10. Goodwill

The following table shows the reconciliation of the carrying amounts of goodwill for the periods presented in the Consolidated Financial Statements as of March 31, 2019:

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

Goodwill is allocated to the following CGUs or groups of CGUs:

As regards 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 of each year 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 expanded by sectoral planning assumptions. Intra-Group evaluations are supplemented by external market studies. The determination of the perpetual annuity is based on country-specific growth figures derived from external sources. The capital costs are calculated as the weighted average cost of equity and borrowings using the capital asset pricing model (weighted average cost of capital – WACC). The parameters used for determining WACC are established on an objective basis.

The following estimates and assumptions were used to measure the recoverable amounts of CGUs or groups of CGUs that account for a significant portion of the voestalpine Group’s total goodwill:

The Steel Division focuses on the production and processing of steel products for the automotive, white goods, electrical, processing as well as energy and engineering industries. The five-year, medium-term business plan for the Steel Division was prepared, for one, 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, for another, taking into account expected steel consumption.² EUROFER anticipates slight growth in the demand for steel, especially in the construction industry. The CRU index is also taken into account in the planning for flat steel products.

Some quality-related adjustments were made in response to positive feedback from individual customer segments. The production plan reflects the sales forecasts. As regards procurement, the planning was based on assumptions concerning raw materials derived from global market forecasts (e.g. Platts price assessments). Based on these assumptions, the gross margin is expected to hold steady in the medium term.

The fifth plan year was used to calculate the perpetual annuity based on an expected growth rate of 1.40% (2017/18: 1.43%). The pre-tax WACC is 8.35% (2017/18: 8.35%).

The five-year, medium-term business plan for the High Performance Metals Division and its two units to which goodwill has been allocated—High Performance Metals (HPM) Production and Value Added Services—was based on the general economic environment of the relevant industry segments (in particular, the automotive,³ oil and gas,⁴ and aerospace industries⁵) as well as on the growth forecasts for the regional sales markets of its core markets, in particular, the eurozone, the USA, China, and Brazil (based on the voestalpine Macroeconomic Report⁶ and Eurostat⁷).

HPM Production bundles seven production locations around the world. Its production activities cover a highly complex and highly demanding range of production: tool steel, high-speed steel, valve steel, high-grade engineering steel, powder-metallurgical steel, powder for additive manufacturing, special steels, and nickel-based alloys. Product manufacturing ranges from smelting to transforming (rolling, forging, hot-rolled, and cold-rolled strips) all the way to heat treatment and processing; add to that the fulfilment of the properties and specifications required by customers. The processing companies produce plate, profiles, and forged parts made of titanium alloys, nickel-based alloys as well as high, medium, and low-grade alloyed steels.

The internal forecasts and estimates for HPM Production—particularly with regard to the components business that targets sophisticated metallurgical applications in the aerospace, oil and gas, energy engineering, and automotive industries—rely on external sources of information and are largely consistent with them. A moderate trend is forecast for the automotive segment. The recovery of the oil and gas segment has been incremental. The aerospace industry should again see a positive trend, with market momentum 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 alloy prices can be passed on to customers in part. The final plan year was used to calculate the perpetual annuity based on a growth factor of 1.78% (2017/18: 1.78%). The pre-tax WACC is 9.75% (2017/18: 10.19%).

In the Value Added Services business segment, the continued systematic expansion of services in the planning period will lead to greater customer loyalty and deeper value creation. Further emphases were already 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. Moreover, an all-out effort is being undertaken in coordination with the powder strategy of the HPM Production unit to turn additive manufacturing into the division’s core competence. Ongoing activities will additionally focus on the systematic continuation of tried and tested cost-savings and optimization programs as well as on new initiatives, especially in the area of process digitalization. This will lead to higher revenue and a positive gross margin trend in the planning period. Changes in the cost of materials due to alloy prices can also be passed on to the market in part by way of so-called “alloy surcharges.” The perpetual annuity begins with the fifth plan year and is based on a growth factor of 1.79% (2017/18: 1.71%). The pre-tax WACC is 9.98% (2017/18: 10.21%).

The Rail Technology and Turnout Systems business segments were combined in the Railway Systems business segment as of April 1, 2018. The Group’s expertise as the leading provider of high-quality rails, high-tech turnouts, and digital monitoring systems as well as related services were brought together under this roof to help further expand its global presence as a provider of complete railway infrastructure systems. The medium-term planning for Railway 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 individual regions.¹ As regards the development of material factor costs, 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 will be kept relatively constant over the planning period and that potential fluctuations in individual markets will balance each other out due to the business segment’s global reach. The perpetual annuity begins with the fifth plan year. The growth rate extrapolated in the cash flows is 1.60%. The pre-tax WACC is 8.24%. A growth rate of 1.72% and a pre-tax WACC of 9.05% were posited for the Turnout Systems business segment reported in the previous year.

The five-year, medium-term planning for Welding Consumables takes into account both macroeconomic trends¹ in each region as well as the projected developments in the relevant industry segments. The expected price trends for raw materials, particularly alloys, are derived from current quoted market prices as well as available forecasts. Both volume growth and a slight increase in the gross margin are anticipated for the planning period, given the organizational measures and optimization programs—which have been initiated, are being implemented, and will be pushed systematically during the planning period too—as well as pertinent market forecasts. The discounted cash flow method used in the impairment tests is applied using a perpetual annuity based on the last planning period. A growth factor of 1.52% (2017/18: 1.51%) was applied to calculate the perpetual annuity. The pre-tax WACC is 8.11% (2017/18: 8.46%).

The cash flow forecasts for Automotive Components are based on the medium-term market growth and production forecasts for the global automotive market based on the forecasts published by LMC Automotive,⁹ particularly for our most important markets in Europe, in the NAFTA region, and in Asia, as well as for our most important customers—the European premium manufacturers. Internal estimates reflect the business segment’s internationalization and growth strategy of the Automotive Components segment. External indicators and market dynamics were adjusted in line with the current model portfolio of Automotive Components customers. Furthermore, customer-specific information regarding medium-term outlooks and sales projections served as sources for the sales planning of 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 1.52% (2017/18: 1.37%). The pre-tax WACC is 9.19% (2017/18: 9.37%).

Precision Strip specializes in the production of globally available, technologically complex cold-rolled strip steel products with precise dimensional accuracy, excellent 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 taking into account the general regional parameters in the core markets and reflects the general economic environment of the industry segments that are key to the given entities. Current market conditions are characterized by stiff competition and strong 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 generally adjusted very slightly downward. These external forecasts are country-specific figures for expected economic growth (GDP forecasts)¹ that were supplemented by industry-specific experience in the relevant markets for the perspective product segments. Customer-specific information regarding 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 1.38% (2017/18: 1.40%). The pre-tax WACC is 9.01% (2017/18: 9.17%).

The impairment tests confirmed the value of all goodwill. A sensitivity analysis of the aforementioned units to which goodwill has been allocated shows that all carrying amounts with two exceptions (High Performance Metals Production and Welding Consumables) would still be covered if the interest rate were to rise by one percentage point and thus that there is no need to recognize an impairment loss. Furthermore, the cash flow sensitivity analysis has shown that, if the cash flows are reduced by 10%, all carrying amounts (with the exception of Welding Consumables) are still covered and that there is no need to recognize an impairment loss. A combined sensitivity analysis of the aforementioned units to which goodwill has been allocated has shown that, if the discount rate is raised by one percentage point and the cash flow reduced by 10%, the carrying amounts (with the exception of High Performance Metals Production and Welding Consumables) are still covered.

The following table shows the excess of the carrying amount over the recoverable value as well as the amount by which both major assumptions would have to change for the estimated recoverable amount to be equal to the carrying amount: