The selected financial data set forth below for, and as of the end of, the five fiscal years ended July 31, 2004, 2003, 2002, 2001 and 2000 are derived from the Consolidated Financial Statements included elsewhere in this Annual Report or previously published (and, in the case of the year
ended July 31, 2000, restated to reflect the adoption in the UK of a new accounting standard for deferred taxation). These selected financial data are qualified in their entirety by reference to, and should be read in conjunction with, the Consolidated Financial Statements and “Operating
and Financial Review and Prospects” included in Item 5 of this Annual Report.
The Company’s Consolidated Financial Statements are prepared in accordance with UK GAAP, which differs in certain significant respects from US GAAP. Reconciliations to US GAAP are set forth on page F-44 of the Consolidated Financial Statements.
The exceptional loss on disposals for the years ended July 31, 2001 and July 31, 2000 relates to the disposal of the Group’s manufacturing businesses.
(2)
Taxation includes an exceptional credit in the year ended July 31, 2000 of £6.0 million relating to the disposal of a subsidiary in 1998.
(3)
Following the adoption in the UK of a new accounting standard for deferred taxation, the balance sheet as of July 31, 2000 and the results for the period ended July 31, 2000 have been restated. This has no impact on the Group’s earnings under US GAAP.
(4)
See Note 41 of the Consolidated Financial Statements for a description of significant differences between UK GAAP and US GAAP.
(5)
Following the adoption of the new US accounting standards for business combinations and goodwill, goodwill on acquisitions completed since July 1, 2001 has not been amortized under US GAAP. Goodwill amortization included in the determination of net income under US GAAP in the years ended July 31, 2002, 2001 and 2000 was £46.0 million, £38.3 million and £34.0 million,
respectively. From August 1, 2002 goodwill has ceased to be amortized under US GAAP.
The following tables set forth, for the periods indicated, period ends, average, high and low exchange rates between British pounds sterling and US dollars based on the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the
Federal Reserve Bank of New York (the “Noon Buying Rate”) on the date of the information so translated (expressed in US dollars per pound sterling). These rates are provided solely for the reader’s convenience and are not necessarily the exchange rates (if any) used by the Company
in the preparation of the Consolidated Financial Statements included elsewhere in this Annual Report.
US Dollars per British
Pounds Sterling
Exchange Rate
Month
High
Low
February 2004
1.8673
1.8182
March 2004
1.8680
1.7943
April 2004
1.8564
1.7674
May 2004
1.8369
1.7544
June 2004
1.8387
1.8090
July 2004
1.8734
1.8160
August 2004
1.8459
1.7921
September 2004
1.8105
1.7733
October 2004
1.8404
1.7790
Company fiscal year ended July 31,
US Dollars per British Pounds
Sterling Average of the Noon
Buying Rate on the Last Business
Day of Each Full Month
2000
1.5811
2001
1.4418
2002
1.4594
2003
1.5915
2004
1.7590
On October 29, 2004, the most recent practicable date for this report, the Noon Buying Rate was $1.8345 = £1.00 (consequently, $1.00 = £0.55 at this rate).
Fluctuations in the exchange rate between British pounds sterling and US dollars will affect the US dollar equivalent of the British pounds sterling denominated prices of the Company’s ordinary shares and, as a result, will affect the market prices of the Company’s American Depositary
Shares (“ADSs”) in the US.
D. Risk Factors Relating to Wolseley’s Industry and Business
You should carefully consider the risk factors discussed below, as well as all other information included in this Annual Report. Wolseley’s business, financial condition and results of operations could be materially adversely affected by any or all of these risks.
Wolseley is subject to inherent risks of the commercial and residential construction and building materials industries.
