TOTAL
Turnover
20.0
-
20.0
Depreciation,
amortization and impairment
(0.1)
-
(0.1)
Net
profit for the year
(2.1)
-
(2.1)
Total
comprehensive income
(2.1)
-
(2.1)
HUDSON'S SHARE IN
PERCENTAGE
35.0
Net profit for the
year
(0.7)
-
(0.7)
Total
comprehensive income
(0.7)
-
(0.7)
F-41
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
CASH
FLOWS USED FOR INCREASE / FROM DECREASE IN
INVENTORIES
IN MILLIONS OF
USD
2018
2017
2016
Balance at January
1
192.4
171.7
155.4
Balance at December
31
198.4
192.4
171.7
Gross
change - at cost
(6.0)
(20.7)
(16.3)
Utilization of
allowances (in 2016: other cash flow effects)
(1.4)
(8.9)
0.5
Currency
translation adjustments
(4.6)
2.7
1.6
Cash
Flow – (Increase) /decrease in inventories
(12.0)
(26.9)
(14.2)
Cost
of sales includes inventories written down to net realizable value
and inventory losses of USD 6.8 (2017: USD 8.5)
million.
19.
TRADE RECEIVABLES
IN MILLIONS OF
USD
31.12.2018
31.12.2017
Trade receivables,
gross
1.3
5.3
Allowances
-
(0.7)
Trade
receivables, net
1.3
4.6
AGING
ANALYSIS OF TRADE RECEIVABLES
IN MILLIONS OF
USD
31.12.2018
31.12.2017
Not
due
0.7
0.7
OVERDUE
Up to 30
days
0.3
0.6
31 to 60
days
0.2
-
61 to 90
days
-
0.8
More than 90
days
0.1
3.2
Total
overdue
0.6
4.6
Trade
receivables, gross
1.3
5.3
MOVEMENT
IN ALLOWANCES
IN MILLIONS OF
USD
2018
2017
Balance
at January 1
(0.7)
(0.2)
Creation
-
(0.4)
Release
0.6
-
Currency
translation adjustments
0.1
(0.1)
Balance
at December 31
-
(0.7)
F-43
20.
OTHER ACCOUNTS RECEIVABLE
IN MILLIONS OF
USD
31.12.2018
31.12.2017
Receivables for
refund from suppliers and related services
18.1
32.1
Loans
receivable
4.0
4.8
Receivables from
subtenants and business partners
1.4
1.2
Personnel
receivables
0.4
1.3
Accounts
receivables
23.9
39.4
Prepayments for
concession fees and rents
5.9
8.0
Prepayments of
sales and other taxes
2.4
1.5
Prepayments,
other
1.7
1.1
Prepayments
10.0
10.6
Guarantee
deposits
0.2
0.2
Other
13.3
9.2
Other
receivables
13.5
9.4
Total
47.4
59.4
Allowances
(0.6)
-
Total
46.8
59.4
MOVEMENT
IN ALLOWANCES
IN MILLIONS OF
USD
2018
2017
Balance
at January 1
-
(1.5)
Creation
(0.6)
-
Utilized
-
1.5
Balance
at December 31
(0.6)
-
F-44
21.
EQUITY
IN MILLIONS OF
USD
31.12.2018
31.12.2017
Share
capital
0.1
0.1
21.1
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 31,2018.
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 will be settled 50 % in first quarter 2019 and 50 %
in first quarter 2020. Hudson expects to settle such awards by
purchasing Class A common shares in the market or by issuing new
shares. Hudson recognized the 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. As of December 31, 2018, no IPO-award forfeited, therefore
526,313 RSU awards remain outstanding.
On
October 31, 2018, Hudson Ltd. granted to selected members of its
senior management the Hudson LTI Plan award 2018 consisting of
435,449 performance share units (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. As of
December 31, 2018, no PSU or RSU Hudson award 2018 forfeited, so
that all 435,449 PSU’s and 145,150 RSU's Hudson awards 2018
remain outstanding.
The
holders of each PSU award 2018 will have the right to receive free
of charge up to two Hudson Ltd. Class A common shares based on the
cumulative results achieved by Hudson over a three year period on
three performance metrics (PM) against the respective targets
(target weight - name - value) and thus as follows: 30 % on Sales
of USD 5,828 million, 30 % on Adjusted EBITDA of USD 708 million
and 40 % on Cash EPS of USD 2.22. Whereby the PM Cash EPS equals
the basic Earnings per Share adjusted for amortization of
intangible assets identified during business combinations and other
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 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 2018 will have the right to receive free of charge one
Hudson share subject to an ongoing contractual relationship with
Hudson throughout the vesting period (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.
F-46
SHARE
PLAN OF DUFRY AG
On December1, 2017, Dufry granted to the members of the Group
Executive Committee (GEC) and selected members of the senior
management, including Hudson 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
May 4, 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, 2018, no PSU award
2017 forfeited, so that 24,474 PSU award 2017 remained
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 26.46 / CHF 25.97). The Cash 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 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 one and a half 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 throughout the vesting
period. Holders of PSU are not entitled to vote or receive
dividends, like shareholders do.
On May3, 2018, the PSU award 2015 vested and Dufry assigned and delivered
free of charge 21,034 Dufry shares to the Hudson holders of these
certificates. The performance of the PSU award 2015 was measured
against the target Cash EPS of USD 24.88 (CHF 24.42) and achieved a
pay-out ratio of 0.926 Dufry shares per PSU award 2015, i.e. a
total of 21,034 shares.
Holders
of 82,536 RSU awards 2016 will have the right to receive free of
charge one Dufry share subject to an ongoing contractual
relationship with Dufry (and Hudson) throughout the vesting period
(award 2016 until January 1, 2019). Holders of these rights are not
entitled to vote or receive dividends, like shareholders
do.
Dufry
has granted to selected members of the senior management the award
2016, which among others assigned 27,399 PSU units to Hudson
employees. The PSU award 2016 has a contractual life of 30 months
and will vest on May 2, 2019. The performance of the PSU award 2016
was measured against the target Cash EPS of USD 25.06 (CHF 24.59),
whereby the group achieved over the three-year period 2016-2018 a
Cash EPS of USD 25.19 (CHF 24.72) so that in May 2019 the PSU award
2016 will vest and Dufry will assign 1,010 Dufry shares per PSU
award 2016 to Hudson’s PSU holders, i.e. a total of 27,672
shares.
In
2018, Hudson recognized through profit and loss all these
share-based plan expenses for a total of USD 6.2 (2017: USD 4.6,
2016: USD 1.2) million.
F-47
21.4
EARNINGS PER
SHARE
21.4.1
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
2018
2017
2016
Net profit
attributable to equity holders of the parent
29.5
(40.4)
23.5
Weighted average
number of ordinary shares outstanding
92,509,779
92,511,080
92,511,080
Basic
earnings per share in USD
0.32
(0.44)
0.25
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
2018
2017
2016
Net profit
attributable to equity holders of the parent
29.5
(40.4)
23.5
Weighted average
number of ordinary shares outstanding
93,181,243
92,511,080
92,511,080
Diluted
earnings per share in USD
0.32
(0.44)
0.25
21.4.2
Weighted average number of ordinary shares
QUANTITY
2018
2017
Outstanding
shares
92,511,080
92,511,080
Less treasury
shares
(1,301)
-
Used
for calculation of basic earnings per share
92,509,779
92,511,080
EFFECT OF
DILUTION
Share
plans
671,464
-
Used
for calculation of diluted earnings per share
93,181,243
92,511,080
F-48
22.
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:
INFORMATION ON
COMPANIES WITH NON-CONTROLLING INTERESTS
The
non-controlling interests (NCI) comprise the portions in equity and
net profit in 86 (Dec. 2018) subsidiaries that are not fully owned
by the Group.
The
list of subsidiaries (refer to the last note of these consolidated
financial statements) provides the following information of most
important subsidiaries with or without NCI's: name, principal place
of business by country, the proportion of ownership hold by the
Group and the total share capital (if applicable).
Our
non-controlling interests consist of partners in either common law
partnerships or LLC's (collectively, “NCI's”). Our
partners own percentages of the NCI's 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 NCI's. Such distributions are allocated among the partners,
Hudson included, based on each partner's percentage interest in the
NCI. Distributions are discretionary only to the extent that
reserves are reasonably required as above stated.
Each of
the NCI's is treated as a separate operating entity and each has
its own revenues and expenses. No expenses of Hudson are shared
with any NCI but Hudson does receive 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. Such payments are fees for
services and not shared expenses.
In addition to the
above, Hudson receives occasional, specific reimbursement for
certain special services rendered and / or payroll
spent on specific projects, including store openings. Large numbers
of Hudson personnel are made available to NCI's in order to
complete tasks in a mandated time frame that would be impossible to
meet with the NCI's own employees.
F-49
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 the Group.
Summarized statement of comprehensive income
IN MILLIONS OF
USD
2018
2017
2016
Hudson
Las Vegas JV
Turnover
70.8
67.1
64.6
Depreciation,
amortization and impairment
(1.7)
(1.3)
(1.4)
Net
profit for the year
12.4
10.9
9.6
Non-controlling
interest
27%
27%
27%
Non-controlling
interest share of the net profit Hudson Las Vegas
The
loans payable received from related parties (refer to note 37) are
denominated in USD or CAD. The weighted average interest rate for
USD loans in 2018 was 5.9 % (2017: 5.9 %). The interest rate for
CAD loans in 2018 was 2.3 % (2017: 3.9 %).
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.
F-50
24.
NET DEBT
2018
IN MILLIONS OF
USD
CASH AND CASH
EQUIVALENTS
FINANCIAL DEBT
CURRENT
FINANCIAL DEBT
NON-CURRENT
NET
DEBT
Balance at
January 1
137.4
80.7
520.4
463.7
Cash flows from / (used in)
operating, financing and investing activities
98.8
-
-
(98.8)
Repayment of financial
debt
-
(24.6)
(23.7)
(48.3)
Cash
flow
98.8
(24.6)
(23.7)
(147.1)
Currency translation
adjustments
(2.0)
(4.7)
(4.1)
(6.8)
Non-cash
movements
(2.0)
(4.7)
(4.1)
(6.8)
Balance at
December 31
234.2
51.4
492.6
309.8
2017
IN MILLIONS OF
USD
CASH AND CASH
EQUIVALENTS
FINANCIAL DEBT
CURRENT
FINANCIAL DEBT
NON-CURRENT
NET
DEBT
Balance at
January 1
187.6
1.5
475.2
289.1
Cash flows from / (used in)
operating, financing and investing activities
(51.1)
-
-
51.1
Repayment of financial
debt
-
(21.5)
(6.5)
(28.0)
Loan from common control
transaction
-
103.1
51.6
154.7
Cash
flow
(51.1)
81.6
45.1
177.8
Currency translation
adjustments
0.9
(2.4)
0.1
(3.2)
Non-cash
movements
0.9
(2.4)
0.1
(3.2)
Balance at
December 31
137.4
80.7
520.4
463.7
2016
IN MILLIONS OF
USD
CASH AND CASH
EQUIVALENTS
FINANCIAL DEBT
CURRENT
FINANCIAL DEBT
NON-CURRENT
NET
DEBT
Balance at
January 1
160.4
0.9
483.1
323.6
Cash flows from / (used in)
operating, financing and investing activities
26.1
-
-
(26.1)
Repayment of financial
debt
-
-
(7.3)
(7.3)
Cash
flow
26.1
(0.0)
(7.3)
(33.4)
Currency translation
adjustments
1.1
0.6
(0.6)
(1.1)
Non-cash
movements
1.1
0.6
(0.6)
(1.1)
Balance at
December 31
187.6
1.5
475.2
289.1
25.
