Notes to the condensed financial statements

General information

Akzo Nobel N.V. is a public limited liability company headquartered in Amsterdam, the Netherlands. The interim condensed consolidated financial statements include the financial statements of Akzo Nobel N.V. and its consolidated subsidiaries (in this document referred to as “AkzoNobel”, “Group” or “the company”).

The company was incorporated under the laws of the Netherlands and is listed on Euronext Amsterdam.

Basis of preparation

All quarterly figures are unaudited. The interim condensed consolidated financial statements have been prepared in accordance with IAS 34 “Interim financial reporting”. The interim condensed consolidated financial statements were discussed and approved by the Board of Management and Supervisory Board. The interim condensed consolidated financial statements should be read in conjunction with AkzoNobel’s consolidated financial statements in the 2018 annual report, as published on March 7, 2019. The financial statements were adopted by the Annual General Meeting of shareholders on April 25, 2019. In accordance with Article 393 of Book 2 of the Dutch Civil Code, PricewaterhouseCoopers Accountants N.V. has issued an unqualified auditor’s opinion on these financial statements.

Invested capital

Invested capital at September 30, 2019, totaled €7.1 billion, up €0.9 billion from year-end 2018, mainly due to seasonality of operating working capital and the impact of the adoption of IFRS 16.

Invested capital

in € millions

September 30, 2018

December 31, 2018

September 30, 2019

1

Trade payables now include certain other payables, which were previously classified as Other working capital. Trade payables, Operating working capital and Other working capital items reported in the quarters of 2018 have been represented for this change of definition for some €240 million.

2

Invested capital includes the impact from the adoption of IFRS 16 “Leases” (as per January 1, 2019). Right-of-use assets (€355 million as per January 1, 2019) have been added to Invested capital whereas Lease liabilities remain excluded from Invested capital. The 2018 comparative figures have not been restated. Further details and a quantification of the impact are provided on page Notes to the condensed consolidated financial statements.

Trade receivables

1,982

1,843

2,080

Inventories

1,150

1,139

1,221

Trade payables 1

(2,053)

(2,084)

(1,970)

Operating working capital (Trade)

1,079

898

1,331

Other working capital items 1

(360)

(414)

(293)

Non-current assets 2

7,123

7,171

8,146

Less investments in associates and joint ventures

(138)

(137)

(153)

Less pension assets

(1,020)

(947)

(1,545)

Deferred tax liabilities

(266)

(368)

(362)

Invested capital 2

6,418

6,203

7,124

Operating working capital (Trade)

Operating working capital as percentage of revenue increased to 13.9% in Q3 of 2019, compared to 11.6% in Q3 of 2018, mainly due to higher trade receivables, higher inventories and lower trade payables, including an adverse impact from acquisitions.

Operating working capital (Trade)

In % of revenue

AkzoNobel – Operating working capital (Trade) (bar chart)

Pension

The net balance sheet position (according to IAS19) of the pension plans at the end of Q3 2019 was a surplus of €0.9 billion (year-end 2018: surplus of €0.4 billion). The development in the first three quarters of 2019 was the result of the net effect of:

  • Top-up payments into pension plans
  • Higher asset returns in key countries

Offset by:

  • Lower discount rates in key countries

In February 2019, negotiations on the triennial review of the main UK defined benefit pension schemes were concluded, leading to a total of €640 million of cash payments:

  • An amount of £290 million (€333 million) of top-up payments have been made in relation to deficit recovery plans for the ICI Pension Fund and Akzo Nobel (CPS) Pension Scheme
  • Top-up payments of £129 million (€146 million) were paid in accordance with the previously agreed recovery plans
  • An amount of £142 million (€161 million) of pre-funding was paid into an escrow account for the Akzo Nobel (CPS) Pension Scheme

Other top-up payments amounted to €2 million.

Workforce

At September 30, 2019, the number of people employed was 34,300 (September 30, 2018: 34,300). Acquisitions in Q4 2018 added around 850 people.

Free cash flows

The cash generation in Q3 2019 improved compared to Q3 2018, mainly due to higher EBITDA and lower income taxes paid, partly offset by lower working capital inflow.

EBITDA was impacted by the adoption of IFRS 16 as per January 1, 2019. As a result, in the first three quarters of 2019, some €83 million of lease expenses were recognized as depreciation of Right-of-use assets (€78 million) and as interest expense (€5 million). The 2018 comparative figures have not been restated.

Consolidated statement of free cash flows

Third quarter

 

January-September

2018

2019

in € millions

2018

2019

297

334

EBITDA

717

929

28

Impairment losses

61

(18)

(5)

Pre-tax results on acquisitions and divestments

(40)

(71)

155

35

Changes in working capital

(427)

(502)

(1)

(2)

Pension top-up payments

(186)

(481)

(44)

(14)

Other changes in provisions

(62)

(27)

(27)

(29)

Interest paid

(41)

(50)

(74)

(45)

Income tax paid

(111)

(132)

(4)

10

Other

(7)

13

284

312

Net cash from operating activities

(157)

(260)

(41)

(52)

Capital expenditures

(120)

(135)

243

260

Free cash flows

(277)

(395)

Accounting policies and restatements

The significant accounting policies applied in the condensed consolidated interim financial statements are consistent with those applied in AkzoNobel’s consolidated financial statements for the year ended December 31, 2018, except for the following changes in accounting policies and disclosures:

IFRS 16 “Leases” is the most important change. IFRS 16 replaces the previous standard on lessee accounting for leases. It requires lessees to bring most leases on balance sheet in a single lease accounting model, recognizing a Right-of-use asset and a Lease liability. Compared with the previous standard for operating leases, it also impacts the classification and timing of expenses and consequently the classification between cash flow from operating activities and cash flow from financing activities. AkzoNobel has adopted IFRS 16 as per January 1, 2019, applying the modified retrospective approach. All Right-of-use assets are measured at the amount of the lease liability at transition, adjusted for any prepaid or accrued lease expenses. Short-term and low-value leases are exempted. AkzoNobel has not restated its 2018 comparative figures. The adoption did not have an impact on group equity. IFRS 16 requires the Right-of-use asset and the Lease liability to be recognized at discounted value and assumptions with regards to termination and renewal options should be taken into consideration.

The blended incremental borrowing rate applied to the lease liabilities at January 1, 2019, was 2.2%. The table below reflects the reconciliation of the operating lease commitments as at December 31, 2018, and the lease liabilities recognized as at January 1, 2019.

Changes in lease accounting

in € millions

Reconciliation

Operating lease commitments as at December 31, 2018

420

Adjustments as a result of a re-assessment of service contracts

(14)

Low-value and short-term leases recognized on a straight-line basis as expense

(11)

Total undiscounted lease commitments

395

Discounting of lease commitments

(40)

Lease liabilities recognized as at January 1, 2019

355

The adoption of the standard as per January 1, 2019, has resulted in the recognition of Right-of-use assets of approximately €355 million, and additional Lease liabilities of approximately €355 million. In addition, assets with a book value of some €65 million have been reclassified to Right-of-use assets, including among others finance leases. In the Consolidated statement of income January - September 2019, the Operating lease expenses (€83 million), previously recorded in Operating income, are replaced by the depreciation charge on Right-of-use assets (€78 million; remains recorded in Operating income) and by Interest expenses for the lease liability (€5 million; recorded in Net financing expenses). In addition we recorded a non-cash impairment charge of Right-of-use assets of €5 million, presented as identified item. On a net basis, the adoption of IFRS 16 has led to an unchanged operating income and an increase of Net financing expenses by €5 million; Profit before tax and Profit for the period were €3 million lower. The payments for the Operating leases (€83 million), previously included in the cash flow from operating activities, are now included in the cash flow from financing activities.

Impact of adoption IFRS 16 on the consolidated balance sheet

in € millions

As reported at December 31, 2018

Restatement due to adoption IFRS 16

Restated opening balance at January 1, 2019

Intangible assets

3,458

(35)

3,423

Property, plant and equipment

1,748

(30)

1,718

Right-of-use assets

420

420

Other financial non-current assets

1,965

1,965

Current assets

11,613

11,613

Total assets

18,784

355

19,139

Group equity

12,038

12,038

Non-current liabilities

3,066

264

3,330

Currrent liabilities

3,680

91

3,771

Total liabilites

18,784

355

19,139

Impact of adoption IFRS 16 on the consolidated statement of income

Third quarter

 

 

January-September

Before IFRS 16

Impact

Including IFRS 16

In € millions

Before IFRS 16

Impact

Including IFRS 16

*

The IFRS 16 impact of €5 million relates to a non-cash impairment of Right-of-use assets following the implementation of our strategic portfolio review.

358

29

387

Adjusted EBITDA

946

83

1,029

305

29

334

EBITDA

846

83

929

(60)

(27)

(87)

Depreciation and
amortization

(183)

(78)

(261)

298

2

300

Adjusted operating income

763

5

768

(48)

(5)

(53)

Identified items *

(95)

(5)

(100)

250

(3)

247

Operating income

668

668

(25)

(2)

(27)

Net financing expenses

(53)

(5)

(58)

(53)

2

(51)

Income tax

(153)

2

(151)

165

(3)

162

Net income from
continuing operations

445

(3)

442

283

29

312

Net cash from
operating activities

(343)

83

(260)

(725)

(29)

(754)

Net cash from financing activities

(5,560)

(83)

(5,643)

12.4

0.1

12.5

ROS%

10.8

0.1

10.9

10.4

(0.1)

10.3

OPI margin

9.4

9.4

 

 

 

ROI%

14.4

(0.5)

13.9

AkzoNobel’s activities as a lessor are not truly material and hence the impact on the financial statements is not significant.

Several other new accounting standards were issued. These include, among others, IFRIC 23 ‘‘Uncertainty over income tax treatments” and ‘‘Plan Amendment, Curtailment and Settlement” (Amendments to IAS 19), both effective as from January 1, 2019. These changes do not have a material effect on AkzoNobel’s Consolidated financial statements, as to a large extent we already complied with these clarifications on IFRS.

Application of IAS 29 "Financial Reporting in Hyperinflationary economies"

IAS 29, “Financial Reporting in Hyperinflationary Economies” is applied to the financial statements for entities whose functional currency is the currency of a hyperinflationary economy. Since July 1, 2018, Argentina qualifies as a so-called hyperinflationary country under IFRS. As a consequence, special accounting procedures have been applied to eliminate hyperinflation effects from the accounts of the Argentinian operations, starting on January 1, 2018. The revaluation effect on the non-monetary assets at January 1, 2018, was a gain of €23 million after taxes, recorded as an adjustment to opening shareholders’ equity. Effects during the subsequent periods were not significant.

Related parties

We purchased and sold goods and services to various related parties in which we hold a 50% or less equity interest (associates and joint ventures). Such transactions were conducted at arm’s length with terms comparable with transactions with third parties. We consider the members of the Executive Committee and the Supervisory Board to be the key management personnel as defined in IAS 24 “Related parties”. In the ordinary course of business, we have transactions with various organizations with which certain of the members of the Supervisory Board and Executive Committee are associated. All related party transactions were conducted at arm’s length.

Seasonality

Revenue and results in Decorative Paints are impacted by seasonal influences. Revenue and profitability tend to be higher in the second and third quarter of the year as weather conditions determine whether paints and coatings can be applied. In Performance Coatings, revenue and profitability vary with building patterns from original equipment manufacturers.

Other activities

In Other activities, we report activities which are not allocated to a particular segment.

Revenue disaggregation

The table below reflects the disaggregation of revenue. Additional disaggregation of revenue is included on the respective pages of Decorative Paints and Performance Coatings.

Revenue disaggregation

January-September

 

 

 

in € millions

Decorative Paints

Performance Coatings

Other

Total

Primary geographical markets - revenue from third parties

 

 

 

 

The Netherlands

158

74

49

281

Other European Countries

1,382

1,532

2,905

USA and Canada

847

847

South America

318

276

594

Asia

800

1,180

1,980

Other regions

142

284

1

427

Total

2,800

4,184

50

7,034

Timing of revenue recognition

 

 

 

 

Goods transferred at a point in time

2,782

4,040

1

6,823

Services transferred over time

18

144

49

211

Total

2,800

4,184

50

7,034

Alternative performance measures

In presenting and discussing AkzoNobel’s operating results, management uses certain alternative performance measures (APM) not defined by IFRS, which exclude the so-called identified items that are generated outside the normal course of business. These alternative performance measures should not be viewed in isolation as alternatives to the equivalent IFRS measures and should be used as supplementary information in conjunction with the most directly comparable IFRS measures. Alternative performance measures do not have a standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other companies. Where a non-financial measure is used to calculate an operational or statistical ratio, this is also considered an APM.

AkzoNobel uses APM adjustments to the IFRS measures to provide clear reporting on the underlying developments of the business. These APM adjustments may affect the IFRS measures operating income, net profit and the earnings per share. A reconciliation of the alternative performance measures to the most directly comparable IFRS measures can be found in the tables for adjusted operating income and adjusted earnings from continuing operations on this page.

Identified items

Identified items were €100 million negative in the first three quarters of 2019, mainly related to transformation costs and non-cash impairments, partly offset by a gain on disposal of €57 million following asset network optimization. In the first three quarters of 2018 identified items were €80 million negative, mainly relating to transformation costs.

Operating income

Third quarter

 

January-September

2018

2019

∆%

in € millions

2018

2019

∆%

112

130

16%

Decorative Paints

271

350

29%

164

156

(5%)

Performance Coatings

447

427

(4%)

(39)

(39)

 

Other activities/eliminations

(181)

(109)

 

237

247

4%

Total

537

668

24%

Identified items

Third quarter

 

January-September

2018

2019

in € millions

2018

2019

3

5

2

Decorative Paints

23

(19)

(44)

6

38

32

Performance Coatings

29

102

73

(3)

10

13

Other activities/eliminations

28

17

(11)

6

53

47

Total

80

100

20

Adjusted operating income

Third quarter

 

January-September

2018

2019

∆%

in € millions

2018

2019

∆%

115

135

17%

Decorative Paints

294

331

13%

170

194

14%

Performance Coatings

476

529

11%

(42)

(29)

 

Other activities/eliminations

(153)

(92)

 

243

300

23%

Total

617

768

24%

Adjusted earnings per share from contuing operations

Third quarter

 

January-September

2018

2019

in € millions

2018

2019

221

226

Profit before tax from continuing operations

522

626

6

53

Identitied items reported in operating income

80

100

Interest on tax settlements

(30)

(67)

(68)

Adjusted income tax

(161)

(180)

(6)

(13)

Non-controlling interests

(35)

(33)

154

198

Adjusted net income from
continuing operatations

376

513

 

 

 

 

 

255.8

204.3

Weighted average number of shares

254.4

218.0

 

 

 

 

 

0.60

0.97

Adjusted earnings per share from continuing operations

1.48

2.35