Business Context and Reporting Period
Company: James Hardie Industries Plc (JHI NV)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended March 31, 2008
Business Overview: JHI NV is the largest manufacturer of fiber cement products for internal and external building construction in the United States, Australia, New Zealand, and the Philippines. The company operates primarily through two segments: USA Fiber Cement and Asia Pacific Fiber Cement. The company is incorporated in The Netherlands and lists its securities on the NYSE (as ADRs) and the ASX (as CUFS).
Key Financial Metrics
| Metric (in millions USD) | Fiscal 2008 | Fiscal 2007 |
|---|---|---|
| Total Net Sales | $1,468.8 | $1,542.9 |
| Operating Loss | $(36.6) | $(86.6) |
| Net Loss | $(71.6) | $151.7 (Income) |
| Operating Cash Flow | $319.3 | $(67.1) |
| Capital Expenditures | $38.5 | $92.1 |
| Total Debt | $264.5 | $188.0 |
| Cash and Cash Equivalents | $35.4 | $34.1 |
| Shareholders' Equity (Deficit) | $(202.6) | $258.7 |
Margins: Gross profit margin decreased to 36.1% in 2008 from 37.1% in 2007. The company reported a net loss per share of $(0.16) for 2008, compared to net income per share of $0.33 in 2007.
Material Changes vs. Prior Period
- Revenue Decline: Total net sales decreased 5% to $1,468.8 million. USA Fiber Cement sales dropped 9% due to an 11% decline in volume driven by the U.S. housing downturn, partially offset by a 2% price increase. Conversely, Asia Pacific sales increased 19% due to favorable currency exchange rates and volume growth.
- Asbestos Adjustments: The company recorded $240.1 million in asbestos adjustments in 2008, compared to $405.5 million in 2007. This included a $175.0 million increase in the asbestos liability due to actuarial estimate changes and an $87.2 million unfavorable foreign exchange impact.
- Impairment Charges: The company recorded $71.0 million in impairment charges in 2008, primarily related to the suspension of production at the Blandon, Pennsylvania plant ($32.4 million) and the closure of the Plant City, Florida Hardie Pipe plant ($25.4 million). No impairment charges were recorded in 2007.
- Equity Position: Shareholders' equity turned into a deficit of $(202.6) million in 2008 from positive equity of $258.7 million in 2007, driven by the net loss and the adoption of FIN 48 (Accounting for Uncertainty in Income Taxes), which reduced retained earnings by $78.0 million.
Guidance, Outlook, and Risks
Outlook: Management expects further weakness in U.S. new housing construction in the short term due to high inventory levels and tighter lending standards. The company has reset its cost base in the USA Fiber Cement business to reflect expected market demand. Capital expenditures for fiscal 2009 are expected to be between $40 million and $60 million.
Material Risks and Contingencies:
- Asbestos Liability: The company has a $1.6 billion asbestos liability related to the Asbestos Injuries Compensation Fund (AICF). Future payments are denominated in Australian dollars, creating significant foreign exchange risk. A 10% unfavorable movement in the AUD/USD rate could impact net income by approximately $92.1 million.
- Tax Litigation (IRS): The IRS issued a Notice of Proposed Adjustment (NOPA) in June 2008 asserting the company does not qualify for beneficial withholding tax rates under the U.S.-Netherlands tax treaty. If the IRS prevails, the company estimates an additional tax liability of approximately $37.0 million for 2006-2007, plus interest and penalties that could reach $13.0 million.
- Tax Litigation (ATO): The Australian Taxation Office (ATO) is seeking reinstatement of a former subsidiary (JHAF) to issue an amended assessment. The potential liability includes primary tax of $93.1 million, penalties of $46.6 million, and interest charges of $80.7 million (as of June 30, 2008). Additionally, a separate amended assessment of $337.5 million is under appeal; the company has paid 50% as a deposit but has not recorded a liability.
- ASIC Proceedings: The Australian Securities and Investments Commission (ASIC) is pursuing civil proceedings against the company and former directors regarding continuous disclosure and misleading conduct. The company has incurred $5.5 million in defense costs as of March 31, 2008, with further costs expected.
Key Facts for Investor Verification
- Asbestos Liability Sensitivity: Verify the impact of the Australian dollar strengthening against the U.S. dollar on the $1.6 billion asbestos liability and future cash flow requirements.
- Tax Disputes: Monitor the resolution of the IRS NOPA regarding the U.S.-Netherlands tax treaty and the ATO proceedings regarding the JHAF reinstatement and the $337.5 million amended assessment.
- Housing Market Exposure: Assess the company's ability to maintain margins and volume in the U.S. market given the severe downturn in new housing starts and the suspension of the Blandon, PA plant.
- Liquidity Position: Review the company's ability to meet AICF funding obligations and capital expenditure needs given the shift to a shareholders' equity deficit and increased debt levels ($264.5 million).
- Customer Concentration: Note that the top three U.S. customers accounted for approximately 59% of USA Fiber Cement gross sales in 2008, creating significant concentration risk.