James Hardie(JHX) - 2020 Q4 - Annual Report

Section 1: Company Information and Governance Introduction James Hardie Industries plc is a global leader in manufacturing fiber cement siding and backerboard, and a market leader in Europe for fiber gypsum products - The company is a world leader in fiber cement siding and backerboard, and a market leader in European fiber gypsum products[13] - Primary geographic markets include the United States, Canada, Australia, New Zealand, the Philippines, and Europe[13] - Products are utilized across various sectors including new residential construction (single and multi-family), manufactured housing, repair and remodeling, and commercial/industrial applications[13] Selected Financial Data The company presents a five-year summary of consolidated financial data, highlighting consistent net sales growth and fluctuating net income, alongside key operational metrics Five-Year Selected Financial Data (Fiscal Years 2016-2020) | Indicator (US$ Millions, except per share data) | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net Sales | 2,606.8 | 2,506.6 | 2,054.5 | 1,921.6 | 1,728.2 | | Net Income | 241.5 | 228.8 | 146.1 | 276.5 | 244.4 | | Total Assets | 4,028.3 | 4,032.6 | 2,351.0 | 2,012.7 | 2,029.4 | | Net Cash from Operating Activities | 451.2 | 304.0 | 308.5 | 382.5 | 222.9 | | Diluted EPS (US$) | 0.54 | 0.52 | 0.33 | 0.62 | 0.55 | | Dividends Declared per Share (US$) | 0.36 | 0.40 | 0.38 | 0.39 | 0.58 | Asbestos Adjustments (Expense) Benefit (US$ Millions) | Year | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Amount | (58.2) | (22.0) | (156.4) | 40.4 | 5.5 | Information on the Company History and Development of the Company Established in 1888, James Hardie pioneered asbestos-free fiber cement technology and expanded globally, notably funding the Asbestos Injuries Compensation Fund (AICF) through the AFFA - The company was established in 1888, listed on the ASX in 1951, and pioneered asbestos-free fiber cement technology in the late-1970s[28] - In February 2007, shareholders approved the Amended and Restated Final Funding Agreement (AFFA) to provide long-term funding to the Asbestos Injuries Compensation Fund (AICF) for Australian asbestos-related personal injury claims[30] - Despite having no legal ownership, the company consolidates AICF for financial reporting purposes due to its pecuniary and contractual interests under the AFFA[33] Business Overview James Hardie is a global leader in fiber cement and fiber gypsum building materials, with North America as its largest market, known for durable products and a multi-channel sales strategy Net Sales by Operating Segment (US$ Millions) | Segment | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | North America Fiber Cement | 1,816.4 | 1,676.9 | 1,578.1 | | Asia Pacific Fiber Cement | 418.4 | 446.8 | 425.4 | | Europe Building Products | 371.4 | 368.3 | 36.3 | | Other Businesses | 0.6 | 14.6 | 14.7 | | Total Net Sales | 2,606.8 | 2,506.6 | 2,054.5 | - The company's fiber cement products offer performance advantages such as resistance to moisture, fire, impact, and termites compared to wood-based products[39] - Principal raw materials for fiber cement are cellulose fiber, silica, Portland cement, and water. For fiber gypsum, key materials are gypsum and recycled paper[61] Organizational Structure Incorporated in Ireland, James Hardie Industries plc details its significant wholly-owned subsidiaries and their jurisdictions of establishment and tax residence Selected Significant Subsidiaries (as of 30 April 2020) | Name of Company | Jurisdiction of Establishment | Jurisdiction of Tax Residence | | :--- | :--- | :--- | | James Hardie Building Products Inc. | United States | United States | | James Hardie Australia Pty Ltd | Australia | Australia | | James Hardie Europe GmbH | Germany | Germany | | Fermacell B.V. | Netherlands | Netherlands | | James Hardie International Finance DAC | Ireland | Ireland | Property, Plants and Equipment The company operates numerous fiber cement and fiber gypsum manufacturing plants globally, with FY2020 capital expenditures at US$193.8 million, including a significant expansion in Prattville, Alabama - The company operates fiber cement manufacturing plants across the US, Australia, New Zealand, and the Philippines, and six manufacturing plants in Europe[90] Total Capital Expenditures (US$ Millions) | Year | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | Total | 193.8 | 317.5 | 210.2 | - A significant active capital project is the US$240.0 million Prattville Greenfield expansion, expected to be commissioned in FY22, which will add 600 mmsf of nameplate capacity[103] Directors, Senior Management and Employees James Hardie Executive Team The executive team, led by CEO Dr. Jack Truong and CFO Jason Miele, oversees key corporate functions and strategic operations - Dr. Jack G. Truong was appointed CEO in January 2019. He previously served as President and CEO of Electrolux North America and had a 22-year career at 3M Company[108][109][110] - Jason Miele was appointed CFO in February 2020. He has been with James Hardie for over 13 years, previously