11. Impairment losses and reversal of impairment losses

Impairment tests of cash generating units (CGUs) 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 Management. 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 budget year was adjusted in response to the economic uncertainties arising from the COVID-19 crisis. 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 distortions in the capital markets resulting from the COVID-19 crisis that were identified by the reporting date were considered in the determination.

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. It also manufactures high-quality input material (hot briquetted iron (HBI)) in Texas, USA, for the production of steel. 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

The CRU Index was also considered in the revenue planning for the flat products. Positive, quality-related adjustments were made in 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 assessments³).

Based on these assumptions, it is expected as per the medium-term business plan that the gross margin will once again develop along a steady trajectory following the business year 2020/21, which will be defined by the COVID-19 crisis.

The fifth plan year was used to calculate the perpetual annuity based on an expected growth rate of 1.33% (2018/19: 1.40%). The after-tax WACC is 6.08% (2018/19: 6.35%); the pre-tax WACC is 7.76% (2018/19: 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,⁴ oil and gas, and aerospace industries) as well as on the growth forecasts⁵ for the regional sales markets of its core markets, in particular, the eurozone, the USA, China, and Brazil.

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 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 consistent with them. A moderate trend is forecast for the automotive segment. The oil and gas segment is a strategic growth market for the division. The planning for the aerospace segment posits that an initial decline in the market will be followed by growth. Overall, this will lead to higher revenue and a positive gross margin trend in the planning period, not least due to the new special steel plant in Kapfenberg, Austria.

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 an expected growth rate of 1.61% (2018/19: 1.78%). The after-tax WACC is 6.97% (2018/19: 7.21%); the pre-tax WACC is 9.10% (2018/19: 9.75%).

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. Pre-processing, 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 input materials due to alloy prices can be passed on to customers in part.

The fifth plan year was used to calculate the perpetual annuity based on an expected growth rate of 1.65% (2018/19: 1.79%). The after-tax WACC is 7.19% (2018/19: 7.45%); the pre-tax WACC is 9.23% (2018/19: 9.98%).

The Group’s expertise as the leading provider of high-quality rails, high-tech turnouts, and digital monitoring systems as well as all associated services was combined in the Railway Systems business segment to further expand the Group’s global presence as a provider of complete railway infrastructure systems. The medium-term business plan for Railway Systems for the next five years is based on market forecasts⁶ 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 fifth plan year was used to calculate the perpetual annuity based on an expected growth rate of 1.53% (2018/19: 1.60%). The after-tax WACC is 6.73% (2018/19: 6.23%); the pre-tax WACC is 8.46% (2018/19: 8.24%).

The five-year, medium-term business plan for Welding Consumables, which engages in the production and sale of welding and joining technology products, takes into account 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. Given pertinent market forecasts as well as the organizational measures and optimization programs that have been initiated, are being implemented, and will be pushed systematically during the planning period, too, both volume growth and a slight increase in the gross margin (which, among other things, also reflects positive effects from the company’s development into a full-service provider) are anticipated for the planning period.

The fifth plan year was used to calculate the perpetual annuity based on an expected growth rate of 1.37% (2018/19: 1.52%). The after-tax WACC is 6.54% (2018/19: 6.11%); the pre-tax WACC is 8.35% (2018/19: 8.11%).

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,⁷ in this case particularly for the most important markets of Automotive Components in Europe, the USMCA region, and Asia, as well as for the most important customers of Automotive Components—the European premium 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. 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 five-year, medium-term business plan.

The planning of the Automotive Components business segment for the business year 2020/21 was revised in light of the COVID-19 crisis. The adjustments in both revenue and EBIT were estimated based on various external market studies and our customers’ current forecasts as to order call-ups that they have provided to us.

The fifth plan year was used to calculate the perpetual annuity based on an expected growth rate of 1.41% (2018/19: 1.52%). The after-tax WACC is 7.24% (2018/19: 6.84%); the pre-tax WACC is 9.35% (2018/19: 9.19%).

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 respective product segments. Customer-specific information regarding medium-term outlooks and sales projections also served as sources for sales planning at Precision Strip. As a result, revenue is expected to increase and the gross margin should be stable in the planning period.

The fifth plan year was used to calculate the perpetual annuity based on an expected growth rate of 1.33% (2018/19: 1.38%). The after-tax WACC is 7.13% (2018/19: 6.80%); the pre-tax WACC is 9.02% (2018/19: 9.01%).

Impairment losses

The Welding Consumables unit of the Metal Engineering Division is one to which goodwill was allocated. In the business year 2019/20, an impairment loss of EUR 39.6 million on the goodwill of Welding Consumables was recognized in other operating expenses due to the current economic environment arising from the COVID-19 crisis and the resulting declines in sales as well as due to the challenging development of margins. The recoverable amount (value in use) for this unit is EUR 460.3 million.

The Tubulars unit of the Metal Engineering Division is one to which goodwill had been allocated. In the business year 2019/20, an impairment loss of EUR 16.8 million on the goodwill of the Tubulars unit was recognized in other operating expenses due to negative developments in the selling environment, which is affected particularly by the sharp drop in oil prices and the concomitant reduction in extraction rates, due to the considerable financial fallout from the Section 232 punitive tariffs that the US administration imposed on steel imports as well as due to the current economic environment arising from the COVID-19 crisis. The Tubulars unit engages mainly in the production of high quality seamless tubes. The recoverable amount (value in use) for the entire unit is EUR 341.1 million.

The fifth plan year was used to calculate the perpetual annuity based on an expected growth rate of 1.36%. The after-tax WACC is 6.19%; the pre-tax WACC is 7.68%.

The discount rate and the cash flows are the most important forward-looking assumptions. There is the risk that any change in these assumptions will necessitate a material adjustment of the carrying amounts within the next business year. Any increase in the after-tax discount rate by one percentage point or any decrease in the cash flows by 10% would trigger the following reductions in the carrying amounts:

The impairment tests confirmed the carrying amount of all other 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 Precision Strip) 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 the carrying amount recognized for High Performance Metals Production) are still covered and that there is no need to recognize an impairment loss. If the discount rate is raised by one percentage point and the cash flows are lowered by 10% as part of a combined sensitivity analysis, with the exception of the goodwill-bearing units High Performance Metals Production, Value Added Services, Automotive Components, and Precision Strip, the carrying amounts of the goodwill-bearing units described above are still covered.

The following table shows the excess of the carrying amount over the recoverable amount 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 as well as the reduction in the carrying amount in connection with an increase in the after-tax discount rate by one percentage point or a decrease in the cash flows by 10%:

Impairment test of cash generating units that have no goodwill and of other assets

In the business year 2019/20, a total of EUR 45.8 million in impairment losses on “Land, land rights, and buildings”; “Plant and equipment”; and “Fixtures and fittings” were recognized in other operating expenses for the Hot Forming cash generating unit of the Metal Forming Division due to changes in the selling environment, due to changes in personnel that deviate from the previous year’s business plan , and due to the current economic environment arising from the COVID-19 crisis. The Hot Forming unit comprises two plants in Germany and the United States and uses hot forming to develop metal pressed parts for the automotive industry. Of the aforementioned amount, EUR 37.5 million were already recognized as of December 31, 2019.

The planning of Hot Forming for the budget year 2020/21 was revised in light of the COVID-19 crisis. The adjustments in both revenue and EBIT were estimated based on various external market studies as well as our customers’ current forecasts as to order call-ups that they have provided to us. The recoverable amount (value in use) for this unit is EUR 232.7 million. An after-tax discount rate of 7.19% was applied; the pre-tax WACC is 9.26%.

