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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended 31 March 2012
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)
(Translation of Registrants name into English)
(Jurisdiction of incorporation or organization)
Europa House, Second Floor
Harcourt Street, Dublin 2, Ireland
(Address of principal executive offices)
353 1411 6924 (Telephone) 353 1479 1128 (Facsimile)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
Indicate the number of outstanding shares of each of the issuers 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):
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
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
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.
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.
FORM 20-F CROSS REFERENCE INDEX
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.
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 Companys financial statements. You should read the selected consolidated financial information in conjunction with the Companys financial statements and related notes contained in Section 2, Consolidated Financial Statements and with the information provided in Section 2, Managements Discussion and Analysis. Historic financial data is not necessarily indicative of our future results and you should not unduly rely on it.
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.
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 Unions 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.
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 Companys 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.
The following is a simplified diagram of our current corporate structure:
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 AICFs directors and the New South Wales (which we refer to as NSW) Government appoints two of AICFs 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 Subsidiarys 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.
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:
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 Companys performance, were relatively flat at 445,600 for fiscal year 2012 compared to fiscal year 2011.
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.
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.
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.
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.
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.
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
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 cements 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:
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.
In the Philippines, new products released over the past five years include Hardisenepa® Fascia Board, Hardiplank® Siding, Hardifloor Systems and Hardipattern® Boards.
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.
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.
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
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:
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.
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.
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.
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:
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.
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.
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.
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.
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 managements 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 managements 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.
The location of each of our fibre cement plants is set forth below:
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 markets 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.
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 Labors Mine Safety and Health Administration that would necessitate additional disclosure under Section 1503(a) of the Dodd-Frank Act.
The following table sets forth our capital expenditures for each year in the three-year period ended 31 March 2012.
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:
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.
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
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
Mr Chenu has a Bachelor of Commerce from the University of Melbourne and an MBA from Macquarie Graduate School of Management, Australia.
Mark Fisher BSc, MBA
Executive General Manager International
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
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 Rigbys 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.
Sean OSullivan BA, MBA
Vice President Investor & Media Relations
He has a Bachelor of Arts in Economics from Sydney University and an MBA from Macquarie Graduate School of Management.
Executive General Manager USA
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.
James Hardies directors have widespread experience, spanning general management, finance, law and accounting. Each director also brings valuable international experience that assists with James Hardies growth.
Michael Hammes BS, MBA
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
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.
Last elected: August 2010
Term expires: August 2013
Brian Anderson BS, MBA, CPA
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
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
David Harrison BA, MBA, CMA
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
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.
James Osborne BA Hons, LLB
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
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
Our CEO, Louis Gries, is an Executive Director on the Companys 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.
This remuneration report explains James Hardies 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 Companys 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 Companys remuneration practices in fiscal year 2012 and also voluntarily includes an outline of the Companys 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
James Hardies 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 Companys 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.
It is James Hardies 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 Companys 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).
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 Companys 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 Companys remuneration framework, which is reviewed by the Remuneration Committee and approved by the Board each fiscal year. Senior executive remuneration takes into account the individuals 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 Companys senior executives. As the Companys 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 years LTI equity grants.
1.4 Senior Executives
The Companys senior executives in fiscal year 2012 were:
2. FISCAL 2012 COMPANY PERFORMANCE AND LINK WITH REMUNERATION POLICY
2.1 Actual Performance
James Hardies 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:
2.2 Market Conditions
A significant proportion of the remuneration for senior executives is Variable Remuneration, which is at risk. The Companys 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 Companys 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.
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 Companys performance in fiscal year 2012 include:
As part of its assessment of the Companys 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 managements performance during the year, the Board determined not to do so in respect of this charge because:
2.4 Performance Linkage with Remuneration Policy
The Board and Remuneration Committee continue to believe that the Companys 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 managements performance compared to prior years and its peers on a range of factors, including performance against the measures in the Companys Variable Remuneration STI and LTI plans, other financial performance, and the Scorecard. Based on that review, the Board and Remuneration Committee concluded that managements performance in fiscal year 2012 was superior to the 75th percentile of its peer group of companies and substantially better than the Companys 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.
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 COMPANYS REMUNERATION ARRANGEMENTS
This section describes the Companys 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 Companys Variable Remuneration incentive plans for senior executives in fiscal year 2012 are set out below:
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 Boards expectations, were previously set out in the 2011 AGM Notice of Meeting. An assessment of the Companys Scorecard performance for fiscal years 2010-2012 is set out on pages 42-44 of this report. The Board will provide an
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:
Given the Boards 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 executives LTI target should be received in Hybrid RSUs. Although this component of a senior executives 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 Companys 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 executives 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 Boards assessment of each senior executives performance at the end of the fiscal year.
Boards Assessment of the Individual Performance Plan for FY12
The IP Plan links financial rewards to the achievement of a senior executives 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 Companys performance against performance hurdles which assess growth above market (which we
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 managements 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:
(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 Companys 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
improvement on performance for fiscal year 2011. The EBIT performance hurdle for the Hybrid RSUs was:
Before the Hybrid RSUs that were granted in June 2012 vest in June 2014 and convert to shares, the Board will assess the Companys results to ensure short-term results in fiscal year 2012 were not obtained at the expense of long-term sustainability, taking into account the Companys financial results, the measures set out in the Scorecard and each senior executives individual performance. Based on this assessment, the Board will determine what percentage of the senior executives 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 executives 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 Companys 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 CEOs LTI target quantum of US$3,100,000 in fiscal year 2012 and James Hardies 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 Companys and the CEOs 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 CEOs Hybrid RSUs should vest, he could receive one of:
Board Assessment of Hybrid RSUs for FY12
The Board believes that Hybrid RSUs are an appropriate incentive vehicle in the current market because they:
Board Assessment of management performance under Executive Incentive and Individual Performance Plans for FY12
The Companys results and the subsequent STI and LTI payouts for fiscal year 2012 were above STI target and marginally below LTI target due to:
The higher payout under the STI plan reflects the Companys 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 Companys 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.
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.
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 Companys total shareholder return relative to its peers (which we refer to as Relative TSR RSUs), plus grants of cash-settled awards based on the Companys 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 Companys relative TSR performance will be measured against the peer
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:
Boards 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 Companys share price performance over the three years from the grant date and the senior executives 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 executives 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 executives awards will vest three years later. Each senior executive will receive a cash payment based on the Companys 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 rewards 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.
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 Companys and managements 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 Companys performance against the Scorecard objectives.
As previously disclosed in the Companys 2009 AGM Notice of Meeting, the Companys performance over the three-year period from FY10-FY12 based on the Scorecard objectives determined in mid-2009 was:
(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 Committees review of local market standards and the individuals 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.
Boards 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 Companys 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 individuals 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 Companys senior executives will receive a base salary increase in fiscal year 2013.
3.4.2 Non-Cash Benefits
James Hardies 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 Companys 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:
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 Companys estimate of the Scorecard Rating to be applied to Scorecard LTI.
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 Companys 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 Companys LTI compensation arrangements, there are a number of changes proposed to remuneration for fiscal year 2013.
There will be no increases to the CEOs base salary, target STI or target LTI in fiscal year 2013.
The principal changes to the Companys STI and LTI plans are:
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 Companys performance against market tracking data from the largest participants in the wood-look products market (collectively, the Wood-Aesthetic Market Index or WMI).
The Companys 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:
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 Companys share of the exterior cladding market at the expense of wood-look competitors, which will create substantial value for shareholders.
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:
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.
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:
5.2 Equity Holdings of Senior Executives
(b) Restricted Stock Units
(c) Scorecard LTI
5.3 Relevant Interests in JHI SE for Senior Executives
The Companys 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:
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 Companys 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 Companys 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 Companys long-term equity incentive plans through the exercise of options or vesting of RSUs (net of taxes and other costs). Details of the Companys 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.
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 CEOs Employment Contract
Details of the terms of the CEOs employment contract are as follows:
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 CFOs Employment Contract
Details of the CFOs employment contract are as follows:
The CFO also receives the Other benefits described in the summary of employment agreements for the senior executives (described below).
6.3 Other senior executives employment contracts
Details of employment contracts for senior executives are as follows:
7. KEY TERMS OF EQUITY GRANTS
7.1 Outstanding Equity Grants
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.