Many of Wolseley’s products are distributed to professional contractors in connection with commercial, industrial and residential construction projects. The level of activity in residential construction markets depends on many factors Wolseley cannot control. These include general
economic conditions, mortgage and other interest rates, inflation, unemployment, demographic trends, gross domestic product growth, the price of oil and consumer confidence in each of the countries and markets in which Wolseley operates. Historically, both new housing starts and
residential remodeling decrease in slow economic periods. The level of activity in the commercial and industrial construction market depends largely on vacancy rates and general economic conditions. Because residential and commercial and industrial construction markets are sensitive
to changes in the economy, downturns (or lack of substantial improvement) in the economy in any of Wolseley’s geographic markets could adversely affect Wolseley’s business, financial condition and results of operations. The US building materials business is particularly dependent
upon the new residential/housing market, which may be adversely affected by significant rises in interest rates and unemployment. Such factors could also have an adverse impact on loss ratios in the construction loan lending program. Whilst the US economy has recovered to a large
extent since the events of September 11, 2001, for example, such recovery may be considered to be slower than expected. The market in continental Europe, for example, which accounted for approximately 21% of Wolseley’s sales in the year ended July 31, 2004, which was subdued
during the fiscal year 2002 and which did not show signs of significant improvement during the fiscal year 2003, only showed modest signs of recovery during fiscal 2004. To the extent recovery from these soft market conditions does not materialize or otherwise takes place over an
extended period of time, Wolseley’s business, financial condition and results of operations may be adversely affected. In addition, the commercial and residential construction and building materials industries may be affected by weather conditions. Because of these factors, there may be
fluctuations in Wolseley’s operating results and the results for any period may not be indicative of results for any future period.
There are risks related to Wolseley’s operating and growth strategies.
A key element of Wolseley’s strategy is to increase the profitability and revenues of its organic businesses as well as that of the businesses it acquires. Although Wolseley has been implementing this strategy over the past several years, it cannot provide assurances that it will continue to
be able to do so successfully. There are risks related to the ability of Wolseley to organically grow businesses, such as those below, and it may not be possible to complete the number of acquisitions at the same rate that it has done so in the past. Another key component of Wolseley’s
strategy is to operate its businesses on a decentralized basis, with local management being responsible for day-to-day operations, profitability and the organic growth of the individual businesses. As a result, Wolseley’s overall profitability could be adversely affected if it is unable to
maintain the efficiencies of operating in this decentralized manner.
Wolseley’s ability to generate organic growth will be affected by various factors, including its ability to:
–
increase sales to existing customers;
–
introduce new products/or lines of business;
–
attract new customers;
–
acquire or develop new brands or outlets;
–
improve operating efficiency;
–
reduce operating and overhead expenses;
–
increase net margins; and
–
hire and retain employees.
Many factors affecting Wolseley’s ability to generate organic growth may be beyond its control. Wolseley cannot be sure that its strategies will be successful or that it will be able to generate enough cash flow from operations to
fund its operations and support these strategies . This could materially and adversely affect its business, financial condition and results of operations.
Fluctuating product prices and unexpected product shortages may impair Wolseley’s operating results.
The market price and availability of lumber, gypsum, stainless steel, aluminum, copper, nickel alloys, plastic and other products (or commodities used in such products) distributed by Wolseley can fluctuate quickly and significantly. These fluctuations may adversely affect Wolseley’s
results of operations. For example, the average price for framing lumber, a significant product for Wolseley’s US Building Materials Distribution segment, was 31.7% higher in fiscal 2004 than fiscal 2003 and 20.8% higher than fiscal 2002. Higher lumber prices had the effect of
increasing sales and profitability of that segment during the 2004 fiscal year. Significant monthly variations were seen during fiscal 2004. For additional information on the effect of lumber prices, see “Item 4 – Information on the Group – Business Overview – Raw Materials and
Commodities”. Ferguson Enterprises, Inc., the US part of the North American Plumbing and Heating business, for example, saw price inflation in products such as copper, steel and plastics during the 2004 fiscal year, which based on management estimates accounted for some 40% of
the increase in Ferguson’s trading profit achieved during the year.
Wolseley distributes plumbing and heating materials and building supplies, including lumber, from a wide variety of manufacturers and suppliers. No one supplier or manufacturer accounted for more than 5% of the Group’s total material and supply purchases during the 2004 fiscal year.
Nevertheless, Wolseley may still experience shortages as a result of unexpected demand or production difficulties. If Wolseley is unable to obtain sufficient products from manufacturers and suppliers, there could be a short-term material adverse effect on our business.
Wolseley’s business growth could outpace the capability of its management and systems.
Wolseley expects to grow both organically and through acquisitions. Wolseley expects to expend significant time and effort in evaluating, completing and integrating acquisitions and opening new facilities. Further expenditure was incurred during the 2004 fiscal year in the Group’s
infrastructure, logistics, systems and human resources. However, Wolseley cannot be certain that its existing systems, including supply chain and logistics, will be adequate to support its expanding operations and acquisitions without the need to spend additional resources to extend
capacity and upgrade as necessary. Any future growth also will impose significant additional responsibilities on Wolseley’s senior management and executive officers. Wolseley’s success and ability to undertake new and concurrent business change initiatives will therefore depend on
recruiting new and retaining existing senior level managers and officers and the successful implementation of infrastructure, logistics and system changes. To the extent Wolseley cannot accomplish these matters, its business, financial condition and results of operations could be
materially and adversely affected.
Wolseley may lose business to competitors and otherwise be unable to compete favorably in its industries.
The plumbing and heating and building materials industries in most of the countries in which Wolseley operates are fragmented. The principal competitive factors are availability of materials and supplies, pricing of products, customer service, availability of credit, technical product
knowledge with respect to application and usage, and advisory and other service capabilities. Wolseley’s competition varies by product line, type of customer and geographic market. Wolseley competes with many local, regional, and, in several markets and product categories, other
national distributors and product manufacturers. Wolseley, to a much more limited extent, also competes with the large home center chains, such as The Home Depot and Lowe’s in the US, for business from professional contractors. Wolseley cannot be sure that competition from such
large home center chains or consolidation in an otherwise fragmented market will not, in the future, include greater competition for the business of professional contractors. Several of the companies that compete with Wolseley may have substantially greater financial and other resources.
No assurance can be given that Wolseley will be able to respond effectively to such competitive pressures. Increased competition by existing and future competitors could result in reductions in sales, prices, volumes and gross margins that could materially adversely affect Wolseley’s
business, financial condition and results of operations. Furthermore, Wolseley’s success will depend, in part, on its ability to gain market share from competitors.
Wolseley is subject to risks related to its international operations.
Wolseley has its principal operations in the US, Canada and Europe and plans to continue to expand in each area. Accordingly, Wolseley is subject to specific risks of conducting business in these geographic regions. For example:
–
Wolseley may have difficulty managing and administering an internationally dispersed business. In particular, the management of Wolseley’s personnel across offices in 13 countries can present logistical and management challenges. Additionally, international operations
present challenges related to operating under different business cultures, laws and languages;
–
fluctuations in currency exchange rates may negatively affect Wolseley’s operating results and its financial position;
–
economic or political instability in some international markets may adversely affect Wolseley’s businesses in those regions;
–
Wolseley may have to comply with unexpected changes in foreign laws and regulatory requirements with which it may not be familiar;
–
export controls or other regulatory restrictions could prevent Wolseley from sourcing and shipping its products into and from some markets;
–
Wolseley may not be able to adequately protect its trademarks and other intellectual property overseas due to uncertainty of laws and enforcement in a number of countries relating to the protection of intellectual property rights;
–
changes in tax regulation and international tax treaties could significantly reduce the financial performance of Wolseley’s foreign operations; and
–
Wolseley may have difficulty sourcing on a multinational basis products of a sufficiently good quality and specification to be supplied to all Group companies.
Wolseley’s success may be limited by its inability to identify and successfully integrate acquisitions.
Wolseley intends to continue to grow by acquiring additional plumbing and heating, building materials and complementary distribution businesses. Competition for these acquisitions may limit the number of acquisitions and lead to higher acquisition prices. There can be no assurance
that Wolseley will be able to identify, acquire or manage profitably additional businesses or to successfully integrate any acquired businesses into Wolseley without substantial costs, delays or other operational or financial problems. Acquisitions also involve a number of special risks,
including possible lower margins, failure to achieve expected results, diversion of management’s attention, failure to retain key personnel of the acquired business and risks associated with unanticipated events or liabilities, any of which could have a material adverse effect on
Wolseley’s business, financial condition and results of operations.
Wolseley may not have access to sufficient funding to finance future acquisitions or organic growth.
If Wolseley cannot secure acceptable financing, it may be unable to pursue its acquisition and organic growth strategies successfully. Wolseley cannot predict the timing, size and success of its acquisitions or the capital it will need for those efforts. Using cash for acquisitions could limit
Wolseley’s financial flexibility and increases the likelihood that Wolseley will need to seek additional capital through future debt or equity financings. Additional debt may include financial covenants limiting Wolseley’s operational and financial flexibility. Ordinary shares may be used
as a component of the consideration for future acquisitions. Issuances of ordinary shares for acquisitions or additional equity financing may dilute the ownership interests of the Company’s shareholders, including holders of American Depositary Receipts (or “ADRs”). If the Company’s
ordinary shares do not maintain a sufficient market value or potential acquisition candidates are unwilling to accept ordinary shares, Wolseley may be required to use more of its cash resources to pursue its acquisition program. Wolseley cannot provide assurances that additional debt or
equity financing will be available on acceptable terms.
Wolseley may be adversely affected by governmental regulations.
Wolseley’s operations are affected by various statutes, regulations and laws in the countries and markets in which it operates. While Wolseley is not engaged in a “regulated” industry, it is subject to various laws applicable to businesses generally, including laws affecting land usage,
zoning, environmental (including laws and regulations affecting the supply of lumber), health and safety, transportation, labor and employment practices (including pensions), competition and other matters. In addition, building codes may affect the products Wolseley’s customers are
allowed to use, and consequently, changes in building codes may affect the salability of some Wolseley products.
Wolseley cannot predict whether future developments in laws and regulations concerning its businesses will affect its earnings or cash flow in a materially adverse manner or whether its operating units will be successful in meeting future demands of regulatory agencies in a manner
which will not materially adversely affect Wolseley’s business, financial condition or results of operations.
An important element of Wolseley’s strategy is the continued development of e-commerce opportunities to promote organic growth. Wolseley’s efforts in this area are subject to governmental regulations relating to the Internet, which could have a material adverse effect on the growth of
e-commerce generally and may adversely affect the development of Wolseley’s e-commerce opportunities.
Litigation may have an adverse impact on Wolseley’s financial results.
The international nature of Wolseley’s operations expose it to the potential for litigation from third parties. In the US, the risk of litigation is generally higher than that in Europe in such areas as workers’ compensation, general employer liability and environmental and asbestos litigation.
In the case of asbestos litigation, Wolseley employs independent professional advisers to actuarially determine the potential gross liability, which necessitates the application of certain assumptions relating to claims development and the cost of settling such claims over the remaining
lifetime of the potential litigants, which is approximately 50 years. Whilst actual experience is reviewed against the assumptions each year and the liability adjusted in the financial statements, there can be no assurance that these assumptions will prove correct over the long term.
Wolseley has insurance which significantly exceeds the current estimated liability. Based on current estimates, no profit or cash flow impact is therefore expected to arise in the foreseeable future. However, there can be no assurance that these assumptions will prove correct. In
accordance with UK GAAP, Wolseley has recognized a discounted liability of £27.9 million in respect of asbestos litigation. An equal debtor account of £27.9 million is shown in other debtors reflecting the discounted sum recoverable from insurers in respect of this liability.