In the business year 2019/20, a total of EUR 209.1 million in impairment losses on “Land, land rights, and buildings” and “Plant and equipment” were recognized in other operating expenses for the Texas cash generating unit of the Steel Division; this unit comprises a single plant and engages in the production of hot briquetted iron (HBI). Of the aforementioned amount, EUR 177.3 million were already recognized as of December 31, 2019. Initially, this impairment loss was rooted in the HBI market’s increasingly certain dependence on general scrap prices starting in the summer of 2019, particularly because spot market customers in the lower and middle quality segment use HBI as a carrier of ore and substitute for rather low-quality scrap. The price of scrap dropped dramatically while iron ore prices remained high. The HBI spot market price disintegrated to a much greater degree than anticipated due to the deteriorating scrap/iron ore price ratio. The strong price sensitivity of the HBI spot market prices as well as the expectation that volatilities in the raw materials markets would continue unabated prompted the company in December 2019 to revise its earnings forecasts (reduction in the long-term sales volume) for the Texas unit. Furthermore, current economic developments shaped by the COVID-19 crisis subsequently led to another, albeit greater adjustment of the short-term earnings forecasts, thus completing the assessments underlying the impairment loss described. The recoverable amount (value in use) for this unit is EUR 666.2 million. An after-tax discount rate of 6.34% was applied; the pre-tax WACC is 7.85%.

In the business year 2019/20, a total of EUR 30.7 million in impairment losses on “Land, land rights, and buildings” and “Plant and equipment” were recognized in other operating expenses for the Foundry cash generating unit of the Steel Division due to negative developments in the selling environment and the resulting reduction in expected earnings as well as due to the current economic environment arising from the COVID-19 crisis. The Foundry unit comprises three facilities and focuses on the production of cast steel. Of the aforementioned amount, a total of EUR 22.5 million was already recognized as of December 31, 2019. The recoverable amount (value in use) for this unit is EUR 77.2 million. An after-tax discount rate of 5.98% was applied; the pre-tax WACC is 7.30%.

In the business year 2019/20, impairment losses of EUR 15.0 million on “Plant and equipment” and “Fixtures and fittings” were recognized in other operating expenses for the Buderus Edelstahl ohne Schmiede cash generating unit of the High Performance Metals Division. This unit which comprises a steel plant, rolling mills, and a drop forge; it focuses on the production of drop forge parts, semi-finished goods as well as hot and cold rolled steel. The impairment stems from negative developments in the selling environment particularly of the automotive and mechanical engineering segments, the resulting adjustment in the unit’s strategic alignment, and lower earnings forecasts due to the current economic developments arising from the COVID-19 crisis. The recoverable amount (value in use) for this unit is EUR 156.2 million. An after-tax discount rate of 6.44% was applied; the pre-tax WACC is 8.38%.

The discount rate and the cash flows are the most important forward-looking assumptions. There is the risk that any change in these assumptions will necessitate a material adjustment of the carrying amounts within the next business year. An increase in the after-tax discount rate by one percentage point and/or a decrease in the cash flows by 10% would trigger the following reductions in the carrying amounts:

In the business year 2019/20, an impairment loss of EUR 26.4 million on intangible assets was recognized in other operating expenses for a cash generating unit of the Metal Engineering Division that engages in the production of seamless tubes. A change in the delivery contract underlying the company’s relationship with Green Pipes during the business year ended led to a complete write-off. The write-off of the customer relationships allocated to the Oil Country Tubular Goods (OCTG) segment arises from the negative developments in the oil and natural gas sector as well as from the ramifications of the Section 232 tariffs. The recoverable amount of these assets is EUR 0.0 million. After-tax discount rates of between 4.73% and 4.93% were applied; the pre-tax WACC is between 6.30% and 6.58%.

In the previous year, the Metal Engineering Division recognized EUR 6.9 million in reversals of impairment losses on intangible assets in other operating income for a cash generating unit that engages in the production of seamless tubes. The reversal of the impairment loss taken on the Green Pipes customer relationship that was recognized in the previous year resulted from a previously announced and subsequently implemented increase in the purchase commitments. The recoverable amount of these assets was EUR 32.5 million. The after-tax discount rates applied were between 4.61% and 5.53%, and the pre-tax WACC was between 6.15 % and 7.38 %.

A decision was taken in the business year 2019/20 to outsource the hot rolling production step (cash generating unit Buderus Edelstahl ohne Schmiede). This led to the discontinuation of the hot rolling line and EUR 11.0 million in write-downs on assets. An additional impairment loss of EUR 7.2 million was taken on individual facilities belonging to three other voestalpine entities due to a lack of adaptive reuse.