Jaguar Land Rover Automotive plc – Annual report – 31 March 2020
2 Accounting policies (extract)
The financial statements have been prepared on a going concern basis. The directors have adopted this basis following a rigorous assessment of the financial position and forecasts of the Group though to 30 September 2021. In particular, careful consideration has been given to the impact of COVID-19, in recognition of the impact it has had on the global economy and automotive industry. The impact has been significant, requiring temporary plant and retailer shutdowns, thereby impacting production and sales, and creating substantial uncertainty over the timeframe for economies and the automotive industry to recover.
Liquidity and funding
The Group ended Fiscal 2019/20 with substantial liquidity of £5.6 billion, including £3.7 billion of cash and other highly liquid investments and a £1.9 billion undrawn revolving credit facility. Net debt was £2.2 billion after £5.9 billion of gross debt and net assets stood at £6.6 billion.
The £5.9 billion of gross debt consists mainly of long-dated bonds (£3.8 billion with various maturities out to 2027, a $1 billion syndicated bank loan (£812 million) with final maturity in 2025, a £625 million amortising UKEF facility with final maturity in 2024 (amortized to £573 million), a £100 million short term secured fleet buy back working capital facility and £540 million of leases. The only contractual debt maturities over the review period are a £300 million bond maturity in January 2021 and the amortisation of £188 million of the UKEF facility as well as the Black Horse fleet buy back facility maturing in Q3 FY21. The undrawn revolving credit facility matures in July 2022. The debt and revolving credit facility have no financial covenant requirements, with the exception of the UKEF facility, which has a £1 billion global liquidity requirement, measured at Quarter ends. This is not projected to be breached in any of the downside scenarios assessed and summarised later in this disclosure. See note 25, Interest Bearing Loans and Borrowings, for additional detail.
Subsequent to the year end, Jaguar Land Rover increased an existing short-term working capital facility from £100 million to £163 million and a wholly-owned Chinese subsidiary completed a £170m equivalent 1-year loan with a Chinese bank. The £170 million equivalent loan was then repaid in June and replaced with a new 3-year £567 million equivalent facility with a syndicate of 5 Chinese banks. The £567 million equivalent syndicated loan is subject to an annual review customary in the Chinese banking market and a profitability covenant and leverage covenant applicable only to Jaguar Land Rover’s Chinese subsidiary, which are not expected to be breached in any of the scenarios tested.
See note 42, Subsequent Events, for additional detail.
The Group has a strong track record of raising funding in the bond and bank markets and continues to expect it will have opportunities to issue new funding in the future as evidenced by the completion of €1 billion of bonds in November and December 2019 and the Chinese £567 million syndicated loan in June 2020. In addition, Jaguar Land Rover has had discussions to access part of the £330 billion of guarantees announced by the UK government to assist companies with COVID-19 but nothing has been agreed so the going concern analysis does not assume anything for this.
Although Jaguar Land Rover is ultimately owned by Tata Motors Limited, Jaguar Land Rover operates its own Treasury function with its own funding and banking arrangements.
Tata Motors Limited is listed on the New York Stock Exchange and stock exchanges in Mumbai (Bombay Stock Exchange and National Stock Exchange) but is over 42% owned by Tata Sons and other entities in the Tata Group. The Group is not dependent on Tata Motors or other affiliates of Tata Sons for funding and only has insignificant trading balances with these companies. Jaguar Land Rover dividend policy is to pay out 25% of after-tax earnings subject to various considerations. In performing their going concern assessment, the directors have assumed that there are no significant changes in funding arrangements with respect to Tata Motors or affiliates of Tata Sons Ltd (other than Jaguar Land Rover Automotive plc and its subsidiaries) and no dividends are paid by Jaguar Land Rover Automotive plc to shareholders over the assessment period.
JLR generally requires payment from retailers on or shortly after delivery of the vehicle. Most retailers use wholesale financing arrangements in place to pay for vehicles. These facilities do not involve recourse to the Group in general and are not accounted as JLR debt. The directors expect these facilities to continue over the going concern review period in all scenarios. In the event any of these facilities were not to continue and retailers were unable to settle invoices immediately, working capital would be negatively impacted, possibly significantly, but this risk is considered remote. In addition, the Group has in place a $700 million debt factoring facility for selected retailers and distributors without such wholesale financing arrangements in place (£392 million utilised at the end of Fiscal 2019/20). The facility matures in March 2021 and the directors expect this to be renewed at that time. In the event any of these facilities were not to continue, working capital would be negatively impacted, possibly significantly, but this risk is considered remote.
Update on trading performance since year end
The COVID-19 pandemic and resulting lockdowns resulted in a sharp drop in sales, first in China in late January, and then other regions in late March, with a peak sales decrease in April. Jaguar Land Rover responded quickly to the COVID-19 pandemic with temporary plant shutdowns and rigorous cost and investment controls to conserve cash as much as possible. The China joint venture production plant was shut down in late January and reopened in late February. All plants outside of China were shutdown from late March with most plants restarting from mid-May and production is expected to gradually increase as sales recover.
As a result of the impact of COVID-19 on sales and production, the Group had negative free cash in April and May of about £1.5 billion. This includes a £1.2 billion unwind of working capital resulting from the plant shutdowns. The working capital unwind primarily reflects the runoff of payments to suppliers for vehicles built before the plant shutdowns, offset partially by the sale of vehicles in inventory. Cash at the end of May was about £2.4 billion, including about £278 million in international subsidiaries and the revolving credit facility of £1.9 billion remained available and undrawn. A free cash outflow of less than £2 billion is now expected in Q1 of Fiscal 2020/21.
The Group is planning for a gradual recovery in the business as lockdowns are relaxed and economies recover. The pick-up in China has been encouraging with all retailers now open and retail sales of 6,828 vehicles in April 2020 (down 3.1% compared to April 2019) and 8,068 in May 2020 (up 4.2% compared to May 2019). The sales of Range Rover and Range Rover Sport have been particularly encouraging.
Other regions have seen peak lockdowns in April with total worldwide retail sales of 14,709 vehicles in April (down 62.5% year-on-year), improving somewhat in May to 20,024 units (down 43.3%). Sales are expected to gradually recover in other regions following the reopening of retailers. Most recently, over 97% of retailers worldwide are open or partially open.
The Group plans to resume production gradually to meet demand as it recovers. The Solihull and Halewood assembly plants and engine plant in the UK, the Slovakia plant and contract manufacturing line in Graz (Austria) restarted from mid-May. The Castle Bromwich plant will reopen in due course while the joint venture plant in China has been re-open since late February.
Given the present uncertainties, Jaguar Land Rover will continue to manage costs and investment spending rigorously to protect liquidity. The Group has announced the Project Charge (now Charge+) transformation programme achieved a further £600 million of cash improvements in the Q4 of Fiscal 2019/20, increasing lifetime savings under the programme to £3.5 billion since launch in the Q2 of Fiscal 2018/19, including investment saving of £1.9 billion measured relative to original planning targets. (All savings attributed to Project Charge+ are unaudited pro forma analytical estimates.)
The Group has announced a Charge+ saving target for Fiscal 2020/21 of £1.5 billion across investment spending, inventory, and selling and administrative as well as material and warranty costs.
The Group has also implemented enhanced cost and investment reduction processes and controls complementing Project Charge+ in response to COVID-19. This includes reductions in non-product spending and lower margin and non-critical investment spending and numerous other cost control measures.
As discussed, the outlook beyond Q1 this year remains uncertain. However, Jaguar Land Rover presently expects a gradual recovery of sales consistent with external industry estimates and improving cash flow boosted by the recovery of working capital as a result of the resumption of production, lower investment and other Project Charge+ cost reductions.
Going concern forecast scenarios
For the purposes of assessing going concern over the period from the date of signing of the accounts to 30 September 2021, the directors have considered 3 scenarios: 1) base case, 2) severe and 3) extreme severe. These scenarios are summarised below. Additional assumption details are provided in note 41 of the accounts.
As indicated, Jaguar Land Rover had about £2.4 billion of cash and short-term liquid investments at the end of May 2020. This includes the £63 million increase in short term working capital facility and £170 million equivalent 1-year loan with a Chinese Bank which were complete after March 2020 and excludes the £567 million equivalent 3-year loan facility completed in June 2020 which replaced the 1 year China loan. As a result, total debt at the date of signing was about £6.5 billion.
Scenario 1: base case
The base case scenario assumes:
- A global industry volume forecast of about 71 million units for calendar year 2020 and 81 million units for 2021 based on external forecasts, representing decreases of about 21% and 10% respectively compared to 2019 industry volumes of about 90 million units.
- A decrease in JLR wholesale volumes somewhat greater for Fiscal 2020/21 and somewhat less for FY22 compared to the industry assumptions referenced.
- Investment, inventory and cost improvements are broadly consistent with the £1.5 billion Project Charge target described above in Fiscal 2020/21. There is not yet a Charge target for Fiscal 2021/22 and so not all of the saving in Fiscal 2020/21 are assumed to continue at the same level in Fiscal 2021/22 for the purposes of this going concern analysis.
Total liquidity including the revolving credit facility is forecast to remain more than adequate with significant headroom in this scenario.
Scenario 2: severe scenario
The severe scenario assumes:
- Global industry volumes of about 55 million units for calendar year 2020 and about 65 million units for calendar year 2021, representing decreases of about 39% and 28% respectively compared to calendar year 2019. This represents a more L shaped recovery from COVID-19, based on selected external industry downside forecasts.
- Compared to Fiscal 2019/20, a decline in JLR wholesale volumes for Fiscal 2020/21 and Fiscal 2021/22 broadly similar to the assumed industry decline referenced, with adjustment for the effect of moving from a calendar year to the Group’s 31st March year-end.
Investment, inventory and cost improvements broadly consistent with Project Charge targets indicated above but increased by about 15% in FY21 and about 5% in FY22 to partially mitigate the lower volumes in this scenario.
Total liquidity including the revolving credit facility was forecast to remain adequate in this scenario but with lower headroom than in the base case.
Scenario 3: extreme severe scenario
An extreme severe scenario was assessed which is the same as Scenario 2 but with the following further sensitivities applied:
- A further volume reduction of about 5% in Fiscal 2020/21 resulting in JLR wholesale volumes down about 35% in Fiscal 2020/21 and about 27% in H1 Fiscal 2021/22, compared to Fiscal 2019/20.
- Partial non-achievement of Fiscal 2020/21 Charge+ targets with respect to inventory and overhead cost savings as well as material, warranty and other costs.
- Modest incremental supply chain cash impacts results from COVID-19.
- A hard Brexit resulting in 10% WTO tariffs on UK vehicle exports to EU countries and increased logistics and other associated costs from 1 January 2021 offset partially by the impact of a weaker pound expected in such a scenario.
- A number of smaller other sensitivities.
In this more severe scenario, the directors have identified a number of “tough choice” mitigating actions within their control that would be implemented to maintain sufficient liquidity in the business to remain a going concern. These actions include:
- Further significant reductions in investment spending;
- Reductions in fixed marketing and other selling and marketing related costs;
- Certain other discretionary costs.
In this more severe scenario, and taking into account these controllable mitigating actions, total liquidity including the revolving credit facility was forecast to remain adequate (without breaching the UKEF quarter–end liquidity covenant) but with more limited headroom.
Going concern conclusions
As described above, the directors have considered going concern in 3 scenarios: 1) base case, 2) severe and 3) extreme severe.
