James Hardie Industries plc 6-K, filed May 19, 2020
James Hardie Industries plc (JHX)
About this 6-K
James Hardie Industries plc filed this 6-K on May 19, 2020.
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16
under the Securities Exchange Act of 1934
For the Month of May 2020
1-15240
(Commission File Number)
JAMES HARDIE INDUSTRIES plc
(Translation of registrant’s name into English)
Europa House, Second Floor
Harcourt Centre
Harcourt Street, Dublin 2, D02, WR20, Ireland
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Form 20-F..X.... Form 40-F.........
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): Not Applicable
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): Not Applicable
Table of Contents
TABLE OF CONTENTS
| Forward-Looking Statements | 3 |
|---|---|
| Exhibit Index | 5 |
| Signatures | 6 |
Table of Contents
Forward-Looking Statements
This Form 6-K contains forward-looking statements. James Hardie Industries plc (the “company”) may from time to time make forward-looking statements in its periodic reports filed with or furnished to the Securities and Exchange Commission, on Forms 20-F and 6-K, in its annual reports to shareholders, in offering circulars, invitation memoranda and prospectuses, in media releases and other written materials and in oral statements made by the company’s officers, directors or employees to analysts, institutional investors, existing and potential lenders, representatives of the media and others. Statements that are not historical facts are forward-looking statements and such forward-looking statements are statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
Examples of forward-looking statements include:
•statements about the company’s future performance;
•projections of the company’s results of operations or financial condition;
•statements regarding the company’s plans, objectives or goals, including those relating to strategies, initiatives, competition, acquisitions, dispositions and/or its products;
•expectations concerning the costs associated with the suspension or closure of operations at any of the company’s plants and future plans with respect to any such plants;
•expectations concerning the costs associated with the significant capital expenditure projects at any of the company’s plants and future plans with respect to any such projects;
•expectations regarding the extension or renewal of the company’s credit facilities including changes to terms, covenants or ratios;
•expectations concerning dividend payments and share buy-backs;
•statements concerning the company’s corporate and tax domiciles and structures and potential changes to them, including potential tax charges;
•uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark;
•statements regarding the effect and consequences of the novel coronavirus ("COVID-19") public health crisis;
•statements regarding tax liabilities and related audits, reviews and proceedings;
•statements regarding the possible consequences and/or potential outcome of legal proceedings brought against us and the potential liabilities, if any, associated with such proceedings;
•expectations about the timing and amount of contributions to AICF, a special purpose fund for the compensation of proven Australian asbestos-related personal injury and death claims;
•expectations concerning the adequacy of the company’s warranty provisions and estimates for future warranty-related costs;
•statements regarding the company’s ability to manage legal and regulatory matters (including but not limited to product liability, environmental, intellectual property and competition law matters) and to resolve any such pending legal and regulatory matters within current estimates and in anticipation of certain third-party recoveries; and
•statements about economic or housing market conditions in the regions in which we operate, including but not limited to, the levels of new home construction and home renovations, unemployment levels, changes in consumer income, changes or stability in housing values, the availability of mortgages and other financing, mortgage and other interest rates, housing affordability and supply, the levels of foreclosures and home resales, currency exchange rates, and builder and consumer confidence.
Words such as “believe,” “anticipate,” “plan,” “expect,” “intend,” “target,” “estimate,” “project,” “predict,” “forecast,” “guideline,” “aim,” “will,” “should,” “likely,” “continue,” “may,” “objective,” “outlook” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Readers are cautioned not to place undue reliance on these forward-looking statements and all such forward-looking statements are qualified in their entirety by reference to the following cautionary statements.
Table of Contents
Forward-looking statements are based on the Company’s current expectations, estimates and assumptions and because forward-looking statements address future results, events and conditions, they, by their very nature, involve inherent risks and uncertainties, many of which are unforeseeable and beyond the Company’s control. Such known and unknown risks, uncertainties and other factors may cause actual results, performance or other achievements to differ materially from the anticipated results, performance or achievements expressed, projected or implied by these forward-looking statements. These factors, some of which are discussed under “Risk Factors” in Section 3 of the Form 20-F filed with the Securities and Exchange Commission on 19 May 2020, include, but are not limited to: all matters relating to or arising out of the prior manufacture of products that contained asbestos by current and former Company subsidiaries; required contributions to AICF, any shortfall in AICF funding and the effect of currency exchange rate movements on the amount recorded in the Company’s financial statements as an asbestos liability; the continuation or termination of the governmental loan facility to AICF; compliance with and changes in tax laws and treatments; competition and product pricing in the markets in which the Company operates; the consequences of product failures or defects; exposure to environmental, asbestos, putative consumer class action or other legal proceedings; general economic and market conditions; the supply and cost of raw materials; possible increases in competition and the potential that competitors could copy the Company’s products; reliance on a small number of customers; a customer’s inability to pay; compliance with and changes in environmental and health and safety laws; risks of conducting business internationally; compliance with and changes in laws and regulations; currency exchange risks; dependence on customer preference and the concentration of the Company’s customer base on large format retail customers, distributors and dealers; dependence on residential and commercial construction markets; the effect of adverse changes in climate or weather patterns; possible inability to renew credit facilities on terms favorable to the Company, or at all; acquisition or sale of businesses and business segments; changes in the Company’s key management personnel; inherent limitations on internal controls; use of accounting estimates; the integration of Fermacell into our business; risk and uncertainties arising out of the COVID-19 public health crisis, including the likely significant negative impact of COVID-19 on our business, sales, results of operations and financial condition and all other risks identified in the Company’s reports filed with Australian, Irish and US securities regulatory agencies and exchanges (as appropriate). The Company cautions you that the foregoing list of factors is not exhaustive and that other risks and uncertainties may cause actual results to differ materially from those referenced in the Company’s forward-looking statements. Forward-looking statements speak only as of the date they are made and are statements of the Company’s current expectations concerning future results, events and conditions. The Company assumes no obligation to update any forward-looking statements or information except as required by law.
Table of Contents
EXHIBIT INDEX
| Exhibit No. | Description |
|---|---|
| 99.1 | Results for Announcement to the Market |
| 99.2 | ASX Cover 31 March 2020 |
| 99.3 | Media Release |
| 99.4 | Management’s Analysis of Results |
| 99.5 | Management Presentation |
| 99.6 | Consolidated Financial Statements |
| 99.7 | Non-Executive Director Appointments and Retirement |
| 99.8 | KPMG Actuarial Report |
| 99.9 | Appendix 3X - Stein |
| 99.10 | Appendix 3X - Wiens |
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| James Hardie Industries plc | |
|---|---|
| Date: 19 May 2020 | By: /s/ Natasha Mercer |
| Natasha Mercer | |
| Company Secretary |
Table of Contents
EXHIBIT INDEX
| Exhibit No. | Description |
|---|---|
| 99.1 | Results for Announcement to the Market |
| 99.2 | ASX Cover 31 March 2020 |
| 99.3 | Media Release |
| 99.4 | Management’s Analysis of Results |
| 99.5 | Management Presentation |
| 99.6 | Consolidated Financial Statements |
| 99.7 | Non-Executive Director Appointments and Retirement |
| 99.8 | KPMG Actuarial Report |
| 99.9 | Appendix 3X - Stein |
| 99.10 | Appendix 3X - Wiens |
7
Document
Exhibit 99.1
| James Hardie Industries plc<br><br>Europa House 2nd Floor,<br><br>Harcourt Centre<br><br>Harcourt Street, Dublin 2,<br><br>D02 WR20, Ireland<br><br><br><br>T: +353 (0) 1 411 6924<br><br>F: +353 (0) 1 479 1128 |
|---|
19 May 2020
The Manager
Company Announcements Office
Australian Securities Exchange Limited
20 Bridge Street
Sydney, NSW 2000
Dear Sir/Madam
Results for the 4^th^ Quarter and Year Ended 31 March 2020
James Hardie announced today that it has filed the following documents relating to fiscal year 2020 with the ASX:
| • | Appendix 4E: Preliminary Final Report for the year ended 31 March 2020 |
|---|---|
| • | Media Release |
| • | Management’s Analysis of Results |
| • | Management Presentation |
| • | Consolidated Financial Statements for the year ended 31 March 2020 |
| • | KPMG Actuarial Report for year ended 31 March 2020 |
Copies of these documents are available on the company’s investor relations website at www.ir.jameshardie.com.au.
| Yours faithfully |
|---|
| Jason Miele |
| Chief Financial Officer |
This announcement has been authorised for release by the Chief Financial Officer, Mr Jason Miele.
James Hardie Industries plc is a limited liability company incorporated in Ireland with its registered office at
Europa House 2^nd^ Floor, Harcourt Centre, Harcourt Street, Dublin 2, D02 WR20, Ireland.
Directors: Michael Hammes (Chairman, USA), Brian Anderson (USA), Russell Chenu (Australia),
Andrea Gisle Joosen (Sweden), David Harrison (USA), Persio Lisboa (USA), Anne Lloyd (USA),
Moe Nozari (USA), Rada Rodriguez (Sweden), Nigel Stein (UK), Harold Wiens (USA).
Chief Executive Officer and Director: Jack Truong (USA)
Company number: 485719
ARBN: 097 829 895
Document
Exhibit 99.2
Results for Announcement to the Market
James Hardie Industries plc
ARBN 097 829 895
| Appendix 4E - Preliminary Final Report Year Ended 31 March 2020 | ||||
|---|---|---|---|---|
| Key Information | Year Ended 31 March | |||
| FY 2020<br><br>US$M | FY 2019<br><br>US$M | Movement | ||
| Net Sales From Ordinary Activities | 2,606.8 | 2,506.6 | Up | 4% |
| Profit From Ordinary Activities After Tax Attributable to Shareholders | 241.5 | 228.8 | Up | 6% |
| Net Profit Attributable to Shareholders | 241.5 | 228.8 | Up | 6% |
| Net Tangible Assets per Ordinary Share | US$1.52 | US$1.35 | Up | 13% |
Dividend Information
•On 5 May 2020, the Company announced the suspension of dividends until further notice. No FY2020 second half dividend will be paid to CUFS holders.
•The FY2020 first half ordinary dividend (“FY2020 first half dividend”) of US10.0 cents per security was paid to CUFS holders on 20 December 2019.
•The FY2020 first half dividend was and any future dividends will be unfranked for Australian taxation purposes.
•The Company will be required to deduct Irish DWT of 25% (the rate having been increased by the Government of Ireland with effect from 1 January 2020) of the gross dividend amount for future dividends, unless the beneficial owner has completed and returned a non-resident declaration form (DWT Form).
•The FY2019 second half ordinary dividend (“FY2019 second half dividend”) of US26.0 cents per security was paid to CUFS holders on 2 August 2019.
Movements in Controlled Entities during the full year Ended 31 March 2020
The following entities were dissolved: James Hardie NZ Holdings Limited (10 June 2019); James Hardie Finance Holdings 2 Limited (20 August 2019); James Hardie NTL1 Limited (20 August 2019); James Hardie NTL2 Limited (20 August 2019); James Hardie NTL3 Limited (20 August 2019); James Hardie Finance Holdings 1 Limited (18 October 2019) and Beechworth Windows LLC (27 March 2020).
The following entities were merged: James Hardie Europe Holdings 2 GmbH was merged into James Hardie Europe Holdings GmbH (3 December 2019); and James Hardie Bauprodukte GmbH was merged into James Hardie Europe GmbH (23 December 2019)
Associates and Joint Venture Entities
FELS Recycling GmbH (51%); Aplicaciones Minerales S.A. (28%)
Audit
The results and information included within this Preliminary Final Report have been prepared using US GAAP and have been subject to an independent audit by external auditors.
| Results for the 4th Quarter and Year Ended 31 March 2020 | |
|---|---|
| Contents | |
| 1. | Media Release |
| 2. | Management's Analysis of Results |
| 3. | Management Presentation |
| 4. | Consolidated Financial Statements |
James Hardie Industries plc is incorporated under the laws of Ireland with its corporate seat in Dublin, Ireland. The liability of members is limited. The information contained in the above documents should be read in conjunction with the James Hardie 2020 Annual Report which can be found on the company website at www.jameshardie.com.
Document
| Media Release<br><br>19 May 2020 |
|---|
Exhibit 99.3
James Hardie Announces Adjusted Net Operating Profit of
US$86.6 million for Q4 Fiscal Year 2020 and US$352.8 million for the full year ended 31 March 2020
James Hardie today announced results for the fourth quarter of its fiscal year 2020 and the full year ended 31 March 2020:
•Group Adjusted net operating profit ("NOPAT") of US$86.6 million for the quarter and US$352.8 million for the full year, an increase of 17% for both compared to prior corresponding periods (“pcp”);
•Group Adjusted EBIT of US$121.0 million for the quarter and US$486.8 million for the full year, an increase of 21% and 20%, respectively, compared to pcp;
•Group net sales of US$673.2 million for the quarter and US$2,606.8 million for the full year, an increase of 8% and 4%, respectively, compared to pcp;
•North America Fiber Cement Segment volume increased 10% for the quarter and 8% for the full year, compared to pcp;
•North America Fiber Cement Segment Adjusted EBIT margin^1^ of 25.3% for the quarter and 25.9% for the full year;
•Asia Pacific Fiber Cement Segment Adjusted EBIT margin^1^ of 20.5% for the quarter and 22.7% for the full year; and
•Europe Building Products Segment Adjusted EBIT margin^1^ of 4.6% for the quarter and 8.2% for the full year.
^1^^^Excludes asset impairment charges and costs associated with the Fermacell acquisition
| CEO Commentary |
|---|
James Hardie CEO, Dr. Jack Truong, said, “We delivered strong fourth quarter results globally, capping a fiscal year of outstanding performance that demonstrated our ability to consistently execute in both growing and highly volatile markets. I am particularly pleased with the outstanding North America performance, as we continued to grow above market while delivering exceptional returns. Underpinning our success in North America was 11% volume growth in the exterior business coupled with sustained volume growth of 5% in the interior business. Our Lean manufacturing initiative continued to generate improved performance across our North American manufacturing network, helping to deliver 26% Adjusted EBIT growth at a 25.3% Adjusted EBIT margin in the fourth quarter.
In the fourth quarter, our Asia Pacific segment delivered good financial returns with revenue up 2% and Adjusted EBIT growth of 4% in local currency at an Adjusted EBIT margin of 20.5%. Our Europe Building Products segment delivered strong revenue growth of 7% in Euros in the quarter, led by fiber cement growth of 50% and fiber gypsum growth of 3%.”
He continued, “Our performance in March was exceptionally strong, despite the highly volatile market environment in which we operated. We supplied our customers seamlessly around the world, growing revenue by double digits in each region we operate in.
Our strong fourth quarter, including the exceptional March performance, led to significant improvement in our liquidity position, increasing from US$464 million at 31 December 2019 to US$510 million at 31 March 2020 and US$578 million at 30 April 2020, while reducing our leverage ratio to 1.9x at 31 March 2020 from 2.1x at 31 December 2019.”
Dr. Truong added, “The fourth quarter marks the fourth consecutive quarter of strong financial results, which yielded a full year Adjusted NOPAT of US$352.8 million, an improvement of 17% compared to the prior year.
| Media Release: James Hardie - Full Year Ended 31 March 2020 | 1 |
|---|---|
| Media Release<br><br>19 May 2020 | |
| --- |
The full year result was driven by our strong North America performance, delivering 7+% growth above market and US$29 million in Lean cost savings in fiscal year 2020. Full year EBIT margin in North America was 25.9%.”
He concluded, “We enter fiscal year 2021 with significant momentum in both our commercial and Lean initiatives, albeit in a rapidly evolving and highly volatile market and economy. Our global team remains focused on executing our strategic plan to deliver growth above market with strong returns. I would like to thank all of our James Hardie team members around the world for an outstanding year of financial performance and an unwavering commitment to zero harm.”
| Outlook |
|---|
Given the highly volatile and uncertain circumstances surrounding the COVID-19 pandemic and its effect on demand in the countries in which James Hardie operates, the Company is unable to provide annual guidance at this time. However, for the first quarter of fiscal year 2021, we expect our North America segment Adjusted EBIT margin to be between 22% and 27%. Further, we expect our liquidity to be greater than US$600 million and our leverage ratio to remain below 2.0x at the end of the first quarter.
James Hardie’s guidance is based on current estimates and assumptions and is subject to a number of known and unknown uncertainties and risks, including those related to the COVID-19 pandemic and set forth below in “Forward-Looking Statements.”
| Further Information |
|---|
Readers are referred to the Company’s Consolidated Financial Statements and Management’s Analysis of Results for the fourth quarter and full year ended 31 March 2020 for additional information regarding the Company’s results, including information regarding income taxes, the asbestos liability and contingent liabilities.
| Use of Non-GAAP Financial Information; Australian Equivalent Terminology |
|---|
This Media Release includes financial measures that are not considered a measure of financial performance under generally accepted accounting principles in the United States (GAAP), such as Adjusted net operating profit and Adjusted EBIT. These non-GAAP financial measures should not be considered to be more meaningful than the equivalent GAAP measure. Management has included such measures to provide investors with an alternative method for assessing its operating results in a manner that is focused on the performance of its ongoing operations and excludes the impact of certain legacy items, such as asbestos adjustments. Additionally, management uses such non-GAAP financial measures for the same purposes. However, these non-GAAP financial measures are not prepared in accordance with US GAAP, may not be reported by all of the Company’s competitors and may not be directly comparable to similarly titled measures of the Company’s competitors due to potential differences in the exact method of calculation. For additional information regarding the non-GAAP financial measures presented in this Media Release, including a reconciliation of each non-GAAP financial measure to the equivalent US GAAP measure, see the section titled “Non-US GAAP Financial Measures” included in the Company’s Management’s Analysis of Results for the fourth quarter and year ended 31 March 2020.
In addition, this Media Release includes financial measures and descriptions that are considered to not be in accordance with US GAAP, but which are consistent with financial measures reported by Australian companies, such as operating profit, EBIT and EBIT margin. Since the Company prepares its Consolidated Financial Statements in accordance with US GAAP, the Company provides investors with a table and definitions presenting cross-references between each US GAAP financial measure used in the Company’s Consolidated Financial Statements to the equivalent non-US GAAP financial measure used in this Media Release. See the sections titled “Non-US GAAP Financial Measures” included in the Company’s Management’s Analysis of Results for the fourth quarter and year ended 31 March 2020.
| Media Release: James Hardie - Full Year Ended 31 March 2020 | 2 |
|---|---|
| Media Release<br><br>19 May 2020 | |
| --- | |
| Forward-Looking Statements | |
| --- |
This Media Release contains forward-looking statements and information that are necessarily subject to risks, uncertainties and assumptions. Many factors could cause the actual results, performance or achievements of James Hardie to be materially different from those expressed or implied in this release, including, among others, the risks and uncertainties set forth in Section 3 “Risk Factors” in James Hardie’s Annual Report on Form 20-F for the year ended 31 March 2020; changes in general economic, political, governmental and business conditions globally and in the countries in which James Hardie does business; changes in interest rates; changes in inflation rates; changes in exchange rates; the level of construction generally; changes in cement demand and prices; changes in raw material and energy prices; changes in business strategy and various other factors. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein. James Hardie assumes no obligation to update or correct the information contained in this Media Release except as required by law.
This media release has been authorized by the James Hardie Board of Directors.
END
Media/Analyst Enquiries:
Anna Collins
| Telephone: | +61 2 8845 3356 |
|---|---|
| Email: | media@jameshardie.com.au |
James Hardie Industries plc is a limited liability company incorporated in Ireland with its registered office at Europa House, 2nd Floor, Harcourt Centre, Harcourt Street, Dublin 2, D02 WR20, Ireland
| Media Release: James Hardie - Full Year Ended 31 March 2020 | 3 |
|---|
Document
| Fiscal 2020<br><br>Fourth Quarter and Full Year Ended 31 March 2020 |
|---|
Exhibit 99.4
| Management’s Analysis of Results |
|---|
This Management’s Analysis of Results forms part of a package of information about James Hardie Industries plc’s results. It should be read in conjunction with the other parts of this package, including the Media Release, the Management Presentation and the consolidated financial statements. Except as otherwise indicated in this Management’s Analysis of Results, James Hardie Industries plc is referred to as “JHI plc.” JHI plc, together with its direct and indirect wholly-owned subsidiaries, are collectively referred to as “James Hardie,” the “Company,” “we,” “our,” or “us.” Definitions for certain capitalized terms used in this Management’s Analysis of Results can be found in the section titled “Non-GAAP Financial Measures.”
This Management’s Analysis of Results includes financial measures that are not considered a measure of financial performance under generally accepted accounting principles in the United States (“US GAAP”). These non-GAAP financial measures should not be considered to be more meaningful than the equivalent US GAAP measures. Management has included such measures to provide investors with an alternative method for assessing its financial condition and operating results in a manner that is focused on the performance of its ongoing operations. These measures exclude the impact of certain legacy items, such as asbestos adjustments, or significant non-recurring items, such as debt restructuring and acquisition costs, asset impairments, as well as adjustments to tax expense. In addition, management provides an adjusted effective tax rate, which excludes the tax impact of the pre-tax special items (items listed above) and tax special items. Management believes that this non-GAAP tax measure provides an ongoing effective rate which investors may find useful for historical comparisons and for forecasting and is an alternative method of assessing the economic impact of taxes on the Company, as it more closely approximates payments to taxing authorities. Management uses such non-GAAP financial measures for the same purposes. These non-GAAP measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with US GAAP. These non-GAAP financial measures are not prepared in accordance with US GAAP, may not be reported by all of the Company’s competitors and may not be directly comparable to similarly titled measures of the Company’s competitors due to potential differences in the exact method of calculation. For additional information regarding the non-GAAP financial measures presented in this Management’s Analysis of Results, including a reconciliation of each non-GAAP financial measure to the equivalent US GAAP measure, see the section titled “Non-US GAAP Financial Measures.” In addition, this Management’s Analysis of Results includes financial measures and descriptions that are considered to not be in accordance with US GAAP, but which are consistent with financial measures reported by Australian companies. Since James Hardie prepares its consolidated financial statements in accordance with US GAAP, the Company provides investors with a table and definitions presenting cross-references between each US GAAP financial measure used in the Company’s consolidated financial statements to the equivalent non-US GAAP financial measure used in this Management’s Analysis of Results. See the section titled “Non-US GAAP Financial Measures.”
These documents, along with an audio webcast of the Management Presentation on 19 May 2020, are available from the Investor Relations area of our website at http://www.ir.jameshardie.com.au
Media/Analyst Enquiries:
Anna Collins
| Telephone: | +61 2 8845 3356 |
|---|---|
| Email: | media@jameshardie.com.au |
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 1 |
| --- | --- |
| GROUP RESULTS | |
| --- |
James Hardie Industries plc
Results for the 4th Quarter and Full Year Ended 31 March
| US$ Millions | Three Months and Full Year Ended 31 March | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Q4 FY20 | Q4 FY19 | Change % | FY20 | FY19 | Change % | ||||||
| Net sales | $ | 673.2 | $ | 624.8 | 8 | $ | 2,606.8 | $ | 2,506.6 | 4 | |
| Cost of goods sold | (433.3) | (414.2) | (5) | (1,673.1) | (1,675.6) | — | |||||
| Gross profit | 239.9 | 210.6 | 14 | 933.7 | 831.0 | 12 | |||||
| Selling, general and administrative expenses | (110.3) | (102.3) | (8) | (415.8) | (403.6) | (3) | |||||
| Research and development expenses | (9.0) | (9.4) | 4 | (32.8) | (37.9) | 13 | |||||
| Asset impairments | (84.4) | (2.8) | (84.4) | (15.9) | |||||||
| Asbestos adjustments | (67.0) | (73.4) | 9 | (58.2) | (22.0) | ||||||
| EBIT | (30.8) | 22.7 | 342.5 | 351.6 | (3) | ||||||
| Net interest expense | (13.3) | (13.3) | — | (54.4) | (50.1) | (9) | |||||
| Loss on early debt extinguishment | — | — | — | (1.0) | |||||||
| Other (expense) income | — | — | (0.1) | 0.1 | |||||||
| Operating (loss) profit before income taxes | (44.1) | 9.4 | 288.0 | 300.6 | (4) | ||||||
| Income tax benefit (expense) | 50.4 | (8.6) | (46.5) | (71.8) | 35 | ||||||
| Net operating profit | $ | 6.3 | $ | 0.8 | $ | 241.5 | $ | 228.8 | 6 | ||
| Earnings per share - basic (US cents) | 1 | — | 55 | 52 | |||||||
| Earnings per share - diluted (US cents) | 1 | — | 54 | 52 | |||||||
| Volume (mmsf) | 1,011.7 | 942.2 | 7 | 3,841.7 | 3,670.0 | 5 | |||||
| Net sales for the quarter and full year increased 8% and 4% from the prior corresponding periods to US$673.2 million and US$2,606.8 million, respectively, driven by higher net sales in the North America Fiber Cement and Europe Building Products segments, partially offset by lower USD net sales in the Asia Pacific Fiber Cement segment.<br><br><br><br>Gross profit of US$239.9 million and US$933.7 million for the quarter and full year increased 14% and 12%, respectively, compared to the prior corresponding periods, primarily driven by higher gross profit in the North America Fiber Cement segment. Gross profit margin of 35.6% and 35.8% for the quarter and full year increased 1.9 and 2.6 percentage points, respectively, compared to the prior corresponding periods.<br><br><br><br>Selling, general and administrative (“SG&A”) expenses for the quarter and full year increased 8% and 3%, respectively, compared to the prior corresponding periods. The increase was primarily driven by investing in demand creation and the unfavorable impact of foreign exchange rates. For the quarter, SG&A expenses were partially offset by lower stock compensation expenses.<br><br><br><br>Asset impairments for the quarter and full year 2020 reflects the non-cash expense associated with the impairments related to our Summerville, USA and Penrose, NZ manufacturing facilities as well as additional non-core assets. | Asbestos adjustments primarily reflect the unfavorable movement in the actuarial adjustment of US$128.0 million recorded in the fourth quarter of fiscal year 2020 partially offset by the effect of foreign exchange on Asbestos net liabilities.<br><br><br><br>Interest expense was flat for the quarter and increased for the full year, compared to the prior corresponding periods. The increase for the full year was primarily due to a higher interest rate on our long-term Euro denominated debt.<br><br><br><br>Other (expense) income for the quarter and full year reflects the gains and losses on interest rate swaps.<br><br><br><br>Income tax expense for the quarter and full year decreased compared to the prior corresponding periods, due to impairment charges incurred in the fourth quarter of fiscal year 2020, US tax loss carryback permitted by the US CARES Act and asbestos adjustments.<br><br><br><br>Net operating profit increased for the quarter, primarily driven by a lower income tax expense and the favorable performance of the North America Fiber Cement segment, partially offset by impairment charges taken in the fourth quarter. Net operating profit increased for the full year, primarily driven by the favorable performance of the North America Fiber Cement segment and a lower income tax expense, partially offset by higher asset impairment charges and asbestos adjustments. | ||||||||||
| --- | --- | ||||||||||
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 2 | ||||||||||
| --- | --- | ||||||||||
| OPERATING RESULTS - SEGMENT | |||||||||||
| --- | |||||||||||
| North America Fiber Cement Segment | |||||||||||
| --- |
Operating results for the North America Fiber Cement segment were as follows:
| US$ Millions | Three Months and Full Year Ended 31 March | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Q4 FY20 | Q4 FY19 | Change | FY20 | FY19 | Change | ||||
| Volume (mmsf) | 655.0 | 593.3 | 10 | % | 2,481.6 | 2,308.1 | 8 | % | |
| Average net sales price per unit (per msf) | US$718 | US$704 | 2 | % | US$725 | US$718 | 1 | % | |
| Fiber cement net sales | 474.5 | 422.0 | 12 | % | 1,816.4 | 1,676.9 | 8 | % | |
| Gross profit | 25 | % | 17 | % | |||||
| Gross margin (%) | 3.8pts | 2.8pts | |||||||
| EBIT | 78.8 | 95.1 | (17 | %) | 429.3 | 382.5 | 12 | % | |
| EBIT margin (%) | 16.6 | 22.5 | (5.9 pts | ) | 23.6 | 22.8 | 0.8pts | ||
| Asset impairment charges and product line discontinuation expenses | 41.2 | — | 41.2 | 5.4 | |||||
| EBIT excluding^1^ | 120.0 | 95.1 | 26 | % | 470.5 | 387.9 | 21 | % | |
| EBIT margin (%) excluding^1^ | 25.3 | 22.5 | 2.8pts | 25.9 | 23.1 | 2.8pts | |||
| ^1^Excludes asset impairment charges and product line discontinuation expenses |
Net sales for the quarter and full year were favorably impacted by higher sales volumes and a higher average net sales price compared to the prior corresponding periods. The increase in volume includes growth in exteriors of 11% and 9% for the quarter and full year, respectively, compared to the prior corresponding periods, reflecting strong growth above market as our commercial transformation gains traction. Interiors volume increased 5% and 1% for the quarter and full year, respectively, compared to the prior corresponding periods, reflecting continuous improvement and traction of our interiors strategy. The increase in average net sales price of 2% and 1% for the quarter and full year, respectively, compared to the prior corresponding periods, primarily reflects the annual change in our strategic pricing effective April 2019.
We note that there are a number of data sources that measure US housing market growth. At the time of filing our results for the period ended 31 March 2020, only US Census Bureau data was available. According to the US Census Bureau, single family housing starts for the quarter were 212,000, or 12% above the prior corresponding period. For the full year ended 31 March 2020, single family housing starts were 911,100, or 5% above the prior corresponding period. We note that the US Census Bureau's data can be different from other indices we use to measure US housing market growth, namely the McGraw-Hill Construction Residential Starts Data (also known as Dodge), the National Association of Home Builders and Fannie Mae.
The change in gross margin can be attributed to the following components:
| For the Three Months Ended 31 March 2020: | |||
|---|---|---|---|
| Higher average net sales price | 1.2 pts | ||
| Lower start-up costs | 0.5 pts | ||
| Lower production costs | 2.1 pts | ||
| Total percentage point change in gross margin | 3.8 pts | ||
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 3 | ||
| --- | --- | ||
| OPERATING RESULTS - SEGMENT | |||
| --- | For the Full Year Ended 31 March 2020: | ||
| --- | --- | ||
| Higher average net sales price | 0.5pts | ||
| Lower start-up costs | 0.6pts | ||
| Lower production costs | 1.7pts | ||
| Total percentage point change in gross margin | 2.8pts |
Gross margin for the quarter increased 3.8 percentage points compared to the prior corresponding period, driven by improved plant performance, lower input and start-up costs and a higher sales price. Gross margin for the full year increased 2.8 percentage points, compared to the prior corresponding period, driven by improved plant performance and a higher sales price, as well as lower input and start-up costs. In addition, gross margin for the full year increased as a result of a one-time charge in fiscal year 2019 related to our decision to discontinue the MCT product line and certain excess and obsolete ColorPlus^®^ color palettes.
SG&A expenses for the quarter and full year were higher compared to the prior corresponding periods primarily driven by our investment in demand creation, including higher marketing and labor related costs. As a percentage of sales, SG&A expenses increased 1.1 percentage points for the quarter and was flat for the full year compared to the prior corresponding periods.
To better harmonize supply and demand in the North American market, we made the operational decision to shut down production at our Summerville, South Carolina plant. We expect the plant to close in mid calendar year 2020. In the fourth quarter of fiscal year 2020 we recorded an impairment charge of US$12.0 million associated with the closure of Summerville. Additionally, we recorded impairment charges totaling US$29.2 million related to a variety of non-core assets located at four of our plants across our North American plant network. These non-core assets were written down to zero based on the determination that they have no future economic benefit.
EBIT for the quarter decreased 17% compared to the prior corresponding period, driven by asset impairment charges and higher SG&A expenses, partially offset by a 25% increase in gross profit. EBIT margin of 16.6% for the quarter decreased 5.9 percentage points, compared to the prior corresponding period.
EBIT for the full year increased 12%, compared to the prior corresponding period, primarily driven by a 17% increase in gross profit, partially offset by asset impairment charges and higher SG&A expenses. EBIT margin of 23.6% for the full year increased 0.8 percentage points compared to the prior corresponding period, driven by the increase in gross margin, partially offset by asset impairment charges.
Results Excluding Asset Impairment Charges and Product Line Discontinuation Expenses
EBIT excluding asset impairment charges and product line discontinuation expenses increased 26% and 21% for the quarter and full year, respectively, compared to the prior corresponding periods, primarily driven by an increase in gross profit of 25% and 17%, respectively, partially offset by higher SG&A expenses.
EBIT margin excluding asset impairment charges and product line discontinuation expenses for the quarter of 25.3% increased 2.8 percentage points, compared to the prior corresponding period, primarily due to the increase in gross margin, partially offset by higher SG&A expenses as a percentage of sales. EBIT margin excluding asset impairment charges and product line discontinuation expenses for the full year of 25.9% increased 2.8 percentage points, compared to the prior corresponding period, primarily due to the increase in gross margin.
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 4 | |
|---|---|---|
| OPERATING RESULTS - SEGMENT | ||
| --- | Asia Pacific Fiber Cement Segment | |
| --- |
The Asia Pacific Fiber Cement segment is comprised of the following businesses: (i) Australia Fiber Cement, (ii) New Zealand Fiber Cement and (iii) Philippines Fiber Cement.
Operating results for the Asia Pacific Fiber Cement segment in US dollars were as follows:
| US$ Millions | Three Months and Full Year Ended 31 March | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Q4 FY20 | Q4 FY19 | Change | FY20 | FY19 | Change | ||||
| Volume (mmsf) | 125.0 | 129.9 | (4 | %) | 532.6 | 546.1 | (2 | %) | |
| Average net sales price per unit (per msf) | US$688 | US$701 | (2 | %) | US$700 | US$724 | (3 | %) | |
| Fiber cement net sales | 95.8 | 102.3 | (6 | %) | 418.4 | 446.8 | (6 | %) | |
| Gross profit | (5 | %) | (5 | %) | |||||
| Gross margin (%) | 0.6pts | 0.3pts | |||||||
| EBIT | (16.7) | 20.5 | 58.5 | 99.8 | (41 | %) | |||
| EBIT margin (%) | (17.4) | 20.0 | (37.4 pts | ) | 14.0 | 22.3 | (8.3 pts | ) | |
| Asset impairment charges | 36.3 | — | 36.3 | — | |||||
| EBIT excluding^1^ | 19.6 | 20.5 | (4 | %) | 94.8 | 99.8 | (5 | %) | |
| EBIT margin (%) excluding^1^ | 20.5 | 20.0 | 0.5pts | 22.7 | 22.3 | 0.4pts | |||
| ^1^Excludes asset impairment charges |
The Asia Pacific Fiber Cement segment results in US dollars were unfavorably impacted by average foreign exchange rate movements as detailed in the table below:
| Q4 FY20 | Full Year FY20 | |||||
|---|---|---|---|---|---|---|
| Results in AUD | Results in USD | Impact of FX | Results in AUD | Results in USD | Impact of FX | |
| Average net sales price per unit (per msf) | +7% | -2% | -9% | +4% | -3% | -7% |
| Fiber cement net sales | +2% | -6% | -8% | FLAT | -6% | -6% |
| Gross profit | +4% | -5% | -9% | +1% | -5% | -6% |
| EBIT excluding asset impairment charges | +4% | -4% | -8% | +2% | -5% | -7% |
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 5 | |||||
| --- | --- | |||||
| OPERATING RESULTS - SEGMENT | ||||||
| --- |
Operating results for the Asia Pacific Fiber Cement segment in Australian dollars were as follows:
| A$ Millions | Three Months and Full Year Ended 31 March | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Q4 FY20 | Q4 FY19 | Change | FY20 | FY19 | Change | ||||
| Volume (mmsf) | 125.0 | 129.9 | (4 | %) | 532.6 | 546.1 | (2 | %) | |
| Average net sales price per unit (per msf) | A$1,048 | A$984 | 7 | % | A$1,027 | A$992 | 4 | % | |
| Fiber cement net sales | 146.1 | 143.6 | 2 | % | 614.1 | 612.2 | — | % | |
| Gross profit | 4 | % | 1 | % | |||||
| Gross margin (%) | 0.6pts | 0.3pts | |||||||
| EBIT | (28.4) | 28.8 | 80.8 | 136.5 | (41 | %) | |||
| EBIT margin (%) | (17.4) | 20.0 | (37.4 pts | ) | 14.0 | 22.3 | (8.3 pts | ) | |
| Asset impairment charges | 58.3 | — | 58.3 | — | |||||
| EBIT excluding^1^ | 29.9 | 28.8 | 4 | % | 139.1 | 136.5 | 2 | % | |
| EBIT margin (%) excluding^1^ | 20.5 | 20.0 | 0.5pts | 22.7 | 22.3 | 0.4pts | |||
| ^1^Excludes asset impairment charges |
Net sales in Australian dollars for the quarter and full year were favorably impacted by a higher average net sales price, partially offset by lower volumes, compared to the prior corresponding periods. Volume decreased 4% for the quarter, compared to the prior corresponding period, driven by the COVID-19 government enforced lockdown of the majority of businesses in the Philippines and New Zealand in March 2020, as well as a significant softening of the Australian market, partially offset by volume growth above the market in Australia. Volume decreased 2% for the full year, compared to the prior corresponding period, primarily driven by a significant softening of the Australian market, partially offset by volume growth above the market in Australia. The 7% and 4% increase in average net sales price for the quarter and full year, respectively, compared to the prior corresponding periods, was primarily driven by our strategic price increase in Australia. Average net sales price for the quarter was also favorably impacted by geographic mix due to a lower proportion of sales in the Philippines, which has a lower average net selling price.
According to Australian Bureau of Statistics data, approvals for detached houses, a key driver of Australian business' sales volume, were 24,447 for the quarter, a decrease of 3%, compared to the prior corresponding period. For the full year, approvals for detached houses were 102,792, a decrease of 11% compared to the prior corresponding period. The other key driver of our sales volume, the alterations and additions market, increased 3% for the quarter ended 31 March 2020, compared to the prior corresponding period. For the full year ended 31 March 2020, the alteration and additions market was flat, compared to the prior corresponding period.
Gross profit in Australian dollars increased 4% for the quarter, compared to the prior corresponding period, driven by lower pulp costs and favorable plant performance in Australia, partially offset by the mandatory lockdown due to COVID-19 in the Philippines and New Zealand, as well as higher freight costs. Gross profit in Australian dollars increased 1% for the full year, compared to the prior corresponding period, due to favorable plant performance in Australia and lower pulp costs, partially offset by higher freight costs and unfavorable plant performance in New Zealand.
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 6 |
|---|---|
| OPERATING RESULTS - SEGMENT | |
| --- |
In Australian dollars, the change in gross margin can be attributed to the following components:
| For the Three Months Ended 31 March 2020: | |
|---|---|
| Higher average net sales price | 3.8 pts |
| Higher production costs | (3.2 pts) |
| Total percentage point change in gross margin | 0.6 pts |
| For the Full Year Ended 31 March 2020: | |
| --- | --- |
| Higher average net sales price | 2.0 pts |
| Higher production costs | (1.7 pts) |
| Total percentage point change in gross margin | 0.3 pts |
We made the strategic decision to move to a regional model for the manufacture and supply of fiber cement products for the New Zealand Market. We will cease all manufacturing of products in New Zealand under this model and shift manufacturing from Penrose, New Zealand to our two plants in Australia: Rosehill and Carole Park. As a result, we recorded asset impairment charges of A$54.4 million in the fourth quarter of fiscal year 2020. We also decided to shut down our James Hardie Systems business which resulted in an impairment charge of A$3.9 million.
EBIT in Australian dollars for the quarter and full year decreased A$57.2 million and A$55.7 million, respectively, compared to the prior corresponding periods, primarily driven by asset impairment charges of A$58.3 million. EBIT margin for the quarter and full year of (17.4)% and 14.0%, respectively, decreased 37.4 percentage points and 8.3 percentage points, respectively, compared to the prior corresponding periods, primarily driven by asset impairment charges.
Results Excluding Asset Impairment Charges
EBIT in Australian dollars excluding asset impairment charges for the quarter and full year increased 4% and 2%, compared to the prior corresponding periods, primarily driven by higher gross profit. EBIT margin excluding asset impairment charges for the quarter and full year of 20.5% and 22.7%, respectively, increased 0.5 percentage points and 0.4 percentage points, respectively, compared to the prior corresponding periods, primarily driven by a higher gross margin. The increase in gross margin was due to a higher average net sales price, partially offset by higher production costs.
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 7 |
|---|---|
| OPERATING RESULTS - SEGMENT | |
| --- | |
| Europe Building Products Segment | |
| --- |
The Europe Building Products segment is comprised of: (i) Europe Fiber Cement and (ii) Europe Fiber Gypsum. Operating results for the Europe Building Products segment in US dollars were as follows:
| US$ Millions | Three Months and Full Year Ended 31 March | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Q4 FY20 | Q4 FY19 | Change | FY20 | FY19 | Change | ||||
| Volume (mmsf) | 231.7 | 219.0 | 6 | % | 827.5 | 815.8 | 1 | % | |
| Average net sales price per unit (per msf) | US$344 | US$346 | (1 | %) | US$345 | US$354 | (3 | %) | |
| Fiber cement net sales | 12.5 | 8.8 | 42 | % | 48.0 | 35.8 | 34 | % | |
| Fiber gypsum net sales^1^ | 90.4 | 89.9 | 1 | % | 323.4 | 332.5 | (3 | %) | |
| Net sales | 102.9 | 98.7 | 4 | % | 371.4 | 368.3 | 1 | % | |
| Gross profit | (16 | %) | (1 | %) | |||||
| Gross margin (%) | (6.8 pts | ) | (0.5 pts | ) | |||||
| EBIT^2^ | (4.9) | 7.1 | 11.2 | 10.0 | 12 | % | |||
| EBIT margin^2^ (%) | (4.8) | 7.2 | (12.0 pts | ) | 3.0 | 2.7 | 0.3pts | ||
| Asset impairment charges | 5.5 | — | 5.5 | — | |||||
| EBIT excluding asset impairment charges | 0.6 | 7.1 | (92 | %) | 16.7 | 10.0 | 67 | % | |
| EBIT margin (%) excluding asset impairment charges | 0.6 | 7.2 | (6.6 pts | ) | 4.5 | 2.7 | 1.8pts | ||
| Costs associated with the Fermacell acquisition | 4.1 | 4.1 | — | % | 13.7 | 29.1 | (53 | %) | |
| Adjusted EBIT excluding^3^ | 4.7 | 11.2 | (58 | %) | 30.4 | 39.1 | (22 | %) | |
| Adjusted EBIT margin (%) excluding^3^ | 4.6 | 11.3 | (6.7 pts | ) | 8.2 | 10.6 | (2.4 pts | ) | |
| ^1^Also includes cement bonded board net sales<br><br>^2^Includes costs associated with the Fermacell acquisition and asset impairment charges<br><br>^3^Excludes asset impairment charges and costs associated with the Fermacell acquisition. Costs associated with the Fermacell acquisition have not been excluded from total Adjusted EBIT and Adjusted net operating profit as presented on pages 13 and 15, respectively | |||||||||
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 8 | ||||||||
| --- | --- | ||||||||
| OPERATING RESULTS - SEGMENT | |||||||||
| --- |
Operating results for the Europe Building Products segment in Euros were as follows:
| € Millions | Three Months and Full Year Ended 31 March | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Q4 FY20 | Q4 FY19 | Change | FY20 | FY19 | Change | ||||
| Volume (mmsf) | 231.7 | 219.0 | 6 | % | 827.5 | 815.8 | 1 | % | |
| Average net sales price per unit (per msf) | €312 | €305 | 2 | % | €311 | €306 | 2 | % | |
| Fiber cement net sales | 11.4 | 7.6 | 50 | % | 43.3 | 32.8 | 32 | % | |
| Fiber gypsum net sales^1^ | 81.9 | 79.3 | 3 | % | 290.9 | 285.2 | 2 | % | |
| Net sales | 93.3 | 86.9 | 7 | % | 334.2 | 318.0 | 5 | % | |
| Gross profit | (13 | %) | 3 | % | |||||
| Gross margin (%) | (6.8 pts | ) | (0.5 pts | ) | |||||
| EBIT^2^ | (4.5) | 6.3 | 10.0 | 9.1 | 10 | % | |||
| EBIT margin^2^ (%) | (4.8) | 7.2 | (12.0 pts | ) | 3.0 | 2.7 | 0.3pts | ||
| Asset impairment charges | 4.9 | — | 4.9 | — | |||||
| EBIT excluding asset impairment charges | 0.4 | 6.3 | (94 | %) | 14.9 | 9.1 | 64 | % | |
| EBIT margin (%) excluding asset impairment charges | 0.6 | 7.2 | (6.6 pts | ) | 4.5 | 2.7 | 1.8pts | ||
| Costs associated with the Fermacell acquisition | 3.7 | 3.5 | 6 | % | 12.3 | 24.6 | (50 | %) | |
| Adjusted EBIT excluding^3^ | 4.1 | 9.8 | (58 | %) | 27.2 | 33.7 | (19 | %) | |
| Adjusted EBIT margin (%) excluding^3^ | 4.6 | 11.3 | (6.7 pts | ) | 8.2 | 10.6 | (2.4 pts | ) | |
| ^1^Also includes cement bonded board net sales<br><br>^2^Includes costs associated with the Fermacell acquisition and asset impairment charges<br><br>^3^Excludes asset impairment charges and costs associated with the Fermacell acquisition. Costs associated with the Fermacell acquisition have not been excluded from total Adjusted EBIT and Adjusted net operating profit as presented on pages 13 and 15, respectively |
Net sales in Euros for the quarter increased 7%, compared to the prior corresponding period, driven by an increase of 50% and 3% in fiber cement and fiber gypsum net sales, respectively. Net sales in Euros for the full year increased 5%, compared to the prior corresponding period, driven by an increase of 32% and 2% in fiber cement and fiber gypsum net sales, respectively. The increase in fiber cement net sales was driven by market penetration in our existing geographies. Fiber gypsum net sales, which includes cement bonded board net sales, increased due to the continued penetration of fiber gypsum and our strategic price increase, partially offset by lower cement bonded board net sales. Cement bonded board net sales decreased for both periods due to lower tunnel project sales as compared to the prior corresponding periods.
Gross profit in Euros decreased 13% for the quarter, compared to the prior corresponding period, primarily driven by €1.8 million of warehousing and freight costs that were previously recorded in SG&A. Gross profit increased 3% for the full year, compared to the prior corresponding period, primarily due to higher net sales, partially offset by €3.2 million of warehousing and freight costs that were previously recorded in SG&A. The increase for the full year was additionally impacted by a one time inventory fair value adjustment of €6.2 million (US$7.3 million) incurred in the first quarter of fiscal year 2019 following the acquisition of Fermacell.
We incurred asset impairment charges of €4.9 million in the fourth quarter of fiscal year 2020, primarily related to non-core assets which were written down to zero based on the determination that they will no longer provide an economic benefit.
EBIT for the quarter decreased €10.8 million, compared to the prior corresponding period, driven by lower gross profit and asset impairment charges. EBIT for the full year increased €0.9 million, compared to the prior
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 9 |
|---|---|
| OPERATING RESULTS - SEGMENT | |
| --- |
corresponding period, driven by lower costs associated with the acquisition of €12.3 million (US$15.4 million), partially offset by asset impairment charges and higher SG&A expenses. The increase in SG&A expenses was primarily due to higher consulting costs and increased headcount associated with the build out of the organization.
Results Excluding Asset Impairment Charges and Costs Associated with the Acquisition
Adjusted EBIT in Euros decreased €5.7 million for the quarter and €6.5 million for the full year, compared to the prior corresponding periods, driven by higher SG&A expenses.
| Other Businesses Segment | |||||||
|---|---|---|---|---|---|---|---|
| US$ Millions | Three Months and Full Year Ended 31 March | ||||||
| --- | --- | --- | --- | --- | --- | --- | --- |
| Q4 FY20 | Q4 FY19 | Change % | FY20 | FY19 | Change % | ||
| Net sales | — | 1.8 | 0.6 | 14.6 | (96) | ||
| EBIT | 0.1 | (4.4) | — | (30.9) |
The Other Businesses segment is comprised of our former fiberglass windows business, which included a fiberglass windows assembly facility as well as a fiberglass pultrusion business. In fiscal year 2019, we made the decision to shut down the fiberglass windows business, closed the windows assembly business and recorded product line discontinuation costs associated with the shutdown of the business. In April 2019, we ceased operations and sold the fiberglass pultrusion portion of the business.
| Research and Development Segment |
|---|
We record R&D expenses depending on whether they are core R&D projects that are designed to benefit all business units, which are recorded in our R&D segment, or commercialization projects for the benefit of a particular business unit, which are recorded in the individual business unit’s segment results. The table below details the expenses of our R&D segment:
| US$ Millions | Three Months and Full Year Ended 31 March | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Q4 FY20 | Q4 FY19 | Change % | FY20 | FY19 | Change % | ||||||
| Segment R&D expenses | $ | (6.6) | $ | (6.1) | (8) | $ | (24.0) | $ | (26.7) | 10 | |
| Segment R&D SG&A expenses | (0.7) | (1.0) | 30 | (3.0) | (2.3) | (30) | |||||
| Total R&D EBIT | $ | (7.3) | $ | (7.1) | (3) | $ | (27.0) | $ | (29.0) | 7 |
The change in segment R&D expenses for the quarter and full year were driven by a change in the prioritization of R&D activities and projects, as well as normal variation among our R&D projects. The expense will fluctuate period to period depending on the nature and number of core R&D projects being worked on and the AUD/USD exchange rates during the period.
Other R&D expenses associated with commercialization projects in business units are recorded in the results of the respective business unit segment. Other R&D expenses associated with commercialization projects for the quarter and full year were US$2.4 million and US$8.8 million, respectively, compared to US$3.3 million and US$11.2 million for the prior corresponding periods, respectively.
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 10 | |
|---|---|---|
| OPERATING RESULTS - SEGMENT | ||
| --- | General Corporate | |
| --- |
Results for General Corporate were as follows:
| US$ Millions | Three Months and Full Year Ended 31 March | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Q4 FY20 | Q4 FY19 | Change % | FY20 | FY19 | Change % | ||||||
| General Corporate SG&A expenses | $ | (12.0) | $ | (14.7) | 18 | $ | (68.2) | $ | (57.3) | (19) | |
| Asbestos: | |||||||||||
| Asbestos adjustments | (67.0) | (73.4) | 9 | (58.2) | (22.0) | ||||||
| AICF SG&A expenses^1^ | (0.4) | (0.4) | — | (1.7) | (1.5) | (13) | |||||
| Asset impairment charges | (1.4) | — | (1.4) | — | |||||||
| General Corporate EBIT | $ | (80.8) | $ | (88.5) | 9 | $ | (129.5) | $ | (80.8) | (60) | |
| ^1^Relates to non-claims related operating costs incurred by AICF, which we consolidate into our financial results due to our pecuniary and contractual interests in AICF |
General Corporate SG&A expenses for the quarter decreased US$2.7 million, compared to the prior corresponding period, driven by lower stock compensation expenses. General Corporate SG&A expenses for the full year increased US$10.9 million, compared to the prior corresponding period, driven by unfavorable movements in recognized foreign exchange losses and the acceleration in the timing of accounting for expenses associated with a retired executive's non-compete and consulting arrangements.
Asbestos adjustments for both periods primarily reflect the unfavorable actuarial adjustment recorded in the fourth quarter in line with KPMGA's actuarial report, as well as, the non-cash foreign exchange re-measurement impact on asbestos related balance sheet items, driven by the change in the AUD/USD spot exchange rate from the beginning balance sheet date to the ending balance sheet date, for each respective period.
The AUD/USD spot exchange rates are shown in the table below:
| FY20 | FY19 | ||
|---|---|---|---|
| 31 March 2019 | 0.7096 | 31 March 2018 | 0.7681 |
| 31 March 2020 | 0.6177 | 31 March 2019 | 0.7096 |
| Change ($) | (0.0919) | Change ($) | (0.0585) |
| Change (%) | (13) | Change (%) | (8) |
For fiscal years 2020 and 2019, the asbestos adjustments recorded by the Company were made up of the following components:
| US$ Millions | Full Year Ended 31 March | |||||
|---|---|---|---|---|---|---|
| FY20 | FY19 | |||||
| Increase in actuarial estimate | $ | (128.0) | $ | (72.7) | ||
| Effect of foreign exchange rate movements | 69.0 | 49.5 | ||||
| Gain (loss) on foreign currency forward contracts | 0.8 | (0.8) | ||||
| Adjustments in insurance receivable | — | 2.0 | ||||
| Asbestos adjustments | $ | (58.2) | $ | (22.0) |
Per the KPMGA actuarial report, the undiscounted and uninflated central estimate net of insurance recoveries increased to A$1.452 billion at 31 March 2020 from A$1.400 billion at 31 March 2019. The change in the undiscounted and uninflated central estimate of A$52.6 million; or 4%, is primarily due to the increase to the
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 11 |
|---|---|
| OPERATING RESULTS - SEGMENT | |
| --- |
actuarial adjustment, partially offset by net cash outflows in the fiscal year 2020 of A$142.4 million. The increase in the KPMGA actuarial estimate is primarily due to increases to the future numbers of mesothelioma claims.
During fiscal year 2020, mesothelioma claims reporting activity was above actuarial expectations and the prior corresponding period. One of the more significant assumptions is the estimated peak period of mesothelioma disease claims, which was assumed to have occurred during the period 1 April 2014 through 31 March 2017. In fiscal year 2018, KPMGA formed the view that the increases in the mesothelioma claims reporting seen in recent years was a permanent effect, and therefore increased the projected number of future mesothelioma claims at 31 March 2018. The revised KPMGA modeling approach for mesothelioma claims considered the claimant’s age which resulted in a higher number of projected claims, partially offset by a reduction in projected average claim size.
At 31 March 2020, KPMGA has noted that the increase in actual claims reporting for the full year 2020 was primarily due to the increase in the number of cross claims which typically cost around one quarter of the cost of direct claims. As such, KPMGA determined that there was a need to separate the two types of claims resulting in a higher projected future number of estimated mesothelioma claims. Due to the increase in the projected cross claims, the average claim size has decreased due to the mix of the projected claim payments.
Consistent with prior years, the claimants ages are increasing, leading to lower average claim sizes. The decrease is partially offset by a lower number of assumed nil settlements for mesothelioma claims. Changes to the assumptions may be necessary in future periods should mesothelioma claims reporting escalate or decline.
Potential variation in the estimated peak period of claims has an impact much greater than the other assumptions used to derive the discounted central estimate. In performing the sensitivity assessment of the estimated incidence pattern reporting for mesothelioma, if the pattern of incidence was shifted by two years, the central estimate could increase by approximately 21% on a discounted basis.
Asbestos gross cash outflows of A$160.2 million for fiscal year 2020 were slightly higher than the actuarial expectation of A$159.0 million.
Readers are referred to Note 13 of our 31 March 2020 consolidated financial statements for further information on asbestos adjustments.
