Business Context and Reporting Period
Company: James Hardie Industries N.V. (JHI NV)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended March 31, 2009
Business Overview: JHI NV is the largest manufacturer of fiber cement products for building construction in the United States, Australia, New Zealand, the Philippines, and Europe. The company operates through two primary segments: USA and Europe Fiber Cement, and Asia Pacific Fiber Cement. The company is incorporated in The Netherlands and trades on the NYSE (ADS) and ASX (CUFS).
Key Financial Metrics
| Metric (in millions USD) | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Total Net Sales | $1,202.6 | $1,468.8 |
| Operating Income | $173.6 | $(36.6) |
| Net Income | $136.3 | $(71.6) |
| EBITDA | $230.0 | $19.9 |
| Cash Flow from Operations | $(45.2) | $319.3 |
| Total Debt | $324.0 | $264.5 |
| Cash and Cash Equivalents | $42.4 | $35.4 |
| Shareholders' Deficit | $(108.7) | $(202.6) |
Note: The company reported a net income of $136.3 million in 2009, a significant turnaround from a net loss of $71.6 million in 2008. This improvement was largely driven by favorable asbestos adjustments and a reduction in impairment charges.
Material Changes vs. Prior Period
- Revenue Decline: Total net sales decreased 18% to $1,202.6 million. The USA and Europe segment saw a 21% decline due to a 22% drop in sales volume driven by the U.S. housing market downturn. The Asia Pacific segment declined 8% primarily due to unfavorable currency exchange rates.
- Profitability Turnaround: Operating income swung from a loss of $36.6 million in 2008 to a profit of $173.6 million in 2009. This was primarily due to a $17.4 million favorable asbestos adjustment in 2009 compared to a $240.1 million unfavorable adjustment in 2008, and the absence of the $71.0 million impairment charges recorded in 2008.
- Cash Flow Deterioration: Operating cash flow turned negative at $(45.2) million, down from $319.3 million. This was caused by a $101.6 million settlement payment to the Australian Taxation Office (ATO) and $110.0 million in quarterly payments to the Asbestos Injuries Compensation Fund (AICF).
- Debt Increase: Total debt increased to $324.0 million from $264.5 million, with $324.0 million drawn against $498.3 million in available credit facilities.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Market Conditions: Management expects continued weakness in the U.S. housing market, with housing starts at record lows. Recovery is expected to be slow in 2009 and 2010. Australia and New Zealand markets are also expected to face declines in housing starts.
- Capital Expenditures: The company expects to spend between $30 million and $50 million on capital expenditures in fiscal 2010, funded by internal cash and credit facilities.
- Dividends: The Board has suspended dividends to conserve capital until market conditions improve significantly.
- Corporate Restructuring: The company filed a Form F-4 to propose a two-stage plan to move its domicile from The Netherlands to Ireland.
Material Risks and Contingencies
- Asbestos Liability: The company maintains a $1.3 billion asbestos liability related to the AICF. Future funding payments are linked to net operating cash flow. A 10% unfavorable movement in the AUD/USD exchange rate could impact net income by approximately $73.2 million.
- ASIC Proceedings: The Australian Securities and Investments Commission (ASIC) found the company liable for false or misleading statements and continuous disclosure failures. A hearing on penalties is pending. The company incurred $14.0 million in legal costs in 2009.
- Tax Litigation: A significant dispute with the ATO regarding a 1999 tax assessment remains unresolved. The company has paid $173.5 million as a deposit but disputes the liability. Additionally, the company's eligibility for U.S.-Netherlands tax treaty benefits for years after 2007 remains undetermined.
- Chile Litigation: A Chilean court awarded $13.4 million in damages against a former subsidiary for predatory pricing. The company is appealing and intends to exercise indemnification rights.
Investor Verification Checklist
- Asbestos Liability Sensitivity: Verify the impact of the Australian Dollar to U.S. Dollar exchange rate on the $1.3 billion asbestos liability and future funding obligations.
- ASIC Penalty Outcome: Monitor the outcome of the ASIC penalty hearing scheduled for late July 2009 and potential additional costs.
- ATO Dispute Resolution: Track the status of the Federal Court of Australia appeal regarding the 1999 tax assessment and the potential release of the $173.5 million deposit.
- U.S. Housing Market Recovery: Assess the timeline for recovery in U.S. housing starts, which directly correlates to the company's primary revenue stream (77% of sales).
- Dividend Policy: Confirm the timeline for the resumption of dividends, which are currently suspended to preserve liquidity.