In each of these scenarios, sufficient liquidity is forecast for the Group to operate and discharge its liabilities as they fall due, taking into account only cash generated from operations, controllable mitigating actions and the funding facilities existing on the date of authorisation of these financial statements, including the presently undrawn revolving credit facility. In practice, the directors also expect the Group will be able to raise additional funding facilities over the assessment period to increase available liquidity, considering the strong track record of raising funding in the bond and bank markets.
The directors do not consider more extreme scenarios than the ones assessed to be plausible.
As described above, the directors, after reviewing the Group’s operating budgets, investment plans and financing arrangements, consider that the Group has sufficient funding available at the date of approval of these financial statements. Accordingly, the Directors are satisfied that it is appropriate to adopt the going concern basis in preparing the Annual Report and Accounts.
41 Additional details on going concern assumptions
The going concern analysis is based on detailed assumptions on how the business normally operates and how COVID-19 might impact the business. The assumptions include but are not limited to the following additional assumption details. Except where stated otherwise, these assumption details are the same for all scenarios.
Currently, over 97% of retailers worldwide are open or partially open although this varies by region and some retailers are open on a constrained basis. The shutdown of retailers during the pandemic has undoubtedly decreased the financial strength of the retailer network with announcements of layoffs and other actions to reduce costs. Jaguar Land Rover is continuously engaging with its retailers and at present is not assuming material risks associated with retailer distress in any of the scenarios.
The business is carefully monitoring the impact of the COVID-19 shutdown on the supply base and readiness of suppliers to support the gradual resumption of production underway. Many of our suppliers are large well-capitalized companies, with others being smaller and medium sized suppliers who tend to have less financial flexibility. At present there are a limited number of known supplier issues, which at this point are not materially different to historically experienced levels. JLR is therefore not presently assuming these represent a material risk compared to historically experienced levels in the Base Case and Severe Scenarios – supplier claims in May 2020 are below prior year levels in terms of number and value. The Extreme Severe Scenario assumes a modest increase in supply chain cash costs related to COVID-19.
Suppliers are on payment terms ranging from 7 to 64 days, with the standard terms being 60 days and the average 58 days. No change in supplier terms is assumed in the going concern analysis compared to historical experience.
COVID-19 and Production Restart Considerations
The Group’s production facilities have been modified to protect the safety of our employees and to comply with social distancing legislation. Production ramp up post lockdown has been managed to ensure that these changes within the facilities are embedded quickly and we don’t expect them to have a lasting impact of the variable costs of production in any of the going concern scenarios. Restart plans have been coordinated with our supply base to ensure that all our suppliers can support the production schedule effectively.
Production facility restarts have been demand led in order to ensure that we manage the impact on variable profit margins. Given the high level of uncertainty the Group has ensured that we remain flexible and react to changes swiftly.
For the purposes of this going concern analysis, no structural changes are assumed to the permanent employee base in any of the scenarios. The Group has participated in the UK job retention scheme whereby the government partially reimburses the wage and salary costs of furloughed workers. At its peak about 20,000 employees were furloughed providing about £50m of monthly subsidy. However participation is now decreasing with plants reopening and it is assumed the programme will not continue after October.
Working capital movements in cash flow are significantly driven by volume levels and changes. This is because supplier payment terms are about 58 days on average although payment terms for individual suppliers can be longer or shorter, while payments for vehicles are received in most countries within a few days of retailers being invoiced. Inventories can also vary to the extent wholesale volumes deviate from forecast before production can be adjusted but in general the Group has set a Charge+ inventory target of £3 billion or lower.
The Group had negative free flow in April and May of about £1.5 billion. This includes a £1.2 billion unwind of working capital resulting from the plant shutdowns. The working capital unwind primarily reflects the runoff of payments to suppliers for vehicles built before the plant shutdowns, offset partially by the sale of vehicles in inventory. Cash at the end of May was about £2.4 billion, including about £278 million in international subsidiaries and the revolving credit facility of £1.9 billion remained available and undrawn. A free cash outflow of less than £2 billion is expected in Q1 of Fiscal 2020/21.
