Impairment losses and reversal of impairment losses

The planning for the budget year was already adjusted to the economic uncertainties arising from the COVID-19 crisis at the time the Consolidated Financial Statements 2019/20 were prepared. In addition, the period covered by the medium-term business plan was re-evaluated as of September 30, 2020, for those units where an indication of impairment was identified.

The general descriptions of plans and models—as specified in Note 11. Impairment losses and reversal of impairment losses, of the Annual Report 2019/20—still apply.

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

Impairment losses
In the first half of the business year 2020/21, an impairment loss of EUR 25.0 million (March 31, 2020: EUR 16.8 million) on the goodwill of the Metal Engineering Division’s Tubulars unit to which goodwill had been allocated was recognized in other operating expenses; the unit engages in the production of high quality seamless tubes. Negative developments in the selling environment, particularly the sharp drop in both crude oil prices and production rates that continued to intensify on account of the COVID-19 crisis, led to substantially lower forecasts of revenue and earnings. The expected future cash flows—especially in the detailed planning period—thus will be lower than those underlying the impairment test as of March 31, 2020. The recoverable amount (value in use) for the entire unit is EUR 249.7 million (March 31, 2020: EUR 341.1 million).

The fifth plan year was used to calculate the perpetual annuity based on a growth rate of 1.33% (March 31, 2020: 1.36%). The after-tax WACC is 6.21% (March 31, 2020: 6.19%); the pre-tax WACC is 7.58% (March 31, 2020: 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 in the future. 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:

HPM Production comprises seven production sites around the world where a highly complex and highly demanding range of manufacturing activities take place. The products manufactured range from smelting all the way to heat treatment and processing. The downstream companies produce plate, sections, and special steel parts made of titanium alloys, nickel-based alloys as well as high, medium, and low-grade alloyed steels.

The sensitivities for HPM Production, which accounts for the largest portion of the voestalpine Group’s total goodwill, are presented in accordance with the most recent Consolidated Financial Statements. See the Consolidated Financial Statements 2019/20 for all other disclosures related to cash generating units containing goodwill.

The final plan year was used to calculate the perpetual annuity based on a growth rate of 1.50% (March 31, 2020: 1.61%). The after-tax WACC is 7.03% (March 31, 2020: 6.97%); the pre-tax WACC is 8.99% (March 31, 2020: 9.10%).

The following table shows the excess of the carrying amount over the recoverable amount and the amount by which both major assumptions would have to change for the estimated recoverable amount to be equal to the carrying amount; it also shows the reduction in the carrying amount resulting from any increase in the after-tax discount rate by one percentage point or any decrease in the cash flows by 10%:

Impairment test of cash generating units that have no goodwill and of other assets
In the first half of the business year 2020/21, a total of EUR 167.6 million (March 31, 2020: EUR 209.1 million) in impairment losses on “Land, land rights, and buildings” as well as “Plant and equipment” were recognized in other operating expenses for the Texas cash generating unit of the Steel Division, which consists of a single facility and produces hot briquetted iron (HBI). Current economic developments owing to the COVID-19 crisis led to an adjustment of the short-term earnings forecasts that is greater than the adjustment taken as of March 31, 2020. 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 also led to the reversal particularly of the medium-term earnings forecasts and the cash flows for the Texas unit. The recoverable amount (value in use) for this unit is EUR 447.8 million (March 31, 2020: EUR 666.2 million). An after-tax discount rate of 6.79% (March 31, 2020: 6.34%) was applied; the pre-tax WACC is 7.98% (March 31, 2020: 7.85%).

In the first half of the business year 2020/21, a total of EUR 5.9 million in impairment losses on “Land, land rights, and buildings” and “Plant and equipment” were recognized in other operating expenses for the Special Wire cash generating unit of the Metal Engineering Division, which comprises a single facility and focuses on the production of special wire (fine wire). This impairment loss stems from the reduction in quantities purchased by the unit’s main customer—in part due to COVID-19—which made itself felt starting in the spring of 2020 and also triggered both lower capacity utilization and higher price pressures. These facts led to the reversal of the earnings forecasts for the Special Wire unit. The recoverable amount (value in use) for this unit is EUR 20.3 million. An after-tax discount rate of 6.11% was applied; the pre-tax WACC is 7.00%.

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 in the future. 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: