James Hardie Industries plc — FY2019 Form 20-F
Period note: The supplied filing is the annual report for the fiscal year ended 31 March 2019, not a standalone 2018 fourth-quarter filing. Financial statements are audited and prepared under US GAAP, in US dollars.
Business context and reporting period
James Hardie manufactures fiber-cement and fiber-gypsum building products, serving residential and commercial construction, repair and remodeling markets. On 3 April 2018, it acquired Fermacell, adding a substantial European fiber-gypsum business. FY2019 results therefore include Fermacell for almost the full year and are not directly comparable with FY2018. The company also revised segment reporting, without changing historical consolidated results.
Key financial metrics
| Metric (US$ millions, except per-share data) | FY2019 | FY2018 |
|---|---|---|
| Net sales | 2,506.6 | 2,054.5 |
| Gross profit | 831.0 | 730.2 |
| Operating income | 351.6 | 229.2 |
| Net income | 228.8 | 146.1 |
| Diluted EPS | $0.52 | $0.33 |
| Operating cash flow | 287.6 | 302.0 |
| Capital expenditures | 301.1 | 203.7 |
- Gross margin was 33.2%, down 2.3 percentage points. Adjusted operating income was $404.6 million, up 2%; adjusted net income was $300.5 million, up 3%; adjusted diluted EPS was $0.68. These are non-GAAP measures.
- Cash used in investing was $848.0 million, including $558.7 million for the Fermacell acquisition; cash provided by financing was $364.2 million.
- Total assets were $4,032.6 million and shareholders’ equity was $974.4 million, compared with a $221.5 million deficit a year earlier. Adoption of an income-tax accounting standard added $1,160.3 million to retained earnings; the equity improvement was not solely operating performance.
- Net debt was $1,301.6 million, up from $602.8 million. Long-term debt was $1,380.3 million; cash and cash equivalents were $78.7 million. The $500 million revolving facility had $150 million drawn and $340.5 million available after letters of credit and guarantees. The company reported compliance with debt covenants.
- Reported segment sales: North America Fiber Cement $1,676.9 million; Asia Pacific Fiber Cement $446.8 million; Europe Building Products $368.3 million; Other Businesses $14.6 million. Europe’s increase chiefly reflects Fermacell.
Material changes versus FY2018
- Revenue rose 22%, driven by the Fermacell acquisition and higher North American and Asia Pacific sales. Reported operating income rose 53% and net income 57%; the comparison is affected by lower asbestos adjustment expense than in FY2018.
- North American segment sales rose 6%; volume and average price each increased 3%, but operating income was essentially flat amid higher production and SG&A costs. Asia Pacific sales rose 5%, while operating income fell 8%, reflecting input costs, plant performance and foreign exchange.
- Gross margin declined amid higher pulp, freight and other production costs. Operating cash flow fell $14.4 million, while capital spending rose to $301.1 million.
- Net debt increased substantially, principally reflecting Fermacell financing and investment. The company issued €400 million of 3.625% notes due 2026 and repaid the acquisition term loan.
Outlook, risks and unusual items
- Management expected modest US housing-market growth in FY2020, at a lower rate than FY2019; Australian addressable-market conditions were expected to weaken. It expected Europe Building Products to grow year over year in sales and operating margin. No consolidated numerical earnings guidance is provided in the supplied text.
- FY2019 included $15.9 million of asset impairments, including charges linked to exiting the fiberglass windows business and discontinuing the MCT product line. Fermacell incurred $21.8 million of transaction and integration costs and a $7.3 million acquisition-accounting inventory adjustment.
- The asbestos liability was $1,089.6 million gross; the net unfunded AFFA liability after related assets and tax was $608.4 million. The company expected to contribute about $100.9 million to AICF in July 2019, equal to 35% of AFFA-defined free cash flow. Actuarial estimates extend through 2072 and are sensitive to claim frequency, settlement costs, timing and exchange rates.
- Key risks include construction-market cyclicality, competition and pricing, rising raw-material and freight costs, foreign exchange and interest-rate exposure, customer concentration, warranties and product liability, environmental and silica regulation, and integration of Fermacell. One customer represented 10.4% of FY2019 sales.
- New Zealand weathertightness claims, tax reviews and other proceedings remain subject to uncertainty. Management did not expect ordinary-course proceedings to be materially adverse, except for asbestos, tax and New Zealand product-liability matters.
- Ernst & Young issued unqualified opinions on the financial statements and internal controls. Management reported effective controls as of 31 March 2019; the control assessment excluded Fermacell under the acquisition-related transition period.
Important facts for investors to verify
- Separate acquisition-driven growth from organic growth and assess the comparable, pro forma contribution and integration progress of Fermacell.
- Review the drivers and sensitivity of the asbestos liability, AICF funding obligations and the July 2019 contribution; check subsequent actuarial updates.
- Reconcile reported and adjusted earnings, especially asbestos adjustments, impairments, acquisition costs and tax effects.
- Check debt maturities, interest-rate exposure, facility availability, covenant headroom and the effect of planned capacity investment on cash flow.
- Monitor US and Australian housing demand, pulp and freight costs, segment margins, customer concentration, warranty provisions and unresolved legal or tax contingencies.