OTHER LIABILITIES
IN MILLIONS OF
USD
31.12.2018
31.12.2017
Personnel
payables
42.1
38.8
Other service
related vendors
15.6
23.3
Concession fee
payables
15.1
12.8
Payables for
capital expenditure
13.6
11.1
Sales tax and other
tax liabilities
11.2
11.9
Insurances
4.3
3.8
Accrued
liabilities
3.4
16.5
Accrued lease
expenses
3.2
2.0
Legal
fees
2.3
-
Payables to
NCI's
0.9
0.8
Other
payables
9.8
11.1
Total
121.5
132.1
There
are no non-current other liabilities.
F-51
26.
DEFERRED TAX ASSETS AND LIABILITIES
Deferred
tax assets or liabilities arising from the following
positions:
IN MILLIONS OF
USD
31.12.2018
31.12.2017
DEFERRED TAX
ASSETS
Property, plant and
equipment
5.2
4.0
Intangible
assets
21.5
19.8
Provisions and
other payables
11.1
11.7
Tax losses carry
forward
43.2
51.5
Other
18.8
15.5
Total
99.8
102.5
DEFERRED TAX
LIABILITIES
Property, plant and
equipment
-
(0.5)
Intangible
assets
(55.5)
(59.8)
Other
(0.4)
(2.0)
Total
(55.9)
(62.3)
Deferred
tax assets, net
43.9
40.2
Deferred
tax balances are presented in the consolidated statements of
financial position as follows:
IN MILLIONS OF
USD
31.12.2018
31.12.2017
Deferred tax
assets
83.9
90.3
Deferred tax
liabilities
(40.0)
(50.1)
Balance
at December 31
43.9
40.2
Reconciliation
of movements to the deferred taxes:
IN MILLIONS OF
USD
31.12.2018
31.12.2017
Changes in deferred
tax assets
(6.4)
(62.7)
Changes in deferred
tax liabilities
10.1
21.7
Currency
translation adjustments
(3.3)
6.4
Deferred
tax movements (expense) at December 31
0.4
(34.6)
THEREOF
Recognized in the
consolidated statements of comprehensive income
6.8
(34.4)
Recognized in
equity
(6.4)
(0.2)
Tax losses carry forward
The
unrecognized tax losses carry forward by expiry date are as
follows:
IN MILLIONS OF
USD
31.12.2018
31.12.2017
Expiring within 1
to 3 years
-
4.4
Expiring within 4
to 7 years
-
0.8
Expiring after 7
years
6.1
39.8
Total
6.1
45.0
During 2018,
Hudson released allowances on previously unrecognized tax losses
carry forward of USD 38.5 million due to changes in
estimates.
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.
F-52
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, 2018, the discretionary credit balance was USD
1.0 million.
28.
COMMITMENTS AND CONTINGENCIES
GUARANTEE
COMMITMENTS
Some
long-term concession agreements, which Hudson has entered into,
include obligations to fulfil minimal lease payments during the
full term of the agreement. The lease payments to airports or
terminals are also called concession fees. Some of these agreements
have been backed with guarantees provided by Hudson or a financial
institution. During the years 2018, 2017 or 2016, no party has
exercised their right to call upon such guarantees.
LEASE
INCOME / (EXPENSE)
Lease
payments under operating leases, including concession agreements,
have been recognized as expense for the periods up to December 31,2018. All accrued, but still unpaid concession fees are presented
under other liabilities in the consolidated statements of financial
position. The Group recognized the following lease and sublease as
income / (expense) in the period:
IN MILLIONS OF
USD
2018
2017
2016
Minimum lease
payments
(293.4)
(262.4)
(206.6)
Variable
rent
(129.7)
(136.7)
(168.7)
Concession
fees expense (note 7)
(423.1)
(399.1)
(375.3)
Premises
(note 9)
(18.0)
(14.9)
(16.3)
Sublease income
(note 7)
12.5
11.6
11.9
Such
fees are usually determined in proportion to sales and require a
minimal payment, which varies by
contract / agreement.
Expected payments
The
total of future minimum lease payments under non-cancellable
operating leases for each of the following years are as
follows:
IN MILLIONS OF
USD
FUTURE
PAYMENTS
Not
later than one year
216.9
Later
than one year and not later than five years
685.5
Later
than five years
358.5
Total
1,260.9
The
total of future minimum sublease payments expected to be received
under non-cancellable subleases at the end of the reporting period
are USD 12.8 million.
F-53
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, 2018, Hudson Group 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-54
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
within net debt, interest bearing loans and borrowings, less cash
and cash equivalents, excluding discontinued
operations.
31.1
GEARING
RATIO
The
following ratio compares owner’s equity to borrowed
funds:
IN MILLIONS OF
USD
31.12.2018
31.12.2017
Cash and cash
equivalents
(234.2)
(137.4)
Financial debt,
short-term
51.4
80.7
Financial debt,
long-term
492.6
520.4
Net
debt
309.8
463.7
Equity attributable
to equity holders of the parent
552.1
493.7
ADJUSTED
FOR
Effects from
transactions with non-controlling interests 1
1.0
0.8
Total
capital 2
553.1
494.5
Total
net debt and capital
862.9
958.2
Gearing
ratio
35.9%
48.4%
1
Represents the
excess paid (received) above fair value of non-controlling
interests on shares acquired (sold) 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 amortized cost have been referred to
in the combined financial statements 2017 as loans and
receivables.
2
Financial assets
and financial liabilities at fair value through profit and loss
include FX derivatives (Fair value Level 2).
3
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-56
31.3
NET INCOME BY
IAS 39 VALUATION CATEGORY
Financial
Assets at December 31, 2018
IN MILLIONS OF
USD
AT AMORTIZED
COST
AT
FVTPL
TOTAL
Interest
income
2.5
-
2.5
From interest
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)
From interest
(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 consolidated statements of comprehensive
income.
2
This
position includes the income from the released impairments and
allowances and recoveries during the period less the increase of
impairments and allowances.
Financial
Assets at December 31, 2017
IN MILLIONS OF
USD
AT AMORTIZED
COST
AT
FVTPL
TOTAL
Interest
income
1.8
-
1.8
Other finance
income
0.1
-
0.1
From interest
1.9
-
1.9
Foreign exchange
gain / (loss) 1
1.1
-
1.1
Impairments/allowances
2
0.3
-
0.3
Total – from subsequent valuation
1.4
-
1.4
Net (expense) / income
3.3
-
3.3
Financial
Liabilities at December 31, 2017
IN MILLIONS OF
USD
AT AMORTIZED
COST
AT
FVTPL
TOTAL
Interest
expenses
(29.4)
-
(29.4)
Other finance
expenses
(0.5)
-
(0.5)
From interest
(29.9)
-
(29.9)
Foreign exchange
gain (loss) 1
0.2
-
0.2
Total – from subsequent valuation
0.2
-
0.2
Net (expense) / income
(29.7)
-
(29.7)
1
This
position includes the foreign exchange gain / (loss)
recognized on third party and intercompany financial assets and
liabilities through consolidated statements of comprehensive
income.
2
This
position includes the income from the released impairments and
allowances and recoveries during the period less the increase of
impairments and allowances.
F-57
32.
FINANCIAL RISK MANAGEMENT OBJECTIVES
As a
retailer, Hudson has activities which need to be 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 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.
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 consolidated statements of
comprehensive income impact 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 Group level may
be hedged through foreign exchange forwards contracts.
F-58
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 Group
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 Group company irrespective of whether the positions
are third party or intercompany.