serving as VP of Investor and Media Relations, Global Treasurer, and Global Controller[112][113][114] Board of Directors The Board of Directors, chaired by Michael Hammes, comprises non-executive directors with diverse international experience in management, finance, and manufacturing - Michael Hammes serves as the independent non-executive Chairman of the Board, appointed in January 2008. He has extensive senior executive experience, including as CEO and Chairman of Sunrise Medical, Inc[138][139] - Brian Anderson, an independent non-executive director since 2006, is the Chairman of the Audit Committee. He previously served as CFO of Baxter International, Inc and was an Audit Partner at Deloitte & Touche LLP[142][143] Remuneration Executive remuneration for FY2020 includes base salary, short-term and long-term incentive plans, with non-executive director fees set within a US$3.8 million shareholder-approved pool FY2020 Remuneration Elements for Senior Executive Officers | Duration | Plan Name | Allocation of Target | Form of Incentive | | :--- | :--- | :--- | :--- | | Short Term (1 year) | Individual Performance Plan | 20% of STI Target | Cash | | | Company Performance Plan | 80% of STI Target | Cash | | Long Term (3 years) | ROCE RSUs | 25% of LTI Target | Restricted Stock Units | | | Relative TSR RSUs | 25% of LTI Target | Restricted Stock Units | | | Scorecard LTI | 50% of LTI Target | Cash | Total Remuneration for Senior Executive Officers (FY2020, US$) | Name | Base Pay | STI Award | Total Remuneration | | :--- | :--- | :--- | :--- | | J Truong (CEO) | 800,000 | 2,160,000 | 6,068,263 | | S Gadd | 558,038 | 747,252 | 2,676,674 | | J Blasko | 447,347 | 489,117 | 1,587,237 | - Non-executive director fees are determined within a maximum aggregate pool of US$3.8 million per annum, approved by shareholders at the 2019 AGM[210] Corporate Governance Report The company adheres to ASX and NYSE corporate governance standards, with a Board overseeing strategic guidance, supported by key committees, a Global Code of Business Conduct, and a Workplace Diversity Policy - The company's corporate governance framework is evaluated against the ASX Corporate Governance Principles and the NYSE Corporate Governance Standards[250] - The Board has established three standing committees: Audit, Remuneration, and Nominating and Governance, each operating under a written charter[262][266] - The company has adopted a Global Code of Business Conduct applicable to all employees and directors, an ethics hotline, and an Insider Trading Policy[326][328][332] Diversity Composition at End of FY2020 | Level | Percentage of Female Employees | Percentage with Diversity Characteristics | | :--- | :--- | :--- | | James Hardie Board | 33% (3 of 9) | 67% (6 of 9) | | US Senior Leadership | 15% (25 of 164) | 29% (47 of 164) | | US Total Workforce | 12% (342 of 2,760) | 38% (1,054 of 2,760) | Section 2: Financial Information Reading this Report This section provides a safe harbor statement, cautioning that forward-looking statements are subject to inherent risks and uncertainties, including asbestos liabilities and the COVID-19 pandemic - The report contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995[371] - Forward-looking statements are subject to known and unknown risks, including asbestos liabilities, competition, market conditions, and the impact of COVID-19, which may cause actual results to differ materially[374] Management's Discussion and Analysis In FY2020, net sales increased 4% to US$2,606.8 million, driven by North America Fiber Cement, while operating income decreased due to impairments and asbestos adjustments, with liquidity strengthened in response to COVID-19 FY20 vs. FY19 Operating Results (US$ Millions) | Metric | FY20 | FY19 | Change % | | :--- | :--- | :--- | :--- | | Net sales | 2,606.8 | 2,506.6 | 4% | | Gross profit | 933.7 | 831.0 | 12% | | Operating income | 342.5 | 351.6 | (3%) | | Net income | 241.5 | 228.8 | 6% | - The North America Fiber Cement segment saw an 8% increase in net sales to US$1,816.4 million, driven by 8% volume growth and a 1% increase in average net sales price[412][416] - Asset impairments totaled US$84.4 million in FY20, primarily related to the closure of the Summerville, USA and Penrose, New Zealand manufacturing facilities and other non-core assets[408] - In response to COVID-19, the company suspended dividends, reduced FY21 capital expenditure guidance to US$80-95 million, and will make its AICF contribution in quarterly installments[484] Consolidated Financial Statements This section presents the audited consolidated financial statements for FY2018-2020, with Ernst & Young LLP providing an unqualified opinion, highlighting asbestos liability valuation and long-lived asset impairment as critical audit matters - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and the company's internal control over financial reporting as of March 31, 2020[499][500] - Critical Audit Matters identified by the auditor were the Asbestos Liability Valuation, due to the complexity and subjectivity of actuarial estimates, and the Impairment of Long-lived Assets, due to the subjectivity of fair value determination[504] Notes to Consolidated Financial Statements The notes detail significant accounting policies and financial statement items, including AICF consolidation, COVID-19 impact, revenue recognition, and specifics on assets, liabilities, and segment information - The company consolidates the Asbestos Injuries Compensation Fund (AICF) as a Variable Interest Entity (VIE) due to its pecuniary and contractual interests under the AFFA, despite having no ownership interest[517] - The asbestos liability is based on an undiscounted and uninflated central estimate from an actuarial study by KPMGA, which projected future cash flows through 2072[561][562] Asbestos Liability Central Estimates (as of 31 March 2020) | Estimate Type | US$ Millions | A$ Millions | | :--- | :--- | :--- | | Discounted and Inflated | 1,250.9 | 2,025.2 | | Undiscounted and Uninflated | 897.1 | 1,452.4 | - The company adopted the new lease accounting standard (ASC 842) on April 1, 2019, recognizing a right-of-use asset of US$79.7 million and a lease liability of US$82.0 million upon adoption[589] Remuneration of Independent Registered Public Accounting Firm This section details the fees billed by Ernst & Young LLP for professional services over the last three fiscal years, all pre-approved by the Audit Committee Fees Billed by Independent Registered Public Accounting Firm (US$ Millions) | Service | FY20 | FY19 | FY18 | | :--- | :--- | :--- | :--- | | Audit fees | 5.7 | 5.7 | 4.3 | | Audit-related fees | — | — | — | | Tax fees | — | — | — | | All other fees | — | — | — | - All services provided by the independent registered public accounting firm are pre-approved by the Audit Committee[746] Section 3: Risk Factors and Other Information Risk Factors The company faces significant risks including the COVID-19 pandemic, dependence on construction markets, competition, capital expenditure overruns, regulatory actions, currency fluctuations, product liabilities, and asbestos-related funding obligations - The COVID-19 pandemic poses a significant risk, potentially impacting manufacturing operations, supply chains, and product demand due to economic downturns and decreased construction activity[749][751] - The company's funding obligation to the Asbestos Injuries Compensation Fund (AFFA) reduces funds available for growth and could be extended if claims escalate beyond current actuarial estimates[811][814][815] - The business is dependent on residential and commercial construction markets, which are influenced by factors outside the company's control like interest rates, unemployment, and consumer confidence[752][753] - Ongoing New Zealand product liability litigation concerning weathertightness claims could result in material losses, as the total liability is subject to significant uncertainties[768][769] Legal Proceedings The company is involved in various legal proceedings, notably New Zealand weathertightness claims, for which liabilities are recognized when probable and estimable, though ultimate outcomes remain uncertain - The company is a defendant in numerous weathertightness claims in New Zealand concerning buildings constructed mainly between 1998 and 2004[846] - A liability is recognized for these claims when a loss is probable and estimable, but the ultimate outcome could be materially different from current estimates due to various uncertainties[847][848] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2020, a conclusion affirmed by Ernst & Young LLP's unqualified opinion - Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2020[851] - Based on the COSO 2013 framework, management concluded that internal control over financial reporting was effective as of March 31, 2020[853] - Ernst & Young LLP provided an unqualified opinion on the effectiveness of the company's internal control over financial reporting[857] Employees As of March 31, 2020, James Hardie employed an average of 4,869 people globally, with a significant portion in North America and a satisfactory relationship with labor unions Average Number of Employees by Segment/Region | Region/Segment | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | Fiber Cement US & Canada | 2,563 | 2,592 | 2,659 | | Europe Building Products | 972 | 994 | 80 | | Fiber Cement Australia | 597 | 603 | 539 | | Fiber Cement New Zealand | 180 | 186 | 170 | | Fiber Cement Philippines | 340 | 304 | 261 | | Total Employees | 4,869 | 4,916 | 3,960 | - As of March 31, 2020, approximately 791 employees were covered by collective agreements, primarily in Europe, Australia, and New Zealand[866] Listing Details James Hardie's securities are listed on the ASX as CUFS and on the NYSE as ADSs under the ticker symbol "JHX", with each ADS representing one CUFS - The company's securities trade on the ASX as CUFS and on the NYSE as ADSs, both under the symbol "JHX"[867][870] - The beneficial ownership ratio is one share of common stock per CUFS, and one CUFS per ADS[867] Constitution As an Irish plc, James Hardie is governed by its Constitution and the Irish Companies Act 2014, outlining provisions for share issuance, voting rights, dividends, and Irish takeover rules - The company is an Irish plc governed by the Irish Companies Act 2014 and its Constitution[879] - The Board has the power to issue shares up to the authorized share capital and to limit statutory pre-emptive rights, subject to shareholder approval and renewal every five years[887] - Under the Irish Takeover Rules, an acquirer whose voting rights reach 30% or more must generally make a mandatory cash offer for the entire company[831][917] - Dividends may only be paid from sufficient distributable profits and provided the company's net assets are not less than its called-up share capital plus undistributable reserves[909] Material Contracts The company reports no material contracts requiring disclosure beyond those already detailed, such as the AFFA, debt facilities, and executive compensation plans - No material contracts require disclosure beyond those already described in the report, such as the AFFA, debt agreements, and executive compensation plans[928] Exchange Controls Ireland has no significant legislative restrictions on capital import/export or remittances to non-resident security holders, except for standard EU financial sanctions - There are no legal provisions in Ireland restricting the import/export of capital or remittances to non-resident security holders, other than standard EU financial sanctions[931] - There are no limitations under Irish law or the company's Constitution on the right of non-residents to hold or vote the company's common stock[932] Taxation This section summarizes material US and Irish tax consequences for shareholders, including dividend taxation and withholding tax exemptions for non-Irish residents from treaty or EU countries - For US Shareholders, dividends are generally considered "qualified dividend income" subject to a maximum 20% tax rate, provided holding period requirements are met[939] - Distributions from the company are subject to a 25% Irish dividend withholding tax, but exemptions are available for non-Irish resident shareholders from treaty or EU countries who submit the required declaration forms[955][956] - The company believes it is eligible for benefits under the US-Ireland Income Tax Treaty, which reduces US withholding tax on interest and dividends paid from its US subsidiaries to its Irish resident subsidiaries[838][839] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks including foreign currency, interest rates, and commodity prices, with a 10% AUD/USD movement impacting net income by US$54.4 million - The company is exposed to foreign currency risk, particularly from its Australian dollar-denominated AFFA liability against its primarily US dollar revenues[977] - A 10% movement in the AUD/USD exchange rate would have an approximate US$54.4 million impact on net income, based on the unfunded net AFFA liability at March 31, 2020[983] - The company is exposed to commodity price risk for materials like pulp and cement. A +/- 10% change in the average cost of core commodities would have impacted FY20 cost of sales by +/- US$31.8 million[989] Section 4: Shareholder Information and Appendices Share/CHESS Units of Foreign Securities Information As of April 30, 2020, the company had 443,144,740 CUFS outstanding, with Australia holding the largest beneficial ownership at 61.38% Geographic Distribution of Beneficial Ownership (as of 31 March 2020) | Geographic Region | Percentage | | :--- | :--- | | Australia | 61.38% | | United States | 14.65% | | United Kingdom | 4.50% | | Europe (ex-UK) | 6.27% | | Asia | 5.08% | | Other | 8.12% | Top 3 Substantial CUFS Holders (as of 30 April 2020) | CUFS Holder | Percentage of Shares Outstanding | | :--- | :--- | | BlackRock, Inc | 6.40% | | AustralianSuper Pty Ltd | 5.99% | | Commonwealth Bank of Australia | 5.99% | Glossary of Abbreviations and Definitions This section provides a glossary of abbreviations and definitions used throughout the report, including key terms and a cross-reference for US GAAP to Australian financial terminology - The report includes a glossary defining key abbreviations like AFFA, AICF, CUFS, and financial metrics such as ROCE and TSR[1002][1003] - A table is provided to cross-reference US GAAP financial terms (e.g., Operating income) to their Australian equivalent terminology (e.g., EBIT)[1005] Exhibit List This section lists all exhibits filed with the Form 20-F, including corporate documents, AFFA agreements, debt instruments, and Sarbanes-Oxley Act certifications - Lists key corporate documents filed as exhibits, including the company's Constitution (Memorandum and Articles of Association)[1007] - Includes various agreements related to the AFFA, debt indentures, and credit facilities[1007][1008] - Contains required certifications from the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act[1011] Signatures The annual report was certified and signed on May 19, 2020, by CEO Jack Truong and Chairman Michael N. Hammes, confirming compliance with Form 20-F filing requirements - The Form 20-F was signed and certified on May 19, 2020[1014][1015] - The signatories are Jack Truong, Chief Executive Officer, and Michael N. Hammes, Chairman[1014][1015]