Factors which could cause actual results to differ from these estimates and expectations include: (i) adverse trends in the ultimate number of asbestos claims filed against any of Wolseley’s US subsidiaries; (ii) increases in the cost of resolving current and future asbestos claims as a result
of adverse trends relating to settlement costs, dismissal rates, legal fees and/or judgment sizes; (iii) decreases in the amount of insurance available to cover asbestos claims as a result of adverse changes in the interpretation of insurance policies or the insolvency of insurers; (iv) the
emergence of new trends or legal theories that enlarge the scope of potential claimants; (v) the impact of bankruptcies of other companies whose share of liability may be imposed on Wolseley’s US subsidiaries under certain state liability laws; (vi) the unpredictable aspects of the US
litigation process; (vii) adverse changes in the mix of asbestos-related diseases with respect to which asbestos claims are made against Wolseley’s US subsidiaries; and (viii) potential legislative changes.
The departure of key personnel could disrupt Wolseley’s business.
Wolseley depends on the efforts of its executive officers, including the senior management of all its businesses, including those recently acquired, to both run its businesses and to introduce business change initiatives. It customarily negotiates employment agreements and agreements not
to compete with key personnel of companies it acquires in order to maintain key customer relationships and manage the transition of the acquired business. The loss of key personnel, or the inability to hire and retain qualified replacements, could adversely affect Wolseley’s business,
financial condition and results of operations.
Wolseley may be unable to attract and retain qualified employees.
Wolseley’s ability to provide high-quality products and services on a timely basis requires an adequate number of qualified employees. Accordingly, Wolseley’s ability to increase its productivity and profitability and support its growth strategy may be limited by its ability to employ,
train, motivate and retain skilled personnel. Its labor expenses may increase as a result of a shortage in the supply of skilled personnel.
Collective bargaining agreements, work stoppages and other labor relations matters may have an adverse effect on Wolseley.
A small proportion of Wolseley’s employees are covered by collective bargaining or other similar labor agreements. Historically, the effects of collective bargaining and other similar labor agreements on the Group have not been significant. Any inability by Wolseley to negotiate
acceptable new contracts with these unions could cause strikes or other work stoppages, and new contracts could result in increased operating costs. If any such strikes or other work stoppages occur, or if other employees become represented by a union, Wolseley could experience a
disruption of its operations and higher labor costs. Labor relations matters affecting Wolseley’s suppliers of products and services could also adversely affect Wolseley’s business from time to time.
Investors may be subject to both United States and United Kingdom taxes.
Investors are strongly urged to consult with their tax advisers concerning the consequences of investing in the Company by purchasing ADRs. The Company’s ADRs are traded in the US, but the Company is organized under the laws of England and Wales. A US holder of the Company’s
ADRs will be treated as the owner of the underlying ordinary shares for the purposes of US and UK tax laws. Therefore, US federal, state and local tax laws and UK tax laws will apply to the ownership of the Company’s ADRs and the underlying ordinary shares. Tax laws of other
jurisdictions may also apply. For a more detailed discussion of tax issues with respect to the ADRs, see “Item 10 – Additional Information, paragraph E – Taxation”.
The price of the Company’s ADRs may be subject to foreign exchange fluctuations.
Fluctuations in the exchange rate between the British pound sterling and the US dollar could have an adverse effect on the market price of our ADRs. See “British Pounds Sterling Exchange Rate Information” for a discussion of exchange rates.
Voting rights with respect to the ADRs are limited by the terms of the Deposit Agreement.
ADR holders may exercise voting rights with respect to the ordinary shares represented by ADRs only in accordance with the provisions of the Deposit Agreement (as defined in “Item 9 – The Offer and Listing, paragraph C – Markets”) relating to the ADRs. There are no provisions
under English law or under the Company’s Memorandum and Articles of Association that limit ADR holders’ ability to exercise their voting rights through the Depositary (as defined in “Item 9 – The Offer and Listing, paragraph C – Markets”) with respect to the underlying ordinary
shares. However, there are practical limitations upon the ability of ADR holders to exercise their voting rights due to the additional procedural steps involved in communicating with such holders. For example, the Company’s Memorandum and Articles of Association require the
Company to notify its shareholders at least 21 days in advance of any annual or other general meeting. The Company’s ordinary shareholders will receive notice directly from the Company and will be able to exercise their voting rights by either attending the meeting in person or voting
by proxy.
