Hunting PLC – Annual report – 31 December 2018
Industry: oil and gas
- Principal Accounting Policies (extract)
- Inventories are stated at the lower of cost and net realisable value.
- Cost is determined using the first-in-first-out method and net realisable value is the estimated selling price less costs of disposal in the ordinary course of business. The cost of inventories includes direct costs plus production overheads.
The net inventory balance comprises $295.2m of inventory carried at cost (2017 – $226.7m restated) and $53.0m of inventory carried at net realisable value (2017 – $54.3m). In determining an estimate of net realisable value, management makes judgements in respect of the durability and general high quality of the Group’s products, which provide a degree of protection against adverse market conditions and competitor product development and pricing activity.
Gross inventories have increased $63.5m from $309.2m (restated) at 31 December 2017 to $372.7m at 31 December 2018. Additions to inventories were $670.4m (2017 – $534.2m), which were offset by foreign exchange losses of $6.8m (2017 – $8.0m gains), inventories expensed to cost of sales of $592.8m (2017 – $514.7m restated), inventories written off of $7.3m (2017 – $4.2m) against the inventory provision and inventories transferred to PPE of $nil (2017 – $0.5m).
The inventory provision has decreased by $3.7m from $28.2m (restated) at 31 December 2017 to $24.5m at 31 December 2018, as a result of an impairment charge included in cost of sales of $6.2m (2017 – $6.6m), offset by foreign exchange gains of $0.6m (2017 – $0.9m losses), $7.3m (2017 – $4.2m) of the provision being utilised in the year against inventories written off and the reversal of previous write-downs of $2.0m (2017 – $1.4m) also included in cost of sales. The reversal of previous write-downs occurred when inventory was sold for an amount higher than its net realisable value and also where older inventories, which had previously been written off, were sold as market conditions improved in the oil and gas sector. Overall, Hunting’s provision for inventory losses has reduced from 9% of gross inventory balances at 31 December 2017 to 7% at 31 December 2018, as improving market conditions have lead to a lower proportion of inventories having a recoverable value less than their cost.
In accordance with the amendments made to the Group’s core committed bank facility in July 2016, security has been granted over inventories in certain subsidiaries in the UK, US and Canada, which have a gross value of $234.1m (2017 – $188.9m).
The Group expects that $290.0m (2017 – $211.9m restated) of the Group’s inventories of $348.2m (2017 – $281.0m restated) will be realised within 12 months of the balance sheet date and $58.2m (2017 – $69.1m) will be realised after 12 months.