11. Impairment losses and reversal of impairment losses

As a rule, the discounted cash flow method is used to test the property, plant and equipment, the intangible assets, and the carrying amounts for impairment (generally based on the value-in-use approach). Impairment tests are conducted whenever impairment losses or a reversal of impairment losses are indicated. In addition, cash generating units and groups of cash generating units containing goodwill as well as intangible assets with unlimited useful lives are tested for impairment at least once a year, specifically, in early March. The calculation is performed on the basis of the projected cash flows as per a five-year, medium-term business plan approved by Management. 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. For the purposes of the impairment tests required for the business year 2021/22, the plan year was partly adjusted in response to the economic distortions resulting especially from the Ukraine war and its effects on the energy and raw materials markets. The capital costs are calculated as the weighted average cost of equity and borrowings using the capital asset pricing model. The parameters used for determining the weighted average cost of capital (WACC) were established on an objective basis. The distortions in the capital markets arising from the Ukraine war that were identified by the reporting date were taken into account.

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:

In connection with the planned sale of 80% of the Texas CGU, a total of EUR 22.4 million (which was determined based on the relative fair values) of the Steel Division’s goodwill was allocated to discontinued operations. In this respect, see item C. Scope of Consolidation – Discontinued Operations.

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, 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 considered in the revenue planning for the flat products. Additionally, 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). The five-year, medium-term business plan includes the investments required for the first step toward implementation of the greentec steel project, which involves replacing a blast furnace with an electric arc furnace. Increases in the emissions allowance prices have already been taken into consideration based largely on the assumption that it will be possible to pass on the cost increases. Based on these assumptions and given the extremely successful business year 2021/22, the medium-term business plan projects that the gross margin will once again develop along a normalized trajectory, taking blast furnace lining work into account. The fifth plan year was used to determine the perpetual annuity based on an expected growth rate of 1.40% (2020/21: 1.29%). The after-tax WACC is 6.71% (2020/21: 6.27%); the pre-tax WACC is 8.48% (2020/21: 7.96%).

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, oil and gas, and aerospace industries) as well as on the growth forecasts⁴ 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 of 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 both the automotive segment and the oil and gas segment. Following the COVID-19-induced crisis years, the aerospace segment is expected to see the highest growth rates. The planning once again expects production rates to normalize at the previous years’ levels in both the medium and the long term. 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.

Increases in the cost of input materials due to alloy prices as well as higher energy costs can largely be passed on to customers. The final plan year was used to calculate the perpetual annuity based on an expected growth rate of 1.65% (2020/21: 1.47%). The after-tax WACC is 7.52% (2020/21: 7.34%); the pre-tax WACC is 9.64% (2020/21: 9.50%).

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 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 consistent pursuit of tried and tested cost-savings and optimization programs as well as on new initiatives, especially with respect to the processes related to the digital transformation, which will lead to higher revenue and a positive gross margin trend in the planning period.

Increases in the cost of input materials due to alloy prices as well as higher energy costs can largely be passed on to customers. The last plan year was used to calculate the perpetual annuity based on an expected growth rate of 1.61% (2020/21: 1.45%). The after-tax WACC is 7.88% (2020/21: 7.70%); the pre-tax WACC is 10.14% (2020/21: 9.93%).

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 five-year, medium-term business plan for Railway Systems is based on market forecasts⁵ 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.⁶ 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 aforementioned business plan also contains the investments required for the first step of the implementation of greentec steel, which involves replacing a blast furnace in the pre-production stage by an electric arc furnace. Increases in emissions allowance prices have been taken into account based largely on the assumption that it will be possible to pass on the related cost increases. 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% (2020/21: 1.41%). The after-tax WACC is 7.54% (2020/21: 6.72%); the pre-tax WACC is 8.99% (2020/21: 8.44%).

The five-year, medium-term business plan for the Welding business unit, which engages in the production and sale of welding and joining technology products, takes into account macroeconomic trends⁷ 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, 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 welding solution 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 1.38% (2020/21: 1.25%). The after-tax WACC is 7.41% (2020/21: 6.69%); the pre-tax WACC is 9.52% (2020/21: 8.60%).

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,⁸ in this case particularly for the most important markets in Europe, the USMCA region, and Asia, as well as for the most important customers—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. The planning for the business year takes assumptions as to the current supply chain distortions into account. 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 fifth plan year was used to calculate the perpetual annuity based on an expected growth rate of 1.24% (2020/21: 1.20%). The after-tax WACC is 7.84% (2020/21: 7.88%); the pre-tax WACC is 10.31% (2020/21: 10.49%).

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 most important industry segments for the 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 share, 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)⁹ 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 1.41% (2020/21: 1.28%). The after-tax WACC is 7.76% (2020/21: 7.77%); the pre-tax WACC is 9.88% (2020/21: 9.93%).

Impairment losses of cash generating units (CGUs) or groups of cash generating units containing goodwill

In the business year 2020/21, an impairment loss of EUR 25.0 million on the goodwill of the Metal Engineering Division’s Tubulars unit to which goodwill had been allocated was recognized in other operating expenses as of September 30, 2020; 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 underlying the impairment test as of September 30, 2020—especially those related to the detailed planning period—thus were lower than those underlying the impairment test as of March 31, 2020. The recoverable amount (value in use) for this unit was EUR 249.7 million as of September 30, 2020. The fifth plan year was used to calculate the perpetual annuity based on a growth rate of 1.33% as of September 30, 2020. The after-tax WACC was 6.21%; the pre-tax WACC was 7.58%. In the second half of 2020/21, sales had already recovered, which led to a significant excess of the carrying amount as of March 31, 2021.

The impairment tests confirmed the carrying amount of all goodwill. A sensitivity analysis of the aforementioned units to which goodwill has been allocated shows that all carrying amounts with the exception of HPM Production, Welding, 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 HPM Production and Precision Strip) 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, the carrying amounts of the aforementioned goodwill-bearing units (Steel Division, Value Added Services, and Railway Systems) are still covered. In order to account for the growing uncertainties in the macroeconomic environment, the sensitivity analysis of net cash flows as of March 31, 2022, was expanded by an additional sensitivity analysis regarding the “reduction in cash flows by 20%.”

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 (break-even analysis) 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% or 20% (general sensitivity analysis):

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

To date, two plants in Germany and the United States belonging to the Metal Forming Division were combined in the Hot Forming CGU, which manufactured metallic pressed parts through hot forming for the automotive industry. From March 31, 2022, each plant is defined as a separate cash generating unit. The changed definition stems from an increase in the volume of major assembly work in Schwäbisch Gmünd, Germany, and changes in key customers’ purchasing strategies from multi-site procurement to local procurement. The corporate activities of the two CGUs are also being managed separately since the end of the reporting period. Once the Hot Forming CGU was split into two separate cash generating units—Schwäbisch Gmünd and Cartersville—the recoverable amount of both new units was determined as of March 31, 2022.

A total of EUR 63.7 million in impairment losses was recognized in other operating expenses (specifically, in “Plant, property and equipment” and in “Other intangible assets”) for the Cartersville CGU, which continues to produce hot-formed components for the automotive industry. The recoverable amount as determined based on the value in use for this unit is EUR 13.5 million. The estimated fair values (net of the disposal costs related to the individually measured assets) were used as the floor to determine the impairment loss, resulting in a carrying amount of EUR 39.0 million after impairment. This comprises property, plant and equipment in the amount of EUR 20.7 million and the carrying amount of the working capital in the amount of EUR 18.3 million.

A reversal of impairment losses in the amount of EUR 11.8 million was recognized in other operating expenses (specifically, in “Land, land rights, and buildings”; “Plant and equipment”; as well as “Other equipment, operating and office equipment”) for the Schwäbisch Gmünd CGU whose product portfolio comprises hot forming and major component assembly. The recoverable amount (value in use) for this unit is EUR 160.4 million. An after-tax discount rate of 7.50% was applied; the pre-tax WACC is 10.17%.

In the business year 2021/22, impairment losses of EUR 15.3 million on “Plant and equipment” and “Fixtures and fittings” were recognized in other operating expenses for the Buderus Edelstahl ohne Schmiede CGU of the HPM Division. This unit 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 losses stem from increases in energy costs, which can be passed on to customers only in part. The recoverable amount (value in use) for this unit is EUR 141.1 million. An after-tax discount rate of 6.90% is applied; the pre-tax WACC was 9.44%.

In the business year 2020/21, a total of EUR 8.6 million in impairment losses on “Land, land rights, and buildings” and “Plant and equipment” were recognized in other operating expenses as of March 31, 2021, for the Special Wire CGU of the Metal Engineering Division, which comprises a single facility and focuses on the production of special wire (fine wire). This impairment loss initially stemmed from the reduction in the quantities purchased by the unit’s main customer, partly due to COVID-19; in turn, this triggered both lower capacity utilization and higher price pressures, in turn further lowering sales and thus also future earnings and cash flow forecasts. The estimated fair values (net of the disposal costs related to the individually measured assets) were used as the floor to determine the impairment loss, resulting in a carrying amount of EUR 18.0 million after impairment. This comprises property, plant and equipment in the amount of EUR 4.1 million and the carrying amount of the working capital in the amount of EUR 13.9 million.

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% or 20% would trigger the following reductions in the carrying amounts:

¹ World Economic Outlook, International Monetary Fund (IMF)
² The European Steel Association (EUROFER) regarding steel consumption in Europe; World Steel Association for non-European data
³ S&P Global Platts
⁴ World Economic Outlook, International Monetary Fund (IMF)
⁵ UNIFE Annual Report
⁶ World Economic Outlook, International Monetary Fund (IMF)
⁷ World Economic Outlook, International Monetary Fund (IMF)
⁸ LMCA GAPF Data
⁹ World Economic Outlook, International Monetary Fund (IMF)