To evaluate its business performance, the Group uses an indicator that it calls “adjusted EBITDA”, which is equal to operating income before depreciation, amortization and adjustments, including:
• restructuring costs intended to grow the Group’s future profits;
• gains or losses on significant asset sales;
• costs relating to corporate and legal restructuring, including legal fees and acquisition costs as well as the impact on margins of recording inventory of acquired companies in the Group’s balance sheet at fair value;
• costs relating to the Company’s initial public offering during fiscal year 2013;
• management fees invoiced by the shareholders of the Company; and
• expenses relating to share-based payments without any related cash payment.
Management believes that adjusted EBITDA is a useful indicator because it measures the performance of the Group’s activities without taking into effect past expenditures (depreciation and amortization) or unusual costs that are not representative of trends in the Group’s results of operations. EBITDA and adjusted EBITDA are not standardized accounting terms with generally accepted definitions. They should not be taken as a substitute for operating income, net income or cash flows, nor should they be treated as a measure of liquidity. Other issuers may calculate
Depreciation and amortization 88.8 105.5 +18.8%
EBITDA 242.2 286.4 +18.2 %
Adjustments
Restructuring costs 6.6 5.3
Gains/losses on asset sales - (0.2)
Unusual items from business combinations 7.6 0.5
IFRS share-based expenses charges 2.5 6.1
Charges relating to the initial public offering Other(1)
(1) “Other” includes management fees invoiced by the shareholders of the Company.
The adjustments used in determining adjusted EBITDA for each fiscal year are described in the comparative analyses of the Group’s results of operations presented below.
9.1.8.2 Estimates and assumptions used in preparing financial statements
The preparation of the Group’s consolidated financial statements in accordance with IFRS requires it to make a number of estimates and assumptions that have an effect on the amounts of its assets and liabilities, as well as on its income and expenses. Management continually revisits these estimates and assumptions based on its experience and other reasonable factors used in its evaluation. The Group’s actual results may differ from these estimates.
These estimates and assumptions relate primarily to the following:
• impairment of goodwill;
• provisions for retirement and other employee benefit obligations;
• other provisions for litigation, warranties and potential liabilities;
• deferred tax assets (tax loss carryforwards, in particular);
• the fair value of consideration paid, acquisitions of minority interests, and acquired assets and liabilities; and
• accounting treatment of financial instruments.
The management estimates used in connection with the preparation of the Group’s financial statements, particularly those relating to the application of accounting techniques and the inclusion of uncertainties, are described in more detail in Note 1.2.2 “Use of Estimates and Judgments” to the Group’s consolidated financial statements included in Section 20.1.1, “Group Consolidated Financial Statements as of and for the Year Ended December 31, 2013”.
9.1.8.2.1 Goodwill
Goodwill represents the difference between the cost of a business combination and the Group’s share of the fair value of the identifiable assets acquired and liabilities assumed on the date control is transferred, corresponding, for example, to the value that the Group assigns to expected synergies and profits. Therefore, evaluation of goodwill may rely on assumptions relating to future cash flows (see Notes 1.5.10, 1.5.15 and 2 to the Group’s consolidated financial statements included in Section 20.1.1, “Group Consolidated Financial Statements as of and for the Year Ended December 31, 2013”).
Goodwill is allocated to cash-generating units (“CGUs”), whose accounting value is tested for impairment annually or whenever there is any indication of an impairment loss. Impairment tests seek to determine whether the net recoverable value of an asset or CGU is less than its net book value. If the net recoverable value is lower than the net book value, an impairment charge is recorded in the income statement in the amount of the difference, allocated first to reduce goodwill of such CGU.
The recoverable value of an asset or a CGU is equal to the higher of the market value minus cost to sell, or the value in use. Value in use is determined by discounting estimated future cash flows
for each CGU using certain assumptions and estimates of management. Market value is the price that could be obtained under normal competitive conditions from an informed buyer minus the cost to sell.
The calculations used to determine value in use are subject to management’s judgment. Cash flows used to calculate value in use are derived from the Group’s budgets and business plans, which are in turn based on assumptions relating to revenues, adjusted EBITDA, working capital requirements and investments. If other assumptions or predictions were to be used, impairment testing would produce different values in use.
Management conducts impairment testing using its best estimate of the future activity of the CGU in question over the next three years, discounted to present value. The pre-tax discount rates used in 2012 and 2013 were 10.0% and 11.0%, respectively. The primary assumptions for sales growth through 2017 range from 1% (for certain CGUs in Europe) to 11% (essentially in emerging markets). The value in use calculation also includes the CGU’s end value, which projects standard cash flows to infinity with an annual growth rate of 3%. In 2013, the combination of an increase of 100 basis points in the discount rate and a decrease of 100 basis points in the growth rate would result in recording an additional loss in value of €12.1 million for the Laminates CGU in the CIS & Others segment.
For more information, see Notes 1.5.15, 2 and 8 to the Group’s consolidated financial statements included in Section 20.1.1, “Group Consolidated Financial Statements as of and for the Year Ended December 31, 2013”.
9.1.8.2.2 Provisions
9.1.8.2.2.1 Provisions for retirement and similar obligations
In accordance with the laws and practices of each country where the Group operates, it maintains retirement, health and disability plans and retirement packages for eligible employees and former employees, as well as for their beneficiaries who meet required conditions. As of December 31, 2013, the Group had such retirement commitments in the United States, Canada, the United Kingdom and Germany, as well as in France, Italy, Sweden, Serbia and Russia.
In accordance with IAS 19, these commitments are valued or updated every six months by independent actuaries. Accounting for actuarial values is based on predicted changes in salaries, medical costs, long-term interest rates, average seniority and life expectancy. An expected rate of return on funds invested is calculated for each plan in accordance with its composition and the projected return of comparable markets. Actuarial values and rates of return are sensitive to changes in predictions and estimates, which are based on assumptions. IAS 19 was modified in 2011, and this modification is reflected in the Company’s consolidated financial statements as of and for the fiscal year ended December 31, 2013. The impact of this modification is not significant for the Company. For more information, see Note 1.2.1 to the Group’s consolidated financial statements included in Section 20.1.1, “Group Consolidated Financial Statements as of and for the Year Ended December 31, 2013”.
As of December 31, 2013, the Group had €205.2 million in liabilities relating to employee benefit commitments, of which €83.0 million is covered by funds invested pursuant to the Group’ various plans, and the remaining €122.2 million relates to unfunded or partially funded plans for which provisions have been recorded. The most significant of these liabilities are in the United States,
Canada, the United Kingdom and Germany; the entities in these countries maintain sufficient externally-managed investments to cover nearly 50% of their liabilities.
For more information, see Note 21 to the Group’s consolidated financial statements included in Section 20.1.1, “Group Consolidated Financial Statements as of and for the Year Ended December 31, 2013”.
9.1.8.2.2.2 Provisions for Litigation, Product Warranties and Restructuring Costs
In accordance with IAS 37 (Provisions, Contingent Liabilities and Contingent Assets), provisions for litigation, warranties and other potential liabilities are recorded when, at the close of the fiscal year, there exists a legal or implicit obligation resulting from a past event that is more likely than not to result in a cash outflow to a third party, and whose amount can be reliably estimated. The amount recorded as a provision is management’s best estimate of the expenditure required to settle the current obligation as of the closing date. Where the time value of money has a significant effect, future outflows are discounted to present value. These provisions relate to environmental, legal, tax and other risks.
The probability of an outflow is calculated based on management’s analysis and assumptions and estimates that depend, in turn, on the nature of the risk. For example, in determining the amount of provisions for litigation, the Group’s management must evaluate the probability of an unfavorable decision, as well as the amount of potential damages. These items are by their nature uncertain. On the other hand, a warranty provision is recorded at the time a given product is sold, with the amount based on historical data on warranty payments. An additional provision is recorded when an event occurs that may give rise to warranty claims for greater amounts than the hypothetical provision. A restructuring provision is recorded when management approves a detailed restructuring plan and the restructuring is announced publicly or implemented. The provision may prove higher or lower than the amount actually incurred, and may be reversed, if necessary.
As of December 31, 2013, the Group had €39.0 million in provisions for warranties, restructurings, claims and litigation. For more information on estimation of and accounting for provisions or their impact on the Group’s results of operations, see Note 20 to the Group’s consolidated financial statements included in Section 20.1.1, “Group Consolidated Financial Statements as of and for the Year Ended December 31, 2013”.
9.1.8.2.3 Deferred Tax Assets
In accordance with IAS 12 (Income Taxes), the Group recognizes deferred tax assets and liabilities on its balance sheet. A deferred tax asset must be recognized for all temporary differences deductible in the future, unused tax loss carryforwards or income tax credits if it is probable that the Group will have future taxable profits that will allow these future tax savings to be utilized.
A deferred tax asset is recognized when it is probable that the Group will use it in the future.
Management must use its judgment in determining the amount of the net tax asset to recognize.
Projected net taxable profits are estimated on the basis of Management’s budget and assumptions, as well as models relating to market conditions. These assumptions and models may have a significant impact on the amounts of deferred tax assets recognized on the Group’s balance sheet.
The Group had €54.5 million in deferred tax assets relating to tax loss carryforwards and unused tax credits as of December 31, 2013, of which €37.9 million related to the Group’s North American tax consolidation group and €7.0 million related to its Canadian subsidiary.
For more information, see Note 7, “Income Tax” and Note 19, “Deferred Tax” to the Group’s consolidated financial statements included in Section 20.1.1, “Group Consolidated Financial Statements as of and for the Year Ended December 31, 2013”.
9.1.8.2.4 Application of IFRS 10, 11 and 12 as from January 1, 2013
The Group adopted IFRS 10, 11, and 12, which contain new methods for consolidating and accounting for joint ventures, during year ended December 31, 2013 (before being required to do so). IFRS 11 defines the accounting treatment for partnerships that are jointly controlled by at least two parties. Under the new standards, only two types of joint arrangements are identified:
joint ventures and joint operations. Classification of a joint arrangement is made on the basis of the rights and obligations of each of the parties.
Under IFRS 11, arrangements that qualify as joint ventures must be accounted for using the equity method, as the proportional method is no longer permitted.
Laminate Park, a company in which the Group holds a 50% interest, had been consolidated using the proportional consolidation method in the Group’s 2012 consolidated financial statements, but is accounted for under the equity method in the Group’s consolidated financial statements as of and for the fiscal year ended December 31, 2013. Information concerning the fiscal year ended December 31, 2012 presented for comparative purposes in this Registration Document was therefore restated to account for the retroactive application of the new method for consolidating Laminate Park. For the fiscal year ended December 31, 2013, adoption of IFRS 11 resulted in a
€22.7 million decrease in the Group’s consolidated net revenues and a €0.4 million increase on operating income, with no effect on net operating results.
For more information, see Notes 2.3 and 1.5.24 to the Group’s consolidated financial statements included in Section 20.1.1, “Group Consolidated Financial Statements as of and for the Year Ended December 31, 2013”.
9.2 COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER