Business context and reporting period
James Hardie Industries SE manufactures fibre-cement building products, primarily for residential construction and renovation markets. This is its audited Form 20-F annual report for the fiscal year ended 31 March 2011, prepared under US GAAP—not a standalone “2010 Q4” filing. The quarterly data below are for fiscal Q4 2011, with Q4 2010 comparatives.
The company completed its move of corporate domicile from the Netherlands to Ireland in June 2010 and became Irish tax resident later that month. Its principal reporting segments are USA and Europe Fibre Cement and Asia Pacific Fibre Cement.
Financial results and key metrics
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | US$1,167.0 million | US$1,124.6 million |
| Gross profit / margin | US$391.9 million / 33.6% | US$416.1 million / 37.0% |
| Operating income (loss) | US$104.7 million | US$(21.0) million |
| Net loss | US$(347.0) million | US$(84.9) million |
| Adjusted EBITDA | US$167.6 million | US$40.7 million |
| Operating cash flow | US$147.2 million | US$183.1 million |
| Investing / financing cash flow | US$(49.6) million / US$(89.7) million | US$(50.5) million / US$(159.0) million |
| Cash / total debt at year-end | US$18.6 million / US$59.0 million | US$19.2 million / US$154.0 million |
| Net current assets | US$135.6 million | US$50.4 million |
| Total assets / shareholders’ equity (deficit) | US$1,960.6 million / US$(454.5) million | US$2,178.8 million / US$(117.9) million |
FY2011 net loss per share was US$(0.80), versus US$(0.20) in FY2010. No dividends were paid in either year. Operating profit excluding asbestos and ASIC items was US$184.0 million, down 12% from US$208.7 million; net income excluding asbestos, ASIC and tax adjustments was US$116.7 million, down 12% from US$133.0 million. These are non-GAAP measures identified by management.
Fiscal Q4 2011 comparison
| Metric | Q4 FY2011 | Q4 FY2010 |
|---|---|---|
| Net sales | US$288.4 million | US$274.9 million |
| Gross profit | US$96.9 million | US$91.4 million |
| Operating income | US$50.8 million | US$11.8 million |
| Net income (loss) | US$(1.8) million | US$(2.3) million |
Q4 FY2011 income tax expense was US$52.4 million; the filing identifies the US$32.6 million corporate-structure tax charge as recorded in Q4. The much larger US$345.2 million non-cash tax charge for the disputed Australian assessment was recorded in Q2.
Material changes and management commentary
- Total FY2011 sales rose 4%. USA and Europe sales fell 2%, with volume down 4% but average selling price up 3%. Asia Pacific sales increased 19% in US dollars, reflecting currency translation as well as higher volume and price.
- Gross profit fell 6% and gross margin contracted 3.4 percentage points. Management cited higher pulp and freight costs, lower US volume, weaker factory cost absorption and higher labour cost per unit. Asia Pacific operating income rose 35%, while USA and Europe operating income fell 23%.
- US housing remained weak: single-family starts were down 7.3% in FY2011. Management expected US residential construction and repair/remodel activity to remain relatively flat in FY2012. New Zealand activity was expected to remain subdued; Australia was described as relatively robust, and Philippine demand as strong.
- Average NBSK pulp price rose 30% to US$978 per ton; management expected prices at or above US$1,000 per ton. US freight costs were also expected to rise.
- Operating cash flow declined by US$35.9 million, partly because FY2011 included a US$63.7 million AICF contribution, compared with none in FY2010. Excluding that contribution, management reported operating cash flow of US$210.9 million, up 15% year over year.
Liquidity, debt and outlook
At 31 March 2011, US$59.0 million was drawn from US$320.0 million of unsecured credit facilities, leaving US$261.0 million available. Net debt was US$40.4 million, down from US$134.8 million a year earlier. The company reported compliance with facility covenants and expected available cash and facilities to cover requirements for at least 12 months, while warning that facility renewal terms and operating conditions could affect liquidity.
Management forecast FY2012 capital expenditures of US$80–105 million, funded through operating cash and credit facilities. It expected an approximately US$51.5 million AICF contribution in FY2012. In May 2011, after year-end, the company announced a policy to distribute 20–30% of profit after tax, excluding asbestos adjustments, through ordinary dividends and to seek an on-market buyback of up to 5% of issued capital. It expected to resume dividends with an interim payment following the November 2011 results, subject to Board review and applicable requirements.
Risks, contingencies and unusual items
- Asbestos funding: The recorded asbestos liability was US$1.698 billion; the reported unfunded net AFFA liability was US$954.7 million after specified related assets. The liability depends on long-term actuarial estimates, insurance recoveries and AUD/USD exchange rates. The sensitivity analysis indicated the discounted, inflated central estimate could rise materially if the projected mesothelioma claims peak occurred five years later than assumed.
- ATO disputed assessment: Following an adverse Federal Court decision, the company recorded a US$345.2 million non-cash tax expense and a US$190.4 million liability for the unpaid portion of the assessment. RCI appealed; judgment had been reserved as of the report date. The US$345.2 million charge did not cause a FY2011 cash outflow.
- ASIC proceedings: The company’s appeal was dismissed and it was ordered to pay 90% of ASIC’s costs relating to its appeal. The amount remained uncertain and no provision was recorded at year-end. Further proceedings involving former officers were ongoing.
- Other exposures: Risks include construction-market dependence, customer concentration, warranty and product claims, environmental and silica-related obligations, raw-material and freight inflation, foreign exchange, and refinancing. The four largest US customers represented about 56% of USA and Europe gross sales.
- Unusual accounting and other matters: FY2011 included US$85.8 million of unfavourable asbestos adjustments, largely reflecting currency effects, and a US$3.8 million unrealised loss on interest-rate swaps. The auditor issued an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- Track the outcome and cash consequences of RCI’s appeal of the ATO assessment, including accrued interest and the US$190.4 million unpaid liability.
- Review subsequent AICF actuarial estimates, claims experience, funding requirements and the effect of AUD/USD movements on the reported asbestos liability.
- Confirm the amount and timing of ASIC-related costs and any further recoveries or indemnification.
- Test the recovery of US housing demand and whether selling-price gains can offset pulp, freight and manufacturing-cost pressures.
- Assess facility renewal and liquidity needs against planned US$80–105 million FY2012 capital spending, the expected AICF contribution and the proposed dividend and buyback policy.