Business context and reporting period
James Hardie Industries plc is a global manufacturer of fibre-cement building products, with its largest market in the United States. This Form 20-F reports the fiscal year ended 31 March 2014 (FY2014), not a standalone “2013 Q4” filing. Financial statements are audited and prepared under US GAAP, in US dollars. The unaudited quarterly data show FY2014 fourth-quarter net sales of $376.4 million and net loss of $186.8 million.
Key financial metrics
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $1,493.8 million | $1,321.3 million |
| Gross profit / margin | $506.4 million / 33.9% | $419.3 million / 31.7% |
| Operating income | $53.1 million | $29.5 million |
| Net income | $99.5 million | $45.5 million |
| Operating cash flow | $322.8 million | $109.3 million |
| Capital expenditures | $115.4 million | $61.1 million |
| Cash and cash equivalents | $167.5 million | $153.7 million |
| Total assets | $2,106.5 million | $2,113.2 million |
| Total shareholders’ equity (deficit) | $(199.0) million | $18.2 million |
Reported operating income includes a $195.8 million unfavourable asbestos adjustment in FY2014. Management’s non-GAAP operating income excluding asbestos, impairment, ASIC and New Zealand product-liability items was $252.8 million, versus $181.0 million in FY2013; this measure is not a US GAAP substitute. Adjusted EBITDA was $114.5 million, versus $90.7 million.
At year-end, $47.0 million of debt was recorded for AICF borrowings under its NSW Government facility; James Hardie and its subsidiaries are not borrowers, guarantors or security providers. Excluding that AICF facility, the company reported a net cash position of $167.5 million. Its own $355.0 million of committed credit facilities were undrawn. Net current assets fell to $116.0 million from $373.7 million. Dividends paid were $199.1 million; $22.1 million was spent on share repurchases.
Material changes versus the prior comparable period
- Sales rose 13%; USA and Europe Fibre Cement sales increased 19%, with volume up 14% and average selling price up 4%. Asia Pacific sales declined 1% in US dollars, despite local-currency growth, due partly to Australian-dollar depreciation.
- Gross margin improved 2.2 percentage points to 33.9%, supported by higher pricing and scale efficiencies, partly offset by higher production and input costs.
- Reported operating income increased to $53.1 million, while asbestos charges increased to $195.8 million from $117.1 million. The 2013 period also included $16.9 million of impairments and $13.2 million of New Zealand product-liability expense; neither impairment charges nor comparable New Zealand expense was as high in 2014.
- Net income increased to $99.5 million. The reported income-tax benefit was $44.9 million, including a $15.4 million ATO interest refund; reported earnings therefore reflect significant tax and asbestos-related items.
- Operating cash flow rose to $322.8 million. The comparison was affected by the prior-year $184.1 million AICF contribution and an $81.3 million prior-year tax receipt. Investing outflow increased with higher capital spending.
- The balance sheet shifted from positive equity to a $199.0 million deficit, principally alongside the accumulated deficit and dividends declared. A $124.6 million dividend payable was recorded at year-end.
Outlook, commentary, risks and unusual items
Management expected improvement in the US operating environment to continue in FY2015, while cautioning that it depended on employment, consumer confidence and the broader economy. If demand developed as expected, management anticipated USA and Europe Fibre Cement operating margin above 20%. It expected Australian sales to track detached-housing activity and described improving conditions in parts of New Zealand.
The company expected average capital expenditures of approximately $200 million annually in FY2015–FY2017 for capacity expansion, upgrades, environmental compliance and new technology. It anticipated an approximately $113 million AICF contribution on 1 July 2014, representing 35% of FY2014 free cash flow as defined by the AFFA. A new $150 million of credit facilities added after year-end increased borrowing capacity to $505 million.
- Asbestos funding and estimates: The gross asbestos liability was $1.706 billion and the net unfunded AFFA liability, net of tax, was $979.2 million. The liability is based on long-range actuarial estimates; the company reported higher-than-expected mesothelioma claims for a second consecutive year. The actuarial analysis indicated substantial sensitivity to claim trends and assumptions.
- Other contingencies: New Zealand product-liability claims were provided for at $12.7 million net of estimated recoveries, with possible additional loss of up to approximately $3.6 million. The Ministry of Education representative action was settled confidentially in December 2013, without material adverse effect.
- Operating and market risks: Results depend on residential construction and renovation, customer demand, competition, raw-material and energy costs, and foreign exchange. Two customers each represented more than 10% of sales in at least one of the last three years; the top five US customers represented about half of USA and Europe Fibre Cement gross sales.
- Other exposures: The filing discusses product warranties, environmental and silica-related matters, tax reviews, currency movements, and execution and cost risks for planned capacity investments. Pulp prices rose 11% in FY2014.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Reconcile reported earnings with the asbestos, tax and other adjustments; confirm how non-GAAP measures are defined and calculated.
- Review the latest AICF actuarial assessment, claims experience, funding obligations and sensitivity to future claim volumes and exchange rates.
- Assess whether the US housing recovery and management’s FY2015 margin outlook materialised, and whether planned capacity expansions deliver expected returns within budget.
- Confirm the status and terms of post-year-end credit facilities, liquidity, dividend payments and share repurchases.
- Monitor customer concentration, pulp and other input costs, foreign-exchange exposure, product warranties and the remaining New Zealand claims.