James Hardie Industries plc — FY2015 Form 20-F
Period: Fiscal year ended 31 March 2015; financial statements are audited and prepared under US GAAP in US dollars. This is an annual report, not a standalone 2014 Q4 filing; the supplied text does not provide clear standalone Q4 results.
Business context
James Hardie manufactures fiber-cement building products, principally siding and backerboard. Its primary markets are the United States, Australia, New Zealand, the Philippines, Canada and Europe. The US and Europe segment generated $1,276.5 million of FY2015 sales; Asia Pacific generated $380.4 million.
Financial results and liquidity
| Metric | FY2015 | FY2014 | Change / note |
|---|---|---|---|
| Net sales | $1,656.9 million | $1,493.8 million | Up 11% |
| Gross profit / margin | $578.8 million / 34.9% | $506.4 million / 33.9% | Margin up 1.0 percentage point |
| Operating income | $335.0 million | $53.1 million | Reported result substantially affected by asbestos adjustments |
| Net income / diluted EPS | $291.3 million / $0.65 | $99.5 million / $0.22 | Reported net income nearly tripled |
| Adjusted operating income / margin | $304.0 million / 18.3% | $252.8 million / 16.9% | Non-GAAP; margin improved |
| Adjusted net income | $221.4 million | $197.2 million | Up 12%; non-GAAP |
| Operating cash flow | $179.5 million | $322.8 million | Down $143.3 million |
| Capital expenditure | $276.2 million | $115.4 million | More than doubled |
| Cash and net debt | $67.0 million cash; $330.5 million net debt | $167.5 million cash; $167.5 million net cash | Moved to net debt |
| Shareholders’ deficit | $202.6 million | $199.0 million | Assets $2,044.5 million; liabilities $2,247.1 million |
FY2015 gross margin benefited from higher pricing and volume, partly offset by higher production costs. USA and Europe volume rose 9% and average selling price rose 4%; Asia Pacific volume also rose 9%. Operating cash flow fell mainly because the AICF payment was $113.0 million higher than in FY2014 and working-capital needs increased. The company had $400 million of principal debt outstanding at year-end: $325 million of senior notes due 2023 and $75 million drawn on credit facilities. It reported $515 million available under $590 million of bilateral facilities and compliance with debt covenants.
Material changes, outlook and risks
- Asbestos obligation: The company recorded a $1,421.6 million gross asbestos liability and a $1,236.1 million net AFFA liability before tax. The net unfunded AFFA liability after tax was $811.7 million. FY2015 asbestos adjustments were a $33.4 million benefit, including a $144.7 million favorable foreign-exchange impact partly offset by a $111.3 million adverse actuarial-estimate change. Management expected an approximately $62.8 million AICF contribution on 1 July 2015.
- Claims uncertainty: FY2015 asbestos claims received (665) exceeded the actuarial estimate (610), and mesothelioma claims were above actuarial expectations for a third consecutive year. The actuary’s sensitivity analysis indicated that delayed decline in claims and later renewed increases could raise its discounted central estimate by approximately 26%.
- Other unusual items: FY2015 included a $4.2 million non-recurring stamp duty expense and a $4.3 million benefit from New Zealand weathertightness claims. The net New Zealand provision was $2.0 million at year-end; the company estimated possible additional loss of up to approximately $0.5 million.
- Management outlook: The company expected moderate US housing-market growth in FY2016, continued Australian sales growth in line with housing and renovation activity, more moderate growth in New Zealand, and Philippines growth from market penetration. It anticipated significant capital spending through FY2017, focused on capacity expansion and plant upgrades. These are expectations, not guarantees.
- Key risks: Results depend on construction and renovation markets, product acceptance, competition, a small number of major customers, raw-material and energy costs, currency movements, and successful completion of expansion projects. Asbestos funding, product warranties, legal claims, environmental and silica-related exposures, tax reviews, debt service and refinancing are additional material uncertainties.
- Shareholder returns: Management stated an ordinary-dividend target payout ratio of 50–70% of net income excluding asbestos. In May 2015 it announced a 0.27-cent-per-security second-half dividend and a 0.22-cent special dividend, as well as a new buyback authorization of up to 5% of issued capital through May 2016.
- Controls and audit: Management and Ernst & Young concluded that internal control over financial reporting was effective as of 31 March 2015; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Reconcile the selected-financial-data table: it lists FY2015 operating income as $291.3 million, while the audited income statement and MD&A report operating income of $335.0 million; $291.3 million is reported net income.
- Review the actuarial assumptions, claims trends, currency sensitivity and funding terms behind the long-term asbestos liability and AICF contributions.
- Assess whether operating cash generation can support the planned capital program, dividends, debt service and AFFA payments, particularly after the shift to net debt.
- Track US housing activity, segment pricing and volumes, input-cost inflation, and delivery and commissioning of capacity projects.
- Review major-customer concentration, product warranty exposure, New Zealand claims, tax contingencies and the terms and availability of credit facilities.