James Hardie Industries plc — FY2013 Form 20-F
Period note: This is an annual report for the fiscal year ended 31 March 2013, not a filing for calendar-year 2012 Q4. It also reports the fiscal fourth quarter ended 31 March 2013. Financial amounts below are US dollars unless stated otherwise; the statements use US GAAP.
Business context and reporting period
James Hardie manufactures fibre-cement building products, principally for residential construction, renovation and repair. Its main markets are the United States, Australia, New Zealand, the Philippines, Europe and Canada. The company reported approximately 2,700 employees and FY2013 net sales of $1.321 billion. The 20-F was audited by Ernst & Young, which issued an unqualified opinion; management and the auditor reported effective internal control over financial reporting.
Financial and operating performance
| Metric (US$ millions, except per-share data) | FY2013 | FY2012 |
|---|---|---|
| Net sales | 1,321.3 | 1,237.5 |
| Gross profit / gross margin | 419.3 / 31.7% | 407.0 / 32.9% |
| Operating income | 29.5 | 155.5 |
| Net income | 45.5 | 604.3 |
| Net cash from operating activities | 109.3 | 387.2 |
| Capital expenditures | 61.1 | 35.8 |
| Cash and cash equivalents at year-end | 153.7 | 265.4 |
| Total debt at year-end | 0 | 30.9 |
| Net current assets | 373.7 | 463.3 |
- Sales rose 7%, led by USA and Europe Fibre Cement sales, up 10% to $951.4 million. Its volume increased 12%, while average selling price declined 1%. Asia Pacific sales fell 2% to $369.9 million, largely reflecting currency translation.
- Gross profit increased 3%, but gross margin declined 1.2 percentage points. Higher fixed manufacturing costs, lower prices and product mix pressures were partly offset by lower pulp and freight costs.
- Operating income fell 81%. The company reported $117.1 million of unfavourable asbestos adjustments, $16.9 million of asset impairments and $13.2 million of New Zealand product-liability expenses. On the company’s non-GAAP measure excluding asbestos, impairments, ASIC expenses and New Zealand product liability, operating income was $181.0 million versus $194.9 million, down 7%.
- Net income fell from $604.3 million to $45.5 million. FY2012 included a $485.2 million tax benefit tied primarily to the successful appeal of a disputed Australian tax assessment. Adjusted net income, excluding specified legacy items and tax adjustments, was $140.8 million versus $144.3 million, down 2%.
- Operating cash flow fell to $109.3 million, principally because FY2012 included a $396.3 million cash tax refund while FY2013 included an $81.3 million tax payment. Investing cash outflow was $59.7 million; financing cash outflow was $158.7 million, including $188.5 million of dividends paid.
- At year-end, $405 million of uncollateralised credit facilities was undrawn; the company said it complied with its debt covenants and expected adequate funding for planned needs over the next 12 months. The AICF loan balance included in FY2012 debt was repaid on 3 April 2012; James Hardie itself was not borrower, guarantor or security provider.
- FY2013’s reported quarterly data show Q4 net sales of $326.8 million, operating loss of $108.3 million and net loss of $69.5 million. Q4 gross profit was $101.8 million. The filing does not provide a clear quarter-specific reconciliation of the operating loss to individual exceptional items.
Material changes, outlook and risks
- Asbestos funding and estimates: The recorded gross asbestos liability was $1.694 billion at 31 March 2013; the net unfunded AFFA liability after tax was $851.6 million. Contributions to AICF during FY2013 were $184.1 million. The company said it did not anticipate a contribution for FY2013 under the AFFA calculation. The actuarial estimate is highly assumption-sensitive: the filing says a five-year delay in the estimated mesothelioma-claims peak could increase the discounted central estimate by about 45%. New claims exceeded actuarial expectations in FY2013.
- Legal contingencies: Existing New Zealand product-liability claims had a $15.2 million net provision; management said an additional loss of up to approximately $10 million was possible. A New Zealand Ministry of Education representative action filed on 16 April 2013 seeks unspecified damages concerning school buildings. The company could not estimate its potential loss and said the claim may materially affect future results. The cited NZ$1.5 billion is the Ministry’s broad weathertightness-risk estimate, not an estimate of James Hardie’s liability. A $2.0 million provision was recorded for ASIC-related costs; management did not expect future costs from those proceedings to be material.
- Capacity investment: The company expected approximately $150 million of FY2014 capital expenditures. It was refurbishing the Fontana, California plant for an anticipated early-2014 reopening and planned an Australian capacity expansion at Carole Park, with expected spending of A$89 million over two years. These plans depend on demand, execution and costs.
- Management outlook: Management described the US housing recovery as sustainable but protracted. If US demand and average selling prices improved as expected, it anticipated a FY2014 USA and Europe segment operating-income margin above 20%. Australia was expected to remain subdued; New Zealand’s improving construction market and a robust Philippines market were expected to support earnings. These are forward-looking expectations, not guarantees.
- Other risks: Results are exposed to construction cycles, competition and pricing, customer concentration (two customers represented 27.3% of sales in FY2013), raw-material costs, currency movements, warranties, environmental and product-liability claims, and the long-term asbestos obligation. The company also cautioned that its Irish domicile and tax arrangements could affect tax, distributions and control matters.
- Shareholder returns: The company paid $0.43 per security during FY2013. It subsequently announced a $0.13 ordinary and $0.24 special dividend, bringing the stated FY2013 full-year dividend to $0.42 per security, and announced a new buyback programme of up to 5% of issued capital. The declared post-year-end distributions and programme remain subject to their terms and applicable constraints.
Most important facts for investors to verify
- How the asbestos actuarial assumptions, claims experience, insurance recoveries and future AFFA contributions affect the recorded liability and cash available for investment or distributions.
- Whether the expected US recovery, price improvement and segment margin above 20% materialise, and whether the planned capacity spending delivers returns without cost overruns or further impairments.
- The eventual scope, allocation and financial effect of the New Zealand Ministry of Education action, separate from the existing New Zealand product-liability provision.
- Underlying earnings and cash generation apart from the unusual FY2012 tax benefit, and the sensitivity of reported results to taxes, exchange rates and legacy items.
- Customer concentration, dividend and buyback capacity, and liquidity after planned capital expenditures and asbestos-related funding obligations.