ADR holders, by comparison, will not receive notice directly from the Company. Rather, in accordance with the Deposit Agreement, the Company will provide the notice to the Depositary, which will in turn, as soon as practicable thereafter, mail to ADR holders:
–
the notice of such meeting;
–
voting instruction forms; and
–
a statement as to the manner in which instructions may be given by ADR holders.
To exercise their voting rights, ADR holders must then instruct the Depositary how to vote their shares. Because of this extra procedural step involving the Depositary, the process for exercising voting rights will take longer for ADR holders than for holders of ordinary shares. ADRs for
which the Depositary does not receive timely voting
instructions will not be voted at any meeting. ADR holders are only able to exercise voting rights through the Depositary as described in this Annual Report.
Limitations Relating to Dividend and Other Distribution Rights of ADR Holders.
ADR holders are entitled to receive dividends and cash distributions paid by the Company in proportion to the number of ordinary shares their ADRs represent. The Depositary will convert cash dividends and other cash distributions into US dollars for distribution to ADR holders, to the
extent such cash dividends and distributions are declared in British pounds sterling. Periodically, the Depositary may be unable to convert the foreign currency into US dollars, in which case the Deposit Agreement permits the Depositary, among other things, to hold on to such foreign
currency it cannot convert for the account of ADR holders who have not been paid. Consequently, ADR holders may be delayed in receiving their dividend payments and other cash distributions. Additionally, if the exchange rate fluctuates during the time when the Depositary cannot
convert the foreign currency, ADR holders may lose some or all of the value of the distribution or alternatively receive a greater US dollar amount than would have been received had the conversion been effected at exchange rates prevailing during that period.
The Company may, from time to time, distribute rights to its shareholders, including rights to acquire securities under the Deposit Agreement relating to ADRs. The Depositary will not offer rights to ADR holders unless both the rights and the securities to which such rights relate are
either exempt from registration under the US Securities Act of 1933, as amended (the “Securities Act”) or are registered under the Securities Act. However, the Company is under no obligation to file a registration statement with respect to any such rights or underlying securities or to
endeavor to cause such a registration statement to be declared effective. Accordingly, ADR holders may be unable to participate in rights offerings by the Company and may experience dilution of their holdings as a result.
ADR holders’ rights will be governed by English law and differ from the rights of shareholders under US law.
Wolseley plc is a public limited company incorporated under the laws of England and Wales. The rights of shareholders, including holders who hold their shares in the form of ADRs, are, therefore, governed by English law and by the Company’s Memorandum and Articles of
Association. These rights differ from the typical rights of shareholders in US corporations. In particular, a majority of the Company’s directors and executive officers and the experts named in this Annual Report are residents of countries other than the US. Further, all or a substantial
portion of their assets and the Company’s assets are located outside the US. As a result, it may not be possible for ADR holders to:
–
effect service of process within the US upon a majority of the Company’s directors, executive officers and the experts named in this Annual Report or on the Company; or
–
enforce in the US courts or outside the US judgments obtained against a majority of the Company’s directors, executive officers and the experts named in this Annual Report or the Company in the US courts in any action, including actions under the civil liability provisions of
US securities laws; or
–
enforce US court judgments obtained against the Company or a majority of the Company’s directors, executive officers and the experts named in this Annual Report in courts situated in jurisdictions outside the US in any action, including actions under the civil liability
provisions of US securities laws.
ADR holders also may have difficulties enforcing, in original actions brought in courts in jurisdictions located outside the US, liabilities under US securities laws.
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