PINX:JHIUF James Hardie Industries PLC DR Annual Report 20-F Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

(Mark One)

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
ACT OF 1934

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended 31 March 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

Date of event requiring this shell company report

For the transition period from              to             

Commission file number 1-15240

JAMES HARDIE INDUSTRIES SE

(Exact name of Registrant as specified in its charter)

N/A

(Translation of Registrant’s name into English)

Ireland

(Jurisdiction of incorporation or organization)

Europa House, Second Floor

Harcourt Center

Harcourt Street, Dublin 2, Ireland

(Address of principal executive offices)

Marcin Firek

(Contact name)

353 1411 6924 (Telephone)        353 1479 1128 (Facsimile)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class:

 

Name of each exchange on which registered:

Common stock, represented by CHESS Units of Foreign Securities   New York Stock Exchange*
CHESS Units of Foreign Securities   New York Stock Exchange*

American Depositary Shares, each representing five units

of CHESS Units of Foreign Securities

  New York Stock Exchange


Table of Contents

 

 

* Listed, not for trading, but only in connection with the registered American Depositary Shares, pursuant to the
requirements

of the Securities and Exchange Commission

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None.

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None.

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report 437,175,963 shares of common stock at 31 March 2012.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  x  Yes  ¨  No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  ¨  Yes  x  No

Note — Checking the box will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  x  Yes  ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x  Yes  ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  x    Accelerated filer   ¨    Non-accelerated filer  ¨

 

 

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  x               

International Financial Reporting Standards as issued

by the International Accounting Standards Board  ¨

   Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

¨  Item 17  ¨   Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨  Yes   x  No


Table of Contents

TABLE OF CONTENTS

 

Page

 

Form 20-F Cross-Reference Index

    3   

Section 1

    5   

Introduction

    5   

Selected Financial Data

    5   

Information on the Company

    8   

History and Development of the Company

    8   

Business Overview

    11   

Organisational Structure

    19   

Property, Plants and Equipment

    19   

Group Management Team

    23   

Board of Directors

    26   

Remuneration Report

    31   

Corporate Governance Report

    62   

Section 2

    82   

Reading this report

    82   

Management’s Discussion and Analysis

    83   

Consolidated Financial Statements

    111   

Notes to Consolidated Financial Statements

    117   

Remuneration of Independent Registered Public Accounting Firm

    160   

Selected Quarterly Financial Data

    161   

Section 3

    162   

Risk Factors

    162   

Commitment to Provide Funding on a Long-Term Basis in Respect of Asbestos-Related
Liabilities of Former Subsidiaries

    177   

Legal Proceedings

    185   

Employees

    191   

Share Ownership

    191   

Related Party Transactions

    199   

Listing Details

    199   

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

    202   

Memorandum and Articles of Association

    203   

Material Contracts

    211   

Exchange Controls

    212   

Taxation

    212   

Quantitative and Qualitative Disclosures About Market Risk

    223   

American Depositary Shares

    225   

Section 4

    227   

SHARE/CHESS Units of Foreign Securities (“CUFS”) Information

    227   

Glossary of Abbreviations and Defined Terms

    230   

Exhibits

    231   

Signatures

    236   

In this annual report, unless the context otherwise indicates, James Hardie Industries SE, a “Societas Europaea,” or a European company incorporated and existing under the laws of Ireland, is referred to as JHI SE. JHI SE together with its direct and indirect wholly owned subsidiaries as of the time relevant to the applicable reference, are collectively referred to as the James Hardie Group. JHI SE and its current direct and indirect wholly owned subsidiaries are collectively referred to as “we,” “us,” “our,” “JHI SE and its wholly owned subsidiaries”, “James Hardie” or the “Company.”


Table of Contents

For certain information about the basis of preparing the financial information in this Annual Report, see Section 2, “Reading this Report.” In addition, this Annual Report contains statements that constitute “forward-looking statements”. For an explanation of forward-looking statements and the risks, uncertainties and assumptions to which they are subject, see Section 2, “Reading this Report.”

A “Glossary of Abbreviations and Defined Terms” has also been included under Section 4 of this Annual Report.

Information contained in or accessible through the websites mentioned in this Annual Report does not form part of this report unless we specifically state that it is incorporated by reference and forms part of this report. All references in this report to websites are inactive textual references and are for information only.

 

2


Table of Contents

FORM 20-F CROSS REFERENCE INDEX

 

20-F Item Number and Description

 

Page

 

PART 1

 

Item 1. Identity of Directors, Senior Management and Advisers

    Not applicable   

Item 2. Offer Statistics and Expected Timetable

    Not applicable   

Item 3. Key Information

 

A. Selected Financial Data

    5-8   

B. Capitalisation and Indebtness

    Not applicable   

C. Reasons for the Offer and Use of Proceeds

    Not applicable   

D. Risk Factors

    162-177   

Item 4. Information on the Company

 

A. History and Development of the Company

    8-10   

B. Business Overview

    11-19   

C. Organisational Structure

    9-10; 19   

D. Property, Plants and Equipment

    19-22; 109   

Item 4A. Unresolved Staff Comments

    None   

Item 5. Operating and Financial Review and Prospects

 

A. Operating Results

    89-102   

B. Liquidity and Capital Resources

    103-110   

C. Research and Development, Patents and Licenses, etc

    17-18; 110   

D. Trend Information

    110   

E. Off-Balance Sheet Arrangements

    110   

F. Tabular Disclosure of Contractual Obligations

    109   

G. Safe Harbor

    82-83   

Item 6. Directors, Senior Management and Employees

 

A. Directors and Senior Management

    23-30   

B. Compensation

    31-61   

C. Board Practices

    62-70   

D. Employees

    191   

E. Share Ownership

    191-198   

Item 7. Major Shareholders and Related Party Transactions

 

A. Major Shareholders

    227-228   

B. Related Party Transactions

    199   

C. Interests of Experts and Counsel

    None   

Item 8. Financial Information

 

A. Consolidated Statements and Other Financial Information

    111-159; 177-190; 208   

B. Significant Changes

    None   

Item 9. The Offer and Listing

 

A. Offer and Listing Details

    199-200   

B. Plan of Distribution

    Not Applicable   

C. Markets

    201   

D. Selling Shareholders

    Not Applicable   

E. Dilution

    Not Applicable   

F. Expenses of the Issue

    Not Applicable   

Item 10. Additional Information

 

A. Share Capital

    Not Applicable   

B. Memorandum and Articles of Association

    203-211   

C. Material Contracts

    211-212   

D. Exchange Controls

    212   

 

3


Table of Contents

FORM 20-F CROSS REFERENCE INDEX

(Continued)

 

20-F Item Number and Description

 

Page

 

E. Taxation

    212-222   

F. Dividends and paying agents

    Not Applicable   

G. Statement by Experts

    Not Applicable   

H. Documents on Display

    222-223   

I. Subsidiary Information

    Not Applicable   

Item 11. Quantitative and Qualitative Disclosures About Market Risk

    223-225   

Item 12. Description of Securities Other Than Equity Securities

 

A. Debt Securities

    Not Applicable   

B. Warrants and Rights

    Not Applicable   

C. Other Securities

    Not Applicble   

D. American Depositary Shares

    225-226   

PART II

 

Item 13. Defaults, Dividend Arrearages and Delinquencies

    None   

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

    None   

Item 15. Controls and Procedures

    75-78   

Item 16A. Audit Committee Financial Expert

    68   

Item 16B. Code of Business Conduct and Ethics

    70   

Item 16C. Principal Accountant Fees and Services

    160   

Item 16D. Exemptions from the Listing Standards for Audit Committees

    None   

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

    202   

Item 16F. Change in Registrant’s Certifying Accountant

    None   

Item 16G. Corporate Governance

    80   

Item 16H. Mine Safety Disclosures

    21   

PART III

 

Item 17. Financial Statements

    Not Applicable   

Item 18. Financial Statements

    111-159   

Item 19. Exhibits

    231-235   

 

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Table of Contents

SECTION 1.

INTRODUCTION

The Company is a world leader in manufacturing fibre cement siding and backerboard. Our current primary geographic markets include the United States (“US”), Australia, New Zealand, the Philippines, Europe and Canada.

Our fibre cement products are used in a number of markets, including new residential construction, manufactured housing, repair and remodeling and a variety of commercial and industrial applications.

We manufacture numerous types of fibre cement products with a variety of patterned profiles and surface finishes for a range of applications, including external siding and soffit lining, internal linings, facades and floor and tile underlay.

We employ approximately 2,600 people and generated net sales of US$1.2 billion in fiscal year 2012.

SELECTED FINANCIAL DATA

We have included in this annual report the audited consolidated financial statements of the Company, consisting of our consolidated balance sheets as of 31 March 2012 and 2011, and our consolidated statements of operations, changes in shareholders’ equity (deficit) and cash flows for each of the years ended 31 March 2012, 2011 and 2010, together with the related notes thereto. The consolidated financial statements included in this annual report have been prepared in accordance with accounting principles generally accepted in the US, or “US GAAP.”

The selected consolidated financial information summarised below for the five most recent fiscal years has been derived in part from the Company’s financial statements. You should read the selected consolidated financial information in conjunction with the Company’s financial statements and related notes contained in Section 2, “Consolidated Financial Statements” and with the information provided in Section 2, “Management’s Discussion and Analysis.” Historic financial data is not necessarily indicative of our future results and you should not unduly rely on it.

 

5


Table of Contents
     Fiscal Year ended 31 March  
     2012     2011     2010     2009     2008  
     (In millions of US dollars except sales price per unit and per share data)  
Consolidated Statements of Operations Data:           

Net Sales

          

USA and Europe Fibre Cement1

    $ 862.0        $ 814.0        $ 828.1        $ 929.3        $ 1,170.5   

Asia Pacific Fibre Cement2

     375.5        353.0        296.5        273.3        298.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

    $ 1,237.5        $ 1,167.0        $ 1,124.6        $ 1,202.6        $ 1,468.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)3

    $ 155.5        $ 104.7        $ (21.0     $ 173.6        $ (36.6

Interest expense

     (11.2     (9.0     (7.7     (11.2     (11.1

Interest income

     3.8        4.6        3.7        8.2        12.2   

Other income (expense)4

     3.0        (3.7     6.3        (14.8       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations
before income taxes

     151.1        96.6        (18.7     155.8        (35.5 )  

Income tax benefit (expense)5

     453.2        (443.6     (66.2     (19.5     (36.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    $ 604.3        $ (347.0     $ (84.9     $ 136.3        $ (71.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    $ 604.3        $ (347.0     $ (84.9     $ 136.3        $ (71.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations per common share — basic

    $ 1.39        $ (0.80     $ (0.20     $ 0.32        $ (0.16

Net income (loss) per common
share — basic

    $ 1.39        $ (0.80     $ (0.20     $ 0.32        $ (0.16

Income (loss) from operations per common share — diluted

    $ 1.38        $ (0.80     $ (0.20     $ 0.31        $ (0.16

Net income (loss) per common
share — diluted

    $ 1.38        $ (0.80     $ (0.20     $ 0.31        $ (0.16

Dividends paid per share

    $ 0.04        $        $        $ 0.08        $ 0.27   

Weighted average number of common shares outstanding

          

Basic

     436.2        435.6        433.1        432.3        455.0   

Diluted

     437.9        435.6        433.1        434.5        455.0   
Consolidated Cash Flow Information:           

Cash flows provided by operating activities

    $ 387.2        $ 147.2        $ 183.1        $ (45.2     $ 319.3   

Cash flows used in investing activities

    $ (49.9     $ (49.6     $ (50.5     $ (26.1     $ (38.5

Cash flows used in financing activities

    $ (84.4     $ (89.7     $ (159.0     $ 25.0        $ (254.4
Other Data:           

Depreciation and amortisation

    $ 65.2        $ 62.9        $ 61.7        $ 56.4        $ 56.5   

Adjusted EBITDA6

    $ 220.7        $ 167.6        $ 40.7        $ 230.0        $ 19.9   

Capital expenditures

    $ 35.8        $ 50.3        $ 50.5        $ 26.1        $ 38.5   

Volume (million square feet)

          

USA and Europe Fibre Cement1

     1,331.8        1,248.0        1,303.7        1,526.6        1,951.2   

Asia Pacific Fibre Cement2

     392.3        407.8        389.6        390.6        398.2   

Average sales price per unit (per thousand square feet)

          

USA and Europe Fibre Cement1

    US$ 647        US$ 652        US$ 635        US$ 609        US$ 600   

Asia Pacific Fibre Cement2

    A$ 916        A$ 916        A$ 894        A$ 879        A$ 862   

 

6


Table of Contents
     Fiscal Year ended 31 March  
     2012      2011     2010     2009     2008  
Consolidated Balance Sheet
Data:
           

Net current assets7

   $ 472.5       $ 135.6      $ 50.4      $ 137.7      $ 183.7   

Total assets

   $     2,310.0       $     1,960.6      $     2,178.8      $     1,891.7      $     2,179.9   

Total debt8

   $ 30.9       $ 59.0      $ 154.0      $ 324.0      $ 264.5   

Common stock

   $ 224.0       $ 222.5      $ 221.1      $ 219.2      $ 219.7   

Shareholders’ equity (deficit)

   $ 126.4       $ (454.5   $ (117.9   $ (108.7   $ (202.6

 

 

 

1 

On 1 April 2008, the Company realigned its operating segments by combining the previously reported segments of USA Fibre Cement and Other into one operating segment, USA and Europe Fibre Cement. USA and Europe Fibre Cement manufactures fibre cement interior linings, exterior siding and related accessory products in the United States which are sold in the United States, Canada and Europe.

 

     The segment also includes fibre reinforced concrete pipes manufactured and sold in the United States (through May 2008). Our Plant City, Florida Hardie Pipe Plant was closed and the business ceased operations in May 2008.

 

2 

Asia Pacific Fibre Cement includes all fibre cement manufactured in Australia, New Zealand and the Philippines and sold in Australia, New Zealand, Asia, the Middle East (Israel, Kuwait, Qatar and United Arab Emirates) and various Pacific Islands.

 

3 

Operating income (loss) includes the following asbestos adjustments, Asbestos Injuries Compensation Fund (which we refer to as “AICF”) SG&A expenses, Australian Securities and Investments Commission (which we refer to as “ASIC”) related expenses (recoveries), and impairment charges:

 

     Fiscal Years Ended 31 March  
     2012     2011     2010     2009     2008  
     (Millions of US dollars)  

(Unfavourable) favourable asbestos adjustments

   $ (15.8   $     (85.8   $     (224.2   $ 17.4      $     (240.1

AICF SG&A expenses

     (2.8     (2.2     (2.1     (0.7     (4.0

ASIC related (expenses) recoveries

     (1.1     8.7        (3.4       (14.0     (5.5

Impairment charges

   $     (14.3   $ —        $ —        $ —        $ (71.0

 

     For additional information on the asbestos adjustments, AICF SG&A expenses, ASIC related expenses (recoveries) and impairment charges, see Section 2, “Management’s Discussion and Analysis” and Notes 11, 13 and 7, respectively, to our consolidated financial statements in Section 2.

 

4 

Other income in fiscal year 2012 and other expense in fiscal year 2011 are due to changes in the fair value of interest rate swap contracts. Other income in fiscal year 2010 primarily includes a realised gain arising from the sale of restricted short-term investments held by AICF. Other expense in fiscal year 2009 consists of an other-than-temporary impairment charge related to restricted short-term investments held by AICF of US$14.8 million. For additional information see Section 2, “Management’s Discussion and Analysis — Results of Operations.”

 

5 

Income tax benefit in fiscal year 2012 includes a benefit of US$485.2 million recognised upon RCI’s successful appeal of the Australian Taxation Office’s (which we refer to as the “ATO”) disputed 1999 amended tax assessment. Income tax expense in fiscal year 2011 includes a charge of US$345.2 million resulting from the dismissal by the Federal Court of Australia of RCI’s appeal of the ATO’s disputed 1999 amended tax assessment. For additional information, see Note 14 to our consolidated financial statements in Section 2.

 

6 

Adjusted EBITDA represents income from operations before interest income, interest expense, income taxes, other non-operating income (expense), described in footnote four above, and depreciation and amortisation charges. The following table presents a reconciliation of Adjusted EBITDA to net cash provided by (used in) operating activities, as this is the most directly comparable GAAP financial measure to Adjusted EBITDA for each of the periods indicated. Items comprising “Net cash provided by (used in) operating activities,” “Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities” and “Change in operating assets and liabilities, net” for fiscal years ended 31 March 2012, 2011 and 2010 are set forth in the Consolidated Statements of Cash Flows on page 115.

 

7


Table of Contents
     Fiscal Years Ended 31 March  
     2012     2011     2010     2009     2008  
     (Millions of US dollars)  

Net cash provided by (used in) operating activities

   $ 387.2      $ 147.2      $ 183.1      $ (45.2   $ 319.3   

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities

     (114.4     (136.8     (312.0     (3.5     (318.9

Change in operating assets and liabilities, net

     331.5        (357.4     44.0        185.0        (72.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     604.3        (347.0     (84.9     136.3        (71.6

Income tax (benefit) expense

     (453.2     443.6        66.2        19.5        36.1   

Interest expense

     11.2        9.0        7.7        11.2        11.1   

Interest income

     (3.8     (4.6     (3.7     (8.2     (12.2

Other (income) expense

     (3.0     3.7        (6.3     14.8          

Depreciation and amortisation

     65.2        62.9        61.7        56.4        56.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 220.7      $ 167.6      $ 40.7      $ 230.0      $ 19.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Adjusted EBITDA is not a measure of financial performance under US GAAP and should not be considered an alternative to, or more meaningful than, income from operations, net income or net cash provided by (used in) operating activities, as defined by US GAAP, or as a measure of our profitability or liquidity. Not all companies calculate Adjusted EBITDA in the same manner as we have and, accordingly, Adjusted EBITDA may not be comparable with other companies. We have included information concerning Adjusted EBITDA because we believe that this data is commonly used by investors to evaluate the ability of a company’s earnings from its core business operations to satisfy its debt, capital expenditure and working capital requirements. To permit evaluation of this data on a consistent basis from period to period, Adjusted EBITDA has been adjusted for non-cash charges, as well as non-operating income and expense items.

 

7 

Total current assets less total current liabilities.

 

8 

Total debt at 31 March 2012 represents the amount owed by AICF under a secured standby loan facility with the government of New South Wales (the “Facility”). Because the Company consolidates AICF due to pecuniary and contractual interests in AICF as a result of the funding arrangements outlined in the AFFA, any drawings, repayments or payments of accrued interest by AICF under the Facility impact the Company’s consolidated financial position, results of operations and cash flows. James Hardie Industries SE and its wholly-owned subsidiaries are not a party to, guarantor of, or security provider in respect of the Facility.

INFORMATION ON THE COMPANY

History and Development of the Company

The Company was established in 1888 as an import business. In 1951, the Company became publicly owned as a listed company on the Australian Stock Exchange. After becoming a listed company, the Company built up a diverse portfolio of building and industrial products including a wide range of asbestos-based products. In the mid-1980s, we pioneered the development of asbestos-free fibre cement technology and began designing and manufacturing a wide range of fibre cement building products that made use of the benefits that came from the products’ durability, versatility and strength. Using the technical and manufacturing expertise developed in Australia, we expanded our operations, in particular to the United States, to become a specialised manufacturer of a wide range of fibre cement building materials.

 

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Our legal name was changed to James Hardie Industries N.V. from RCI Netherlands Holdings B.V. in July 2001 when our legal form was converted from a “besloten vennootschap met beperkte aansprakelijkheid” (which we refer to as a “B.V.”), to a “naamloze vennootschap” (which we refer to as “N.V.”), or a public limited liability company whose stock, unlike a private limited liability company, may be transferred without executing a notarial deed if such company is listed on a recognised stock exchange. In February 2001, the shareholders of James Hardie Industries Limited (which we refer to as “JHIL”) agreed to exchange their shares for shares in James Hardie Industries N.V., which retained its primary listing on the Australian Securities Exchange (“ASX”). In February 2010, our legal name was changed to James Hardie Industries SE when our legal form was converted from a Dutch N.V. to a Dutch Societas Europaea (which we refer to as “SE”) in connection with the implementation of Stage 1 of a two-stage re-domicile proposal (together, the “Re-domicile”) to change our registered corporate domicile from The Netherlands to Ireland. As a Dutch SE, we became subject to the Council of the European Union’s Regulation on the Statute for a European Company (SE Regulations). On 17 June 2010, we implemented Stage 2 of the Re-domicile and changed our registered corporate domicile to Ireland and became an Irish tax resident on 29 June 2010.

We conduct our operations under legislation in various jurisdictions. As an Irish SE, we are subject to Irish law in addition to the SE Regulation, European Union Council Regulations and relevant European Union Directives. Prior to becoming an Irish SE, we were also subject to the jurisdiction of the Dutch authority Financial Markets and the Dutch Corporate Governance Code. In addition, we operate under the regulatory requirements of numerous jurisdictions and organisations, including the ASX, Australian Securities and Investments Commission (“ASIC”), the New York Stock Exchange (“NYSE”), the United States Securities and Exchange Commission (“SEC”), the Irish Takeover Panel and various other rulemaking bodies.

Our corporate domicile is located in Ireland. The address of our registered office in Ireland is Europa House, Second Floor, Harcourt Centre, Harcourt Street, Dublin 2, Ireland. The telephone number there is +353 1411 6924. Our agent in the United States is CT Corporation. Its office is located at 3 Winners Circle, 3rd Floor, Albany, New York 12205.

Corporate Restructuring

On 17 May 2011, we announced that we had commenced an internal reorganisation involving the simplification of our corporate structure, including some of the arrangements which were previously part of our Netherlands domicile. This internal reorganisation is being made to facilitate the ability to access and distribute surplus cash flows and earnings of our operating subsidiaries more efficiently, including for the purpose of making periodic contributions to AICF. As part of this restructure, the Company incurred a tax charge of US$32.6 million on undistributed earnings of its US subsidiaries during fiscal year 2011, as it remitted US earnings as part of the internal reorganisation.

This tax charge did not impact the contribution to AICF in July 2011, although it did reduce the amount to be contributed to AICF in July 2012 by approximately US$12.4 million. However, this reduction was offset by the Company’s early contribution to AICF of US$138.7 million on 2 April 2012, which was 35% of amounts received from the ATO during fiscal year 2012. See Note 14 to our consolidated financial statements in Section 2 for additional information on amounts received from the ATO.

 

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The following is a simplified diagram of our current corporate structure:

 

LOGO

Consolidation of AICF

In February 2007, our shareholders approved the Amended and Restated Final Funding Agreement (which we refer to as “AFFA”) entered into on 21 November 2006 to provide long-term funding to AICF. JHI SE owns 100% of James Hardie 117 Pty Ltd (the “Performing Subsidiary”) that funds AICF subject to the provisions of the AFFA. We appoint three of AICF’s directors and the New South Wales (which we refer to as “NSW”) Government appoints two of AICF’s directors.

Under the terms of the AFFA, the Performing Subsidiary has an obligation to make payments to AICF on an annual basis. The amount of these annual payments is dependent on several factors, including our free cash flow (as defined in the AFFA), actuarial estimations, actual claims paid, operating expenses of AICF and the annual cash flow cap. JHI SE guarantees the Performing Subsidiary’s obligation. As a result, for purposes of US GAAP, we consider JHI SE to be the primary beneficiary of AICF.

Although we have no legal ownership in AICF, for financial reporting purposes, our interest in AICF is considered variable and we consolidate AICF due to our pecuniary and contractual interests in AICF as a result of the funding arrangements outlined in the AFFA. Our consolidation of AICF results in a separate recognition of the asbestos liability and certain other asbestos-related assets and liabilities on our consolidated balance sheet. Among other items, we record a deferred tax asset for the anticipated future tax benefit we believe is available to us that arises from amounts contributed to the asbestos fund by the Performing Subsidiary. Since fiscal year 2007, movements in the asbestos liability arising from changes in foreign currency or actuarial adjustments are classified as asbestos adjustments, and the income tax benefit arising from contributions to AICF is included within income tax benefit (expense) on our consolidated statements of operations when realised. See Note 2 to our consolidated financial statements in Section 2.

 

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Business Overview

General Overview of our Business

Based on net sales, we believe we are the largest manufacturer of fibre cement products and systems for internal and external building construction applications in the United States, Australia, New Zealand, and the Philippines. We market our fibre cement products and systems under various Hardie brand names and other brand names such as Artisan® Lap and ArtisanTM Accent Trim by James Hardie, Cemplank® and Prevail® siding (we also formerly marketed siding under the brand name SentryTM siding), Scyon™, Stria® siding, and HardieBacker®. We believe that, in certain applications, our fibre cement products and systems provide a combination of distinctive performance, design and cost advantages when compared to other fibre cement products and alternative products and systems that use solid wood, engineered wood, vinyl, brick, stucco or gypsum wallboard. The sale of fibre cement products in the United States accounted for 67%, 68% and 72% of our total net sales in fiscal years 2012, 2011 and 2010, respectively.

Our fibre cement products are used in a number of markets, including new residential construction (single and multi-family housing), manufactured housing (mobile and pre-fabricated homes), repair and remodeling and a variety of commercial and industrial applications (stores, warehouses, offices, hotels, motels, schools, libraries, museums, dormitories, hospitals, detention facilities, religious buildings and gymnasiums). We manufacture numerous types of fibre cement products with a variety of patterned profiles and surface finishes for a range of applications, including external siding and soffit lining, internal linings, facades, and floor and tile underlayments.

In contrast to some other building materials, fibre cement provides durability attributes, such as strong resistance to moisture, fire, impact and termites, requires relatively little maintenance and can be used as a substrate to create a wide variety of architectural effects with textured and colored finishes.

The breakdown of our net sales by operating segment for each of our last three fiscal years is as follows:

 

     Fiscal Year Ended 31 March  
     2012      2011      2010  
     (Millions of US dollars)  

USA and Europe Fibre Cement

   $ 862.0       $ 814.0       $ 828.1   

Asia Pacific Fibre Cement

     375.5         353.0         296.5   
  

 

 

    

 

 

    

 

 

 

Total

   $   1,237.5       $   1,167.0       $   1,124.6   
  

 

 

    

 

 

    

 

 

 

Industry Overview

US Housing Industry and Fibre Cement Industry

In the United States, fibre cement is principally used in the residential building industry. Such usage fluctuates based on the level of new home construction and the repair and remodeling of existing homes. The level of activity is generally a function of interest rates and the availability of financing to homeowners to purchase a new home or make improvements to their existing homes, inflation, unemployment levels, demographic trends, gross domestic product growth and consumer confidence. Demand for building products is also affected by residential housing starts and existing home sales, the age and size of the housing stock and overall home improvement expenditures. According to the US Census Bureau, single family housing starts, which are one of the key drivers of the Company’s performance, were relatively flat at 445,600 for fiscal year 2012 compared to fiscal year 2011.

 

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In the United States, the largest application for fibre cement products is in the external siding industry. Siding is a component of every building and it usually occupies more square footage than any other external building component, such as windows and doors. Selection of siding material is based on installed cost, durability, aesthetic appeal, strength, weather resistance, maintenance requirements and cost, insulating properties and other features. Different regions of the United States show a decided preference amongst siding materials according to economic conditions, weather, materials availability and local taste. The principal siding materials are vinyl, stucco, fibre cement, solid wood and brick. Vinyl has the largest share of the siding market.

International Fibre Cement Industry

In Australia and New Zealand, fibre cement building products are used in both the residential and commercial building industries with applications in external siding, internal walls, ceilings, floors, soffits and fences. The residential building industry represents the principal market for fibre cement products. We believe the level of activity in this industry is generally a function of interest rates, inflation, unemployment levels, demographic trends, gross domestic product growth and consumer confidence. Demand for fibre cement building products is also affected by the level of new housing starts and renovation activity.

Fibre cement products have, across a range of product applications, gained broader acceptance in Australia and New Zealand than in the United States, primarily due to earlier introduction in Australia and New Zealand.

Australia

According to the Australian Bureau of Statistics (“ABS”) total dwelling commencements in Australia decreased from 167,577 in calendar year 2010 to 146,509 in calendar year 2011 with detached houses decreasing from 106,575 in calendar year 2010 to 91,807 in calendar year 2011. Renovation activity, as measured in local currency expenditures by the ABS, has increased from calendar year 2010 to calendar year 2011 for a total increase over this period of approximately 4%. The Housing Industry Association of Australia expects new housing construction and renovation activity to soften over the short-to-medium term.

Former subsidiaries of ABN 60 developed fibre cement in Australia as a replacement for asbestos cement in the early 1980s. Asbestos sheet production ceased in the early 1980s and asbestos pipe production ceased in 1987. Competition has intensified over the past decade in Australia. In addition to competition from solid wood, engineered wood, wallboard, masonry and brick, two Australian competitors have established fibre cement manufacturing facilities in Australia and fibre cement imports are also growing.

New Zealand

According to Statistics New Zealand, new dwellings consents in New Zealand decreased from approximately 14,611 for the year ended March 2011 to 14,596 for the year ended March 2012. Residential renovation activity in New Zealand has decreased from the year ended March 2011 to the year ended March 2012 for a total decrease over this period of approximately 4%. InfoMetrics New Zealand believes new housing construction and renovation activity are expected to remain weak through calendar year 2012, with consents consistent with calendar year 2011.

Competition continues to intensify in New Zealand as fibre cement imports have become more cost competitive and overseas manufacturers struggling with the global recession look for additional markets to add to their existing ones.

 

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Philippines

In the Philippines and other Asian and Middle Eastern (Israel, Kuwait, Qatar and the United Arab Emirates) markets, fibre cement building products are used in both the residential and commercial building industries with applications in ceilings, internal walls, external siding, external facades and soffits. The residential building industry represents the principal market for fibre cement products. In general, fibre cement products have, across a range of product applications, gained broader acceptance in these regions over the last decade. In the Philippines, additional imported fibre cement products have entered the market. However, in some of the developing markets, gypsum usage has increased and penetrated into fibre cement applications. Fibre cement and asbestos cement production facilities are located throughout Asia and exporting between countries is common practice. We believe that fibre cement (we do not manufacture fibre cement products containing asbestos) has good long-term growth potential because of the benefits of light-weight and framed construction compared to traditional masonry construction. In addition, we believe the opportunity to replace wood-based products, such as plywood, with more durable fibre cement will be attractive to some consumers in some of these markets.

Europe

In Europe, fibre cement building products are used in both residential and commercial building industries with applications in external siding, internal walls, floors, soffits and roofing. We compete in most segments except roofing and promote the use of fibre cement products against traditional masonry, gypsum-based products and wood-based products. Since we commenced selling our products in Europe in fiscal year 2004, we have continued to work to grow demand for our products by building awareness among distributors, builders and contractors. Management believes that the growth outlook for fibre cement in Europe is favourable in light of stricter insulation requirements driving demand for advanced exterior cladding systems and better building practices increasing the use of fibre cement in interior applications.

Products

We manufacture fibre cement products in the United States, Australia, New Zealand and the Philippines. In fiscal year 2004, we commenced our European fibre cement business by distributing our fibre cement products in the United Kingdom and France. We also manufacture fibre cement pipes in Australia and previously manufactured fibre cement pipes and roofing products in the United States. In May 2008 and April 2006, we ceased operation of our pipes and roofing businesses, respectively, in the United States. Our total product offering is aimed at the building and construction markets, including new residential construction, manufactured housing, repair and remodeling and a variety of commercial and industrial building applications.

We offer a wide range of fibre cement products for both exterior and interior applications. In the United States and elsewhere, our products are typically sold as planks or flat sheets with a variety of patterned profiles and finishes. Planks are used for external siding while flat sheets are used for internal and external wall linings and floor and tile underlayments. Outside the United States, we also manufacture fibre cement products for use in other applications such as building facades, lattice, fencing, decorative columns, flooring, soffit lining and ceiling applications, some of which have not yet been introduced into the United States.

We developed a proprietary technology platform that enables us to produce thicker yet lighter-weight fibre cement products that are generally lighter and easier to handle than traditional building products. The first application of this technology in the United States has been our HardieTrim® board. HardieTrim board is a fibre cement trim product that is used on the exterior of residential and

 

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commercial construction to replace traditional wood and engineered wood trim. HardieTrim board was launched in fiscal year 1999, with the introduction of HardieTrim HLD board.

We believe that our products provide certain performance, design and cost advantages. The principal fibre cement attributes in exterior applications are durability and low maintenance, particularly when compared to competing wood and wood-based products, while offering comparable aesthetics. Our fibre cement products exhibit resistance to the damaging effects of moisture, fire, impact and termites compared to wood and wood-based products, which we believe has enabled us to gain a competitive advantage over competing products. Vinyl siding products generally have better durability characteristics than wood-based products, but typically cannot duplicate fibre cement’s aesthetics and the characteristics necessary for effectively accepting paint applications.

Our fibre cement products provide strength and the ability to imprint patterns that closely resemble patterns and profiles of traditional materials such as wood and stucco. The surface properties provide an effective paint-holding finish to wood and engineered wood products such that the periods between necessary maintenance and repainting are generally longer. Compared to masonry construction, fibre cement is lightweight, physically flexible and can be cut using readily available tools. This makes fibre cement suitable for lightweight construction across a range of architectural styles. Fibre cement is well suited to both timber and steel-framed construction.

In our interior product range, we believe our ceramic tile underlayment products exhibit better handling and installation characteristics compared to fibreglass mesh cement boards. Compared to wood and wood-based products, our products provide the same general advantages that apply to external applications. In addition, our fibre cement products exhibit less movement in response to exposure to moisture than many alternative competing products, providing a more consistent and durable substrate on which to install tiles. In internal lining applications where exposure to moisture and impact damage are significant concerns, our products provide superior moisture resistance and impact resistance than traditional gypsum wet area wallboard and other competing products.

In the United States, the following new products were released over the last five years:

 

   

During fiscal year 2008, we introduced Artisan® Lap siding, 10’ Artisan® Accent Trim and HardieWrap® weather barrier.

 

   

During fiscal year 2009, we introduced two new siding profiles, HardieSoffit® Beaded Porch Panel and HardieShingle® Shingle Plank.

 

   

During fiscal year 2010, we introduced HardieZone® System siding products.

 

   

During fiscal year 2011, we introduced new HardieShingle® siding, HardieTrim® NT3™ Boards, two new lap siding products, 12’ Artisan® Accent Trim and HardieBacker® ProGrid™ cement board.

 

   

During fiscal year 2012, we introduced new profile HZ5® HardiePlank® siding, additional HardieShingle® siding profiles, new Improved Smooth HardieTrim® boards, new HardieTrim® Crown Mouldings and three new colors to the James Hardie® ColorPlus® palette.

In Australia and New Zealand, new products released over the past five years include Axon® cladding, Scyon™ Stria® siding, Secura® Interior Flooring, Secura™ Exterior Flooring and Horizon Lining; in Australia only, new products include: Matrix® cladding and Axent® trim; and additionally, in New Zealand only, the following new products were released: ShingleSide panel and CLD™ Cavity Battens and Rigid Air Barrier.

 

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In the Philippines, new products released over the past five years include Hardisenepa® Fascia Board, Hardiplank® Siding, Hardifloor™ Systems and Hardipattern® Boards.

Seasonality

Our earnings are seasonal and typically follow activity levels in the building and construction industry. In the United States, the calendar quarters ending in December and March generally reflect reduced levels of building activity depending on weather conditions. In Australia and New Zealand, the calendar quarter ending in March is usually affected by a slowdown due to summer holidays. In the Philippines, construction activity diminishes during the wet season from June through September and during the last half of December due to the slowdown in business activity over the holiday period. Also, general industry patterns can be affected by weather, economic conditions, industrial disputes and other factors. See Section 3, “Risk Factors.”

Raw Materials

The principal raw materials used in the manufacture of fibre cement are cellulose fibre (wood-based pulp), silica (sand), portland cement and water.

Cellulose Fibre. Reliable access to specialised, consistent quality, low cost pulp is critical to the production of fibre cement building materials. Cellulose fibre is sourced from New Zealand, the United States, Canada, and Chile and is processed to our specifications. It is further processed using our proprietary technology to provide the reinforcing material in the cement matrix of fibre cement. We have developed a high level of internal expertise in the production and use of wood-based pulps. This expertise is shared with our pulp producers, which have access to appropriate raw wood stocks, in order to formulate superior reinforcing pulps. The resulting pulp formulas are typically proprietary and are the subject of confidentiality agreements between the pulp producers and us. Moreover, we have obtained patents in the United States and in certain other countries covering certain unique aspects of our pulping formulas and processes that we believe cannot adequately be protected through confidentiality agreements. However, we cannot assure you that our intellectual property and other proprietary information will be protected in all cases. See Section 3, “Risk Factors.” We have entered into contracts that discount pulp prices in relation to various pulp indices and purchase our pulp from several qualified suppliers in an attempt to mitigate price increases and supply interruptions.

Pulp has historically demonstrated more price sensitivity than other raw materials that we use in our manufacturing process. In fiscal year 2012, the average Northern Bleached Softwood Kraft (which we refer to as “NBSK”) pulp price was US$952 per ton, a 3% decrease compared to fiscal year 2011. Input costs are expected to remain at elevated levels when compared to historic long-term averages.

Silica. High purity silica is sourced locally by the various production plants. In the majority of locations, we use silica sand as a silica source. In certain other locations, however, we process quartz rock and beneficiate silica sand to ensure the quality and consistency of this key raw material.

Cement. Cement is acquired in bulk from local suppliers and is supplied on a just-in-time basis to our manufacturing facilities. The silos at each fibre cement plant hold between one and three days of our cement requirements. We continue to evaluate options on agreements with suppliers for the purchase of cement that can fix our cement prices over longer periods of time.

Water. We use local water supplies and seek to process all wastewater to comply with environmental requirements.

 

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Sales, Marketing and Distribution

The principal markets for our fibre cement products are the United States, Australia, New Zealand, the Philippines, Canada, and in parts of Europe, including the United Kingdom and France. In addition, we sell fibre cement products in many other countries, including Belgium, China, Denmark, France, French Caribbean, Germany, Hong Kong, Hungary, India, Indonesia, Ireland, Italy, Malta, Mexico, the Middle East (Israel, Kuwait, Qatar and the United Arab Emirates), The Netherlands, Norway, various Pacific Islands, South Africa, South Korea, Spain, Sri Lanka, Switzerland, Taiwan, Turkey and Vietnam. Our brand name, customer education in comparative product advantages, differentiated product range and customer service, including technical advice and assistance, provide the basis for our marketing strategy. We offer our customers support through a specialised fibre cement sales force and customer service infrastructure in the United States, Australia, New Zealand, the Philippines and Europe (which is based out of The Netherlands). The customer service infrastructure includes inbound customer service support coordinated nationally in each country (customer service support for Canada is based out of the United States and customer service support for Europe is based out of The Netherlands), and is complemented by outbound telemarketing capability. Within each regional market, we provide sales and marketing support to building products dealers and lumber yards and also provide support directly to the customers of these distribution channels, principally homebuilders and building contractors.

In the United States, we sell fibre cement products for new residential construction predominantly to distributors, which then sell these products to dealers or lumber yards. This two-step distribution process is supplemented with direct sales to dealers and lumber yards as a means of accelerating product penetration and sales. Repair and remodel products in the United States are typically sold through the large home center retailers and specialist distributors. Our top five US customers accounted for approximately 55% of our total USA and Europe Fibre Cement gross sales in fiscal year 2012. In Australia and New Zealand, both new construction and repair and remodel products are generally sold directly to distributor/hardware stores and lumber yards rather than through the two-step distribution process. In the Philippines, a network of thousands of small to medium size dealer outlets sells our fibre cement products to consumers, builders and real estate developers, although in recent years, do-it-yourself type stores have started to enter the Philippines market. Physical distribution of product in each country is primarily by road or sea transport, except in the United States where transportation is primarily by road and, to a lesser extent, by rail.

Fibre cement products manufactured in Australia, New Zealand and the Philippines are exported to a number of markets in Asia, the Pacific, and the Middle East (Israel, Kuwait, Qatar and the United Arab Emirates) by sea transport. We maintain dedicated regional sales management teams in our major sales territories. As of 31 May 2012, the sales teams (including telemarketing staff) consisted of approximately 301 people in the United States and Canada, 72 people in Australia, 22 people in New Zealand, 38 people in the Philippines, and 26 people in Europe. We also employ one person based in Hong Kong and one person based in South Korea, who each function as a regional export salesperson, and who covers markets such as South Korea, Hong Kong, Macau, China and the Middle East (Israel, Kuwait, Qatar and the United Arab Emirates). Our national sales managers and national account managers, together with the regional sales managers and sales representatives, maintain relationships with national and other major accounts. Our sales force includes skilled trades people who provide on-site technical advice and assistance. In some cases, sales forces manage specific product categories.

Despite the fact that distributors and dealers are generally our direct customers, we also aim to increase primary demand for our products by marketing our products directly to homeowners, architects and builders. We encourage them to specify and install James Hardie® products because of the quality and craftsmanship of our products. This “pull through” strategy, in turn, assists us in

 

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expanding sales for our distribution network as distributors benefit from the increasing demand for our products.

Geographic expansion of our fibre cement business has occurred in markets where framed construction is prevalent for residential applications or where there are opportunities to change building practices from masonry to framed construction. Expansion is also possible where there are direct substitution opportunities irrespective of the methods of construction. Our entry into the Philippines is an example of the ability to substitute fibre cement for an alternative product (in this case plywood). With the exception of our current major markets, as well as Japan and certain rural areas in Asia, Scandinavia, and Eastern Europe, most markets in the world principally utilise masonry construction for external walls in residential construction. Accordingly, further geographic expansion depends substantially on our ability to provide alternative construction solutions and for those solutions to be accepted in those markets.

Because fibre cement products were relatively new to the Philippines, the launch of our fibre cement products in the Philippines in fiscal year 1999 was accompanied by strategies to address the particular needs of local customers and the building trade. For example, we established a carpenter training and accreditation program whereby Filipino carpenters who are unfamiliar with our products are taught installation techniques. We have also put greater emphasis on building our relationships with new home developers and builders in order to educate the market on the benefits of our products in this particular sector.

Dependence on Trade Secrets and Research and Development

We pioneered the successful development of cellulose reinforced fibre cement and, since the 1980s, have progressively introduced products developed as a result of our proprietary product formulation and process technology. The introduction of differentiated products is one of the core components of our global business strategy. This product differentiation strategy is supported by our significant investment in research and development activities.

The following table sets forth our research and development expenditures for the three preceding fiscal years:

 

     Fiscal Years Ended 31 March  
(Millions of US dollars)    2012      2011      2010  

Research and Development Expenditures1

     32.4       $ 31.2       $ 30.4   

Research and Development Expenditures as a percentage of total net sales

     2.6%         2.7%         2.7%   

 

 

 

1 

Included within research and development expenditures for fiscal years 2012, 2011 and 2010 is US$2.0 million, US$3.2 million and US$3.3 million, respectively, classified as selling, general and administrative expenses.

Our current patent portfolio is based mainly on fibre cement compositions, associated manufacturing processes and the resulting products. Our non-patented technical intellectual property consists primarily of our operating and manufacturing know-how, which is maintained as trade secret information. We have increased our abilities to effectively create, manage and utilise our intellectual property and have implemented a strategy that increasingly uses patenting, licensing, trade secret protection and joint development to protect and increase our competitive advantage. However, we cannot assure you that our intellectual property and other proprietary information will be protected in all cases. In addition, if our research and development efforts fail to generate new, innovative products or processes, our overall profit margins may decrease and demand for our products may fall.

 

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In addition, the Company has a variety of patents and licenses; industrial, commercial and financial contracts; and manufacturing processes. While the Company is dependent on the competitive advantage that these items provide as a whole, the Company is not dependent on any one of them individually and does not consider any one of them individually to be material. We do not materially rely on intellectual property licensed from any outside third parties. See Section 3, “Risk Factors.”

Governmental Regulation

As noted above, on 17 June 2010 we moved our corporate domicile to Ireland and are now subject to Irish law in addition to the SE Regulations. In addition, we continue to operate under the regulatory requirements of numerous jurisdictions and organisations, including the ASX, ASIC, the NYSE, the SEC, the Irish Takeovers Panel and various other rulemaking bodies. See Section 3, “Memorandum and Articles of Association” for information regarding Irish Company Law and regulations to which we are subject.

Environmental Regulation

Our operations and properties are subject to extensive federal, state and local and foreign environmental protection and health and safety laws, regulations and ordinances. These environmental laws, among other matters, govern activities and operations that may have adverse environmental effects, such as discharges to air, soil and water, and establish standards for the handling of hazardous and toxic substances and the handling and disposal of solid and hazardous wastes. In the United States, these environmental laws include, but are not limited to:

 

   

the Resource Conservation and Recovery Act;

   

the Comprehensive Environmental Response, Compensation and Liability Act;

   

the Clean Air Act;

   

the Occupational Safety and Health Act;

   

the Mine Safety and Health Act;

   

the Emergency Planning and Community Right to Know Act;

   

the Clean Water Act;

   

the Safe Drinking Water Act;

   

the Surface Mining Control and Reclamation Act;

   

the Toxic Substances Control Act;

   

the National Environmental Policy Act; and

   

the Endangered Species Act,

as well as analogous state, regional and local regulations. Other countries also have statutory schemes relating to the protection of the environment.

Some environmental laws provide that a current or previous owner or operator of real property may be liable for the costs of removal or remediation of environmental contamination on, under, or in that property or other impacted properties. In addition, persons who arrange, or are deemed to have arranged, for the disposal or treatment of hazardous substances may also be liable for the costs of removal or remediation of environmental contamination at the disposal or treatment site, regardless of whether the affected site is owned or operated by such person. Environmental laws often impose liability whether or not the owner, operator or arranger knew of, or was responsible for, the presence of such environmental contamination. Also, third parties may make claims against owners or operators of properties for personal injuries, property damage and/or for clean-up associated with releases of hazardous or toxic substances pursuant to applicable environmental laws and common law tort theories, including strict liability.

 

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Environmental compliance costs in the future will depend, in part, on continued oversight of operations, expansion of operations and manufacturing activities, regulatory developments and future requirements that cannot presently be predicted.

Organisational Structure

JHI SE is incorporated and domiciled in Ireland.

The table below sets forth our significant subsidiaries, all of which are wholly-owned by JHI SE, either directly or indirectly, as of 31 May 2012.

 

Name of Company

  

Jurisdiction of
Establishment

James Hardie 117 Pty Ltd

   Australia

James Hardie Aust Holdings Pty Ltd.

   Australia

James Hardie Austgroup Pty Ltd.

   Australia

James Hardie Australia Management Pty Ltd.

   Australia

James Hardie Australia Pty Ltd.

   Australia

James Hardie Building Products Inc.

   United States

James Hardie Europe B.V.

   Netherlands

James Hardie Holdings Ltd

   Ireland

James Hardie International Finance Ltd.

   Ireland

James Hardie International Group Ltd.

   Ireland

James Hardie International Holdings Ltd.

   Ireland

James Hardie N.V.

   Netherlands

James Hardie New Zealand Ltd

   New Zealand

James Hardie Philippines Inc

   Philippines

James Hardie Research (Holdings) Pty Ltd

   Australia

James Hardie Research Pty Ltd

   Australia

James Hardie Technology Limited

   Bermuda

James Hardie U.S. Investments Sierra LLC

   United States

N.V. Technology Holdings, A Limited Partnership

   Australia

RCI Pty Ltd

   Australia

Property, Plants and Equipment

We estimate that our manufacturing plants are among the largest and lowest cost fibre cement manufacturing plants in the United States. We believe that the location of our plants positions us near attractive markets in the United States while minimising our transportation costs for product distribution and raw material sourcing.

Our manufacturing plants use significant amounts of water which, after internal recycling and reuse, are eventually discharged to publicly owned treatment works (with the exception of our Blandon, Pennsylvania and Summerville, South Carolina facilities, which maintain closed loop systems, at which production was suspended in November 2007 and November 2008, respectively). The discharge of process water is monitored by us, as well as by regulators. In addition, we are subject to regulations that govern the air quality and emissions from our plants. In the past, from time to time, we have received notices of discharges in excess of our water and air permit limits. In each case, we have addressed the concerns raised in those notices, including the payment of any associated minor fines and capital expenditures associated with preventing future discharges in excess of permitted levels.

 

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Plants and Process

Fibre Cement Building Products

We manufacture fibre cement building products in the United States and Asia Pacific. Annual design capacity is based on management’s historical experience with our production process and is calculated assuming continuous operation, 24 hours per day, seven days per week, producing 5/16” medium density product at a targeted operating speed. Annual design capacity is not necessarily reflective of our actual capacity utilisation rates for our fibre cement plants by region. Annual capacity utilisation is affected by factors such as demand, product mix, batch size, plant availability and production speeds and is usually less than annual design capacity. We manufacture products of varying thicknesses and density.

We currently have an annual design capacity of 3,390 mmsf and 520 mmsf in the United States and Asia Pacific, respectively, for our fibre cement building products. Fiscal year 2012 capacity utilisation, based on this annual design capacity, for our fibre cement building products plants was an average of 46% and 72% in the United States and Asia Pacific, respectively. As indicated above, annual design capacity is based on management’s estimates. No accepted industry standard exists for the calculation of our fibre cement manufacturing facility design and utilisation capacities.

Fibre Reinforced Concrete Pipes

We manufacture fibre reinforced concrete pipes in Australia. Our current annual design capacity for our fibre reinforced concrete pipes plant is 50 thousand tons.

Plant Locations

The location of each of our fibre cement plants is set forth below:

 

Fibre Cement Building Products
United States – Plants Operating

  

Cleburne, Texas

  

Peru, Illinois

  

Plant City, Florida

Pulaski, Virginia

  

Reno, Nevada

Tacoma, Washington

Waxahachie, Texas

  

    United States – Plants Suspended

  

Blandon, Pennsylvania1

Fontana, California2

  

Summerville, South Carolina2

  

    Asia Pacific

  

        Australia

  

Sydney, New South Wales

  

Brisbane, Queensland (Carole Park)3

  

        New Zealand

  

Auckland

  

        The Philippines

  

Manila

  

Fibre Reinforced Concrete Pipes

  

            Australia

  

Brisbane, Queensland (Meeandah)3

  

 

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1 

We suspended production at our Blandon, Pennsylvania plant in November 2007.

 

2 

We suspended production at our Fontana, California and Summerville, South Carolina plants in December 2008 and November 2008, respectively.

 

3 

There are two manufacturing plants in Brisbane. Carole Park produces only flat sheets and Meeandah produces only pipes and columns.

While the same basic process is used to manufacture fibre cement products at each facility, plants are designed to produce the appropriate mix of products to meet each geographic market’s specific, projected needs. The facilities were constructed and are operated so production can be efficiently adjusted in response to increased consumer demand by increasing production capacity utilisation, enhancing the economies of scale or adding additional lines to existing facilities, or making corresponding reductions in production capacity in response to weaker demand.

Except for the Waxahachie, Texas facility, we own all of our fibre cement manufacturing facilities located in the United States. The lease for the Waxahachie, Texas facility expires on 31 March 2020, at which time we have an option to purchase the facility.

Our three Australian fibre cement manufacturing facilities are not owned by us. One of the leases expires on 23 March 2016, with an option to renew the lease for two further terms of 10 years expiring in March 2036. The other two leases expire on 23 March 2019, and contain options to renew for two further terms of 10 years expiring in March 2039. There is no purchase option available under our leases related to our Australian sites. Our one New Zealand fibre cement manufacturing facility is not owned by us. The lease for our New Zealand facility expires on 22 March 2016, at which time we have an option to renew the lease for two further terms of 10 years expiring in March 2036. There is no purchase option available under our lease related to our New Zealand facility.

We own 40% of the land on which our Philippines fibre cement plant is located, and 100% of the Philippines plant itself.

Mines

We lease silica quartz mine sites in Tacoma, Washington; and Reno, Nevada. The lease for our quartz mine in Tacoma, Washington expires in February 2014 (with options to renew). The lease for our silica quartz mine site in Reno, Nevada expires in January 2014 (with options to purchase).

As a mine operator, we are required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), and rules promulgated by the Securities and Exchange Commission implementing that section of the Dodd-Frank Act, to provide certain information concerning mine safety violations and other regulatory matters concerning the operation of our mines. During fiscal year 2012, we did not receive any notices, citations, orders, legal action or other communication from the U.S. Department of Labor’s Mine Safety and Health Administration that would necessitate additional disclosure under Section 1503(a) of the Dodd-Frank Act.

 

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Capital Expenditures

The following table sets forth our capital expenditures for each year in the three-year period ended 31 March 2012.

 

     Fiscal Years Ended 31 March  
     2012      2011      2010  
     (Millions of US dollars)  

USA and Europe Fibre Cement

   $ 26.7       $ 39.5       $ 40.6   

Asia Pacific Fibre Cement

     6.7         9.9         6.7   

Research and Development and Corporate

     2.4         0.9         3.2   
  

 

 

    

 

 

    

 

 

 

Total Capital Expenditures

   $     35.8       $     50.3       $     50.5   
  

 

 

    

 

 

    

 

 

 

The Company did not have any material divestitures in the fiscal years ended 31 March 2012, 2011 and 2010.

The significant capital expenditure projects over the past three fiscal years in our USA and Europe Fibre Cement business include:

 

   

commencement of a new finishing capability on an existing product line in fiscal year 2009. As of 31 March 2012, we have incurred US$23.5 million related to this project;

 

   

commencement of expenditures to enhance environmental compliance at our plants in fiscal year 2011. As of 31 March 2012, we have incurred US$11.0 million related to this project;

 

   

an upgrade to our supply chain management IT systems. As of 31 March 2012, we have incurred US$4.3 million related to this project;

 

   

expenditures related to a new ColorPlus line at our Cleburne plant. As of 31 March 2012, we have incurred US$5.7 million related to this project; and

 

   

addition of 12 foot XLD Trim capability at our Peru, Illinois plant for US$3.6 million in fiscal year 2011.

We currently expect to spend between US$70 million and US$100 million in fiscal year 2013 for capital expenditures, including facility upgrades and expansions, equipment to enhance environmental compliance, and the implementation of new fibre cement technologies. We expect to fund our capital expenditures through a combination of internal cash and funds from our credit facilities.

Competitive pressures and market developments could require further increases in capital expenditures. Our financing for these capital expenditures is expected to come from cash from our future operations and from external debt to the extent that cash from operations does not cover our capital expenditures. However, if we are unable to extend our credit facilities, or are unable to renew our credit facilities on terms that are substantially similar to the ones we presently have, we may experience liquidity issues and may have to reduce our levels of planned capital expenditures to conserve cash for future cash flow requirements.

 

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GROUP MANAGEMENT TEAM

Our management is overseen by a Group Management Team (which we refer to as “GMT”), whose members cover the key areas of fibre cement research and development, production, manufacturing, sales, human resources, investor relations, finance and legal.

Members of the GMT (in alphabetical order) are:

Joe Blasko BSc, JD

General Counsel

Age 45

 

 

LOGO

 

Joe Blasko joined James Hardie as General Counsel in June 2011. Mr Blasko reports to the Company’s CEO.

 

Before joining James Hardie, Mr Blasko was Assistant General Counsel, and later, the General Counsel at Liebert Corporation, an Emerson Network Power Systems company and wholly-owned subsidiary of Emerson Electric Co. In his four years with Liebert/Emerson, Mr Blasko was responsible for establishing the legal department in Columbus, Ohio, managing and overseeing all  legal matters and working closely with

the executive management team. In this role, Mr Blasko also had global responsibilities which required expertise across multiple jurisdictions.

From 2004 to 2006, Mr Blasko was Associate General Counsel at The Scotts Miracle-Gro Company, serving as the effective “general counsel” to numerous corporate divisions within the organisation. From 1997 to 2004 Mr Blasko gained considerable regulatory and litigation expertise working at Vorys, Slater, Seymour and Pease LLP in Ohio.

Mr Blasko has a Juris Doctor from Case Western Reserve University in Cleveland, Ohio and a Bachelor of Science in Foreign Service from Georgetown University, with a specialty in Foreign Service, International Relations, Law and Organisations.

Russell Chenu BCom, MBA

Chief Financial Officer

Age 62

 

 

LOGO

 

Russell Chenu joined James Hardie as Interim Chief Financial Officer (“CFO”) in October 2004 and was appointed CFO in February 2005. He was elected to the Company’s Managing Board by CUFS holders at the 2005 Annual General Meeting (“AGM”), re-elected in 2008 and continued as a member of the Managing Board until it was dissolved in June 2010.

 

Mr Chenu is an experienced corporate and finance executive who has held senior finance and management  positions with a  number of Australian  publicly-listed

companies. In a number of these senior roles, he has been engaged in significant strategic business planning and business change, including several turnarounds, new market expansions and management leadership initiatives.

Mr Chenu has a Bachelor of Commerce from the University of Melbourne and an MBA from Macquarie Graduate School of Management, Australia.

 

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Mark Fisher BSc, MBA

Executive General Manager — International

Age 41

 

LOGO  

Mark Fisher joined James Hardie in 1993 as a Production Engineer. Since then, he

has worked for the Company as Finishing Manager, Production Manager and Product Manager at various locations; Sales and Marketing Manager; and as General Manager of our Europe Fibre Cement business. Mr Fisher was appointed Vice President — Specialty Products in November 2004, then Vice President — Research & Development in December 2005. In February 2008, his role was expanded to cover Engineering & Process Development. In January 2010, he was appointed Executive General Manager – International, responsible for research and

development, engineering, manufacturing logistics and product management, as well as the Company’s non-US businesses.

Mr Fisher has a Bachelor of Science in Mechanical Engineering and an MBA from University of Southern California.

Louis Gries BSc, MBA

Chief Executive Officer

Age 58

 

LOGO  

Louis Gries joined James Hardie as Manager of the Fontana fibre cement plant in California in February 1991 and was appointed President of James Hardie Building Products, Inc in December 1993. Mr Gries became Executive Vice President —- Operations in January 2003, responsible for operations, sales and marketing in our businesses in the Americas, Asia Pacific and Europe.

 

He was appointed Interim CEO in October 2004 and became CEO in February 2005. Mr Gries was elected to the Company’s Managing Board by CUFS holders at the 2005

AGM and continued as Chairman of the Managing Board until it was dissolved in June 2010.

In April 2012, the Company announced that effective 30 June 2012, Mr Gries would also assume responsibility for managing the US business upon Mr Nigel Rigby’s departure from the Company.

Before he joined James Hardie, Mr Gries worked for 13 years for USG Corp, including a variety of roles in research, plant quality and production, and product and plant management.

He has a Bachelor of Science in Mathematics from the University of Illinois and an MBA from California State University, Long Beach, California.

 

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Sean O’Sullivan BA, MBA

Vice President — Investor & Media Relations

Age 47

 

LOGO  

Sean O’Sullivan joined James Hardie as Vice President — Investor & Media Relations in December 2008. For the eight years prior to joining James Hardie, Mr O’Sullivan was Head of Investor Relations at St. George Bank, where he established and led the investor relations function.

 

Mr O’Sullivan’s background includes thirteen years as a fund manager for GIO Asset Management, responsible for domestic and global investments. During this period, he spent time on secondment with McKinsey and Co, completing a major study into the

Australian financial services industry. Mr O’Sullivan’s final position at GIO was General Manager of Diversified Investments where his responsibilities included determining the asset allocation for over A$10 billion in funds under management. After leaving the GIO, Mr O’Sullivan worked for Westpac Banking Corporation in funds management sales.

He has a Bachelor of Arts in Economics from Sydney University and an MBA from Macquarie Graduate School of Management.

Nigel Rigby

Executive General Manager — USA

Age 45

 

LOGO   Nigel Rigby joined James Hardie in 1998 as a Planning Manager for our New Zealand business and has held a number of sales, marketing and product and business development roles with the Company. In November 2004, Mr Rigby was appointed Vice President — Emerging Markets and in 2006 he was named Vice President — General Manager Northern Division. In November 2008, he became Vice President — General Manager of the Company’s newly-formed US Eastern Division, responsible for the former Northern and Southern Division markets and plants. In January 2010, he was appointed Executive General Manager – USA,
responsible for the US business.

In April 2012, the Company announced that Mr Rigby will be leaving the Company effective 30 June 2012.

Before joining us, Mr Rigby held various management positions at Fletcher Challenge, a New Zealand based company involved in energy, pulp and paper, forestry and building materials.

None of the persons above has any familial relationship with each other or with the Board of Directors listed below. In addition, none of the individuals listed above is party to any arrangement or understanding with a major shareholder, customer, supplier or other entity, pursuant to which any of the above was selected as a member of the GMT.

 

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BOARD OF DIRECTORS

James Hardie’s directors have widespread experience, spanning general management, finance, law and accounting. Each director also brings valuable international experience that assists with James Hardie’s growth.

Michael Hammes BS, MBA

Age 70

 

LOGO  

Michael Hammes was elected as an independent Non-Executive Director of James Hardie in February 2007. He was appointed Chairman of the Board in January 2008 and is a member of the Audit Committee, the Remuneration Committee and the Nominating and Governance Committee. Mr Hammes previously served as a member of the Re-domicile Due Diligence Committee.

 

Experience: Mr Hammes has extensive commercial experience at a senior executive level. He has held a number of executive positions in the medical products, hardware

and home improvement, and automobile sectors, including CEO and Chairman of Sunrise Medical, Inc (2000-2007), Chairman and CEO of Guide Corporation (1998-2000), Chairman and CEO of Coleman Company, Inc (1993-1997), Vice Chairman of Black & Decker Corporation (1992-1993) and various senior executive roles with Chrysler Corporation (1986-1990) and Ford Motor Company (1979-1986).

Directorships of listed companies in the past five years: Current – Lead Director of Navistar International Corporation (since 1996) and Director of DynaVox Mayer-Johnson (listed in April 2010).

Other: Resident of the United States.

Last elected: August 2011

Term expires: August 2014

Donald McGauchie AO

Age 62

 

LOGO  

Donald McGauchie joined James Hardie as an independent Non-Executive Director in August 2003 and was appointed Acting Deputy Chairman in February 2007 and Deputy Chairman in April 2007. He is a member of the Board, Chairman of the Nominating and Governance Committee and a member of the Remuneration Committee.

 

Experience: Mr McGauchie has wide commercial experience within the food processing, commodity trading,  finance  and  telecommunication sectors. He also has

extensive public policy experience, having previously held several high-level advisory positions to the Australian Government.

Directorships of listed companies in the past five years: Current - Chairman (since 2010) and Director (since 2010) of Australian Agricultural Company Limited; Chairman (since 2010) and Director (since 2003) of Nufarm Limited; Director of GrainCorp Limited (since 2009). Former - Chairman of Telstra Corporation Limited (2004-2009).

Other: Chairman Australian Wool Testing Authority (since 2005) and Director since 1999; Former Director of The Reserve Bank of Australia (2001-2011); resident of Australia.

 

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Last elected: August 2010

Term expires: August 2013

Brian Anderson BS, MBA, CPA

Age 61

 

LOGO  

Brian Anderson was appointed as an independent Non-Executive Director of James Hardie in December 2006. He is a member of the Board, Chairman of the Audit Committee and a member of the Remuneration Committee. He previously served as Chairman of the Re-domicile Due Diligence Committee.

 

Experience: Mr Anderson has extensive financial and business experience at both executive and board levels. He has held a variety of senior positions, with thirteen years at Baxter International, Inc, including Corporate Vice President of Finance, Senior Vice

President and CFO (1997-2004) and, more recently, Executive  Vice  President  and CFO of OfficeMax, Inc (2004-2005). Earlier in his career, Mr Anderson was an Audit Partner of Deloitte & Touche LLP (1986-1991).

Directorships of listed companies in the past five years: Current – Chairman (since 2010) and Director (since 2005) of A.M. Castle & Co.; Director of Pulte Homes Corporation (since 2005); Director (since 1999) and Lead Director (since April 2011) of W.W. Grainger, Inc.

Other: Resident of the United States.

Last elected: August 2009

Term expires: August 2012. Mr. Anderson will stand for re-election at the 2012 AGM.

David Dilger CBE, BA, FCA

Age 55

 

LOGO  

David Dilger was appointed as an independent Non-Executive Director of James Hardie in September 2009. He is a member of the Board, and a member of the Audit Committee and Remuneration Committee.

 

Experience: Mr Dilger has substantial experience in multinational manufacturing operations and a strong finance background. He has held a number of senior executive positions, including CEO of Greencore Group plc (1995-2008), CEO of Food Industries plc (1988-1991) and CFO of Woodchester Investments (1984-1988).

Directorships of listed companies in the past five years: Former – Non-executive director of The Bank of Ireland plc (2003-2009) serving as Senior Independent Director (2007-2009).

Other: Former Chairman of Dublin Airport Authority plc (2009-2011); resident of Ireland.

Last elected: August 2010

Term expires: August 2013

 

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David Harrison BA, MBA, CMA

Age 65

 

LOGO  

David Harrison was appointed as an independent Non-Executive Director of James Hardie in May 2008. He is a member of the Board, Chairman of the Remuneration Committee and a member of the Audit Committee.

 

Experience: Mr Harrison is an experienced Company director with a finance background, having served in corporate finance roles, international operations and information technology during 22 years with Borg Warner/General Electric Co. His previous experience  includes  ten years at Pentair, Inc., as  Executive  Vice President

and CFO (1994-1996 and 2000-2007) and Vice President and CFO roles at Scotts, Inc. and Coltec Industries, Inc. (1996-2000).

Directorships of listed companies in the past five years: Current – Director National Oilwell Varco (since 2003); Director Navistar International Corporation (since 2007).

Other: Resident of the United States.

Last elected: August 2010

Term expires: August 2013

Alison Littley BA, FCIPS

Age 50

 

LOGO  

Alison Littley was appointed as an independent Non-Executive Director of James Hardie in February 2012. She is a member of the Board and a member of the Audit Committee.

 

Experience: Ms Littley has substantial experience in multinational manufacturing and supply chain operations, and she brings a strong international leadership background building effective management teams and third party relationships. She has held a variety of positions, most recently as  Chief  Executive of Buying Solutions,

a UK Government Agency responsible for procurement of goods and services on behalf of UK government and public sector bodies (2006-2011). She has previously held senior management roles in Diageo plc (1999-2006) and Mars, Inc (1981-1999).

Directorships of listed companies in the past five years: None.

Other: Resident of the United Kingdom.

Last elected: Ms Littley will be standing for election at the August 2012 AGM.

 

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James Osborne BA Hons, LLB

Age 63

 

LOGO  

James Osborne was appointed as an independent Non-Executive Director of James Hardie in March 2009. He is a member of the Board and a member of the Nominating and Governance Committee. He previously served as a member of the Re-domicile Due Diligence Committee.

 

Experience: Mr Osborne is an experienced company director with a strong legal background and a considerable knowledge of international business operations in North America and Europe. His career includes 35  years  with the leading Irish law

firm, A&L Goodbody, in roles which included opening the firm’s New York office in 1979 and serving as the firm’s managing partner (1982-1994). He has served as a consultant to the firm since 1994. Mr Osborne also contributed to the listing of Ryanair in London, New York and Dublin and continues to serve on Ryanair’s board.

Directorships of listed companies in the past five years: Current – Director, Ryanair Holdings plc (since 1996); Former – Chairman, Independent News & Media (2011-2012), Chairman, Newcourt Group plc (2004-2009).

Other: Chairman, Eason & Son Ltd (since August 2010), Chairman, Centric Health (since 2006); resident of Ireland.

Last elected: August 2009

Term expires: August 2012. Mr. Osborne will stand for re-election at the 2012 AGM.

Rudy van der Meer M.Ch.Eng

Age 67

 

LOGO  

Rudy van der Meer was elected as an independent Non-Executive Director of James Hardie in February 2007. He is a member of the Board and the Nominating and Governance Committee.

 

Experience: Mr van der Meer is an experienced former executive, with considerable knowledge of international business and the building and construction sector. During his 32-year association with Akzo Nobel N.V., he held a number of senior positions including CEO – Coatings (2000-2005),  CEO – Chemicals (1993-2000), and member

of the five person Executive Board (1993-2005).

Directorships of listed companies in the past five years: Current – Chairman of the Supervisory Board of Imtech N.V. (since 2005); Director LyondellBasell Industries NV (since August 2010); Former – Member of the Supervisory Board of Hagemeyer N.V. (2006-2008).

Other: Chairman of the Board of Energie Beheer Nederland B.V. (since 2006); Chairman of the Supervisory Board of VGZ U.A. Health Insurance (since May 2011); resident of The Netherlands.

Last elected: August 2011

Term expires: August 2014

 

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Our CEO, Louis Gries, is an Executive Director on the Company’s Board. Mr Gries’ biographical details appear in the Group Management Team section.

None of the persons above has any familial relationship with each other or with the GMT. In addition, none of the individuals listed above is party to any arrangement or understanding with a major shareholder, customer, supplier or other entity, pursuant to which any of the above was selected as a director.

 

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REMUNERATION REPORT

This remuneration report explains James Hardie’s approach to remuneration, and has been adopted by the Board on the recommendation of the Remuneration Committee.

Irish law does not require the Company to produce a remuneration report or to submit it to shareholders. Similarly, the Company is not required under the ASX Corporate Governance Council Principles and Recommendations or section 300A of the Australian Corporations Act to submit a remuneration report to shareholders for a non-binding vote. However, taking into consideration the Company’s large Australian shareholder base, James Hardie has voluntarily produced a remuneration report for non-binding shareholder approval for some years and currently intends to continue to do so. This document reports on the Company’s remuneration practices in fiscal year 2012 and also voluntarily includes an outline of the Company’s proposed remuneration framework for fiscal year 2013.

During fiscal year 2012 the Remuneration Committee retained Towers Watson (in the United States) and Guerdon Associates (in Australia) as its independent advisers, and the Company retained Hewitt Associates as its external remuneration adviser.

1. APPROACH TO CEO AND SENIOR EXECUTIVE REMUNERATION

1.1 Objectives

James Hardie’s remuneration philosophy is to provide competitive remuneration, compared with US companies exposed to the US housing market, that emphasises operational excellence and shareholder value creation through incentives which link executive remuneration with the interests of shareholders. The Company’s executive remuneration framework is based on a pay-for-performance policy that differentiates remuneration amounts based on an evaluation of performance by the business and the individual.

1.2 Policy

It is James Hardie’s policy to align remuneration received with performance achieved.

Remuneration packages for senior executives comprise fixed pay and benefits (which we refer to as “Fixed Remuneration”) and variable performance pay (which we refer to as “Variable Remuneration”), based on both short-term incentives (which we refer to as “STI”) and long-term incentives (which we refer to as “LTI”). The Company’s policy is for fixed pay and benefits for senior executives to be positioned at the market median and total target direct remuneration (comprising salary and target STI and LTI) to be positioned at the market 75th percentile if stretch target performance goals are met. Performance hurdles for target STI and LTI payments are set with the expectation that the Company will deliver profitability and growth results in the top quartile of its listed, US building products peer group companies. If these performance hurdles are not met, the amount payable under the STI and LTI components will be less (and potentially zero for poor performance).

 

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1.3 Setting Remuneration Packages

Individual remuneration packages for the CEO and senior executives are evaluated by the Remuneration Committee annually to make sure that they continue to achieve the Company’s objectives and are competitive with developments in the market. The Remuneration Committee commissions a review from its independent US compensation adviser of the remuneration positioning for the CEO and senior executives relative to their US peers. Subject to compliance with US tax code requirements, the Board makes the final decisions concerning the remuneration (base salary, employment contract terms, ‘Scorecard’ rating, and STI and LTI target, maximum and actual grants) of the CEO and CFO. The CEO makes recommendations to the Board and Remuneration Committee regarding the remuneration of senior executives other than himself. The Remuneration Committee then makes the final decisions concerning the remuneration of the remaining senior executives, for review by the Board.

Remuneration decisions are based on the Company’s remuneration framework, which is reviewed by the Remuneration Committee and approved by the Board each fiscal year. Senior executive remuneration takes into account the individual’s competencies, skills and performance, the specific roles and responsibilities of the relevant position, advice received by the Remuneration Committee from external independent compensation advisers, and other practices specific to the markets in which the Company operates and countries in which the executive is based or was based prior to any relocation.

Each year the Remuneration Committee reviews and approves a list of peer group companies which it uses for comparative purposes in setting remuneration for the CEO, CFO and the Company’s senior executives. As the Company’s main business and most of its senior executives are in the US, the peer group used by the Company comprises US listed companies exposed to the US housing market. The same peer group is used to determine relative performance for that year’s LTI equity grants.

1.4 Senior Executives

The Company’s senior executives in fiscal year 2012 were:

 

   

Louis Gries, Chief Executive Officer

 

   

Joe Blasko, General Counsel

 

   

Russell Chenu, Chief Financial Officer

 

   

Mark Fisher, Executive General Manager – International

 

   

Nigel Rigby, Executive General Manager – USA

 

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2. FISCAL 2012 COMPANY PERFORMANCE AND LINK WITH REMUNERATION POLICY

2.1 Actual Performance

James Hardie’s five-year EBIT and Net income, and five-year A$ Total Shareholder Return (including dividends and capital returns) mapped against changes in US housing starts are shown in the graphs below:

 

EBIT1
(Millions of US dollars)

 

LOGO

1 Excludes asbestos, asset impairments and ASIC expenses.

     

Net Income2
(Millions of US dollars)

 

LOGO

2 Excludes asbestos, asset impairments, ASIC expenses and tax adjustments.

LOGO

2.2 Market Conditions

A significant proportion of the remuneration for senior executives is Variable Remuneration, which is at risk. The Company’s remuneration arrangements aim to ensure a link between the performance of the Company and bonuses paid and equity awarded.

Operating conditions in the US residential housing market continued to be demanding in fiscal year 2012. According to the US Census Bureau, single family housing starts, which are one of the key drivers of the Company’s performance, were approximately 445,600 in fiscal year 2012, which is relatively flat compared to fiscal year 2011. Repair and remodel activity also slightly declined during fiscal year 2012.

Although there were ongoing challenges in the housing market, including tight credit conditions, elevated unemployment rates and a shadow inventory of foreclosed homes, fiscal year 2012 reflected a more stable market environment (albeit at historically low levels) and consistent operating results when compared with fiscal year 2011. Although some industry data suggest increased interest among potential homebuyers, builder confidence remains at relatively low levels and the market remains restrained due to the many challenges that continue to inhibit a sustainable recovery in the overall housing market and broader US economy.

 

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2.3 Company Performance

Despite these challenges and the significant decline in the US housing market since March 2006, the Company achieved strong results in fiscal year 2012, gaining both category and market share and continuing to be in a strong operational and financial position. Some of the key components in the Company’s performance in fiscal year 2012 include:

 

   

an improvement of 20% in the Company’s net operating result to US$140.4 million, excluding asbestos, asset impairments, ASIC expenses and tax adjustments;

 

   

an improvement in net sales, sales volume and EBIT (excluding asset impairments) for the USA and Europe Fibre Cement business of 6%, 7% and 1%, respectively;

 

   

an improvement in net sales and EBIT for the Asia Pacific business of 6% and 1%, respectively, in a generally weak industry environment and with sales volume down 4%;

 

   

successful resolution of the RCI litigation, which resulted in a refund of A$369.8 million from the ATO; and

 

   

strong net operating cash flow, which resulted in a net cash position of US$265.4 million at 31 March 2012 (compared to net debt of US$40.4 million at 31 March 2011) and allowed the Board to recommence dividend payments and capital management and to make an advance payment to the Asbestos Injuries Compensation Fund of US$138.7 million.

As part of its assessment of the Company’s performance in the US, the Board considered the impact of an asset impairment charge of US$14.3 million taken during fiscal year 2012. Although the Board would normally take the view that such a charge should be included in the calculation of management’s performance during the year, the Board determined not to do so in respect of this charge because:

 

   

replacement of the asset provided space for new plant and equipment which will be used to more cost-effectively service continued growth in one of the Company’s key markets; and

 

   

recent improvements in manufacturing efficiency mean that markets serviced by the asset can be serviced more effectively by the Company’s existing manufacturing facilities.

2.4 Performance Linkage with Remuneration Policy

The Board and Remuneration Committee continue to believe that the Company’s remuneration framework is appropriate to focus management on dealing with the continuing difficult US housing industry conditions and provides appropriate alignment between senior executives and shareholders.

As part of their annual review of management performance, the Board and Remuneration Committee review management’s performance compared to prior years and its peers on a range of factors, including performance against the measures in the Company’s Variable Remuneration STI and LTI plans, other financial performance, and the Scorecard. Based on that review, the Board and Remuneration Committee concluded that management’s performance in fiscal year 2012 was superior to the 75th percentile of its peer group of companies and substantially better than the Company’s performance in fiscal year 2011. As a result of this assessment, Variable Remuneration outcomes in fiscal year 2012 are substantially above fiscal year 2011 and, for the STI plans, above target.

 

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More details about this assessment, including the percentage of the maximum Variable Remuneration awarded to or forfeited by senior executives is set out in section 3 of this Remuneration Report below.

3. DESCRIPTION OF COMPANY’S REMUNERATION ARRANGEMENTS

This section describes the Company’s remuneration arrangements applying in fiscal year 2012.

3.1 Overview of Variable Remuneration

Variable Remuneration is at risk and is earned by senior executives when the Company or the individual meets or exceeds specified performance goals. The Company’s Variable Remuneration incentive plans for senior executives in fiscal year 2012 are set out below:

 

       
Duration   Plan Name   Amount   Form Incentive Paid

Short-term (1-3 years)

  Individual Performance Plan (IP Plan)   20% of STI Target   Cash
  Executive Incentive Plan   80% of STI Target   Cash
    40% of LTI Target   Hybrid RSUs
Long-term (3-5 years)   Long Term Incentive Plan (LTIP)   30% of LTI Target   Relative TSR RSUs
    30% of LTI Target   Scorecard LTI (cash)

3.2 Scorecard

The Company includes an element of a ‘Scorecard’ rating in both its Hybrid RSUs (formerly called Executive Incentive Plan RSUs) and Scorecard LTI to ensure continued focus by senior executives on a balance of financial, strategic, business, customer and organisational development goals. Each of these are important contributors to long-term creation of shareholder value. The Scorecard contains a number of key objectives and the measures the Board expects to see achieved in relation to these objectives. Individual senior executives may receive different ratings depending on their contribution to achieving the Scorecard objectives. Although most of the objectives in the Scorecard have quantitative targets, the Company has not allocated a specific weighting to any single objective and the final Scorecard assessment will involve an element of judgment by the Board.

The Remuneration Committee monitors progress against the Scorecard annually. The Scorecard can only be applied by the Board to exercise negative discretion (ie, to reduce the amount of Hybrid RSUs and Scorecard LTI that will ultimately vest). It cannot be applied to enhance the maximum reward that can be received. The only change to the Scorecard objectives for fiscal year 2012 compared to fiscal year 2011 was the replacement of the ‘Zero to Landfill’ objective with a broader ‘Manufacturing Efficiency’ objective, which is a multi-year initiative that builds on the waste reduction objectives of ‘Zero-to-Landfill’ with a focus on increasing machine efficiencies and product capabilities. Among other matters, this objective will support more efficient manufacturing. It is likely that senior executives will receive different ratings when assessing their Scorecard performance for the Hybrid RSUs and Scorecard LTI.

Further details related to the Scorecard for fiscal year 2012, including the method of measurement, historical performance against the proposed measures and the Board’s expectations, were previously set out in the 2011 AGM Notice of Meeting. An assessment of the Company’s Scorecard performance for fiscal years 2010-2012 is set out on pages 42-44 of this report. The Board will provide an

 

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explanation of the final assessment of performance under the Scorecard for fiscal years 2012-2014 at the conclusion of fiscal year 2014.

3.3 Description of Variable Remuneration

3.3.1 Short-Term Incentives

The STI target for senior executives is allocated between corporate goals (under the Executive Incentive Plan or EIP Plan) and individual goals (under the Individual Performance Plan or IP Plan). The STI target for senior executives was determined as a percentage of base salary, which was unchanged in fiscal year 2012:

 

    Position    STI Target as % of
base salary
    Proportion of STI
Target allocated to
corporate goals
    Proportion of STI
target allocated to
individual goals
 

    Chief Executive Officer

     125     80     20

    Chief Financial Officer

     33     0     100

    Other senior executives

     45-65     75-80     20-25

Given the Board’s assessment at the start of fiscal year 2012 that the US housing market continued to be uncertain and was lacking stability, for fiscal year 2012 the Board determined that 40% of each senior executive’s LTI target should be received in Hybrid RSUs. Although this component of a senior executive’s Variable Remuneration is received in three years time, it is treated as STI since the maximum amount which can be paid is determined at the end of the first year based on the Company’s performance in fiscal year 2012, and then subject to the negative discretion exercisable two years later if the Board feels that performance in fiscal year 2012 was achieved at the expense of long-term measures, including those set forth in the Scorecard.

(a) FY12 STI Cash bonus for individual goals – Individual Performance Plan

Part of the STI target for each senior executive is allocated based on their individual performance and is payable in cash. The maximum payout for this component is 150% of the STI target allocated based on the respective senior executive’s individual performance. Senior executives are assessed by the Board and the Remuneration Committee on their individual performance against specific objectives for fiscal year 2012, which are approved by the Board and the Remuneration Committee. Rewards are based on the Board’s assessment of each senior executive’s performance at the end of the fiscal year.

Board’s Assessment of the Individual Performance Plan for FY12

The IP Plan links financial rewards to the achievement of a senior executive’s specific individual objectives that have benefited the Company and contributed to shareholder value and that are not directly captured by the corporate component of the STI.

(b)FY12 STI cash bonus for corporate goals - Executive Incentive Plan

Each senior executive (other than the CFO) has part of their STI target allocated based on achievement of corporate objectives and is payable in cash. The maximum payout for this component is 300% of the STI target allocated for corporate performance.

The Company uses a ‘Payout Matrix’ which provides for a range of possible payouts depending on the Company’s performance against performance hurdles which assess growth above market (which we

 

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refer to as the “Growth Measure”) and earnings (which we refer to as the “Return Measure”) to determine the level of payout under the EIP. The purpose of the two Payout Matrix performance hurdles is to ensure that as management increases its top line growth focus, it does not do so at the expense of short to medium-term returns. Management is encouraged to balance growth and returns since achievement of strong rewards requires management to generate both strong earnings and sales growth substantially above market. Higher returns on one measure at the expense of the other measure result in lower, or nil, reward.

To ensure management does not unduly benefit or is not unduly penalised by external factors, the Growth Measure and Return Measure are respectively indexed for changes in new housing starts and the US repair and remodel market, and for changes in pulp prices. Other factors such as costs related to legacy issues and exchange rate movements are also excluded. The Board also has discretion to change the payout under the Payout Matrix if growth relative to market is below expectations and the Board determines that the reason for such performance is outside management’s control, or following a management decision endorsed by the Board given an assessment of market circumstances at the time.

Each business has its own Payout Matrix which includes a range of Return Measure and Growth Measure targets. All senior executives, including the CEO, are assessed based on the consolidated results of all the operating businesses.

The Company does not disclose the Growth Measure and Return Measure targets since these are commercial in confidence. However, achieving a target payment for fiscal year 2012 would have required performance in excess of the average of the performance for the previous three years on both the Growth Measure and the Return Measure.

Board Assessment of the Executive Incentive Plan for FY12

The Board believes that the Payout Matrix under the EIP is appropriate because it:

 

   

provides management with an incentive towards achieving the overall corporate goals;

 

   

balances growth with returns;

 

   

recognises the need to flexibly respond to strategic opportunities depending on our markets’ ability to recover from the currently prevailing uncertain economic environment;

 

   

incorporates indexing for factors beyond management’s control; and

 

   

incorporates Board discretion where a long-term decision endorsed by the Board would impact short-term results measured under the Payout Matrix in the Board’s assessment of management’s performance.

(c) FY12 LTI (Hybrid RSUs) - Executive Incentive Plan

For fiscal year 2012, 40% of the LTI target for senior executives was allocated to the EIP and payable in Hybrid RSUs. The maximum initial grant of Hybrid RSUs is up to 300% of the target. The number of Hybrid RSUs granted is based on the Company’s performance against corporate level EBIT performance targets approved by the Board. The targets for fiscal year 2012 were derived based on the STI EIP ‘Payout Matrix’ for fiscal year 2012 and a grant of Hybrid RSUs at target required an

 

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improvement on performance for fiscal year 2011. The EBIT performance hurdle for the Hybrid RSUs was:

 

LOGO

Before the Hybrid RSUs that were granted in June 2012 vest in June 2014 and convert to shares, the Board will assess the Company’s results to ensure short-term results in fiscal year 2012 were not obtained at the expense of long-term sustainability, taking into account the Company’s financial results, the measures set out in the Scorecard and each senior executive’s individual performance. Based on this assessment, the Board will determine what percentage of the senior executive’s Hybrid RSUs will vest and convert to shares. In effect, the Scorecard applies a “holdback and forfeiture” principle to give the Board discretion to review fiscal year 2012 performance with the benefit of another two years of trading and assess whether the strong results in fiscal year 2012 were obtained at the expense of long-term sustainability.

Although this component of a senior executive’s Variable Remuneration is received in three years time, it is treated as an STI since the maximum amount which can be paid is determined at the end of the first year based on the Company’s performance in fiscal year 2012, and then subject to the negative discretion exercisable in a further two years if the Board feels that performance in fiscal year 2012 was achieved at the expense of long-term performance.

Calculation of the Hybrid RSUs granted to the CEO for fiscal year 2012 performance is described below:

Based on the CEO’s LTI target quantum of US$3,100,000 in fiscal year 2012 and James Hardie’s performance of 98% of target against the Hybrid RSU EBIT performance hurdle, the CEO received:

40% x US$3,100,000 x 98% = US$1,215,200 which was settled in 166,459 Hybrid RSUs on 7 June 2012.