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 12 | |
|---|---|---|
| OPERATING RESULTS - OTHER | ||
| --- | EBIT | |
| --- |
The table below summarizes EBIT results as discussed above:
| US Millions | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Q4 FY20 | Q4 FY19 | Change % | FY20 | FY19 | Change % | |||||
| North America Fiber Cement1, 2 | $ | 120.0 | $ | 95.1 | 26 | $ | 470.5 | $ | 387.9 | 21 |
| Asia Pacific Fiber Cement1 | 19.6 | 20.5 | (4) | 94.8 | 99.8 | (5) | ||||
| Europe Building Products1 | 0.6 | 7.1 | (92) | 16.7 | 10.0 | 67 | ||||
| Other Businesses2 | 0.1 | (0.9) | — | (6.8) | ||||||
| Research and Development | (7.3) | (7.1) | (3) | (27.0) | (29.0) | 7 | ||||
| General Corporate1, 3 | (12.0) | (14.7) | 18 | (68.2) | (57.3) | (19) | ||||
| Adjusted EBIT | 121.0 | 100.0 | 21 | 486.8 | 404.6 | 20 | ||||
| Asbestos: | ||||||||||
| Asbestos adjustments | (67.0) | (73.4) | 9 | (58.2) | (22.0) | |||||
| AICF SG&A expenses | (0.4) | (0.4) | — | (1.7) | (1.5) | (13) | ||||
| Asset impairment charges and product line discontinuation1, 2 | (84.4) | (3.5) | (84.4) | (29.5) | ||||||
| EBIT | $ | (30.8) | $ | 22.7 | $ | 342.5 | $ | 351.6 | (3) | |
| 1Adjusted EBIT excludes asset impairment charges of US84.4 million in the fourth quarter and full year 2020. These charges consist of US41.2 million, US36.3 million, US5.5 million and US1.4 million in the North America Fiber Cement, Asia Pacific Fiber Cement, Europe Building Products and General Corporate segments, respectively. Readers are referred to Notes 7, 8 and 9 of our 31 March 2020 consolidated financial statements for further information on impairments | ||||||||||
| 2Adjusted EBIT for the full year 2019 excludes product line discontinuation expenses, primarily reflected in the Other Businesses Segment as a result of our decision to discontinue our Windows business. In addition, the North America Fiber Cement Segment incurred US5.4 million in the full year 2019 related to the discontinuation of our MCT product line as well as certain excess and obsolete ColorPlus® color palettes3Excludes Asbestos-related expenses and adjustments |
All values are in US Dollars.
| Net Interest Expense | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| US$ Millions | Three Months and Full Year Ended 31 March | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Q4 FY20 | Q4 FY19 | Change % | FY20 | FY19 | Change % | ||||||
| Gross interest expense | $ | (16.5) | $ | (16.2) | (2) | $ | (66.9) | $ | (59.6) | (12) | |
| Capitalized interest | 2.6 | 1.7 | 53 | 9.5 | 5.4 | 76 | |||||
| Interest income | 0.1 | 0.7 | (86) | 1.6 | 2.1 | (24) | |||||
| Net AICF interest income | 0.5 | 0.5 | — | 1.4 | 2.0 | (30) | |||||
| Net interest expense | $ | (13.3) | $ | (13.3) | — | $ | (54.4) | $ | (50.1) | (9) |
Gross interest expense for the quarter increased US$0.3 million, compared to the prior corresponding period, primarily due to a higher average outstanding balance of our revolving credit facility. For the full year, gross interest expense increased US$7.3 million, compared to the prior corresponding period, primarily due to the higher interest rate on our long-term Euro denominated debt compared to the 364-day term loan facility used to initially finance the Fermacell acquisition in the prior year.
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 13 | |||
|---|---|---|---|---|
| OPERATING RESULTS - OTHER | ||||
| --- | Income Tax | |||
| --- | ||||
| --- | --- | --- | --- | --- |
| Q4 FY20 | Q4 FY19 | FY20 | FY19 | |
| Income tax benefit (expense) (US Millions) | 50.4 | (8.6) | (46.5) | (71.8) |
| Effective tax rate (%) | 114.3 | 91.5 | 16.1 | 23.9 |
| Adjusted income tax expense1 (US Millions) | (20.6) | (12.4) | (78.1) | (52.1) |
| Adjusted effective tax rate1 (%) | 19.2 | 14.4 | 18.1 | 14.8 |
| 1Includes tax adjustments related to the amortization benefit of certain US intangible assets, asbestos, and other tax adjustments |
All values are in US Dollars.
Total income tax for the quarter and full year decreased US$59.0 million and US$25.3 million, respectively, compared to the prior corresponding periods, due to impairment charges incurred in the fourth quarter of fiscal year 2020, US tax loss carryback permitted by the US CARES Act and asbestos adjustments.
Adjusted income tax expense for the full year increased US$26.0 million, compared to the prior corresponding period, primarily due to the mix of geographic earnings and the proportional impact of tax adjustments related to the straight-line amortization benefit of certain US intangible assets.
Readers are referred to Note 16 of our 31 March 2020 consolidated financial statements for further information related to income tax.
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 14 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| OPERATING RESULTS - OTHER | |||||||||||
| --- | |||||||||||
| Net Operating Profit | |||||||||||
| --- | |||||||||||
| US$ Millions | Three Months and Full Year Ended 31 March | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Q4 FY20 | Q4 FY19 | Change % | FY20 | FY19 | Change % | ||||||
| EBIT | $ | (30.8) | $ | 22.7 | $ | 342.5 | $ | 351.6 | (3) | ||
| Net interest expense | (13.3) | (13.3) | — | (54.4) | (50.1) | (9) | |||||
| Loss on early debt extinguishment | — | — | — | (1.0) | |||||||
| Other (expense) income | — | — | (0.1) | 0.1 | |||||||
| Income tax expense | 50.4 | (8.6) | (46.5) | (71.8) | 35 | ||||||
| Net operating profit | 6.3 | 0.8 | 241.5 | 228.8 | 6 | ||||||
| Excluding: | |||||||||||
| Asbestos: | |||||||||||
| Asbestos adjustments | 67.0 | 73.4 | (9) | 58.2 | 22.0 | ||||||
| AICF SG&A expenses | 0.4 | 0.4 | — | 1.7 | 1.5 | 13 | |||||
| AICF interest income, net | (0.5) | (0.5) | — | (1.4) | (2.0) | 30 | |||||
| Asset impairment charges and product line discontinuation^1^ | 84.4 | 3.5 | 84.4 | 29.5 | |||||||
| Loss on early debt extinguishment | — | — | — | 1.0 | |||||||
| Tax adjustments^2^ | (71.0) | (3.8) | (31.6) | 19.7 | |||||||
| Adjusted net operating profit | 86.6 | 73.8 | 17 | 352.8 | 300.5 | 17 | |||||
| Adjusted diluted earnings per share (US cents) | 19 | 17 | 79 | 68 | |||||||
| ^1^In fiscal year 2020, asset impairment charges reflect the non-cash expense associated with the impairments related to our Summerville, USA and Penrose, NZ manufacturing facilities as well as additional non-core assets. In fiscal year 2019, these charges reflect the costs incurred as a result of our decision to discontinue product lines in both our North America Fiber Cement segment and our Other Businesses segment<br><br>^2^Includes tax adjustments related to the amortization benefit of certain US intangible assets, asbestos and other tax adjustments |
Adjusted net operating profit of US$86.6 million for the quarter increased US$12.8 million, or 17%, compared to the prior corresponding period, driven by a US$21.0 million increase in Adjusted EBIT, partially offset by higher Adjusted income tax expense of US$8.2 million. The Adjusted EBIT increase was driven by the increase in Adjusted EBIT of US$24.9 million in the North America Fiber Cement segment, partially offset by a decrease in Adjusted EBIT of US$6.5 million in the Europe Building Products segment.
Adjusted net operating profit of US$352.8 million for the full year increased US$52.3 million, or 17%, compared to the prior corresponding period, driven by a US$82.2 million increase in Adjusted EBIT, partially offset by higher Adjusted income tax expense of US$26.0 million and higher net interest expense of US$4.3 million. The Adjusted EBIT increase was driven by the increase of US$82.6 million in the North America Fiber Cement segment, partially offset by a US$10.9 million increase in General Corporate SG&A expenses.
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 15 |
|---|---|
| OTHER INFORMATION | |
| --- |
1
| Cash Flow |
|---|
Operating Activities
Cash provided by operating activities for the full year increased US$147.2 million, compared to the prior corresponding period, to US$451.2 million. The increase in cash provided by operating activities was driven primarily by an increase in net income adjusted for non-cash items of US$189.2 million and cash provided by accounts payable of US$41.6 million, partially offset by an increase in receivables driven by an income tax receivable recorded during the quarter of US$84.7 million as a result of the CARES Act.
Investing Activities
Cash used in investing activities decreased US$660.6 million to US$203.8 million in fiscal year 2020. The decrease in cash used in investing activities was primarily due to the US$558.7 million acquisition of Fermacell in the prior year, as well as a decrease in purchases in property, plant and equipment of US$123.7 million partially offset by lower net proceeds from AICF's short-term investments of US$25.7 million.
Financing Activities
Cash used in financing activities for the year was US$179.0 million, compared to cash provided by financing activities of US$364.2 million in the prior corresponding period. The US$543.2 million change was primarily driven by the net proceeds from debt of US$492.4 million utilized in the acquisition of Fermacell in the prior year, compared to nil in the current year, and lower net proceeds from credit facilities of US$70.0 million in current year.
| Capacity Expansion |
|---|
We continually evaluate the capacity required to service the housing markets in which we operate to ensure we meet demand and achieve our market penetration objectives. As announced on 5 May 2020, we have adjusted our fiscal year 2021 planned capital expenditures to be in a range of US$80 million - US$95 million. During the current quarter:
In North America we:
•Continued the construction of a greenfield expansion project in Prattville, Alabama, at an estimated total cost of US$240.0 million. We have deferred the expected commissioning date to fiscal year 2022 in our efforts to better match supply with demand.
In Asia Pacific we:
•In Q3 FY20 we completed the brownfield expansion project at our existing Carole Park facility. We anticipate we will commission this sheet machine in early fiscal year 2022 as a result of our strategic decision to shift to importing products to New Zealand from our Australian manufacturing plants.
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 16 |
|---|---|
| OTHER INFORMATION | |
| --- | |
| Liquidity and Capital Allocation | |
| --- |
Our cash position increased from US$78.7 million at 31 March 2019 to US$144.4 million at 31 March 2020.
At 31 March 2020, we held two forms of debt: an unsecured revolving credit facility and senior unsecured notes. The effective weighted average interest rate on our total debt was 4.3% and 4.4% at 31 March 2020 and 31 March 2019, respectively. The weighted average term of all debt, including undrawn facilities, was 5.3 years and 6.3 years at 31 March 2020 and 31 March 2019, respectively.
At 31 March 2020, a total of US$130.0 million was drawn from our US$500.0 million unsecured revolving facility, compared to US$150.0 million at 31 March 2019. At 31 March 2020, our cash and amount available under the revolving credit facility was US$365.4 million. The unsecured revolving credit facility's expiration date is December 2022 and the size of the facility may be increased by up to US$250.0 million.
Based on our existing cash balances, together with anticipated operating cash flows arising during the year and unutilized committed credit facilities, we anticipate that we will have sufficient funds to meet our planned working capital and other expected cash requirements for the next twelve months.
We have historically met our working capital needs and capital expenditure requirements from a combination of cash flows from operations and credit facilities. Seasonal fluctuations in working capital generally have not had a significant impact on our short or long term liquidity.
| Capital Management and Dividends |
|---|
The COVID-19 pandemic and actions taken in response thereto are continuing to have a significant adverse effect on many sectors of the economy, including new home building and remodeling activity. Accordingly, we have currently reduced our production capacity to match supply and demand. While this reduction in production is expected to be temporary, the duration of the COVID-19 pandemic, the actions to contain the pandemic and treat its impacts, and the effects on our operations are highly uncertain and cannot be predicted at this time.
To further strengthen the Company’s liquidity position and to manage market volatility, the Company is taking the following strategic measures:
•The immediate suspension of dividends until further notice, as approved by the Board of Directors.
•Adjusted FY21 Capital Expenditures to be in a range of US$80 – US$95 million, compared to a historic three-year, annual average of approximately US$240 million.
•Will make its annual contributions to Asbestos Injuries Compensation Fund (AICF) in quarterly installments, versus one lump sum payment in July 2020, as allowed under the provisions of the Amended and Restated Final Funding Agreement (AFFA).
The following table summarizes the dividends declared or paid in respect of fiscal years 2020, 2019 and 2018:
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 17 | |||
|---|---|---|---|---|
| OTHER INFORMATION | ||||
| --- | ||||
| US Millions | Total US$ <br>(Millions) | Announcement <br>Date | Record Date | Payment Date |
| --- | --- | --- | --- | --- |
| FY 2020 first half dividend1 | 44.7 | 7 November 2019 | 18 November 2019 | 20 December 2019 |
| FY 2019 second half dividend | 113.9 | 21 May 2019 | 6 June 2019 | 2 August 2019 |
| FY 2019 first half dividend | 43.6 | 8 November 2018 | 12 December 2018 | 22 February 2019 |
| FY 2018 second half dividend | 128.5 | 22 May 2018 | 7 June 2018 | 3 August 2018 |
| FY 2018 first half dividend | 46.2 | 9 November 2017 | 13 December 2017 | 23 February 2018 |
| FY 2017 second half dividend | 131.3 | 18 May 2017 | 8 June 2017 | 4 August 2017 |
| 1Includes US2.8 million of withholding taxes paid on 10 January 2020 |
All values are in US Dollars.
| Other Asbestos Information |
|---|
Claims Data
| Q4 FY20 | Q4 FY19 | Change % | FY20 | FY19 | Change % | |
| Claims received | 151 | 133 | (14) | 657 | 568 | (16) |
| Actuarial estimate for the period | 141 | 144 | 2 | 564 | 576 | 2 |
| Difference in claims received to actuarial estimate | (10) | 11 | (93) | 8 | ||
| Average claim settlement1 (A) | 262,000 | 219,000 | (20) | 277,000 | 262,000 | (6) |
| Actuarial estimate for the period2 | 306,000 | 290,000 | (6) | 306,000 | 290,000 | (6) |
| Difference in claims paid to actuarial estimate | 44,000 | 71,000 | 29,000 | 28,000 | ||
| 1Average claim settlement is derived as the total amount paid divided by the number of non-nil claim settlements2This actuarial estimate is a function of the assumed experience by disease type and the relative mix of settlements assumed by disease type. Any variances in the assumed mix of settlements by disease type will have an impact on the average claim settlement experience |
All values are in US Dollars.
For the full year ended 31 March 2020, we noted the following related to asbestos-related claims:
•Net cash outflow was 5% below actuarial expectations;
•Gross cash outflow was 1% above actuarial expectations;
•Claims received were 16% above actuarial expectations and the prior corresponding period;
•Mesothelioma claims reported were 16% higher than actuarial expectations and the prior corresponding period;
•The number of claims settled were 8% above actuarial expectations and 5% above the prior corresponding period;
•The average claim settlement was 9% below actuarial expectations and 6% above the prior corresponding period; and
•Average claim settlement sizes were lower than actuarial expectations for all mesothelioma age groups and for most other disease types.
AICF Funding
We funded US$108.9 million to AICF during the second quarter of fiscal year 2020, as provided under the AFFA. From the time AICF was established in February 2007 through the date of this Report, we have contributed approximately A$1,350.1 million to the fund.
We anticipate that we will make contributions totaling approximately US$153.3 million to AICF during fiscal year 2021. This amount represents 35% of our free cash flow of US$438.0 million. Our free cash flow, as
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 18 |
|---|---|
| OTHER INFORMATION | |
| --- |
defined by the AFFA, is our operating cash flow per US GAAP in effect in December 2004. To reconcile our current year operating cash flow of US$451.2 million to 2004 US GAAP, a US$13.2 million adjustment is required.
Readers are referred to Notes 2 and 13 of our 31 March 2020 consolidated financial statements for further information on asbestos.
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 19 |
|---|---|
| NON-US GAAP FINANCIAL MEASURES | |
| --- | |
| Financial Measures - US GAAP equivalents | |
| --- |
This document contains financial statement line item descriptions that are considered to be non-US GAAP, but are consistent with those used by Australian companies. Because we prepare our consolidated financial statements under US GAAP, the following table cross-references each non-US GAAP line item description, as used in Management’s Analysis of Results and Media Release, to the equivalent US GAAP financial statement line item description used in our consolidated financial statements:
| Management’s Analysis of Results and Media Release | Consolidated Statements of Operations and Other Comprehensive Income (Loss) (US GAAP) |
|---|---|
| Net sales | Net sales |
| Cost of goods sold | Cost of goods sold |
| Gross profit | Gross profit |
| Selling, general and administrative expenses | Selling, general and administrative expenses |
| Research and development expenses | Research and development expenses |
| Asbestos adjustments | Asbestos adjustments |
| EBIT* | Operating income (loss) |
| Net interest income (expense)* | Sum of interest expense and interest income |
| Other income (expense) | Other income (expense) |
| Operating profit (loss) before income taxes* | Income (loss) before income taxes |
| Income tax (expense) benefit | Income tax (expense) benefit |
| Net operating profit (loss)* | Net income (loss) |
| *- Represents non-US GAAP descriptions used by Australian companies. |
EBIT – Earnings before interest and tax.
EBIT margin – EBIT margin is defined as EBIT as a percentage of net sales.
Sales Volume
mmsf – million square feet, where a square foot is defined as a standard square foot of 5/16” thickness.
msf – thousand square feet, where a square foot is defined as a standard square foot of 5/16” thickness.
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 20 |
|---|---|
| NON-US GAAP FINANCIAL TERMS | |
| --- |
This Management’s Analysis of Results includes certain financial information to supplement the Company’s consolidated financial statements which are prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”). These financial measures are designed to provide investors with an alternative method for assessing our performance from on-going operations, capital efficiency and profit generation. Management uses these financial measure for the same purposes. These financial measures include:
•Adjusted EBIT;
•North America Fiber Cement Segment Adjusted EBIT excluding asset impairment charges and product line discontinuation expenses;
•Asia Pacific Fiber Cement Segment Adjusted EBIT excluding asset impairment charges;
•Europe Building Products Segment Adjusted EBIT excluding asset impairment charges;
•Europe Building Products Segment Adjusted EBIT excluding asset impairment charges and costs associated with the acquisition;
•Adjusted EBIT margin;
•North America Fiber Cement Segment Adjusted EBIT margin excluding asset impairment charges and product line discontinuation expenses;
•Asia Pacific Fiber Cement Segment Adjusted EBIT margin excluding asset impairment charges;
•Europe Building Products Segment Adjusted EBIT margin excluding asset impairment charges;
•Europe Building Products Segment Adjusted EBIT margin excluding asset impairment charges and costs associated with the acquisition;
•Adjusted net operating profit;
•Adjusted diluted earnings per share;
•Adjusted operating profit before income taxes;
•Adjusted income tax expense;
•Adjusted effective tax rate;
•Adjusted EBITDA;
•Adjusted EBITDA excluding Asbestos;
•Adjusted selling, general and administrative expenses (“Adjusted SG&A”); and
•Adjusted return on capital employed ("Adjusted ROCE").
These financial measures are or may be non-US GAAP financial measures as defined in the rules of the U.S. Securities and Exchange Commission and may exclude or include amounts that are included or excluded, as applicable, in the calculation of the most directly comparable financial measures calculated in accordance with US GAAP. These financial measures are not meant to be considered in isolation or as a substitute for comparable US GAAP financial measures and should be read only in conjunction with the Company’s consolidated financial statements prepared in accordance with US GAAP. In evaluating these financial measures, investors should note that other companies reporting or describing similarly titled financial measures may calculate them differently and investors should exercise caution in comparing the Company’s financial measures to similar titled measures by other companies.
| Non-financial Terms |
|---|
AFFA – Amended and Restated Final Funding Agreement
AICF – Asbestos Injuries Compensation Fund Ltd
Legacy New Zealand weathertightness claims ("New Zealand weathertightness") – Expenses arising from defending and resolving claims in New Zealand that allege generic defects in certain fiber cement products and systems, breach of duties including the failure to conduct appropriate testing of these products and systems, failure to warn and misleading and deceptive conduct in relation to the marketing and sale of the products and systems
New South Wales loan facility ("NSW Loan") – AICF has access to a secured loan facility made available by the New South Wales Government, which can be used by AICF to fund the payment of asbestos claims and certain operating and legal costs
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 21 |
|---|---|
| NON-US GAAP FINANCIAL MEASURES | |
| --- | |
| Financial Measures - US GAAP equivalents | |
| --- |
Adjusted EBIT
| US$ Millions | Three Months and Full Year Ended 31 March | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Q4 FY20 | Q4 FY19 | FY20 | FY19 | ||||||
| EBIT | $ | (30.8) | $ | 22.7 | $ | 342.5 | $ | 351.6 | |
| Asbestos: | |||||||||
| Asbestos adjustments | 67.0 | 73.4 | 58.2 | 22.0 | |||||
| AICF SG&A expenses | 0.4 | 0.4 | 1.7 | 1.5 | |||||
| Asset impairment charges and product line discontinuation expenses | 84.4 | 3.5 | 84.4 | 29.5 | |||||
| Adjusted EBIT | $ | 121.0 | $ | 100.0 | $ | 486.8 | $ | 404.6 | |
| Net sales | 673.2 | 624.8 | 2,606.8 | 2,506.6 | |||||
| Adjusted EBIT margin | 18.0% | 16.0% | 18.7% | 16.1% |
North America Fiber Cement Segment Adjusted EBIT excluding asset impairments and product line discontinuation
| US$ Millions | Three Months and Full Year Ended 31 March | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Q4 FY20 | Q4 FY19 | FY20 | FY19 | ||||||
| North America Fiber Cement Segment EBIT | $ | 78.8 | $ | 95.1 | $ | 429.3 | $ | 382.5 | |
| Asset impairment charges and product line discontinuation expenses | 41.2 | — | 41.2 | 5.4 | |||||
| North America Fiber Cement Segment Adjusted EBIT excluding asset impairment charges and product line discontinuation expenses | $ | 120.0 | $ | 95.1 | $ | 470.5 | $ | 387.9 | |
| North America Fiber Cement segment net sales | 474.5 | 422.0 | 1,816.4 | 1,676.9 | |||||
| North America Fiber Cement Segment Adjusted EBIT margin excluding asset impairment charges and product line discontinuation expenses | 25.3% | 22.5% | 25.9% | 23.1% |
Asia Pacific Fiber Cement Segment Adjusted EBIT excluding asset impairments
| US$ Millions | Three Months and Full Year Ended 31 March | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Q4 FY20 | Q4 FY19 | FY20 | FY19 | ||||||
| Asia Pacific Fiber Cement Segment EBIT | $ | (16.7) | $ | 20.5 | $ | 58.5 | $ | 99.8 | |
| Asset impairment charges | 36.3 | — | 36.3 | — | |||||
| Asia Pacific Fiber Cement Segment Adjusted EBIT excluding asset impairment charges | $ | 19.6 | $ | 20.5 | $ | 94.8 | $ | 99.8 | |
| Asia Pacific Fiber Cement segment net sales | 95.8 | 102.3 | 418.4 | 446.8 | |||||
| Asia Pacific Fiber Cement Segment Adjusted EBIT margin excluding asset impairment charges | 20.5% | 20.0% | 22.7% | 22.3% | |||||
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 22 | ||||||||
| --- | --- | ||||||||
| NON-US GAAP FINANCIAL MEASURES | |||||||||
| --- |
Europe Building Products Segment Adjusted EBIT excluding asset impairments and costs associated with the acquisition
| US Millions | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Q4 FY20 | Q4 FY19 | FY20 | FY19 | |||||||||
| Europe Building Products Segment EBIT | $ | (4.9) | $ | 7.1 | $ | 11.2 | $ | 10.0 | ||||
| Asset impairment charges | 5.5 | — | 5.5 | — | ||||||||
| Europe Building Products Segment Adjusted EBIT excluding asset impairment charges | 0.6 | 7.1 | 16.7 | 10.0 | ||||||||
| Inventory fair value adjustment1 | — | — | — | 7.3 | ||||||||
| Transaction costs2 | — | — | — | 7.2 | ||||||||
| Integration costs3 | 4.1 | 4.1 | 13.7 | 14.6 | ||||||||
| Costs associated with the acquisition | $ | 4.1 | $ | 4.1 | $ | 13.7 | $ | 29.1 | ||||
| Europe Building Products Segment Adjusted EBIT excluding asset impairments and costs associated with the acquisition | $ | 4.7 | $ | 11.2 | $ | 30.4 | $ | 39.1 | ||||
| Europe Building Products segment net sales | 102.9 | 98.7 | 371.4 | 368.3 | ||||||||
| Europe Building Products Segment Adjusted EBIT margin excluding asset impairments | 0.6 | % | 7.2 | % | 4.5 | % | 2.7 | % | ||||
| Europe Building Products Segment Adjusted EBIT margin excluding asset impairments and costs associated with the acquisition | 4.6% | 11.3% | 8.2% | 10.6% | ||||||||
| 1Under US GAAP, we were required to value the inventory acquired at fair market value. The revaluation resulted in a preliminary total inventory fair value adjustment of US7.3 million. As this inventory was sold during the first quarter of FY19, the entire adjustment was recognized into cost of goods sold during that period2Transaction costs include certain non-recurring fees incurred in conjunction with the acquisition of Fermacell3Integration costs relate to professional, legal and other fees incurred in conjunction with the integration of Fermacell |
All values are in US Dollars.
Adjusted net operating profit
| US$ Millions | Three Months and Full Year Ended 31 March | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Q4 FY20 | Q4 FY19 | FY20 | FY19 | ||||||||||
| Net operating profit | $ | 6.3 | $ | 0.8 | $ | 241.5 | $ | 228.8 | |||||
| Asbestos: | |||||||||||||
| Asbestos adjustments | 67.0 | 73.4 | 58.2 | 22.0 | |||||||||
| AICF SG&A expenses | 0.4 | 0.4 | 1.7 | 1.5 | |||||||||
| AICF interest income, net | (0.5 | ) | (0.5 | ) | (1.4 | ) | (2.0 | ) | |||||
| Loss on early debt extinguishment | — | — | — | 1.0 | |||||||||
| Asset impairment charges and product line discontinuation expenses | 84.4 | 3.5 | 84.4 | 29.5 | |||||||||
| Tax adjustments^1^ | (71.0 | ) | (3.8 | ) | (31.6 | ) | 19.7 | ||||||
| Adjusted net operating profit | $ | 86.6 | $ | 73.8 | $ | 352.8 | $ | 300.5 | |||||
| ^1^Includes tax adjustments related to the amortization benefit of certain US intangible assets, asbestos, and other tax adjustments | |||||||||||||
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 23 | ||||||||||||
| --- | --- | ||||||||||||
| NON-US GAAP FINANCIAL MEASURES | |||||||||||||
| --- |
Adjusted diluted earnings per share
| Q4 FY20 | Q4 FY19 | FY20 | FY19 | |||||
| Adjusted net operating profit (US millions) | $ | 86.6 | $ | 73.8 | $ | 352.8 | $ | 300.5 |
| Weighted average common shares outstanding - Diluted (millions) | 444.5 | 443.4 | 444.1 | 443.0 | ||||
| Adjusted diluted earnings per share (US cents) | 19 | 17 | 79 | 68 |
All values are in US Dollars.
Adjusted effective tax rate
| US$ Millions | Three Months and Full Year Ended 31 March | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Q4 FY20 | Q4 FY19 | FY20 | FY19 | ||||||
| Operating (loss) profit before income taxes | $ | (44.1) | $ | 9.4 | $ | 288.0 | $ | 300.6 | |
| Asbestos: | |||||||||
| Asbestos adjustments | 67.0 | 73.4 | 58.2 | 22.0 | |||||
| AICF SG&A expenses | 0.4 | 0.4 | 1.7 | 1.5 | |||||
| AICF interest income, net | (0.5) | (0.5) | (1.4) | (2.0) | |||||
| Loss on early debt extinguishment | — | — | — | 1.0 | |||||
| Asset impairment charges and product line discontinuation expenses | 84.4 | 3.5 | 84.4 | 29.5 | |||||
| Adjusted operating profit before income taxes | $ | 107.2 | $ | 86.2 | $ | 430.9 | $ | 352.6 | |
| Income tax benefit (expense) | 50.4 | (8.6) | (46.5) | (71.8) | |||||
| Tax adjustments^1^ | (71.0) | (3.8) | (31.6) | 19.7 | |||||
| Adjusted income tax expense | $ | (20.6) | $ | (12.4) | $ | (78.1) | $ | (52.1) | |
| Effective tax rate | 114.3% | 91.5% | 16.1% | 23.9% | |||||
| Adjusted effective tax rate | 19.2% | 14.4% | 18.1% | 14.8% | |||||
| ^1^Includes tax adjustments related to the amortization benefit of certain US intangible assets, asbestos, and other tax adjustments |
Adjusted EBITDA excluding Asbestos
| US$ Millions | Three Months and Full Year Ended 31 March | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Q4 FY20 | Q4 FY19 | FY20 | FY19 | ||||||
| EBIT | $ | (30.8) | $ | 22.7 | $ | 342.5 | $ | 351.6 | |
| Depreciation and amortization | 37.7 | 30.7 | 131.5 | 119.4 | |||||
| Adjusted EBITDA | $ | 6.9 | $ | 53.4 | $ | 474.0 | $ | 471.0 | |
| Asbestos: | |||||||||
| Asbestos adjustments | 67.0 | 73.4 | 58.2 | 22.0 | |||||
| AICF SG&A expenses | 0.4 | 0.4 | 1.7 | 1.5 | |||||
| Adjusted EBITDA excluding Asbestos | $ | 74.3 | $ | 127.2 | $ | 533.9 | $ | 494.5 | |
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 24 | ||||||||
| --- | --- | ||||||||
| NON-US GAAP FINANCIAL MEASURES | |||||||||
| --- |
Adjusted selling, general and administrative expenses (“Adjusted SG&A”)
| US$ Millions | Three Months and Full Year Ended 31 March | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Q4 FY20 | Q4 FY19 | FY20 | FY19 | ||||||
| SG&A expenses | $ | 110.3 | $ | 102.3 | $ | 415.8 | $ | 403.6 | |
| Excluding: | |||||||||
| AICF SG&A expenses | (0.4) | (0.4) | (1.7) | (1.5) | |||||
| Product line discontinuation | — | (0.7) | — | (2.1) | |||||
| Adjusted SG&A expenses | $ | 109.9 | $ | 101.2 | $ | 414.1 | $ | 400.0 | |
| Net sales | 673.2 | 624.8 | 2,606.8 | 2,506.6 | |||||
| SG&A expenses as a percentage of net sales | 16.4% | 16.4% | 16.0% | 16.1% | |||||
| Adjusted SG&A expenses as a percentage of net sales | 16.3% | 16.2% | 15.9% | 16.0% |
Adjusted Return on Capital Employed ("Adjusted ROCE")
| US Millions | ||||
|---|---|---|---|---|
| FY19 | ||||
| Numerator | ||||
| Adjusted EBIT | $ | 486.8 | $ | 404.6 |
| Adjustments to EBIT2 | — | (7.3) | ||
| Adjusted EBIT for ROCE | 486.8 | 397.3 | ||
| Denominator | ||||
| Gross capital employed (GCE) | 1,753.7 | 1,492.7 | ||
| Adjustments to GCE3 | (195.5) | (77.4) | ||
| Adjusted gross capital employed3 | $ | 1,558.2 | $ | 1,415.3 |
| Adjusted ROCE | 31.2% | 28.1% | ||
| 1Adjusted ROCE is used to assess annual financial results and therefore is not presented for the three months ended 31 March 2020 and 20192Adjustments as calculated according to ROCE stock compensation plan documents3Calculated as Total Assets minus Current Liabilities as reported in our financial results; adjusted by (i) excluding balance sheet items related to legacy issues (such as asbestos adjustments) dividends payables and deferred taxes; (ii) adding back asset impairment charges in the relevant period, unless otherwise determined by the renumeration committee; (iii) for fiscal year 2019 adding back leasehold assets for manufacturing facilities and other material leased assets; and (iv) deducting all greenfield construction-in-progress, and any brownfield construction-in-progress projects involving capacity expansion that are individually greater than US20 million, until such assets reach commercial production and are transferred to the fixed asset register |
All values are in US Dollars.
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 25 |
|---|---|
| SUPPLEMENTAL FINANCIAL INFORMATION | |
| --- |
As set forth in Note 13 of the consolidated financial statements, the net AFFA liability, while recurring, is based on periodic actuarial determinations, claims experience and currency fluctuations. The Company’s management measures its financial position, operating performance and year-over-year changes in operating results with and without the effect of the net AFFA liability.
Further, the Company's annual payment to AICF is determined by reference to the free cash flow as defined in the AFFA. Free cash flow for these purposes is defined as the Company's operating cash flow, based on US GAAP as of 21 December 2004. As there have been changes to US GAAP since the AFFA was entered into, the annual payment is no longer based upon the current US GAAP operating cash flow statement.
Accordingly, management believes that the following non-GAAP information is useful to it and investors in evaluating the company’s financial position and ongoing operating financial performance, as well as estimating the annual payment due to AICF. The following non-GAAP tables should be read in conjunction with the consolidated financial statements and related notes contained therein.
James Hardie Industries plc
Supplementary Financial Information
31 March 2020
(Unaudited)
| US$ Millions | Total Excluding Asbestos Compensation | Asbestos<br><br>Compensation | As Reported<br><br>(US GAAP) | ||
|---|---|---|---|---|---|
| Restricted cash and cash equivalents – Asbestos | $ | — | $ | 36.4 | 36.4 |
| Restricted short term investments – Asbestos | — | 21.6 | 21.6 | ||
| Insurance receivable – Asbestos^1^ | — | 43.5 | 43.5 | ||
| Workers compensation asset – Asbestos^1^ | — | 22.2 | 22.2 | ||
| Deferred income taxes – Asbestos | — | 319.1 | 319.1 | ||
| Asbestos liability^1^ | — | 986.4 | 986.4 | ||
| Workers compensation liability – Asbestos^1^ | — | 22.2 | 22.2 | ||
| Income taxes payable^1^ | 53.6 | (23.4) | 30.2 | ||
| Asbestos adjustments | — | (58.2) | (58.2) | ||
| Selling, general and administrative expenses | (414.1) | (1.7) | (415.8) | ||
| Net interest (expense) income | (55.8) | 1.4 | (54.4) | ||
| Income tax expense | (85.1) | 38.6 | (46.5) | ||
| ^1^The amounts shown on these lines are a summation of both the current and non-current portion of the respective asset or liability as presented on our consolidated balance sheets | |||||
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 26 | ||||
| --- | --- | ||||
| SUPPLEMENTAL FINANCIAL INFORMATION | |||||
| --- |
James Hardie Industries plc
Supplementary Statements of Cash Flows
For the Full Year Ended
31 March 2020
(Unaudited)
| US$ Millions | US GAAP <br>as of <br>21 December 2004 | Reconciling Items to Current US GAAP | As Reported | |||
|---|---|---|---|---|---|---|
| Cash Flows From Operating Activities | ||||||
| Net income | $ | 241.1 | $ | 0.4 | $ | 241.5 |
| Adjustments to reconcile net income to net cash provided by operating activities | ||||||
| Depreciation and amortization | 131.5 | — | 131.5 | |||
| Lease expense | — | 18.1 | 18.1 | |||
| Deferred income taxes | 64.0 | — | 64.0 | |||
| Stock-based compensation | 10.3 | — | 10.3 | |||
| Asbestos adjustments | 58.2 | — | 58.2 | |||
| Excess tax benefits from share-based awards | (0.4) | — | (0.4) | |||
| Assets impairments | 77.4 | — | 77.4 | |||
| Other, net | 17.2 | — | 17.2 | |||
| Changes in operating assets and liabilities: | ||||||
| Restricted cash and cash equivalents - Asbestos | 96.5 | (96.5) | — | |||
| Payment to AICF | (108.9) | 108.9 | — | |||
| Accounts and other receivables | (118.6) | — | (118.6) | |||
| Inventories | 3.2 | — | 3.2 | |||
| Lease assets and liabilities, net | — | (15.6) | (15.6) | |||
| Prepaid expenses and other assets | (2.6) | — | (2.6) | |||
| Insurance receivable - Asbestos | 7.6 | — | 7.6 | |||
| Accounts payable and accrued liabilities | 45.1 | — | 45.1 | |||
| Asbestos liability | (105.6) | 105.6 | — | |||
| Claims and handling costs paid - Asbestos | — | (105.6) | (105.6) | |||
| Income taxes payable | (11.0) | — | (11.0) | |||
| Other accrued liabilities | 33.0 | (2.1) | 30.9 | |||
| Net cash provided by operating activities | $ | 438.0 | $ | 13.2 | $ | 451.2 |
| Cash Flows From Investing Activities | ||||||
| Purchases of property, plant and equipment | $ | (193.8) | — | $ | (193.8) | |
| Proceeds from sale of property, plant and equipment | 8.0 | — | 8.0 | |||
| Capitalized interest | (9.5) | — | (9.5) | |||
| Purchase of restricted short-term investments - Asbestos | — | (75.5) | (75.5) | |||
| Proceeds from sale of restricted short-term investments - Asbestos | — | 67.0 | 67.0 | |||
| Net cash used in investing activities | $ | (195.3) | $ | (8.5) | $ | (203.8) |
| Cash Flows From Financing Activities | ||||||
| Proceeds from credit facilities | $ | 330.0 | — | $ | 330.0 | |
| Repayments of credit facilities | (350.0) | — | (350.0) | |||
| Repayment of finance lease obligations and borrowings | — | (0.4) | (0.4) | |||
| Excess tax benefits from share-based awards | 0.4 | (0.4) | — | |||
| Dividends paid | (158.6) | — | (158.6) | |||
| Net cash used in financing activities | $ | (178.2) | $ | (0.8) | $ | (179.0) |
| Effects of exchange rate changes on cash and cash equivalents, restricted cash and restricted cash - Asbestos | 1.2 | (7.4) | (6.2) | |||
| Net increase in cash and cash equivalents, restricted cash and restricted cash - Asbestos | $ | 65.7 | $ | (3.5) | $ | 62.2 |
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 27 | |||||
| --- | --- | |||||
| FORWARD-LOOKING STATEMENTS | ||||||
| --- |
This Management’s Analysis of Results contains forward-looking statements. James Hardie Industries plc (the “Company”) may from time to time make forward-looking statements in its periodic reports filed with or furnished to the Securities and Exchange Commission, on Forms 20-F and 6-K, in its annual reports to shareholders, in offering circulars, invitation memoranda and prospectuses, in media releases and other written materials and in oral statements made by the Company’s officers, directors or employees to analysts, institutional investors, existing and potential lenders, representatives of the media and others. Statements that are not historical facts are forward-looking statements and such forward-looking statements are statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
Examples of forward-looking statements include:
▪statements about the Company’s future performance;
▪projections of the Company’s results of operations or financial condition;
▪statements regarding the Company’s plans, objectives or goals, including those relating to strategies, initiatives, competition, acquisitions, dispositions and/or its products;
▪expectations concerning the costs associated with the suspension or closure of operations at any of the Company’s plants and future plans with respect to any such plants;
▪expectations concerning the costs associated with the significant capital expenditure projects at any of the Company’s plants and future plans with respect to any such projects;
▪expectations regarding the extension or renewal of the Company’s credit facilities including changes to terms, covenants or ratios;
▪expectations concerning dividend payments and share buy-backs;
▪statements concerning the Company’s corporate and tax domiciles and structures and potential changes to them, including potential tax charges;
▪uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark;
▪statements regarding the effect and consequences of the novel coronavirus ("COVID-19") public health crisis;
▪statements regarding tax liabilities and related audits, reviews and proceedings;
▪statements regarding the possible consequences and/or potential outcome of legal proceedings brought against us and the potential liabilities, if any, associated with such proceedings;
▪expectations about the timing and amount of contributions to AICF, a special purpose fund for the compensation of proven Australian asbestos-related personal injury and death claims;
▪expectations concerning the adequacy of the Company’s warranty provisions and estimates for future warranty-related costs;
▪statements regarding the Company’s ability to manage legal and regulatory matters (including but not limited to product liability, environmental, intellectual property and competition law matters) and to resolve any such pending legal and regulatory matters within current estimates and in anticipation of certain third-party recoveries; and
▪statements about economic or housing market conditions in the regions in which we operate, including but not limited to, the levels of new home construction and home renovations, unemployment levels, changes in consumer income, changes or stability in housing values, the availability of mortgages and other financing, mortgage and other interest rates, housing affordability and supply, the levels of foreclosures and home resales, currency exchange rates, and builder and consumer confidence.
Words such as “believe,” “anticipate,” “plan,” “expect,” “intend,” “target,” “estimate,” “project,” “predict,” “forecast,” “guideline,” “aim,” “will,” “should,” “likely,” “continue,” “may,” “objective,” “outlook” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Readers are cautioned not to place undue reliance on these forward-looking statements and all such forward-looking statements are qualified in their entirety by reference to the following cautionary statements.
Forward-looking statements are based on the Company’s current expectations, estimates and assumptions and because forward-looking statements address future results, events and conditions, they, by their very nature, involve inherent risks and uncertainties, many of which are unforeseeable and beyond the Company’s control. Such known and unknown risks, uncertainties and other factors may cause actual results, performance or other achievements to differ materially from the anticipated results, performance or achievements expressed, projected or implied by these forward-looking statements. These factors, some of which are discussed under “Risk Factors” in Section 3 of the Form 20-F filed with the Securities and Exchange Commission on 19 May 2020, include, but are not limited to: all matters relating to or arising out of the prior manufacture of products that contained asbestos by current and former Company subsidiaries; required contributions to AICF, any shortfall in AICF funding and the effect of currency exchange rate movements on the amount recorded in the Company’s financial statements as an asbestos liability; the continuation or termination of the governmental loan facility to AICF; compliance with and changes in tax laws and treatments; competition and product pricing in the markets in which the Company operates; the consequences of product failures or defects; exposure to environmental, asbestos, putative consumer class action or other legal proceedings; general economic and market conditions; the supply and cost of raw materials; possible increases in competition and the potential that competitors could copy the Company’s products; reliance on a small number of customers; a customer’s inability to pay; compliance with and changes in environmental and health and safety laws; risks of conducting business internationally; compliance with and changes in laws and regulations; currency exchange risks; dependence on customer preference and the concentration of the Company’s customer base on large format retail customers, distributors and dealers; dependence on residential and commercial construction markets; the effect of adverse changes in climate or weather patterns; possible inability to renew credit facilities on terms favorable to the Company, or at all; acquisition or sale of businesses and business segments; changes in the Company’s key management personnel; inherent limitations on internal controls; use of accounting estimates; the integration of Fermacell into our business; risk and uncertainties arising out of the COVID-19 public health crisis, including the likely significant negative impact of COVID-19 on our business, sales, results of operations and financial condition and all other risks identified in the Company’s reports filed with Australian, Irish and US securities regulatory agencies and exchanges (as appropriate). The Company cautions you that the foregoing list of factors is not exhaustive and that other risks and uncertainties may cause actual results to differ materially from those referenced in the Company’s forward-looking statements. Forward-looking statements speak only as of the date they are made and are statements of the Company’s current expectations concerning future results, events and conditions. The Company assumes no obligation to update any forward-looking statements or information except as required by law.
| Management's Analysis of Results: James Hardie - 4th Quarter and Full Year Ended Fiscal Year 2020 | 28 |
|---|
ex995managementpresentat
Exhibit 99.5 Q4 FY20 MANAGEMENT PRESENTATION 19 May 2020
James Hardie Q4 FY20 Results CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS This Management Presentation contains forward-looking statements. James Hardie Industries plc (the “Company”) may from time to time make forward-looking statements in its periodic reports filed with or furnished to the Securities and Exchange Commission, on Forms 20-F and 6-K, in its annual reports to shareholders, in offering circulars, invitation memoranda and prospectuses, in media releases and other written materials and in oral statements made by the Company’s officers, directors or employees to analysts, institutional investors, existing and potential lenders, representatives of the media and others. Statements that are not historical facts are forward-looking statements and such forward-looking statements are statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include: ◦ statements about the Company’s future performance; ◦ projections of the Company’s results of operations or financial condition; ◦ statements regarding the Company’s plans, objectives or goals, including those relating to strategies, initiatives, competition, acquisitions, dispositions and/ or its products; ◦ expectations concerning the costs associated with the suspension or closure of operations at any of the Company’s plants and future plans with respect to any such plants; ◦ expectations concerning the costs associated with the significant capital expenditure projects at any of the Company’s plants and future plans with respect to any such projects; ◦ expectations regarding the extension or renewal of the Company’s credit facilities including changes to terms, covenants or ratios; ◦ expectations concerning dividend payments and share buy-backs; ◦ statements concerning the Company’s corporate and tax domiciles and structures and potential changes to them, including potential tax charges; ◦ uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark; ◦ statements regarding the effect and consequences of the novel coronavirus ("COVID-19") public health crisis; ◦ statements regarding tax liabilities and related audits, reviews and proceedings; ◦ statements regarding the possible consequences and/or potential outcome of legal proceedings brought against us and the potential liabilities, if any, associated with such proceedings; ◦ expectations about the timing and amount of contributions to Asbestos Injuries Compensation Fund (AICF), a special purpose fund for the compensation of proven Australian asbestos-related personal injury and death claims; ◦ expectations concerning the adequacy of the Company’s warranty provisions and estimates for future warranty-related costs; ◦ statements regarding the Company’s ability to manage legal and regulatory matters (including but not limited to product liability, environmental, intellectual property and competition law matters) and to resolve any such pending legal and regulatory matters within current estimates and in anticipation of certain third-party recoveries; and ◦ statements about economic or housing market conditions in the regions in which we operate, including but not limited to, the levels of new home construction and home renovations, unemployment levels, changes in consumer income, changes or stability in housing values, the availability of mortgages and other financing, mortgage and other interest rates, housing affordability and supply, the levels of foreclosures and home resales, currency exchange rates, and builder and consumer confidence. Page 2
James Hardie Q4 FY20 Results CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS (continued) Words such as “believe,” “anticipate,” “plan,” “expect,” “intend,” “target,” “estimate,” “project,” “predict,” “forecast,” “guideline,” “aim,” “will,” “should,” “likely,” “continue,” “may,” “objective,” “outlook” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Readers are cautioned not to place undue reliance on these forward-looking statements and all such forward-looking statements are qualified in their entirety by reference to the following cautionary statements. Forward-looking statements are based on the Company’s current expectations, estimates and assumptions and because forward-looking statements address future results, events and conditions, they, by their very nature, involve inherent risks and uncertainties, many of which are unforeseeable and beyond the Company’s control. Such known and unknown risks, uncertainties and other factors may cause actual results, performance or other achievements to differ materially from the anticipated results, performance or achievements expressed, projected or implied by these forward-looking statements. These factors, some of which are discussed under “Risk Factors” in Section 3 of the Form 20-F filed with the Securities and Exchange Commission on 19 May 2020, include, but are not limited to: all matters relating to or arising out of the prior manufacture of products that contained asbestos by current and former Company subsidiaries; required contributions to AICF, any shortfall in AICF funding and the effect of currency exchange rate movements on the amount recorded in the Company’s financial statements as an asbestos liability; the continuation or termination of the governmental loan facility to AICF; compliance with and changes in tax laws and treatments; competition and product pricing in the markets in which the Company operates; the consequences of product failures or defects; exposure to environmental, asbestos, putative consumer class action or other legal proceedings; general economic and market conditions; the supply and cost of raw materials; possible increases in competition and the potential that competitors could copy the Company’s products; reliance on a small number of customers; a customer’s inability to pay; compliance with and changes in environmental and health and safety laws; risks of conducting business internationally; compliance with and changes in laws and regulations; currency exchange risks; dependence on customer preference and the concentration of the Company’s customer base on large format retail customers, distributors and dealers; dependence on residential and commercial construction markets; the effect of adverse changes in climate or weather patterns; possible inability to renew credit facilities on terms favorable to the Company, or at all; acquisition or sale of businesses and business segments; changes in the Company’s key management personnel; inherent limitations on internal controls; use of accounting estimates; the integration of Fermacell into our business; risk and uncertainties arising out of the COVID-19 public health crisis, including the likely significant negative impact of COVID-19 on our business, sales, results of operations and financial condition and all other risks identified in the Company’s reports filed with Australian, Irish and US securities regulatory agencies and exchanges (as appropriate). The Company cautions you that the foregoing list of factors is not exhaustive and that other risks and uncertainties may cause actual results to differ materially from those referenced in the Company’s forward-looking statements. Forward-looking statements speak only as of the date they are made and are statements of the Company’s current expectations concerning future results, events and conditions. The Company assumes no obligation to update any forward-looking statements or information except as required by law. Page 3
James Hardie Q4 FY20 Results USE OF NON-GAAP FINANCIAL INFORMATION; AUSTRALIAN EQUIVALENT TERMINOLOGY This Management Presentation includes financial measures that are not considered a measure of financial performance under generally accepted accounting principles in the United States (US GAAP). These financial measures are designed to provide investors with an alternative method for assessing our performance from on-going operations, capital efficiency and profit generation. Management uses these financial measures for the same purposes. These financial measures include: ◦ Adjusted EBIT; ◦ North America Fiber Cement Segment Adjusted EBIT excluding asset impairment charges and product line discontinuation expenses; ◦ Asia Pacific Fiber Cement Segment Adjusted EBIT excluding asset impairment charges; ◦ Europe Building Products Segment Adjusted EBIT excluding asset impairment charges; ◦ Europe Building Products Segment Adjusted EBIT excluding asset impairment charges and costs associated with the acquisition; ◦ Adjusted EBIT margin; ◦ North America Fiber Cement Segment Adjusted EBIT margin excluding asset impairment charges and product line discontinuation expenses; ◦ Asia Pacific Fiber Cement Segment Adjusted EBIT margin excluding asset impairment charges; ◦ Europe Building Products Segment Adjusted EBIT margin excluding asset impairment charges; ◦ Europe Building Products Segment Adjusted EBIT margin excluding asset impairment charges and costs associated with the acquisition; ◦ Adjusted net operating profit; ◦ Adjusted diluted earnings per share; ◦ Adjusted operating profit before income taxes; ◦ Adjusted income tax expense; ◦ Adjusted effective tax rate; ◦ Adjusted EBITDA; ◦ Adjusted EBITDA excluding Asbestos; and ◦ Adjusted selling, general and administrative expenses (“Adjusted SG&A”); and ◦ Adjusted return on capital employed ("Adjusted ROCE"). These financial measures are or may be non-US GAAP financial measures as defined in the rules of the U.S. Securities and Exchange Commission and may exclude or include amounts that are included or excluded, as applicable, in the calculation of the most directly comparable financial measures calculated in accordance with US GAAP. These non-GAAP financial measures should not be considered to be more meaningful than the equivalent US GAAP measure. Management has included such measures to provide investors with an alternative method for assessing its operating results in a manner that is focused on the performance of its ongoing operations and excludes the impact of certain legacy items, such as asbestos adjustments. Additionally, management uses such non-GAAP financial measures for the same purposes. However, these non-GAAP financial measures are not prepared in accordance with US GAAP, may not be reported by all of the Company’s competitors and may not be directly comparable to similarly titled measures of the Company’s competitors due to potential differences in the exact method of calculation. For additional information regarding the non-GAAP financial measures presented in this Management Presentation, including a reconciliation of each non-GAAP financial measure to the equivalent US GAAP measure, see the slide titled “Non-US GAAP Financial Measures” included in the Appendix to this Management Presentation. In addition, this Management Presentation includes financial measures and descriptions that are considered to not be in accordance with US GAAP, but which are consistent with financial measures reported by Australian companies, such as operating profit, EBIT and EBIT margin. Since the Company prepares its Consolidated Financial Statements in accordance with US GAAP, the Company provides investors with a table and definitions presenting cross-references between each US GAAP financial measure used in the Company’s Consolidated Financial Statements to the equivalent non-US GAAP financial measure used in this Management Presentation. See the section titled “Non-US GAAP Financial Measures” included in the Appendix to this Management Presentation. Page 4
James Hardie Q4 FY20 Results AGENDA ◦ Q4 and Full Year FY20 Group Operating Review & Financial Results ◦ FY21 Strategy Update ◦ Questions and Answers Page 5
James Hardie Q4 FY20 Results TODAY'S PRESENTERS Dr. Jack Truong Chief Executive Officer Jason Miele Chief Financial Officer Page 6
Q4 and Full Year FY20 Group Operating Review & Financial Results
James Hardie Q4 FY20 Results SAFETY AND WELL-BEING ◦Pandemic protocols in place, globally ◦Strict social distancing policy ◦Extensive disinfection and hygiene processes ◦24/7 PPE and hygiene kits ◦Sick leave and child care support ◦Work from home model utilized where applicable ◦Service our customers seamlessly Relentless Focus on Safe and Sustainable Work Environment Page 8
James Hardie Q4 FY20 Results FY20 GROUP RESULTS OVERVIEW Q4 FY20 FY20 ◦Volume increased 7% in the quarter, led by 1,011.7 mmsf 3,841.7 mmsf 10% in North America Sales Volume 7 % 5 % a a ◦Adjusted EBIT grew 21% in the quarter, US$673.2 M US$2,606.8 M Net Sales driven by: 8 % 4 % • North America +26% a a • APAC +4% in local currency US$121.0 M US$486.8 M Adjusted EBIT1 21 % 20 % ◦Adjusted NOPAT increased 17% for the a a quarter and full year Adjusted Net Operating US$86.6 M US$352.8 M Profit2 17 % 17 % ◦Operating cash flow increased 48% driving US$451.2 M improved liquidity and financial flexibility Operating Cash Flow 48 % a. Excludes asbestos related expenses and adjustments as well as asset impairment charges and product line discontinuation expenses b. Excludes asbestos related expenses and adjustments, tax adjustments, asset impairment charges and product line discontinuation expenses and loss on early debt extinguishment Outstanding FY20 performance Continued positive momentum into FY21 Page 9
James Hardie Q4 FY20 Results FY20 NORTH AMERICA SUMMARY nd Q4 FY20 FY20 ◦Exteriors volume growth accelerated in the 2 655 mmsf 2,481.6 mmsf half of year Sales Volume 10 % 8 % • +11% for the quarter a a • +9% for the full year US$474.5 M US$1,816.4 M Net Sales Interiors volume growth continued to improve 12 % 8 % ◦ a a • +5% for the quarter US$120.0 M US$470.5 M • +1% for the full year EBIT Excluding1 26 % 21 % ◦Lean savings of US$29 million, ahead of plan a a 1 1 25.3 % 25.9 % ◦Full year EBIT Margin Excluding of 25.9% EBIT Margin Excluding 2.8 pts 2.8 pts exceeded top end of long-term target range 1 Excludes asset impairment charges and product line discontinuation expenses 7+ % PDG and 25.9% EBIT Margin for the full year Page 10
James Hardie Q4 FY20 Results FY20 EUROPE SUMMARY Q4 FY20 FY20 ◦Continued Fiber Cement growth in Euros 231.7 mmsf 827.5 mmsf • Net Sales +50% for the quarter Sales Volume 6 % 1 % • Net Sales +32% for the full year €93.3 M €334.2 M ◦Improved Fiber Gypsum growth in Euros Net Sales • Net Sales +3% for the quarter 7 % 5 % • Net Sales +2% for the full year €4.1 M €27.2 M EBIT Excluding1 ◦EBIT Margin Excluding¹ of 8.2% for the full year -58 % -19 % ◦Soft housing market in Western Europe, 4.6 % 8.2 % EBIT Margin Excluding1 particularly in Germany, France, and the UK -6.7 pts -2.4 pts 1 Excludes asset impairment charges and costs associated with the Fermacell acquisition Revenue growth back on-track in Q4 Page 11
James Hardie Q4 FY20 Results FY20 APAC SUMMARY Q4 FY20 FY20 ◦ Continued growth above market in Australia 125 mmsf 532.6 mmsf Sales Volume ◦ Q4 volume, gross profit and EBIT unfavorably impacted by -4 % -2 % mandatory lockdown in the Philippines and New Zealand a a due to COVID-19 A$146.1 M A$614.1 M Net Sales 1 2 % FLAT ◦ Moderate EBIT Excluding growth in Australian dollars a a • Fourth quarter +4% A$29.9 M A$139.1 M EBIT Excluding1 • Full year +2% 4 % 2 % 1 a a ◦ Full year EBIT Margin Excluding in the top half of long 20.5 % 22.7 % term target range EBIT Margin Excluding1 0.5 pts 0.4 pts 1 Excludes asset impairment charges Good financial results driven by Australia business performance Page 12
James Hardie Q4 FY20 Results CASH MANAGEMENT AND LIQUIDITY ◦ Operating Cash Flow up 48% in FY20 to US$451.2 million ◦ US$577.9 million of liquidity at 30 April 2020 ◦ Leverage ratio of 1.9x at 31 March 2020 ◦ Actions taken: • Drive Business Continuity 1 • Suspended dividends • FY21 Capital Expenditure plan reduced a. Unaudited • AICF payment in quarterly installments • Cost Control and Working Capital actions Strong Liquidity and Financial Flexibility Page 13
James Hardie Q4 FY20 Results IMPROVING AND SECURING GLOBAL OPERATIONS As announced on 5 May 2020: ◦Closure of Summerville, SC plant, USA ◦Delayed commissioning of Prattville, AL plant, USA ◦Shifting to an import model in New Zealand ◦Exited the James Hardie Systems business, Australia ◦Temporary shuttering of Siglingen plant, Germany ◦Streamlined organizational structure and resourcing levels Stay strong during the crisis to emerge from the crisis even stronger Page 14
James Hardie Q4 FY20 Results FINANCIAL IMPACT OF ACTIONS ANNOUNCED ON 5 MAY 2020 ◦ Non-cash impairment expenses of US$84.4 million recorded in Q4FY20 • North America US$41.2 million • Asia Pacific US$36.3 million • Europe US$5.5 million • General Corporate Costs US$1.4 million ◦ Severance costs totaling approximately US$10.5 million to be incurred in the first half of FY21 • We expect to exclude these one-time COVID-19 severance expenses from Adjusted EBIT and Adjusted NOPAT in FY21 ◦ Expect EBIT accretion between US$20 million - US$30 million in FY21 Page 15
James Hardie Q4 FY20 Results CASH FLOWS CAPITAL EXPENDITURES US$ Millions FY20 FY19 Change % Cash provided by operations 451.2 304 48 % 1 % Cash used in investing (203.8) (864.4) (76 ) Cash (used in) provided by financing (179.0) 364.2 Higher operating cash flow, up 48% CAPEX spend for the full year of US$193.8 million Driven by increased profitability and cash generation ◦ ◦North America capacity projects from our operating business units, particularly in • We continue construction of our Prattville facility with expected construction completion in Q1FY21 North America and Australia • Deferred expected commissioning date to FY22 Lower investing and financing activities ◦Asia Pacific capacity projects • In Q3 FY20, completed a brownfield expansion at our ◦ No acquisition in FY20 existing Carole Park facility • Expected commissioning date - early FY22 ◦Adjusted FY21 Capital Expenditures to be in a range of US$80 - US$95 million Page 16
James Hardie Q4 FY20 Results LIQUIDITY PROFILE AT 31 MARCH 2020 Strong balance sheet ◦ US$509.8 million of liquidity at 31 March 2020 Millions • US$144.4 million cash 1 • US$365.4 million available on revolving credit facility 3 ◦ US$1,210.2 million net debt 2 2 Corporate debt structure ◦ US$400 million 4.75% senior unsecured notes maturing 2025 ◦ US$400 million 5.00% senior unsecured notes maturing 2028 2 ◦ €400 million (US$440.7) 3.625 % senior unsecured notes, maturing 2026 ◦ US$500 million unsecured revolving credit facility, maturing 2022 ◦ Do not anticipate accessing accordion feature of revolving credit facility a. Incremental liquidity of up to US$250 million may be accessed via an accordion feature, Leverage strategy which is provided for under the terms of the syndicated revolving credit facility agreement, but not credit approved b. Based on exchange rate as of 31 March 2020 ◦ ~1.9x net debt to Adjusted EBITDA excluding asbestos c. Includes debt issuance costs (US$16.1 million) Strong liquidity position Page 17
FY21 STRATEGY UPDATE
James Hardie Q4 FY20 Results CURRENT STRATEGIC PRIORITIES Safe and Sustainable Work Environment Strong Liquidity and Financial Flexibility Gain Market Share Execute Lean Manufacturing Initiatives Develop High Impact Innovations Page 19
James Hardie Q4 FY20 Results FULL EXTERIOR SOLUTIONS Page 20
James Hardie Q4 FY20 Results SOLUTIONS FROM STARTER TO CUSTOM BUILT HOMES: ATLANTA, USA Page 21
James Hardie Q4 FY20 Results Q1 FY21 GUIDANCE AND QTD RESULTS 1 1 April 2020 – 15 May 2020 Results ◦ NA Exteriors Volume: down 3% ◦ Australia Volume: flat ◦ Europe Volume: down 16% 2 Q1 FY21 Guidance ◦ NA Adjusted EBIT Margin range of 22%-27% in Q1 FY21 ◦ Liquidity greater than US$600 million at 30 June 2020 a. Amounts are unaudited. Percent change in volume is compared to prior corresponding period of 1 April 2019 - 15 May 2019.◦ Leverage ratio less than 2.0x at 30 June 2020 b. Guidance is based on current estimates and assumptions and is subject to a number of known and unknown uncertainties and risks, including those related to the COVID-19 pandemic and set forth at the start of this presentation in “Forward Looking Statements” Page 22
QUESTIONS
APPENDIX
James Hardie Q4 FY20 Results GROUP RESULTS – 4TH QUARTER AND FULL YEAR FY20 Q4 FY20 FY20 Volume and Net Sales 1,011.7 mmsf 3,841.7 mmsf Sales Volume ◦ Strong top line growth driven by volume growth in North 7 % 5 % America a a US$673.2 M US$2,606.8 M Net Sales 8 % 4 % Gross profit increased 14% for Q4 and 12% for the full a a US$239.9 M US$933.7 M year Gross Profit 14 % 12 % a a (US$30.8) M US$342.5 M Gross margin % up 190bps for Q4 and 260bps for the EBIT -236 % -3 % full year a a US$6.3 M US$241.5 M Net Operating Profit 2 688 % 6 % Adjusted net operating profit increased 17% for both a a the quarter and full year US$121.0 M US$486.8 M Adjusted EBIT1 21 % 20 % ◦ Strong Adjusted EBIT growth a a ◦ Full year partially offset by higher tax and interest expense Adjusted Net Operating US$86.6 M US$352.8 M 2 Profit 17 % 17 % a a US$451.2 M Operating Cash Flow 48 % 1 Excludes asbestos related expenses and adjustments and product line discontinuation expenses 2 Excludes asbestos related expenses and adjustments, tax adjustments, product line discontinuation expenses and loss on early debt extinguishment Page 25
James Hardie Q4 FY20 Results NORTH AMERICA FIBER CEMENT SUMMARY Q4 FY20 FY20 ◦Exteriors volume continued growth above market 655 mmsf 2,481.6 mmsf • +11% for the quarter Sales Volume 10 % 8 % • +9% for the full year d d d d d d d d d US$474.5 M US$1,816.4 M ◦Continued momentum in Interiors business Net Sales 12 % 8 % • Interiors volumes +5% for Q4 and +1% for the full year d d d d d d d d d US$718 per msf US$725 per msf ◦Price favorably impacted by annual change in Average Price 2 % 1 % strategic pricing d d d d d d d d d 1 US$78.8 M US$429.3 M EBIT Excluding up 26% for the quarter and EBIT -17 % 12 % 21% for the full year d d d d d d d d d US$120.0 M US$470.5 M EBIT Excluding1 ◦Higher net sales – volume and price 26 % 21 % d d d d d d d d d ◦Lean savings exceeding plan 25.3 % 25.9 % EBIT Margin Excluding1 ◦Lower freight for the full year 2.8 pts 2.8 pts a. Excludes asset impairment charges and product line discontinuation expenses ◦Lower pulp costs Page 26
James Hardie Q4 FY20 Results APAC SUMMARY Q4 FY20 FY20 Volume 125 mmsf 532.6 mmsf Sales Volume ◦Volume growth above market in Australia -4 % -2 % d d d d d d d ◦Q4 volume unfavorably impacted by mandatory A$146.1 M A$614.1 M Net Sales government lockdown in the Philippines and NZ 2 % FLAT d d d d d d d ◦Continued softening of Australian housing market A$1,048 per msf A$1,027 per msf Average Price 7 % 4 % EBIT Excluding1 d d d d d d d US$(16.7) M US$58.5 M ◦Higher average net sales price EBIT -181 % -41 % Lean savings d d d d d d d ◦ A$(28.4) M A$80.8 M EBIT ◦Lower pulp costs -199 % -41 % d d d d d d d ◦Higher freight A$29.9 M A$139.1 M EBIT Excluding1 ◦Segment results in US dollars impact by 4 % 2 % unfavorable foreign exchange rate movements 20.5 % 22.7 % EBIT Margin Excluding1 0.5 pts 0.4 pts a. Excludes asset impairment charges Page 27
James Hardie Q4 FY20 Results EUROPE BUILDING PRODUCTS SUMMARY Q4 FY20 FY20 Net Sales in Euros 231.7 mmsf 827.5 mmsf ◦ Fiber cement net sales +50% for Q4 Sales Volume 6 % 1 % ◦ Fiber cement net sales +32% for the full year d d d d d d d d d €93.3 M €334.2 M ◦ Fiber gypsum net sales +3% for Q4 Net Sales 7 % 5 % Fiber gypsum net sales +2% for the full year d d d d d d d d d ◦ €312 per msf €311 per msf Average Price EBIT Excluding 2 % 2 % 1 d d d d d d d d d ◦ Lower EBIT Excluding US$(4.9) M US$11.2 M • Higher SG&A costs EBIT -169 % 12 % 1 ◦ EBIT Margin Excluding of 8.2% for the full year d d d d d d d d d US$4.7 M US$30.4 M • Below expectations due to higher SG&A costs EBIT Excluding1 -58 % -22 % d d d d d d d d d €4.1 M €27.2 M EBIT Excluding1 -58 % -19 % d d d d d d d d d 4.6 % 8.2 % EBIT Margin Excluding1 -6.7 pts -2.4 pts 1 Excludes asset impairment charges and costs associated with the Fermacell acquisition Page 28
James Hardie Q4 FY20 Results SEGMENT EBIT AND INCOME TAX Exited Windows business Committed to R&D investment 1 2 Higher stock compensation expense Adjusted ETR within our expectations 2 1 Excludes asset impairment charges and asbestos related expenses and adjustments Includes tax adjustments related to the amortization benefit of certain US intangible assets, asbestos and other tax adjustments Page 29
James Hardie Q4 FY20 Results NORTH AMERICA FIBER CEMENT 1 1 1 EBIT Margin 1 Excludes asset impairment charges of US$41.2 million in Q4 FY20 and product line discontinuation expenses of US$5.4 million in Q2 FY19 FY20 EBIT Margin Excluding1 of 25.9% Page 30
James Hardie Q4 FY20 Results NORTH AMERICA INPUT COSTS ◦ The price of NBSK pulp down 18% compared to pcp ◦ Freight prices down 8% compared to pcp ◦ Cement prices up 1% compared to pcp ◦ Gas prices down 20% compared to pcp ◦ Electric prices flat compared to pcp The information underlying the table above is sourced as follows: ◦ Pulp – Cost per ton – from RISI ◦ Gas – Cost per thousand cubic feet for industrial users – from US Energy Information Administration ◦ Electric – Cost per thousand kilowatt hour for industrial users – from US Energy Information Administration ◦ Cement – Relative index from the Bureau of Labor Statistics ◦ Freight – Cost per mile – from Dial-a-Truck Solutions ◦ Gas and Electric prices for current quarter are based on prior quarter actuals Page 31
James Hardie Q4 FY20 Results NORTH AMERICA FIBER CEMENT ◦FY20 strategic price increase effective April 2019 Page 32
James Hardie Q4 FY20 Results TRANSLATION IMPACT ON CONSOLIDATED RESULTS 1 As reported Q4’20 and full year FY20 figures converted using Q4‘19 and full year FY19 average exchange rates, respectively 2 Reflects the difference between Q4’20 As Reported and Q4’20 using Q4’19 average exchange rates, as well as full year FY20 As reported and full year FY20 using full year FY19 average exchange rates Page 33
James Hardie Q4 FY20 Results ASIA PACIFIC FIBER CEMENT RESULTS AUD vs USD Three Months and Full Year Ended 31 March Q4 FY20 FY20 Results in Results in Impact of Results in Results in Impact of AUD USD FX AUD USD FX Average net sales price per unit +7% -2% -9% +4% -3% -7% (per msf) Net sales +2% -6% -8% FLAT -6% -6% Gross profit +4% -5% -9% +1% -5% -6% EBIT Excluding1 +4% -4% -8% +2% -5% -7% 1 Excludes asset impairment charges of US$36.3 million (A$58.3 million) for the quarter and full year FY20 Page 34
James Hardie Q4 FY20 Results FINANCIAL SUMMARY Three Months and Full Year Ended 31 March US$ Millions Q4 FY20 Q4 FY19 % Change FY20 FY19 % Change Net sales North America Fiber Cement $ 474.5 $ 422.0 12 $ 1,816.4 $ 1,676.9 8 Asia Pacific Fiber Cement 95.8 102.3 (6) 418.4 446.8 (6) Europe Building Products 102.9 98.7 4 371.4 368.3 1 Other Businesses — 1.8 0.6 14.6 (96) Total net sales $ 673.2 $ 624.8 8 $ 2,606.8 $ 2,506.6 4 EBIT North America Fiber Cement1 $ 120.0 $ 95.1 26 $ 470.5 $ 387.9 21 Asia Pacific Fiber Cement1 19.6 20.5 (4) 94.8 99.8 (5) Europe Building Products1, 2 0.6 7.1 (92) 16.7 10.0 67 Other Businesses1 0.1 (0.9) — (6.8) Research & Development (7.3) (7.1) (3) (27.0) (29.0) 7 General Corporate1, 3 (12.0) (14.7) 18 (68.2) (57.3) (19) Adjusted EBIT $ 121.0 $ 100.0 21 $ 486.8 $ 404.6 20 Net operating profit Net interest expense4 $ (13.8) $ (13.8) — $ (55.8) $ (52.1) (7) Other (expense) income — — (0.1) 0.1 Adjusted income tax expense5 (20.6) (12.4) (66) (78.1) (52.1) (50) Adjusted net operating profit $ 86.6 $ 73.8 17 $ 352.8 $ 300.5 17 1 Excludes asset impairment charges and product line discontinuation expenses 2 Includes integration costs as well as FY19 transaction costs and inventory fair value adjustment 3 Excludes Asbestos related expenses and adjustments 4 Excludes AICF interest income 5 Includes tax adjustments Page 35
James Hardie Q4 FY20 Results DEPRECIATION AND AMORTIZATION Three Months and Full Year Ended 31 March US$ Millions Q4 FY20 Q4 FY19 FY20 FY19 Depreciation and amortization North America Fiber Cement $ 22.7 $ 21.7 $ 88.7 $ 80.2 Asia Pacific Fiber Cement 3.3 3.0 12.7 12.8 Europe Building Products 10.6 4.5 25.6 18.7 Other Businesses — 0.6 0.2 2.3 Research and Development 0.3 0.3 1.1 1.1 General Corporate 0.8 0.6 3.2 4.3 Total depreciation and amortization $ 37.7 $ 30.7 $ 131.5 $ 119.4 Page 36
James Hardie Q4 FY20 Results ASBESTOS COMPENSATION KEY POINTS ◦ Updated actuarial report completed as at 31 March 2020 • Undiscounted and uninflated estimate increased to A$1,452 million from A$1,400 million ◦ For fiscal year 2020, we noted the following related to asbestos-related claims experience: • Net cash outflow was 5% below actuarial expectations • Claims received were 16% higher than actuarial expectations, primarily due to an increase in cross claims. Cross claims typically cost one quarter of direct claims ◦ Total contributions of US$108.9 million were made by James Hardie to AICF during FY2020 ◦ AICF has A$93.9 million in cash and investments as at 31 March 2020 ◦ We anticipate that we will make further contributions totaling approximately US$153.3 million to AICF during FY2021 • Quarterly payments will be made in July 2020, October 2020, January 2021 and March 2021 Page 37
James Hardie Q4 FY20 Results NET POST-TAX UNFUNDED ASBESTOS LIABILITY A$ millions (except where stated) FY20 FY19 1,452.4 1,399.8 Central Estimate - Undiscounted and Uninflated $ $ Provision for claims handling costs of AICF 26.8 28.5 Cross claims and other 47.5 35.1 Net assets of AICF (90.7) (78.2) Effect of tax (554.6) (528.0) Net post-tax unfunded liability in A$ millions $ 881.4 $ 857.2 Exchange rate A$ to US$ 0.6177 0.7096 Net post-tax unfunded liability in US$ millions $ 544.4 $ 608.4 Page 38
James Hardie Q4 FY20 Results ASBESTOS CLAIMS DATA Full year ended 31 March 2020 ◦ Net cash outflow was 5% below actuarial expectations ◦ Gross cash outflow was 1% above actuarial expectations ◦ Claims received were 16% above actuarial estimates and pcp primarily due to an increase in cross claims ◦ Number of claims settled were 8% above actuarial 1 estimates and 5% above pcp ◦ Average claim settlement was 9% below actuarial estimates and 6% higher than pcp 1 Average claim settlement is derived as the total amount paid divided by the number of non-nil claims Page 39
James Hardie Q4 FY20 Results ASBESTOS CASH MOVEMENTS FOR FULL YEAR A$ millions AICF cash and investments - 31 March 2019 $ 81.1 Contributions to AFFA by James Hardie 156.7 Insurance recoveries 11.0 Interest income, net 2.4 Claims paid (153.3) Operating costs (4.0) AICF cash and investments - 31 March 2020 $ 93.9 Page 40
James Hardie Q4 FY20 Results UPDATED ACTUARIAL ESTIMATE Page 41
James Hardie Q4 FY20 Results NON-US GAAP FINANCIAL MEASURES AND TERMS This Management Presentation forms part of a package of information about the company’s results. It should be read in conjunction with the other parts of this package, including the Management’s Analysis of Results, Media Release and Consolidated Financial Statements Definitions EBIT – Earnings before interest and taxes EBIT margin – EBIT margin is defined as EBIT as a percentage of net sales Sales Volumes mmsf – million square feet, where a square foot is defined as a standard square foot of 5/16” thickness msf – thousand square feet, where a square foot is defined as a standard square foot of 5/16” thickness Non-financial Terms AFFA – Amended and Restated Final Funding Agreement AICF – Asbestos Injuries Compensation Fund Ltd Legacy New Zealand weathertightness claims ("New Zealand weathertightness") – Expenses arising from defending and resolving claims in New Zealand that allege generic defects in certain fiber cement products and systems, breach of duties including the failure to conduct appropriate testing of these products and systems, failure to warn and misleading and deceptive conduct in relation to the marketing and sale of the products and systems New South Wales loan facility ("NSW Loan") – AICF has access to a secured loan facility made available by the New South Wales Government, which can be used by AICF to fund the payment of asbestos claims and certain operating and legal costs Page 42
James Hardie Q4 FY20 Results NON-US GAAP FINANCIAL MEASURES Financial Measures – US GAAP equivalents This document contains financial statement line item descriptions that are considered to be non-US GAAP, but are consistent with those used by Australian companies. Because the company prepares its Consolidated Financial Statements under US GAAP, the following table cross-references each non-US GAAP line item description, as used in Management’s Analysis of Results and Media Release, to the equivalent US GAAP financial statement line item description used in the company’s Consolidated Financial Statements: Management's Analysis of Results and Consolidated Statements of Operations Media Release and Other Comprehensive Income (Loss) (US GAAP) Net Sales Net Sales Cost of goods sold Cost of goods sold Gross profit Gross profit Selling general and administrative expenses Selling general and administrative expenses Research and development expenses Research and development expenses Asbestos adjustments Asbestos adjustments EBIT* Operating income (loss) Net interest income (expense)* Sum of interest expense and interest income Other income (expense) Other income (expense) Operating profit (loss) before income taxes* Income (loss) before income taxes Income tax (expense) benefit Income tax (expense) benefit Net operating profit (loss)* Net income (loss) *- Represents non-US GAAP descriptions used by Australian companies Page 43
James Hardie Q4 FY20 Results NON-US GAAP FINANCIAL MEASURES Financial Measures – US GAAP equivalents Adjusted EBIT Three Months and Full Year Ended 31 March US$ Millions Q4 FY20 Q4 FY19 FY20 FY19 EBIT $ (30.8) $ 22.7 $ 342.5 $ 351.6 Asbestos: Asbestos adjustments 67.0 73.4 58.2 22.0 AICF SG&A expenses 0.4 0.4 1.7 1.5 Asset impairment charges and product 84.4 3.5 84.4 29.5 line discontinuation expenses Adjusted EBIT $ 121.0 $ 100.0 $ 486.8 $ 404.6 Net sales 673.2 624.8 2,606.8 2,506.6 Adjusted EBIT Margin 18.0 % 16.0 % 18.7 % 16.1 % Adjusted net operating profit Three Months and Full Year Ended 31 March US$ Millions Q4 FY20 Q4 FY19 FY20 FY19 Net operating profit $ 6.3 $ 0.8 $ 241.5 $ 228.8 Asbestos: Asbestos adjustments 67.0 73.4 58.2 22.0 AICF SG&A expenses 0.4 0.4 1.7 1.5 AICF interest income, net (0.5) (0.5) (1.4) (2.0) Loss on early debt extinguishment — — — 1.0 Asset impairment charges and product 84.4 3.5 84.4 29.5 line discontinuation expenses Tax adjustments1 (71.0) (3.8) (31.6) 19.7 Adjusted net operating profit $ 86.6 $ 73.8 $ 352.8 $ 300.5 1 Includes tax adjustments related to the amortization benefit of certain US intangible assets, asbestos, and other tax adjustments Page 44
James Hardie Q4 FY20 Results NON-US GAAP FINANCIAL MEASURES North America Fiber Cement Segment Adjusted EBIT excluding asset impairment charges and product line discontinuation expenses Three Months and Full Year Ended 31 March US$ Millions Q4 FY20 Q4 FY19 FY20 FY19 North America Fiber Cement Segment EBIT $ 78.8 $ 95.1 $ 429.3 $ 382.5 Asset impairment charges and product line discontinuation 41.2 — 41.2 5.4 expenses North America Fiber Cement Segment Adjusted EBIT excluding $ 120.0 $ 95.1 $ 470.5 $ 387.9 asset impairment charges and product line discontinuation North America Fiber Cement Segment net sales 474.5 422.0 1,816.4 1,676.9 North America Fiber Cement Segment Adjusted EBIT Margin excluding asset impairment charges and product line 25.3 % 22.5 % 25.9 % 23.1 % discontinuation expenses Asia Pacific Fiber Cement Segment Adjusted EBIT excluding asset impairment charges Three Months and Full Year Ended 31 March US$ Millions Q4 FY20 Q4 FY19 FY20 FY19 Asia Pacific Fiber Cement Segment EBIT $ (16.7) $ 20.5 $ 58.5 $ 99.8 Asset impairment charges 36.3 — 36.3 — Asia Pacific Fiber Cement Segment Adjusted EBIT excluding $ 19.6 $ 20.5 $ 94.8 $ 99.8 asset impairment charges Asia Pacific Fiber Cement Segment net sales 95.8 102.3 418.4 446.8 Asia Pacific Fiber Cement Segment Adjusted EBIT Margin 20.5 % 20.0 % 22.7 % 22.3 % excluding asset impairment charges Page 45
James Hardie Q4 FY20 Results NON-US GAAP FINANCIAL MEASURES Europe Building Products Segment Adjusted EBIT excluding asset impairments and costs associated with the acquisition Three Months and Full Year Ended 31 March US$ Millions Q4 FY20 Q4 FY19 FY20 FY19 Europe Building Products Segment EBIT $ (4.9) $ 7.1 $ 11.2 $ 10.0 Asset impairment charges 5.5 — 5.5 — Europe Building Products Segment Adjusted EBIT excluding $ 0.6 $ 7.1 $ 16.7 $ 10.0 asset impairments Inventory fair value adjustment1 — — — 7.3 Transaction costs2 — — — 7.2 Integration costs3 4.1 4.1 13.7 14.6 Costs associated with the acquisition 4.1 4.1 13.7 29.1 Europe Building Products Segment Adjusted EBIT excluding $ 4.7 $ 11.2 $ 30.4 $ 39.1 asset impairments and costs associated with the acquisition Europe Building Products Segment net sales 102.9 98.7 371.4 368.3 Europe Building Products Segment Adjusted EBIT Margin 0.6 % 7.2 % 4.5 % 2.7 % excluding asset impairment charges Europe Building Products Segment Adjusted EBIT Margin excluding asset impairment charges and costs associated 4.6 % 11.3 % 8.2 % 10.6 % with the acquisition 1 Under US GAAP, we were required to value the inventory acquired at fair market value. The revaluation resulted in a preliminary total inventory fair value adjustment of US$7.3 million. As this inventory was sold during the first quarter of FY19, the entire adjustment was recognized into cost of goods sold during that period 2 Transaction costs include certain non-recurring fees incurred in conjunction with the acquisition of Fermacell 3 Integration costs relate to professional, legal and other fees incurred in conjunction with the integration of Fermacell Page 46
James Hardie Q4 FY20 Results NON-US GAAP FINANCIAL MEASURES Adjusted diluted earnings per share Three Months and Full Year Ended 31 March Q4 FY20 Q4 FY19 FY20 FY19 Adjusted net operating profit (US$ Millions) $ 86.6 $ 73.8 $ 352.8 $ 300.5 Weighted average common shares outstanding - 444.5 443.4 444.1 443.0 Diluted (Millions) Adjusted diluted earnings per share (US cents) 19 17 79 68 Adjusted effective tax rate Three Months and Full Year Ended 31 March US$ Millions Q4 FY20 Q4 FY19 FY20 FY19 Operating (loss) profit before income taxes $ (44.1) $ 9.4 $ 288.0 $ 300.6 Asbestos: Asbestos adjustments 67.0 73.4 58.2 22.0 AICF SG&A expenses 0.4 0.4 1.7 1.5 AICF interest income, net (0.5) (0.5) (1.4) (2.0) Loss on early debt extinguishment — — — 1.0 Asset impairment charges and product line 84.4 3.5 84.4 29.5 discontinuation expenses Adjusted operating profit before income taxes $ 107.2 $ 86.2 $ 430.9 $ 352.6 Income tax benefit (expense) 50.4 (8.6) (46.5) (71.8) Tax adjustments1 (71.0) (3.8) (31.6) 19.7 Adjusted income tax expense (20.6) (12.4) (78.1) (52.1) Effective tax rate 114.3 % 91.5 % 16.1 % 23.9 % Adjusted effective tax rate 19.2 % 14.4 % 18.1 % 14.8 % 1 Includes tax adjustments related to the amortization benefit of certain US intangible assets, asbestos, and other tax adjustments Page 47
James Hardie Q4 FY20 Results NON-US GAAP FINANCIAL MEASURES Adjusted EBITDA excluding asbestos Three Months and Full Year Ended 31 March US$ Millions Q4 FY20 Q4 FY19 FY20 FY19 EBIT $ (30.8) $ 22.7 $ 342.5 $ 351.6 Depreciation and amortization 37.7 30.7 131.5 119.4 Adjusted EBITDA $ 6.9 $ 53.4 $ 474.0 $ 471.0 Asbestos: Asbestos adjustments 67.0 73.4 58.2 22.0 AICF SG&A expenses 0.4 0.4 1.7 1.5 Adjusted EBITDA excluding Asbestos $ 74.3 $ 127.2 $ 533.9 $ 494.5 Adjusted selling, general and administrative expenses ("Adjusted SG&A") Three Months and Full Year Ended 31 March US$ Millions Q4 FY20 Q4 FY19 FY20 FY19 SG&A expenses $ 110.3 $ 102.3 $ 415.8 $ 403.6 Excluding: AICF SG&A expenses (0.4) (0.4) (1.7) (1.5) Product line discontinuation — (0.7) — (2.1) Adjusted SG&A expenses $ 109.9 $ 101.2 $ 414.1 $ 400.0 Net sales 673.2 624.8 2,606.8 2,506.6 SG&A expenses as a percentage of net sales 16.4 % 16.4 % 16.0 % 16.1 % Adjusted SG&A expenses as a percentage of net sales 16.3 % 16.2 % 15.9 % 16.0 % Page 48
James Hardie Q4 FY20 Results NON-US GAAP FINANCIAL MEASURES Adjusted return on capital employed (Adjusted "ROCE") Full Year Ended 31 March1 US$ Millions FY20 FY19 Numerator: Adjusted EBIT $ 486.8 $ 404.6 Adjustments to EBIT2 — (7.3) Adjusted EBIT for ROCE $ 486.8 $ 397.3 Denominator: Gross capital employed (GCE) $ 1,753.7 $ 1,492.7 Adjustments to GCE3 (195.5) (77.4) Adjusted gross capital employed $ 1,558.2 $ 1,415.3 Adjusted Return on Capital Employed 31.2 % 28.1 % a. Adjusted ROCE is used to assess annual financial results and therefore is not presented for the three months ended 31 March 2020 and 2019 b. Adjustments as calculated according to ROCE stock compensation plan documents c. Calculated as Total Assets minus Current Liabilities as reported in our financial results; adjusted by (i) excluding balance sheet items related to legacy issues (such as asbestos adjustments) dividends payable and deferred taxes; (ii) adding back asset impairment charges in the relevant period, unless otherwise determined by the renumeration committee; (iii) for fiscal year 2019 adding back leasehold assets for manufacturing facilities and other material leased assets; and (iv) deducting all greenfield construction-in-progress, and any brownfield construction-in-progress projects involving capacity expansion that are individually greater than US$20 million, until such assets reach commercial production and are transferred to the fixed asset register Page 49
Q4 FY20 MANAGEMENT PRESENTATION 19 May 2020
Document
Exhibit 99.6
James Hardie Industries plc
Consolidated Financial Statements
as of and for the Period Ended 31 March 2020
F-1
James Hardie Industries plc
Index
| Page | |
|---|---|
| Report of Independent Registered Public Accounting Firm | F-3 |
| Consolidated Balance Sheets as of 31 March 2020 and 2019 | F-6 |
| Consolidated Statements of Operations and Comprehensive Income for the Fiscal Years Ended 31 March 2020, 2019 and 2018 | F-7 |
| Consolidated Statements of Cash Flows for the Fiscal Years Ended 31 March 2020, 2019 and 2018 | F-8 |
| Consolidated Statements of Changes in Shareholders’ Equity (Deficit) for the Fiscal Years Ended 31 March 2020, 2019 and 2018 | F-9 |
| Notes to Consolidated Financial Statements | F-10 |
F-2
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of James Hardie Industries plc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of James Hardie Industries plc (the Company) as of 31 March 2020 and 2019, the related consolidated statements of operations and comprehensive income, changes in shareholders' equity (deficit), and cash flows for each of the three years in the period ended 31 March 2020, and the related notes^^(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at 31 March 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended 31 March 2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
F-3
| Asbestos Liability Valuation | |
|---|---|
| Description of the Matter | At 31 March 2020, the aggregate asbestos liability was US$986.4 million. As disclosed in Note 13 to the consolidated financial statements, the liability relates to an agreement to provide long-term funding to the Asbestos Injuries Compensation Fund (“AICF”), a special purpose fund established to provide compensation of proven Australian-related personal injuries.<br><br><br><br>Auditing management’s estimate of the asbestos liability is challenging because the estimation process is based on actuarial estimates of projected future cash flows which are inherently uncertain. The projected cash flows are complex and use subjective assumptions including the projected number of claims, estimated cost of settlement per claim, inflation rates, legal costs, and timing of receipt of claims and settlements. |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company's internal controls over the identification of claims, review of calculations performed by the Company’s third-party actuary and management’s review of the use of historical claim data and actuarial assumptions mentioned above to project the future liability.<br><br><br><br>To evaluate the estimate of the asbestos liability, our audit procedures included, among others, testing the underlying claims data used in the calculation to internal and external data on a sample basis. We involved our actuarial specialists to assist in evaluating the methodologies and key assumptions mentioned above to independently develop a range for the asbestos liability and compare that range to management’s recorded liability. We also assessed the adequacy of the related disclosures in the Company’s consolidated financial statements. |
F-4
| Impairment of Long-lived Assets | |
|---|---|
| Description of the Matter | For the year ended 31 March 2020, the Company recorded an US$84.4 million impairment expense primarily related to property, plant and equipment, operating lease right-of-use assets and asset retirement obligations as disclosed in Notes 8, 9 and 19. As disclosed in Note 2 to the consolidated financial statements, the Company evaluates events or changes in circumstances that indicate that an asset might be impaired. When such indicators are identified, the recoverability test is performed by grouping long-lived assets that represent the lowest level of identifiable cash flows and the undiscounted future cash flows are compared to the carrying amount of the asset group.<br><br><br><br>Auditing the Company's impairment assessments involved a high degree of subjectivity as estimates underlying the determination of fair value were based on assumptions about future market and economic conditions, long-term demand for the Company’s products and the discount rate. |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the long-lived asset impairment processes, including identification of indicators of impairment, and controls over management’s review of the significant assumptions underlying the fair value determination.<br> <br>To test the long-lived asset impairment assessments, our audit procedures included, among others, evaluating the methodologies used, and significant assumptions discussed above as well as the underlying data used by the Company in determining fair value. With the assistance of our valuation specialists, we tested the Company’s determination of fair value of certain land, building, equipment including salvage values and asset retirement obligations by evaluating comparable market data and independently developing a range of fair values. We also assessed the adequacy of the related disclosures in the Company’s consolidated financial statements. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
Irvine, California
19 May 2020
F-5
James Hardie Industries plc
Consolidated Balance Sheets
| (Millions of US dollars) | 31 March <br>2020 | 31 March <br>2019 | ||
|---|---|---|---|---|
| Assets | ||||
| Current assets: | ||||
| Cash and cash equivalents | $ | 144.4 | $ | 78.7 |
| Restricted cash and cash equivalents | 5.0 | 5.1 | ||
| Restricted cash and cash equivalents - Asbestos | 36.4 | 39.8 | ||
| Restricted short-term investments - Asbestos | 21.6 | 17.7 | ||
| Accounts and other receivables, net | 363.3 | 254.6 | ||
| Inventories | 305.1 | 317.4 | ||
| Prepaid expenses and other current assets | 26.1 | 31.3 | ||
| Insurance receivable - Asbestos | 5.0 | 7.5 | ||
| Workers’ compensation - Asbestos | 1.5 | 2.0 | ||
| Total current assets | 908.4 | 754.1 | ||
| Property, plant and equipment, net | 1,341.7 | 1,388.4 | ||
| Operating lease right-of-use-assets | 40.5 | — | ||
| Finance lease right-of-use-assets | 1.7 | — | ||
| Goodwill | 196.9 | 201.1 | ||
| Intangible assets, net | 166.7 | 174.4 | ||
| Insurance receivable - Asbestos | 38.5 | 43.7 | ||
| Workers’ compensation - Asbestos | 20.7 | 25.8 | ||
| Deferred income taxes | 989.4 | 1,092.9 | ||
| Deferred income taxes - Asbestos | 319.1 | 349.3 | ||
| Other assets | 4.7 | 2.9 | ||
| Total assets | $ | 4,028.3 | $ | 4,032.6 |
| Liabilities and Shareholders’ Equity | ||||
| Current liabilities: | ||||
| Accounts payable and accrued liabilities | $ | 274.7 | $ | 255.5 |
| Accrued payroll and employee benefits | 87.1 | 84.9 | ||
| Operating lease liabilities | 14.3 | — | ||
| Finance lease liabilities | 0.5 | — | ||
| Accrued product warranties | 7.0 | 6.8 | ||
| Income taxes payable | 8.9 | 13.4 | ||
| Asbestos liability | 103.9 | 110.5 | ||
| Workers’ compensation - Asbestos | 1.5 | 2.0 | ||
| Other liabilities | 12.1 | 9.9 | ||
| Total current liabilities | 510.0 | 483.0 | ||
| Long-term debt | 1,354.6 | 1,380.3 | ||
| Deferred income taxes | 81.9 | 80.4 | ||
| Operating lease liabilities | 41.4 | — | ||
| Finance lease liabilities | 1.5 | — | ||
| Accrued product warranties | 35.4 | 39.8 | ||
| Income taxes payable | 21.3 | 25.2 | ||
| Asbestos liability | 882.5 | 979.1 | ||
| Workers’ compensation - Asbestos | 20.7 | 25.8 | ||
| Other liabilities | 43.7 | 44.6 | ||
| Total liabilities | 2,993.0 | 3,058.2 | ||
| Commitments and contingencies (Note 15) | ||||
| Shareholders’ equity: | ||||
| Common stock, Euro 0.59 par value, 2.0 billion shares authorized; 443,144,740 shares issued and outstanding at 31 March 2020 and 442,269,905 shares issued and outstanding at 31 March 2019 | 230.6 | 230.0 | ||
| Additional paid-in capital | 207.3 | 197.6 | ||
| Retained earnings | 659.5 | 577.1 | ||
| Accumulated other comprehensive loss | (62.1) | (30.3) | ||
| Total shareholders’ equity | 1,035.3 | 974.4 | ||
| Total liabilities and shareholders’ equity | $ | 4,028.3 | $ | 4,032.6 |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
James Hardie Industries plc
Consolidated Statements of Operations and Comprehensive Income
| Years Ended 31 March | ||||||
|---|---|---|---|---|---|---|
| (Millions of US dollars, except per share data) | 2020 | 2019 | 2018 | |||
| Net sales | $ | 2,606.8 | $ | 2,506.6 | $ | 2,054.5 |
| Cost of goods sold | (1,673.1) | (1,675.6) | (1,324.3) | |||
| Gross profit | 933.7 | 831.0 | 730.2 | |||
| Selling, general and administrative expenses | (415.8) | (403.6) | (311.3) | |||
| Research and development expenses | (32.8) | (37.9) | (33.3) | |||
| Asset impairments | (84.4) | (15.9) | — | |||
| Asbestos adjustments | (58.2) | (22.0) | (156.4) | |||
| Operating income | 342.5 | 351.6 | 229.2 | |||
| Interest expense, net | (57.5) | (54.2) | (32.9) | |||
| Interest income | 3.1 | 4.1 | 3.4 | |||
| Loss on early debt extinguishment | — | (1.0) | (26.1) | |||
| Other (expense) income | (0.1) | 0.1 | 0.7 | |||
| Income before income taxes | 288.0 | 300.6 | 174.3 | |||
| Income tax expense | (46.5) | (71.8) | (28.2) | |||
| Net income | $ | 241.5 | $ | 228.8 | $ | 146.1 |
| Income per share: | ||||||
| Basic | $ | 0.55 | $ | 0.52 | $ | 0.33 |
| Diluted | $ | 0.54 | $ | 0.52 | $ | 0.33 |
| Weighted average common shares outstanding (Millions): | ||||||
| Basic | 442.6 | 441.9 | 441.2 | |||
| Diluted | 444.1 | 443.0 | 442.3 | |||
| Comprehensive income, net of tax: | ||||||
| Net income | $ | 241.5 | $ | 228.8 | $ | 146.1 |
| Cash flow hedges | — | (0.1) | — | |||
| Pension adjustments | 0.8 | — | — | |||
| Currency translation adjustments | (32.6) | (28.9) | 0.9 | |||
| Comprehensive income | $ | 209.7 | $ | 199.8 | $ | 147.0 |
The accompanying notes are an integral part of these consolidated financial statements.
F-7
James Hardie Industries plc
Consolidated Statements of Cash Flows
| Years Ended 31 March | ||||||
|---|---|---|---|---|---|---|
| (Millions of US dollars) | 2020 | 2019 | 2018 | |||
| Cash Flows From Operating Activities | ||||||
| Net income | $ | 241.5 | $ | 228.8 | $ | 146.1 |
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
| Depreciation and amortization | 131.5 | 119.4 | 92.0 | |||
| Lease expense | 18.1 | — | — | |||
| Deferred income taxes | 64.0 | 12.7 | (76.8) | |||
| Stock-based compensation | 10.3 | 12.5 | 11.1 | |||
| Asbestos adjustments | 58.2 | 22.0 | 156.4 | |||
| Excess tax benefits from share-based awards | (0.4) | — | (0.8) | |||
| Asset impairments | 77.4 | 15.9 | — | |||
| Loss on early debt extinguishment | — | 1.0 | 26.1 | |||
| Other, net | 17.2 | 16.3 | 12.6 | |||
| Changes in operating assets and liabilities: | ||||||
| Accounts and other receivables | (118.6) | (18.1) | (2.0) | |||
| Inventories | 3.2 | (28.6) | (51.7) | |||
| Lease assets and liabilities, net | (15.6) | — | — | |||
| Prepaid expenses and other assets | (2.6) | (1.7) | (2.8) | |||
| Insurance receivable - Asbestos | 7.6 | 4.8 | 7.3 | |||
| Accounts payable and accrued liabilities | 45.1 | 3.5 | 20.7 | |||
| Claims and handling costs paid - Asbestos | (105.6) | (108.8) | (104.4) | |||
| Income taxes payable | (11.0) | 8.8 | 26.9 | |||
| Other accrued liabilities | 30.9 | 15.5 | 47.8 | |||
| Net cash provided by operating activities | $ | 451.2 | $ | 304.0 | $ | 308.5 |
| Cash Flows From Investing Activities | ||||||
| Purchases of property, plant and equipment | $ | (193.8) | $ | (317.5) | $ | (210.2) |
| Proceeds from sale of property, plant and equipment | 8.0 | — | 7.9 | |||
| Capitalized interest | (9.5) | (5.4) | (4.8) | |||
| Acquisition of business, net of cash acquired | — | (558.7) | — | |||
| Purchase of restricted short-term investments - Asbestos | (75.5) | (89.1) | (78.4) | |||
| Proceeds from restricted short-term investments - Asbestos | 67.0 | 106.3 | 40.0 | |||
| Net cash used in investing activities | $ | (203.8) | $ | (864.4) | $ | (245.5) |
| Cash Flows From Financing Activities | ||||||
| Proceeds from credit facilities | $ | 330.0 | $ | 230.0 | $ | 380.0 |
| Repayments of credit facilities | (350.0) | (180.0) | (455.0) | |||
| Proceeds from 364-day term loan facility | — | 492.4 | — | |||
| Repayments of 364-day term loan facility | — | (458.8) | — | |||
| Proceeds from senior unsecured notes | — | 458.8 | 800.0 | |||
| Debt issuance costs | — | (6.1) | (15.7) | |||
| Repayment of senior unsecured notes | — | — | (400.0) | |||
| Call redemption premium paid to note holders | — | — | (19.5) | |||
| Proceeds from issuance of shares | — | — | 0.2 | |||
| Repayment of finance lease obligations and borrowings | (0.4) | — | — | |||
| Dividends paid | (158.6) | (172.1) | (177.5) | |||
| Repayments of NSW Loan - Asbestos | — | — | (51.9) | |||
| Net cash (used in) provided by financing activities | $ | (179.0) | $ | 364.2 | $ | 60.6 |
| Effects of exchange rate changes on cash and cash equivalents, restricted cash and restricted cash - Asbestos | $ | (6.2) | $ | 6.6 | $ | (3.2) |
| Net increase (decrease) in cash and cash equivalents, restricted cash and restricted cash - Asbestos | 62.2 | (189.6) | 120.4 | |||
| Cash and cash equivalents, restricted cash and restricted cash - Asbestos at beginning of period | 123.6 | 313.2 | 192.8 | |||
| Cash and cash equivalents, restricted cash and restricted cash - Asbestos at end of period | $ | 185.8 | $ | 123.6 | $ | 313.2 |
| Non-Cash Investing and Financing Activities | ||||||
| Capital expenditures incurred but not yet paid | $ | 8.3 | $ | 25.9 | $ | 8.1 |
| Supplemental Disclosure of Cash Flow Activities | ||||||
| Cash paid during the year for interest | $ | 61.5 | $ | 57.0 | $ | 26.3 |
| Cash paid during the year for income taxes, net | $ | 52.5 | $ | 26.3 | $ | 49.1 |
| Cash paid to AICF | $ | 108.9 | $ | 103.0 | $ | 102.2 |
The accompanying notes are an integral part of these consolidated financial statements.
F-8
James Hardie Industries plc
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
| (Millions of US dollars) | Common Stock | Additional Paid-in Capital | Accumulated (Deficit) Equity | Accumulated Other Comprehensive Gain (Loss) | Total | |||||
|---|---|---|---|---|---|---|---|---|---|---|
| Balances as of 31 March 2017 | $ | 229.1 | $ | 173.8 | $ | (612.9) | $ | (2.2) | $ | (212.2) |
| Net income | — | — | 146.1 | — | 146.1 | |||||
| Other comprehensive income | — | — | — | 0.9 | 0.9 | |||||
| Stock-based compensation | 0.4 | 11.6 | (0.9) | — | 11.1 | |||||
| Equity awards exercised | — | 0.2 | — | — | 0.2 | |||||
| Dividends declared | — | — | (167.6) | — | (167.6) | |||||
| Balances as of 31 March 2018 | $ | 229.5 | $ | 185.6 | $ | (635.3) | $ | (1.3) | $ | (221.5) |
| Net income | — | — | 228.8 | — | 228.8 | |||||
| Other comprehensive loss | — | — | — | (29.0) | (29.0) | |||||
| Stock-based compensation | 0.5 | 12.0 | — | — | 12.5 | |||||
| Adoption of ASU 2016-16 | — | — | 1,160.3 | — | 1,160.3 | |||||
| Dividends declared | — | — | (176.7) | — | (176.7) | |||||
| Balances as of 31 March 2019 | $ | 230.0 | $ | 197.6 | $ | 577.1 | $ | (30.3) | $ | 974.4 |
| Net income | — | — | 241.5 | — | 241.5 | |||||
| Other comprehensive loss | — | — | — | (31.8) | (31.8) | |||||
| Stock-based compensation | 0.6 | 9.7 | — | — | 10.3 | |||||
| Adoption of ASU 2016-02 | — | — | 0.2 | — | 0.2 | |||||
| Dividends declared | — | — | (159.3) | — | (159.3) | |||||
| Balances as of 31 March 2020 | $ | 230.6 | $ | 207.3 | $ | 659.5 | $ | (62.1) | $ | 1,035.3 |
The accompanying notes are an integral part of these consolidated financial statements.
F-9
James Hardie Industries plc
Notes to Consolidated Financial Statements
1. Background and Basis of Presentation
Nature of Operations
James Hardie Industries plc ("JHI plc") manufactures and sells fiber cement, fiber gypsum and cement-bonded building products for interior and exterior building construction applications, primarily in the United States, Australia, Europe, New Zealand, the Philippines and Canada. On 3 April 2018, JHI plc completed the acquisition of German-based XI (DL) Holdings GmbH (n/k/a James Hardie Europe Holdings GmbH) and its subsidiaries (including, but not limited to, Fermacell GmbH (n/k/a James Hardie Europe GmbH)) (collectively, "Fermacell"). Fermacell manufactures and sells fiber gypsum and cement-bonded building products primarily in continental Europe.
Basis of Presentation
The consolidated financial statements represent the financial position, results of operations and cash flows of JHI plc and its wholly-owned subsidiaries and variable interest entity (“VIE”). Unless the context indicates otherwise, JHI plc and its direct and indirect wholly-owned subsidiaries and VIE (as of the time relevant to the applicable reference) are collectively referred to as “James Hardie”, the “James Hardie Group” or the “Company”. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). All intercompany balances and transactions have been eliminated in consolidation.
COVID-19 Impact
In March 2020, the World Health Organization (WHO) characterized the outbreak of COVID-19 as a global pandemic. In response to this declaration, governments have taken certain actions to contain the outbreak and spread of COVID-19. While our plants in Philippines, New Zealand, and Spain were required to close under mandatory government lockdowns, these closures did not materially impact our fourth quarter results. However, the COVID-19 pandemic and actions taken in response thereto are continuing to have a significant adverse effect on many sectors of the economy, including new home building and remodeling activity. Accordingly, we have currently reduced our production capacity to match supply and demand. While this reduction in production is expected to be temporary, the duration of the COVID-19 pandemic, the actions to contain the pandemic and treat its impacts, and the effects on our operations are highly uncertain and cannot be predicted at this time. Therefore, while we expect the reduced production to negatively impact our business, results of operations, cash flows and financial position, the related financial impact cannot be reasonably estimated at this time.
2. Summary of Significant Accounting Policies
Variable Interest Entities
A VIE is an entity that is evaluated for consolidation using more than a simple analysis of voting control. The analysis is based on: (i) what party has the power to direct the most significant activities of the VIE that impact its economic performance; and (ii) what party has rights to receive benefits or is obligated to absorb losses that are significant to the VIE. The analysis of the party that consolidates a VIE is a continual assessment.
F-10
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
In February 2007, the Company’s shareholders approved the Amended and Restated Final Funding Agreement (the “AFFA”), an agreement pursuant to which the Company provides long-term funding to Asbestos Injuries Compensation Fund (“AICF”), a special purpose fund that provides compensation for the Australian-related personal injuries for which certain former subsidiary companies of James Hardie in Australia (being Amaca Pty Ltd (“Amaca”), Amaba Pty Ltd (“Amaba”) and ABN 60 Pty Limited (“ABN 60”) (collectively, the “Former James Hardie Companies”)) are found liable. JHI plc owns 100% of James Hardie 117 Pty Ltd (the “Performing Subsidiary”), which, under the terms of the AFFA, has an obligation to make payments to AICF on an annual basis subject to the provisions of the AFFA. JHI plc guarantees the Performing Subsidiary’s obligation. Additionally, the Company appoints three AICF directors and the New South Wales (“NSW”) Government appoints two AICF directors.
Although the Company has no ownership interest in AICF, for financial reporting purposes, the Company consolidates AICF, which is a VIE as defined under US GAAP, due to its pecuniary and contractual interests in AICF as a result of the funding arrangements outlined in the AFFA. The Company’s consolidation of AICF results in AICF’s assets and liabilities being recorded on its consolidated balance sheets and AICF’s income and expense transactions being recorded in the consolidated statements of operations and comprehensive income. These items are Australian dollar-denominated and are subject to remeasurement into US dollars at each reporting date.
For the fiscal years ended 31 March 2020, 2019 and 2018, the Company did not provide financial or other support to AICF that it was not previously contractually required to provide.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
While there have been no changes in the application of principles, methods, and assumptions used to determine our significant estimates, we may be required to revise certain accounting estimates and judgments related to the economic and business impact of the COVID-19 pandemic, such as, but not limited to, those related to the valuation of goodwill, intangibles, long-lived assets, accounts receivable, and inventory, which could have a material adverse effect on our financial position and results of operations.
Foreign Currency Translation/Remeasurement
All assets and liabilities are translated or remeasured into US dollars at current exchange rates while revenues and expenses are translated or remeasured at average exchange rates in effect for the period. The effects of foreign currency translation adjustments are included directly in other comprehensive income in shareholders’ equity (deficit). Gains and losses arising from foreign currency transactions are recognized in income.
F-11
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
The Company has recorded on its balance sheet certain foreign assets and liabilities, including asbestos-related assets and liabilities under the terms of the AFFA, that are denominated in foreign currencies and subject to translation (foreign entities) or remeasurement (AICF entity and Euro denominated debt) into US dollars at each reporting date. Unless otherwise noted, the Company converts foreign currency denominated assets and liabilities into US dollars at the spot rate at the end of the reporting period; while revenues and expenses are converted using an average exchange rate for the period. The Company records gains and losses on its Euro denominated debt which are economically offset by foreign exchange gains and losses on loans between subsidiaries, resulting in a net immaterial translation gain or loss which is recorded in the Selling, general and administrative expenses in the consolidated statements of operations and comprehensive income.
Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents generally relate to amounts subject to letters of credit with insurance companies, which restrict the cash from use for general corporate purposes.
Accounts Receivable
The Company evaluates the collectability of accounts receivable on an ongoing basis based on historical bad debts, customer credit-worthiness, current economic trends and changes in the Company's customer payment activity. An allowance for doubtful accounts is provided for known and estimated bad debts. Although credit losses have historically been within expectations, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has had in the past. Because the Company's accounts receivable are concentrated in a relatively small number of customers, a significant change in the liquidity or financial position of any of these customers could impact their ability to make payments and result in the need for additional allowances which would decrease net sales.
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is generally determined under the first-in, first-out method, except that the cost of raw materials and supplies is determined using actual or average costs. Cost includes the costs of materials, labor and applied factory overhead. On a regular basis, the Company evaluates its inventory balances for excess quantities and obsolescence by analyzing demand, inventory on hand, sales levels and other information. Based on these evaluations, inventory costs are adjusted to net realizable value, if necessary.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Property, plant and equipment of businesses acquired are recorded at their estimated fair value at the date of acquisition. Depreciation of property, plant and equipment is computed using the straight-line method over the following estimated useful lives:
| Years | |
|---|---|
| Buildings | 5 to 50 |
| Buildings Improvements | 3 to 40 |
| Leasehold Improvements | 4 to 40 |
| Machinery and Equipment | 1 to 40 |
F-12
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
Leases
The Company adopted Accounting Standards Update ("ASU") No. 2016-02 ("Accounting Standards Codification (ASC) 842"), which supersedes the lease accounting requirements in ASC Topic 840, starting with fiscal year beginning 1 April 2019, with the impact of initial application recognized as a cumulative-effect adjustment to retained earnings of US$0.2 million, and has elected the practical expedient available under the guidance to not adjust comparative periods presented. As a result of the adoption of this standard, the Company has changed its accounting policy for leases, as outlined below.
In addition, the Company has also elected the package of practical expedients permitted under the transition guidance, which, among other things, allows for carry-forwards of historical lease classifications, the determination of whether a contract contains a lease under the new definition of a lease and whether previously capitalized initial direct costs qualify for capitalization.
At lease commencement, which is generally when the Company takes possession of the asset, the Company records a lease liability and a corresponding right-of-use ("ROU") asset. Lease liabilities represent the present value of minimum lease payments over the expected lease term, which includes options to extend the lease when it is reasonably certain those options will be exercised. Determining the lease term and amount of lease payments to include in the calculation of the ROU asset and lease liability for leases containing options requires the use of judgment to determine whether the exercise of an option is reasonably certain, and if the option period and payments should be included in the calculation of the associated ROU asset and liability. In making this determination, the Company considers all relevant economic factors that would compel the Company to exercise an option. The Company’s leases generally do not provide a readily determinable implicit borrowing rate. As such, the discount rate used to calculate present value is the lessee’s incremental borrowing rate, which is primarily based upon the periodic risk-adjusted interest margin and the term of the lease.
Minimum lease payments include base rent as well as fixed escalation of rental payments. In determining minimum lease payments, the Company separates non-lease components such as common area maintenance or other miscellaneous expenses that are updated based on landlord estimates for real estate leases. Additionally, many of the Company’s transportation and equipment leases require additional payments based on the underlying usage of the assets such as mileage and maintenance costs. Due to the variable nature of these costs, the cash flows associated with these costs are expensed as incurred and not included in the lease payments used to determine the ROU asset and associated lease liability.
ROU assets represent the right to control the use of the leased asset during the lease term and are initially recognized as an amount equal to the lease liability. In addition, prepaid rent, initial direct costs, and adjustments for lease incentives are components of the ROU asset. Over the lease term, the lease expense is amortized on a straight-line basis beginning on the lease commencement date. ROU assets are assessed for impairment as part of the impairment of long-lived assets, which is performed whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.
A ROU asset and lease liability are not recognized for leases with an initial term of 12 months or less, and the lease expense is recognized on a straight-line basis over the lease term.
Depreciation and Amortization
The Company records depreciation and amortization under both Cost of goods sold and Selling, general and administrative expenses, depending on the asset’s business use. All depreciation and amortization related to plant building, machinery and equipment is recorded in Cost of goods sold.
F-13
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
Goodwill and Other Intangible Assets
Goodwill is the excess of purchase price over the fair value of tangible and identifiable intangible net assets acquired in various business combinations. Goodwill is not amortized but is tested at the reporting unit level for impairment annually, or more often if indicators of impairment exist. Factors that could cause an impairment in the future could include, but are not limited to, adverse macroeconomic conditions, deterioration in industry or market conditions, decline in revenue and cash flows or increases in costs and capital expenditures compared to projected results. A goodwill impairment charge is recorded for the amount by which the carrying value of the reporting unit exceeds the fair value of the reporting unit.
Intangible assets from acquired businesses are recognized at their estimated fair values at the date of acquisition and consist of trademarks, customer relationships and other intangible assets. Finite-lived intangibles are amortized to expense over the applicable useful lives, ranging from 2 to 13 years, based on the nature of the asset and the underlying pattern of economic benefit as reflected by future net cash inflows. The Company performs an impairment test of intangibles annually, or whenever events or changes in circumstances indicate their carrying value may be impaired.
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant and equipment, are evaluated each quarter for events or changes in circumstances that indicate that an asset might be impaired because the carrying amount of the asset may not be recoverable. These include, without limitation, a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used, a current period operating or cash flow loss combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group and/or a current expectation that it is more likely than not that a long lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
When such indicators of potential impairment are identified, recoverability is tested by grouping long-lived assets that are used together and represent the lowest level for which cash flows are identifiable and distinct from the cash flows of other long-lived assets, which is typically at the production line or plant facility level, depending on the type of long-lived asset subject to an impairment review.
Recoverability is measured by a comparison of the carrying amount of the asset group to the estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount exceeds the estimated undiscounted future cash flows, an impairment charge is recognized at the amount by which the carrying amount exceeds the estimated fair value of the asset group.
The methodology used to estimate the fair value of the asset group is based on a discounted cash flow analysis or a relative, market-based approach based on purchase offers or appraisals received from third parties, that considers the asset group’s highest and best use that would maximize the value of the asset group. In addition, the estimated fair value of an asset group also considers, to the extent practicable, a market participant’s expectations and assumptions in estimating the fair value of the asset group. If the estimated fair value of the asset group is less than the carrying value, an impairment loss is recognized at an amount equal to the excess of the carrying value over the estimated fair value of the asset group.
Accrued Product Warranties
An accrual for estimated future warranty costs is recorded based on an analysis by the Company, which includes the historical relationship of warranty costs to installed product at an estimated remediation cost per standard foot. Based on this analysis and other factors, the adequacy of the Company’s warranty provision is adjusted as necessary.
F-14
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
Debt
The Company’s debt consists of an unsecured revolving credit facility and senior unsecured notes. Each of the Company's debt instruments is recorded at cost, net of any original issue discount or premium, where applicable. The related original issue discount, premium and debt issuance costs are amortized over the term of each respective borrowing using the effective interest method. Debt is presented as current if the liability is due to be settled within 12 months after the balance sheet date, unless the Company has the ability and intention to refinance on a long-term basis in accordance with US GAAP. See Fair Value Measurements below and Note 11 for the Company’s fair value considerations.
In addition, the Company consolidates AICF which has a loan facility, which is included in Asbestos-related Accounting Policies below.
Revenue Recognition
The Company recognizes revenues when the requisite performance obligation has been met, that is, when the Company transfers control of its products to customers, which depending on the terms of the underlying contract, is generally upon delivery. The Company records estimated reductions in sales for customer rebates and discounts including volume, promotional, cash and other discounts. Rebates and discounts are recorded based on management’s best estimate when products are sold. The estimates are based on historical experience for similar programs and products. Management reviews these rebates and discounts on an ongoing basis and the related accruals are adjusted, if necessary, as additional information becomes available.
A portion of the Company’s revenue is made through distributors under a vendor managed inventory agreement whereby revenue is recognized upon the transfer of title and risk of loss to the distributors.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Under this method, deferred income taxes are recognized by applying enacted statutory rates applicable to future years to differences between the tax bases and financial reporting amounts of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The realization of the US deferred tax assets is affected primarily by the continued profitability of the US business. A valuation allowance is provided when it is more likely than not that all or some portion of deferred tax assets will not be realized. Interest and penalties related to uncertain tax positions are recognized in Income tax expense on the consolidated statements of operations and comprehensive income.
Financial Instruments
The Company calculates the fair value of financial instruments and includes this additional information in the notes to the consolidated financial statements. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
F-15
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
Periodically, interest rate swaps, commodity swaps and forward exchange contracts are used to manage market risks and reduce exposure resulting from fluctuations in interest rates, commodity prices and foreign currency exchange rates. Changes in the fair value of financial instruments that are not designated as hedges are recorded in earnings within Other (expense) income at each measurement date. The Company does not use derivatives for trading purposes.
Fair Value Measurements
Assets and liabilities of the Company that are carried or disclosed at fair value are classified in one of the following three categories:
| Level 1 | Quoted market prices in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date; |
|---|---|
| Level 2 | Observable market-based inputs or unobservable inputs that are corroborated by market data for the asset or liability at the measurement date; |
| --- | --- |
| Level 3 | Unobservable inputs that are not corroborated by market data used when there is minimal market activity for the asset or liability at the measurement date. |
| --- | --- |
Fair value measurements of assets and liabilities are assigned a level within the fair value hierarchy based on the lowest level of any input that is significant to the fair value measurement in its entirety.
The carrying amounts of Cash and Cash Equivalents, Restricted cash and cash equivalents, Trade receivables, Trade payables and the Revolving Credit Facility approximates their respective fair values due to the short-term nature of these instruments.
Stock-based Compensation
Stock-based compensation expense represents the estimated fair value of equity-based and liability-classified awards granted to employees and is recognized as an expense over the vesting period. Stock-based compensation expense is included in the line item Selling, general and administrative expenses on the consolidated statements of operations and comprehensive income.
Equity awards with vesting based solely on a service condition are typically subject to graded vesting, in that the awards outstanding generally vest as follows: 25% at the first anniversary date of the grant; 25% at the second anniversary date of the grant; and 50% at the third anniversary date of the grant. For equity awards subject to graded vesting, the Company has elected to use the accelerated recognition method. Accordingly, each vesting tranche is valued separately, and the recognition of stock-based compensation expense is more heavily weighted earlier in the vesting period. Stock-based compensation expense for equity awards that are subject to performance or market vesting conditions are based upon an estimate of the number of awards that are expected to vest and typically recognized ratably over the vesting period. The Company issues new shares to award recipients when the vesting condition for restricted stock units (“RSU’s”) has been satisfied.
For RSU’s subject to a service vesting condition, the fair value is equal to the market value of the Company’s common stock on the date of grant, adjusted for the fair value of estimated dividends as the restricted stock holder is not entitled to dividends over the vesting period. For RSU’s subject to a scorecard performance vesting condition, the fair value is adjusted for changes in JHI plc’s common stock price at each balance sheet date until the end of the performance period. For RSU’s subject to a market vesting condition, the fair value is estimated using a Monte Carlo Simulation.
F-16
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
Compensation expense recognized for liability-classified awards is based upon an estimate of the number of awards that are expected to vest and on the fair market value of JHI plc’s common stock on the date of the grant. A corresponding liability is recorded and adjusted for subsequent changes in JHI plc’s common stock price at each balance sheet date.
Earnings Per Share
Basic earnings per share ("EPS") is calculated using net income divided by the weighted average number of common shares outstanding during the period. Diluted EPS is similar to basic EPS except that the weighted average number of common shares outstanding is increased to include the number of additional common shares calculated using the treasury method that would have been outstanding if the dilutive potential common shares, such as stock options and RSUs, had been issued.
Basic and dilutive common shares outstanding used in determining net income per share are as follows:
| Years Ended 31 March | |||
|---|---|---|---|
| (Millions of shares) | 2020 | 2019 | 2018 |
| Basic common shares outstanding | 442.6 | 441.9 | 441.2 |
| Dilutive effect of stock awards | 1.5 | 1.1 | 1.1 |
| Diluted common shares outstanding | 444.1 | 443.0 | 442.3 |
| (US dollars) | 2020 | 2019 | 2018 |
| Net income per share - basic | 0.55 | 0.52 | 0.33 |
| Net income per share - diluted | 0.54 | 0.52 | 0.33 |
There were no potential common shares which would be considered anti-dilutive for the fiscal years ended 31 March 2020, 2019 and 2018.
Unless they are anti-dilutive, RSU’s which vest solely based on continued employment are considered to be outstanding as of their issuance date for purposes of computing diluted EPS and are included in the calculation of diluted EPS using the Treasury Method. Once these RSU’s vest, they are included in the basic EPS calculation on a weighted-average basis.
RSU’s which vest based on performance or market conditions are considered contingent shares. At each reporting date prior to the end of the contingency period, the Company determines the number of contingently issuable shares to include in the diluted EPS calculation, as the number of shares that would be issuable under the terms of the RSU arrangement, if the end of the reporting period were the end of the contingency period. Once these RSU’s vest, they are included in the basic EPS calculation on a weighted-average basis.
Potential common shares of 1.5 million, 2.2 million and 1.6 million for the fiscal years ended 31 March 2020, 2019 and 2018, respectively, have been excluded from the calculation of diluted common shares outstanding as they are considered contingent shares which are not expected to vest.
F-17
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
Asbestos-related Accounting Policies
Asbestos Liability
The amount of the asbestos liability has been recognized by reference to (but not exclusively based upon) the most recent actuarial estimate of projected future cash flows as calculated by KPMG Actuarial (“KPMGA”), who are engaged and appointed by AICF under the terms of the AFFA. Based on their assumptions, KPMGA arrived at a range of possible total future cash flows and calculated a central estimate, which is intended to reflect a probability-weighted expected outcome of those actuarially estimated future cash flows projected by KPMGA to occur through 2072.
The Company recognizes the asbestos liability in the consolidated financial statements by reference to (but not exclusively based upon) the undiscounted and uninflated central estimate. The Company considered discounting when determining the best estimate under US GAAP. The Company has recognized the asbestos liability by reference to (but not exclusively based upon) the central estimate as undiscounted on the basis that the timing and amounts of such cash flows are not fixed or readily determinable. The Company considered inflation when determining the best estimate under US GAAP. It is the Company’s view that there are material uncertainties in estimating an appropriate rate of inflation over the extended period of the AFFA. The Company views the undiscounted and uninflated central estimate as the best estimate under US GAAP.
Adjustments in the asbestos liability due to changes in the actuarial estimate of projected future cash flows and changes in the estimate of future operating costs of AICF are reflected in the consolidated statements of operations and comprehensive income during the period in which they occur. Claims paid by AICF and claims-handling costs incurred by AICF are treated as reductions in the Asbestos liability balances.
Insurance Receivable
The insurance receivable recorded by the Company has been recognized by reference to (but not exclusively based upon) the most recent actuarial estimate of recoveries expected from insurance policies and insurance companies with exposure to the asbestos claims, as calculated by KPMGA. The assessment of recoveries is based on the expected pattern of claims against such policies less an allowance for credit risk based on credit agency ratings. The insurance receivable generally includes these cash flows as undiscounted and uninflated, however, where the timing of recoveries has been agreed with the insurer, the receivables are recorded on a discounted basis. The Company records insurance receivables that are deemed probable of being realized.
Adjustments in the insurance receivable due to changes in the actuarial estimate, or changes in the Company’s assessment of recoverability are reflected in the consolidated statements of operations and comprehensive income during the period in which they occur. Insurance recoveries are treated as a reduction in the insurance receivable balance.
Workers’ Compensation
An estimate of the liability related to workers’ compensation claims is prepared by KPMGA as part of the annual actuarial assessment. This estimate contains two components - amounts that will be met by a workers’ compensation scheme or policy and amounts that will be met by the Former James Hardie Companies.
F-18
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
The estimated liability is included as part of the asbestos liability and adjustments to the estimate are reflected in the consolidated statements of operations and comprehensive income during the period in which they occur. Amounts that are expected to be paid by the workers’ compensation schemes or policies are recorded as workers’ compensation receivable. Adjustments to the workers’ compensation liability result in an equal adjustment in the workers’ compensation receivable recorded by the Company and have no effect on the consolidated statements of operations and comprehensive income.
Restricted Cash and Cash Equivalents
Cash and cash equivalents of AICF are reflected as restricted assets, as the use of these assets is restricted to the settlement of asbestos claims and payment of the operating costs of AICF. Since cash and cash equivalents are highly liquid, the Company classifies these amounts as a current asset on the consolidated balance sheets.
Restricted Short-Term Investments
Short-term investments of AICF consist of highly liquid investments held in the custody of major financial institutions. All short-term investments are classified as available for sale and are recorded in the financial statements at fair value. The fair value of restricted short-term investments is based on quoted market prices using the specific identification method. Unrealized gains and losses on the fair value of these investments are included as a separate component of Accumulated other comprehensive loss. Realized gains and losses on short-term investments are recognized in Other (expense) income on the consolidated statements of operations and comprehensive income.
Short-Term Debt
AICF has access to a secured loan facility (the “AICF Loan Facility”) made available by the NSW Government, which can be used by AICF to fund the payment of asbestos claims and certain operating and legal costs of AICF and Former James Hardie Companies (together, the “Obligors”).
Interest accrues daily on amounts outstanding, is calculated based on a 365-day year and is payable monthly. AICF may, at its discretion, elect to accrue interest payable on amounts outstanding under the AICF Loan Facility on the date interest becomes due and payable.
Deferred Income Taxes
The Performing Subsidiary can claim a tax deduction for its contributions to AICF over a five-year period commencing in the year the contribution is incurred. Consequently, a deferred tax asset has been recognized equivalent to the anticipated tax benefit over the life of the AFFA.
Adjustments are made to the deferred income tax asset as adjustments to the asbestos-related assets and liabilities are recorded.
Asbestos Adjustments
The Asbestos adjustments reflected in the consolidated statements of operations and comprehensive income reflect the net change in the actuarial estimate of the asbestos liability and insurance receivables, and the change in the estimate of AICF claims handling costs. Additionally, as the asbestos-related assets and liabilities are denominated in Australian dollars, the reported values of these asbestos-related assets and liabilities in the Company’s consolidated balance sheets in US dollars are subject to adjustment depending on the closing exchange rate between the two currencies at the balance sheet dates, the effect of which is also included in Asbestos adjustments in the consolidated statements of operations and comprehensive income.
F-19
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
Asbestos Impact on Statement of Cash Flows
Restricted cash and cash equivalents - Asbestos
The Restricted cash and cash equivalents held by AICF as recorded on the consolidated balance sheets is included in the total beginning and ending cash balance in the consolidated statements of cash flows. The movement in Restricted cash and cash equivalents - Asbestos is reflected in either the cash flows from operating activities, cash flows from investing activities or cash flows from financing activities sections of the consolidated statements of cash flows as described in detail below.
Asbestos Adjustments
The Asbestos adjustments as recorded on the consolidated statements of operations and comprehensive income (as described above) is presented as a reconciling item from net income to cash flows from operating activities in the consolidated statements of cash flows.
Asbestos Insurance Receivable
Proceeds from insurance claims by AICF are reflected in the cash flows from operating activities section of the consolidated statements of cash flows.
Asbestos Claims Paid
Asbestos claims paid by AICF are reflected in the cash flows from operating activities section of the consolidated statements of cash flows.
Restricted Short-Term Investments
Purchases or proceeds from short-term investments, made by AICF, are reflected in the cash flows from investing activities section of the consolidated statements of cash flows.
AICF Loan Facility
Any drawings, repayments, or payments of accrued interest under the AICF Loan Facility, made by AICF, are reflected in the cash flows from financing activities section of the consolidated statements of cash flows.
Business combinations
The Company accounts for acquired businesses using the acquisition method of accounting. This method requires that the purchase price be allocated to the identifiable assets acquired and liabilities assumed at their estimated fair values at the date of acquisition. The excess of the purchase price over the identifiable assets acquired and liabilities assumed is recorded as goodwill.
The fair values are determined by management, taking into consideration information supplied by management of the acquired entities, and other relevant information. Such information typically includes valuations obtained from independent appraisal experts, which management reviews and considers in its estimates of fair values. The valuations are generally based upon future cash flow projections for the acquired assets, discounted to present value. The determination of fair values requires significant judgment by management, particularly with respect to the value of identifiable intangible assets. This judgment could result in either a higher or lower value assigned to amortizable or depreciable assets. The impact could result in either higher or lower amortization and/or depreciation expense. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but due to the inherent
F-20
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
uncertainty during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.
Immaterial Change in Statement of Cash Flows Line Items
In connection with the preparation of the condensed consolidated financial statements for the three months ended 30 June 2019, the Company determined that amounts previously reported in its consolidated statements of cash flows for the fiscal years ended 31 March 2019 and 2018, reflected an error in the amount of purchases of property, plant and equipment which were not yet paid. This error understated net cash used in investing activities for the fiscal years ended 31 March 2019 and 2018 by US$16.4 million and US$6.5 million, respectively, with an equal understatement of net cash provided by operating activities.
This error had no effect on the Company's consolidated balance sheets, statements of operations and comprehensive income or statements of changes in shareholders' equity (deficit) as of and for the fiscal years ended 31 March 2019 and 2018.
In accordance with the relevant guidance, management evaluated the materiality of the error from a qualitative and quantitative perspective. Based on such evaluation, the Company concluded that the error did not have a material impact on the previously reported consolidated statements of cash flows for the fiscal years ended 31 March 2019 and 2018 or affect the trend of financial results. The amounts presented within this report in the consolidated statement of cash flows have been adjusted for the fiscal years ended 31 March 2019 and 2018, as set forth in the following table:
| Year Ended<br> 31 March 2019 | Year Ended<br> 31 March 2018 | |||||||
|---|---|---|---|---|---|---|---|---|
| (Millions of US dollars) | As <br>reported | As<br>adjusted | As <br>reported | As<br>adjusted | ||||
| Cash Flows From Operating Activities | ||||||||
| Accounts payable and accrued liabilities | $ | (12.9) | $ | 3.5 | $ | 14.2 | $ | 20.7 |
| Net cash provided by operating activities | 287.6 | 304.0 | 302.0 | 308.5 | ||||
| Cash Flows From Investing Activities | ||||||||
| Purchases of property, plant and equipment | (301.1) | (317.5) | (203.7) | (210.2) | ||||
| Net cash used in investing activities | (848.0) | (864.4) | (239.0) | (245.5) |
The understatement of cash flows from operating activities for the fiscal year ended 31 March 2018 resulted in a recalculation of the payment to AICF. During the second quarter of fiscal year 2020, a payment of US$8.0 million representing the cash flow error was paid to AICF along with the payment of US$100.9 million representing 35% of the Company's as reported free cash flow for the fiscal year ended 31 March 2019. See Note 13 for AICF funding.
F-21
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
Recent Accounting Pronouncements
Recently Adopted
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, which provides guidance on the amount, timing, and uncertainty of cash flows arising from leases. The standard requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. Lessor accounting will remain largely unchanged from current guidance; however, ASU No. 2016-02 will provide improvements that are intended to align lessor accounting with the lessee model and with updated revenue recognition guidance. The amendments in ASU No. 2016-02 shall be applied on a modified retrospective basis and are effective for fiscal years and interim periods within those fiscal years, beginning after 15 December 2018, with early adoption permitted. In July 2018, the FASB issued ASU No. 2018-11, which provided a second accepted transition method, which would allow companies to adopt the new lease standard as a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the period of adoption, rather than at the beginning of the earliest period presented. The Company adopted ASU No. 2016-02 (and related clarifying guidance issued by the FASB) starting with fiscal year beginning 1 April 2019 using the modified retrospective transition method outlined in ASU No. 2018-11 with the impact of initial application recognized as a cumulative-effect adjustment of US$0.2 million. Further, the Company recognized a ROU asset of US$79.7 million and a lease liability of US$82.0 million, with the offsetting balance representing a reduction in the previously recognized deferred rent balance at 1 April 2019. As of the date of adoption, there was no impact on the Company’s consolidated statements of operations and comprehensive income or consolidated statements of cash flows.
Recently Issued
In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. The amendments in ASU No. 2019-04 are being issued as updates related to ASU No. 2016-01, ASU No. 2016-13 and ASU No. 2017-12. The amendments in ASU No. 2019-04 are effective for fiscal years and interim periods within those fiscal years, beginning after 15 December 2019 using a modified retrospective approach, with early adoption permitted. The Company will adopt ASU No. 2019-04 starting with the fiscal year beginning 1 April 2020 and does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income taxes (Topic 740). The amendments in the ASU No. 2019-12 are being issued to simplify the accounting for income taxes and are effective for fiscal years and interim periods within those fiscal years, beginning after 15 December 2020 with early adoption permitted. The Company is currently evaluating the impact of these updates on its consolidated financial statements.
F-22
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
- Revenues
The following represents the Company's disaggregated revenues for the fiscal years ended 31 March 2020, 2019 and 2018:
| Year Ended 31 March 2020 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (Millions of US dollars) | North America<br>Fiber Cement | Asia Pacific<br>Fiber Cement | Europe Building<br>Products | Other<br><br>Businesses^1^ | Consolidated | |||||
| Fiber cement revenues | $ | 1,816.4 | $ | 418.4 | $ | 48.0 | $ | — | $ | 2,282.8 |
| Fiber gypsum revenues | — | — | 323.4 | — | 323.4 | |||||
| Other revenues | — | — | — | 0.6 | 0.6 | |||||
| Total revenues | $ | 1,816.4 | $ | 418.4 | $ | 371.4 | $ | 0.6 | $ | 2,606.8 |
| ^1^Effective 31 March 2020, the Other Businesses segment no longer qualifies as a reportable segment. Refer to Note 19 for further details. | ||||||||||
| Year Ended 31 March 2019 | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| (Millions of US dollars) | North America<br>Fiber Cement | Asia Pacific<br>Fiber Cement | Europe Building<br>Products | Other <br>Businesses | Consolidated | |||||
| Fiber cement revenues | $ | 1,676.9 | $ | 446.8 | $ | 35.8 | $ | — | $ | 2,159.5 |
| Fiber gypsum revenues | — | — | 332.5 | — | 332.5 | |||||
| Other revenues | — | — | — | 14.6 | 14.6 | |||||
| Total revenues | $ | 1,676.9 | $ | 446.8 | $ | 368.3 | $ | 14.6 | $ | 2,506.6 |
| Year Ended 31 March 2018 | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| (Millions of US dollars) | North America<br>Fiber Cement | Asia Pacific<br>Fiber Cement | Europe Building<br>Products | Other <br>Businesses | Consolidated | |||||
| Fiber cement revenues | $ | 1,578.1 | $ | 425.4 | $ | 36.3 | $ | — | $ | 2,039.8 |
| Fiber gypsum revenues | — | — | — | — | — | |||||
| Other revenues | — | — | — | 14.7 | 14.7 | |||||
| Total revenues | $ | 1,578.1 | $ | 425.4 | $ | 36.3 | $ | 14.7 | $ | 2,054.5 |
The process by which the Company recognizes revenues is similar across each of the Company's reportable segments and is described in further detail below. Fiber cement and fiber gypsum revenues are primarily generated from the sale of siding and various boards used in internal and external applications, as well as accessories. Fiber gypsum revenues also includes the sale of cement-bonded boards in the Europe Building Products segment. Other revenues in the Other Businesses segment were generated from the sale of fiberglass products and windows in North America.
The Company recognizes revenues when the requisite performance obligation has been met, that is, when the Company transfers control of its products to customers, which depending on the terms of the underlying contract, is generally upon delivery. The Company considers shipping and handling activities that it performs as activities to fulfill the sales of its products, with amounts billed for such costs included in net sales and the associated costs incurred for such services recorded in cost of sales, in accordance with the practical expedient provided by ASC 606.
F-23
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
Certain of the Company's customers receive discounts and rebates as sales incentives, amounts which are recorded as a reduction to revenue at the time the revenue is recognized. These amounts are an estimate recorded by the Company based on historical experience and contractual obligations, the underlying assumptions of which are periodically reviewed and adjusted by the Company, as necessary.
The Company’s contracts are generally short-term in nature, generally not exceeding twelve months, with payment terms varying by the type and location of products or services offered; however, the period between invoicing and when payment is due is not significant.
- Cash and Cash Equivalents, Restricted Cash and Restricted Cash - Asbestos
The following table provides a reconciliation of Cash and cash equivalents, Restricted cash and Restricted cash - Asbestos reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows:
| 31 March | ||||||||
|---|---|---|---|---|---|---|---|---|
| (Millions of US dollars) | 2020 | 2019 | 2018 | 2017 | ||||
| Cash and cash equivalents | $ | 144.4 | $ | 78.7 | $ | 281.6 | $ | 78.9 |
| Restricted cash | 5.0 | 5.1 | 5.0 | 5.0 | ||||
| Restricted cash - Asbestos | 36.4 | 39.8 | 26.6 | 108.9 | ||||
| Total cash and cash equivalents, restricted cash and restricted cash - Asbestos | $ | 185.8 | $ | 123.6 | $ | 313.2 | $ | 192.8 |
Restricted cash relates to an insurance policy which restricts the cash from general corporate purposes.
Restricted cash - Asbestos is restricted to the settlement of asbestos claims and for the payment of the operating costs of AICF.
5. Accounts and Other Receivables
Accounts and other receivables consist of the following components:
| 31 March | ||||
|---|---|---|---|---|
| (Millions of US dollars) | 2020 | 2019 | ||
| Trade receivables | $ | 268.4 | $ | 245.5 |
| Income taxes receivable | 84.7 | — | ||
| Other receivables and advances | 14.6 | 12.0 | ||
| Provision for doubtful trade receivables | (4.4) | (2.9) | ||
| Total accounts and other receivables | $ | 363.3 | $ | 254.6 |
The following are changes in the provision for doubtful trade receivables:
| 31 March | ||||||
|---|---|---|---|---|---|---|
| (Millions of US dollars) | 2020 | 2019 | 2018 | |||
| Balance at beginning of period | $ | 2.9 | $ | 1.3 | $ | 0.9 |
| Adjustment to provision | 1.7 | 2.8 | 0.6 | |||
| Write-offs, net of recoveries | (0.2) | (1.2) | (0.2) | |||
| Balance at end of period | $ | 4.4 | $ | 2.9 | $ | 1.3 |
F-24
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
- Inventories
Inventories consist of the following components:
| 31 March | ||||
|---|---|---|---|---|
| (Millions of US dollars) | 2020 | 2019 | ||
| Finished goods | $ | 224.4 | $ | 235.0 |
| Work-in-process | 8.1 | 7.3 | ||
| Raw materials and supplies | 87.0 | 88.8 | ||
| Provision for obsolete finished goods and raw materials | (14.4) | (13.7) | ||
| Total inventories | $ | 305.1 | $ | 317.4 |
As of 31 March 2020 and 2019, US$37.9 million and US$32.9 million, respectively, of the Company’s finished goods inventory balance was held at vendor managed inventory locations.
7. Goodwill and Other Intangible Assets
Goodwill
The following are the changes in the carrying value of goodwill for the fiscal years ended 31 March 2020 and 2019:
| (Millions of US dollars) | Europe Building Products | Asia Pacific Fiber Cement | Other<br>Businesses | Total | ||||
|---|---|---|---|---|---|---|---|---|
| Balance - 31 March 2018 | $ | — | $ | 0.3 | $ | 4.6 | $ | 4.9 |
| Acquired | 220.0 | — | — | 220.0 | ||||
| Impairment | — | — | (4.6) | (4.6) | ||||
| Foreign exchange impact | (19.2) | — | — | (19.2) | ||||
| Balance - 31 March 2019 | $ | 200.8 | $ | 0.3 | $ | — | $ | 201.1 |
| Impairment | — | (0.2) | — | (0.2) | ||||
| Foreign exchange impact | (3.9) | (0.1) | — | (4.0) | ||||
| Balance - 31 March 2020 | $ | 196.9 | $ | — | $ | — | $ | 196.9 |
Intangible Assets
At 31 March 2020, indefinite lived intangible assets other than goodwill of US$120.9 million include tradenames and other indefinite lived intangible assets, which had a net carrying amount of US$113.5 million and US$7.4 million, respectively.
The following are the net carrying amount of amortizable intangible assets for the fiscal years ended 31 March 2020 and 2019:
| (Millions of US dollars) | Accumulated Amortization | Net Carrying Amount | |||
| Customer Relationships | 51.4 | $ | (6.4) | $ | 45.0 |
| Other1 | (10.8) | 0.8 | |||
| Total | 63.0 | $ | (17.2) | $ | 45.8 |
| 1 Includes impairment charges of US1.4 million for the fiscal year ended 31 March 2020 |
All values are in US Dollars.
F-25
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
| (Millions of US dollars) | Accumulated Amortization | Net Carrying Amount | |||
| Customer Relationships | 52.0 | $ | (4.3) | $ | 47.7 |
| Other1 | (8.6) | 3.2 | |||
| Total | 63.8 | $ | (12.9) | $ | 50.9 |
| 1 Includes impairment charges of US2.6 million for the fiscal year ended 31 March 2019 |
All values are in US Dollars.
The amortization of intangible assets was US$3.1 million, US$6.1 million and US$0.9 million for the fiscal years ended 31 March 2020, 2019 and 2018, respectively.
At 31 March 2020, the estimated future amortization of intangible assets is as follows:
| Years ended 31 March (Millions of US dollars): | ||
|---|---|---|
| 2021 | $ | 2.6 |
| 2022 | 3.3 | |
| 2023 | 4.1 | |
| 2024 | 4.4 | |
| 2025 | 4.5 |
F-26
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
- Property, Plant and Equipment
Property, plant and equipment consist of the following components:
| (Millions of US dollars)<br><br>Cost or valuation: | Land | Buildings | Machinery <br>and<br>Equipment | Construction<br>in<br>Progress^1^ | Total | |||||
|---|---|---|---|---|---|---|---|---|---|---|
| At 31 March 2018 | $ | 68.2 | $ | 346.8 | $ | 1,236.1 | $ | 178.9 | $ | 1,830.0 |
| Additions^2^ | 1.6 | 58.9 | 203.6 | 76.7 | 340.8 | |||||
| Acquisitions | 19.2 | 44.1 | 159.5 | 7.5 | 230.3 | |||||
| Transfers^3^ | — | (6.0) | 2.2 | (6.5) | (10.3) | |||||
| Disposals^4^ | (0.2) | (5.9) | (48.1) | (1.2) | (55.4) | |||||
| Exchange differences | (5.0) | (5.1) | (45.7) | 1.8 | (54.0) | |||||
| At 31 March 2019 | $ | 83.8 | $ | 432.8 | $ | 1,507.6 | $ | 257.2 | $ | 2,281.4 |
| Additions^2^ | 0.3 | 13.9 | 152.3 | 19.3 | 185.8 | |||||
| Transfers^3^ | — | 0.7 | 3.1 | (4.9) | (1.1) | |||||
| Disposals^4^ | — | (1.7) | (55.3) | 0.2 | (56.8) | |||||
| Impairment | — | (0.1) | (10.2) | (5.4) | (15.7) | |||||
| Exchange differences | (5.1) | (13.1) | (86.1) | 1.2 | (103.1) | |||||
| At 31 March 2020 | $ | 79.0 | $ | 432.5 | $ | 1,511.4 | $ | 267.6 | $ | 2,290.5 |
| Accumulated depreciation: | ||||||||||
| At 31 March 2018 | $ | — | $ | (137.4) | $ | (700.5) | $ | — | $ | (837.9) |
| Depreciation | — | (14.6) | (95.0) | — | (109.6) | |||||
| Transfers^3^ | — | 0.8 | 3.7 | — | 4.5 | |||||
| Disposals^4^ | — | 4.1 | 23.3 | — | 27.4 | |||||
| Exchange differences | — | 3.2 | 19.4 | — | 22.6 | |||||
| At 31 March 2019 | $ | — | $ | (143.9) | $ | (749.1) | $ | — | $ | (893.0) |
| Depreciation | — | (15.7) | (109.7) | — | (125.4) | |||||
| Transfers^3^ | — | — | 0.3 | — | 0.3 | |||||
| Disposals^4^ | — | 1.5 | 40.3 | — | 41.8 | |||||
| Impairment | — | (0.6) | (48.2) | — | (48.8) | |||||
| Exchange differences | — | 6.4 | 69.9 | — | 76.3 | |||||
| At 31 March 2020 | $ | — | $ | (152.3) | $ | (796.5) | $ | — | $ | (948.8) |
| Net book value amount: | ||||||||||
| At 31 March 2019 | $ | 83.8 | $ | 288.9 | $ | 758.5 | $ | 257.2 | $ | 1,388.4 |
| At 31 March 2020 | $ | 79.0 | $ | 280.2 | $ | 714.9 | $ | 267.6 | $ | 1,341.7 |
______________
1Construction in progress is presented net of assets transferred into service.
2Additions include US$9.5 million and US$5.4 million of capitalized interest for the fiscal years ended 31 March 2020 and 2019, respectively.
3Transfers for fiscal year 2020 include the net book value of US$0.8 million of leased assets in North America Fiber Cement segment that were moved from Property, plant and equipment, net to Operating lease right-of-use assets on the consolidated balance sheet at 31 March 2020. Transfers for fiscal year 2019 include the net book value of US$5.8 million associated with the Company's fiberglass windows business, which was classified as held for sale and was removed from Property, plant and equipment, net and was included in the Prepaid expenses and other current assets on the consolidated balance sheets at 31 March 2019.
F-27
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
4The US$15.0 million net book value of disposals in fiscal year 2020 includes US$11.7 million of usage of replacement parts. The remaining net book value of disposals of US$3.3 million is related to the disposal of assets no longer in use. The US$28.0 million net book value of disposals in fiscal year 2019 includes US$13.7 million of usage of replacement parts, US$6.1 million of impairment due to the Company's decision to cease production of its fiberglass windows business, US$2.6 million of impairment related to the discontinuance of its MCT product line, US$0.4 million of impairment charges on individual assets and US$5.2 million of disposals of assets no longer in use.
Depreciation expense for the fiscal years ended 31 March 2020, 2019 and 2018 was US$125.4 million, US$109.6 million and US$88.9 million, respectively.
Impairment of Property, Plant & Equipment
The Company performs an asset impairment review on a quarterly basis in connection with its assessment of production capabilities and the Company’s ability to meet market demand. Based on the Company's strategic planning and allocation of its long-term investment in capital, as well as the downturn of the current economic market associated with the global pandemic, the Company has carefully reviewed the carrying value of its long-lived assets. The following table summarizes the impairment charges:
| Years Ended 31 March | ||||||
|---|---|---|---|---|---|---|
| (Millions of US dollars) | 2020 | 2019 | 2018 | |||
| North America Fiber Cement | $ | 44.0 | $ | 3.0 | $ | 0.7 |
| Asia Pacific Fiber Cement | 15.0 | — | — | |||
| Europe Building Products | 5.5 | — | — | |||
| Other Businesses | — | 6.1 | — | |||
| $ | 64.5 | $ | 9.1 | $ | 0.7 |
Charges recorded to Asset Impairments
North America Fiber Cement segment
For the fiscal year ended 31 March 2020, impairment charges of US$41.2 million were recorded in the North America Fiber Cement segment. Included in this total is US$12.0 million related to the Company's decision to shut down its Summerville, South Carolina facility. This decision resulted from the potential impact of COVID-19 on future fiber cement sales volume. Assets are grouped and evaluated for impairment at the level for which there are identifiable cash flows, which in the case of the Summerville plant included the manufacturing equipment, land, building and right of use assets. In accordance with the applicable accounting guidance, the Company recorded an impairment charge for the difference between the carrying value of the asset group of US$22.1 million and the fair value, based on a third party appraisal of land and buildings, less costs to sell of US$10.1 million.
The remaining impairment charges of US$29.2 million is related to a variety of non-core assets located at four plants across the network which will no longer be used and will be disposed. Due to the unique nature of the non-core fixed assets and the lack of history of selling manufacturing assets, management believes that there will be no future cash flows nor salvage value related to these assets and fully impaired them as of 31 March 2020.
For the fiscal year ended 31 March 2019, the Company recorded impairment charges of US$2.6 million in the North America Fiber Cement segment related to the discontinuance of its MCT product line.
F-28
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
Asia Pacific Fiber Cement segment
For the fiscal year ended 31 March 2020, the Company recorded impairment charges of US$14.0 million in the Asia Pacific Fiber Cement segment due to the decision to shift to an import sales model rather than continue manufacturing in New Zealand, and US$1.0 million due to its decision to exit the James Hardie Systems business on the determination that it no longer fits within the Company's core business. The US$14.0 million charge relates to the full write-down of most of the machinery and equipment at the Penrose plant and the related excess spare parts which will not be utilized prior to shutdown. All the equipment and spare parts are unique to the Company and have immaterial resale or salvage values. The remaining net book value of the Penrose plant’s assets at 31 March 2020 is US$2.6 million.
Europe Building Products segment
For the fiscal year ended 31 March 2020, impairment charges of US$5.5 million were recorded in Europe Building Products segment relating to a variety of non-core assets which no longer provide economic benefit to the Company.
Other Businesses segment
For the fiscal year ended 31 March 2019, the Company recorded impairment charges of US$6.1 million in the Other Businesses segment to due to the Company's decision to cease production of its fiberglass windows business.
Charges recorded to Cost of goods sold
Other impairment charges in the North America Fiber Cement segment related to individual assets totaled US$2.8 million, US$0.4 million and US$0.7 million during fiscal years ended 31 March 2020, 2019 and 2018, respectively.
F-29
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
- Leases
The Company's lease portfolio consists primarily of real estate, forklifts at its manufacturing facilities and a fleet of vehicles primarily for sales representatives. The lease term for all of its leases includes the non-cancellable period of the lease plus any additional periods covered by either an option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor. ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate.
The following table represents the Company's ROU assets and lease liabilities at 31 March 2020:
| (Millions of US dollars) | 31 March 2020 | |
|---|---|---|
| Assets: | ||
| Operating leases, net | $ | 40.5 |
| Finance leases, net | 1.7 | |
| Total right-of-use assets | $ | 42.2 |
| Liabilities: | ||
| Operating leases: | ||
| Current | $ | 14.3 |
| Non-Current | 41.4 | |
| Total operating lease liabilities | $ | 55.7 |
| Finance leases: | ||
| Current | $ | 0.5 |
| Non-Current | 1.5 | |
| Total finance lease liabilities | $ | 2.0 |
| Total lease liabilities | $ | 57.7 |
The Company leases the land and buildings at its New Zealand plant, and the option term of this lease agreement ends in 2026, with a second option to renew until 2036. The second option to renew was reasonably certain until the current quarter, when the Company made the decision to shift to an import sales model and close its New Zealand plant. As a result, the Company remeasured its Right-of-use assets and Lease Liability for the New Zealand plant, resulting in a reduction in both the asset and liability in the current quarter of approximately US$19.4 million. Subsequently, the Company impaired the remaining Right-of-use assets value of US$11.2 million, which was recorded to Asset impairments in the Company's consolidated statements of operations and comprehensive income, as the facility is not expected to generate future positive cash flows.
F-30
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
The following represents the Company's lease expense for the fiscal year ended 31 March 2020:
| (Millions of US dollars) | Year Ended <br>31 March 2020 | |
|---|---|---|
| Operating leases | $ | 18.4 |
| Short-term leases | 1.0 | |
| Variable leases | 0.1 | |
| Finance leases | 0.3 | |
| Interest on lease liabilities | 0.1 | |
| Total lease expense | $ | 19.9 |
At 31 March 2020 the weighted-average remaining lease term of the Company's leases is as follows:
| (In Years) | 31 March 2020 |
|---|---|
| Operating leases | 5.4 |
| Finance leases | 4.4 |
At 31 March 2020 the weighted-average discount rate of the Company's leases is as follows:
| 31 March 2020 | ||
|---|---|---|
| Operating leases | 4.4 | % |
| Finance leases | 4.4 | % |
The following are future lease payments for non-cancellable leases at 31 March 2020:
| Years ended 31 March (Millions of US dollars): | Operating<br>Leases | Finance<br>Leases | Total | |||
|---|---|---|---|---|---|---|
| 2021 | $ | 16.7 | $ | 0.6 | $ | 17.3 |
| 2022 | 13.1 | 0.5 | 13.6 | |||
| 2023 | 9.2 | 0.5 | 9.7 | |||
| 2024 | 6.7 | 0.3 | 7.0 | |||
| 2025 | 4.4 | 0.2 | 4.6 | |||
| Thereafter | 8.8 | 0.1 | 8.9 | |||
| Total | $ | 58.9 | $ | 2.2 | $ | 61.1 |
| Less: imputed interest | 3.4 | |||||
| Total lease liabilities | $ | 57.7 |
Supplemental cash flow and other information related to leases were as follows:
| (Millions of US dollars) | 31 March 2020 | |
|---|---|---|
| Cash paid for amounts included in the measurement of lease liabilities: | ||
| Operating cash flows used for operating leases | $ | 18.0 |
| Operating cash flows used for finance leases | 0.1 | |
| Financing cash flows used for finance leases | 0.4 | |
| Non-cash ROU assets obtained in exchange for new lease liabilities | 12.9 |
F-31
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
- Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following components:
| 31 March | ||||
|---|---|---|---|---|
| (Millions of US dollars) | 2020 | 2019 | ||
| Trade creditors | $ | 151.3 | $ | 142.4 |
| Accrued interest | 8.6 | 8.8 | ||
| Other creditors and accruals | 114.8 | 104.3 | ||
| Total accounts payable and accrued liabilities | $ | 274.7 | $ | 255.5 |
11. Long-Term Debt
At 31 March 2020 and 2019, the Company held two forms of debt: an unsecured revolving credit facility and senior unsecured notes due 2025, 2026 and 2028. The effective weighted average interest rate on the Company’s total debt was 4.3% and 4.4% at 31 March 2020 and 31 March 2019, respectively. The weighted average term of the unsecured revolving credit facility and senior unsecured notes, including undrawn facilities, was 5.3 years and 6.3 years at 31 March 2020 and 2019, respectively.
Unsecured Revolving Credit Facility
In December 2015, James Hardie International Finance Designated Activity Company (“JHIF”) and James Hardie Building Products Inc. (“JHBP”), each a wholly-owned subsidiary of JHI plc, entered into a US$500.0 million unsecured revolving credit facility (the “Revolving Credit Facility”) with certain commercial banks and HSBC Bank USA, National Association, as administrative agent. The Revolving Credit Facility was initially set to expire in December 2020, however, in December 2017, the Revolving Credit Facility was amended to, among other things, extend the maturity date to December 2022. The size of the Revolving Credit Facility may be increased by up to US$250.0 million through the exercise of an accordion option.
Debt issuance costs in connection with the Revolving Credit Facility are recorded as an offset to Long-Term Debt in the Company's consolidated balance sheets and are being amortized as interest expense using the effective interest method over the stated term of 5 years. At 31 March 2020 and 2019, the Company’s debt issuance costs have an unamortized balance of US$1.9 million and US$2.6 million, respectively.
The amount drawn under the Revolving Credit Facility was US$130.0 million and US$150.0 million at 31 March 2020 and 2019, respectively. The effective weighted average interest rate on the Company’s total outstanding Revolving Credit Facility was 2.6% and 4.3% at 31 March 2020 and 2019, respectively.
Borrowings under the Revolving Credit Facility bear interest at per annum rates equal to, at the borrower's option, either: (i) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin for LIBOR loans; or (ii) a base rate plus an applicable margin for base rate loans. The base rate is calculated as the highest of (x) the rate that the administrative agent announces from time to time as its prime lending rate, as in effect from time to time, (y) 1/2 of 1% in excess of the overnight Federal Funds Rate, and (z) LIBOR for an interest period of one month plus 1.00%. The applicable margin is calculated based on a pricing grid that in each case is linked to the Company's consolidated net leverage ratio. For LIBOR Loans, the applicable margin ranges from 1.25% to 2.00%, and for base rate loans it ranges from 0.25% to 1.00%. The Company also pays a commitment fee of between 0.20% and 0.35% on the actual daily amount of the unutilized revolving loans. The applicable commitment fee percentage is based on a pricing grid linked to the Company’s consolidated net leverage ratio.
F-32
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
In the event that JHIF’s or James Hardie International Group Limited's ("JHIGL"), as applicable, long-term senior unsecured non-credit enhanced rating from each of Standard & Poor’s Ratings Services (“S&P”), and Moody’s Investors Service, Inc. (“Moody’s”) is at least BBB- from S&P, and at least Baa3 from Moody’s, at JHIF’s election, for new borrowings under the Revolving Credit Facility, an alternate applicable rate may be applied with respect to the commitment fee of 0.25% per annum and an alternative margin may be applied with respect to: (a) LIBOR Loans, 1.50%; and (b) base rate loans, 0.50%.
The Revolving Credit Facility is guaranteed by each of JHIGL and James Hardie Technology Limited ("JHTL"), each of which are wholly-owned subsidiaries of JHI plc.
The Revolving Credit Facility agreement contains certain covenants that, among other things, restrict JHIGL and its restricted subsidiaries’ ability to incur indebtedness and grant liens other than certain types of permitted indebtedness and permitted liens, make certain restricted payments, and undertake certain types of mergers or consolidations actions. In addition, the Company: (i) must not exceed a maximum ratio of net debt to earnings before interest, tax, depreciation and amortization, excluding all asbestos-related liabilities, assets, income, gains, losses and charges other than AICF payments, all AICF selling, general and administrative (“SG&A”) expenses, all Australian Securities and Investment Commission (“ASIC”)-related expenses, all recoveries and asset impairments, and all New Zealand product liability expenses and (ii) must meet or exceed a minimum ratio of earnings before interest, tax, depreciation and amortization to interest charges, excluding all income, expense and other profit and loss statement impacts of asbestos income, gains, losses and charges, all AICF SG&A expenses, all ASIC-related expenses, all recoveries and asset impairments, and all New Zealand product liability expenses. At 31 March 2020, the Company was in compliance with all covenants contained in the Revolving Credit Facility agreement.
2026 Senior Notes
In October 2018, JHIF completed the sale of €400.0 million (US$440.7 million, based on the exchange rate at 31 March 2020) aggregate principal amount of senior unsecured notes due 1 October 2026 (the “2026 Notes”). The 2026 Notes were issued at par and the proceeds from the offering were used to repay €400.0 million outstanding borrowings under a 364-day term loan facility (the "Term Loan Facility") which was used to complete the Fermacell acquisition. On 3 October 2018, JHIF repaid all €400.0 million aggregate principal amount and accrued interest of its Term Loan Facility following the completion of the sale of €400.0 million (US$458.8 million, based on the exchange rate at 3 October 2018) aggregate principal amount of 3.625% senior unsecured notes due 2026. In connection with this repayment, the Company recorded a loss on early debt extinguishment of US$1.0 million during the fiscal year ended 31 March 2019 associated with the unamortized portion of the deferred financing fees.
Debt issuance costs in connection with the 2026 Notes are recorded as an offset to Long-Term Debt on the Company’s consolidated balance sheet and are being amortized as interest expense using the effective interest method over the stated term of 8 years. At 31 March 2020 and 2019, the Company’s debt issuance costs have an unamortized balance of US$5.0 million and US$5.7 million, respectively. Interest is payable semi-annually in arrears on 1 October and 1 April of each year at a rate of 3.625% with first payment made on 1 April 2019.
The 2026 Notes are guaranteed by JHIGL, JHBP and JHTL, each of which are wholly-owned subsidiaries of JHI plc.
F-33
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
The indenture governing the 2026 Notes contains covenants that, among other things, limit the ability of the guarantors and their restricted subsidiaries to incur liens on assets, make certain restricted payments, engage in certain sale and leaseback transactions and merge or consolidate with or into other companies. These covenants are subject to certain exceptions and qualifications as described in the indenture. At 31 March 2020, the Company was in compliance with all of its requirements under the indenture related to the 2026 Notes.
The Company’s 2026 Notes have an estimated fair value of US$395.7 million (based on EUR/USD exchange rate at 31 March 2020) based on the trading price observed in the market at or near the balance sheet date and are categorized as Level 1 within the fair value hierarchy.
2025 and 2028 Senior Notes
In December 2017, JHIF completed the sale of US$800.0 million aggregate principal amount of senior unsecured notes. The sale of the senior notes were issued at par with US$400.0 million due 15 January 2025 (the “2025 Notes”) and the remaining US$400.0 million due 15 January 2028 (the “2028 Notes”).
The proceeds from the offering were used for general corporate purposes, including funding the redemption of all US$400.0 million aggregate principal amount of its previously outstanding 5.875% senior unsecured notes due 2023 (the "2023 Notes"). In connection with this redemption, the Company recorded a loss on early debt extinguishment of US$26.1 million during the fiscal year ended 31 March 2018, which included US$19.5 million of call redemption premiums and US$6.6 million of unamortized financing costs associated with these notes. The Company also used part of the net proceeds from this offering to finance a portion of the Fermacell acquisition.
Debt issuance costs in connection with the 2025 and 2028 Notes are recorded as an offset to Long-Term Debt on the Company’s consolidated balance sheets.
Debt issuance costs in connection with the 2025 Notes have an unamortized balance of US$4.3 million and US$5.2 million at 31 March 2020 and 2019, respectively. The debt issuance costs are being amortized as interest expense using the effective interest method over the stated term of 7 years. Interest is payable semi-annually in arrears on 15 January and 15 July of each year at a rate of 4.75% with first payment made on 15 July 2018.
Debt issuance costs in connection with the 2028 Notes have an unamortized balance of US$4.9 million and US$5.6 million at 31 March 2020 and 2019, respectively. The debt issuance costs are being amortized as interest expense using the effective interest method over the stated term of 10 years. Interest is payable semi-annually in arrears on 15 January and 15 July of each year at a rate of 5.00% with first payment made on 15 July 2018.
The 2025 and 2028 Notes are guaranteed by JHIGL, JHBP and JHTL, each of which are wholly-owned subsidiaries of JHI plc.
The indenture governing the 2025 and 2028 Notes contains covenants that, among other things, limit the ability of the guarantors and their restricted subsidiaries to incur liens on assets, make certain restricted payments, engage in certain sale and leaseback transactions and merge or consolidate with or into other companies. These covenants are subject to certain exceptions and qualifications as described in the indenture. At 31 March 2020, the Company was in compliance with all of its requirements under the indenture related to the 2025 and 2028 Notes.
F-34
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
The Company’s 2025 and 2028 Notes have an estimated fair value of US$752.0 million at 31 March 2020, based on the trading price observed in the market at or near the balance sheet date and are categorized as Level 1 within the fair value hierarchy.
Off Balance Sheet Arrangements
As of 31 March 2020, the Company had a total borrowing base capacity under the Revolving Credit Facility of US$500.0 million with outstanding borrowings of US$130.0 million, and US$4.6 million of drawn letters of credit and bank guarantees. These letters of credit and bank guarantees relate to various operational matters including insurance, performance bonds and other items, leaving the Company with US$365.4 million of available borrowing capacity under the Revolving Credit Facility.
Global Exchange Market Listing
On 25 April 2018, the 2025 and 2028 Notes were admitted to listing on the Global Exchange Market (the “GEM”), which is operated by Euronext Dublin, and on 7 February 2019, the 2026 Notes were admitted to listing on the GEM. Interest paid on the 2025, 2026 and 2028 Notes quoted on the GEM is not subject to Irish withholding tax.
- Product Warranties
The Company offers various warranties on its products, including a 30-year limited warranty on certain fiber cement siding products in the United States. A typical warranty program requires the Company to replace defective products within a specified time period from the date of sale. It is possible that future warranty costs could differ from those estimates.
The following are the changes in the product warranty provision:
| 31 March | ||||||
|---|---|---|---|---|---|---|
| (Millions of US dollars) | 2020 | 2019 | 2018 | |||
| Balance at beginning of period | $ | 46.6 | $ | 52.8 | $ | 46.6 |
| Increase (Decrease) in product warranties accrual | 0.8 | (0.8) | 13.1 | |||
| Acquired during the period | — | 0.5 | — | |||
| Settlements made in cash or in kind | (5.0) | (5.9) | (6.9) | |||
| Balance at end of period | $ | 42.4 | $ | 46.6 | $ | 52.8 |
F-35
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
13. Asbestos
The AFFA was approved by shareholders in February 2007 to provide long-term funding to AICF. For a discussion of the AFFA and the accounting policies utilized by the Company related to the AFFA and AICF, see Note 2.
Asbestos Adjustments
The Asbestos adjustments included in the consolidated statements of operations and comprehensive income comprise the following:
| Years Ended 31 March | ||||||
|---|---|---|---|---|---|---|
| (Millions of US dollars) | 2020 | 2019 | 2018 | |||
| Change in estimates: | ||||||
| Change in actuarial estimate - asbestos liability | $ | (133.8) | $ | (73.8) | $ | (152.1) |
| Change in actuarial estimate - insurance receivable | 5.7 | — | 1.2 | |||
| Change in estimate - AICF claims-handling costs | 0.1 | 1.1 | (0.5) | |||
| Subtotal - Change in estimates | (128.0) | (72.7) | (151.4) | |||
| Effect of foreign exchange on Asbestos net liabilities | 69.0 | 49.5 | (5.3) | |||
| Gain (loss) on foreign currency forward contracts | 0.8 | (0.8) | 1.4 | |||
| Adjustments in insurance receivable | — | 2.0 | — | |||
| Asbestos research and education contribution | — | — | (1.1) | |||
| Total Asbestos Adjustments | $ | (58.2) | $ | (22.0) | $ | (156.4) |
In December 2017, the Company, AICF and the NSW Government executed an AFFA Amending Deed which in effect excludes the recovery of gratuitous services costs (colloquially referred to as Sullivan v Gordon damages) that arose following the promulgation of the Wrongs (Part VB) (Dust and Tobacco-Related Claims) Regulation 2016 by the State of Victoria. As a result of the amendment, AICF reduced the Asbestos liability by A$56.8 million (US$43.6 million based upon the exchange rate at 31 March 2018) in the third quarter of fiscal year 2018. This adjustment is reflected in Asbestos adjustments in the consolidated statements of operations and comprehensive income during the fiscal year ended 31 March 2018.
Actuarial Study; Claims Estimate
AICF commissioned an updated actuarial study of potential asbestos-related liabilities as of 31 March 2020. Based on KPMGA’s assumptions, KPMGA arrived at a range of possible total cash flows and calculated a central estimate, which is intended to reflect a probability-weighted expected outcome of those actuarially estimated future cash flows.
The following table sets forth the central estimates, net of insurance recoveries, calculated by KPMGA as of 31 March 2020:
| Year Ended 31 March 2020 | ||
|---|---|---|
| (Millions of US and Australian dollars, respectively) | US$ | A$ |
| Central Estimate – Discounted and Inflated | 1,250.9 | 2,025.2 |
| Central Estimate – Undiscounted but Inflated | 1,368.3 | 2,215.2 |
| Central Estimate – Undiscounted and Uninflated | 897.1 | 1,452.4 |
The asbestos liability has been revised to reflect the most recent undiscounted and uninflated actuarial estimate prepared by KPMGA as of 31 March 2020.
F-36
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
In estimating the potential financial exposure, KPMGA has made a number of assumptions, including, but not limited to, assumptions related to the total number of claims that are reasonably estimated to be asserted through 2072, the typical cost of settlement (which is sensitive to, among other factors, the industry in which a plaintiff claims exposure, the alleged disease type, the age of the claimant and the jurisdiction in which the action is brought), the legal costs incurred in the litigation of such claims, the rate of receipt of claims, the settlement strategy in dealing with outstanding claims and the timing of settlements.
Due to inherent uncertainties in the legal and medical environment, the number and timing of future claim notifications and settlements, the recoverability of claims against insurance contracts, and estimates of future trends in average claim awards, as well as the extent to which the above named entities will contribute to the overall settlements, the actual liability could differ materially from that which is currently recorded.
The potential range of costs as estimated by KPMGA is affected by a number of variables such as nil settlement rates, peak year of claims, past history of claims numbers, average settlement rates, past history of Australian asbestos-related medical injuries, current number of claims, average defense and plaintiff legal costs, base wage inflation and superimposed inflation. The potential range of losses disclosed includes both asserted and unasserted claims.
A sensitivity analysis performed by KPMGA to determine how the actuarial estimates would change if certain assumptions (i.e., the rate of inflation and superimposed inflation, the average costs of claims and legal fees, and the projected numbers of claims) were different from the assumptions used to determine the central estimates. The sensitivity analysis performed in the actuarial report is directly related to the discounted but inflated central estimate and the undiscounted but inflated central estimate. The actual cost of the liabilities could be outside of that range depending on the results of actual experience relative to the assumptions made.
The following table summarizes the results of the analysis:
| As of 31 March 2020 | ||
|---|---|---|
| (Millions of US and Australian dollars, respectively) | US$ | A$ |
| Discounted (but inflated) - Low | 913.0 | 1,478.2 |
| Discounted (but inflated) - High | 2,109.3 | 3,414.9 |
| Undiscounted (but inflated) - Low | 984.3 | 1,593.6 |
| Undiscounted (but inflated) - High | 2,385.2 | 3,861.7 |
During fiscal year 2020, mesothelioma claims reporting activity was unfavorable compared to actuarial expectations and the prior corresponding period. One of the more significant assumptions is the estimated peak period of mesothelioma disease claims, which was assumed to have occurred during the period 1 April 2014 through 31 March 2017. In fiscal year 2018, KPMGA formed the view that the increases in the mesothelioma claims reporting seen in recent years was a permanent effect, and therefore increased the projected number of future mesothelioma claims at 31 March 2018. The revised KPMGA modeling approach for mesothelioma claims considered the claimant’s age which resulted in a higher number of projected claims, partially offset by a reduction in projected average claim size.
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James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
At 31 March 2020, KPMGA identified that the increase in actual claims reporting for the full year 2020 was primarily due to the increase in the number of cross claims which typically cost one quarter of the cost of direct claims. As such, KPMGA determined that there was a need to separate the two types of claims resulting in a higher projected future number of estimated mesothelioma claims. Due to the increase in the projected cross claims, the average claim size is projected to decrease due to the mix of the projected claim payments.
Consistent with prior years, the claimants ages are increasing leading to lower average claim size. The decrease is partially offset by a lower number of assumed nil settlements for mesothelioma claims. Changes to the assumptions may be necessary in future periods should mesothelioma claims reporting escalate or decline.
Potential variation in the estimated peak period of claims has an impact much greater than the other assumptions used to derive the discounted central estimate. In performing the sensitivity assessment of the estimated incidence pattern reporting for mesothelioma, if the pattern of incidence was shifted by two years, the central estimate could increase by approximately 21% on a discounted basis.
Claims Data
The following table shows the activity related to the numbers of open claims, new claims and closed claims during each of the past five years and the average settlement per settled claim and case closed:
| For the Years Ended 31 March | |||||
|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | 2017 | 2016 | |
| Number of open claims at beginning of period | 332 | 336 | 352 | 426 | 494 |
| Number of new claims | 657 | 568 | 562 | 557 | 577 |
| Number of closed claims | 596 | 572 | 578 | 631 | 645 |
| Number of open claims at end of period | 393 | 332 | 336 | 352 | 426 |
| Average settlement amount per settled claim | A$277,000 | A$262,000 | A$253,000 | A$224,000 | A$248,000 |
| Average settlement amount per case closed | A$245,000 | A$234,000 | A$217,000 | A$168,000 | A$219,000 |
| Average settlement amount per settled claim | US$189,000 | US$191,000 | US$196,000 | US$168,000 | US$183,000 |
| Average settlement amount per case closed | US$167,000 | US$171,000 | US$168,000 | US$126,000 | US$161,000 |
Under the terms of the AFFA, the Company has rights of access to actuarial information produced for AICF by the actuary appointed by AICF, which is currently KPMGA. The Company’s disclosures with respect to claims statistics are subject to it obtaining such information, however, the AFFA does not provide the Company an express right to audit or otherwise require independent verification of such information or the methodologies to be adopted by the approved actuary. As such, the Company relies on the accuracy and completeness of the information provided by AICF to the approved actuary and the resulting information and analysis of the approved actuary when making disclosures with respect to claims statistics.
F-38
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
Asbestos-Related Assets and Liabilities
The Company has included on its consolidated balance sheets the asbestos-related assets and liabilities of AICF under the terms of the AFFA. These amounts are detailed in the table below, and the net total of these asbestos-related assets and liabilities is referred to by the Company as the “Net AFFA Liability.”
| 31 March | ||||
|---|---|---|---|---|
| (Millions of US dollars) | 2020 | 2019 | ||
| Asbestos liability – current | $ | (103.9) | $ | (110.5) |
| Asbestos liability – non-current | (882.5) | (979.1) | ||
| Asbestos liability – Total | (986.4) | (1,089.6) | ||
| Insurance receivable – current | 5.0 | 7.5 | ||
| Insurance receivable – non-current | 38.5 | 43.7 | ||
| Insurance receivable – Total | 43.5 | 51.2 | ||
| Workers’ compensation asset – current | 1.5 | 2.0 | ||
| Workers’ compensation asset – non-current | 20.7 | 25.8 | ||
| Workers’ compensation liability – current | (1.5) | (2.0) | ||
| Workers’ compensation liability – non-current | (20.7) | (25.8) | ||
| Workers’ compensation – Total | — | — | ||
| Other net liabilities | (2.0) | (2.1) | ||
| Restricted cash and cash equivalents of AICF | 36.4 | 39.8 | ||
| Restricted short-term investments of AICF | 21.6 | 17.7 | ||
| Net Unfunded AFFA liability | $ | (886.9) | $ | (983.0) |
| Deferred income taxes – non-current | 319.1 | 349.3 | ||
| Income tax payable | 23.4 | 25.3 | ||
| Net Unfunded AFFA liability, net of tax | $ | (544.4) | $ | (608.4) |
F-39
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
The following is a detailed rollforward of the Net Unfunded AFFA liability, net of tax, for the fiscal year ended 31 March 2020:
| (Millions of US dollars) | Asbestos <br>Liability | Insurance<br>Receivables | Restricted<br>Cash and Investments | Other <br>Assets <br>and Liabilities | Net Unfunded AFFA Liability | Deferred Tax<br>Assets | Income<br>Tax<br>Payable | Net Unfunded AFFA Liability, net of tax | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Opening Balance - 31 March 2019 | $ | (1,089.6) | $ | 51.2 | $ | 57.5 | $ | (2.1) | $ | (983.0) | $ | 349.3 | $ | 25.3 | $ | (608.4) |
| Asbestos claims paid^1^ | 104.6 | — | (104.6) | — | — | — | — | — | ||||||||
| Payment received in accordance with AFFA^2^ | — | — | 108.9 | — | 108.9 | — | — | 108.9 | ||||||||
| AICF claims-handling costs incurred (paid) | 1.0 | — | (1.0) | — | — | — | — | — | ||||||||
| AICF operating costs paid - non claims-handling | — | — | (1.7) | — | (1.7) | — | — | (1.7) | ||||||||
| Change in actuarial estimate | (133.8) | 5.7 | — | — | (128.1) | — | — | (128.1) | ||||||||
| Change in claims handling cost estimate | 0.1 | — | — | — | 0.1 | — | — | 0.1 | ||||||||
| Impact on deferred income tax due to change in<br><br>actuarial estimate | — | — | — | — | — | 38.4 | — | 38.4 | ||||||||
| Insurance recoveries | — | (7.6) | 7.6 | — | — | — | — | — | ||||||||
| Movement in income tax payable | — | — | — | — | — | (25.8) | 0.8 | (25.0) | ||||||||
| Other movements | — | — | 3.2 | (1.1) | 2.1 | 0.3 | — | 2.4 | ||||||||
| Effect of foreign exchange | 131.3 | (5.8) | (11.9) | 1.2 | 114.8 | (43.1) | (2.7) | 69.0 | ||||||||
| Closing Balance - 31 March 2020 | $ | (986.4) | $ | 43.5 | $ | 58.0 | $ | (2.0) | $ | (886.9) | $ | 319.1 | $ | 23.4 | $ | (544.4) |
____________
1Claims paid of US$104.6 million reflects A$153.3 million converted at the average exchange rate for the period based on the assumption that these transactions occurred evenly throughout the period.
2The payment received in accordance with AFFA of US$108.9 million reflects the US dollar equivalent of the A$156.7 million payment, translated at the exchange rate set five days before the day of payment.
AICF Funding
During the fiscal year ending 31 March 2021, the Company anticipates that it will contribute approximately US$153.3 million to AICF. This amount represents 35% of the Company's free cash flow which is equivalent to operating cash flows of US$451.2 million less an adjustment of US$13.2 million, resulting in free cash flow of US$438.0 million for fiscal year 2020, as defined by the AFFA.
During the fiscal years ended 31 March 2020, 2019 and 2018, the Company contributed US$108.9 million (A$156.7 million), US$103.0 million (A$138.4 million) and US$102.2 million (A$135.1 million), respectively, to AICF.
Restricted Short-Term Investments
In July 2019, AICF invested A$110.0 million of its excess cash in time deposits. During the fiscal year ended 31 March 2020, A$75.0 million of these time deposits matured and were reclassified to Restricted cash - Asbestos on the consolidated balance sheet as of 31 March 2020. The remaining time deposits of A$35.0 million (US$21.6 million, based on the exchange rate at 31 March 2020) are classified as available-for-sale investments and reflected within Restricted short-term investments - Asbestos on the consolidated balance sheet.
F-40
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
The remaining time deposits bear a fixed interest rate and have a maturity as follows:
| Maturity Date | Interest Rate | A$ Millions |
|---|---|---|
| 30 April 2020 | 1.70% | 20.0 |
| 1 June 2020 | 1.70% | 15.0 |
In July 2018, AICF invested A$120.0 million of its excess cash in time deposits. During the fiscal year ended 31 March 2019, A$95.0 million of these time deposits matured and were reclassified to Restricted cash and cash equivalents - Asbestos on the consolidated balance sheet. During the fiscal year ended 31 March 2020, the remaining time deposits of A$25.0 million matured and were reclassified to Restricted cash and cash equivalents - Asbestos on the consolidated balance sheets.
AICF – NSW Government Secured Loan Facility
AICF may borrow, subject to certain conditions, up to an aggregate amount of A$320.0 million (US$197.7 million, based on the exchange rate at 31 March 2020). The AICF Loan Facility is available to be drawn for the payment of claims through 1 November 2030, at which point, all outstanding borrowings must be repaid. Borrowings made under the AICF Loan Facility are classified as current, as AICF intends to repay the debt within one year.
At 31 March 2020 and 2019, AICF had no amounts outstanding under the AICF Loan Facility.
To the extent the NSW Government sources funding for the AICF Loan Facility from the Commonwealth of Australia (the “Commonwealth”), the interest rate on the AICF Loan Facility is calculated by reference to the cost of NSW’s borrowings from the Commonwealth for that purpose, being calculated with reference to the Commonwealth Treasury fixed coupon bond rate for a period determined as appropriate by the Commonwealth.
To the extent that NSW’s source of funding is not from the Commonwealth, the interest rate on drawings under the AICF Loan Facility is calculated as (i) during the period to (but excluding) 1 May 2020, a yield percent per annum calculated at the time of the first drawdown of the AICF Loan Facility by reference to the NSW Treasury Corporation’s 6% 1/05/2020 Benchmark Bonds, (ii) during the period after 1 May 2020, a yield percent per annum calculated by reference to NSW Treasury Corporation bonds on issue at that time and maturing in 2030, or (iii) in any case, if the relevant bonds are not on issue, a yield percent per annum in respect of such other source of funding for the AICF Loan Facility determined by the NSW Government in good faith to be used to replace those bonds, including any guarantee fee payable to the Commonwealth in respect of the bonds (where the bonds are guaranteed by the Commonwealth) or other source of funding.
Under the AICF Loan Facility, the Former James Hardie Companies each guarantee the payment of amounts owed by AICF and AICF’s performance of its obligations under the AICF Loan Facility. Each Obligor has granted the NSW Government a security interest in certain property including cash accounts, proceeds from insurance claims, payments remitted by the Company to AICF and contractual rights under certain documents including the AFFA. Each Obligor may not deal with the secured property until all amounts outstanding under the AICF Loan Facility are paid, except as permitted under the terms of the security interest.
Under the terms of the AICF Loan Facility, each Obligor must, upon receipt of proceeds from insurance claims and payments remitted by the Company under the AFFA, apply all of such proceeds in repayment of amounts owing under the AICF Loan Facility. NSW may, at its sole discretion, waive or postpone (in such manner and for such period as it determines) the requirement for the Obligors to apply proceeds of insurance claims and payments remitted by the Company to repay amounts owed under the AICF Loan Facility to ensure AICF has sufficient liquidity to meet its future cash flow needs.
F-41
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
The Obligors are subject to certain operating covenants under the AICF Loan Facility and the terms of the security interest, including, without limitation, (i) positive covenants relating to providing corporate reporting documents, providing particular notifications and complying with the terms of the AFFA, and (ii) negative covenants restricting them from voiding, cancelling, settling, or adversely affecting existing insurance policies, disposing of assets and granting security to secure any other financial indebtedness, other than in accordance with the terms and conditions of the AICF Loan Facility.
Upon an event of default, NSW may cancel the commitment and declare all amounts outstanding as immediately due and payable. The events of default include, without limitation, failure to pay or repay amounts due in accordance with the AICF Loan Facility, breach of covenants, misrepresentation, cross default by an Obligor and an adverse judgment (other than a personal asbestos or Marlew claim) against an Obligor.
14. Derivative Instruments
Interest Rate Swaps
The fair value of interest rate swap contracts is calculated based on the fixed rate, notional principal, settlement date and present value of the future cash inflows and outflows based on the terms of the agreement and the future floating interest rates as determined by a future interest rate yield curve. The model used to value the interest rate swap contracts is based upon well recognized financial principles, and interest rate yield curves can be validated through readily observable data by external sources. Although readily observable data is used in the valuations, different valuation methodologies could impact the estimated fair value. Accordingly, the interest rate swap contracts are categorized as Level 2 within the fair value hierarchy.
For the fiscal years ended 31 March 2020, 2019 and 2018, the unrealized and realized gains and losses recorded on interest rate swap contracts are immaterial and are included in Other (expense) income.
At 31 March 2020, the weighted average fixed interest rate of these contracts is 2.3% and the weighted average remaining life is 0.3 years. At 31 March 2020 and 2019, these contracts have a fair value of a US$0.1 million payable and a US$0.3 million receivable, respectively.
The notional amount of interest rate swap contracts was US$25.0 million and US$75.0 million as of 31 March 2020 and 2019, respectively, and represents the basis upon which payments are calculated and are reported on a net basis when a legal and enforceable right of set-off exists.
15. Commitments and Contingencies
The Company is involved from time to time in various legal proceedings and administrative actions related to the normal conduct of its business, including general liability claims, putative class action lawsuits and litigation concerning its products.
Although it is impossible to predict the outcome of any pending legal proceeding, management believes that such proceedings and actions should not, individually or in the aggregate, have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows, except as they relate to asbestos and New Zealand product liability claims as described in these consolidated financial statements.
F-42
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
New Zealand Weathertightness Claims
Since fiscal year 2002, the Company’s New Zealand subsidiaries have been joined in a number of weathertightness claims in New Zealand that relate to residential buildings (single dwellings and apartment complexes) and a small number of non-residential buildings, primarily constructed from 1998 to 2004. The claims often involve multiple parties and allege that losses were incurred due to excessive moisture penetration of the buildings’ structures. The claims typically include allegations of poor building design, inadequate certification of plans, inadequate construction review and compliance certification and deficient work by sub-contractors.
Historically, the Company’s New Zealand subsidiaries have been joined to these claims as one of several co-defendants, including local government entities responsible for enforcing building codes and practices, resulting in the Company’s New Zealand subsidiaries becoming liable for only a portion of each claim. In addition, the Company’s New Zealand subsidiaries have had access to third-party recoveries to defray a portion of the costs incurred in resolving such claims. However, in 2015 the Company and/or its subsidiaries were named as the sole defendants in four claims on behalf of multiple defendants, each of which allege that the New Zealand subsidiaries’ products were inherently defective and that the Company and its subsidiaries breached duties including failure to conduct appropriate testing of these products and systems, failure to warn and misleading and deceptive conduct in relation to the marketing and sale of the products and systems. Two of these claims are against two New Zealand subsidiaries as sole defendants but in two claims, three non-New Zealand Subsidiaries and the Company are named as defendants along with the two New Zealand subsidiaries and a direct New Zealand holding company.
The Company recognizes a liability for asserted and unasserted New Zealand weathertightness claims in the period in which a loss becomes probable and estimable. The amount of a reasonably probable loss is dependent on a number of factors including, without limitation, the specific facts and circumstances unique to each claim, the existence of any co-defendants involved in defending the claim, the solvency of such co-defendants (including the ability of such co-defendants to remain solvent until the related claim is ultimately resolved), the availability of claimant compensation under a government compensation scheme and extent to which the co-defendants and the Company and its subsidiaries have access to third-party recoveries to cover a portion of the costs incurred in defending and resolving such actions. In addition to the above limitations, the total loss incurred is also dependent on the manner and extent to which statutory limitation periods will apply to any received claims.
To the extent that it is probable and estimable, the estimated loss for these matters, net of estimated third-party recoveries, incorporates assumptions that are subject to the foregoing uncertainties and are principally derived from, but not exclusively based on, historical claims experience together with facts and circumstances unique to each claim. If the nature and extent of claims in future periods differ from historical claims experience, the Company's assessment of probable and estimable liability with respect to current asserted claims changes and/or actual liability is different to the estimates, then the actual amount of loss may be materially higher or lower than estimated losses accrued at 31 March 2020.
Environmental and Legal
The operations of the Company, like those of other companies engaged in similar businesses, are subject to several laws and regulations on air and water quality, waste handling and disposal. The Company’s policy is to accrue for environmental costs when it is determined that it is probable that an obligation exists and the amount can be reasonably estimated.
F-43
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
16. Income Taxes
Income tax expense includes income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. Income tax expense consists of the following components:
| Years Ended 31 March | ||||||
|---|---|---|---|---|---|---|
| (Millions of US dollars) | 2020 | 2019 | 2018 | |||
| Income before income taxes: | ||||||
| Domestic | $ | 209.6 | $ | 196.4 | $ | 155.1 |
| Foreign | 78.4 | 104.2 | 19.2 | |||
| Income before income taxes: | $ | 288.0 | $ | 300.6 | $ | 174.3 |
| Income tax expense: | ||||||
| Current: | ||||||
| Domestic | $ | (31.1) | $ | (26.6) | $ | (14.8) |
| Foreign | 39.8 | (6.5) | (69.4) | |||
| Current income tax benefit (expense) | 8.7 | (33.1) | (84.2) | |||
| Deferred: | ||||||
| Domestic | (4.5) | (1.3) | (1.8) | |||
| Foreign | (50.7) | (37.4) | 57.8 | |||
| Deferred income tax (expense) benefit | (55.2) | (38.7) | 56.0 | |||
| Total income tax expense | $ | (46.5) | $ | (71.8) | $ | (28.2) |
Income tax expense computed at the statutory rates represents taxes on income applicable to all jurisdictions in which the Company conducts business, calculated at the statutory income tax rate in each jurisdiction multiplied by the pre-tax income attributable to that jurisdiction.
Income tax expense is reconciled to the tax at the statutory rates as follows:
| Years Ended 31 March | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| (Millions of US dollars) | 2020 | 2019 | 2018 | ||||||
| Income tax expense computed at the statutory tax rates | $ | (38.7) | $ | (48.9) | $ | (24.6) | |||
| US state income taxes, net of the federal benefit | (5.7) | (3.1) | (4.3) | ||||||
| Asbestos - effect of foreign exchange | 20.9 | 14.9 | (1.8) | ||||||
| Expenses not deductible | (7.4) | (4.9) | (4.7) | ||||||
| US manufacturing deduction | — | — | 2.5 | ||||||
| Foreign taxes on domestic income | (43.5) | (34.5) | (34.2) | ||||||
| Amortization of intangibles | — | — | 12.4 | ||||||
| Taxes on foreign income | 2.7 | 4.5 | (3.0) | ||||||
| Net deferred tax liability revaluation | (1.8) | 0.2 | 27.7 | ||||||
| US net operating loss carryback | 25.5 | — | — | ||||||
| Other items | 1.5 | — | 1.8 | ||||||
| Total income tax expense | $ | (46.5) | $ | (71.8) | $ | (28.2) | |||
| Effective tax rate | 16.1 | % | 23.9 | % | 16.2 | % |
F-44
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
Deferred tax balances consist of the following components:
| 31 March | ||||
|---|---|---|---|---|
| (Millions of US dollars) | 2020 | 2019 | ||
| Deferred tax assets: | ||||
| Intangible assets | $ | 1,126.4 | $ | 1,209.8 |
| Asbestos liability | 319.1 | 349.3 | ||
| Other provisions and accruals | 54.1 | 55.6 | ||
| Net operating loss carryforwards | 41.3 | 69.9 | ||
| Foreign and research tax credit carryforwards | 114.2 | 115.5 | ||
| Total deferred tax assets | 1,655.1 | 1,800.1 | ||
| Valuation allowance | (262.9) | (267.6) | ||
| Total deferred tax assets net of valuation allowance | 1,392.2 | 1,532.5 | ||
| Deferred tax liabilities: | ||||
| Depreciable and amortizable assets | (117.5) | (132.2) | ||
| Other | (48.1) | (38.5) | ||
| Total deferred tax liabilities | (165.6) | (170.7) | ||
| Total deferred taxes, net | $ | 1,226.6 | $ | 1,361.8 |
Deferred income taxes include net operating loss carry-forwards. At 31 March 2020, the Company had tax loss carry-forwards in Australia, Europe and the US of approximately US$41.3 million, that are available to offset future taxable income in the respective jurisdiction.
The Company establishes a valuation allowance against a deferred tax asset if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
At 31 March 2020, the Company had a valuation allowance of approximately US$2.3 million against a portion of the European net operating loss carry-forwards in respect of which realization is not more likely than not.
The Australian net operating loss carry-forwards primarily result from current and prior year tax deductions for contributions to AICF. James Hardie 117 Pty Limited, the performing subsidiary under the AFFA, is able to claim a tax deduction for its contributions to AICF over a five-year period commencing in the year the contribution is incurred. At 31 March 2020, the Company recognized a tax deduction of US$86.2 million (A$126.4 million) for the current year relating to total contributions to AICF of US$468.0 million (A$632.0 million) incurred in tax years 2016 through 2020.
At 31 March 2020, the Company had foreign tax credit carry-forwards of US$112.4 million and research credits of US$1.8 million that are available to offset future taxes payable. At 31 March 2020, the Company had a 100% valuation allowance against the foreign tax credit carry-forwards.
F-45
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
In determining the need for and the amount of a valuation allowance in respect of the Company’s asbestos related deferred tax asset, management reviewed the relevant empirical evidence, including the current and past core earnings of the Australian business and forecast earnings of the Australian business considering current trends. Although realization of the deferred tax asset will occur over the life of the AFFA, which extends beyond the forecast period for the Australian business, Australia provides an unlimited carry-forward period for tax losses. Based upon managements’ review, the Company believes that it is more likely than not that the Company will realize its asbestos related deferred tax asset and that no valuation allowance is necessary as of 31 March 2020. In the future, based on review of the empirical evidence by management at that time, if management determines that realization of its asbestos related deferred tax asset is not more likely than not, the Company may need to provide a valuation allowance to reduce the carrying value of the asbestos related deferred tax asset to its realizable value.
Income taxes payable represents taxes currently payable which are computed at statutory income tax rates applicable to taxable income derived in each jurisdiction in which the Company conducts business.
At 31 March 2020, the Company had income taxes payable of US$30.2 million, prepaid or refundable income taxes of US$85.5 million and total income tax and withholding tax paid, net of refunds received, during the fiscal year ended 31 March 2020 of US$52.5 million.
The US Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in March 2020 providing wide ranging economic relief for individuals and businesses. One component of the CARES Act provides the Company with an opportunity to carryback US net operating losses (“NOLs”) arising during the years ended 31 March 2019 and 2020 to the prior five tax years. The Company has previously valued its NOLs at the US federal corporate income tax rate of 21%. However, the provisions of the CARES Act provide for NOL carryback claims to be calculated based on a rate of 35%, which was the US federal corporate tax rate in effect in the carryback years. The Company intends to utilize these carryback provisions to obtain an estimated refund of US$87.6 million. During the quarter ended 31 March 2020 the Company recorded current taxes receivable of US$84.7 million, a reduction of US$2.9 million in non-current taxes payable associated with the deferred deemed repatriation tax and an income tax benefit of US$25.5 million resulting from tax losses being utilized at the higher US federal corporate tax rate applying in the carryback years. The impact of the CARES Act on the Company’s future earnings is currently uncertain and no adjustments have been made to other deferred tax assets.
Due to the size and nature of its business, the Company is subject to ongoing reviews by taxing jurisdictions on various tax matters. The Company accrues for tax contingencies based upon its best estimate of the taxes ultimately expected to be paid, which it updates over time as more information becomes available. Such amounts are included in taxes payable or other non-current liabilities, as appropriate. If the Company ultimately determines that payment of these amounts is unnecessary, the Company reverses the liability and recognizes a tax benefit during the period in which the Company determines that the liability is no longer necessary. The Company records additional tax expense in the period in which it determines that the recorded tax liability is less than the ultimate assessment it expects.
The Company or its subsidiaries files income tax returns in various jurisdictions including Ireland, the United States, Australia and various jurisdictions in Europe and Asia Pacific. The Company is no longer subject to examinations in Ireland and Australia for tax years prior to tax year 2016 and in the US for tax years prior to tax year 2017.
F-46
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
Taxing authorities from various jurisdictions in which the Company operates are in the process of reviewing and auditing the Company’s respective jurisdictional tax returns for various ranges of years. The Company accrues tax liabilities in connection with ongoing audits and reviews based on knowledge of all relevant facts and circumstances, taking into account existing tax laws, its experience with previous audits and settlements, the status of current tax examinations and how the tax authorities view certain issues.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of unrecognized tax benefits and interest and penalties are as follows:
| (Millions of US Dollars) | Unrecognized<br>tax benefits | Interest and<br>Penalties | ||
|---|---|---|---|---|
| Balance at 31 March 2017 | $ | 0.7 | $ | — |
| Additions for tax positions of the current and prior year | — | — | ||
| Balance at 31 March 2018 | $ | 0.7 | $ | — |
| Additions for tax positions of the current year | 0.1 | 0.1 | ||
| Reductions applicable to lapse of statute of limitations | (0.2) | — | ||
| Balance at 31 March 2019 | $ | 0.6 | $ | 0.1 |
| Additions for tax positions of the prior years | 0.1 | — | ||
| Balance at 31 March 2020 | $ | 0.7 | $ | 0.1 |
At 31 March 2020, the total amount of unrecognized tax benefits and the total amount of interest and penalties accrued by the Company that, if recognized, would affect the effective tax rate is US$0.7 million and US$0.1 million, respectively
The Company recognizes penalties and interest accrued related to unrecognized tax benefits in Income tax expense. During the fiscal years ended 31 March 2020, 2019 and 2018, expense of nil, US$0.1 million and nil, respectively, relating to interest and penalties was recognized within income tax expense arising from movements in unrecognized tax benefits. The liabilities associated with uncertain tax benefits are included in Other liabilities on the Company’s consolidated balance sheets.
Several years may elapse before an uncertain tax position is audited or ultimately resolved. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months. These changes could result from the completion of ongoing examinations, the expiration of the statute of limitations, or other circumstances. At this time, an estimate of the range of the reasonably possible change cannot be made.
F-47
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
17. Stock-Based Compensation
Total stock-based compensation expense consists of the following:
| Years Ended 31 March | ||||||
|---|---|---|---|---|---|---|
| (Millions of US dollars) | 2020 | 2019 | 2018 | |||
| Liability Awards Expense (Income) | $ | 2.8 | $ | (0.6) | $ | 5.6 |
| Equity Awards Expense | 10.3 | 12.5 | 11.1 | |||
| Total stock-based compensation expense | $ | 13.1 | $ | 11.9 | $ | 16.7 |
As of 31 March 2020, the unrecorded future stock-based compensation expense related to outstanding equity awards was US$9.7 million and will be recognized over an estimated weighted average amortization period of 1.9 years.
2001 Equity Incentive Plan
Under the Company’s 2001 Equity Incentive Plan (the “2001 Plan”), the Company can grant equity awards in the form of nonqualified stock options, performance awards, restricted stock grants, stock appreciation rights, dividend equivalent rights, phantom stock or other stock-based benefits such as restricted stock units. The 2001 Plan was first approved by the Company’s shareholders in 2001 and was reapproved to continue until September 2021 at the 2011 Annual General Meeting. The Company is authorized to issue 45,077,100 shares under the 2001 Plan.
Under the 2001 Plan, grants have been made at fair market value to management and other employees of the Company. Each grant confers the right to subscribe for one ordinary share in the capital of JHI plc. Outstanding restricted stock units generally vest as follows: 25% at the first anniversary date of the grant; 25% at the second anniversary date of the grant; and 50% at the third anniversary date of the grant.
Restricted stock units may not be sold, transferred, assigned, pledged or otherwise encumbered so long as such units remain restricted. The Company determines the conditions or restrictions of any restricted stock units, which include requirements of continued employment. At 31 March 2020, there were 520,632 restricted stock units outstanding under this plan.
Long-Term Incentive Plan 2006
At the 2006 Annual General Meeting, the Company’s shareholders approved the establishment of a Long-Term Incentive Plan 2006 (the “LTIP”) to provide incentives to certain members of senior management (“Executives”). The shareholders also approved, in accordance with certain LTIP rules, the issue of options in the Company to executives of the Company. At the Company’s 2008 Annual General Meeting, the shareholders amended the LTIP to also allow restricted stock units to be granted under the LTIP. The LTIP was re-approved by the Company’s shareholders with certain amendments at each of the 2008, 2012, 2015 and 2018 Annual General Meetings.
As of 31 March 2020, the Company had granted 14,347,871 restricted stock units under the LTIP. These restricted stock units may not be sold, transferred, assigned, pledged or otherwise encumbered so long as such units remain restricted. The Company determines the conditions or restrictions of any restricted stock awards, which may include requirements of continued employment, individual performance or the Company’s financial performance or other criteria. Restricted stock units either vest or expire as set out in the grant documents or LTIP rules. At 31 March 2020, there were 2,641,805 restricted stock units outstanding under the LTIP.
F-48
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
The following table summarizes the Company’s shares available for grant as options, restricted stock units or other equity instruments under the LTIP and 2001 Plan at 31 March 2020, 2019 and 2018:
| Shares<br>Available for<br>Grant | |
|---|---|
| Balance at 31 March 2018 | 25,458,910 |
| Granted | (1,714,094) |
| Balance at 31 March 2019 | 23,744,816 |
| Granted | (800,437) |
| Balance at 31 March 2020 | 22,944,379 |
Restricted Stock Units
The Company estimates the fair value of restricted stock units on the date of grant and recognizes this estimated fair value as compensation expense over the periods in which the restricted stock vests.
The following table summarizes the Company’s restricted stock unit activity during the noted period:
| Restricted<br>Stock Units | Weighted<br>Average Fair<br>Value at Grant<br>Date (A$) | |
|---|---|---|
| Non-vested at 31 March 2018 | 4,137,592 | 14.63 |
| Granted | 1,714,094 | 14.12 |
| Vested | (745,787) | 15.53 |
| Forfeited | (844,391) | 13.71 |
| Non-vested at 31 March 2019 | 4,261,508 | 14.47 |
| Granted | 800,437 | 18.08 |
| Vested | (874,835) | 16.21 |
| Forfeited | (1,024,673) | 15.21 |
| Non-vested at 31 March 2020 | 3,162,437 | 14.64 |
Restricted Stock Units – service vesting
During fiscal year 2020 and 2019, 24,006 and 617,793 restricted stock units (service vesting) were granted to employees under the 2001 Plan, respectively. The fair value of each restricted stock unit (service vesting) is equal to the market value of the Company’s common stock on the date of the grant, adjusted for the fair value of estimated dividends as the restricted stock unit holder is not entitled to dividends over the vesting period.
During fiscal year 2020 and 2019, 304,591 and 242,964 restricted stock units (service vesting) that were previously granted as part of the 2001 Plan became fully vested and the underlying common stock was issued, respectively.
F-49
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
Restricted Stock Units – performance vesting
Under the terms of the LTIP, in fiscal year 2020 and 2019, the Company granted to senior executives and managers of the Company 273,258 units and 383,182 units, respectively. The vesting of the restricted stock units is subject to a return on capital employed (“ROCE”) performance hurdle being met and is subject to negative discretion by the Board. The Board’s discretion will reflect the Board’s judgment of the quality of the returns balanced against management’s delivery of market share growth and a scorecard of key qualitative and quantitative performance objectives. During fiscal year 2020, after exercise of negative discretion by the Board, 207,271 restricted stock units (performance vesting) that were granted in fiscal year 2017 as part of the long-term incentive award became fully vested and the underlying common stock was issued. The remaining 169,816 unvested restricted stock units from this grant were cancelled.
When the Board reviews the awards and determines whether any negative discretion should be applied at the vesting date, the award recipients may receive all, some, or none of their awards. The Board may only exercise negative discretion and may not enhance the maximum award that was originally granted to the award recipient.
The fair value of each restricted stock unit (performance vesting) is adjusted for changes in JHI plc’s common stock price at each balance sheet date and for the fair value of estimated dividends as the restricted stock unit holder is not entitled to dividends over the vesting period until the performance conditions are applied at the vesting date.
Restricted Stock Units – market condition
Under the terms of the LTIP, the Company granted restricted stock units (market condition) to senior executives and managers of the Company during fiscal years 2020 and 2019. The vesting of these restricted stock units is subject to a market condition as outlined in the relevant notice of meeting. The fair value of each of these restricted stock units (market condition) granted under the LTIP is estimated using a binomial lattice model that incorporates a Monte Carlo simulation (the “Monte Carlo” method).
The following table includes the assumptions used for restricted stock grants (market condition) valued during the fiscal years ended 31 March 2020 and 2019, respectively:
| Vesting Condition: | Market | Market | Market | Market | Market | |||||
|---|---|---|---|---|---|---|---|---|---|---|
| FY20 | FY20 | FY20 | FY19 | FY19 | ||||||
| Date of grant^1^ | 25 Feb 2020 | 20 Sep 2019 | 9 Aug 2019 | 6 Sep 2018 | 17 Aug 2018 | |||||
| Dividend yield (per annum) | 2.9 | % | 3.1 | % | 3.1 | % | 3.0 | % | 3.0 | % |
| Expected volatility | 26.6 | % | 26.6 | % | 27.8 | % | 26.8 | % | 28.1 | % |
| Risk free interest rate | 1.2 | % | 1.6 | % | 1.6 | % | 2.7 | % | 2.7 | % |
| Expected life in years | 2.5 | 2.9 | 2.0 | 2.9 | 3.0 | |||||
| JHX stock price at grant date (A$) | 29.54 | 24.69 | 21.68 | 20.87 | 22.00 | |||||
| Number of restricted stock units | 6,676 | 477,979 | 18,518 | 49,381 | 663,738 |
____________
| 1 | The Company determines the grant date of an award on the date a mutual understanding of the key terms and conditions of the award are established between the Company and the award recipient. |
|---|
F-50
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
During fiscal year 2020, 362,973 restricted stock units (market condition) that were previously granted became fully vested and the underlying common stock was issued. During fiscal year 2019, 218,473 restricted stock units (market condition) that were previously granted became fully vested and the underlying common stock was issued.
Scorecard LTI – cash settled units
Under the terms of the LTIP, in fiscal year 2020 and 2019, the Company granted scorecard LTI cash settled units of 791,217 and 1,178,109, respectively. These awards provide recipients a cash incentive based on an average 20 trading-day closing price of JHI plc’s common stock price and each executive’s scorecard rating. The vesting of awards is measured on individual performance conditions based on certain performance measures. Compensation expense recognized for awards are based on the fair market value of JHI plc’s common stock on the date of grant and recorded as a liability. The expense is recognized ratably over the vesting period and the liability is adjusted for subsequent changes in JHI plc’s common stock price at each balance sheet date adjusted for the fair value of estimated dividends as the restricted stock unit holder is not entitled to dividends over the vesting period.
In fiscal year 2020, 129,549 of the 458,484 Scorecard LTI units that were previously granted in fiscal year 2017 as part of the long-term incentive award became fully vested and the balance cancelled as a result of the Board’s determination of management’s performance against the FY2017-19 Scorecard. The cash amount paid to award recipients was based on an average 20 trading-day closing price of JHI plc’s common stock price
In fiscal year 2019, 153,667 of the 456,995 Scorecard LTI units that were previously granted in fiscal year 2016 as part of the long-term incentive award became fully vested and the balance cancelled as a result of the Board’s determination of management’s performance against the FY2016-18 Scorecard. The cash amount paid to award recipients was based on an average 20 trading-day closing price of JHI plc’s common stock price.
18. Capital Management and Dividends
The following table summarizes the dividends declared or paid during the fiscal years 2020, 2019 and 2018:
| (Millions of US dollars) | US$ Millions<br>Total Amount | Announcement Date | Record Date | Payment Date |
|---|---|---|---|---|
| FY 2020 first half dividend 1 | 44.7 | 7 November 2019 | 18 November 2019 | 20 December 2019 |
| FY 2019 second half dividend | 113.9 | 21 May 2019 | 6 June 2019 | 2 August 2019 |
| FY 2019 first half dividend | 43.6 | 8 November 2018 | 12 December 2018 | 22 February 2019 |
| FY 2018 second half dividend | 128.5 | 22 May 2018 | 7 June 2018 | 3 August 2018 |
| FY 2018 first half dividend | 46.2 | 9 November 2017 | 13 December 2017 | 23 February 2018 |
| FY 2017 second half dividend | 131.3 | 18 May 2017 | 8 June 2017 | 4 August 2017 |
| 1 Includes US2.8 million of withholding taxes paid on 10 January 2020 |
All values are in US Dollars.
F-51
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
19. Operating Segment Information and Concentrations of Risk
The Company has reported its operating segment information in the format that the operating segment information is available to and evaluated by the CODM. The North America Fiber Cement segment manufactures fiber cement interior linings, exterior siding products and related accessories in the United States; these products are sold in the United States and Canada. The Asia Pacific Fiber Cement segment includes all fiber cement products manufactured in Australia, New Zealand and the Philippines, and sold in Australia, New Zealand, Asia, the Middle East and various Pacific Islands. The Europe Building Products segment includes the newly acquired Fermacell business and fiber cement product manufactured in the United States that is sold in Europe. The Other Businesses segment ceased to be an operating and reportable segment effective 31 March 2020 due to the Company's completion of its exit of its non-fiber cement manufacturing and sales activities in North America, including fiberglass windows. The Research and Development segment represents the cost incurred by the research and development centers. General Corporate costs primarily consist of Asbestos adjustments, officer and employee compensation and related benefits, professional and legal fees, administrative costs and rental expense, net of rental income, on the Company’s corporate offices.
Operating Segments
The following is the Company’s operating segment information:
| Net Sales<br>Years Ended 31 March | ||||||
|---|---|---|---|---|---|---|
| (Millions of US dollars) | 2020 | 2019 | 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 | |||
| Worldwide total | $ | 2,606.8 | $ | 2,506.6 | $ | 2,054.5 |
| Income Before Income Taxes<br>Years Ended 31 March | ||||||
| (Millions of US dollars) | 2020 | 2019 | 2018 | |||
| North America Fiber Cement^1^ | $ | 429.3 | $ | 382.5 | $ | 381.9 |
| Asia Pacific Fiber Cement^1^ | 58.5 | 99.8 | 108.1 | |||
| Europe Building Products^1,8^ | 11.2 | 10.0 | 0.3 | |||
| Other Businesses | — | (30.9) | (8.6) | |||
| Research and Development^1^ | (27.0) | (29.0) | (27.8) | |||
| Segments total | 472.0 | 432.4 | 453.9 | |||
| General Corporate^2,7^ | (129.5) | (80.8) | (224.7) | |||
| Total operating income | 342.5 | 351.6 | 229.2 | |||
| Net interest expense^3^ | (54.4) | (50.1) | (29.5) | |||
| Loss on early debt extinguishment | — | (1.0) | (26.1) | |||
| Other (expense) income | (0.1) | 0.1 | 0.7 | |||
| Worldwide total | $ | 288.0 | $ | 300.6 | $ | 174.3 |
F-52
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
| Depreciation and Amortization<br><br>Years ended 31 March | ||||||
|---|---|---|---|---|---|---|
| (Millions of US dollars) | 2020 | 2019 | 2018 | |||
| North America Fiber Cement | $ | 88.7 | $ | 80.2 | $ | 72.5 |
| Asia Pacific Fiber Cement | 12.7 | 12.8 | 12.6 | |||
| Europe Building Products | 25.6 | 18.7 | 0.1 | |||
| Other Businesses | 0.2 | 2.3 | 2.1 | |||
| General Corporate | 3.2 | 4.3 | 3.3 | |||
| Research and Development | 1.1 | 1.1 | 1.4 | |||
| Total | $ | 131.5 | $ | 119.4 | $ | 92.0 |
| Total Identifiable Assets<br>31 March | ||||||
| --- | --- | --- | --- | --- | ||
| (Millions of US dollars) | 2020 | 2019 | ||||
| North America Fiber Cement | $ | 1,320.0 | $ | 1,280.2 | ||
| Asia Pacific Fiber Cement | 314.3 | 328.8 | ||||
| Europe Building Products | 748.5 | 717.7 | ||||
| Other Businesses^4^ | — | 10.9 | ||||
| Research and Development | 8.6 | 8.1 | ||||
| Segments total | 2,391.4 | 2,345.7 | ||||
| General Corporate ^4,5,6^ | 1,636.9 | 1,686.9 | ||||
| Worldwide total | $ | 4,028.3 | $ | 4,032.6 |
The following is the Company’s geographical information:
| Net Sales<br>Years Ended 31 March | ||||||
|---|---|---|---|---|---|---|
| (Millions of US dollars) | 2020 | 2019 | 2018 | |||
| North America^10^ | $ | 1,817.0 | $ | 1,691.5 | $ | 1,592.8 |
| Australia | 290.4 | 315.1 | 301.1 | |||
| Germany | 135.7 | 137.1 | 2.1 | |||
| New Zealand | 72.2 | 79.1 | 76.8 | |||
| Other Countries^9^ | 291.5 | 283.8 | 81.7 | |||
| Worldwide total | $ | 2,606.8 | $ | 2,506.6 | $ | 2,054.5 |
| Total Identifiable Assets<br>31 March | ||||||
| (Millions of US dollars) | 2020 | 2019 | ||||
| North America^10^ | $ | 1,324.8 | $ | 1,294.6 | ||
| Australia | 220.0 | 235.4 | ||||
| Germany | 519.3 | 512.3 | ||||
| New Zealand | 32.4 | 39.2 | ||||
| Other Countries^9^ | 294.9 | 264.2 | ||||
| Segments total | 2,391.4 | 2,345.7 | ||||
| General Corporate^5,6^ | 1,636.9 | 1,686.9 | ||||
| Worldwide total | $ | 4,028.3 | $ | 4,032.6 |
____________
F-53
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
1Research and development expenditures are expensed as incurred and are summarized by segment in the following table:
| Years Ended 31 March | ||||||
|---|---|---|---|---|---|---|
| (Millions of US dollars) | 2020 | 2019 | 2018 | |||
| North America Fiber Cement | $ | 5.3 | $ | 6.5 | $ | 6.1 |
| Asia Pacific Fiber Cement | 1.8 | 2.1 | 1.8 | |||
| Europe Building Products | 1.7 | 2.6 | — | |||
| Research and Development^a^ | 24.0 | 26.7 | 25.4 | |||
| $ | 32.8 | $ | 37.9 | $ | 33.3 |
^a^ The Research and Development segment also included Selling, general and administrative expenses of US$3.0 million, US$2.3 million and US$2.4 million in fiscal years 2020, 2019 and 2018, respectively.
2The principal components of General Corporate costs are officer and employee compensation and related benefits, professional and legal fees, administrative costs, and rental expense on the Company’s corporate offices. Also included in General Corporate costs are the following:
| Years Ended 31 March | ||||||
|---|---|---|---|---|---|---|
| (Millions of US dollars) | 2020 | 2019 | 2018 | |||
| Asbestos adjustments | $ | (58.2) | $ | (22.0) | $ | (156.4) |
| AICF SG&A expenses | (1.7) | (1.5) | (1.9) | |||
| Gain on sale of Fontana building | — | — | 3.4 | |||
| Fermacell acquisition costs | — | — | 10.0 |
3The Company does not report net interest expense for each operating segment as operating segments are not held directly accountable for interest expense. Included in net interest expense is net AICF interest income of US$1.4 million, US$2.0 million and US$1.9 million in fiscal years 2020, 2019 and 2018, respectively.
4Assets held for sale at 31 March 2020 and 2019 are US$0.4 million in General Corporate costs and US$5.8 million in the Other Businesses segment, respectively. During the fiscal year ended 31 March 2020, US$5.4 million of assets previously classified as held for sale in the Other Businesses segment were disposed.
5Included in General Corporate costs are deferred tax assets for each operating segment that are not held directly accountable for deferred income taxes.
6Asbestos-related assets at 31 March 2020 and 2019 are US$443.9 million and US$486.8 million, respectively, and are included in the General Corporate costs.
7Included in the General Corporate costs are New Zealand weathertightness legal costs of US$1.9 million, US$3.3 million and nil for the fiscal years ended 31 March 2020, 2019 and 2018, respectively.
8Included in the Europe Building Products segment are Fermacell integration costs of US$13.7 million for the fiscal year ended 31 March 2020. Included in the Europe Building Products segment are Fermacell transaction and integration costs of US$21.8 million and the amortization of the inventory fair value adjustment of US$7.3 million for the fiscal year ended 31 March 2019.
9Included are all other countries that account for less than 5% of net sales and total identifiable assets individually, primarily in the Philippines, Switzerland and other European countries.
10The amounts disclosed for North America are substantially all related to the USA.
F-54
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
The following represents the Asset impairments by segment for the fiscal year ended 31 March 2020:
| (Millions of US dollars) | Asia Pacific Fiber Cement | Europe Building Products | General Corporate | Total | |||||
|---|---|---|---|---|---|---|---|---|---|
| Property, plant and equipment 1 | 41.2 | $ | 15.0 | $ | 5.5 | $ | — | $ | 61.7 |
| Right-of-use assets 2 | 11.2 | — | — | 11.2 | |||||
| Intangible assets | — | — | 1.4 | 1.4 | |||||
| Inventories 3 | 2.9 | — | — | 2.9 | |||||
| Goodwill | 0.2 | — | — | 0.2 | |||||
| Asset Retirement Obligations 4 | 5.8 | — | — | 5.8 | |||||
| Other | 1.2 | — | — | 1.2 | |||||
| 41.2 | $ | 36.3 | $ | 5.5 | $ | 1.4 | $ | 84.4 | |
| 1 Excludes US2.8 million of impairment charges in North America Fiber Cement segment on individual assets that were included in Cost of goods sold. Refer to Note 8 for further details. | |||||||||
| 2 Refer to Note 9 for further details. | |||||||||
| 3 The US2.9 million charge primarily relates to the estimated costs associated with pallets and raw materials, with the closing of the New Zealand plant and exit of James Hardie Systems. | |||||||||
| 4 The total Asset Retirement Obligation balance at 31 March 2020 of US8.0 million is recorded in the Asia Pacific Fiber Cement segment in Other liabilities - non-current and relates to the New Zealand plant. This balance is inclusive of the impairment amount above. |
All values are in US Dollars.
Concentrations of Risk
The distribution channels for the Company’s fiber cement products are concentrated. If the Company were to lose one or more of its major customers, there can be no assurance that the Company will be able to find a replacement. Therefore, the loss of one or more customers could have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows.
The Company has one customer who contributes greater than 10% of net sales in each of the past three fiscal years. This customer’s accounts receivable represented 6.0% and 8.5% of the Company’s accounts receivable at 31 March 2020 and 2019, respectively. The following is net sales generated by this customer, which is from the North America Fiber Cement segment:
| Years Ended 31 March | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Millions of US dollars) | 2020 | 2019 | 2018 | ||||||||||
| Customer A | $ | 306.0 | 12.0 | % | $ | 260.5 | 10.4 | % | $ | 246.9 | 12.0 | % |
Approximately 34%, 36% and 22% of the Company’s net sales in fiscal year 2020, 2019 and 2018, respectively, were from outside the United States. Consequently, changes in the value of foreign currencies could significantly affect the consolidated financial position, results of operations and cash flows of the Company’s non-US operations on translation into US dollars.
F-55
James Hardie Industries plc
Notes to Consolidated Financial Statements (continued)
20. Accumulated Other Comprehensive Gain (Loss)
Accumulated other comprehensive gain (loss) is comprised of the following at 31 March 2020:
| (Millions of US dollars) | Cash Flow<br>Hedges | Pension<br>Actuarial Gain | Foreign<br>Currency<br>Translation<br>Adjustments | Total | ||||
|---|---|---|---|---|---|---|---|---|
| Balance at 31 March 2019 | $ | 0.2 | $ | — | $ | (30.5) | $ | (30.3) |
| Other comprehensive gain (loss) | — | 0.8 | (32.6) | (31.8) | ||||
| Balance at 31 March 2020 | $ | 0.2 | $ | 0.8 | $ | (63.1) | $ | (62.1) |
- Employee Benefit Plan
In the United States, the Company sponsors a defined contribution plan, the James Hardie Retirement and Profit Sharing Plan (the “401(k) Plan”) which is a tax-qualified retirement and savings plan covering all US employees, including the Senior Executive Officers, subject to certain eligibility requirements. In addition, the Company matches employee's contributions dollar for dollar up to a maximum of the first 6% of an employee’s eligible compensation.
For the fiscal years ended 31 March 2020, 2019 and 2018, the Company made matching contributions of US$11.1 million, US$10.6 million and US$10.4 million, respectively.
F-56
Document
| Media Release<br><br>15 May 2020 |
|---|
Exhibit 99.7
James Hardie Announces Appointment of New Non-Executive Directors and Non-Executive Director Retirement
The Board of James Hardie Industries plc (James Hardie) has appointed Nigel Stein and Harold Wiens as independent non-executive directors of James Hardie effective 14 May 2020.
Mr Stein has extensive experience in the global automotive and manufacturing sectors. He currently serves as Chairman of Inchcape plc (Inchcape), an automotive distribution, retail and financing company, a position he has held since May 2018. Mr Stein joined Inchcape as a non-executive director in October 2015. Prior to holding this position, Mr Stein served as Chief Executive Officer of GKN plc (GKN) from January 2012 to December 2017. He joined the automotive and aerospace components supplier in 1994 and during his time with GKN held various senior positions in general management and finance including six years as Group Chief Financial Officer. Earlier in his career, Mr Stein held senior finance positions with Laird plc and Hestair plc. From 2003 until 2011, he served as an independent non-executive director on the Board of Ferguson (formerly Wolseley) plc, the leading specialist distributor of plumbing and heating products in North America and the UK. Mr Stein is a member of the Institute of Chartered Accountants of Scotland and Industry Chairman of Automotive Council. He is a resident of the United Kingdom.
Mr Wiens worked at 3M Company (3M) for thirty-eight years. He served as Executive Vice President, Industrial Business and Transportation Business from 1998 until his retirement from 3M in 2006. It is 3M’s largest and most diverse business serving many different end markets ranging from electronic to automotive and aerospace manufacturing. During this time, Mr Wiens restructured the business, leading a global implementation of Six Sigma that drove significant international growth. Prior to holding this position, Mr Wiens served as Executive Vice President, Sumitomo 3M, 3M’s largest subsidiary, headquartered in Tokyo, Japan, from 1995 to 1998 and served as Data Storage Business Leader and Vice President from 1988 to 1995 and as Memory Technologies Group Manufacturing Manager from 1983 to 1988. Mr Wiens began his career with 3M in 1968 and held many positions of increasing responsibility over his first fifteen years with 3M. He is a resident of the United States.
Commenting on the appointments, Michael Hammes, Chairman of James Hardie, said “I am delighted that Nigel and Harold have agreed to join our Board. Nigel brings significant international, manufacturing and financial experience, while Harold brings a wealth of experience with proven results in driving global business growth with a strong focus on operational excellence. They will both be valuable additions to the Board.
James Hardie also announces that Brian Anderson will retire as a non-executive director with effect from the conclusion of the Annual General Meeting of the Company on 7 August 2020.
This media release has been authorized by the James Hardie Board of Directors
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Investor / Analyst Enquires: Anna Collins
Telephone: +61 2 8845 3356
Email: media@jameshardie.com.au
James Hardie Industries plc is a limited liability company incorporated in Ireland with its registered office at Europa House, 2^nd^ Floor, Harcourt Centre, Harcourt Street, Dublin 2, D02 WR20, Ireland.
Forward Looking Statements
This Media Release contains forward-looking statements. James Hardie Industries plc (the “Company”) may from time to time make forward-looking statements in its periodic reports filed with or furnished to the Securities and Exchange Commission, on Forms 20-F and 6-K, in its annual reports to shareholders, in offering circulars, invitation memoranda and prospectuses, in media releases and other written materials and in oral statements made by the Company’s officers, directors or employees to analysts, institutional investors, existing and potential lenders, representatives of the media and others. Statements that are not historical facts are forward-looking statements and such forward-looking statements are statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
Examples of forward-looking statements include:
•statements about the Company’s future performance;
•projections of the Company’s results of operations or financial condition;
•statements regarding the Company’s plans, objectives or goals, including those relating to strategies, initiatives, competition, acquisitions, dispositions and/or its products;
•expectations concerning the costs associated with the suspension or closure of operations at any of the Company’s plants and future plans with respect to any such plants;
•expectations concerning the costs associated with the significant capital expenditure projects at any of the Company’s plants and future plans with respect to any such projects;
•expectations regarding the extension or renewal of the Company’s credit facilities including changes to terms, covenants or ratios;
•expectations concerning dividend payments and share buy-backs;
•statements concerning the Company’s corporate and tax domiciles and structures and potential changes to them, including potential tax charges;
•uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark;
•statements regarding the effect and consequences of the novel coronavirus ("COVID-19") public health crisis;
•statements regarding tax liabilities and related audits, reviews and proceedings;
•statements regarding the possible consequences and/or potential outcome of legal proceedings brought against us and the potential liabilities, if any, associated with such proceedings;
•expectations about the timing and amount of contributions to Asbestos Injuries Compensation Fund (AICF), a special purpose fund for the compensation of proven Australian asbestos-related personal injury and death claims;
•expectations concerning the adequacy of the Company’s warranty provisions and estimates for future warranty-related costs;
•statements regarding the Company’s ability to manage legal and regulatory matters (including but not limited to product liability, environmental, intellectual property and competition law matters) and to resolve any such pending legal and regulatory matters within current estimates and in anticipation of certain third-party recoveries; and
•statements about economic conditions, such as changes in the US economic or housing recovery or changes in the market conditions in the Asia Pacific region, the levels of new home construction and home renovations, unemployment levels, changes in consumer income, changes or stability in housing values,
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the availability of mortgages and other financing, mortgage and other interest rates, housing affordability and supply, the levels of foreclosures and home resales, currency exchange rates, and builder and consumer confidence.
Words such as “believe,” “anticipate,” “plan,” “expect,” “intend,” “target,” “estimate,” “project,” “predict,” “forecast,” “guideline,” “aim,” “will,” “should,” “likely,” “continue,” “may,” “objective,” “outlook” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Readers are cautioned not to place undue reliance on these forward-looking statements and all such forward-looking statements are qualified in their entirety by reference to the following cautionary statements.
Forward-looking statements are based on the Company’s current expectations, estimates and assumptions and because forward-looking statements address future results, events and conditions, they, by their very nature, involve inherent risks and uncertainties, many of which are unforeseeable and beyond the Company’s control. Such known and unknown risks, uncertainties and other factors may cause actual results, performance or other achievements to differ materially from the anticipated results, performance or achievements expressed, projected or implied by these forward-looking statements. These factors, some of which are discussed under “Risk Factors” in Section 3 of the Form 20-F filed with the Securities and Exchange Commission on 21 May 2019 and subsequently amended on 8 August 2019, include, but are not limited to: all matters relating to or arising out of the prior manufacture of products that contained asbestos by current and former Company subsidiaries; required contributions to AICF, any shortfall in AICF and the effect of currency exchange rate movements on the amount recorded in the Company’s financial statements as an asbestos liability; the continuation or termination of the governmental loan facility to AICF; compliance with and changes in tax laws and treatments; competition and product pricing in the markets in which the Company operates; the consequences of product failures or defects; exposure to environmental, asbestos, putative consumer class action or other legal proceedings; general economic and market conditions; the supply and cost of raw materials; possible increases in competition and the potential that competitors could copy the Company’s products; reliance on a small number of customers; a customer’s inability to pay; compliance with and changes in environmental and health and safety laws; risks of conducting business internationally; compliance with and changes in laws and regulations; currency exchange risks; dependence on customer preference and the concentration of the Company’s customer base on large format retail customers, distributors and dealers; dependence on residential and commercial construction markets; the effect of adverse changes in climate or weather patterns; possible inability to renew credit facilities on terms favorable to the Company, or at all; acquisition or sale of businesses and business segments; changes in the Company’s key management personnel; inherent limitations on internal controls; use of accounting estimates; the integration of Fermacell into our business; risk and uncertainties arising out of the COVID-19 public health crisis, including the likely significant negative impact of COVID-19 on our business, sales, results of operations and financial condition and all other risks identified in the Company’s reports filed with Australian, Irish and US securities regulatory agencies and exchanges (as appropriate). The Company cautions you that the foregoing list of factors is not exhaustive and that other risks and uncertainties may cause actual results to differ materially from those referenced in the Company’s forward-looking statements. Forward-looking statements speak only as of the date they are made and are statements of the Company’s current expectations concerning future results, events and conditions. The Company assumes no obligation to update any forward-looking statements or information except as required by law.
