Chemring Group PLC |Annual Report and Accounts 2012

74
Financial statements
Notes to the group financial statements
13. Goodwill continued
2012
%
2011
%
2012
£m
2011
£m
Hi-Shear Technology Corporation 14.5 11.6 49.0 48.9
Simmel Difesa S.p.A. 13.8 13.7 44.9 48.2
Roke Manor Research Limited 14.0 2.9 28.3 28.3
Chemring Energetics UK Limited 12.8 11.7 18.1 18.1
Non-Intrusive Inspection Technology, Inc. 15.7 11.6 15.5 15.4
Chemring Detection Systems, Inc.* 16.0 11.6 13.7 13.7
Chemring Energetic Devices, Inc. 11.9 11.6 12.9 28.6
Chemring Ordnance, Inc. 14.9 11.8 - 6.8
Other 32.4 35.7
Total goodwill 214.8 243.7
* See note 32
The pre-tax discount rate for Roke Manor Research Limited is significantly higher than the previous year due to the forthcoming change in
the presentation of the UK tax treatment of research and development tax credits, and so brings the rate more in line with the other CGUs.
The Group tests goodwill at least annually for impairment or more frequently if there are indications that goodwill might be impaired.
The recoverable amounts of the CGU are determined from value-in-use calculations. The key assumptions for the value-in-use are those
regarding the discount rates, the growth rates and expected changes to cash flows during the period for which management have detailed
plans. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and
the risks specific to the CGU.
Pre-tax discount rates, derived from the Group’s post-tax weighted average cost of capital of 7.8% (2011: 9.4%), and adjusted for a
premium specific to each CGU to account for differences in currency risk, country risk and other factors affecting specific CGUs, have
been used to discount projected cash flows. Premiums range from 1% to 4%.
The calculation has used the Group’s forecast figures for the next five years. At the end of five years, it assumes the performance of the
Group companies will grow at a nominal annual rate of 0.5% in perpetuity thereafter. The growth rates are based on management’s view
of industry growth forecasts. Having considered the actual or potential budget cuts in the US and UK, management have revised down
forecast growth rates for these markets. Changes in selling prices and direct costs are based on past practices and expectations of future
changes in the market. The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management
for the next five years, and extrapolates cash flows after that period based on growth as described above.
Following a detailed review, impairment losses have been recognised in relation to Chemring Ordnance, Inc. and Chemring Energetic
Devices, Inc. at the year end totalling £22.5 million (2011: £nil). The impairment losses recognised in the consolidated income statement,
as part of non-underlying items within continuing operating profit, in respect of goodwill are as follows:
Chemring Ordnance, Inc. 6.8 -
Chemring Energetic Devices, Inc. 15.7 -
2012
£m
2011
£m
22.5 -
The impairment losses were based on value-in-use calculations and relate only to goodwill. The impairment charge relates to businesses
operating within the Munitions and Pyrotechnics segments, but it is not possible to allocate the impairment charge by segment.
The impairment charges were primarily driven by business valuations that were negatively impacted by lower cash flows within business
plans, reflecting the challenging economic conditions facing the defence industry within the US.
There is significant headroom within the remaining value-in-use calculations. Additionally, stress testing has indicated that, with the
exception of Hi-Shear Technology Corporation, no reasonably possible change in the key assumptions used would result in a significant
impairment charge being recorded in the financial statements.
A 25% fall in the forecast cashflows of the US CGUs and a 10% fall for all other CGUs was modelled. Hi-Shear Technology Corporation
would require an impairment charge of up to £20 million in these circumstances, but no impairment would be required for any other CGU
in this scenario.
A 2% addition to the discount rate for each CGU was also modelled, and under these circumstances Hi-Shear Technology Corporation
would require an impairment charge of up to £12 million. The remaining CGUs would not require any impairment.
The long term growth rates beyond the end of the forecast five years were also set to zero, but this would not result in a significant
impairment charge at any of the CGUs.
Chemring Group PLC Report and Accounts 2012