10. Goodwill

The following table shows a reconciliation of the carrying amounts of goodwill for the periods presented in the consolidated financial statements as of March 31, 2017:

The additions to goodwill of EUR 5.4 million include EUR 7.0 million from company acquisitions in the business year 2016/17 as well as an adjustment to the provisional purchase price allocation of Advanced Tooling TEK Co., LTD., China, from the business year 2015/16, due to final fair value adjustments to inventories, property, plant and equipment, and other intangible assets amounting to EUR –1.6 million.

Impairment tests for cash-generating units or groups of cash-generating units containing goodwill

Goodwill is allocated to the following cash-generating units or groups of cash-generating units:

With regard to the value in use, goodwill is reviewed for impairment applying the discounted cash flow method. The calculation is performed on the basis of cash flows as of the beginning of March under a five-year medium-term business plan approved by the Supervisory Board. This medium-term business plan is based on historical data as well as on assumptions regarding the expected future market performance. The Group’s planning assumptions are extended to include sectoral planning assumptions. Intra-group evaluations are complemented by external market studies. The cash flows in the perpetual annuity are based on the assumption of country-specific growth derived from external sources. The capital costs are calculated as the weighted average cost of equity and the weighted average cost of borrowed capital and using the capital asset pricing model (weighted average costs of capital). The parameters used for determining the WACC are established on an objective basis.

Estimates and assumptions used to measure the recoverable amounts of cash-generating units or groups of cash-generating units with a significant share of the voestalpine Group’s total goodwill include:

The Steel Division focuses on the production and processing of steel products for the segments automotive industry, white goods, electrical industry, processing industry, energy, and engineering industry. The five-year medium-term business plan for the Steel Division was prepared on the basis of external economic forecasts for the eurozone, the USA, China, Russia, and Mexico (based on the IMF’s world economic outlook)¹ and under consideration of expected steel consumption². EUROFER anticipates growth in demand for steel, especially in the automotive and construction industries. The CRU-index is also taken into account in planning for flat steel products.

Some quality-related adjustments have been made due to positive feedback from individual customer segments. The production plan reflects the sales forecasts. With respect to procurement, the assumptions regarding raw materials according to global market forecasts (based on e.g. Platts price assessments) were taken as a basis for planning. Based on these assumptions, the gross margin is expected to develop positively in the medium term.

The fifth plan year was used to calculate the perpetual annuity based on an expected growth rate of 1.27% (2015/16: 1.25%). The pre-tax WACC is 7.74% (2015/16: 7.56%).

The five-year medium-term business plan for the High Performance Metals Division and its two goodwill-carrying units—High Performance Metals (HPM) Production and Value Added Services—was based on both the general economic environment of the relevant industry segments (in particular the automotive,³ oil and gas,⁴ and aerospace industries⁵) as well as the growth forecasts for the regional sales markets in its core markets, especially the eurozone, the USA, China, Brazil, and Mexico (based on the IMF’s world economic outlook⁶ and Deutsche Bank Research⁷).

HPM Production bundles seven production locations around the world. Production covers a highly complex and highly demanding production spectrum: tool steel, high-speed steel, valve steel, special constructional steel, powder-metallurgical steel, special steels, and nickel-based alloys. It includes smelting and transforming (rolling, forging, hot-rolled, and cold-rolled strips) to heat treatment and processing, as well as meeting the properties and specifications required by the customer. The processing companies produce plate, profiles, and drop-forged parts from titanium alloys, nickel-based alloys and high, medium, and low-grade alloyed steels.

The internal forecasts and estimates for HPM production—in particular with regard to the components business that targets sophisticated metallurgical applications in the aerospace, oil and gas, energy engineering, and automotive industries—rely on these external sources of information and are largely consistent with them. A positive trend is again forecast for the automotive segment. A conservative budget approach was taken in the oil and gas segment; no substantial recovery is expected before the end of 2017. The aerospace industry should again see a positive trend with market dynamics flattening at a high level. Overall, this will lead to higher revenue and a positive gross margin trend in the planning period.

Changes in the cost of input materials due to the price of alloys can mostly be passed on to customers. The final plan year was used to calculate the perpetual annuity based on a growth factor of 1.72% (2015/16: 1.74%). The pre-tax WACC is 9.54% (2015/16: 9.72%).

In the Value Added Services business segment, the continued systematic expansion of services in the planning period will lead to greater customer loyalty and increased value creation. Further focus areas were defined here in the past business year. Preprocessing, heat treatment, and coating—Value Added Services now operates 18 coating centers for customers worldwide—will also be expanded in line with customer requirements. Ongoing activities will additionally focus on the systematic continuation of tried and tested cost-cutting and optimization programs as well as new initiatives, especially in the area of digitalization. This will lead to higher revenue and a positive gross margin trend in the planning period. Changes in material costs due to alloy prices can also be passed on to the market through what are known as “alloy surcharges.” The perpetual annuity begins with the fifth plan year and is based on a growth factor of 1.60% (2015/16: 1.51%). The pre-tax WACC is 9.70% (2015/16: 10.02%).

The medium-term planning for Turnout Systems for the next five years is based on market forecasts⁸ and project planning for railway infrastructure, taking into consideration the business segment’s strategic focus and the increasing influence of digitalization in the rail segment. It also accounts for the different levels of economic development in the individual regions⁹. With regard to the most important factor cost developments, general forecasts of the development of personnel expenses and internal assumptions on the development of steel prices were integrated into the budgets. The planning assumes that the gross margin is kept relatively constant over the planning period and that fluctuation in the individual markets balance each other out as a result of the business segment’s global reach. The perpetual annuity begins with the fifth plan year and is based on a growth factor of 1.64% (2015/16: 1.51%). The pre-tax WACC is 9.35% (2015/16: 8.94%).

The five-year medium-term planning for Welding Consumables takes into account both macroeconomic trends¹⁰ in each region as well as the projected developments in the relevant industry segments. The expected price trends for raw materials, and in particular for alloys, are derived from current quoted market prices as well as the available forecasts. Based on the organizational measures and optimization program initiated and being implemented, which will be systematically continued in the planning period, as well as market forecasts, volume growth and a slight increase in the gross margin is anticipated in the planning period. The discounted cash flow method used in the course of the impairment tests is applied using a perpetual annuity based on the last planning period. A growth factor of 1.45% (2015/16: 1.36%) was applied for the perpetual annuity. The pre-tax WACC is 8.97% (2015/16: 8.70%).

The cash flow forecasts for Automotive Components are based on the medium-term market growth and production forecasts for the global automotive market according to the forecasts published by LMC Automotive¹¹, particularly for our most important markets in Europe, in the NAFTA region, and in Asia, as well as for our most important customers—premium European manufacturers. Internal estimates reflect the business segment’s internationalization and growth strategy. External indicators and market dynamics were adjusted in line with the current model portfolio of Automotive Components customers. Customer-specific information about medium-term outlooks and sales projections also served as sources for business planning at Automotive Components. This will lead to higher revenue and a positive gross margin trend in the planning period. The fifth plan year was used to calculate the perpetual annuity based on a growth factor of 1.24% (2015/16: 1.15%). The pre-tax WACC is 9.04% (2015/16: 9.19%).

Precision Strip specializes in the production of globally available, technologically complex cold-rolled strip steel products with exact dimensional accuracy, outstanding surface quality, and unique edge profiles for the highest customer requirements in the process industry. The five-year medium-term business plan for Precision Strip was prepared under consideration of the general regional conditions in the core markets and reflects the general economic environment of the most important industry segments for the companies. Current market conditions are characterized by strong competition and pressure on margins. The growth indicated in the planning is largely based on securing market leadership in niche markets, expanding market shares, and developing new markets. External forecasts were taken into account in internal estimates and, as a general rule, were adjusted very slightly downward. These external forecasts are country-specific figures for expected economic growth (GDP forecasts)¹², supplemented by industry-specific experience in the relevant markets for each product segment. Customer-specific information about medium-term outlooks and sales projections also served as sources for business planning at Precision Strip. As a result, revenue is expected to increase and the gross margin should be stable in the planning period. The final plan year was used to calculate the perpetual annuity based on a growth factor of 1.31% (2015/16: 1.24%). The pre-tax WACC is 8.91% (2015/16: 9.00%).

The value of all goodwill was confirmed by the impairment tests. A sensitivity analysis of the goodwill-carrying units described above showed that all carrying amounts would still be covered if the interest rate were to rise by one percentage point and there is no need to recognize an impairment loss. Furthermore, the cash flow sensitivity analysis showed that if the cash flows are reduced by 10%, all carrying amounts are still covered and there is no need to recognize an impairment loss. A combined sensitivity analysis of the goodwill-carrying units described above showed that, with an increase of the discount rate by one percentage point and a reduction in cash flow of 10%, the carrying amounts are still covered with three exceptions (Steel Division, High Performance Metals Production and Welding Consumables).

The following table shows the carrying amount coverage as well as the amount by which both major assumptions would have to change for the estimated recoverable amount to become equal to the carrying amount: