JHX

Business Context and Reporting Period

Company: James Hardie Industries Plc (formerly James Hardie Industries SE)

Reporting Period: Fiscal year ended March 31, 2010

Business Overview: The Company is the largest manufacturer of fiber cement products for internal and external building construction applications in the United States, Australia, New Zealand, and the Philippines. Operations are divided into two primary segments: USA and Europe Fiber Cement, and Asia Pacific Fiber Cement.

Corporate Status: During the reporting period, the Company completed Stage 1 of a two-stage re-domicile proposal, transforming from a Dutch N.V. to a Dutch SE. Subsequent to the fiscal year end (June 2010), the Company completed Stage 2, moving its corporate domicile to Ireland and becoming an Irish tax resident.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total net sales decreased 6% to $1,124.6 million, driven primarily by a 11% decline in the USA and Europe segment due to a 15% drop in sales volume caused by the U.S. housing downturn. The Asia Pacific segment saw a 9% sales increase, aided by favorable currency movements.
• Profitability Reversal: The Company reported an operating loss of $21.0 million compared to operating income of $173.6 million in the prior year. This reversal was primarily due to a $224.2 million unfavorable asbestos adjustment.
• Asbestos Adjustments: The $224.2 million charge was largely driven by a $220.9 million loss on foreign currency exchange resulting from the appreciation of the Australian dollar against the U.S. dollar, which increased the reported value of the Australian-dollar-denominated asbestos liability.
• Cash Flow Improvement: Operating cash flow turned positive at $183.1 million, a significant improvement from the $45.2 million outflow in 2009. This was due to the absence of large one-time cash outflows in 2010, specifically the $101.6 million ATO settlement and $110.0 million AICF contributions made in 2009.
• Debt Reduction: Total debt decreased by $170.0 million to $154.0 million as the Company repaid significant term facilities.

Guidance, Outlook, and Risks

• Outlook: Management anticipates a slow recovery in the U.S. housing market for fiscal 2011, with analysts expressing less confidence in sustained improvement. Asia Pacific markets are expected to perform somewhat better than in 2010. Operating costs are expected to rise in 2011 due to upward pressure on commodity prices (pulp, cement, energy).
• Capital Expenditures: The Company expects to spend approximately $70 million to $80 million on capital expenditures in fiscal 2011.
• Dividends: Dividends remain suspended to conserve capital until market conditions improve significantly.
• Key Risks:
  • Asbestos Liability: The Company maintains a $1.6 billion asbestos liability. Future funding payments to the Asbestos Injuries Compensation Fund (AICF) are linked to net operating cash flow. A 10% unfavorable movement in the AUD/USD exchange rate could impact net income by approximately $101 million.
  • Taxation: Significant uncertainty remains regarding the Company's eligibility for benefits under the U.S.-Ireland and U.S.-Netherlands tax treaties. Failure to qualify could result in a 30% U.S. withholding tax on interest and royalties, significantly increasing the effective tax rate.
  • Legal Proceedings: Ongoing appeals regarding the Australian Securities and Investments Commission (ASIC) proceedings against the Company and former directors remain unresolved. The Company incurred $3.4 million in ASIC-related expenses in 2010.
  • ATO Dispute: A disputed amended tax assessment of approximately A$368 million remains pending appeal. The Company has paid 50% as a deposit but has not recorded a liability, believing its position will be upheld.

Investor Verification Checklist

• Asbestos Liability Sensitivity: Verify the impact of the Australian dollar's exchange rate on the reported asbestos liability and future cash flow requirements.
• Tax Treaty Status: Confirm the Company's ongoing eligibility for reduced withholding tax rates under the U.S.-Ireland and U.S.-Netherlands treaties, as a loss of these benefits would materially increase tax expenses.
• ASIC Proceedings Outcome: Monitor the final judgment on the ASIC appeals, as the Company could face significant fines or indemnification costs for former directors.
• ATO Dispute Resolution: Track the outcome of the Federal Court of Australia appeal regarding the 1999 amended tax assessment, which could result in a significant expense if the Company loses.
• U.S. Housing Recovery: Assess the sustainability of the U.S. housing market recovery, as the Company's largest segment (USA and Europe) is highly sensitive to housing starts and remodeling activity.