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ex998kpmgactuarialmarchf
Exhibit 99.8 Valuation of Asbestos- Related Disease Liabilities of former James Hardie entities (“the Liable Entites”) to be met by the AICF Trust Prepared for Asbestos Injuries Compensation Fund Limited (“AICFL”) As at 31 March 2020 19 May 2020
KPMG Actuarial ABN: 91 144 686 046 A division of KPMG Financial Services Consulting Pty Ltd Telephone: +61 2 9335 7000 Australian Financial Services Licence No. 392050 Facsimile: +61 2 9335 7001 International Towers Sydney 3 DX: 1056 Sydney 300 Barangaroo Ave www.kpmg.com.au Sydney NSW 2000 PO Box H67 Australia Square NSW 1215 Australia 19 May 2020 Narreda Grimley Chief Operations Officer Asbestos Injuries Compensation Fund Limited Suite 202, Level 2, 56 Clarence Street Sydney NSW 2000 Cc Jason Miele, Chief Financial Officer, James Hardie Industries plc Mark Hare, Director, Department of Premier and Cabinet, The State of New South Wales The Board of Directors, Asbestos Injuries Compensation Fund Limited Dear Narreda Valuation of Asbestos-Related Disease Liabilities of former James Hardie entities (“The Liable Entities”) to be met by the AICF Trust We are pleased to provide you with our Annual Actuarial Report relating to the asbestos-related disease liabilities of the Liable Entities which are to be met by the AICF Trust. The report is effective as at 31 March 2020 and has taken into account claims data and information provided to us by AICFL as at 31 March 2020. If you have any questions with respect to the contents of this report, please do not hesitate to contact us. Yours sincerely Neil Donlevy MA FIA FIAA Jefferson Gibbs BSc FIA FIAA Executive, KPMG Financial Services Executive, KPMG Financial Services Consulting Pty Ltd Consulting Pty Ltd Fellow of the Institute of Actuaries (London) Fellow of the Institute of Actuaries (London) Fellow of the Institute of Actuaries of Fellow of the Institute of Actuaries of Australia Australia © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Executive Summary Important Note: Basis of Report This valuation report (“the Report”) has been prepared by KPMG Actuarial, a division of KPMG Financial Services Consulting Pty Ltd (ABN 91 144 686 046) (hereafter collectively referred to as “KPMG”) in accordance with an “Amended and Restated Final Funding Agreement in respect of the provision of long-term funding for compensation arrangements for certain victims of Asbestos-related diseases in Australia” (hereafter referred to as the “the Amended Final Funding Agreement”) between James Hardie Industries NV (now known as James Hardie Industries plc) (hereafter referred to as “James Hardie”), James Hardie 117 Pty Limited, the State of New South Wales and Asbestos Injuries Compensation Fund Limited (“AICFL”) which was signed on 21 November 2006. This Report is intended to meet the requirements of the Amended Final Funding Agreement and values the asbestos-related disease liabilities of the Liable Entities to be met by the AICF Trust. This Report is not intended to be used for any other purpose and may not be suitable, and should not be used, for any other purpose. Opinions and estimates contained in the Report constitute our judgment as of the date of the Report. The information contained in this Report is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever as, advice and is not intended to influence a person in making a decision in relation to any financial product or an interest in a financial product. No one should act on the information contained in this Report without obtaining appropriate professional advice after a thorough examination of the accuracy and appropriateness of the information contained in this Report having regard to their objectives, financial situation and needs. In preparing the Report, KPMG has relied on information supplied to it from various sources and has assumed that the information is accurate and complete in all material respects. KPMG has not independently verified the accuracy or completeness of the data and information used for this Report. Except insofar as liability under statute cannot be excluded, KPMG, its executives, directors, employees and agents will not be held liable for any loss or damage of any kind arising as a consequence of any use of the Report or purported reliance on the Report including any errors in, or omissions from, the valuation models. The Report must be read in its entirety. Individual sections of the Report, including the Executive Summary, could be misleading if considered in isolation. In particular, the opinions expressed in the Report are based on a number of assumptions and qualifications which are set out in the full Report. KPMG | i © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Introduction The Amended Final Funding Agreement requires the completion of an Annual Actuarial Report evaluating the potential asbestos-related disease liabilities of the Liable Entities to be met by the AICF Trust. KPMG has been retained by AICFL to provide this Annual Actuarial Report as required under the Amended Final Funding Agreement and this is detailed in our Engagement Letter dated 14 November 2019. The Liable Entities are defined as being the following entities: • Amaca Pty Ltd (formerly James Hardie & Coy); • Amaba Pty Ltd (formerly Jsekarb, James Hardie Brakes and Better Brakes); and • ABN60 Pty Ltd (formerly James Hardie Industries Ltd). In addition, the liability for Baryulgil claims is deemed to be a liability of Amaca by virtue of the James Hardie (Civil Liability) Act 2005 (NSW). Under Part 4 of that Act, Amaca is liable for the “Marlew Asbestos Claims” or “Marlew Contribution Claims” as defined in that Act. Our valuation is on a central estimate basis and is intended to be effective as at 31 March 2020. It has been based on claims data and information as at 31 March 2020 provided to us by AICFL. Overview of Recent Claims Experience and comparison with previous valuation projections In this section we compare the actual experience in 2019/20 (referred to in the following tables as “FY20 Actual”) with the projections for 2019/20 that were contained within our previous valuation report at 31 March 2019. We will refer to these projections for 2019/20 as “FY20 Expected” in the tables that follow. Claim numbers There have been 438 mesothelioma claims reported in 2019/20, a 16% increase compared to the 376 mesothelioma claims reported in 2018/19 and 16% above expectations for 2019/20 (378 claims). Direct claims were 5% above expectations whilst cross claims were 56% above expectations. As such, the primary cause of the increase was cross claims, and these claims typically cost around one quarter of the cost of direct claims. For non-mesothelioma claims (excluding workers compensation claims), there have been 198 claims reported in 2019/20, a 16% increase compared to 170 claims reported in 2018/19. The following table shows the comparison of actual experience with that which had been forecast at the previous valuation. KPMG | ii © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Table E.1. Comparison of claim numbers Ratio of FY20 FY20 Actual Actual to FY19 Actual Expected Expected (%) Mesothelioma (direct claims) 316 300 105% 304 <60 21 22 95% 16 60-70 60 67 90% 57 70-80 145 128 113% 146 80+ 87 83 105% 84 age not known 3 0 n/a 1 Mesothelioma (cross claims) 122 78 156% 72 <60 2 6 33% 5 60-70 20 19 105% 14 70-80 57 31 184% 31 80+ 33 22 150% 19 age not known 10 0 n/a 3 Total 438 378 116% 376 Ratio of FY20 FY20 Actual Actual to FY19 Actual Expected Expected (%) Asbestosis 136 96 142% 103 Lung Cancer 25 21 119% 15 ARPD & Other 33 33 100% 39 Wharf 4 12 33% 13 Workers 21 24 88% 22 Total 219 186 118% 192 KPMG | iii © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Average Claim Awards Average claims awards in 2019/20 have been lower than expectations across most disease types with the exception of ARPD & Other. For mesothelioma, average claim sizes have been favourable across all four age cohorts. The following tables shows the comparison of actual experience with that which had been forecast at the previous valuation. Table E.2. Comparison of average claim size of mesothelioma non-nil claims Ratio of FY20 FY20 Actual Actual to FY19 Actual Expected Expected ($) ($) (%) ($) Mesothelioma (all claims) <60 588,000 661,995 89% 561,771 60-70 361,864 408,195 89% 389,486 70-80 332,192 334,170 99% 326,333 80+ 265,876 270,720 98% 252,778 Mesothelioma (direct claims) <60 614,647 660,925 60-70 428,047 458,688 70-80 393,135 370,192 80+ 313,356 300,716 Mesothelioma (cross claims) <60 135,000 115,579 60-70 81,857 145,243 70-80 88,418 118,001 80+ 80,703 81,868 Mesothelioma Large Claims (settled) Number 1 4 25% 2 Average claim size 1,715,000 2,564,438 67% 2,366,000 Large claim expenditure 1,715,000 10,257,752 17% 4,732,000 Note: FY19 Actuals have been inflated (by 4%) to mid 2019/20 values Note: FY20 expected for mesothelioma were set aggregated across direct and cross claims for each age cohort. Table E.3. Comparison of average claim size of non-mesothelioma non-nil claims Ratio of FY20 FY20 Actual Actual to FY19 Actual Expected Expected ($) ($) (%) ($) Asbestosis 108,337 111,038 98% 96,692 Lung Cancer 83,998 121,613 69% 78,160 ARPD & Other 139,825 105,750 132% 112,859 Wharf 98,606 105,750 93% 57,542 Workers 50,000 153,338 33% 0 KPMG | iv © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Cashflow expenditure: gross and net Gross cashflow expenditure, at $160.2m, was 1% above expectations. Net cashflow expenditure, at $142.4m, was lower than expectations by 5%. Table E.4. Comparison of cashflow Ratio of FY20 FY20 Actual Actual to FY19 Actual Expected Expected ($M) ($M) (%) ($M) Gross Cashflow 160.2 159.0 101% 154.4 Insurance and Other Recoveries (14.0) (9.5) 147% (11.6) Insurance recoveries from HIH (3.8) 0.0 n/a 0.0 and from commutations Net Cashflow 142.4 149.5 95% 142.8 Liability Assessment At 31 March 2020, our projected central estimate of the liabilities of the Liable Entities (the Discounted Central Estimate) to be met by the AICF Trust is $2,025.2m. We have not allowed for the future Operating Expenses of the AICF Trust or the Liable Entities in the liability assessment. Table E.5. Comparison of central estimate of liabilities 31 March 2020 31 March 2019 $m $m Gross of Net of Net of insurance Insurance insurance insurance recoveries recoveries recoveries recoveries Total uninflated and 1,521.2 68.8 1,452.4 1,399.8 undiscounted cash-flows Inflation allowance 784.1 21.3 762.8 818.7 Total inflated and 2,305.3 90.1 2,215.2 2,218.5 undiscounted cash-flows Discounting allowance (196.4) (6.4) (190.0) (350.1) Net present value liabilities 2,108.9 83.7 2,025.2 1,868.4 KPMG | v © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Comparison with previous valuation In the absence of any change to the claim projection assumptions from our 31 March 2019 valuation, other than allowing for the changes in the discount rate, we would have projected a Discounted Central Estimate liability of $1,888.7m as at 31 March 2020. The increase of $20.3m relative to the valuation result at 31 March 2019 is due to: • A decrease of $122.2m, being the net impact of expected claims payments (which reduce the liability) and the “unwind of discount” (to reflect the fact that cashflows are now one year nearer). • An increase of $142.5m resulting from reductions to the yield curve between 31 March 2019 and 31 March 2020, particularly relating to lower yields at durations below 15 years. Our liability assessment at 31 March 2020 of $2,025.2m therefore represents an increase of $136.5m arising from changes to the actuarial assumptions. The change is principally a consequence of: • An increase to the projected future number of mesothelioma claims given the higher numbers of claims reported in 2019/20; • An increase to the projected future number of asbestosis claims given the higher numbers of claims reported in 2019/20; and • A decrease to the assumed nil settlement rates for mesothelioma claims; offset by • Recognition of the change in mix of mesothelioma claims towards cross claims which are less costly than direct claims within the same age group; • Recognition of the favourable mix of claims by claimant age, given the increased proportions of claims emerging from older age cohorts relative to previous assumptions; • A decrease in the rate of future claims inflation by 25 basis points across all future years; and • Higher assumed future cross-claims recovery rates. The following chart shows an analysis of the change in our liability assessments from 31 March 2019 to 31 March 2020 on a discounted basis. KPMG | vi © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Figure E.1. Analysis of change in central estimate liability (discounted basis) 2,100 1.7 21.4 25.3 41.8 38.5 2,050 9.9 5.5 2,000 197.0 1,950 1,900 44.0 2,025.2 1,850 Discounted centralestimate ($m) 142.5 1,800 149.4 1,888.7 1,868.4 1,750 27.2 1,700 Other 2020 2019 (expected) segmentation costs Nil Settlement Rate Unwind of discount reporting for FY21 Direct / cross claims (direct/cross) Net Claims Payments Claims Net Mesothelioma claims Mesothelioma actuarial changes actuarial reporting for FY21 Cross claim recoveries Change in discount rate Net Liability at 31 March Net Liability at 31 March Long-term wage inflation Expected net liability - no Non-mesothelioma claims Non-mesothelioma Age Mix / Incidence Pattern Average claim sizes and legal Note: Green bars signal that this factor has given rise to a decrease in the liability whilst light blue bars signal that this factor has given rise to an increase in the liability. KPMG | vii © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Amended Final Funding Agreement calculations The Amended Final Funding Agreement sets out the basis on which payments will be made to the AICF Trust. Additionally, there are a number of other figures specified within the Amended Final Funding Agreement that we are required to calculate. These are: • Discounted Central Estimate; • Term Central Estimate; and • Period Actuarial Estimate. Table E.6. Amended Final Funding Agreement calculations $m Discounted Central Estimate (net of cross-claim recoveries, 2,025.2 Insurance and Other Recoveries) Period Actuarial Estimate (net of cross-claim recoveries, gross 518.9 of Insurance and Other Recoveries) comprising: Discounted value of cashflow in 2020/21 166.0 Discounted value of cashflow in 2021/22 179.3 Discounted value of cashflow in 2022/23 173.6 Term Central Estimate (net of cross-claim recoveries, 1,996.7 Insurance and Other Recoveries) The actual funding amount due at a particular date will depend upon a number of factors, including: • the net asset position of the AICF Trust at that time; • the free cash flow amount of the James Hardie Group in the preceding financial year; and • the Period Actuarial Estimate in the latest Annual Actuarial Report. Potential impacts of COVID-19 At the time of preparing this report, COVID-19 continues within Australia and globally. We note the significant impact that the emergence of COVID-19 has had on the yield curve as at 31 March 2020. For the purpose of our report, we have made no explicit allowance or adjustment for the impact of COVID-19. We have concluded that the number of claims received in the year were not substantially affected by the restrictions in place in Australia. In relation to both the number of claims settled and the amounts of claims-related expenditure in the year to 31 March 2020, we have also concluded that neither of these were substantially affected by the restrictions in place in Australia. We have documented the deliberations that led to these conclusions in Section 1.5 of this Report. KPMG | viii © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Uncertainty Estimates of asbestos-related disease liabilities are subject to considerable uncertainty, significantly more than personal injury liabilities in relation to other causes, such as CTP or Workers Compensation claims. It should therefore be expected that the actual emergence of the liabilities will vary from any estimate. As indicated in Figure E.2, depending on the actual out-turn of experience relative to that currently forecast, the variation could potentially be substantial. Thus, no assurance can be given that the actual liabilities of the Liable Entities to be met by the AICF Trust will not ultimately exceed the estimates contained in this Report. Any such variation may be significant. We have performed sensitivity testing to identify the impact of different assumptions upon the size of the liabilities. The different scenarios selected are documented at Section 11.2 of this report. We have not included a sensitivity test for the impact of changes in discount rates although, as noted in this Report, changes in discount rates can introduce significant volatility to the Discounted Central Estimate result reported at each year-end. We note that these sensitivity test ranges are not intended to correspond to a specified probability of sufficiency, nor are they intended to indicate an upper bound or a lower bound of all possible outcomes. Figure E.2. Sensitivity testing results – Impact around the Discounted Central Estimate (in $m) Base number of claims Average claim and legal cost size Nil settlement rate Superimposed inflation Mesothelioma incidence pattern Combination (1) Combination (2) -1,000 -500 0 500 1,000 1,500 The single most sensitive assumption shown in the chart is the peak period of claims reporting against the Liable Entities. Shifting the pattern of incidence by 2 years could add approximately $427m (21%) on a discounted basis to our valuation (as shown in the above chart by the scenario labelled “mesothelioma incidence pattern”). KPMG | ix © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Table E.7. Summary results of sensitivity analysis ($m) Undiscounted Discounted Central estimate 2,215.2 2,025.2 Low Scenario 1,593.6 1,478.2 High Scenario 3,861.7 3,414.9 Whilst the table above indicates a range around the discounted central estimate of liabilities of -$547m to +$1,390m, the actual cost of liabilities could fall outside that range depending on the actual experience. Executive Summary Not Report Please note that this executive summary is intended as a brief overview of our Report. To properly understand our analysis and the basis of our liability assessment requires examination of our Report in full. KPMG | x © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Contents Executive Summary i 1. Scope and Purpose 1 2. Data 9 3. Valuation Methodology and Approach 12 4. Claims Experience: Mesothelioma Claim Numbers 23 5. Claims Experience: Claim numbers (non-mesothelioma) 34 6. Exposure and Latency Experience and Incidence Pattern Assumptions 37 7. Claims Experience: Average Claims and Legal Costs 48 8. Claims Experience: Nil Settlement Rates 65 9. Economic and Other Assumptions 72 10. Valuation Results 79 11. Uncertainty 87 Appendices A Projected inflated and undiscounted cashflows ($m) 91 B Projected inflated and discounted cashflows ($m) 92 C Glossary of terms used in the Amended Final Funding Agreement 93
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Scope and Purpose 1.1 Introduction The Amended Final Funding Agreement requires the completion of an Annual Actuarial Report evaluating the potential asbestos-related disease liabilities of the Liable Entities to be met by the AICF Trust. 1.1.1 Liable Entities The Liable Entities are defined as being the following entities: • Amaca Pty Ltd \(formerly James Hardie & Coy\); • Amaba Pty Ltd \(formerly Jsekarb, James Hardie Brakes and Better Brakes\); and • ABN60 Pty Ltd \(formerly James Hardie Industries Ltd\). In addition, the liability for Baryulgil claims is deemed to be a liability of Amaca by virtue of the James Hardie \(Civil Liability\) Act 2005 \(NSW\). Under Part 4 of that Act, Amaca is liable for “Marlew Asbestos Claims” or “Marlew Contribution Claims” as defined in that Act. Baryulgil claims are discussed further in Section 5.8. 1.1.2 Personal asbestos claims Under the Amended Final Funding Agreement, the liabilities to be met by the AICF Trust relate to personal asbestos-related disease liabilities of the Liable Entities. The precise scope of the liabilities is documented in Section 1.2 and in Appendix C of this Report. 1.1.3 Purpose of report KPMG has been retained by AICFL to provide an Annual Actuarial Report as required under the Amended Final Funding Agreement and this is detailed in our Engagement Letter dated 14 November 2019. The prior written consent of KPMG is required for any other use of this Report or the information contained in it. Our valuation is effective as at 31 March 2020 and has been based on claims data and information as at 31 March 2020 provided to us by AICFL. 1.2 Scope of report We have been requested to provide an actuarial assessment as at 31 March 2020 of the asbestos-related disease liabilities of the Liable Entities to be met by the AICF Trust, consistent with the terms of the Amended Final Funding Agreement. KPMG | 1 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative \(“KPMG International”\), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
The assessment is on a central estimate basis and is based on the claims experience as at 31 March 2020. A "central estimate” liability assessment is an estimate of the expected value of the range of potential future liability outcomes. In other words, if all the possible values of the liabilities are expressed as a statistical distribution, the central estimate is an estimate of the mean of that distribution. It is of note that our liability assessment: • Relates to the Liable Entities and Marlew (in relation to Marlew Claims arising from asbestos mining activities at Baryulgil). • Is intended to cover: – The amount of settlements, judgments or awards for all Personal Asbestos Claims. – Claims Legal Costs incurred by the AICF Trust in connection with the settlement of Personal Asbestos Claims. • Is not intended to cover: – Personal injury or death claims arising from exposure to asbestos which took place outside Australia. – Personal injury or death claims, arising from exposure to Asbestos, which are brought in Courts outside Australia. – Claims for economic loss, other than any economic loss forming part of an award for damages for personal injury and/or death. – Claims for loss of property, including those relating to land remediation. – The costs of asbestos or asbestos product removal relating to asbestos or asbestos products manufactured or used by or on behalf of the Liable Entities. • Includes an allowance for: – Compensation to the NSW Dust Diseases Authority (“DDA”) or a Workers Compensation Scheme by way of a claim by such parties for contribution or reimbursement from the Liable Entities, but only to the extent that the cost of such claims is within the limits of funding for such claims as outlined within the Amended Final Funding Agreement. – Workers Compensation claims, being claims from former employees of the Liable Entities, but only to the extent that such liabilities are not met by a Workers Compensation Scheme or Policy (see section 1.2.1). • Assumes that the product and public liability insurance policies of the Liable Entities will continue to respond to claims as and when they fall due. We have not made any allowance for the impact of any disputation concerning Insurance Recoveries, nor for any legal costs that may be incurred in resolving such disputes. KPMG | 2 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
• Makes no allowance for: – Insurance Recoveries from insurance policies placed from 1986 onwards which were placed on a “claims made” basis. – the future Operating Expenses of the Liable Entities or the AICF Trust. Separate allowance for future Operating Expenses should be considered by the management of AICFL. – the inherent uncertainty of the liability assessment. That is, no additional provision (or risk margin) has been included in excess of a central estimate. Readers of this Report may refer to our previous reports which are available at www.ir.jameshardie.com.au and www.aicf.org.au. 1.2.1 Workers Compensation Workers Compensation claims are claims made by former employees of the Liable Entities. Such past, current and future reported claims were insured with, amongst others, Allianz Australia Limited, QBE and the various State-based Workers Compensation Schemes. Under the Amended Final Funding Agreement, the part of a future Workers Compensation claim that is met by a Workers Compensation Scheme or Policy of the Liable Entities is outside of the AICF Trust. The AICF Trust is, however, to provide for any part of a claim not covered by a Workers Compensation Scheme or Policy (e.g. as a result of the existence of limits of indemnity and policy deductibles on those policies of insurance). On this basis our liability assessment in relation to Workers Compensation claims and which relates to the AICF Trust, includes only the amount borne by the Liable Entities in excess of the anticipated recoveries due from a Workers Compensation Scheme or Policy. In making our assessment we have assumed that the Workers Compensation insurance programme will continue to respond to claims by former employees of the Liable Entities as and when they fall due. To the extent that they were not to respond owing to (say) insurer insolvency, Insurer Guarantee Funds may be available to meet such obligations. 1.2.2 Dust Disease Authority and Other Reimbursements The Amended Final Funding Agreement indicates that the AICF Trust is intended to meet Personal Asbestos Claims and that claims by the DDA or a Workers Compensation Scheme for reimbursement will only be met up to a certain specified limit (aggregated across the DDA and Workers Compensation Schemes), being: • In the first financial year (2006/07) a limit of $750,000 applied; • In respect of each financial year thereafter, that limit is indexed annually in line with the Consumer Price Index. At 31 March 2020, the annual limit is $1.04m; • There is an overall unindexed aggregate cap of $30m; • At 31 March 2020, AICFL has paid out $11.47m to the DDA. KPMG | 3 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
The cashflow and liability figures contained within this Report have already removed that component of any reimbursements that will not be met by the AICF Trust owing to the application of these limits and caps. 1.2.3 Risk Margins Australian-licensed insurance companies are required to hold, and many non-insurance companies elect to hold, insurance and self-insurance claims provisions at a level above the central estimate basis to reflect the uncertainty attaching to the liability assessment and to include an allowance in respect of that uncertainty. A risk margin is an additional amount held, above the central estimate, so as to increase the likelihood of adequacy of the provisions to meet the ultimate cost of settlement of those liabilities. We note that the Amended Final Funding Agreement envisages the ongoing financing of the AICF Trust is to be based on a “central estimate” approach and that the Annual Actuarial Report should provide a Discounted Central Estimate valuation. Accordingly, we have made no allowance for any risk margins within this Report. 1.3 Areas of potential exposure As identified in Section 1.2, there are other potential sources of claims exposure beyond those directly considered within this Report. However, in a number of cases they are unquantifiable even if they have the potential to generate claims. This is especially the case for those sources of future claim where there has been no evidence of claims to date. 1.3.1 General areas of potential exposure Areas of potential changes in claims exposure we have not explicitly allowed for in our valuation include, but are not limited to: • Future significant individual landmark and precedent-setting judicial decisions; • Significant medical advancements; • Unimpaired claims, i.e. claims for fear, stress, pure nervous shock or psychological illness; • A change in the basis of compensation for asymptomatic pleural plaques for which no associated physical impairment is exhibited; • A proliferation (compared to past and current levels of activity) of “third-wave” claims, i.e. claims arising as a result of indirect exposure such as home renovation, washing clothes of family members that worked with asbestos, or from workers involved in the removal of asbestos or the demolition of buildings containing asbestos; • Changes in legislation, especially those relating to tort reform for asbestos sufferers. Examples include the current consultation by the Law Reform Commission in Western Australia in relation to damages for gratuitous services and provisional damages; • Introduction of new, or elimination of existing, heads of damage; KPMG | 4 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
• Exemplary and aggravated or punitive damages (being damages awarded for personal injuries caused as a result of negligence or reckless conduct); • Changes in the basis of apportionment of awards for asbestos-related diseases for claimants who have smoked; • Changes to taxation; and • Future bankruptcies of other asbestos claim defendants (i.e. other liable manufacturers or distributors). Nonetheless, implicit allowance is made in respect of some of these items in the allowance for superimposed inflation included in our liability assessment. Furthermore, to the extent that some of these have emerged in past claims experience, they are reflected in our projections. 1.3.2 Third-wave claims We have made allowance for so-called “third-wave” claims. These are defined as claims for personal injury and / or death arising from asbestos exposure during home renovations by individuals or to builders involved in such renovations. Such claims are allowed for within the projections to the extent to which they have arisen to date and to the extent our exposure model factors in these exposures in its projection. We have not allowed for a significant additional surge in third-wave claims (over and above current levels of activity) in the future arising from renovations, but conversely we have not allowed for a tempering of those third-wave claims already included within our projection as a result of improved education of individuals as to the risks of such home renovations, or of any local Councils or State Governments passing laws in this regard. It should be noted that claims for the cost of asbestos or asbestos product removal from homes and properties or any claims for economic loss arising from asbestos or asbestos products being within such homes and properties is not required to be met by the AICF Trust. 1.4 Data reliances and limitations KPMG has relied upon the accuracy and completeness of the data with which it has been provided. KPMG has not verified the accuracy or completeness of the data, although we have undertaken steps to test its consistency with data previously received. However, KPMG has placed reliance on the data previously received, and currently provided, as being accurate and complete in all material respects. 1.5 Potential impacts of COVID-19 At the time of preparing this report, COVID-19 continues within Australia and globally. We note the significant impact that the emergence of COVID-19 has had on the yield curve as at 31 March 2020. For the purpose of our report, we have made no explicit allowance or adjustment for the impact of COVID-19. We have concluded that the number of claims received in the year were not substantially affected by the restrictions in place in Australia. KPMG | 5 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
We have based this conclusion on the following facts: • For the first 11 months of the financial year (i.e. through to 29 February 2020), AICF and also plaintiff and defendant law firms continued to operate as normal. • The number of COVID-19 cases in Australia was less than 30 as at 29 February 2020. • Claims received by the Liable Entities in March will have related to diagnoses that on average would have arisen approximately 6 months prior. As such, the Statements of Claim that were served against the Liable Entities in March 2020 would have already been substantially in preparation and/or completed by 29 February 2020. • AICF received 33 mesothelioma claims and 17 non-mesothelioma claims in March 2020. In the previous 11 months there had been 607 claims (an average of 55 claims per month). • AICF currently (since its shutdown) receives Statements of Claim electronically rather than by courier, given the closure of the offices. In relation to both the number of claims settled and the amounts of claims-related expenditure in the year to 31 March 2020, we have also concluded that neither of these were substantially affected by the restrictions in place in Australia. The rationale for this conclusion is the same as above with the following additional points: • AICF settled 28 mesothelioma claims and 27 non-mesothelioma claims in March 2020. In the previous 11 months, there had been 541 claims settled (an average of 49 claims per month). • Claims payments in March 2020 primarily relate to claims whose settlements are agreed in February 2020. As noted above, there had been no operational impacts through to 29 February 2020. 1.6 Uncertainty It must be understood that estimates of asbestos-related disease liabilities are subject to considerable uncertainty. This is due to the fact that the ultimate disposition of future claims will be subject to the outcome of events that have not yet occurred. Examples of these events, as noted in Section 1.3, include jury decisions, court interpretations, legislative changes, epidemiological developments, medical advancements, public attitudes, potential additional third-wave exposures and social and economic conditions such as inflation. Therefore, it should be expected that the actual emergence of the liabilities will vary, perhaps materially, from any estimate. Thus, no assurance can be given that the actual liabilities of the Liable Entities to be met by the AICF Trust will not ultimately exceed the estimates contained herein. Any such variation may be significant. KPMG | 6 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
1.7 Distribution and use The purpose of this Report is as stated in Section 1.1. This Report should not be used for any purpose other than those specified. This Report will be provided to the Board and management of AICFL. This Report will also be provided to the Board and management of James Hardie, the NSW Government and to EY in their capacity as auditors to both James Hardie and AICFL. We understand that this Report will be filed with the ASX and placed on James Hardie’s website in its entirety. We understand that this Report will also be placed on AICFL’s website in its entirety. KPMG consents to this Report being made available to the above-mentioned parties and for the Report to be distributed in the manner described above. To the extent permitted by law, neither KPMG nor its Executives, directors or employees will be responsible to any third parties for the consequences of any actions they take based upon the opinions expressed with this Report, including any use of or purported reliance upon this Report not contemplated in Section 1.2. Any reliance placed is that party’s sole responsibility. Where distribution of this Report is permitted by KPMG, the Report may only be distributed in its entirety and judgements about the conclusions and comments drawn from this Report should only be made after considering the Report in its entirety and with necessary consultation with KPMG. Readers are also advised to refer to the “Important Note: Basis of Report” section at the front of the Executive Summary of this Report. 1.8 Date labelling convention used in this Report In our analyses throughout this Report (unless otherwise stated), the “year” we refer to aligns with the financial year of AICFL and James Hardie and runs from 1 April to 31 March. A “2008” notified claim would be a claim notified in the period 1 April 2008 to 31 March 2009. This might also be referred to as “2008/09” or “FY09”. Similarly, a “2019” claim settlement would be a claim settled in the period 1 April 2019 to 31 March 2020. This might also be referred to as “2019/20” or “FY20”. 1.9 Author of the report This Report is authored by Neil Donlevy, an Executive of KPMG Financial Services Consulting Pty Ltd, a Fellow of the Institute of Actuaries (London) and a Fellow of the Institute of Actuaries of Australia. This Report is co-authored by Jefferson Gibbs, an Executive of KPMG Financial Services Consulting Pty Ltd, a Fellow of the Institute of Actuaries (London) and a Fellow of the Institute of Actuaries of Australia. In relation to this Report, the primary regulator for both Neil Donlevy and Jefferson Gibbs is the Institute of Actuaries of Australia. KPMG | 7 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
1.10 Professional standards and compliance This Report details a valuation of the outstanding claims liabilities of entities which hold liabilities with features similar to general insurance liabilities. In preparing this Report, we have complied with the Professional Standard 302 of the Institute of Actuaries of Australia (“PS302”), “Valuation of General Insurance Claims”. However, as we note in Section 1.2, this Report does not include an allowance for the future Operating Expenses of the AICF Trust (which are estimated by AICFL) and nor does it include any allowance for a risk margin to reflect the inherent uncertainty in the liability assessment. 1.11 Control processes and review This valuation report and the underlying analyses have been subject to technical review and internal peer review. The technical review focuses on ensuring that the valuation models and supporting claims experience analyses that are carried out are performed correctly and that the calculations are being correctly applied. The technical review also focuses on ensuring that the data that is being used has been reconciled insofar as possible. Internal peer review involves a review of the approach, the methods, the assumptions selected and the professional judgments applied. Both the technical review and internal peer review processes are applied to the Report as well as the valuation models. 1.12 Basis of preparation of Report We have been advised by the management of AICFL to prepare the Report on a “going concern” basis (i.e. we should assume that AICFL will be able to meet any shortfall in the cost of the liabilities of the Liable Entities as they fall due). The cashflow estimates contained in this Report assume that claims against the Liable Entities will continue to be paid in full as and when they fall due. KPMG | 8 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
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Data 2.1 Data provided to KPMG We have been provided with the following data by AICFL: • Claims dataset at 31 March 2020 with individual claims listings; • Accounting transactions dataset at 31 March 2020 \(which includes individual claims payment details\); and • Detailed insurance bordereaux information \(being a listing of claims filed with the insurers of the Liable Entities\) as at 31 March 2020. We have allowed for the benefits of the product and public liability insurance policies of the Liable Entities based on information provided to us by AICFL relating to the insurance programme’s structure, coverage and layers. We have also considered the claims data listings which formed the basis of our previous valuation assessments. The data structures provided for the claims and accounting datasets are consistent with those provided at previous valuations. 2.2 Data limitations We have tested the consistency of the various data sets provided to us at different valuation dates. Section 2.3 outlines the nature of the testing undertaken. However, we have not otherwise verified the data and have instead relied on the data provided as being complete and accurate in all material respects. We have relied upon the robustness of AICFL’s internal administration and systems as to the completeness of the data provided. Consequently, should there be material errors or incompleteness in the data, our assessment could also be affected materially. 2.3 Data reconciliation and testing We have performed a reconciliation of the data provided at 31 March 2020 with the data provided at 31 March 2019. We have undertaken a number of tests and reconciliations to test the accuracy of the data to the extent possible, noting the limitations outlined above. KPMG | 9 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative \(“KPMG International”\), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
2.3.1 Reconciliation with previous valuation’s data We have performed a reconciliation of the claims database as at 31 March 2020 with that provided at 31 March 2019. Our findings are: • Claims notifications: There were no new claims reported that had a report date prior to 31 March 2019. No claims (that already had a notification date) changed notification date between the two databases. • Portfolio category: Seven claims changed category. Two of these changed to mesothelioma. • Settlement date: There has been one claim that previously had a settlement date prior to 31 March 2019 that has changed settlement dates at the current valuation. Changing and developing data is not unexpected or to be considered as adverse. Indeed, changing data is common to all claims administration systems. We do not consider the number or extent of the changes noted above to be unreasonable, nor do we consider the changes to be material to the valuation. 2.3.2 Reconciliation of claims settlement amounts between claims and accounting databases We have mapped the financial data between the claims and accounting databases into standardised groupings as follows: Table 2.1: Grouping of financial data from claims and accounting databases CLAIMS DATABASE ACCOUNTING DATABASE Damages (gross of cross-claims) plus DDB reimbursement plus Medicare (from Accounting Damages plus DDB reimbursements plus Award Database) Medicare Costs plus Other less Medicare (from Costs / Other accounting database) Costs plus Consulting Defence legal costs Defence legal costs Defence legal costs Note: Recovery amounts are available from the accounting database We have compared the payment records between the claims database and the accounting database from the earliest date to the current file position. The table below shows the results of this reconciliation for all claim transactions to date. Table 2.2: Comparison of amounts from claims and accounting databases ($m) CLAIMS DATABASE ACCOUNTING DATABASE Damages (gross of recoveries, excluding medicare) 1,885.7 Damages (gross of recoveries) 1,888.4 Costs 57.7 Costs 58.4 DDB 16.2 DDB 16.3 Other (inc Medicare) 5.5 Consulting 2.2 Medicare 3.2 Interest 0.2 Defence legal costs 208.6 Defence legal costs 209.1 Total Value 2,173.7 Total Value 2,177.8 Standardisation Award plus Medicare plus DDB 1,905.1 Award plus Medicare plus DDB 1,907.9 Costs / Other 60.0 Costs / Other 60.8 Defence legal costs 208.6 Defence legal costs 209.1 Total Value 2,173.7 Total Value 2,177.8 KPMG | 10 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
The standardisation is the most relevant comparison because the two database extracts allocate the information (particularly in relation to Medicare) in slightly different ways. Once the standardisation has been undertaken, the two datasets reconcile closely – with reconciliation differences for claim awards totalling approximately $2.8m (31 March 2019: $2.5m). Our approach for each claim record has been to take the maximum value of the two databases for each claim record. This results in the following overall totals being used in our analysis: • $1,908.3m for the claims award component; • $61.3m for the costs / other component; and • $209.4m for the defence legal costs component. This approach, of taking the maximum value for each claims record, may result in some minor prudence in our overall analysis although the amount of prudence is not considered to be significant in the context of the size of the potential liabilities and the underlying uncertainty in any valuation estimating future claims costs over the next 40 years or more. 2.4 Data conclusion We have not verified the underlying data nor have we undertaken “auditing at source”. No material data issues have been identified and notified to us by the Approved Auditor of AICFL (EY) during their testing. We have tested the data for internal consistency with the data provided at the previous valuation (31 March 2019). Based on that testing and reconciliation, and subject to the limitations described in Section 1.4, we have formed the view that: • Generally, the data is consistent between valuations, with any differences in the data being readily explainable; • The financial data appears to reconcile reasonably between the two data sources (the claims dataset and the accounting transactions datasets); • Any data issues that have emerged are not significant in relation to the size of the liabilities; and • The data is appropriate for use for the purpose of this Report. KPMG | 11 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
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Valuation Methodology and Approach 3.1 Valuation methodology changes We have, in broad terms, maintained the core valuation methodology adopted at our previous valuation. At this valuation, in light of the emerging experience in relation to mesothelioma claim numbers and the changes in mix of those claims, we have separately analysed \(and set assumptions for\) direct claims and cross claims. Readers of this report are reminded that for mesothelioma claims, we have four separate age cohorts for which we set assumptions, namely • <60 years of age; • 60-70 years of age; • 70-80 years of age; and • 80+ years of age. We have derived separate assumptions for direct claims and cross claims and for each of the four age cohorts for: • estimated future claim numbers \(including latency assumptions\); • average claim sizes; • average legal costs; and • nil settlement rates. 3.2 Overview of current methodology The methodology involves assessing the liabilities in two separate components, being: • Allowance for the cost of settling claims which have already been reported but have not yet been settled \(“pending claims”\); and • Allowance for the cost of settling claims which have not yet been reported \(“Incurred But Not Reported” or “IBNR” claims\). KPMG | 12 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative \(“KPMG International”\), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
For pending claims, we have used the case estimates (where available) with some adjustments to reflect the extent to which the case estimates (on average) tend to overstate the ultimate cost. For IBNR claims we have used an “average cost per claim method”. In brief, the overall methodology may be summarised as follows: • Project the future number of claims expected to be reported in each future year by disease type (for product and public liability) and for Workers Compensation and wharf claims taking into account the expected future incidence of mesothelioma and other diseases and also the past rate of co-joining of the Liable Entities; • Analyse past average attritional claim costs of non-nil claims in mid 2019/20 money terms. We have defined attritional claims to be claims which are less than $1m in 2006/07 money terms. We estimate a baseline attritional non-nil average claim cost in mid 2019/20 money terms. This represents the Liable Entities’ share of a claim rather than the total claim settlement; • Analyse past historical average plaintiff/other and defendant legal costs for non-nil claim settlements; • Analyse past historical average defendant legal costs for nil claim settlements; • Estimate a “large claims loading” for mesothelioma claims by estimating the frequency, or incidence rate, and average claim size and legal cost sizes of such claims (being claims which are in excess of $1m in 2006/07 money terms); • Project the pattern and incidence of future claims settlements from the claims reporting profile projected. This is done by using a settlement pattern derived from consideration of past experience of the pattern of delay between claim reporting and claim settlement for each disease type; • Estimate the proportion of claims which will be settled with no liability against the Liable Entities by reference to past proportions of claims settled for nil claim cost (we refer to this as the “nil settlement rate”); • Inflate average claim, plaintiff/other and defence legal costs and large claim costs to the date of settlement of claims allowing for base inflation and (where applicable) superimposed inflation; • Multiply the claims numbers which are expected to be settled for non-nil amounts in a period by the inflated average non-nil claim costs (including the “large claims loading”) and plaintiff/other and defence legal costs for that period; • Make allowance in defence legal costs for that proportion of settled claims which are expected to be settled for no liability but for which defence costs will be incurred; • Inflate average defence legal costs of nil claims to the date of settlement of claims allowing for base inflation; • Multiply the claims numbers which are expected to be settled for nil amounts in a period by the inflated average defence legal costs for nil claims for that period; KPMG | 13 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
• Add the expected claims costs and legal payments relating to pending claims (after allowance for the potential savings on case estimates) after making allowance for the assumed settlement pattern of pending claims; • This gives the projected future gross cashflow for each future financial year; • Adjust the projected gross cashflow (where applicable) for the impact of the annual and aggregate caps on DDA reimbursements; • Estimate the recoveries resulting from cross-claims made by the Liable Entities against other parties (“cross-claim recoveries”); • Project Insurance Recoveries to establish the net cashflows; • Discount the cashflows using a yield curve derived from yields on Commonwealth Government Fixed Interest Bonds at the valuation date to arrive at our present value liability assessment. It should be noted that this description is an outline and is not intended to be exhaustive in consideration of all the stages we consider or all investigations we undertake. Those other stages are outlined in more detail elsewhere in this Report and readers are advised to refer to those sections for a more detailed understanding of the process undertaken. As discussed elsewhere, the liabilities are established on a central estimate basis. 3.3 Disease type and class subdivision 3.3.1 Claims records excluded from our analysis We have excluded records that relate to cross-claims brought by the Liable Entities against other defendants. Where the cross-claim is brought as part of the main proceedings the claim is automatically counted in our analysis of the number of claims. However, where the cross- claim by the Liable Entities is severed from the main proceedings, the existence of a separate record in the claims dataset does not indicate an additional claim (or liability) against the Liable Entities. In these circumstances such claims records are not counted in our analysis. We have also excluded “insurance recovery” claims records. This is because the insurance recovery record is a separate record that exists for claims records where an insurance recovery is due. In other words, the claim against the Liable Entity has already been included in our analysis and the insurance recovery record exists for operational purposes only. 3.3.2 Categories of claim We have sub-divided the remaining claims into the following groups: • Product and Public Liability; • Workers Compensation, being claims by former employees of the Liable Entities; and • Wharf claims, being claims by individuals whose occupations involved working on the docks or wharves, or where part of their exposure related to wharves. KPMG | 14 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
3.3.3 Categories of disease For product and public liability claims, we have separately analysed the individual disease types. We have split the data by disease type for these claims, because there is sufficient volume of claims to do so, because different disease types display substantially different average claim sizes, and because the incidence pattern of future notifications is expected to vary between the different disease types. We have not divided the Workers Compensation or wharf claims data by disease type, given their low financial significance and the reduced credibility of the data if sub-divided by disease type (given the low number of claims). For the purposes of our analysis, we have allocated each claim once and therefore to one disease only. We have selected the following order of priority, based on the relative severity of the disease: • Mesothelioma; • Lung cancer / Other cancer; • Asbestosis; and then • Asbestos-Related Pleural Disease and Other (“ARPD & Other”). This means that if a product or public liability claim has mesothelioma as one of its listed diseases, it is counted as a mesothelioma claim. If a product or public liability claim has lung cancer or other cancer as one of its listed diseases (but not mesothelioma), it is counted as a lung cancer claim. If a product or public liability claim has asbestosis as one of its listed diseases, it is only counted as asbestosis if it has no reference to mesothelioma, lung cancer or other cancer as one of its diseases. For mesothelioma, we have also separated claims based on the age of the claimant at the date of notification of the claim. We have used four age cohorts, namely: • <60 years of age; • 60-70 years of age; • 70-80 years of age; and • >80 years of age. We have further separated mesothelioma between direct claims and cross claims. 3.4 Numbers of future claims notifications: mesothelioma To project the pattern of incidence of claims against the Liable Entities, we have constructed a model which utilises the following inputs: • The current Australian population by year of birth / current age and gender; • Standard mortality rates by age and gender. This is used to project the population by year of birth / age at each future year; KPMG | 15 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
• The relative risk-exposure (or incidence rates) between males and females; • The relative risk-exposure by age of person at time of exposure; • The exposure to asbestos in Australia; • The statistical distribution of the latency period from average exposure separately for direct claims and cross claims, and by age of claimant, together with the underlying parameters (the mean and the standard deviation) of the latency model. Detailed discussion of the approach taken is documented in our 31 March 2018 Annual Actuarial Report. 3.4.1 Exposure model We have constructed a proxy for exposure by reference to statistics showing the levels of Australian usage of asbestos. We do not have detailed individual exposure information for the Liable Entities, its products or where the products were used and how many people were exposed to those products. However, given the market share of James Hardie over the years (through to 1987) and its relative stability, we have used a national pattern of usage as a reasonable proxy for the Liable Entities’ exposure. Figure 3.1: Consumption and production indices – Australia 1930-2002 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 - 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Production Consumption Source: World Mineral Statistics Dataset, British Geological Survey, www.mineralsuk.com R Virta, USGS Website Annual Yearbook There is an implicit assumption within the use of the consumption to derive the level of future claim notifications that: • the consumption of asbestos is directly correlated with, and is a suitable proxy for, the number (and extent of exposure) of people exposed to asbestos in any year; and • the rate of incidence of individuals developing an asbestos-related disease arising from exposure to asbestos is the same for each exposure year and is independent of the type of asbestos used. KPMG | 16 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
3.4.2 Latency model We have continued to assume that the latency pattern (from the average date of exposure) is statistically distributed with a normal distribution. We have derived separate latency assumptions for mesothelioma as between direct claims and cross claims. The revised model projection assumptions are shown in the table below. Table 3.1: Latency assumptions for mesothelioma claims Direct Cross Mean 39 41 Standard Deviation 9 10 The analysis supporting the selection of these parameters is summarised in Section 6. 3.4.3 Calibrating the curve index to current reporting experience We take the claim curve index and then calibrate the number of notifications in each future year by reference to the recent levels of claims reporting and the number of claims we have assumed for the 2020/21 financial year. This approach implicitly assumes that: • The future rate of incidence of asbestos-related diseases manifesting as a result of a past exposure to asbestos will remain stable; • The pattern of diagnosis and the delay between diagnosis and reporting remain stable; • The “propensity to claim” by individuals will remain stable; and • The rate of co-joining the Liable Entities in common law claims will remain stable. Changes to any of these factors over time will result in changes to the actual pattern of incidence of claims reporting. The claim curve index also provides us with the proportions of the total number of claims reported in each future year that relate to each of the four age groups and separately for direct claims and cross claims for mesothelioma. Our assumptions for the base number of claims projected to be reported in 2020/21 are summarised in Section 4.6 and Section 5.7. 3.5 Incidence of claim settlements from future claim notifications We derive a settlement pattern by analysing triangulations of the numbers of settlements and claims payments by delay from the year of notification. From these settlement pattern analyses, we have estimated the pace at which claims notified in the future will settle, and used this to project the future number, and monetary amount, of settlements in each financial year for each disease type. Our analysis and assumptions selected are summarised in Section 9.5. KPMG | 17 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
3.6 Average claim costs of IBNR claims 3.6.1 Attritional claims We define a large claim as one for which the award is greater than or equal to $1m in 2006/07 money terms (which equates to approximately $1.67m in mid 2019/20 money terms). We define an attritional claim as a non-nil, non-large claim. We define a nil claim as one for which the award payable by the relevant Liable Entity is zero. We have estimated the following five components to the average cost assessment: • Average award (sometimes including plaintiff legal costs) of a non-nil “attritional” claim. • Average plaintiff legal / other costs of a non-nil “attritional” claim. • Average defence legal costs of a non-nil “attritional” claim. • Average defence legal costs of a nil claim. • Large claim awards and legal cost allowances. All of our analyses have been constructed using past average awards, which have been inflated to mid 2019/20 money terms using a historical base inflation index (of 4% per annum). This allows for basic inflation effects when identifying trends in historical average settlements. We then determine a prospective average cost in mid 2019/20 money terms, including an explicit allowance for overseas exposures resulting from the decision in Talifero vs Amaca. Our analysis and assumptions are summarised in Section 7. 3.6.2 Large claims loading We analyse the historical incidence rate of large claims (being measured as the ratio of the number of large claims to the total number of non-nil claims), and the average claim size and legal costs of these claims. We use these to arrive at a “per claim” loading (being the average large claim cost multiplied by the large claim incidence rate per claim), being the additional amount we need to add to our attritional average claim size to allow for large claims. We have derived separate incidence rate and average claim size assumptions for each of the four age groups for mesothelioma. Our analysis and assumptions are summarised in Section 7.11. 3.6.3 Future inflation of average claim sizes Allowance for future claim cost inflation is made. This is modelled as a combination of base inflation plus superimposed inflation. This enables us to project future average settlement costs in each future year, which can then be applied to the IBNR claims numbers as they settle in each future year. Our analysis and assumptions in relation to claims inflation are summarised in Section 9.2. KPMG | 18 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
3.7 Proportion of claims settled for nil amounts We apply a “nil settlement rate” to the overall number of settlements to estimate the number of claims which will be settled for nil claim cost (i.e. other than in relation to defence legal costs) and those which will be settled for a non-nil claim cost. The prospective nil settlement rate is estimated by reference to the analysis of past trends in the rate of nil settlements. Our analysis and assumptions selected are summarised in Section 8. 3.8 Pending claims 3.8.1 Definition of pending claims At 31 March 2020, there were 443 claims for which claim awards have not yet been fully settled by the Liable Entities. Additionally, there are a number of other claims for which defence legal costs have not yet been settled, even though the awards have been settled. 3.8.2 Evaluating the liability for pending claims The excess amount of the liability for pending claims, over the case estimates held, is what the insurance industry terms Incurred But Not Enough Reported (“IBNER”). Depending on the case estimation procedure of a company and the nature of the liabilities, IBNER can be either positive or negative, with a negative IBNER implying that the ultimate cost of settling claims will be less than case estimates, i.e. that there is some degree of redundancy in case estimates. 3.8.3 Findings The table below shows that there has been no deterioration compared to the estimates we previously adopted and are currently adopting (both of which have already made allowance for a 25% saving on case estimates). Table 3.2: Change in cost of claims during 2019/20 financial year ($m) – claim award component only Current year Prior year reported Figures in $ millions Total reported claims claims Estimates for pending claims at 31 March 2019 0.0 79.8 79.8 (undiscounted) Paid in the year to 31 March 2020 81.2 64.8 146.0 Estimates for pending claims at 31 March 2020 62.4 11.1 73.5 (undiscounted) Incurred Cost in the financial year 143.6 (3.9) 139.6 The table above shows that there has been a decrease of $3.9m in the cost of claims that were reported prior to 31 March 2019. We have maintained our assumption for the level of redundancy in case estimates on currently reported claims at 25% at this valuation (March 2019: 25%). This assumption is only applied to the case estimates for the claim award. KPMG | 19 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
3.9 Insurance Recoveries Insurance Recoveries are defined as proceeds which are estimated to be recoverable under the product and public liability insurance policies of the Liable Entities, and therefore exclude any such proceeds from a Workers Compensation Scheme or Policy in which the Liable Entities participate or which the Liable Entities hold. In applying the insurance programme we therefore consider only the projected gross cashflows relating to product and public liability claims. Historical analysis of the claims data suggests that approximately 97.5% of all liability claims by cost have been product liability claims. 3.9.1 Programme overview Until 31 May 1986, the Liable Entities had in place product and public liability insurance policies that were placed on a claims occurring basis. Product liability claims were insured under these insurance policies on an “in the aggregate” basis whilst public liability claims were insured on an “each and every loss” basis. From 31 May 1986, the insurance policies were placed on a claims made basis in relation to asbestos-related product and public liability cover. In summary, the insurance policies were placed as follows: • For the period up to June 1976, the insurance policies were written on a claims occurring basis. The insurance was provided by QBE but the cover provided by these policies was commuted in June 2000. Therefore we have assumed no future Insurance Recoveries from these policies. • For the period from June 1976 to 31 May 1986, the insurance policies were written on a claims occurring basis; insured by Lloyds’ of London, London Market insurers, Australian insurers and HIH entities. • For the period 31 May 1986 to 31 March 1997, the insurance policies were written on a claims-made basis. For the purpose of this Report, we have made no allowance for any future Insurance Recoveries arising from these policies. 3.9.2 Modelling insurance recoveries on the claims occurring programme Our methodology for projecting the future insurance recoveries to be collected by AICFL involves the following steps: • Identify the current contract positions for each insurance policy year. This assumes that all monies due have been collected, and does not allow for the impact of commutations that have taken place. • Allocate the projected future gross cashflows to individual insurance policy years using an allocation basis that has been determined by reference to the exposure methodology used to project future claim numbers and also using a “period of exposure” allocation. • This gives a projection of how the insurance programme is utilised over time. KPMG | 20 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
This method allows us to: • evaluate the total insurance recoveries due by payment year; • determine how the insurance recoveries due will be assigned to each layer and to each insurer; and • identify and allow for when the individual layers are projected to be fully exhausted. We then make an additional adjustment to the projected recoveries to exclude those projected future insurance recoveries that are assigned to the participations of insurers who have already commuted their coverage with AICFL and the Liable Entities or insurers who have settled their coverage by way of a Scheme of Arrangement. 3.9.3 Commutations, HIH and Schemes of Arrangement Other commutations have been entered into by AICFL in previous years and these commutations have typically (other than QBE) involved the payment of a lump sum amount. In these circumstances, we have assumed that the insurance liabilities of that company to the Liable Entities have been fully discharged and no further recoveries will fall due. Additionally, we have assumed that all monies have been paid in relation to insurance recoveries for the claims occurring period from HIH. For the claims occurring period, where a claim filed against a company under a Scheme of Arrangement has been accepted and payment made, we have assumed that the insurance liabilities of that company to the Liable Entities have been fully discharged and no further recoveries will fall due. We have made no allowance or adjustment in our valuation for any other future commutations with the remaining insurers. 3.9.4 Unpaid insurance recoveries We have not included within our liability estimate any allowance for insurance recoveries under the claims occurring period that are due but have not yet been collected. We are advised that such monies amount to approximately $2m at 31 March 2020. These amounts are more appropriately dealt with as being debtors of AICFL. 3.9.5 Bad and doubtful debt allowance on Insurance Recoveries We have made allowance for bad and doubtful debts on future Insurance Recoveries within our valuation by use of the default rates as shown in the table below. KPMG | 21 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Table 3.3: Credit rating default rates by duration Rating Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr. 5 Yr. 6 Yr. 7 Yr. 8 Yr. 9 Yr. 10 Yr. 11 Yr. 12 Yr. 13 Yr. 14 Yr. 15 AAA 0.00% 0.03% 0.13% 0.24% 0.35% 0.45% 0.51% 0.59% 0.65% 0.70% 0.73% 0.76% 0.79% 0.85% 0.92% AA+ 0.00% 0.05% 0.05% 0.10% 0.15% 0.21% 0.26% 0.32% 0.38% 0.44% 0.50% 0.56% 0.62% 0.69% 0.76% AA 0.02% 0.03% 0.08% 0.22% 0.36% 0.48% 0.60% 0.71% 0.80% 0.89% 0.97% 1.03% 1.14% 1.20% 1.27% AA- 0.03% 0.08% 0.17% 0.25% 0.32% 0.44% 0.50% 0.55% 0.61% 0.66% 0.72% 0.79% 0.81% 0.85% 0.90% A+ 0.05% 0.09% 0.20% 0.33% 0.43% 0.53% 0.64% 0.76% 0.89% 1.03% 1.17% 1.31% 1.47% 1.66% 1.83% A 0.06% 0.14% 0.23% 0.35% 0.48% 0.65% 0.83% 1.00% 1.19% 1.41% 1.59% 1.73% 1.86% 1.95% 2.12% A- 0.06% 0.16% 0.26% 0.38% 0.54% 0.70% 0.93% 1.10% 1.23% 1.34% 1.45% 1.58% 1.71% 1.83% 1.92% BBB+ 0.10% 0.29% 0.50% 0.73% 0.97% 1.25% 1.46% 1.68% 1.93% 2.17% 2.41% 2.58% 2.80% 3.07% 3.37% BBB 0.16% 0.41% 0.64% 1.01% 1.36% 1.72% 2.04% 2.36% 2.72% 3.08% 3.46% 3.77% 4.01% 4.12% 4.33% NR 3.66% 7.13% 10.12% 12.56% 14.55% 16.18% 17.55% 18.69% 19.70% 20.62% 21.39% 22.02% 22.60% 23.13% 23.65% R 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Source: Standard & Poors’ 2018 Annual Global Corporate Default Study and Rating Transitions. NR relates to companies which are Not Rated R relates to companies which have been subject to Regulatory Action regarding solvency. We have considered the credit rating of the insurers (and/or their parent companies) of the Liable Entities as at March 2020 and applied the relevant credit rating default rates to the expected future cashflows by year, treaty and insurer. 3.10 Cross-claim recoveries A cross-claim can be brought by, or against, one or more Liable Entities. Cross-claims brought against a Liable Entity (“Contribution Claims”) are included in our analysis of the claims experience. Cross-claims brought by a Liable Entity relate to circumstances where the Liable Entity seeks to join (as a cross-defendant) another party to the claim in which the Liable Entity is already joined. Our approach in the valuation has been to separately value the rate of recovery (“cross-claims recovery rate”) as a percentage of the gross award based on historical experience of such recoveries. Our analysis and assumptions selected are summarised in Section 9.4. 3.11 Discounting cashflows Cashflows are discounted on the basis of yields available at the valuation date on Commonwealth of Australia fixed interest Government Bonds (“Commonwealth Government Bonds”) of varying coupon rates and durations to maturity. Our approach to the determination of the discount rates is broadly unchanged from the approach adopted at 31 March 2019, and is: • For years 1 to 16, zero coupon spot rates were determined by reference to the prices, coupons and durations of Commonwealth Government Bonds; • For years 19 and onwards, we have selected a uniform long-term discount rate of 4.00% per annum (FY2019: 4.50% per annum); and • For years 17 and 18, we have selected spot rates that “linearly interpolate” between the year-16 rate and the year-19 rate (of 4.00%). Our selected assumptions are summarised in Section 9.3. KPMG | 22 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
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Claims Experience: Mesothelioma Claim Numbers 4.1 Overview The following chart shows the number of mesothelioma claims reported by year of notification. Figure 4.1: Number of mesothelioma claims reported annually 500 450 438 413 397 393 400 369 374 376 350 305 309 300 276 270 268 259 250 200 150 100 50 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year of notification Note: Throughout Sections 4 to 9, the date convention used in tables and charts is that \(for example\) 2008/09 indicates the financial year running from 1 April 2008 to 31 March 2009. Furthermore, unless clearly identifying a calendar year, the label “2008” in charts or tables would indicate the financial year running from 1 April 2008 to 31 March 2009. For 2019/20, there were 438 mesothelioma claims reported. This represented a 16% increase relative to the prior year. KPMG | 23 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative \(“KPMG International”\), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
4.2 External statistics on mesothelioma claims incidence The following chart compares the total number of mesothelioma cases reported (diagnosed) nationally to the number of mesothelioma claims received by the Liable Entities. It should be noted that the two sets of data correspond to different definitions of year and so are not directly comparable and some caution should be exercised. The “year” is calendar year for the national cases (i.e. 2012 is the year running from 1 January 2012 to 31 December 2012); whilst for the Liable Entities it is the financial year (i.e. 2012 is the year running from 1 April 2012 to 31 March 2013). Figure 4.2: Number of mesothelioma cases reported nationally compared to the number of claims received by the Liable Entities 800 80.0% 700 70.0% 600 60.0% 500 50.0% 400 40.0% 300 30.0% 200 20.0% 100 10.0% 0 0.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Claims received by the Liable Entities Number of cases diagnosed nationally Liable Entities as % of national cases (31/3/20) (RHS) Liable Entities as % of national cases (31/3/19) (RHS) Liable Entities as % of national cases (31/3/18) (RHS) Sources: Australian Cancer Incidence and Mortality book for Mesothelioma, Australian Institute of Health and Welfare, updated February 2018 for 2000-2013 Annual Report of the Australian Mesothelioma Registry for 2014 and onwards The annual number of mesothelioma cases diagnosed nationally was relatively stable for the period 2007 to 2011 varying between 666 and 704 cases. In calendar year 2018, the number of cases diagnosed nationally (as currently reported) fell to 662. It should be noted there may be a considerable degree of under-reporting in the 2018 year and, to a lesser extent, the 2017 year, noting that: • The 2015 year was first reported as 650, and this increased to 710 (as reported in the 2016 Australian Mesothelioma Registry Report), then to 734 (as reported in the 2017 Australian Mesothelioma Registry Report), and now to 745 (as reported in the 2018 Australian Mesothelioma Registry Report). • The 2016 year was first reported as 700, and this increased to 757 (as reported in the 2017 Australian Mesothelioma Registry Report), and now to 773 (as reported in the 2018 Australian Mesothelioma Registry Report). KPMG | 24 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
These increases in national statistics lead to a lower ratio for the number of Liable Entity claims as a percentage of the number of national cases of mesothelioma. As a consequence the currently estimated 57% for 2018/19 may be over-stated and (if previous experience of initial under-reporting of the number of national cases were to recur) may be more in the order of 50%. It should be noted that not all cases of mesothelioma result in a claim being brought in Common Law. Furthermore, even if a claim is brought, not all claims will involve the Liable Entities. In relation to NSW, we have additional information from the Dust Diseases Tribunal (NSW) that indicates what proportion of common law claims the Liable Entities are joined in for NSW. For the DDB/DDA data, the “year” is financial year (i.e. 2012 is the year running from 1 July 2012 to 30 June 2013). In contrast, in the DDT data, “year” is defined as a calendar year (i.e. 2012 is the year running from 1 January 2012 to 31 December 2012). It should be noted that the four sets of data correspond to different definitions of year and so are not directly comparable and some caution should be exercised. Figure 4.3: Number of mesothelioma cases reported in NSW 300 250 200 150 100 50 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 NSW Claims (AICF) DDB/DDA cases NSW cases DDT cases Sources: NSW Central Cancer Registry Reporting Module, 2012 for 2007-2012. Australian Mesothelioma Registry for 2013-2018. Insurance and Care NSW Annual Report 2018-19. DDT statistics provided by the State of New South Wales The chart shows that whilst the number of NSW cases of mesothelioma has been relatively stable across the period since 2007/08, other than the 12% increase in 2016 and the consequential reductions in 2017 and 2018, the number of common law DDT cases has risen by 56% between 2007 and 2019. The Liable Entities have experienced a broadly similar rate of growth in claim numbers in that same period. The data would appear to indicate that the Liable Entities are not being increasingly joined in common law claims in NSW, nor that there is necessarily an increasing prevalence of mesothelioma in NSW, but rather that the proportion of people being diagnosed who then KPMG | 25 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
bring a common law claim is the primary factor leading to the increases in claim numbers that have been observed in the last ten years (i.e. there has been an increase in the propensity to claim). The chart below shows the mix of national cases by age. The data shows a broadly similar pattern to AICF’s own experience, with the proportion of cases relating to people under 70 years of age trending down and currently comprising around 25% of all cases. Figure 4.4: Age profile of mesothelioma cases nationally 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 <60 60-70 70-80 80+ Sources: Australian Institute of Health and Welfare; Australian Mesothelioma Registry Report Note: Data by age cohort for 2017 was not published in the 2017 Australian Mesothelioma Registry Report KPMG | 26 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
4.3 Profile of mesothelioma claims 4.3.1 Direct claims and cross claims The following chart shows the number of claims separately as between claims brought by claimants (‘direct claims’) and claims brought by other defendants (‘cross claims’). Figure 4.5: Number of mesothelioma claims by type of claim 350 326 315 316 309 304 300 284 288 249 250 218 219 208 211 192 200 150 122 100 90 85 87 82 86 84 68 67 72 56 59 50 50 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year of notification Direct claims Cross claims Both direct and cross claims have experienced an increase in the number of claims in 2019/20 at 316 and 122 respectively. However, the most notable of these was the increase in cross claims from 72 claims in 2018/19 to 122 claims in 2019/20. 4.3.2 Source of claims Renovator claims can involve both short periods and long periods of exposure and the definition used in the chart below also includes other family and home exposures (e.g. family members involved in washing clothes of people who were using asbestos products). The number of renovator claims in 2019/20 has shown a material increase since 2016/17, to the highest level historically observed. For non-renovator claim, the number of claims has also significantly increased relative to the favourable experience in 2018/19; reverting back to the level observed in 2015/2016. The increase this year is primarily related to the high cross claims reporting activity. KPMG | 27 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Figure 4.6: Number of mesothelioma claims by source of claim 300 250 240 227 232 208 200197 198 189 190 200 180 186 184 185 163 154 156 153 149 143 146 144 150 130129 122 127 115 100 50 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year of notification Renovator Non Renovator 4.3.3 Delay from diagnosis to notification The chart below measures the time-lag (in days) from diagnosis of mesothelioma to notification of a claim against the Liable Entities. Direct claims have typically taken between 5 months and 7 months to be reported after diagnosis of mesothelioma. The increase in the time-lag for cross claims in 2019/20 is primarily a function of a number of claims relating to South Australian power stations involving two cross-claimants. Figure 4.7: Delay from diagnosis of mesothelioma to notification of claim against the Liable Entities 700 600 500 400 300 200 100 Average lag (days) between diagnosis and notification and notification diagnosis between lag (days) Average 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Notification year Cross claims Direct claims KPMG | 28 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
4.4 Profile of mesothelioma claims: direct claims 4.4.1 Claims by State Claims reporting for direct claims has varied between 288 and 326 claims in the last six years. NSW remains the most significant State in terms of the numbers of direct claims, at between 35% and 40% of direct claims. After two favourable years of experience, Victoria has reverted to prior observed levels. Figure 4.8: Number of mesothelioma direct claims by State 350 300 250 200 150 100 50 0 2014 2015 2016 2017 2018 2019 NSW VIC WA SA QLD NT 4.4.2 Age profile of claimants The chart below shows that the primary source of growth since 2007/08 has been for claimants over the age of 70. Since 2007/08, the total number of claims for claimants under the age of 70 has been relatively stable, whilst the number of claims for claimants over 70 have more than doubled. Figure 4.9 Number of mesothelioma direct claims by age of claimant 160 140 120 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year of notification < 60 60 - 70 70 - 80 80 + KPMG | 29 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
4.5 Profile of mesothelioma claims: cross claims 4.5.1 Claims by State We have analysed the number of mesothelioma claim notifications by the State in which the cross claim is filed. Figure 4.10: Number of mesothelioma cross claims by State 140 120 100 80 60 40 20 0 2014 2015 2016 2017 2018 2019 NSW VIC WA SA QLD NT In 2019/20, NSW recorded its joint-highest level of claims reporting for cross claims (at the same level as 2017/18). Victoria also recorded its highest level of claims reporting for cross- claims. Notwithstanding these two features, the most material increase in cross claims reporting emerged from South Australia and most notably a significant number of claims relating to power station exposures. There were 14 claimants where “duplicate claims” arose (i.e. 2 cross claims were lodged for each claimant). We understand that a number of these claims related to claims that were brought against the other entities up to 7 years ago and the lodgement of these cross claims against the Liable Entities was pending resolution of a legal matter that did not involve the Liable Entities. It is also expected that some of these claims may give rise to either a sharing of the potential liability or the recovery of monies by Amaca (by way of separate cross-claim action) given the claims relate to the Hardie-BI joint venture. KPMG | 30 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
4.5.2 Age profile of claimants The chart below shows that the primary source of growth in 2019/20 has been for claimants over the age of 70. Figure 4.11: Number of mesothelioma cross claims by age of claimant 60 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year of notification < 60 60 - 70 70 - 80 80 + It is clearly observable that there has been a material increase in the number and proportion of claimants aged 70-80 and 80+. Analysis indicates that this growth in claim volumes is primarily from South Australia and relates to the power station claims. As noted later in this document, the variation in claim size by age for cross-claimants appears to be less significant than it is for direct claimants. In other words, age mix by cross-claimants is not as substantial a factor to the overall valuation when compared with age mix for direct claims, albeit there is still some variation by age cohort. KPMG | 31 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
4.6 Base valuation assumption for number of mesothelioma claims The actual claims reporting experience in 2019/20 has been 16% higher than expectations for 2019/20 in relation to overall mesothelioma claim numbers. At the 31 March 2020 valuation, we have considered it appropriate to set assumptions separately for direct and cross claims and for each of the four age cohorts. The number of direct claims (at 316 claims) has been approximately 5% higher than expectations and 4% higher than the previous year. Additionally, the experience across the last six years has varied between 288 and 326 claims. We have set our assumption for direct claims for 2020/21 at 312 claims, being broadly equal to the average of the last three years of claims reporting activity. The number of cross claims (at 122 claims) was far beyond levels previously experienced. It is not clear if this level of claims reporting was a one-off or will continue in future years. Additionally, we have also observed that of the 33 cross claims from South Australia, there are 14 claimants with “duplicate claims” (i.e. where there are 2 claim records for each claimant). In this context, and noting this is also the first year of this heightened level of cross claims reporting, we have selected an assumption of 108 cross claims for 2020/21. In total, we are therefore projecting 420 mesothelioma claims to be reported in 2020/21. The table below summarises the overall assumptions and the mix assumptions by age cohort for 2020/21, as well as providing a comparison of the previous two years’ actual experience. Table 4.1: Assumed mix of claims by age cohort and type of claim for 2020/21 FY21 FY21 FY20 Actual FY20 Actual FY19 Actual FY19 Actual Assumption Assumption Numbers % Numbers % Numbers % Mesothelioma (direct claims) 312 316 304 <60 21 6.7% 21 6.6% 16 5.3% 60-70 63 20.2% 60 19.0% 57 18.8% 70-80 144 46.2% 145 45.9% 146 48.0% 80+ 84 26.9% 87 27.5% 84 27.6% age not known 0 0.0% 3 0.9% 1 0.3% Mesothelioma (cross claims) 108 122 72 <60 3 2.8% 2 1.6% 5 6.9% 60-70 21 19.4% 20 16.4% 14 19.4% 70-80 51 47.2% 57 46.7% 31 43.1% 80+ 33 30.6% 33 27.0% 19 26.4% age not known 0 0.0% 10 8.2% 3 4.2% KPMG | 32 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
4.7 Inherent uncertainties in the future number of mesothelioma claims There remain material uncertainties in relation to the base level of claims reporting and the total future number of mesothelioma claims to be reported against the Liable Entities. It is possible that claims reporting activity could increase next year, or fall next year. There remain uncertainties in relation to the peak period of claims reporting for mesothelioma, particularly given that 2019/20 saw the highest number of mesothelioma claims received historically, albeit primarily this was due to the extremely high level of cross-claims reporting. Additionally, it is unclear whether this level of cross claims reporting is a one-off feature or will recur in future years. There also remain material uncertainties as to the pace at which future claims reporting will reduce (“the decay rate”) as well as the rate of co-joining of the Liable Entities in common law claims. Additionally, should the mix of claims by claimant age or the mix between direct claims and cross claims change relative to that currently assumed, the overall average claim sizes emerging would differ from that currently expected. Depending on the outcome of future experience, further changes to the valuation assumptions and therefore to the valuation results may be necessary in future periods. Such changes could be material. As a consequence of the above noted uncertainties, further volatility in relation to the valuation result should be anticipated. Section 11 of our Report provides an indication of the sensitivity of the valuation result to the peak period and the decay rate of mesothelioma claims reporting after 2020/21. KPMG | 33 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
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Claims Experience: Claim numbers \(non-mesothelioma\) 5.1 Overview The table below shows the number of claims reported by year of notification and by disease category. Table 5.1: Number of claims by disease type Notification Year Asbestosis Lung Cancer ARPD & Other Wharf Workers 2007 171 28 43 8 46 2008 163 40 44 11 59 2009 120 40 43 3 61 2010 141 13 36 8 30 2011 110 15 36 6 30 2012 128 33 38 7 27 2013 117 26 49 15 32 2014 143 25 39 11 34 2015 91 19 30 11 29 2016 97 18 33 11 24 2017 87 26 28 8 20 2018 103 15 39 13 22 2019 136 25 33 4 21 2007-2019 1,607 323 491 116 435 All Years 2,620 672 860 246 1,448 5.2 Asbestosis claims In 2019/20, there were 136 asbestosis claims reported: the highest level since 2014/15. The last three years have averaged 109 claims and the last four years have averaged 106 claims. In selecting our assumption for 2020/21, we have \(in broad terms\) taken the average of the last three years as a base level. We have assumed 108 asbestosis claims will be reported in 2020/21. In doing so, we have not given significant weight to the 2019/20 experience so far, noting the favourable experience of the previous four years; instead therefore treating 2019/20 as a one- off at this stage. Should experience remain elevated in 2020/21, this assumption would likely need to increase further. 5.3 Lung cancer claims In 2019/20, there were 25 lung cancer claims reported. The last three years have averaged 22 claims and the last four years have averaged 21 claims. We have assumed 24 lung cancer claims will be reported in 2020/21. KPMG | 34 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative \(“KPMG International”\), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
5.4 ARPD & Other claims In 2019/20, there were 33 ARPD & Other claims reported. The last three years have averaged 33 claims and the last four years have averaged 33 claims. We have assumed 36 ARPD & Other claims will be reported in 2020/21. 5.5 Workers Compensation claims In 2019/20, there were 21 Workers Compensation claims reported. The last four years have varied between 20 and 24 claims. We have assumed 24 Workers Compensation claims will be reported in 2020/21. It should be noted that the financial impact of this source of claim is not substantial to the Liable Entities given the proportion of claims which are settled for nil liability against the Liable Entities (typically above 90%), which results from the insurance arrangements in place. 5.6 Wharf claims In 2019/20, there were 4 Wharf claims reported. The previous six years varied between 8 claims and 15 claims. We have assumed 12 wharf claims will be notified in 2020/21. Again, the financial impact of this source of claim is not currently significant. 5.7 Summary of base claims numbers assumptions (including mesothelioma) As outlined in Sections 4 and 5, our assumptions as to the number of claims to be reported in 2020/21 are as follows: Table 5.2: Claim numbers experience and assumptions for 2020/21 FY21 FY19 actual FY20 actual FY20 expected assumption Mesothelioma 376 438 378 420 Asbestosis 103 136 96 108 Lung Cancer 15 25 21 24 ARPD & Other 39 33 33 36 Wharf 13 4 12 12 Worker 22 21 24 24 Total 568 657 564 624 FY20 Expected is the assumption selected for 2019/20 in our previous valuation report. KPMG | 35 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
5.8 Baryulgil Almost half of the claims settled which relate to asbestos mining activities at Baryulgil (as discussed previously in Section 1.2.3) have been settled with no liability against the Liable Entities; and for the remaining settled claims, the Liable Entities have typically borne one-third to one-half of the settlement amount, reflecting the contribution by other defendants to the overall settlement (including those which have since been placed in liquidation). For the purposes of our valuation, we have estimated there to be 8 future claims reported, comprising 5 mesothelioma claims and 3 non-mesothelioma claims. We have assumed average claims and legal costs broadly in line with those described in Section 7. Our projected liability assessment at 31 March 2020 of the additional provision (for claims not yet reported) that could potentially be required is an undiscounted liability of $2.2m and a discounted liability of $2.1m, all of which is deemed to be a liability of Amaca. KPMG | 36 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
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Exposure and Latency Experience and Incidence Pattern Assumptions 6.1 Mesothelioma claims experience 6.1.1 Exposure information from claims notified to date We have reviewed the actual exposure information available for claims notified to date. This has been conducted by using the exposure dates stored in the claims database at an individual claim level and identifying the number of person-years of exposure in each exposure year. Figure 6.1: Exposure \(person-years\) of all Liable Entities’ mesothelioma claimants to date 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1920 1923 1926 1929 1932 1935 1938 1941 1944 1947 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 Exposure year The chart shows that, currently, the peak year of exposure for claims reported to date is in 1972. It should be recognised that there is a degree of bias in this analysis in that the claims notified to date will tend to have arisen from the earlier periods of exposure. Over time, we expect the right-hand side of this curve to develop and the peak year of exposure to trend towards the early-1970s to mid-1970s, and an increase in the absolute level at all periods of exposure as more claims are notified and the associated exposures from these are included in the analysis. KPMG | 37 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative \(“KPMG International”\), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
The relatively low level of exposure from 1987 onwards (about 5% of the total) is not unexpected given that all asbestos products ceased being manufactured by the Liable Entities by 1987. The exposure after that date likely results from usage of products already produced and sold before that date. The chart above is a cumulative chart of the position to date and does not show trends in the allocation of claims to exposure years over time. For example, one would expect that more recently reported claims should be associated with, on average, later exposures; and that claims reported in future years would continue that trend towards later exposure periods. To understand better these trends, we have modelled claimants’ exposures for each past claim report year. Figure 6.2: Exposure (person years) of all mesothelioma claimants to date by report year and exposure period 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year of notification 1920-1959 1960-1969 1970-1975 1976-1980 1981-1985 1986 onwards As can be seen in the chart above, there has been a general increasing shift towards the exposure period after 1970, evident by the downwards trends in the chart from left to right indicating that an increasing proportion of the claimants’ exposure relates to more recent exposure periods. For example, pre-1970 exposures made up approximately 45% of mesothelioma claims exposures in 2007/08 but less than 30% of claims exposures in 2019/20. We would expect that such a trend (towards claims emerging from later exposure periods) should continue for some time to come. KPMG | 38 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
6.2 Mesothelioma: direct claims 6.2.1 Latency period of reported claims We have analysed the actual latency period of the reported claims of the Liable Entities. In the charts that follow, we have measured the average actual latency period from the average date of exposure to the date of notification of a claim. The chart below shows the average latency observed for mesothelioma claims and the 25th percentile and 75th percentile observations. Figure 6.3: Latency of mesothelioma direct claims 50 500 45 450 40 400 35 350 30 300 25 250 20 200 Number of claims of Number 15 150 10 100 5 50 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Latency period (years) of claims reported in report year in report reported claims of (years) period Latency Year of notification Average latency of reported claims 25th percentile latency of reported claims 75th percentile latency of reported claims Number of claims reported The observed average latency period from the average exposure is currently approximately 44 years for direct claims, increasing at about 0.6 years for each passing year. The observed average latency of claims reported in future report years should also be expected to show a further upward trend in the coming years. Figure 6.4: Latency distribution of mesothelioma direct claims 300 250 200 150 Number of claims of Number 100 50 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 Latency (years) KPMG | 39 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Our latency model assumes a “normal distribution” and the chart seems to (in broad terms) support that assumption at this time. For direct claims, the mean latency to date is 39 years, the median latency to date is 39 years, and the mode of the latency is 40 years. The standard deviation is around 8.6 years. The following chart shows how the average reported latencies vary between each of the age groups. Figure 6.5: Latency of mesothelioma direct claims by age of claimant 50 45 40 35 30 25 20 Latency period (years) of claims reported in report year in report reported claims of (years) period Latency 15 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year of notification <60 60 - 70 70 - 80 80+ Combined Our latency model for mesothelioma direct claims from first exposure assumes a mean latency of 39 years and a standard deviation of 9 years. 6.2.2 Overall future incidence pattern and IBNR claim numbers The following chart shows the pattern of future notifications which have resulted from the application of our methodology. Figure 6.6: Projected future claim notifications for mesothelioma direct claims 350 300 250 200 150 100 50 0 2019 / 2020 2020 / 2021 2021 / 2022 2022 / 2023 2023 / 2024 2024 / 2025 2025 / 2026 2026 / 2027 2027 / 2028 2028 / 2029 2029 / 2030 2030 / 2031 2031 / 2032 2032 / 2033 2033 / 2034 2034 / 2035 2035 / 2036 2036 / 2037 2037 / 2038 2038 / 2039 2039 / 2040 2040 / 2041 2041 / 2042 2042 / 2043 2043 / 2044 2044 / 2045 2045 / 2046 2046 / 2047 31 March 2019 projection Model 1: 31 March 2019 projection rebased to FY21 Seed Value Model 2: 31 March 2020 Model with FY21 Seed Value KPMG | 40 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
6.2.3 Assumed change in future mix of claims by claimant age We have assumed a mix of direct claims by claimant age for 2020/21 as follows: • 6.7% (21 claims) for ages less than 60, • 20.2% (63 claims) for ages 60-70, • 46.2% (144 claims) for ages 70-80, • 26.9% (84 claims) for ages over 80. The following chart shows the change in mix of claims by claimant age over time both historically and projected into the future periods. Figure 6.7: Mix of claims by claimant age for mesothelioma direct claims 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 <60 60-70 70-80 80+ 6.2.4 Impact to projected future claim numbers The table below summarises the projected future claim numbers for mesothelioma direct claims by period and compares the current valuation with the previous valuation projection. Table 6.1: Projected future mesothelioma direct claims by reporting period Claim Number Projections: Previous Current Valuation Valuation Direct Valuation Valuation change change (%) FY2020 300 316 16 5.3% FY21 - FY25 1,247 1,354 107 8.6% FY26 - FY30 781 828 47 6.1% FY31 - FY40 558 574 16 3.0% FY41 - FY45 62 64 2 2.5% 1 April 2045 onwards 24 24 1 3.3% Total 2,971 3,160 189 6.4% FY2020 to FY2025 1,547 1,670 123 8.0% FY2026 onwards 1,424 1,490 66 4.7% The higher starting value for 2020/21 has increased the future number of direct claims in the period FY21-FY25. However, the shorter mean latency and standard deviation lead to smaller percentages increases in projected claims reporting for later periods. KPMG | 41 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
6.3 Mesothelioma: cross claims 6.3.1 Latency period of reported claims We have analysed the actual latency period of the reported claims of the Liable Entities. In the charts that follow, we have measured the average actual latency period from the average date of exposure to the date of notification of a claim. The chart below shows the average latency observed for mesothelioma claims and the 25th percentile and 75th percentile observations. Figure 6.8: Latency of mesothelioma cross claims 55 500 50 450 45 400 40 350 35 300 30 250 25 200 20 claims of Number 150 15 10 100 5 50 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Latency period (years) of claims reported in report year in report reported claims of (years) period Latency Year of notification Average latency of reported claims 25th percentile latency of reported claims 75th percentile latency of reported claims Number of claims reported The observed average latency period from the average exposure is currently approximately 47 years for cross claims, increasing at about 0.8 years for each passing year. Figure 6.9: Latency distribution of mesothelioma cross claims 80 70 60 50 40 Number of claims of Number 30 20 10 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 Latency (years) Our latency model assumes a “normal distribution” and the chart seems to (in broad terms) support that assumption at this time, whilst noting that smaller claim numbers will lead to more volatility (and a lower ‘goodness of fit’). KPMG | 42 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
For cross claims, the mean latency to date is 40.5 years, the median latency is 41 years and the mode of the latency is 44 years. The standard deviation is around 10 years. The following chart shows how the average reported latencies vary between each of the age groups. Figure 6.10: Latency of mesothelioma claims by age of claimant and type of claim 55 50 45 40 35 30 25 20 Latency period (years) of claims reported in report year in report reported claims of (years) period Latency 15 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year of notification <60 60-70 70 - 80 80+ Combined Our latency model for mesothelioma cross claims from first exposure assumes a mean latency of 41 years and a standard deviation of 10 years. 6.3.2 Overall future incidence pattern and IBNR claim numbers The following chart shows the pattern of future notifications which have resulted from the application of our methodology. Figure 6.11: Projected future claim notifications for mesothelioma cross claims 140 120 100 80 60 40 20 0 2019 / 2020 2020 / 2021 2021 / 2022 2022 / 2023 2023 / 2024 2024 / 2025 2025 / 2026 2026 / 2027 2027 / 2028 2028 / 2029 2029 / 2030 2030 / 2031 2031 / 2032 2032 / 2033 2033 / 2034 2034 / 2035 2035 / 2036 2036 / 2037 2037 / 2038 2038 / 2039 2039 / 2040 2040 / 2041 2041 / 2042 2042 / 2043 2043 / 2044 2044 / 2045 2045 / 2046 2046 / 2047 31 March 2019 projection Model 1: 31 March 2019 projection rebased to FY21 Seed Value Model 2: 31 March 2020 Model with FY21 Seed Value KPMG | 43 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
6.3.3 Assumed change in future mix of claims by claimant age We have assumed a mix of cross claims by claimant age for 2020/21 as follows: • 2.8% (3 claims) for ages less than 60, • 19.4% (21 claims) for ages 60-70, • 47.2% (51 claims) for ages 70-80, • 30.6% (33 claims) for ages over 80. The following chart shows the change in mix of claims by claimant age over time both historically and projected into the future periods. Figure 6.12: Mix of claims by claimant age for mesothelioma cross claims 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 <60 60-70 70-80 80+ 6.3.4 Impact to projected future claim numbers The table below summarises the projected future claim numbers for mesothelioma cross claims by period and compares with the previous valuation projection. Table 6.2: Projected future mesothelioma cross claims by reporting period Previous Current Valuation Valuation Claim Number Projections: Cross Valuation Valuation change change (%) FY2020 78 122 44 56.4% FY21 - FY25 324 492 168 51.7% FY26 - FY30 203 343 140 69.1% FY31 - FY40 145 281 136 94.1% FY41 - FY45 16 35 19 118.0% 1 April 2045 onwards 6 14 7 120.7% Total 772 1,287 515 66.6% FY2020 to FY2025 402 614 212 52.6% FY2026 onwards 370 673 303 81.9% The materially higher starting value for 2020/21 has significantly increased the future number of cross claims in the period FY21-FY25. Additionally, the assumed longer mean latency and standard deviation lead to higher percentages increases in projected claims reporting for later periods. KPMG | 44 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
6.4 Non-mesothelioma experience 6.4.1 Latency period of reported claims The trend in latency periods for other disease types is shown in the following charts. Figure 6.13: Latency of asbestosis claims 60 180 50 150 40 120 30 90 20 60 claims of Number 10 30 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Latency period (years) of claims reported in report year in report reported claims of (years) period Latency Year of notification Average latency of reported claims 25th percentile latency of reported claims 75th percentile latency of reported claims Number of claims reported Figure 6.14: Latency of lung cancer claims 60 60 50 50 40 40 30 30 20 20 claims of Number 10 10 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Latency period (years) of claims reported in report year in report reported claims of (years) period Latency Year of notification Average latency of reported claims 25th percentile latency of reported claims 75th percentile latency of reported claims Number of claims reported KPMG | 45 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Figure 6.15: Latency of ARPD & Other claims 60 60 50 50 40 40 30 30 20 20 claims of Number 10 10 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Latency period (years) of claims reported in report year in report reported claims of (years) period Latency Year of notification Average latency of reported claims 25th percentile latency of reported claims 75th percentile latency of reported claims Number of claims reported The average observed latency periods for the other disease types show a more surprising trend, appearing to be longer than epidemiological literature has tended to suggest. A summary of our underlying latency assumptions by disease type are shown below. The mean and standard deviation values quoted are applied to a normal distribution model. Table 6.3: Assumed underlying latency distribution parameters from average date of exposure to date of notification Standard Mean latency deviation of (years) latency (years) Asbestosis 35 8 Lung Cancer 35 10 ARPD & Other 32 10 Wharf n/a n/a Workers compensation n/a n/a These assumptions are unchanged from the previous valuation. 6.4.2 Modelled assumptions for peak year of claim incidence Based on the application of our exposure model and our latency model, and the assumptions contained explicitly or implicitly within those models, the peak year of notification of claims reporting against the Liable Entities for each disease type (excluding mesothelioma) is modelled to be as follows: Table 6.4: Modelled peak year of claim notifications Current valuation Previous valuation Asbestosis 2008/09 2008/09 Lung Cancer 2010/11 2010/11 ARPD & Other 2007/08 2007/08 Wharf 2008/09 2008/09 Workers Compensation 2007/08 2007/08 KPMG | 46 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
These modelled assumptions are unchanged and reflect no changes to the exposure data and no changes to the latency model assumptions at this time. We note that whilst the “modelled peak” derived from our model is as shown above, this does not automatically translate to, nor does it imply that, the “highest claims reporting year” will be those years. This is because variation from year to year is expected due to normal ‘statistical variation’ in claim numbers. 6.4.3 Projected incidence patterns We have projected the future number of claim notifications from the curve we have derived using our exposure model and our latency model. We have applied this curve to the base number of claims we have estimated for each disease type for 2020/21 as summarised in Section 5.7. The following chart shows the pattern of future notifications which have resulted from the application of our exposure and latency model and the recalibration of the curve to our revised expectations of claims reporting activity for 2020/21. Figure 6.16: Projected future claim notifications for other disease types 200 175 150 125 100 75 Number claims of Number 50 25 0 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 2024 2027 2030 2033 2036 2039 2042 Year of notification Asbestosis Lung cancer ARPD & Other Wharf Workers KPMG | 47 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
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Claims Experience: Average Claims and Legal Costs 7.1 Overview We have analysed the average claim awards, average plaintiff/other costs and average defendant legal costs by disease type in arriving at our valuation assumptions. The table below shows how the average settlement cost for non-nil attritional \(i.e. non-large\) claims has varied by settlement year. All data have been converted into mid 2019/20 money terms using a historical base inflation index of 4% per annum. We refer to these amounts as “inflated average attritional awards” in the charts and tables that follow. The average amounts shown hereafter relate to the average amount of the contribution made by the Liable Entities, and does not reflect the total award payable to the plaintiff unless this is clearly stated to be the case. In particular, for Workers Compensation the average award reflects the average contribution by the Liable Entities for claims in which they are joined but relates only to that amount of the award determined against the Liable Entities which is not met by a Workers Compensation Scheme or Policy. Table 7.1: Average attritional non-nil claim award \(inflated to mid 2019/20 money terms\) Settlement Mesothelioma Asbestosis Lung Cancer ARPD & Other Wharf Workers Year Compensation 2007 361,392 125,290 175,752 75,543 75,738 418,556 2008 410,176 131,992 129,934 137,809 222,693 84,670 2009 366,109 148,268 150,266 130,644 87,139 148,715 2010 372,211 121,087 195,338 102,742 53,095 0 2011 391,972 149,436 171,129 133,595 104,134 1,231,712 2012 385,600 161,242 153,915 114,284 46,301 111,854 2013 394,704 125,007 131,239 123,126 131,360 25,306 2014 366,832 120,840 167,559 87,092 97,361 85,166 2015 346,429 117,688 136,099 120,237 157,667 0 2016 310,538 88,316 45,903 82,171 41,505 0 2017 327,532 113,337 126,562 71,377 85,087 261,387 2018 332,687 96,692 78,160 112,859 57,542 0 2019 332,521 108,337 83,998 139,825 98,606 50,000 KPMG | 48 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative \(“KPMG International”\), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
7.2 Mesothelioma claims 7.2.1 Overall average claim sizes The chart below shows the average claim size for non-nil, non-large claims inflated to mid 2019/20 money terms. Figure 7.1: Average attritional awards (inflated to mid 2019/20 money terms) and number of non-nil claims settlements for mesothelioma claims (excluding large claims) 450,000 450 400,000 400 350,000 350 300,000 300 250,000 250 200,000 200 Average cost Average 150,000 150 100,000 100 claims of Number 50,000 50 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Settlement year Inflated Average Attritional Award Number of non-nil settlements 7.2.2 Claim sizes by age of claimant The following chart shows that there is a significant difference between the average costs of claims for different age groups. Figure 7.2: Average attritional awards (inflated to mid 2019/20 money terms) by age of claimant 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year of settlement <60 60-70 70 - 80 80+ KPMG | 49 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
7.2.3 Claim sizes by claim type and age of claimant The following table shows the comparison of the average cost of claims settled in 2019/20 for direct and cross claims, split by age cohort. This table demonstrates the significant difference between the average costs of claims between direct claims and cross claims. This also explains why the separation of the mesothelioma category between direct claims and cross claims is important if the mix of claims by number is, or has been, changing. Table 7.2: Average attritional awards (inflated to mid 2019/20 money terms) for direct and cross claims by age of claimant Direct Claims Cross Claims # settled Average # settled Average Age (non-nil) Claim Size (non-nil) Claim Size <60 17 614,647 1 135,000 60 - 70 55 428,047 13 81,857 70 - 80 152 393,135 38 88,418 80+ 78 313,356 20 80,703 Overall 302 391,357 72 85,737 KPMG | 50 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
7.3 Mesothelioma: direct claims experience and assumptions The chart below shows the average claim size by age cohort since 2000/01 for direct mesothelioma claims. Figure 7.3: Average attritional awards (inflated to mid 2019/20 money terms) by age of claimant 1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year of settlement <60 60-70 70 - 80 80+ For claimants under the age of 60: • The average size for 2019/20 was $615,000, a 7% reduction on the average size for 2018/19. • The last three years have averaged $654,000; the last four years have averaged $622,000; the last five years have averaged $619,000, the last six years have averaged $635,000; the last seven years have averaged $682,000. • The four-year and five-year averages are particularly influenced by the favourable experience in 2016/17. • We have taken a longer-term view noting the smaller numbers of claims in this age group and because it appears that the experience in 2016/17 was somewhat aberrational. • We have therefore selected an assumption of $675,000. For claimants aged 60-70: • The average size for 2019/20 was $428,000, a 7% reduction on the average size for 2018/19. • The last three years have averaged $434,000; the last four years have averaged $426,000; the last five years have averaged $444,000, the last six years have averaged $456,000; the last seven years have averaged $464,000. • We have taken a longer-term view noting the smaller numbers of claims in this age group. • We have therefore selected an assumption of $460,000. KPMG | 51 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
For claimants aged 70-80: • The average size for 2019/20 was $393,000, a 6% increase on the average size for 2018/19. • The last three years have averaged $374,000; the last four years have averaged $367,000; the last five years have averaged $369,000, the last six years have averaged $365,000; the last seven years have averaged $369,000. • This segment is the largest segment by both number of claims and total expenditure. • We have therefore selected an assumption of $375,000. • We observe that five out of the last six years have seen an average size of $375,000 or less. The experience for the 2019/20 year was particularly influenced by a higher number of claims in excess of $700,000. For claimants aged 80+: • The average size for 2019/20 was $313,000, a 4% increase on the average size for 2018/19. • The last three years have averaged $302,000; the last four years have averaged $303,000; the last five years have averaged $302,000, the last six years have averaged $305,000; the last seven years have averaged $308,000. • We have therefore selected an assumption of $310,000. KPMG | 52 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
7.4 Mesothelioma cross claims experience and assumptions The chart below shows the average claim size by age cohort since 2000/01 for cross claims. Figure 7.4: Average attritional awards (inflated to mid 2019/20 money terms) by age of claimant 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year of settlement <60 60-70 70 - 80 80+ For claimants under the age of 60: • The average size for 2019/20 was $135,000. • There are typically between 1 and 5 claims in this age cohort. As such, the claim size experience can be volatile from year to year depending on the specific circumstances of a small number of claims. • We have therefore selected an assumption of $250,000 whilst noting this assumption is not material to the overall valuation given the small number of claims. For claimants aged 60-70: • The average size for 2019/20 was $82,000. • The last three years have averaged $142,000; the last four years have averaged $142,000; the last five years have averaged $144,000, the last six years have averaged $136,000; the last seven years have averaged $132,000. • We have taken a longer-term view noting the smaller numbers of claims in this age group. • We have therefore selected an assumption of $150,000. KPMG | 53 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
For claimants aged 70-80: • The average size for 2019/20 was $88,000. • The last three years have averaged $99,000; the last four years have averaged $90,000; the last five years have averaged $91,000, the last six years have averaged $93,000; the last seven years have averaged $95,000. • This segment is the largest cross claims segment by both number of claims and total expenditure. • We have therefore selected an assumption of $95,000. For claimants aged 80+: • The average size for 2019/20 was $81,000. • The last three years have averaged $77,000; the last four years have averaged $76,000; the last five years have averaged $80,000, the last six years have averaged $84,000; the last seven years have averaged $83,000. • We have therefore selected an assumption of $85,000. 7.5 Additional allowance for mesothelioma claims for the potential costs from overseas exposures (Talifero vs Amaca) We have made an allowance of $6,000 per mesothelioma claim (in mid 2019/20 money terms). This amount has been applied across all mesothelioma claims, both direct claims and cross claims), to allow for the potential costs arising from overseas exposures consequent to the decision in Talifero vs Amaca. We have then applied that assumption (with wage and superimposed inflation) for future years. Our per-claim adjustment is only applied to mesothelioma claims. KPMG | 54 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
7.6 Asbestosis claims For asbestosis, it can be seen from Table 7.1 that the period since 2007/08 has had volatile average claim size experience, with average claim sizes ranging from $88,000 to $161,000 (in mid 2019/20 money terms). Figure 7.5: Average awards (inflated to mid 2019/20 money terms) and number of non-nil claims settlements for asbestosis claims 180,000 180 160,000 160 140,000 140 120,000 120 100,000 100 80,000 80 Average cost Average 60,000 60 40,000 40 claims of Number 20,000 20 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Settlement year Mar-19 Valn Mar-19 Valn Mar-20 Inflated Average Attritional Award Number of non-nil settlements The average of the past three years is $106,000; the average of the past four years is $102,000 and the average of the past five years is $106,000. In setting an assumption, we also note there has been one asbestosis claim settled as a “large claim” and this is not shown in the above analysis. Taking all of the above factors into consideration, we have adopted a valuation assumption of $110,000 for asbestosis claims in mid 2019/20 money terms. This assumption represents a decrease of 1% in inflation-adjusted terms from our previous assumption. KPMG | 55 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
7.7 Lung cancer claims The average award for lung cancer claims has exhibited some volatility in the past five years, although this is not unexpected given the small volume of claim settlements (approximately 10 to 30 claims per annum). Figure 7.6: Average awards (inflated to mid 2019/20 money terms) and number of non-nil claims settlements for lung cancer claims 240,000 40 200,000 32 160,000 24 120,000 16 80,000 Average cost Average 8 claims of Number 40,000 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Settlement year Mar-19 Valn Mar-19 Valn Mar-20 Inflated Average Attritional Award Number of non-nil settlements The average of the past three years is $87,000; the average of the past four years is $80,000 and the average of the past five years is $92,000. Taking all of the above factors into consideration, and noting the volatility arising from the small number of non-nil claims, we have adopted a valuation assumption of $110,000. This assumption represents a decrease of 10% in inflation-adjusted terms from our previous assumption. KPMG | 56 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
7.8 ARPD & Other claims The average award size has shown considerable volatility and two of the last five years have seen some of the lowest average claim sizes historically observed. Figure 7.7: Average awards (inflated to mid 2019/20 money terms) and number of non-nil claims settlements for ARPD & Other claims 160,000 42 140,000 36 120,000 30 100,000 24 80,000 18 60,000 Average cost Average 12 40,000 Number of claims of Number 20,000 6 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Settlement year Mar-19 Valn Mar-19 Valn Mar-20 Inflated Average Attritional Award Number of non-nil settlements The average of the past three years is $110,000; the average of the past four years is $104,000 and the average of the past five years is $108,000. Each of these is affected by the unusually favourable experience in 2017/18. Taking all of the above factors into consideration, we have adopted a valuation assumption of $110,000 for ARPD & Other claims in mid 2019/20 money terms. This assumption represents an increase of 4% in inflation-adjusted terms from our previous assumption. KPMG | 57 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
7.9 Workers Compensation claims The average award for non-nil Workers Compensation claims has shown a large degree of volatility, reflecting the small number of non-nil claims. Figure 7.8: Average awards (inflated to mid 2019/20 money terms) and number of non-nil claims settlements for Workers Compensation claims 400,000 8 350,000 7 300,000 6 250,000 5 200,000 4 150,000 3 Average cost Average 100,000 2 Number of claims of Number 50,000 1 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Settlement year Mar-19 Valn Mar-19 Valn Mar-20 Inflated Average Attritional Award Number of non-nil settlements It should be noted that the high average claim size in 2011/12 is due to one claim of $900,000 (in 2011/12 values). Furthermore, we understand that this claim payment was recovered from the workers compensation insurer at a later date. Taking all of the above factors into consideration, we have adopted a valuation assumption of $150,000. This assumption represents a decrease of 2% in inflation-adjusted terms from our previous assumption. This assumption is not material to the overall liability given the high proportion of claims (in excess of 90%) which are settled with no retained liability against the Liable Entities. KPMG | 58 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
7.10 Wharf claims For wharf claims, the average of the past three years has been $81,000; the average of the past four years has been $69,000 and the average of the past five years has been $92,000. Figure 7.9: Average awards (inflated to mid 2019/20 money terms) and number of non-nil claims settlements for wharf claims 240,000 12 200,000 10 160,000 8 120,000 6 Average cost Average 80,000 4 Number of claims of Number 40,000 2 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Settlement year Mar-19 Valn Mar-19 Valn Mar-20 Inflated Average Attritional Award Number of non-nil settlements The experience in 2008/09 was impacted by one large claim of almost $600,000 (in 2008/09 values). At this valuation, we have adopted a valuation assumption of $100,000 in mid 2019/20 money terms. This assumption represents a 5% decrease compared to our previous valuation in inflation-adjusted terms. Given the small volume of wharf claims, this assumption is not financially significant to the overall results. KPMG | 59 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
7.11 Mesothelioma large claim size and incidence rates There have been 69 mesothelioma claims settled with awards in excess of $1m in 2006/07 money terms. There has only ever been one cross claim that has been a large claim (settled in 2000). Given this, the assumed large claim incidence rate for cross claims has been set at 0% for all age cohorts. The following analysis is therefore only applicable for direct claims. In aggregate, large claims have been settled at an average cost of approximately $2.47m. There have been two claims of more than $6.0m each in mid 2019/20 money terms. In selecting a large claim incidence rate or an expected annual number of large claims for direct claims, we have analysed the number of large claims by year of notification, separately for each of the four age groups. We have also shown the incidence rate of large claims for each of the age groups. Figure 7.10: Number of large claims by year of notification 12 10 8 6 Number of claims of Number 4 2 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year of notification < 60 60 - 70 70 - 80 80 + KPMG | 60 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Figure 7.11: Large claims incidence rate by age of claimant 25.0% 20.0% 15.0% 10.0% Incidence Rate 5.0% 0.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2007-2019 < 60 60 - 70 70 - 80 There have been no large claims for claimants over the age of 80. We have assumed a future large claim incidence rate of 10.00% for claimants under 60 years of age, 1.00% for claimants between 60 and 70 years of age, and 0.10% for claimants between 70 and 80 years of age. For the average large claim size, we have adopted a valuation assumption of $2.45m in mid 2019/20 money terms and we have adopted the same average claim size for all age groups. This is based on analysis that shows minimal variation in average claim size for large claims between claimants in each of the age cohorts We have made an additional allowance for plaintiff legal costs to allow for those instances where such costs are made additional to, rather than included with, the claims award and also for defence costs. The actual incidence of, and settlement of, large claims is not readily predictable and therefore deviations will occur from year to year due to random fluctuations because of the small numbers of large claims (between 1 and 8 large claims per annum). KPMG | 61 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
7.12 Summary average claim cost assumptions The following table provides a summary of our average claim cost assumptions at this valuation, and those assumed at the previous valuation. Table 7.3: Summary average claim cost assumptions Current Previous % Valuation Valuation change Mesothelioma: Direct <60 681,000 n/a n/a Mesothelioma: Direct 60-70 466,000 n/a n/a Mesothelioma: Direct 70-80 381,000 n/a n/a Mesothelioma: Direct 80+ 316,000 n/a n/a Mesothelioma: Cross <60 256,000 n/a n/a Mesothelioma: Cross 60-70 156,000 n/a n/a Mesothelioma: Cross 70-80 101,000 n/a n/a Mesothelioma: Cross 80+ 91,000 n/a n/a Asbestosis 110,000 111,038 -1% Lung Cancer 110,000 121,613 -10% ARPD & Other 110,000 105,750 4% Wharf 100,000 105,750 -5% Workers Compensation 150,000 153,338 -2% Average Size: Average Size: $2.45m. $2.49m. Mesothelioma Large Claims Frequency: Frequency: (award only) 10.00% (<60), 9.00% (<60), 1.00% (60-70), 1.00% (60-70), 0.1% (70-80) 0.1% (70-80) Note: Both the current valuation assumption and the previous valuation assumption are expressed in mid 2019/20 money terms. Note: For mesothelioma, the previous valuation assumptions were aggregate assumptions across direct and cross claims. As such we have not shown them in the above table. Note: For mesothelioma, the current valuation assumptions include an allowance of $6,000 for the decision in Talifero vs Amaca KPMG | 62 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
7.13 Defence legal costs 7.13.1 Non-nil claims The average defence legal costs for non-nil claims by settlement year have been relatively stable over the last ten years for mesothelioma, asbestosis and ARPD & Other, albeit showing some general downward drift over time. The average defence costs for lung cancer have shown a greater degree of variability, although this is not unexpected given the small volume of claim settlements (approximately 10 to 30 claims per annum). Figure 7.12: Average defence legal costs (inflated to mid 2019/20 money terms) for non-nil claims settlements by settlement year 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Settlement year Mesothelioma Asbestosis Lung cancer ARPD & Other Note: The chart does not include average defence costs for Wharf and Worker claims due to the smaller number of claims involved and the variability that exists as a consequence. 7.13.2 Large claims The average defence legal costs across all large claims to date has been $167,500 although this has generally been trending downwards over time. We have allowed for defence legal costs of $105,000 per large claim having regard to more recent experience. 7.13.3 Nil claims The average defence legal costs for nil claims by settlement year has been volatile for all disease types. For mesothelioma, the volatility is a consequence of low nil settlement rate, meaning that there may be 20 to 30 nil claims in any year. For the other disease types, the number of nil claims might typically be of the order of 10 claims per annum for each disease type. KPMG | 63 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Figure 7.13: Average defence legal costs (inflated to mid 2019/20 money terms) for nil claims settlements by settlement year 60,000 50,000 40,000 30,000 20,000 10,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Settlement year Mesothelioma Asbestosis Lung cancer ARPD & Other Note: The chart does not include average defence costs for Wharf and Worker claims due to the smaller number of claims involved and the variability that exists as a consequence. 7.14 Summary average defendant legal costs assumptions The following table provides a summary of our defendant legal costs assumptions at this valuation, and those assumed at the previous valuation. We have adopted different legal cost assumptions for mesothelioma for the four age groups and separately for direct and cross claims, based on analysis which indicates there is variation (which in part will be related to the average size of claims in each age group and claim type). Table 7.4: Summary average defendant legal costs assumptions Current Valuation Previous Valuation Non Nil Nil Non Nil Nil Claims Claims Claims Claims Mesothelioma: Direct <60 35,000 20,000 n/a n/a Mesothelioma: Direct 60-70 25,000 20,000 n/a n/a Mesothelioma: Direct 70-80 22,000 15,000 n/a n/a Mesothelioma: Direct 80+ 20,000 10,000 n/a n/a Mesothelioma: Cross <60 34,000 10,000 n/a n/a Mesothelioma: Cross 60-70 22,000 10,000 n/a n/a Mesothelioma: Cross 70-80 17,000 10,000 n/a n/a Mesothelioma: Cross 80+ 15,000 10,000 n/a n/a Asbestosis 19,000 7,000 18,675 8,300 Lung Cancer 26,000 15,000 25,938 15,563 ARPD & Other 20,000 10,000 18,675 10,375 Wharf 15,000 5,000 15,563 5,188 Workers Compensation 15,000 1,000 15,563 1,038 Mesothelioma Large 105,000 0 108,938 0 Note: Both the current valuation assumption and the previous valuation assumption are expressed in mid 2019/20 money terms. KPMG | 64 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
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Claims Experience: Nil Settlement Rates 8.1 Overview We have analysed the nil settlement rates, being the number of nil settlements expressed as a percentage of the total number of settlements \(nil and non-nil\). Table 8.1: Nil settlement rates Settlement Year Mesothelioma Asbestosis Lung Cancer ARPD & Other Wharf Workers Compensation 2007 13% 9% 31% 19% 72% 85% 2008 8% 9% 24% 13% 0% 95% 2009 8% 8% 29% 2% 14% 83% 2010 6% 6% 41% 14% 0% 100% 2011 10% 7% 32% 11% 0% 67% 2012 9% 16% 23% 20% 40% 99% 2013 3% 8% 3% 13% 20% 99% 2014 9% 11% 16% 8% 9% 97% 2015 7% 6% 25% 8% 8% 100% 2016 20% 13% 57% 16% 9% 100% 2017 8% 18% 59% 7% 9% 88% 2018 5% 15% 16% 5% 22% 100% 2019 6% 9% 32% 19% 0% 96% KPMG | 65 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative \(“KPMG International”\), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
