Hunting PLC – Annual report – 31 December 2021
Industry: oil and gas
41. 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 Group’s inventory is highly durable and is well maintained. It can, therefore, hold its value well with the passing of time. When volume demand falls, or prices are reduced, management has to assess whether the carrying value of inventory can still be achieved. For some markets and product lines there may be a limited number, or even no sales, to form a benchmark in the current year. In these cases, management looks at historical activity levels and has to form a judgement as to likely future demand in light of market forecasts and likely competitor activities. In 2021, the complexity of these judgements increased following a second year with historically low turn rates leading to increases in inventory age and higher provision levels. As a result of these conditions, management has enhanced its provision estimation methodology, in particular for items with low turn rates, and this change has contributed to $22.8m of the exceptional charge, excluding the $5.2m impairment provision related to the Marubeni-Itochu transaction. It is not practical to determine the precise quantitative effect of this change. As noted in the 2021 Half Year Report, pressure control equipment (“PCE”) inventory was considered sensitive to changes in future expectations and provisions against the inventory line item have been increased to $11.3m at 31 December 2021; further details including sensitivities can be found in note 16(g). Management has considered the judgements and estimates made in each of the Group’s businesses and, other than PCE equipment, has not identified any individual estimates, which in the event of a change, would lead to a material change in the next financial period.
Because of such judgements, the net inventory balance comprises $145.3m of inventory carried at cost (2020 – $240.6m) and $59.1m carried at net realisable value (“NRV”), which represents 29% of net inventories (2020 – $47.8m at NRV representing 17% of net inventories). Provisions for inventories held at NRV are subject to change if expectations change.
The reversal of previous write-downs occurs when inventory is sold for an amount higher than its net realisable value and also where older inventories, which had previously been written off, are sold as market conditions improve in the oil and gas sector. Overall, Hunting’s provision for inventory losses increased to 23% (2020 – 11%) of gross inventories balance at 31 December 2021 reflecting the continued downturn impacting the oil and gas sector. Details of the impairment review can be found in note 16.
Inventories of $128.8m are expected to be realised within 12 months of the balance sheet date (2020 – $165.0m) and $75.6m after 12 months (2020 – $123.4m).
In accordance with the requirements of the Group’s $160m committed Revolving Credit Facility, security has been granted over inventories in certain subsidiaries in the UK, US and Canada, which have a gross value of $184.3m (2020 – $198.2m).
16. Impairment of Non-financial Assets (extract)
(g) Impairment of Inventory
Certain inventory was written down to its net realisable value due to the reduced turn rates and increased ageing of inventories, lower oil and gas prices reducing demand and inventory selling prices being lowered. A net impairment charge of $25.8m (2020 – $36.4m charge) was recognised in the year. Charges of $28.0m, and the reversal of inventory provisions of $2.1m charged to exceptional items, were reflected as exceptional items (note 6). Included in the exceptional charge is $5.2m recognised on the transaction with Marubeni-Itochu. During 2020, $34.2m of the impairment charge was recognised as an exceptional item (note 6).
As indicated in the 2021 Half Year Report, the Group is carrying pressure control equipment inventory in North America that has substantially reduced inventory utilisation rates in 2020 and 2021 as a result of capital constraints applied during the global downturn as a result of the COVID-19 pandemic. The improvement in trading during H2 2021 was not as strong as anticipated. While management do expect a significant improvement in the market going forward, the Group has increased provisions to $11.3m at 31 December 2021. Inventory utilisation provisions have been applied to all line items that are not currently forecast to be consumed within a three year time frame. If this period is extended by a year the provision would decline by $1.6m.