At the conclusion of the additional two-year performance period in June 2014, the Board will assess the Company’s and the CEO’s performance in fiscal year 2012 with the benefit of an additional two years of trading. The number of Hybrid RSUs which will vest is between 0% and 100%. For indicative purposes, assuming that the Board determines 100% or 85% or 70% of the CEO’s Hybrid RSUs should vest, he could receive one of:

 

   

if the Board determines 100% of the RSUs should vest: 166,459 shares

 

   

if the Board determines 85% of the RSUs should vest: 141,490 shares

 

   

if the Board determines 70% of the RSUs should vest: 116,521 shares

 

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Board Assessment of Hybrid RSUs for FY12

The Board believes that Hybrid RSUs are an appropriate incentive vehicle in the current market because they:

 

   

provide an incentive to ensure that the Company’s growth focus is not achieved at the expense of short- and medium-term shareholder returns;

 

   

align management with shareholders because the reward vehicle is based on share price;

 

   

focus on long-term results over the three-year performance period;

 

   

recognise that quantifying a specific long-term financial outcome requirement was not yet possible in the market prevailing at the start of fiscal year 2012;

 

   

avoid a mechanistic formula with outcomes based on market movements rather than management action; and

 

   

allow for the “forfeiture” of some or all of the potential value, in the collective judgment of the independent directors, based on financial returns, individual performance and a number of long-term objectives identified by the Board as being able to affect longer-term outcomes in uncertain economic times.

Board Assessment of management performance under Executive Incentive and Individual Performance Plans for FY12

The Company’s results and the subsequent STI and LTI payouts for fiscal year 2012 were above STI target and marginally below LTI target due to:

 

   

USA and Europe Fibre Cement performing substantially above target on the Growth Measure, due to strong category and market share growth, and marginally below target on the Return Measure, due to lower prices in the second half of fiscal year 2012, higher freight costs and higher product provisions offset by strong manufacturing performance, lower energy prices and higher volume; and

 

   

Asia Pacific achieving performance slightly above target on the Growth Measure, despite difficult market conditions in all geographic markets except the Philippines, and performance marginally above target on the Return Measure, due to a mixture of strong sales activity, improved price and product mix, controlled organisational spend and manufacturing performance.

The higher payout under the STI plan reflects the Company’s strong Growth Measure performance in fiscal year 2012, whereas the lower payout under the LTI plan (before the Board even considers whether to exercise its negative discretion in two years’ time) reflects the Company’s marginally below target performance on the Return Measure.

The Board and the Remuneration Committee believe that stabilisation in the US housing market means that the heightened focus on short-term performance for the past four years using the Hybrid RSUs is no longer required. In fiscal year 2013, the Hybrid RSUs will be replaced by a long-term financial return measure based on return on capital employed (which we refer to as “ROCE RSUs”). ROCE RSUs are described in more detail in the 2012 AGM Notice of Meeting.

 

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The percentage of the maximum Variable Remuneration under the EIP awarded to or forfeited by senior executives for performance in fiscal year 2012 compared to fiscal year 2011 is set out below.

 

     Cash STI1    Hybrid RSUs2
     

Awarded

%

  

Forfeited

%

  

Awarded

%

  

Forfeited

%

 

L Gries

           

Fiscal Year 2012

   56    44    33    67

Fiscal Year 2011

   31    69    8    92
 

J Blasko3

           

Fiscal Year 2012

   56    44    -    -

Fiscal Year 2011

   -    -    -    -
 

R Chenu

           

Fiscal Year 2012

   100    -    33    67

Fiscal Year 2011

   100    -    8    92
 

M Fisher

           

Fiscal Year 2012

   58    42    33    67

Fiscal Year 2011

   34    66    8    92
 

N Rigby

           

Fiscal Year 2012

   56    44    33    67

Fiscal Year 2011

   28    72    8    92

 

1 

Awarded = % of fiscal year 2011 or 2012 Cash STI maximum actually paid. Forfeited = % of fiscal year 2011 or 2012 STI maximum foregone. STI amounts were paid in cash under the Executive Incentive Program and IP Plan or as an additional one-off discretionary bonus for one executive in fiscal year 2011. These amounts do not include Hybrid RSUs. The cash payments for each fiscal year are paid in the June following the end of the fiscal year.

2 

Awarded = % of fiscal year 2011 or 2012 Hybrid RSUs maximum which actually granted. Forfeited = % of fiscal year 2011 or 2012 Hybrid RSUs maximum which was foregone. The value earned for performance in a fiscal year was granted in the form of Hybrid RSUs in the June following the end of the fiscal year. Hybrid RSUs will vest two years after grant date and convert to shares, subject to the Board’s exercise of negative discretion.

3 

Commenced employment 13 June 2011. Received relocation allowance in lieu of fiscal year 2012 LTI grants.

3.3.2 Long-Term Incentives

The remaining 60% of the LTI target for senior executives is allocated as grants of RSUs based on the Company’s total shareholder return relative to its peers (which we refer to as “Relative TSR RSUs”), plus grants of cash-settled awards based on the Company’s stock price performance and the Scorecard (which we refer to as “Scorecard LTI”). The maximum award under both of these programs is capped at 300% of the target.

(a) FY12 Relative TSR RSUs

30% of the LTI target for senior executives is allocated as grants of Relative TSR RSUs, which were granted in September 2011 for fiscal year 2012. The peer group for the Relative TSR RSUs consists of the same peer group of companies exposed to the US housing market which the Company uses for compensation benchmarking purposes. The Board and the Remuneration Committee believe that US companies form a more appropriate peer group than ASX-listed companies as they are exposed to the same macro factors in the US housing market as the Company faces. The names of the companies comprising the peer group for each grant of Relative TSR RSUs are set out in section 7 of this Remuneration Report. The Company’s relative TSR performance will be measured against the peer

 

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group over a 3- to 5-year period from grant date, with testing after the third year, and then every six months until the end of year 5, based on the following schedule:

 

    Performance against Peer Group    % of Relative TSR
RSUs vested
 

    <50th Percentile

     0%   

    50th Percentile

     33%   

    51st – 74th Percentile

     Sliding Scale   

    >75th Percentile

     100%   

Board’s Assessment of the Relative TSR RSU Component of Long Term Incentive Plan for FY12

The Board considered whether re-testing is appropriate for Relative TSR RSUs, given some investors prefer a single test for relative performance measures. The Board concluded that re-testing is appropriate given that further volatility may be experienced in the continuation of the global financial crisis. In addition, this approach extends the motivational potential of the Relative TSR RSUs from three to five years and, given that the Company will incur the same accounting expense irrespective of the vesting outcome, is more effective from a cost-benefit perspective.

(b) FY12 Scorecard LTI

30% of the LTI target for senior executives is allocated as grants of Scorecard LTI awards that were granted in June 2011 for fiscal year 2012. Scorecard LTI is a cash-settled award with the final payout based on the Company’s share price performance over the three years from the grant date and the senior executive’s Scorecard rating. At the start of the three-year performance period, the Company will calculate the number of shares the senior executives could have acquired if they received a maximum payout on the Scorecard LTI on that date. At the end of the three-year performance period, the Board will assess each of the senior executive’s contribution to the long-term objectives set out in the Scorecard to give them a rating of between 0 and 100. Depending on this rating, between 0% and 100% of the senior executive’s awards will vest three years later. Each senior executive will receive a cash payment based on the Company’s share price at the end of the period multiplied by the number of shares they could have acquired at the start of the performance period, adjusted downward in accordance with their Scorecard rating.

Board Assessment of Scorecard LTI for FY12

The Board introduced Scorecard LTI because it determined that a reward that focused on longer-term strategic and operational goals was essential, given that specific longer-term financial objectives cannot be readily determined in an uncertain housing market. Ensuring that the reward’s value is tied to share price provides alignment with shareholder interests. Moreover, payment in cash allows flexibility to apply the reward across different countries, while providing executives with liquidity to pay tax or other material commitments at a time that coincides with vesting of shares (via the RSU programs) such that they are less likely to decide to sell their shares.

 

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Board Assessment of management performance under Scorecard LTI for FY12

At the end of fiscal year 2012 the Board and the Remuneration Committee performed their first review of the Company’s and management’s performance under the Scorecard, relating to the grant of Scorecard LTI in June 2009 as part of the FY10 LTI. A weighted average Scorecard rating of 61% (from a range of 50% to 83%) was applied based on the senior executives’ contribution to the Company’s performance against the Scorecard objectives.

As previously disclosed in the Company’s 2009 AGM Notice of Meeting, the Company’s performance over the three-year period from FY10-FY12 based on the Scorecard objectives determined in mid-2009 was:

 

Measure   Performance over
period
  Board Requirement   Reasons   Assessment  of
Management’s
Performance

US Primary

Demand

Growth

(PDG)

 

FY12: 9.1%

 

FY11: (4.4)%1

 

FY10: 7.4%1

 

1    Figures have been restated to reflect updated methodology calculation.

 

Minimum: Maintain relative to market

 

Stretch: Primary demand growth relative to market

  A key strategy for the Company is to maximise its market share growth/retention of the exterior cladding market for new housing and for repair & remodel segments, which it does by growing fibre cement’s share of the exterior cladding market and by maintaining the Company’s share of the fibre cement category.   Growth above stretch target achieved over three year period. Negative result in FY11 recovered and improved in FY12.

US Product

Mix Shift

  Color Plus and Artisan penetration improved each year.  

Board Minimum: 5% annual improvement in penetration of ColorPlus and Artisan products

 

Stretch: 10% annual improvement in penetration of ColorPlus and Artisan products

  The Company aims to maintain its leadership position across the fibre cement category of the exterior cladding market by developing new products/marketing/manufacturing approaches that will result in an improved mix of our products and gross margins.   Performance above stretch target. The focus of this goal will include other differentiated products going forward.

US Zero To

the Landfill

(ZTL)

  In the past three years the Company has made significant progress in reducing the amount of materials sent to landfill.  

Minimum: 5% annual reduction of equivalent dumpsters sent to landfill

 

Stretch: 7% annual reduction of equivalent dumpsters sent to landfill

  This measure is a primary contributor to the Company’s environmental goals and improving material yield will reduce manufacturing costs. In addition, achieving important environmental, social and governance (ESG) goals reduces risk.   Growth above stretch target achieved over three year period. The elimination rate slowed as savings became more difficult to find. The goal was expanded in FY11 to a broader manufacturing efficiency goal.

 

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Measure   Performance over
period
  Board Requirement   Reasons   Assessment  of
Management’s
Performance

Safety

 

FY12: 1.46 18.1

 

FY11: 1.74 18.8

 

FY10: 1.7   37

 

No fatalities

 

Minimum: 10.4 Incident Rate (IR) (FY10 industry average) and 50 Severity Rate (SR)

 

Stretch: 2.0 IR and 20 SR

  Safety of Company employees is an essential ESG measure.   Performance above stretch goals. Results below 2 IR and 20 SR are now expected.

Strategic

Positioning

  JH Europe re-set as a viable business. Acquired small fibreglass windows manufacturer and shaped trim technology.   The Board expects that management will continue to diversify to provide more balance and greater profit opportunities to Company.   Developing and, as appropriate, implementing, alternative strategic actions for sustainable growth beyond the Company’s traditional markets will create shareholder value through increased profits and diversification for lower risk.   Performance met minimum goals.

Legacy

Issues

  All major legacy issues concluded.  

Minimum: Resolve or address the Dutch domicile and make substantial progress on others

 

Stretch: Resolve or address all legacy issues

 

Resolution of these issues

is a fundamental component

of the Company’s ESG goals, paving the way to lower risk and more certainty for all

stakeholders.

 

Performance met stretch goals. All major legacy issues concluded, largely in the Company’s favour.

 

Only remaining issue is conclusion of appeals of certain former directors and officers in the ASIC litigation (the Company is not involved in these proceedings).

Managing

During the

Economic

Crisis

  With nil debt, ample liquidity, strong EBIT margins, strong cash flow and earnings, JH is well-positioned, including relative to peers.   Maintain an adequate capital structure.  

With the US building materials industry experiencing a downturn unprecedented in the past 60 years, managing the Company through this time so it can emerge at the end of this period in as strong or stronger competitive

position in the overall industry is crucial.

  Performance met Board requirements. Strong cash generation in the business and a successful resolution of the ATO litigation.

 

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Measure   Performance over
period
  Board Requirement   Reasons   Assessment  of
Management’s
Performance

Talent

Management/

Development

  The Company continues to have a strong management team.   It is not possible to set a specific goal for this measure beyond requiring that management capability be retained and grown.   Improving management development and capability is important to the Company’s future growth.   Performance below Board minimum requirements. The CEO will be managing the US business for the next few years with a focus on developing a strong management team capable of achieving the Company’s goals.

(c) FY12 Long-Term Incentives Below Senior Executive Level

In fiscal year 2012, selected employees other than senior executives received equity-based, long-term incentives in the form of RSUs under the 2001 JHI SE Equity Incentive Plan (which we refer to as the “2001 Plan”). Participation in such a plan helps align the interests of employees with shareholders. Award levels are determined based on the Remuneration Committee’s review of local market standards and the individual’s responsibility, performance and potential to enhance shareholder value. Unlike the RSUs granted to senior executives, these RSUs generally vest at the rate of 25% on the 1st anniversary of the grant, 25% on the 2nd anniversary date and 50% on the 3rd anniversary date. The term of the 2001 Plan was extended through to 2021 at the 2011 AGM.

Board’s Assessment of 2001 Plan

The majority of participants in the 2001 Plan are US employees. Senior executives named in this report did not receive RSUs under the 2001 Plan in fiscal year 2012. The RSUs granted to other employees under the 2001 Plan follow normal and customary US grant guidelines and market practice and have no performance hurdles. The Board is satisfied that this practice is necessary to attract and retain US employees and is particularly effective in the current environment for the better management of the Company’s cash flow.

3.4 Description of Fixed Remuneration

Fixed remuneration consists of base salaries, non-cash benefits, participation in a defined contribution retirement plan and superannuation contributions.

3.4.1 Base Salaries

Base salary provides a guaranteed level of income that recognises the market value of the position and internal equities between roles, and the individual’s capability, experience and performance. Base salaries for senior executives are positioned around the market median for positions of similar responsibility. Base salaries are reviewed by the Remuneration Committee each year, although increases are not automatic. Following a review of senior executive compensation at the start of fiscal year 2013, the Board determined that only two of the Company’s senior executives will receive a base salary increase in fiscal year 2013.

 

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3.4.2 Non-Cash Benefits

James Hardie’s executives may receive non-cash benefits such as a cost of living allowance, medical and life insurance benefits, car allowances, membership in executive wellness programs, long service leave and an annual financial planning allowance (which includes tax return preparation assistance).

3.4.3 Retirement Plan/Superannuation

In every country in which it operates, the Company offers employees access to pension, superannuation or individual retirement savings plans consistent with the laws of the respective country.

3.5 Relative Weightings of Fixed and Variable Remuneration in 2012

The Company’s improved performance in fiscal year 2012 was reflected in an increase in the Variable Remuneration paid to senior executives in fiscal year 2012 compared to fiscal year 2011:

 

     Fixed
Remuneration1
     Variable Remuneration3  
     

Salary, Non-cash
Benefits,
Superannuation,
401(k) etc

%

    

Cash
Incentive
2

    

Hybrid
RSUs

%

    

Scorecard
LTI

%

    

Relative
TSR
RSUs

%

    

Total
Variable

%

 

L Gries

                 

Fiscal Year 2012

     12         18         12         29         29         88   

Fiscal Year 2011

     20         12         4         32         32         80   

J Blasko4

                 

Fiscal Year 2012

     70         30         -         -         -         30   

Fiscal Year 2011

     -         -         -         -         -         -   

R Chenu

                 

Fiscal Year 2012

     54         12         6         14         14         46   

Fiscal Year 2011

     55         13         2         15         15         45   

M Fisher

                 

Fiscal Year 2012

     30         24         8         19         19         70   

Fiscal Year 2011

     36         17         3         22         22         64   

N Rigby

                 

Fiscal Year 2012

     27         27         8         19         19         73   

Fiscal Year 2011

     36         17         3         22         22         64   

 

 

1 

Includes base salary, non-cash benefits, expatriate benefits, other non-recurring benefits and superannuation/pension payments.

2 

Includes STI amounts that were paid in cash under the Executive Incentive Program and IP Plan (for fiscal year 2011 as an additional one-off discretionary bonus for one executive). The cash payments for each fiscal year are paid in the June following the end of the fiscal year.

3 

Equity components include fiscal year 2012 SG&A expense for Hybrid RSUs, Scorecard LTI and Relative TSR RSUs.

4 

Commenced employment 13 June 2011. Received relocation allowance in lieu of fiscal year 2012 LTI grants.

 

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3.6 Variable Remuneration Payable in Future Years

Details of the accounting cost of the Variable Remuneration for fiscal year 2012 that may be paid to senior executives in future years are set out below. The minimum amount payable is nil in all cases. The maximum amount payable will depend on the share price at time of vesting, and is therefore not possible to determine. The table below is based on the fair value of the RSUs and Scorecard LTI according to US GAAP accounting standards and the Company’s estimate of the Scorecard Rating to be applied to Scorecard LTI.

 

    Scorecard LTI¹
(US dollars)
        Hybrid RSUs²
(US dollars)
        Relative TSR RSUs³
(US dollars)
 
     FY2012     FY2013     FY2014     FY2015         FY2012   FY2013     FY2014     FY2015         FY2012     FY2013     FY2014     FY2015  

L Gries

    659,222        807,437        807,437        150,427        -     487,867        599,567        111,700          451,695        832,670        832,670        383,256   

J Blasko4

    N/A        N/A        N/A        N/A        N/A     N/A        N/A        N/A          N/A        N/A        N/A        N/A   

R Chenu

    74,428        91,162        91,162        16,984        -     55,082        67,693        12,611          50,998        94,012        94,012        43,271   

M Fisher

    74,428        91,162        91,162        16,984        -     55,082        67,693        12,611          50,998        94,012        94,012        43,271   

N Rigby

    22,642        27,733        27,733        5,167        -     22,347        27,464        5,117          N/A        N/A        N/A        N/A   
    830,720        1,017,494        1,017,494        189,562        -     620,378        762,417        142,039          553,691        1,020,694        1,020,694        469,798   
 

 

 

     

 

     

 

 

 

 

 

1 

Represents annual SG&A expense for Scorecard LTI granted in June 2011 based on Board assumption of final Scorecard rating. The fair value of each award is adjusted for changes in JHI SE’s common stock price at each balance sheet date until the final Scorecard rating is applied in June 2014, at which time the final value is based on the Company’s share price and the senior executive’s Scorecard rating at the time of vesting.

 

2 

Represents annual SG&A expense for the Hybrid RSUs granted in June 2012 for performance in fiscal year 2012. The fair value of each RSU is adjusted for changes in JHI SE’s common stock price at each balance sheet date until the Board exercises negative discretion and some, all or none of the awards become vested in June 2014.

 

3 

Represents annual SG&A expense for the Relative TSR RSUs granted in September 2011 with fair market value estimated using the Monte Carlo option-pricing method.

 

4 

Commenced employment 13 June 2011. Received relocation allowance in lieu of fiscal year 2012 LTI grants.

4. CHANGES TO REMUNERATION FOR FISCAL YEAR 2013

4.1 Overview of Remuneration for Fiscal Year 2013

The Board and the Remuneration Committee have spent a considerable amount of time over the past year reviewing the Company’s existing remuneration arrangements. With the Board believing that the US housing market has now stabilised to an extent which permits the setting of multi-year financial metrics as part of the Company’s LTI compensation arrangements, there are a number of changes proposed to remuneration for fiscal year 2013.

There will be no increases to the CEO’s base salary, target STI or target LTI in fiscal year 2013.

The principal changes to the Company’s STI and LTI plans are:

 

   

introducing an adjustment to the result achieved on the Growth Measure of the Payout matrix depending on the Company’s performance against the largest participants in the ‘wood-look’ market;

 

   

replacing the existing Hybrid RSUs with RSUs which have a performance measure based on the Company’s average return on capital employed (ROCE) over a three year period;

 

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changing the performance criteria for the Relative TSR RSUs to increase the performance required to achieve target and maximum rewards, eliminate cliff vesting at the 50th percentile and provide for rewards to incrementally increase from the 40th percentile;

 

   

reducing the maximum payout that can be received under the ROCE and Relative TSR RSUs (which account for 70% of target LTI) from 300% to 200% of LTI target. The Board has retained the maximum payout of 300% of target for the Scorecard LTI to give itself flexibility;

 

   

increasing the number of days used to calculate the starting and testing points to 20 business days to reduce the impact of a single day’s volatility on vesting;

 

   

updating the Peer Group for fiscal year 2013 grants of Relative TSR RSUs; and

 

   

updating the Scorecard objectives for fiscal year 2013.

The following section summarises the changes to the Executive Incentive Plan and the Scorecard LTI for fiscal year 2013.

4.2 STI - Changes to Executive Incentive Plan for FY13

The Board proposes to continue with the basic Payout Matrix approach balancing performance on the Growth Measure against performance on the Return Measure for the corporate portion of the EIP described on page 36 of this report.

However, in fiscal year 2013 it will adjust the Growth Measure of the Payout Matrix based on the Company’s performance against market tracking data from the largest participants in the ‘wood-look’ products market (collectively, the “Wood-Aesthetic Market Index” or “WMI”).

The Company’s performance against each of the three individual components of the WMI will impact the Growth Return by adding or subtracting from the current primary demand growth derived multiple as follows:

 

   

if the Company meets or exceeds the performance of all three WMI participants, 0.2x will be added to the Growth Measure;

 

   

If the Company meets or exceeds the performance of two of the three WMI participants, there will be no change to the Growth Measure; and

 

   

If the Company fails to meet or exceed the performance of more than one of the three WMI participants, then 0.2x will be subtracted from the Growth Measure.

In each case, the resulting Growth Measure is multiplied by the Return Measure to achieve the final payout.

The Board and the Remuneration Committee believe that this amendment will further focus management on increasing the Company’s share of the exterior cladding market at the expense of ‘wood-look’ competitors, which will create substantial value for shareholders.

 

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4.3 LTI - Changes to Scorecard LTI for FY13

The Board uses the Scorecard to set strategic objectives for which performance can only be assessed over a period of time. The changes to the objectives for fiscal year 2013, and the reasons for those changes are set out below:

 

Goal   Change   Reasons

Primary demand growth

  Supplemented to include growth against ‘wood-look’ products.   This will provide greater focus on the areas where the Company can increase fibre-cement’s share of the market.

Product Mix Shift

  No change to the objective. But as the Company develops new differentiated products, measurement of this goal will include those products.   Product mix shift is a key part of the Company’s product leadership through creating new differentiated value-added products.
Managing during the Economic Crisis   Replaced with a new goal ‘Positioning the Company for potential recovery’.   Moving the Company to a more appropriate leverage and being ready to grow in the event that the US housing market recovers.

Legacy Issues

  Removed.   Not required now that most of the Company’s legacy issues have been resolved.

The other components of the Scorecard remain unchanged.

4.3 LTI - Changes to ROCE RSUs and Relative TSR RSUs

The 2012 AGM Notice of Meeting contains details of the changes to the ROCE RSUs and Relative TSR RSUs.

 

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5. REMUNERATION PAID TO SENIOR EXECUTIVES

5.1 Total Remuneration for Senior Executives

Details of the remuneration of the senior executives in fiscal years 2012 and 2011 are set out below:

 

(US dollars)   Primary     Post-
employment
    Equity Awards     Other        

Name

  Base Pay     Bonuses1     Noncash
Benefits2
    Superan-
nuation and
401(k)
Benefits
    Ongoing
Vesting3
    Mark-to-
Market4
    Relocation
Allowances,
Expatriate
Benefits,
and Other
Non-
recurring5
    Total  

L Gries

               

Fiscal Year 2012

  $ 956,825      $ 1,959,285      $ 106,960      $ 14,700      $ 4,832,467      $ 1,469,093      $ 104,000      $ 9,443,330   

Fiscal Year 2011

    944,137        948,342        50,948        17,072        5,016,523        58,953        599,806        7,635,781   

J Blasko

               

Fiscal Year 2012

    230,769        161,730        45,840        9,808        -        -        387,062 6      835,209   

Fiscal Year 2011

    N/A        N/A        N/A        N/A        N/A        N/A        N/A        N/A   

R Chenu

               

Fiscal Year 2012

    953,735 7      339,510        96,474        88,800        895,737        287,159        105,133        2,766,548   

Fiscal Year 2011

    828,334        255,494        85,570        78,812        862,097        5,467        132,740        2,248,514   

M Fisher

               

Fiscal Year 2012

    434,317        416,599        50,979        14,877        701,388        220,125        -          1,838,285   

Fiscal Year 2011

    438,596        200,803        28,401        15,986        750,268        5,457        -          1,439,511   

N Rigby

               

Fiscal Year 2012

    509,711        529,939        28,469        -          734,313        171,637        -          1,974,069   

Fiscal Year 2011

    472,663        204,204        24,413        -          758,905        6,227        -          1,466,412   

Total Compensation for Senior Executives

  

Fiscal Year 2012

  $ 3,085,357      $ 3,407,063      $ 328,722      $ 128,185      $ 7,163,905      $ 2,148,014      $ 596,195      $ 16,857,441   

Fiscal Year 2011

  $ 2,683,730      $ 1,608,843      $  189,332      $ 111,870      $ 7,387,793      $ 76,104      $ 732,546      $  12,790,218   

 

  1 

Includes STI amounts that were paid in cash under the Executive Incentive Program and IP Plan or as an additional one-off discretionary bonus for one executive in fiscal year 2011. The cash payments for each fiscal year are paid in the June following the end of the fiscal year.

 

  2 

Includes the aggregate amount of all noncash benefits received by the executive in the year indicated. Examples of noncash benefits that may be received by executives include medical and life insurance benefits, car allowances, membership in executive wellness programs, long service leave, financial planning and tax services.

 

  3 

Includes grants of Scorecard LTI awards, Relative TSR RSUs and Hybrid RSUs. Relative TSR RSUs are valued using Monte Carlo simulation method. Hybrid RSUs and Scorecard LTI awards are valued based on JHI SE’s share price at each balance date. The fair value of equity awards granted are included in compensation during the period in which the equity awards vest. In the case of Hybrid RSUs and Scorecard LTI awards, this amount excludes the equity award expense in fiscal years 2012 and 2011 resulting from changes in the Company’s share price, which is disclosed separately in the Equity Awards “Mark-to-Market” column.

 

  4 

Hybrid RSUs and Scorecard LTI awards are valued based on the Company’s share price at each reporting date. The amount included in this column is the equity award expense resulting solely from changes in the US dollar share price during fiscal years 2012 and 2011. During fiscal year 2012, there was a 27% appreciation in the Company’s share price from US$6.30 to US$7.99.

 

  5 

Includes a non-cash charge to recognise gross-up and tax paid on equity vested during fiscal years 2012 and 2011 for which a portion of the vesting period was while L Gries and R Chenu were seconded to The Netherlands.

 

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Table of Contents
  6 

Commenced employment 13 June 2011. Received relocation allowance in lieu of fiscal year 2012 LTI grants.

 

  7 

R Chenu’s base salary is denominated in A$ and a significant amount of this increase is as a result of changes in the A$:US$ exchange rate.

5.2 Equity Holdings of Senior Executives

(a) Options

 

                         
Name   Grant
Date
    Exercise
Price
per right
(A$)
    Holding
at
1 April
2011
    Granted     Total
Value at
Grant¹
(US$)
    Vested     Exercised     Value at
Exercise
per right²
(US$)
    Lapsed     Value at
Lapse
per right³
(US$)
  Holding
at 31
March
2012
   

Weighted
Average
Fair
Value

per right4

 

Senior Executives

  

                                                                                   

L Gries

    3-Dec-026      $   6.4490        325,000        325,000      $ 210,633        325,000        (325,000     1.0610        -      -     -        0.6481   
      5-Dec-036      $ 7.0500        325,000        325,000      $ 338,975        325,000        -        -        -      -     325,000        1.0430   
      21-Nov-067      $ 8.4000        415,000        415,000      $ 888,100        415,000        -        -        -      -     415,000        2.1400   
      21-Nov-067      $ 8.4000        381,000        381,000      $ 1,131,570        228,600        -        -        (152,400   -     228,600        2.9700   
      29-Aug-077      $ 7.8300        445,000        445,000      $ 965,650        445,000        -        -        -      -     445,000        2.1700   
      29-Aug-077      $ 7.8300        437,000        437,000      $ 1,302,260        343,482        -        -        -      -     437,000        2.9800   

J Blasko

    -        -        -        -        -        -        -        -        -      -     -        -   

R Chenu

    22-Feb-056      $ 6.3000        93,000        93,000      $ 107,973        93,000        -        -        -      -     93,000        1.1610   
      21-Nov-067      $ 8.4000        65,000        65,000      $ 139,100        65,000        -        -        -      -     65,000        2.1400   
      21-Nov-067      $ 8.4000        60,000        60,000      $ 178,200        36,000        -        -        (24,000   -     36,000        2.9700   
      29-Aug-077      $ 7.8300        68,000        68,000      $ 147,560        68,000        -        -        -      -     68,000        2.1700   
      29-Aug-077      $ 7.8300        66,000        66,000      $ 196,680        51,876        -        -        -      -     66,000        2.9800   

M Fisher

    3-Dec-026      $ 6.4490        74,000        74,000      $ 47,959        74,000        (74,000     1.3510        -      -     -        0.6481   
      5-Dec-036      $ 7.0500        132,000        132,000      $ 137,676        132,000        -        -        -      -     132,000        1.0430   
      14-Dec-046      $ 5.9900        180,000        180,000      $ 183,276        180,000        (90,000     0.8500        -      -     90,000        1.0182   
      1-Dec-056      $ 8.9000        190,000        190,000      $ 386,137        190,000        -        -        -      -     190,000        2.0323   
      21-Nov-066      $ 8.4000        158,500        158,500      $ 291,069        158,500        -        -        -      -     158,500        1.8364   
      10-Dec-076      $ 6.3800        277,778        277,778      $ 275,084        277,778        -        -        -      -     277,778        0.9903   

N Rigby

    17-Dec-016      $ 5.0586        20,003        20,003      $ 8,467        20,003        (20,003     1.8914        -      -     -        0.4233   
      3-Dec-026      $ 6.4490        27,000        27,000      $ 17,499        27,000        (27,000     1.1510        -      -     -        0.6481   
      5-Dec-036      $ 7.0500        33,000        33,000      $ 34,419        33,000        -        -        -      -     33,000        1.0430   
      14-Dec-046      $ 5.9900        180,000        180,000      $ 183,276        180,000        (180,000     1.6900        -      -     -        1.0182   
      1-Dec-056      $ 8.9000        190,000        190,000      $ 386,137        190,000        -        -        -      -     190,000        2.0323   
      21-Nov-066      $ 8.4000        158,500        158,500      $ 291,069        158,500        -        -        -      -     158,500        1.8364   
      10-Dec-076      $ 6.3800        277,778        277,778      $ 275,084        277,778        (277,778     1.3000        -      -     -        0.9903   

 

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(b) Restricted Stock Units

 

Name   

Grant

Date

     Holding
at
1 April
2011
     Granted     

Total

Value at
Grant¹
(US$)

     Vested     Lapsed    Holding
at 31
March
2012
     Weighted
Average
Fair Value
per right4
 

Senior Executives

  

                                                         

L Gries

     15-Sep-088          558,708         558,708       $ 1,592,318         (558,708   -      -       $     2.8500   
       29-May-099          487,446         487,446       $ 1,640,256         (487,446   -      -       $ 3.3650   
       15-Sep-098          234,900         234,900       $ 1,176,849         -      -      234,900       $ 5.0100   
       11-Dec-098          81,746         81,746       $ 564,865         -      -      81,746       $ 6.9100   
       7-Jun-109          360,267         360,267       $ 2,142,760         -      -      360,267       $ 5.9477   
       15-Sep-108          577,255         577,255       $ 2,595,627         -      -      577,255       $ 4.4965   
       7-Jun-119          -         45,687       $ 279,901         -      -      45,687       $ 6.1265   
       15-Sep-118         -         606,852       $ 2,500,291         -      -      606,852       $ 4.1201   

J Blasko

     -         -         -         -         -      -      -         -   

R Chenu

     15-Sep-088          108,637         108,637       $ 309,615         (108,637   -      -       $ 2.8500   
       29-May-099          94,781         94,781       $ 318,938         (94,781   -      -       $ 3.3650   
       15-Sep-098          45,675         45,675       $ 228,832         -      -      45,675       $ 5.0100   
       11-Dec-098          15,895         15,895       $ 109,834         -      -      15,895       $ 6.9100   
       7-Jun-109          70,052         70,052       $ 416,648         -      -      70,052       $ 5.9477   
       15-Sep-108          72,157         72,157       $ 324,454         -      -      72,157       $ 4.4965   
       7-Jun-119          -         5,711       $ 34,988         -      -      5,711       $ 6.1265   
       15-Sep-118         -         68,516       $ 282,293         -      -      68,516       $ 4.1201   

M Fisher

     17-Dec-088          116,948         116,948       $ 268,980         (116,948        -       $ 2.3000   
       29-May-099          77,548         77,548       $ 260,949         (77,548        -       $ 3.3650   
       15-Sep-098          39,150         39,150       $ 196,142              39,150       $ 5.0100   
       11-Dec-098          13,624         13,624       $ 94,142              13,624       $ 6.9100   
       7-Jun-109          60,044         60,044       $ 357,124              60,044       $ 5.9477   
       15-Sep-108          67,003         67,003       $ 301,279              67,003       $ 4.4965   
       7-Jun-119          -         5,303       $ 32,489              5,303       $ 6.1265   
       15-Sep-118         -         68,516       $ 282,293                      68,516       $ 4.1201   

N Rigby

     17-Dec-088          116,948         116,948       $ 268,980         (116,948        -       $ 2.3000   
       29-May-099          77,548         77,548       $ 260,949         (77,548        -       $ 3.3650   
       15-Sep-098          39,150         39,150       $ 196,142              39,150       $ 5.0100   
       11-Dec-098          13,624         13,624       $ 94,142              13,624       $ 6.9100   
       7-Jun-109          60,044         60,044       $ 357,124              60,044       $ 5.9477   
       15-Sep-108          72,157         72,157       $ 324,454              72,157       $ 4.4965   
       7-Jun-119          -         5,711       $ 34,988              5,711       $ 6.1265   
       15-Sep-118         -         78,304       $ 322,620                      78,304       $ 4.1201   

 

 

1 

Total Value at Grant = Weighted Average Fair Value per right multiplied by number of rights granted.

 

2 

Value at Exercise/right = Market Value of a share of the Company’s stock price at Exercise less the Exercise price per right.

 

3 

Value at Lapse/right = Fair Market Value of a share of the Company’s stock at Lapse less the Exercise price per right.

 

4 

Weighted Average Fair Value per right is estimated on the date of grant using the Black-Scholes option-pricing model or Monte Carlo option pricing method, depending on the plan the options were issued under.

 

5 

Options granted under the 2005 Managing Board Transitional Stock Option Plan.

 

6 

Options granted under the 2001 JHI SE Equity Incentive Plan.

 

7 

Options granted under James Hardie Industries Long-Term Incentive Plan 2006 (LTIP).

 

8 

Relative TSR RSUs granted under the LTIP.

 

9 

Hybrid RSUs (formerly Executive Incentive Plan RSUs) granted under LTIP.

 

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Table of Contents

(c) Scorecard LTI

 

Name           

Grant

Date

    

Holding
at

1 April
2011

     Granted      Vested      Lapsed      Holding at
31 March
2012
 

Senior Executives

                                                     

L Gries

     21-Jun-09         483,294         483,294         -         -         483,294   
       29-Jun-10         442,424         442,424         -         -         442,424   
       7-Jun-11         -         455,239         -         -         455,239   

J Blasko

     -         -         -         -         -         -   

R Chenu

     21-Jun-09         93,974         93,974         -         -         93,974   
       29-Jun-10         55,303         55,303         -         -         55,303   
       7-Jun-11         -         51,398         -         -         51,398   

M Fisher

     21-Jun-09         80,549         80,549         -         -         80,549   
       29-Jun-10         51,353         51,353         -         -         51,353   
       7-Jun-11         -         51,398         -         -         51,398   

N Rigby

     21-Jun-09         80,549         80,549         -         -         80,549   
       29-Jun-10         55,303         55,303         -         -         55,303   
       7-Jun-11         -         58,740         -         -         58,740   

5.3 Relevant Interests in JHI SE for Senior Executives

The Company’s LTI plans and stock ownership guidelines (described below) provide a strong level of alignment between senior executives and shareholders. Changes in relevant interests of senior executives in JHI SE securities between 1 April 2011 and 31 March 2012 are set out below:

 

     

CUFS at

1 April 2011

    

CUFS at

31 March
2012

    

Options at

1 April 2011

    

Options at

31 March
2012

    

RSUs at

1 April 2011

    

RSUs at

31 March
2012

 

L Gries

     298,543         689,922         2,328,000         1,850,600         2,300,322         1,906,707   

R Chenu

     55,990         152,420         352,000         328,000         407,197         278,006   

J Blasko

     -         -         -         -         -         -   

M Fisher

     96,519         158,964         1,012,278         848,278         374,317         253,640   

N Rigby

     73,792         265,102         886,281         381,500         379,471         268,990   

5.4 Stock Ownership Guidelines

The Remuneration Committee believes that senior executives should hold James Hardie stock to further align their interests with those of the Company’s shareholders. The Company has adopted stock ownership guidelines for the CEO, CFO and remaining senior executives, respectively, which require them to accumulate holdings of 3 times, 1.5 times and 1 times their base salary in the Company over a period of five years from 1 April 2009.

Until the stock ownership guidelines have been met, a senior executive is required to retain at least 75% of shares obtained under the Company’s long-term equity incentive plans, through the exercising of options or vesting of the RSUs (net of taxes and other costs). The CEO and two other senior executives exceeded their respective stock ownership guidelines during fiscal year 2011. However, even after the stock ownership guidelines have been met, senior executives are required to retain at least 25% of shares issued under the Company’s long-term equity incentive plans through the exercise of options or vesting of RSUs (net of taxes and other costs). Details of the Company’s policy regarding employees hedging James Hardie shares or grants under various equity incentive plans are set out on page 72 of the Corporate Governance Report within this annual report.

 

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5.5 Loans

The Company did not grant loans to senior executives during fiscal year 2012. There are no loans outstanding to senior executives.

6. EMPLOYMENT CONTRACTS

Remuneration and other terms of employment for the CEO, CFO and senior executives are formalised in employment contracts. The main elements of these contracts are set out below.

6.1 CEO’s Employment Contract

Details of the terms of the CEO’s employment contract are as follows:

 

Components    Details

Length of contract

   Indefinite. The CEO is an ‘at-will’ employee.

Base salary

   US$950,000 for fiscal year 2012 and 2013. Salary reviewed annually by the Board and there will be no base salary increase for fiscal year 2013.

Short-term incentive

  

Annual STI target is 125% of annual base salary for fiscal year 2012 and 2013. The quantum of STI target is reviewed annually by the Board in May.

 

The Remuneration Committee recommends the Company’s and CEO’s performance objectives, and the performance against these objectives, to the Board for approval. The CEO’s short-term incentive is calculated under the EIP and the IP Plan.

Long-term incentive

   On the approval of shareholders, a LTI incentive will be granted each year. The recommended value of LTI to be granted will be appropriate for this level of executive in the US. For fiscal year 2012 and 2013, the LTI target is unchanged at US$3.1 million.

Defined Contribution Plan

   The CEO may participate in the US 401(k) defined contribution plan up to the annual US Internal Revenue Service (IRS) limit. The Company will match the CEO’s contributions into the plan up to the annual IRS limit.

Resignation

   The CEO may cease employment with the Company by providing written notice. If the CEO retires with the approval of the Board then his unvested RSUs and awards will not be forfeited and will be held until the next test date.

Termination by James Hardie

  

The Company may terminate the CEO’s employment for cause or not for cause. If the Company terminates the CEO’s employment, not for cause, or the CEO terminates his employment “for good reason” the Company will pay the following:

 

(a) amount equivalent to 1.5 times the CEO’s annual base salary at the time of termination; and

 

(b) amount equivalent to 1.5 times the CEO’s average STI actually paid in up to the previous three fiscal years as CEO; and

 

(c) continuation of health and medical benefits at the Company’s expense for the duration of the consulting agreement referenced below; and

Post-termination Consulting

   The Company will request the CEO, and the CEO will agree, to consult to the Company upon termination for a minimum of two years, as long as the CEO maintains the Company’s non-compete and confidentiality agreements and executes a release of claims following the effective date of termination. Under the consulting agreement, the CEO will receive the annual base salary and annual target incentive in exchange for this consulting and non-compete.

 

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     Under the terms of equity incentive grants made to the CEO under the LTIP, the CEO’s outstanding options will not expire during any post-termination consulting period. In addition, in the event of an agreed separation or agreed retirement, his unvested restricted stock units and awards will not be automatically forfeited. This arrangement is a standard arrangement for US executives and the Board considers that it is an appropriate restraint for Mr Gries given his intimate involvement in developing the Company’s fibre cement business in the United States over the past 21 years.

Until the Company moved our corporate domicile to Ireland, the CEO was on international assignment in The Netherlands. During the time of his international assignment, his employment contract provided for the Company to cover the extra personal tax burden imposed by residency in The Netherlands (tax equalisation) and the cost of filing income tax returns in The Netherlands.

The CEO also receives the ‘Other’ benefits described in the summary of employment agreements for the senior executives (described below).

6.2 CFO’s Employment Contract

Details of the CFO’s employment contract are as follows:

 

Components    Details

Length of contract

   Fixed period concluding 5 October 2012.

Base salary

   A$900,279 for fiscal year 2012. Salary reviewed annually by the Board and there will be no A$ base salary increase for fiscal year 2013.

Short-term incentive

   Annual STI target is 33% of annual base salary as set out in the CFO’s employment contract, based on personal goals. The CFO does not participate in the Executive Incentive Program for his short-term incentive.

Long-term incentive

   The CFO will receive a LTI incentive with performance hurdles each year. The value of LTI to be granted will be equivalent to at least US$350,000.

Superannuation

   The CFO is entitled to superannuation contributions equal to 9% of his base salary. The contribution to the CFO’s superannuation fund will be the maximum contribution currently allowed by law, with the balance paid to the CFO in cash.

Resignation or Termination of role

   The Company or CFO may cease the CFO’s employment with the Company by providing three months’ notice in writing.

Redundancy or diminution of role

   If the position of CFO is determined to be redundant or subject to a material diminution in status, duties or responsibility, the Company or the CFO may terminate the CFO’s employment. The Company will pay the CFO a severance payment equal to the greater of 12 months’ pay or the remaining proportion of the term of the contract.

International Assignment

   Additional benefits due to international assignment: housing allowance, goods and services allowance, moving and storage. The Company covers the extra personal tax burden imposed by residency in The United States and, prior to that, The Netherlands (tax equalisation) and the cost of filing income tax returns.

The CFO also receives the ‘Other’ benefits described in the summary of employment agreements for the senior executives (described below).

 

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6.3 Other senior executives’ employment contracts

Details of employment contracts for senior executives are as follows:

 

Components    Details

Length of contract

   Indefinite.

Base salary

   Base salary is subject to Remuneration Committee approval and reviewed annually in May.

Short-term incentive

   An annual STI target is set at a percentage of the senior executive’s salary. The STI target is between 45% and 65% and reviewed annually.

Long-term incentive

   Senior executives will receive a LTI incentive with performance hurdles each year. The value of LTI to be granted will be approved by the Remuneration Committee.

Defined Contribution Plan

   US senior executives may participate in the US 401(k) defined contribution plan up to the annual IRS limit. The Company will match the senior executive’s contributions into the plan up to the annual IRS limit.

Resignation

   The senior executive may cease employment with the Company by providing 30 days’ written notice.

Termination by James Hardie

   The Company may terminate the senior executive’s employment for cause or not for cause. Other than the post-termination consulting arrangement discussed below for a termination without cause or a resignation for good reason, no other termination payments are payable, except as required under the terms of the applicable STI or LTI plans.

Post-termination Consulting

   Depending on the senior executive’s individual contract, and the reasons for termination, the Company may request the senior executive, and the senior executive will agree, to consult to the Company for two years upon termination, as long as they sign and comply with 1) a consulting agreement, which will require them to maintain non-compete and confidentiality obligations to the Company, and 2) a release of claims in a form acceptable to the Company. In exchange for the consulting agreement, the Company shall pay the senior executive’s annual base salary as of the termination date for each year of consulting.

Other

   Health, Welfare and Vacation Benefits: Eligible to receive all health, welfare and vacation benefits offered to all US employees and also eligible to participate in the Company’s Executive Health and Wellness program.
   Business Expenses: Senior executives are entitled to receive reimbursement for all reasonable and necessary travel and other business expenses incurred or paid in connection with the performance of services under their employment.
   Automobile: The Company will either lease an automobile for business and personal use by the senior executive, or, in the alternative, the executive will be entitled to an automobile lease allowance not to exceed US$750 per month.
     Financial Planning: The Company will reimburse senior executives for financial planning expenses incurred by the senior executive (including preparation of tax returns) up to a specified sum.

 

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7.        KEY TERMS OF EQUITY GRANTS

7.1 Outstanding Equity Grants

 

2001 JHI SE Equity Incentive Plan (Options)    Annual option grants made in December 2002, 2003, 2004 and 2005, November 2007 and December 2007. Off-cycle grants made to new employees in March 2007.

Offered to

   General management, not Managing Board directors1 (all awards were granted while JHI SE was domiciled in The Netherlands).

Vesting schedule

   All of the options are fully vested and exercisable.

Expiration date

   10th anniversary of each grant.
2001 JHI SE Equity Incentive Plan    Annual grants made in December 2009, 2010 and 2011.
(RSUs)    RSUs replaced options as the Company’s grant vehicle in 2008.

Offered to

   Senior employees other than senior executives.

Vesting schedule

   25% of RSUs vest on the 1st anniversary of the grant, 25% vest on the 2nd anniversary date and 50% vest on the 3rd anniversary date.

Expiration date

   RSUs convert to shares on vesting on a one-for-one basis.

James Hardie Industries Long Term Incentive Plan 2006 (LTIP)

Option Grants

   Options granted on 29 August 2007. The grant was divided into two tranches: Return on Capital Employed (which we refer to as “ROCE”) and TSR.

Offered to

   Managing Board directors.

Performance period

   Three years to five years from the grant date.

Retesting

   Yes, for the TSR tranche only, on the last Business Day of each six-month period following the 3rd Anniversary and before the 5th Anniversary.

Exercise period

   Until ten years from the grant date.

Performance condition

   For the ROCE tranche:
   ROCE performance against the following global peer group of building materials companies in US, Europe and Australia specialising in building materials: Boral Limited, Valspar Corporation, Hanson plc, Rinker Group Limited (2006 grant only), Weyerhaeuser, Lafarge SA, CSR Limited, Cemex SA de CV, Nichiha Corp, Fletcher Building Limited, Martin Marietta Materials Inc, Saint Gobain, Eagle Materials Inc, Texas Industries, Wienerberger AG, Lousiana-Pacific Corporation, Florida Rock Industries Inc, CRH plc, USG Corporation, Vulcan Materials Co and The Siam Cement Plc.
   For the TSR tranche:
     TSR performance against a peer group of comparable companies in the S&P/ASX 100 at the time of grant excluding financial institutions, insurance companies, property trusts, oil and gas producers and mining companies, and adjusted to account for additions and deletions to S&P/ASX 100 during the relevant period.

Vesting criteria

   For the ROCE tranche:
  

– 0% vesting if ROCE below 60th percentile of peer group.

– 50% vesting if ROCE at 60th percentile of peer group.

– Between the 60th and 85th percentiles, vesting on a straight line basis.

– 100% vesting if ROCE is at 85th percentile of peer group.

 

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For the TSR tranche:

   –  0% vesting if TSR below 50th percentile of peer group.
    

–  50% vesting if TSR at 50th percentile of peer group.

–  Between 50th and 75th percentiles, vesting on a straight line basis.

–  100% vesting if TSR is at 75th percentile of peer group.

Vesting to date

   To date, the ROCE tranche options vested 100% and the TSR tranche options have vested 56%. No options have been exercised.

James Hardie Industries Long Term Incentive Plan 2006.

(Relative TSR RSUs)

(RSUs)

   Relative TSR RSUs granted December 2009 and September 2010 and 2011.

Offered to

   Senior executives and Managing Board directors1.

Performance period

   Three years to five years from the grant date.

Retesting

   Yes, on the last Business Day of each six month period following three years from grant date and before five years from grant date.

Exercise period

   Until five years from the grant date.

Performance condition

   TSR performance hurdle compared to the following peer group of companies: Acuity Brands, Inc., Eagle Materials, Inc, Headwaters, Inc, Lennox International, Inc, Louisiana-Pacific Corp., Martin Marietta Materials, Inc, Masco Corporation, MDU Resources Group, Inc, Mueller Water Products, Inc, NCI Building Systems, Inc, Owens Corning, Quanex Building Products Corp., Sherwin Williams, Simpson Manufacturing Co., Texas Industries, Inc, Trex, USG, Valmont Industries, Valspar Corporation, Vulcan Materials and Watsco, Inc. For 2010 onwards, the TSR performance hurdle peer group companies also include American Woodmark Corp, Apogee Enterprises, Inc, Amstrong World Enterprises, Inc, Fortune Brands, Inc, Interface, Inc, Mohawk Industries, Inc and PGT Inc.

Vesting criteria

  

–  0% vesting if TSR below 50th percentile of peer group.

–  33% vesting if TSR at 50th percentile of peer group.

–  Between 50th and 75th percentile, vesting is on a straight line basis.

–  100% vesting if TSR is at 75th percentile of peer group.

RSU exercise price

   Not applicable.

Expiration date

   RSUs convert to shares on vesting on a one-for-one basis.

 

 

1 

The Managing Board was dissolved on 17 June 2010 following completion of JHI SE’s re-domicile to Ireland.

 

James Hardie Industries Long Term Incentive Plan 2006

(Hybrid RSUs)

(Previously referred to as Executive Incentive RSUs)

   Hybrid RSUs granted June 2010, 2011 and 2012.

Offered to

   Senior executives and Managing Board directors.

Option Exercise Price

   Nil.

Vesting schedule

   A proportion will vest on the 2nd anniversary of the grant depending on the Board’s exercise of negative discretion to allow each senior executive between 0% and 100% of the RSUs to vest.

Expiration date

   RSUs convert to shares on vesting on a one-for-one basis.

 

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James Hardie Industries Long Term Incentive Plan 2006

Scorecard LTI

(Cash)

   Cash-settled Awards granted June 2009, 2010, 2011 and 2012.

Offered to

   Senior executives.

Option Exercise Price

   Nil.

Performance period

   Three years from the grant date.

Payment schedule

   A cash payment based on the Company’s share price at the end of the performance period multiplied by the number of shares that could have been acquired at the start of the performance period and the senior executive’s Scorecard rating.
     A proportion of the payment will be payable on the 3rd anniversary of the grant depending on each senior executive’s Scorecard rating between 0 and 100.

Expiration date

   Three years from the grant date.

7.2     Equity grants which vested or lapsed in fiscal year 2012

The following equity grants vested or lapsed in fiscal year 2012. Further details of each grant are set out above in section 7.1.

 

2001 JHI SE Equity Incentive Plan (Options)