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
31.12.2018
31.12.2017
Effect on the
consolidated statements of comprehensive income - profit (loss) of
USD
0.3
0.3
Effect on the
consolidated statements of comprehensive income - profit (loss) of
EUR
0.0
0.0
Effect on the
consolidated statements of comprehensive income - profit (loss) of
CAD
-
(0.2)
F-59
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.
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 ASSETS 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.
A
party is related to the Hudson Group if the party directly or
indirectly controls, is controlled by, or is under common control
with the Hudson Group, has an interest in the Hudson Group that
gives it significant influence over the Hudson Group, has joint
control over the Hudson Group or is an associate or a joint venture
of the Hudson Group. In addition, members of the key management
personnel of the Hudson Group or close members of the family are
also considered related parties.
The
following tables reflect related party transactions and
transactions with associated companies:
Items of comprehensive income
IN MILLIONS OF
USD
2018
2017
2016
PURCHASE OF GOODS
FROM
International
Operation & Services (UY) SA
(82.5)
(67.4)
(27.3)
International
Operations & Services (USA)
-
-
(37.2)
Hudson News
Distributors 1
(0.3)
(12.2)
(15.6)
Hudson RPM
1
(18.6)
(8.5)
(5.0)
PURCHASE OF
SERVICES FROM
Dufry International
AG, Interest expenses
(28.2)
(28.6)
(2.5)
Dufry International
AG, Franchise fee expenses
(15.2)
(50.6)
(42.9)
Dufry Financial
Services B.V., Interest expenses
(2.0)
(0.9)
-
Dufry Finance SNC,
Interest expenses
-
-
(26.6)
Dufry Management
AG, IT expenses
(1.8)
(1.3)
-
World Duty Free
Group SA, IT expenses
(0.1)
(0.2)
-
World Duty Free
Group SA, Franchise fees expense
-
-
(7.2)
OTHER OPERATIONAL
INCOME FROM
Dufry International
AG, Debt waiver
-
9.4
-
SALES OF SERVICES
TO
International
Operations & Services (USA), Advertising income
5.7
-
-
Dufry International
AG, Other selling income
2.8
-
-
Nuance Group
(Chicago) LLC, Other selling income 2
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.
2
Transactions with
associated companies.
F-62
Items of financial position
IN MILLIONS OF
USD
2018
2017
ACCOUNTS
RECEIVABLES AT DECEMBER 31
International
Operations & Services (USA), Other receivables
5.6
-
Dufry International
AG, Other receivables
3.3
-
International
Operation & Services (UY) SA, Other receivables
0.1
-
International
Operations & Services (CH) AG, Other receivables
International
Operation & Services (UY) SA, Trade payables
28.9
31.5
International
Operations & Services (USA), Trade payables
-
-
Dufry International
AG, Fee payables
0.3
1.8
Dufry International
AG, Other payables
-
7.2
Dufry Management
AG, Fee payables
0.2
0.1
Dufry Management
AG, Other payables
-
0.3
Dufry AG, Other
payables
1.1
-
World Duty Free
Group UK Ltd, Other payables
0.2
0.3
Dufry Financial
Services B.V., Other payables
0.1
0.2
Hudson News
Distributors, Trade payables 1
-
0.1
Hudson RPM, Trade
payables 1
1.5
-
1
Hudson
News Distributors and Hudson RPM are controlled by James S. Cohen,
a member of Hudson's board of directors.
2
Transactions with
associated companies.
Board members and executives
The
compensation to board members and key executives for the services
provided during the respective years include all forms of
consideration paid, payable or provided by Hudson Group, including
compensation in Dufry shares as follows:
IN MILLIONS OF
USD
2018
2017
2016
Salaries
5.8
3.6
3.2
Variable
payment
3.6
2.9
2.7
Non-monetary
benefits
0.2
0.1
0.1
Share based
payments
8.8
4.6
0.6
Total
18.4
11.2
6.6
The
board members did not receive any compensation for the years 2017
and 2016.