8.2 Mesothelioma claims Nil settlement rates vary substantially between direct claims and cross claims as shown in the chart below. Figure 8.1: Mesothelioma nil settlement rate for direct claims and cross claims 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Nil Rate: Cross Nil Rate: Direct In considering the future nil settlement rate assumption for direct claims, we observe: • The nil settlement rate for the past three years has averaged 3.1%, for the past four years has averaged 3.3% and for the past five years has averaged 3.3%. • The nil settlement rate for 2019/20 was 3.5% • The average rate from 2007/08 to 2019/20 has been 4%. Taking all of these factors into consideration, we have assumed a future nil settlement rate of 4%. In considering the future nil settlement rate assumption for cross claims, we observe: • The nil settlement rate for the 2016/17 year of 55% was due to 54 Queensland statutory recovery claims being closed at nil cost in December 2016. • The average nil settlement rate from 2007/08 to 2019/20 has been 24%. • Removing the Queensland claims, the nil settlement rate for the past three years has averaged 17%, for the past four years has averaged 19% and for the past five years has averaged 18%. Taking all of these factors into consideration, we have assumed a future nil settlement rate of 19%. The nil settlement rate assumptions have been applied equally to all age groups. We have done this because analysis by age group did not seem to indicate materially different nil settlement rates for the four age groups over time, and because the number of nil claims annually is quite small, meaning that sub-division of experience into four age groups results in reduced credibility and greater volatility. KPMG | 66 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
8.3 Asbestosis claims As with mesothelioma, the historical asbestosis nil settlement rate has been volatile. Figure 8.2: Asbestosis nil claims experience 200 20% 180 18% 160 16% 140 14% 120 12% 100 10% Nil Nil Rate Settlement Number of claims of Number 80 8% 60 6% 40 4% 20 2% 0 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Settlement year Number of settlements Nil settlement rate In considering the future nil settlement rate assumption, we note the following: • The nil settlement rate for the past three years has averaged 14%, for the past four years has averaged 13% and for the past five years has averaged 12%. • The nil settlement rate for 2019/20 was 9%. Taking all of these factors into consideration, we have assumed a future nil settlement rate of 11%, a decrease from our previous valuation assumption of 12%. KPMG | 67 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
8.4 Lung cancer claims Given the small volumes of claims, volatility in the nil settlement rate for lung cancer claims is to be expected. Figure 8.3: Lung cancer nil claims experience 50 100% 45 90% 40 80% 35 70% 30 60% 25 50% Nil Nil Rate Settlement Number of claims of Number 20 40% 15 30% 10 20% 5 10% 0 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Settlement year Number of settlements Nil settlement rate In considering the future nil settlement rate assumption, we note the following: • The nil settlement rate for the past three years has averaged 31%, for the past four years has averaged 38% and for the past five years has averaged 36%. • The nil settlement rate for 2019/20 was 32%. Taking all of these factors into consideration, we have assumed a future nil settlement rate of 28%, an increase from our previous valuation assumption of 25%. KPMG | 68 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
8.5 ARPD & Other claims As with other disease types, there has been significant volatility in the historical nil settlement rate, given the low numbers of claims for this disease. Figure 8.4: ARPD & Other nil claims experience 50 25% 45 40 20% 35 30 15% 25 Nil Nil Rate Settlement Number of claims of Number 20 10% 15 10 5% 5 0 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Settlement year Number of settlements Nil settlement rate The nil settlement rate for the past three years has averaged 11%, for the past four years has averaged 12% and for the past five years has averaged 11%. We have selected 10% as our nil settlement rate assumption, an increase from our previous assumption of 9%. KPMG | 69 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
8.6 Workers Compensation claims The nil settlement rates for Workers Compensation claims have been high and reflect the portion of claims whose costs are fully met by a Workers Compensation Scheme or Policy. The proportion of such claims which are fully met by insurance has been relatively stable since 1997/98, typically varying between 80% and 100%. The nil settlement rate has been in excess of 90% for eight out of the past ten years, and it has been above 80% for nine out of the past ten years. Figure 8.5: Workers Compensation nil claims experience 150 100% 135 90% 120 80% 105 70% 90 60% 75 50% Nil Nil Rate Settlement Number of claims of Number 60 40% 45 30% 30 20% 15 10% 0 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Settlement year Number of settlements Nil settlement rate We have selected 96% as our nil settlement rate assumption, a decrease from our previous valuation assumption of 97%. The overall financial impact of this assumption is not material. KPMG | 70 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
8.7 Wharf claims During the past ten years, the nil settlement rate has exhibited considerably volatility for wharf claims, varying between 0% and 40%. The nil settlement rate for the past three years has averaged 11%, for the past four years it has averaged 11% and for the past five years it has averaged 10%. Figure 8.6: Wharf nil claims experience 20 100% 18 90% 16 80% 14 70% 12 60% 10 50% Nil Nil Rate Settlement Number of claims of Number 8 40% 6 30% 4 20% 2 10% 0 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Settlement year Number of settlements Nil settlement rate We have selected a nil settlement rate assumption of 10%, unchanged from our previous valuation assumption. Given the low volume of claims activity for wharf claims, this assumption is highly subjective but is also not material to the overall liability assessment. 8.8 Summary assumptions The following table provides a summary of our nil settlement rate assumptions at this valuation, and those assumed at the previous valuation. Table 8.2: Summary nil settlement rate assumptions Current Previous Valuation Valuation Mesothelioma: Direct 4.0% n/a Mesothelioma: Cross 19.0% n/a Asbestosis 11.0% 12.0% Lung Cancer 28.0% 25.0% ARPD & Other 10.0% 9.0% Wharf 10.0% 10.0% Workers Compensation 96.0% 97.0% Note: For mesothelioma, our previous valuation adopted an aggregate assumption of 7%. KPMG | 71 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
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Economic and Other Assumptions 9.1 Overview The two main economic assumptions required for our valuation are: • The underlying claims inflation assumptions adopted to project the future claims settlement amounts and related costs. • The discount rate adopted for the present value determinations. We also discuss the basis of derivation of other valuation assumptions, being: • The cross-claim recovery rate; and • The pattern of settlement of future reported claims and pending claims. 9.2 Claims inflation We are required to make assumptions about the future rate of inflation of claims costs. We have adopted a standard Australian actuarial claims inflation model for liabilities of the type considered in this report that is based on: • An underlying, or base, rate of general economic inflation relevant to the liabilities, in this case based on wage/salary \(earnings\) inflation; and • A rate of superimposed inflation, i.e. the rate at which claims costs inflation exceeds base inflation. 9.2.1 Base inflation We have adopted a base \(wage\) inflation assumption for FY2021 onwards of 3.50% per annum. This is a slight reduction from our previous valuation assumption of 3.75% per annum. We have made this reduction in light of continued low wage inflation and economic forecasts for future wage inflation in Australia, whilst also having regard to the lower ten-year government bond yields which are approximately 80 basis points lower than 12 months ago. This assumption applies both to claims awards and legal costs. 9.2.2 Superimposed inflation Superimposed inflation is a term commonly used by Australian actuaries to measure the rate at which average claims costs escalate in excess of a base \(usually wage\) inflation measure. KPMG | 72 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative \(“KPMG International”\), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
As a result, superimposed inflation is a “catch-all” for a range of potential factors affecting claims costs, including (but not limited to): • Courts making compensation payments in relation to new heads of damage; • Courts changing the levels of compensation paid for existing heads of damage; • Advancements in medical treatments – for example, this could lead to higher medical treatment costs (e.g. the cost of the use of new drug treatments); • Allowance for medical costs to rise faster than wages because of the use of enhanced medical technologies; • Changes in life expectancy; • Changes in retirement age – this would increase future economic loss awards; • Changes in the relative share of the liability to be borne by the Liable Entities’ (which we refer to as “the contribution rate”) and which might result from changes in the number of defendants joined in claims; • Changes in the mix of claims costs by different heads of damage; and • Changes in the mix of claimants by age of claimant. Additionally, superimposed inflation also captures those characteristics of claims experience which might have different relative claim sizes but which are currently modelled in aggregate (rather than explicitly and separately modelled). This includes factors such as: • Changes in the mix of claims between direct and cross claims; • Changes in the mix of claims between renovator and non-renovator claims; and • Changes in the mix of claims by the numbers of defendants to each claim. Whilst the future rate of superimposed inflation is uncertain, and not predictable from one year to the next, it is of note that the average claim costs appear to have been relatively stable in recent years (after adjusting for wage inflation) and that, if anything, average claim sizes have trended downwards in recent years. As discussed elsewhere in this report, this reflects the changing mix of claimants by claimant age (shifting towards older claimants). Furthermore, the emergence of new or expanding heads of damage does not tend to proceed smoothly but progresses in “steps”, depending on the outcome of legislative and other developments. We have reviewed the rate of inflation of claims costs by settlement year for the past 19 years for mesothelioma claims. We have assessed this by analysing inflated claim costs and therefore the following chart measures the trend in the rate of superimposed inflation. KPMG | 73 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Figure 9.1: Average mesothelioma awards of the Liable Entities (inflated to mid 2019/20 money terms) by age of claimant 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year of settlement <60 60-70 70 - 80 80+ For claimants under 60 years of age, the rate of superimposed inflation: • Averaged (0.6)% per annum for 2000/01 to 2019/20; • Averaged (1.2)% per annum for 2002/03 to 2019/20; • Averaged 0.5% per annum for 2004/05 to 2019/20; • Averaged (0.6)% per annum for 2007/08 to 2019/20. For claimants 60-70 years of age, the rate of superimposed inflation: • Averaged (0.7)% per annum for 2000/01 to 2019/20; • Averaged (1.5)% per annum for 2002/03 to 2019/20; • Averaged 0.2% per annum for 2004/05 to 2019/20; • Averaged (0.1)% per annum for 2007/08 to 2019/20. For claimants 70-80 years of age, the rate of superimposed inflation: • Averaged 0.5% per annum for 2000/01 to 2019/20; • Averaged (0.2)% per annum for 2002/03 to 2019/20; • Averaged 0.7% per annum for 2004/05 to 2019/20; • Averaged 1.4% per annum for 2007/08 to 2019/20. For claimants 80+ years of age, the rate of superimposed inflation: • Averaged 1.8% per annum for 2000/01 to 2019/20; KPMG | 74 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
• Averaged (1.3)% per annum for 2002/03 to 2019/20; • Averaged (0.1)% per annum for 2004/05 to 2019/20; • Averaged 1.0% per annum for 2007/08 to 2019/20. The actuarial approach for this report is to take an average view for superimposed inflation to be applied over the long-term, noting that there will necessarily be deviations from this average on an annual basis and that cashflows are projected for the next 50 or more years. Weighing all of the evidence together, and in particular recognising that the period since 2000/01 has generally been benign, we have adopted an assumed long-term rate of future superimposed inflation of claims awards of 2.00% per annum. This assumption is applied to the claim awards for all categories of claim and age cohorts. There is no superimposed inflation applied to legal costs. The assumption for superimposed inflation is unchanged from the previous valuation. The outcome of this assumption is a “superimposed inflation allowance” of approximately $270m on a discounted central estimate basis and approximately $320m on an inflated and undiscounted central estimate basis. KPMG | 75 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
9.3 Discount rates: Commonwealth bond zero coupon yields We have calculated the zero coupon yield curve at 31 March 2020 underlying the prices, coupons and durations of Commonwealth Government Bonds for the purpose of discounting the liabilities for this report. The use of such discount rates is consistent with standard Australian actuarial practice for such liabilities, is in accordance with the Institute of Actuaries of Australia’s Professional Standard PS302 and is also consistent with our understanding of the Australian accounting standards. The chart below shows the assumptions for the current valuation and the previous valuation. Figure 9.2: Zero coupon yield curve by duration 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Yield curve at 31 March 2020 Yield curve at 31 March 2019 At this valuation, in light of the continued lower yields at long durations and particularly noting the approximate 40 basis point reduction in the year-16 yield between 31 March 2019 and 31 March 2020, we consider it appropriate to lower the long-term assumption from 4.50% per annum to 4.00% per annum. The reduction in the long-term discount rate has increased the Discounted Central Estimate by approximately $3m. This adjustment is relatively small because the vast majority of the future cashflows (more than 85%) are projected to be paid over the next 18 years. By contrast, the reduction in the discount rates for durations 1 to 16 years has increased the Discounted Central Estimate by approximately $140m. KPMG | 76 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
9.4 Cross-claim recovery rates The following chart shows how the experience of cross-claim recoveries has varied over the last nine years, both in monetary terms and expressed as a percentage of gross payments. Figure 9.3: Cross-claim recovery experience 8,000,000 8.00% 7,000,000 7.00% 6,000,000 6.00% 5,000,000 5.00% 4,000,000 4.00% 3,000,000 3.00% 2,000,000 2.00% 1,000,000 1.00% 0 0.00% 2011 2012 2013 2014 2015 2016 2017 2018 2019 Cross-Claim Recoveries Other Recoveries Recovery rate (%) Cross claim recoveries reduced year on year from 2012/13 to 2015/16, both in absolute terms and as a percentage of gross payments. The subsequent three years saw successive increases in the level of cross-claim recoveries, followed by a slight decrease in 2019/20, whilst still being at levels considerably above previous years. Over the nine-year period, cross claim recoveries have been approximately 3.5% of gross payments. In light of the additional year of experience and given the consistent level of recovery activity in each of the last four years, we have now increased our assumption for cross-claim recoveries to be 3.5% of claims awards (2019: 3.0% of claims awards). KPMG | 77 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
9.5 Settlement Patterns Triangulation methods are used to derive the past pattern of settlement of claims and are used in forming a view on future settlement patterns. The following triangles provide an illustrative example of how we perform this: Figure 9.4: Settlement pattern derivation for mesothelioma claims: paid as % of ultimate cost Yr of Notification 0 1 2 3 4 5 6 7 8 9 10 11 12 2005 57.9% 92.3% 97.5% 97.5% 97.9% 99.4% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 2006 61.7% 93.7% 97.6% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 2007 53.3% 97.1% 99.5% 99.8% 99.8% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 2008 67.3% 96.5% 97.7% 99.3% 99.9% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 2009 57.7% 88.4% 92.7% 99.2% 99.4% 99.8% 100.0% 100.0% 100.0% 100.0% 100.0% 2010 71.7% 96.4% 99.7% 99.9% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 2011 57.1% 96.9% 99.1% 99.7% 100.0% 100.0% 100.0% 100.0% 100.0% 2012 55.7% 97.7% 99.7% 100.0% 100.0% 100.0% 100.0% 100.0% 2013 65.3% 94.9% 99.6% 99.8% 100.0% 100.0% 100.0% 2014 65.8% 96.6% 98.6% 99.5% 100.0% 100.0% 2015 65.5% 96.3% 99.4% 99.8% 100.0% 2016 57.3% 98.2% 99.2% 99.9% 2017 55.4% 96.7% 98.4% 2018 55.4% 96.4% 2019 60.8% Figure 9.5: Settlement pattern derivation for non-mesothelioma claims: paid as % of ultimate cost Yr of Notification 0 1 2 3 4 5 6 7 8 9 10 11 12 2005 19.6% 81.3% 94.6% 98.1% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 2006 22.7% 72.0% 91.5% 94.7% 99.4% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 2007 28.9% 83.1% 93.0% 99.6% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 2008 26.1% 84.5% 95.6% 97.3% 99.7% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 2009 40.4% 77.7% 94.1% 95.9% 96.1% 97.5% 100.0% 100.0% 100.0% 100.0% 100.0% 2010 26.1% 84.7% 95.7% 97.4% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 2011 36.8% 90.1% 99.8% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 2012 38.7% 89.1% 98.4% 99.9% 99.9% 100.0% 100.0% 100.0% 2013 28.4% 84.1% 95.7% 97.7% 98.9% 99.9% 99.9% 2014 32.7% 90.6% 97.2% 99.8% 100.0% 100.0% 2015 46.4% 88.9% 95.0% 98.5% 98.5% 2016 23.6% 77.4% 95.0% 97.7% 2017 36.5% 88.5% 93.5% 2018 20.5% 81.6% 2019 28.9% We have estimated the settlement pattern for future claim reporting as follows: Table 9.1: Settlement pattern of claims awards by delay from claim reporting Delay (years) Mesothelioma Non-Mesothelioma 0 60.0% 30.0% 1 36.0% 54.0% 2 2.5% 9.5% 3 1.0% 4.0% 4 0.5% 1.0% 5 0.0% 0.5% 6 0.0% 0.5% 7 0.0% 0.5% 8 0.0% 0.0% 9 0.0% 0.0% These assumed settlements patterns have been modified slightly since our previous valuation, resulting in an assumption of a slight speeding-up for mesothelioma claim and non- mesothelioma claim settlements. For mesothelioma, we have adopted one pattern because analysis of the average time to settlement for each of the four age groups was not materially different to the overall average time to settlement. KPMG | 78 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
- Valuation Results 10.1 Central estimate liability At 31 March 2020, our projected central estimate of the liabilities of the Liable Entities (the Discounted Central Estimate) to be met by the AICF Trust is $2,025.2m (2019: $1,868.4m). We have not allowed for the future Operating Expenses of the AICF Trust or the Liable Entities in the liability assessment. The following table shows a summary of our central estimate liability assessment and compares the current assessment with our previous valuation. Table 10.1: Comparison of central estimate of liabilities 31 March 2020 31 March 2019 $m $m Gross of Net of Net of insurance Insurance insurance insurance recoveries recoveries recoveries recoveries Total uninflated and 1,521.2 68.8 1,452.4 1,399.8 undiscounted cash-flows Inflation allowance 784.1 21.3 762.8 818.7 Total inflated and 2,305.3 90.1 2,215.2 2,218.5 undiscounted cash-flows Discounting allowance (196.4) (6.4) (190.0) (350.1) Net present value liabilities 2,108.9 83.7 2,025.2 1,868.4 KPMG | 79 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
10.2 Comparison with previous valuation In the absence of any change to the claim projection assumptions from our 31 March 2019 valuation, other than allowing for the changes in the discount rate, we would have projected a Discounted Central Estimate liability of $1,888.7m as at 31 March 2020. The increase of $20.3m relative to the valuation result at 31 March 2019 is due to: • A decrease of $122.2m, being the net impact of expected claims payments (which reduce the liability) and the “unwind of discount” (to reflect the fact that cashflows are now one year nearer). • An increase of $142.5m resulting from reductions to the yield curve between 31 March 2019 and 31 March 2020, particularly relating to lower yields at durations below 15 years. Our liability assessment at 31 March 2020 of $2,025.2m therefore represents an increase of $136.5m arising from changes to the actuarial assumptions. The change is principally a consequence of: • An increase to the projected future number of mesothelioma claims given the higher numbers of claims reported in 2019/20; • An increase to the projected future number of asbestosis claims given the higher numbers of claims reported in 2019/20; and • A decrease to the assumed nil settlement rates for mesothelioma claims; offset by • Recognition of the change in mix of mesothelioma claims towards cross claims which are less costly than direct claims within the same age group; • Recognition of the favourable mix of claims by claimant age, given the increased proportions of claims emerging from older age cohorts relative to previous assumptions; • A decrease in the rate of future claims inflation by 25 basis points across all future years; and • Higher assumed future cross-claims recovery rates. The following chart shows an analysis of the change in our liability assessments from 31 March 2019 to 31 March 2020 on a discounted basis. KPMG | 80 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Figure 10.1: Analysis of change in central estimate liability (discounted basis) 2,100 1.7 21.4 25.3 41.8 38.5 2,050 9.9 5.5 2,000 197.0 1,950 1,900 44.0 2,025.2 1,850 Discounted centralestimate ($m) 142.5 1,800 149.4 1,888.7 1,868.4 1,750 27.2 1,700 Other 2020 2019 (expected) segmentation costs Nil Settlement Rate Unwind of discount reporting for FY21 Direct / cross claims (direct/cross) Net Claims Payments Claims Net Mesothelioma claims Mesothelioma actuarial changes actuarial reporting for FY21 Cross claim recoveries Change in discount rate Net Liability at 31 March Net Liability at 31 March Long-term wage inflation Expected net liability - no Non-mesothelioma claims Non-mesothelioma Age Mix / Incidence Pattern Average claim sizes and legal Note: Green bars signal that this factor has given rise to a decrease in the liability whilst light blue bars signal that this factor has given rise to an increase in the liability. KPMG | 81 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
10.3 Comparison of valuation results since 30 September 2006 We have analysed how our valuation results have changed since the Initial Report (as defined in the Amended Final Funding Agreement) at 30 September 2006. The table below shows the results over time. We have used the inflated and undiscounted results as the comparison. We consider this to be the most appropriate assessment as it removes the impacts of changes in discount rates and the “unwind of the discount”. Table 10.2: Comparison of net undiscounted valuation results since 30 September 2006 FY2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY2017 FY2018 FY2019 FY2019 Valuation result at end of previous financial year 3,169 2,811 3,027 3,124 2,906 2,661 2,525 2,513 2,805 2,743 2,427 2,200 2,381 2,219 Net payments made (actual) -32 -55 -93 -86 -76 -76 -86 -113 -121 -129 2 -124 -143 -142 Expected valuation result (no actuarial changes) 3,137 2,756 2,934 3,038 2,830 2,585 2,439 2,400 2,684 2,614 2,429 2,076 2,238 2,077 Actual valuation at end of financial year 2,811 3,027 3,124 2,906 2,661 2,525 2,513 2,805 2,743 2,427 2,200 2,381 2,219 2,215 Impact of actuarial valuation changes -326 271 190 -132 -169 -60 74 405 59 -187 -229 305 -19 138 Cumulative changes since 30 September 2006 -326 -55 135 3 -166 -226 -152 253 312 125 -104 201 182 320 Note: For FY2007, the starting valuation ($3,169m) is the valuation at 30 September 2006, not the valuation at 31 March 2006. The table shows that whilst there have been seven years where there have been increases and seven years where there have been decreases arising from changes to actuarial valuation assumptions, over the period from 30 September 2006 to 31 March 2020 the valuation has increased by approximately $320m (10% of the valuation contained in the Initial Report). In terms of net cashflows, actual net payments of $1,274m have been made since 30 September 2006. This compares with an estimate of $1,467m projected for the same period (1 October 2006 to 31 March 2020) in the valuation at 30 September 2006. After allowing for removal of the beneficial impact of HIH, Equitas and other commutations ($187m), actual net cashflows have been $6m (0.4%) lower than those projected in the valuation at 30 September 2006 for the period 1 October 2006 to 31 March 2020. Gross cashflows over the same period have been $25m (1.5%) below those projected in the valuation at 30 September 2006 ($1,678m vs $1,703m). KPMG | 82 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
10.4 Cashflow projections 10.4.1 Historical cashflow expenditure The following chart shows the historical expenditure by the Liable Entities relating to asbestos-related claim settlements since the formation of AICFL. Figure 10.2: Historical claim-related expenditure of the Liable Entities ($m) 180 160 160 154 155 154 Millions 139 140 143 142 140 129 125 121 120 124 120 112 112 104 100 98 100 93 87 85 80 74 74 74 60 55 40 20 -2 0 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 -20 Gross Net Gross cashflow payments in the 12 months to 31 March 2020 were $160.2m. This was $1.2m (1%) higher than the gross cashflow projected for 2019/20 in our 31 March 2019 valuation ($159.0m). Net cashflow payments in the 12 months to 31 March 2020 were $142.4m. This was $7.1m (5%) lower than the net cashflow projected for 2019/20 in our 31 March 2019 valuation report ($149.5m). 10.4.2 Key changes in cashflow projections by period of cashflow The following table summarises how the projected cashflows compare between the current and previous valuation. Table 10.3: Comparison of projected cashflows by period Previous Current Valuation Valuation Cashflow Projections ($m) Valuation Valuation change change (%) FY2020 149 142 -7 -4.7% FY21 - FY25 751 811 60 8.0% FY26 - FY30 583 632 49 8.4% FY31 - FY40 581 613 31 5.4% FY41 - FY45 98 103 6 5.7% 1 April 2045 onwards 56 56 1 1.5% Total 2,219 2,358 139 6.3% FY2020 to FY2025 901 953 53 5.9% FY2026 onwards 1,318 1,404 86 6.5% Note: Figures may not add “on sight” due to rounding. KPMG | 83 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
10.4.3 Future cashflow projections The following chart shows the projected net cashflows underlying our current valuation and the projected net cashflow projection underlying our previous valuation at 31 March 2019. Figure 10.3: Annual cashflow projections – inflated and undiscounted ($m) 180 150 AUD Millions AUD 120 90 60 30 0 2000 01 / 2000 06 / 2005 11 / 2010 16 / 2015 21 / 2020 26 / 2025 31 / 2030 36 / 2035 41 / 2040 46 / 2045 51 / 2050 56 / 2055 61 / 2060 66 / 2065 71 / 2070 -30 Payment year Actual net cashflow HIH and commutation proceeds Current cashflow projection (March 2020) Previous cashflow projection (March 2019) Given the extremely long-tailed nature of asbestos-related liabilities, a small change in an individual assumption can have a significant impact upon the cashflow profile of the liabilities. KPMG | 84 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
10.5 Amended Final Funding Agreement calculations The Amended Final Funding Agreement sets out the basis on which payments will be made to the AICF Trust. Additionally, there are a number of other figures specified within the Amended Final Funding Agreement that we are required to calculate. These are: • Discounted Central Estimate; • Term Central Estimate; and • Period Actuarial Estimate. Table 10.4: Amended Final Funding Agreement calculations $m Discounted Central Estimate (net of cross-claim recoveries, 2,025.2 Insurance and Other Recoveries) Period Actuarial Estimate (net of cross-claim recoveries, gross 518.9 of Insurance and Other Recoveries) comprising: Discounted value of cashflow in 2020/21 166.0 Discounted value of cashflow in 2021/22 179.3 Discounted value of cashflow in 2022/23 173.6 Term Central Estimate (net of cross-claim recoveries, 1,996.7 Insurance and Other Recoveries) The actual funding amount due at a particular date will depend upon a number of factors, including: • the net asset position of the AICF Trust at that time; • the free cash flow amount of the James Hardie Group in the preceding financial year; and • the Period Actuarial Estimate in the latest Annual Actuarial Report. KPMG | 85 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
10.6 Insurance Recoveries Our liability valuation has made allowance for a discounted central estimate of Insurance Recoveries of $83.7m. This estimate is comprised as follows: Table 10.5: Insurance recoveries at 31 March 2020 Undiscounted central Discounted central $m estimate estimate Gross liability (net of cross claim recoveries) 2,305.3 2,108.9 Product liability recoveries 81.2 75.7 Bad and doubtful debt allowance (product) (1.0) (0.9) Public liability recoveries 10.1 9.0 Bad and doubtful debt allowance (public) (0.1) (0.1) Insurance recovery asset 90.1 83.7 Net liability 2,215.2 2,025.2 Insurance recovery rate 4.0% 4.0% Bad and doubtful debt rate 1.3% 1.2% Value of Insurance Policies per Facility Agreement 74.7 The combined bad and doubtful debt rate is 1.2% on a discounted basis (2019: 1.3%). The AICF Facility Agreement requires the Approved Actuary to calculate the discounted central estimate value of certain Insurance Policies, being those specified in Schedule 5 of the AICF Facility Agreement. At 31 March 2020 the discounted central estimate of the Insurance Policies, as specified in Schedule 5 of the AICF Facility Agreement, is $74.7m (2019: $72.8m). KPMG | 86 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
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Uncertainty 11.1 Overview There is uncertainty involved in any valuation of the liabilities of an insurance company or a self-insurer. The sources of such uncertainty include, but are not limited to: • Parameter error – this is the risk that the parameters and assumptions chosen ultimately prove not to be reflective of future experience. • Model error – this is the risk that the model selected for the valuation of the liabilities ultimately proves not to be adequate for the projection of the liabilities. • Legal and social developments – this is the risk that the legal environment in which claims are settled changes relative to its current and historical position thereby causing significantly different awards. • Future actual rates of inflation being different from that assumed. • The general economic environment being different from that assumed. • Potential sources of exposure – this is the risk that there exist sources of exposure which are as yet unknown or unquantifiable, or for which no liabilities have yet been observed, but which may trigger future claims. In the case of asbestos liabilities, these uncertainties are exacerbated by the extremely long latency period from exposure to onset of disease and notification of a claim. Asbestos-related claims often take in excess of 40 years from original exposure to become notified and then settled, compared with an average delay from exposure to settlement of 4-5 years for many other compensation-type liabilities such as Comprehensive Third-Party injury liabilities or other Workers Compensation liabilities. Specific forms of uncertainty relating to asbestos-related disease liabilities include: • The difficulty in quantifying the extent and pattern of past asbestos exposures and the number and incidence of the ultimate number of lives that may be affected by asbestos related diseases arising from such past asbestos exposures; • The timing of the peak level and future pattern of incidence of claims reporting for mesothelioma; • The propensity of individuals affected by diseases arising from such exposure to file common law claims against defendants; • The extent to which the Liable Entities will be joined in such future common law claims; • The mix of claimants by age, in particular noting the shift towards older claimants and which has had a downwards effect on average claim sizes in recent years; KPMG | 87 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative \(“KPMG International”\), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
• The mix of mesothelioma claims between direct claims and cross claims; • The fact that the ultimate severity of the impact of the disease and the quantum of the claims that will be awarded will be subject to the outcome of events that have not yet occurred, including: – medical and epidemiological developments, including those relating to life expectancy in general; – court interpretations; – legislative changes; – changes to the form and range of benefits for which compensation may be awarded (“heads of damage”); – public attitudes to claiming; – the potential for future procedural reforms in NSW and other States affecting the legal costs incurred in managing and settling claims; – potential third-wave exposures; and – social and economic conditions such as inflation. 11.2 Sensitivity testing As we have noted above, there are many sources of uncertainty. Actuaries often perform “sensitivity testing” to identify the impact of different assumptions on future experience, thereby providing an indication of the degree of parameter error risk to which the valuation assessment is exposed. Sensitivity testing may be considered as being a mechanism for testing “what will the liabilities be if instead of choosing [x] for assumption [a] we choose [y]?” It is also a mechanism for identifying how the result will change if experience turns out different in a particular way relative to that which underlies the central estimate expectations. As such, it provides an indication of the level of variability inherent in the valuation. We have performed some sensitivity tests of the results of our central estimate valuation. We have sensitivity tested the following factors: • number of claims notified: 10% above and below our central estimate assumption. • average claim cost of a non-nil claim: 5% above and below our central estimate assumption. • nil settlement rate: 2 percentage points above and below our central estimate assumption. • superimposed inflation: being 0% per annum or 4% per annum over all future years. • mesothelioma incidence pattern: we have tested the impact of shifting out the pattern of incidence by two further years. KPMG | 88 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
There are other factors which influence the liability assessment and which could be sensitivity tested, including: • The cross-claim recovery rate; • The variation in timing of claim notifications (but with no change in the overall number of notifications); and • The pattern and delay of claim settlements from claim notification. We have not sensitivity tested these factors, viewing them as being of less financial significance individually. We have not sensitivity tested the value of Insurance Recoveries as uncertainties typically relate to legal risk and disputation risk, and it is not possible to parameterise a sensitivity test in an informed manner. We have not included a sensitivity test for the impact of changes in discount rates although, as noted in this Report, changes in discount rates can introduce significant volatility to the Discounted Central Estimate result reported at each year-end. 11.3 Results of sensitivity testing The chart below shows the impact of various individual sensitivity tests on the Discounted Central Estimate of the liabilities, and of a combined sensitivity test of a number of factors. Although we have tested multiple scenarios of each assumption, one cannot gauge an overall potential range by simply adding these tests together. Accordingly, we have prepared a range based on a combination of factors. Figure 11.1: Sensitivity testing results – Impact around the Discounted Central Estimate (in $m) Base number of claims Average claim and legal cost size Nil settlement rate Superimposed inflation Mesothelioma incidence pattern Combination (1) Combination (2) -1,000 -500 0 500 1,000 1,500 KPMG | 89 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Figure 11.2: Sensitivity testing results – Impact around the undiscounted central estimate (in $m) Base number of claims Average claim and legal cost size Nil settlement rate Superimposed inflation Mesothelioma incidence pattern Combination (1) Combination (2) -1,000 -500 0 500 1,000 1,500 2,000 The single most sensitive assumption shown in the chart is the incidence pattern of mesothelioma claims reporting against the Liable Entities. Shifting the pattern of incidence by 2 years could add approximately $427m (21%) on a discounted basis to our valuation (as shown in Figure 11.1 by the scenario labelled “mesothelioma incidence pattern”). Table 11.1: Summary results of sensitivity analysis ($m) Undiscounted Discounted Central estimate 2,215.2 2,025.2 Low Scenario 1,593.6 1,478.2 High Scenario 3,861.7 3,414.9 Whilst the table above indicates a range around the discounted central estimate of liabilities of -$547m to +$1,390m, the actual cost of liabilities could fall outside that range depending on the actual experience. We further note that these sensitivity test ranges are not intended to correspond to a specified probability of sufficiency nor are they intended to indicate an upper bound or a lower bound of all possible outcomes. KPMG | 90 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
A Projected inflated and undiscounted cashflows ($m) Workers Workers Compensation Wharf Legal Mesothelioma Asbestosis Lung Cancer ARPD & Other Legal and Compensation Legal and and Other Cross Claim Payment Year Claims Claims Claims Claims Other Costs Claims Other Costs Wharf Claims Costs Baryulgil Recoveries Gross Insurance Net 2020 / 2021 138.0 12.0 2.0 2.6 15.9 0.1 0.0 0.5 0.1 0.3 5.4 166.2 6.6 159.6 2021 / 2022 147.8 11.8 2.1 3.6 18.7 0.1 0.0 1.0 0.2 0.3 5.8 179.9 7.4 172.5 2022 / 2023 143.7 11.6 2.1 3.7 17.7 0.1 0.0 1.1 0.2 0.2 5.7 174.8 7.7 167.2 2023 / 2024 138.4 10.7 2.0 3.5 16.9 0.1 0.0 1.1 0.2 0.2 5.5 167.6 7.9 159.7 2024 / 2025 132.8 10.1 1.9 3.3 15.7 0.1 0.0 1.0 0.2 0.2 5.2 160.0 7.8 152.2 2025 / 2026 125.6 9.5 1.8 3.0 14.7 0.1 0.0 0.9 0.1 0.2 4.9 151.1 7.6 143.4 2026 / 2027 118.5 8.7 1.7 2.8 13.7 0.1 0.0 0.9 0.1 0.1 4.6 142.0 6.3 135.7 2027 / 2028 110.3 7.9 1.6 2.5 12.7 0.1 0.0 0.8 0.1 0.1 4.3 131.9 5.4 126.5 2028 / 2029 102.5 7.2 1.5 2.3 11.7 0.1 0.0 0.7 0.1 0.1 4.0 122.1 3.9 118.2 2029 / 2030 94.3 6.5 1.3 2.0 10.3 0.1 0.0 0.7 0.1 0.1 3.7 111.7 3.7 108.0 2030 / 2031 86.2 5.8 1.2 1.8 9.2 0.1 0.0 0.6 0.1 0.1 3.3 101.7 3.5 98.2 2031 / 2032 78.1 5.1 1.1 1.6 8.2 0.1 0.0 0.5 0.1 0.1 3.0 91.8 3.3 88.5 2032 / 2033 70.2 4.5 1.0 1.4 7.3 0.1 0.0 0.5 0.1 0.1 2.7 82.3 3.1 79.2 2033 / 2034 62.7 3.9 0.9 1.2 6.4 0.0 0.0 0.4 0.1 0.0 2.4 73.2 2.8 70.4 2034 / 2035 55.7 3.4 0.8 1.0 5.6 0.0 0.0 0.3 0.0 0.0 2.1 64.7 2.7 62.0 2035 / 2036 49.1 2.9 0.7 0.9 4.8 0.0 0.0 0.3 0.0 0.0 1.9 56.9 1.5 55.4 2036 / 2037 43.1 2.4 0.6 0.7 4.2 0.0 0.0 0.2 0.0 0.0 1.6 49.7 1.2 48.5 2037 / 2038 37.7 2.0 0.5 0.6 3.6 0.0 0.0 0.2 0.0 0.0 1.4 43.2 1.1 42.2 2038 / 2039 32.9 1.7 0.4 0.5 3.0 0.0 0.0 0.2 0.0 0.0 1.2 37.5 0.9 36.5 2039 / 2040 28.6 1.4 0.3 0.4 2.6 0.0 0.0 0.1 0.0 0.0 1.1 32.4 0.8 31.6 2040 / 2041 24.8 1.1 0.3 0.3 2.2 0.0 0.0 0.1 0.0 0.0 0.9 28.0 0.7 27.2 2041 / 2042 21.6 0.9 0.2 0.3 1.9 0.0 0.0 0.1 0.0 0.0 0.8 24.1 0.7 23.5 2042 / 2043 18.7 0.7 0.2 0.2 1.6 0.0 0.0 0.1 0.0 0.0 0.7 20.8 0.6 20.2 2043 / 2044 16.2 0.6 0.2 0.2 1.3 0.0 0.0 0.1 0.0 0.0 0.6 17.9 0.5 17.4 2044 / 2045 14.0 0.5 0.1 0.1 1.1 0.0 0.0 0.0 0.0 0.0 0.5 15.4 0.5 14.9 2045 / 2046 11.5 0.4 0.1 0.1 0.9 0.0 0.0 0.0 0.0 0.0 0.4 12.6 0.4 12.2 2046 / 2047 9.2 0.3 0.1 0.1 0.7 0.0 0.0 0.0 0.0 0.0 0.3 10.0 0.3 9.7 2047 / 2048 7.3 0.2 0.1 0.1 0.6 0.0 0.0 0.0 0.0 0.0 0.3 7.9 0.3 7.7 2048 / 2049 5.8 0.2 0.0 0.0 0.4 0.0 0.0 0.0 0.0 0.0 0.2 6.3 0.2 6.1 2049 / 2050 4.6 0.1 0.0 0.0 0.3 0.0 0.0 0.0 0.0 0.0 0.2 4.9 0.2 4.8 2050 / 2051 3.6 0.1 0.0 0.0 0.3 0.0 0.0 0.0 0.0 0.0 0.1 3.9 0.1 3.8 2051 / 2052 2.9 0.1 0.0 0.0 0.2 0.0 0.0 0.0 0.0 0.0 0.1 3.1 0.1 3.0 2052 / 2053 2.3 0.0 0.0 0.0 0.2 0.0 0.0 0.0 0.0 0.0 0.1 2.4 0.1 2.3 2053 / 2054 1.8 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.1 1.9 0.1 1.8 2054 / 2055 1.4 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.1 1.5 0.1 1.4 2055 / 2056 1.1 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 1.2 0.0 1.1 2056 / 2057 0.8 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.9 0.0 0.8 2057 / 2058 0.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.6 0.0 0.6 2058 / 2059 0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.5 0.0 0.4 2059 / 2060 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.0 0.3 2060 / 2061 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.0 0.2 2061 / 2062 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.1 2062 / 2063 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2063 / 2064 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2064 / 2065 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2065 / 2066 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2066 / 2067 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2067 / 2068 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2068 / 2069 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2069 / 2070 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2070 / 2071 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2071 / 2072 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 TOTAL 1,945.4 134.4 26.7 40.9 214.9 1.6 0.4 12.6 1.9 2.2 75.7 2,305.3 90.1 2,215.2 KPMG | 91 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
B Projected inflated and discounted cashflows ($m) Workers Workers Compensation Wharf Legal Mesothelioma Asbestosis Lung Cancer ARPD & Other Legal and Compensation Legal and and Other Cross Claim Payment Year Claims Claims Claims Claims Other Costs Claims Other Costs Wharf Claims Costs Baryulgil Recoveries Gross Insurance Net 2020 / 2021 137.9 12.0 2.0 2.6 15.9 0.1 0.0 0.5 0.1 0.3 5.4 166.0 6.6 159.4 2021 / 2022 147.3 11.8 2.1 3.6 18.7 0.1 0.0 1.0 0.2 0.3 5.8 179.3 7.4 171.9 2022 / 2023 142.8 11.6 2.1 3.6 17.6 0.1 0.0 1.1 0.2 0.2 5.6 173.6 7.6 166.0 2023 / 2024 136.8 10.6 2.0 3.4 16.7 0.1 0.0 1.0 0.2 0.2 5.4 165.7 7.8 157.9 2024 / 2025 130.5 9.9 1.9 3.2 15.4 0.1 0.0 1.0 0.2 0.2 5.1 157.2 7.7 149.6 2025 / 2026 122.5 9.2 1.8 3.0 14.4 0.1 0.0 0.9 0.1 0.2 4.8 147.4 7.5 139.9 2026 / 2027 114.6 8.4 1.6 2.7 13.2 0.1 0.0 0.8 0.1 0.1 4.5 137.3 6.1 131.2 2027 / 2028 105.5 7.6 1.5 2.4 12.1 0.1 0.0 0.8 0.1 0.1 4.1 126.2 5.2 121.0 2028 / 2029 96.8 6.8 1.4 2.2 11.0 0.1 0.0 0.7 0.1 0.1 3.8 115.3 3.7 111.7 2029 / 2030 87.8 6.0 1.2 1.9 9.5 0.1 0.0 0.6 0.1 0.1 3.4 104.0 3.4 100.6 2030 / 2031 78.9 5.3 1.1 1.7 8.5 0.1 0.0 0.5 0.1 0.1 3.1 93.2 3.2 90.0 2031 / 2032 70.3 4.6 1.0 1.4 7.4 0.1 0.0 0.5 0.1 0.1 2.7 82.6 3.0 79.7 2032 / 2033 62.0 4.0 0.9 1.2 6.4 0.0 0.0 0.4 0.1 0.0 2.4 72.6 2.7 69.9 2033 / 2034 54.2 3.4 0.7 1.0 5.5 0.0 0.0 0.3 0.0 0.0 2.1 63.3 2.4 60.9 2034 / 2035 47.1 2.8 0.6 0.9 4.7 0.0 0.0 0.3 0.0 0.0 1.8 54.7 2.3 52.4 2035 / 2036 40.5 2.4 0.5 0.7 4.0 0.0 0.0 0.2 0.0 0.0 1.6 46.9 1.2 45.7 2036 / 2037 34.7 2.0 0.5 0.6 3.4 0.0 0.0 0.2 0.0 0.0 1.3 39.9 0.9 39.0 2037 / 2038 29.3 1.6 0.4 0.5 2.8 0.0 0.0 0.2 0.0 0.0 1.1 33.6 0.8 32.8 2038 / 2039 24.6 1.3 0.3 0.4 2.3 0.0 0.0 0.1 0.0 0.0 0.9 28.1 0.7 27.4 2039 / 2040 20.6 1.0 0.2 0.3 1.9 0.0 0.0 0.1 0.0 0.0 0.8 23.4 0.6 22.8 2040 / 2041 17.2 0.8 0.2 0.2 1.5 0.0 0.0 0.1 0.0 0.0 0.6 19.4 0.5 18.9 2041 / 2042 14.4 0.6 0.2 0.2 1.2 0.0 0.0 0.1 0.0 0.0 0.5 16.1 0.4 15.7 2042 / 2043 12.0 0.5 0.1 0.1 1.0 0.0 0.0 0.0 0.0 0.0 0.4 13.3 0.4 13.0 2043 / 2044 10.0 0.4 0.1 0.1 0.8 0.0 0.0 0.0 0.0 0.0 0.4 11.0 0.3 10.7 2044 / 2045 8.3 0.3 0.1 0.1 0.7 0.0 0.0 0.0 0.0 0.0 0.3 9.1 0.3 8.8 2045 / 2046 6.6 0.2 0.1 0.1 0.5 0.0 0.0 0.0 0.0 0.0 0.2 7.2 0.2 7.0 2046 / 2047 5.0 0.2 0.0 0.0 0.4 0.0 0.0 0.0 0.0 0.0 0.2 5.5 0.2 5.3 2047 / 2048 3.8 0.1 0.0 0.0 0.3 0.0 0.0 0.0 0.0 0.0 0.1 4.2 0.1 4.0 2048 / 2049 2.9 0.1 0.0 0.0 0.2 0.0 0.0 0.0 0.0 0.0 0.1 3.2 0.1 3.1 2049 / 2050 2.2 0.1 0.0 0.0 0.2 0.0 0.0 0.0 0.0 0.0 0.1 2.4 0.1 2.3 2050 / 2051 1.7 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.1 1.8 0.1 1.8 2051 / 2052 1.3 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 1.4 0.1 1.3 2052 / 2053 1.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 1.1 0.0 1.0 2053 / 2054 0.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.8 0.0 0.8 2054 / 2055 0.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.6 0.0 0.6 2055 / 2056 0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.4 0.0 0.4 2056 / 2057 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.0 0.3 2057 / 2058 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.0 0.2 2058 / 2059 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.0 0.2 2059 / 2060 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.1 2060 / 2061 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.1 2061 / 2062 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2062 / 2063 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2063 / 2064 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2064 / 2065 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2065 / 2066 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2066 / 2067 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2067 / 2068 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2068 / 2069 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2069 / 2070 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2070 / 2071 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2071 / 2072 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 TOTAL 1,773.8 125.4 24.7 38.2 198.6 1.5 0.4 11.7 1.8 2.1 69.1 2,108.9 83.7 2,025.2 KPMG | 92 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
C Glossary of terms used in the Amended Final Funding Agreement The following provides a glossary of terms which are referenced in the Amended Final Funding Agreement and upon which we have relied in preparing our report. The operation of these definitions cannot be considered in isolation but instead need to be considered in the context of the totality of the Amended Final Funding Agreement. AICF means the trustee of the Asbestos Injuries Compensation Fund from time to time, in its capacity as trustee, initially being Asbestos Injuries Compensation Fund Limited. These terms also need to be read in conjunction with the Deed of Amendment dated 19 December 2017 which added a new clause (13.4A) and which is effective from 1 January 2018. AICF Funded Liability means: (a) any Proven Claim; (b) Operating Expenses; (c) Claims Legal Costs; (d) any claim that was made or brought in legal proceedings against a Former James Hardie Company commenced before 1 December 2005; (e) Statutory Recoveries within the meaning and subject to the limits set out in the Amended Final Funding Agreement; (f) a claim or category of claim which James Hardie and the NSW Government agree in writing is a “AICF Funded Liability” or a category of “AICF Funded Liability". but in the cases of paragraphs (a), (c) and (d) excludes any such liabilities or claims to the extent that they have been recovered or are recoverable under a Worker’s Compensation Scheme or Policy. Claims Legal Costs means all costs, charges, expenses and outgoings incurred or expected to be borne by AICF or the Former James Hardie Companies, in respect of legal advisors, other advisors, experts, court proceedings and other dispute resolution methods in connection with Personal Asbestos Claims and Marlew Claims but in all cases excluding any costs included as a component of calculating a Proven Claim. KPMG | 93 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Concurrent Wrongdoer in relation to a personal injury or death claim for damages under common law or other law (excluding any law introduced or imposed in breach of the restrictions on adverse regulatory or legislative action against the James Hardie Group under the Amended Final Funding Agreement, and which breach has been notified to the NSW Government in accordance with Amended Final Funding Agreement), means a person whose acts or omissions, together with the acts or omissions of one or more Former James Hardie Companies or Marlew or any member of the James Hardie Group (whether or not together with any other persons) caused, independently of each other or jointly, the damage or loss to another person that is the subject of that claim. Contribution Claim means a cross-claim or other claim under common law or other law (excluding any law introduced or imposed in breach of the restrictions on adverse regulatory or legislative action against the James Hardie Group under the Amended Final Funding Agreement, and which breach has been notified to the NSW Government in accordance with Amended Final Funding Agreement): (a) for contribution by a Concurrent Wrongdoer against a Former James Hardie Company or a member of the James Hardie Group in relation to facts or circumstances which give rise to a right of a person to make a Personal Asbestos Claim or a Marlew Claim; or (b) by another person who is entitled under common law (including by way of contract) to be subrogated to such a first mentioned cross-claim or other claim; Discounted Central Estimate means the central estimate of the present value (determined using the discount rate used within the relevant actuarial report) of the liabilities of the Former James Hardie Companies and Marlew in respect of expected Proven Claims and Claims Legal Costs, calculated in accordance with the Amended Final Funding Agreement. Excluded Claims are any of the following liabilities of the Former James Hardie Companies: (i) personal injury or death claims arising from exposure to Asbestos outside Australia; (ii) personal injury or death claims arising from exposure to Asbestos made outside Australia; (iii) claims for economic loss (other than any economic loss forming part of the calculation of an award of damages for personal injury or death) or loss of property, including those relating to land remediation and/or Asbestos or Asbestos products removal, arising out of or in connection with Asbestos or Asbestos products manufactured, sold, distributed or used by or on behalf of the Liable Entities; (iv) any Excluded Marlew Claim; (v) any liabilities of the Liable Entities other than AICF Funded Liabilities. Excluded Marlew Claim means a Marlew Claim: (a) covered by the indemnities granted by the Minister of Mineral Resources under the deed between the Minister, Fuller Earthmoving Pty Limited and James Hardie Industries Limited dated 11 March 1996; or (b) by a current or former employee of Marlew in relation to an exposure to Asbestos in the course of such employment to the extent: (i) the loss is recoverable under a Worker’s Compensation Scheme or Policy; or KPMG | 94 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
(ii) the Claimant is not unable to recover damages from a Marlew Joint Tortfeasor in accordance with the Marlew Legislation; (c) by an individual who was or is an employee of a person other than Marlew arising from exposure to Asbestos in the course of such employment by that other person where such loss is recoverable from that person or under a Worker’s Compensation Scheme or Policy; or (d) in which another defendant (or its insurer) is a Marlew Joint Tortfeasor from whom the plaintiff is entitled to recover compensation in proceedings in the Dust Diseases Tribunal, and the Claimant is not unable to recover damages from that Marlew Joint Tortfeasor in accordance with the Marlew Legislation. Former James Hardie Companies means Amaca, Amaba and ABN 60. Insurance and Other Recoveries means any proceeds which may reasonably be expected to be recovered or recoverable for the account of a Former James Hardie Company or to result in the satisfaction (in whole or part) of a liability of a Former James Hardie Company (of any nature) to a third party, under any product liability insurance policy or public liability insurance policy or commutation of such policy or under any other contract, including any contract of indemnity, but excluding any such amount recovered or recoverable under a Worker’s Compensation Scheme or Policy. Liable Entities see Former James Hardie Companies. Marlew means Marlew Mining Pty Ltd (in liquidation), ACN 000 049 650, previously known as Asbestos Mines Pty Ltd. Marlew Claim means, subject to the limitation on Statutory Recoveries, a claim which satisfies one of the following paragraphs and which is not an Excluded Marlew Claim: (a) any present or future personal injury or death claim by an individual or the legal personal representative of an individual, for damages under common law or other law (excluding any law introduced or imposed in breach of the restrictions on adverse regulatory or legislative action against the James Hardie Group under the Amended Final Funding Agreement, and which breach has been notified to the NSW Government in accordance with the Amended Final Funding Agreement) which: (i) arose or arises from exposure to Asbestos in the Baryulgil region from Asbestos Mining Activities at Baryulgil conducted by Marlew, provided that: A. the individual’s exposure to Asbestos occurred wholly within Australia; or B. where the individual has been exposed to Asbestos both within and outside Australia, the amount of damages included in the Marlew Claim shall be limited to the amount attributable to the proportion of the exposure which caused or contributed to the loss or damage giving rise to the Marlew Claim which occurred in Australia; (ii) is commenced in New South Wales in the Dust Diseases Tribunal; and KPMG | 95 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
(iii) is or could have been made against Marlew had Marlew not been in external administration or wound up, or could be made against Marlew on the assumption (other than as contemplated under the Marlew legislation) that Marlew will not be in the future in external administration; (b) any claim made under compensation to relatives legislation by a relative of a deceased individual (or personal representative of such a relative) or (where permitted by law) the legal personal representative of a deceased individual in each case where the individual, but for such individual’s death, would have been entitled to bring a claim of the kind described in paragraph (a); or (c) a Contribution Claim relating to a claim described in paragraphs (a) or (b). Marlew Joint Tortfeasor means any person who is or would be jointly and severally liable with Marlew in respect of a Marlew Claim, had Marlew not been in external administration or wound up, or on the assumption that Marlew will not in the future be, in external administration or wound up other than as contemplated under the Marlew Legislation. Payable Liability means any of the following: (a) any Proven Claim (whether arising before or after the date of this deed); (b) Operating Expenses; (c) Claims Legal Costs; (d) any liability of a Former James Hardie Company to the AICFL, however arising, in respect of any amounts paid by the AICFL in respect of any liability or otherwise on behalf of the Former James Hardie Company; (e) any claim that was made or brought in legal proceedings against a Former James Hardie Company commenced before 1 December 2005; (f) if regulations are made pursuant to section 30 of the Transaction Legislation and if and to the extent the AICFL and James Hardie have notified the NSW Government that any such liability is to be included in the scope of Payable Liability, any liability of a Former James Hardie Company to pay amounts received by it from an insurer in respect of a liability to a third party incurred by it for which it is or was insured under a contract of insurance entered into before 2 December 2005; and (g) Statutory Recoveries within the meaning and subject to the limits set out in the Amended Final Funding Agreement, but in the cases of paragraphs (a), (c) and (e) excludes any such liabilities or claims to the extent that they have been recovered or are recoverable under a Worker’s Compensation Scheme or Policy. Period Actuarial Estimate means, in respect of a period, the central estimate of the present value (determined using the discount rate used in the relevant actuarial report) of the liabilities of the Former James Hardie Companies and Marlew in respect of expected Proven Claims and Claims Legal Costs (in each case which are reasonably expected to become payable in that period), before allowing for Insurance and Other Recoveries, calculated in accordance with the Amended Final Funding Agreement. KPMG | 96 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Personal Asbestos Claim means any present or future personal injury or death claim by an individual or the legal personal representative of an individual, for damages under common law or under other law (excluding any law introduced or imposed in breach of the restrictions on adverse regulatory or legislative action against the James Hardie Group under the Amended Final Funding Agreement, and which breach has been notified to the NSW Government under the Amended Final Funding Agreement) which: (a) arises from exposure to Asbestos occurring in Australia, provided that: (i) the individual’s exposure to Asbestos occurred wholly within Australia; or (ii) where the individual has been exposed to Asbestos both within and outside Australia, damages included in the Marlew Claim shall be limited to the amount attributable to the proportion of the exposure which caused or contributed to the loss or damage giving rise to the Personal Asbestos Claim which occurred in Australia; (b) is made in proceedings in an Australian court or tribunal; and (c) is made against: (i) all or any of the Liable Entities; or (ii) any member of the James Hardie Group from time to time; (d) any claim made under compensation to relatives legislation by a relative of a deceased individual (or personal representative of such a relative) or (where permitted by law) the legal personal representative of a deceased individual in each case where the individual, but for such individual’s death, would have been entitled to bring a claim of the kind described in paragraph (a); or (e) a Contribution Claim made in relation to a claim described in paragraph (a) or (b) but excludes all claims covered by a Worker’s Compensation Scheme or Policy. Proven Claim means a proven Personal Asbestos Claim in respect of which final judgment has been given against, or a binding settlement has been entered into by, a Former James Hardie Company, to the extent to which that entity incurs liability under that judgment or settlement, or a Proven Marlew Claim. Statutory Recoveries means any statutory entitlement of the NSW Government or any Other Government or any governmental agency or authority of any such government (“Relevant Body”) to impose liability on or to recover an amount or amounts from any person in respect of any payments made or to be made or benefits provided by a Relevant Body in respect of claims (other than as a defendant or in settlement of any claim, including a cross-claim or claim for contribution). Term means the period (i) from the date on which the principal obligations under the Amended Final Funding Agreement will commence to 31 March 2045, (ii) as may be extended in accordance with the terms of the Amended Final Funding Agreement. KPMG | 97 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
Term Central Estimate means the central estimate of the present value (determined using the discount rate used in the relevant Annual Actuarial Report) of the liabilities of the Former James Hardie Companies and Marlew in respect of expected Proven Claims and Claims Legal Costs (in each case reasonably expected to become payable in the relevant period) after allowing for Insurance and Other Recoveries during that period, from and including the day following the end of the Financial Year preceding that Payment Date up to and including the last day of the Term (excluding any automatic or potential extension of the Term, unless or until the Term has been extended). Workers Compensation Scheme or Policy means any of the following: (a) any worker’s compensation scheme established by any law of the Commonwealth or of any State or Territory; (b) any fund established to cover liabilities under insurance policies upon the actual or prospective insolvency of the insurer (including without limitation the Insurer Guarantee Fund established under the Worker’s Compensation Act 1987 (NSW)); and (c) any policy of insurance issued under or pursuant to such a scheme. KPMG | 98 © 2020 KPMG Financial Services Consulting Pty Ltd is affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity’ are registered trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation
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Document
Exhibit 99.9
Appendix 3X
Initial Director’s Interest Notice
Rule 3.19A.1
Appendix 3X
Initial Director’s Interest Notice
Information or documents not available now must be given to ASX as soon as available. Information and documents given to ASX become ASX’s property and may be made public.
Introduced 30/9/2001.
| Name of entity James Hardie Industries plc |
|---|
| ARBN 097 829 895 |
We (the entity) give ASX the following information under listing rule 3.19A.1 and as agent for the director for the purposes of section 205G of the Corporations Act.
| Name of Director | Nigel STEIN |
|---|---|
| Date of appointment | 14 May 2020 |
Part 1 - Director’s relevant interests in securities of which the director is the registered holder
In the case of a trust, this includes interests in the trust made available by the responsible entity of the trust
Note: In the case of a company, interests which come within paragraph (i) of the definition of “notifiable interest of a director” should be disclosed in this part.
| Number & class of securities<br><br><br><br>Nil |
|---|
- See chapter 19 for defined terms.
11/3/2002 Appendix 3X Page 1
Appendix 3X
Initial Director’s Interest Notice
Part 2 – Director’s relevant interests in securities of which the director is not the registered holder
In the case of a trust, this includes interests in the trust made available by the responsible entity of the trust
| Name of holder & nature of interest<br><br>Note: Provide details of the circumstances giving rise to the relevant interest. | Number & class of Securities<br><br><br><br>Nil |
|---|
Part 3 – Director’s interests in contracts
Note: In the case of a company, interests which come within paragraph (ii) of the definition of “notifiable interest of a director” should be disclosed in this part.
| Detail of contract | Not applicable |
|---|---|
| Nature of interest | Not applicable |
| Name of registered holder<br>(if issued securities) | Not applicable |
| No. and class of securities to which interest relates | Not applicable |
- See chapter 19 for defined terms.
Appendix 3X Page 2 11/3/2002
Document
Exhibit 99.10
Appendix 3X
Initial Director’s Interest Notice
Rule 3.19A.1
Appendix 3X
Initial Director’s Interest Notice
Information or documents not available now must be given to ASX as soon as available. Information and documents given to ASX become ASX’s property and may be made public.
Introduced 30/9/2001.
| Name of entity James Hardie Industries plc |
|---|
| ARBN 097 829 895 |
We (the entity) give ASX the following information under listing rule 3.19A.1 and as agent for the director for the purposes of section 205G of the Corporations Act.
| Name of Director | Harold WIENS |
|---|---|
| Date of appointment | 14 May 2020 |
Part 1 - Director’s relevant interests in securities of which the director is the registered holder
In the case of a trust, this includes interests in the trust made available by the responsible entity of the trust
Note: In the case of a company, interests which come within paragraph (i) of the definition of “notifiable interest of a director” should be disclosed in this part.
| Number & class of securities<br><br><br><br>Nil |
|---|
- See chapter 19 for defined terms.
11/3/2002 Appendix 3X Page 1
Appendix 3X
Initial Director’s Interest Notice
Part 2 – Director’s relevant interests in securities of which the director is not the registered holder
In the case of a trust, this includes interests in the trust made available by the responsible entity of the trust
| Name of holder & nature of interest<br><br>Note: Provide details of the circumstances giving rise to the relevant interest. | Number & class of Securities<br><br><br><br>Indirect interest in 5,700 American Depository Receipts (ADRs), equivalent to a holding of 5,700 ordinary shares/CUFS. The registered holder is UBS Financial Services Inc. and they are held on account for the joint beneficial owners, Harold and Claudia Wiens. |
|---|
Part 3 – Director’s interests in contracts
Note: In the case of a company, interests which come within paragraph (ii) of the definition of “notifiable interest of a director” should be disclosed in this part.
| Detail of contract | Not applicable |
|---|---|
| Nature of interest | Not applicable |
| Name of registered holder<br>(if issued securities) | Not applicable |
| No. and class of securities to which interest relates | Not applicable |
- See chapter 19 for defined terms.
Appendix 3X Page 2 11/3/2002