James Hardie Industries plc — FY2018 Form 20-F
Reporting period: Fiscal year ended 31 March 2018. Although the request references “2017 Q4,” this filing is an annual report, not a quarterly filing. Financial statements are audited and prepared under U.S. GAAP, in U.S. dollars.
Business context
James Hardie manufactures fiber-cement building products, primarily siding and backerboard. North America accounted for the majority of revenue. On 3 April 2018, after year-end, the company completed its acquisition of German building-products business Fermacell for an enterprise value of €473 million.
Financial and operating performance
| Metric (US$ millions, except per-share data) | FY2018 | FY2017 |
|---|---|---|
| Net sales | 2,054.5 | 1,921.6 |
| Gross profit / margin | 730.2 / 35.5% | 674.7 / 35.1% |
| Operating income | 229.2 | 393.2 |
| Net income | 146.1 | 276.5 |
| Diluted GAAP EPS | $0.33 | $0.62 |
| Operating cash flow | 295.0 | 292.1 |
| Capital expenditures | 203.7 | 101.9 |
- Sales rose 7%; gross profit rose 8%. North America sales increased 6%, supported by higher prices and slightly higher volume. International Fiber Cement sales rose 12%, mainly on 9% volume growth.
- North America operating income increased 11% to $381.9 million; International Fiber Cement operating income increased 14% to $108.4 million. Other Businesses reported an $8.6 million operating loss.
- GAAP operating income fell 42% and net income fell 47%, principally because asbestos adjustments shifted from a $40.4 million benefit to a $156.4 million expense, alongside a $26.1 million early-debt-extinguishment loss and $10.0 million of Fermacell acquisition costs.
- Management-reported adjusted EBIT was $397.5 million, up 12%; adjusted net operating profit was $291.3 million, up 17%; adjusted diluted EPS was $0.66 versus $0.56. These are non-GAAP measures and exclude specified items.
- Operating cash flow was nearly flat year over year. Investing cash outflow was $200.6 million, reflecting the higher capital program; financing cash inflow was $112.5 million, primarily due to new notes. Cash and cash equivalents were $281.6 million at year-end.
- Gross debt principal was approximately $900 million and reported net debt was $602.8 million, compared with $485.6 million net debt a year earlier. The balance sheet reported total assets of $2,351.0 million and a shareholders’ deficit of $221.5 million.
Material changes, liquidity and capital allocation
- In December 2017, the company issued $800 million of notes: $400 million due 2025 at 4.75% and $400 million due 2028 at 5.00%. Proceeds funded redemption of $400 million of 5.875% notes due 2023, repayment of revolving borrowings, capital expenditures and part of the Fermacell purchase. The refinancing generated the $26.1 million extinguishment loss.
- At year-end, $100 million was drawn on a $500 million revolving credit facility, leaving $400 million available; the facility matures in December 2022. The company reported compliance with debt covenants. It drew €400 million (about $492.4 million) under a 364-day term loan after year-end to complete the Fermacell acquisition.
- Capital expenditures increased to $203.7 million, mainly for North American capacity expansion. Major projects included Tacoma, Philippines and Carole Park; a new Prattville, Alabama plant was announced at an estimated $240 million, with expected commissioning in the first half of FY2020.
- Cash dividends paid were $177.5 million. The company declared a 10-cent first-half dividend and, after year-end, a 30-cent second-half dividend. Its stated ordinary-dividend policy targets a 50%–70% payout of net income excluding asbestos, subject to applicable constraints.
- The company expected to contribute approximately $103 million to AICF in July 2018, representing 35% of FY2018 AFFA-defined free cash flow. It stated that cash, operating cash flow net of expected AFFA payments, and available facilities should fund planned capital expenditure and working capital for at least 12 months.
Outlook, risks and unusual items
- Management expected modest U.S. housing-market growth and a prolonged recovery to continue into FY2019; single-family construction and repair-and-remodel markets were expected to grow at rates similar to FY2018. Australian sales were expected to track average growth in relevant repair-and-remodel and detached-housing markets in eastern Australia. No quantified earnings guidance was provided.
- U.S. volume growth was held back by capacity constraints, particularly in the prior year and first half of FY2018. Management cited input-cost pressure, including higher freight, labor, raw materials and production costs. U.S. NBSK pulp market prices averaged $1,155 per ton, up 15% year over year.
- The asbestos obligation is a major estimate and cash-flow exposure. The gross recorded liability was $1,215.1 million; the net unfunded AFFA liability, net of tax, was $690.4 million. The actuarial central estimate rose to A$1.443 billion, reflecting higher projected mesothelioma claims, partly offset by lower average claim sizes and an AFFA amendment. A two-year shift in the assumed mesothelioma incidence pattern could increase the discounted central estimate by approximately 18%.
- Other key risks include dependence on construction markets and a concentrated customer base (one customer generated 12.0% of FY2018 sales), competition, raw-material and energy costs, foreign-exchange movements, product warranties, environmental and silica regulation, and execution and integration risks for Fermacell. The U.S. Tax Cuts and Jobs Act’s future effects remained uncertain.
- Management reported capacity constraints and a short-term business impact in areas affected by Hurricanes Harvey and Irma. A U.S. product-liability appeal was being settled on terms described as non-material to the subsidiary. The net provision for New Zealand weathertightness claims was $0.9 million.
Important facts for investors to verify
- Review the audited statements and non-GAAP reconciliations, especially the contrast between GAAP net income of $146.1 million and adjusted net operating profit of $291.3 million.
- Assess the assumptions and sensitivities behind the asbestos liability, future AFFA payments, actuarial claim projections and related tax assets.
- Confirm Fermacell’s purchase-price allocation, financing costs, integration progress and contribution to European revenue, earnings and cash flow; the filing says acquisition pro formas and final allocation were not yet practicable to disclose.
- Track utilization, service levels and commissioning timelines for capacity projects, alongside demand growth and cost inflation.
- Monitor post-acquisition leverage, debt covenants, refinancing needs, dividend capacity and the cash available after AFFA contributions.