James Hardie Industries Ltd. is an Australian company specializing in building materials. It also has several plants in the USA specializing in producing fibrecement roofing materials. It reported the following financial results on its 1998 income statement:

1998 1997 Total revenues (($bn) 1.29 1.62 Net profit ($m) 41.6 83.0 Abnormals ($m) (41.7) 31.7 EBIT ($m) 132.0 87.4 EPS .206 . 131

(Results shown for the 12 months ended March 31, 1998; net profit is after tax and after abnormals.)

Required

a. Calculate adjusted income by eliminating the abnormal items from James Hardie’s reported net profits.

b. Discuss how this adjusted income figure is more useful and more representative than the reported net profits.

c. Discuss the concept of adjusted income as it relates to sustainable earnings or sustainable operating profit for each year.

d. Given the decreasing level of total revenues, explain why you think it is still likely that James Hardie will show an increase in its 1999 net profit.. LOP95