As production volumes resume, this effect is assumed to reverse and wholesale revenues are assumed to increase while payments to suppliers will lag because of the difference between supplier and retailer payment terms described.
There is a certain degree of volatility in cashflows by month and within months. Historically this has averaged about £188 million intra-month with only a very limited number of exceptions over £400 million. It is assumed this level of volatility varies with sales and production volumes and so would be smaller in lower volume scenarios. While not assumed, this could be reduced through more active day to day management of receipts and payments.
The Scenario 1 and Scenario 2 assumption for Brexit is that a deal is agreed to avoid a hard Brexit. Scenario 3 assumes a hard Brexit. A hard Brexit is assumed to result in 10% WTO tariffs on UK vehicle exports to EU countries and increased logistics and other associated costs from 1 January 2021, offset partially by the impact of a weaker pound expected in such a scenario.
18 Intangible assets (extract)
The directors are of the view that the operations of the Group, excluding equity accounted investments, represent a single cash-generating unit (“CGU”). This is because of the closely connected nature of the cash flows and the degree of integrated development and manufacturing activities.
In response to the annual requirement of IAS 36, and the economic impact of COVID-19 (see note 2 for more details on the immediate impact on JLR), management performed an impairment assessment as at 31 March 2020.
In the year ending 31 March 2019 an impairment loss was recorded and therefore the recoverable amount of the CGU was equal to its carrying amount. However, as seen in the Group’s Q2 and Q3 results, prior to the impact of COVID-19, the business was performing well, hitting growth and profitability targets through both sales growth and strong cost control. Performance improvements included continued growth in one of the Group’s key markets, China.
Similar to the prior year, a significant amount of the value in the VIU assessment is in the terminal value. Management are forecasting volumes to be returning to comparable pre-COVID-19 levels by 2023 and therefore the impact of COVID-19 on the VIU is offset by the long-term view of the business supported by the observed pre-COVID-19 trading. The forecast data has been supported by external industry sources.
For the current year assessment, the recoverable value was determined using the value in use (“VIU”) approach outlined in IAS 36. No impairment was identified as the CGU recoverable amount exceeded its carrying amount by £380m. The impairment loss recorded in the previous year was not reversed because it was considered that there was no significant change in the headroom associated with the CGU.
The Group has considered it appropriate to undertake the impairment assessment with reference to the latest business plan that was in effect as at the reporting date. This plan has been updated to reflect management’s best estimate of the impact of all relevant adjusting post balance sheet events, with consideration given to those arising due to the economic impact of COVID-19. The business plan includes a five-year cash flow forecast and contains growth rates that are primarily a function of the Group’s Cycle Plan assumptions, historic performance and management’s expectation of future market developments through to 2024/25. In forecasting the future cash flows management have given due consideration to the risks that have arisen due to the current economic uncertainty.
The Group has assessed the impact of COVID-19 and updated the cash flow forecast to reflect the latest Cycle Plan changes, including investment spend and new vehicle volume forecast. Additionally, the Group has assessed the potential risk of a more severe impact due to COVID-19 on volume in the short term (consistent with Going Concern basis of preparation, see page 53. The potential impact of this reasonably possible outcome of a short-term volume reduction and slower recovery has been included in the VIU calculations through an adjustment in the discount rate.
The directors’ approach and key assumptions used to determine the Group’s CGU VIU were as follows:
- Growth rate applied beyond approved forecast period – calculated based on the weighted average long term GDP forecasts based on JLRs geographical sales footprint;
- Discount rate – the discount rate is calculated with reference to a weighted average cost of capital (WACC) calculated by reference to an industry peer group. Inputs include risk-free rate, equity risk premium and risk adjustments based on company-specific risk factors including risks associated with uncertainty in relation to the short-term impact of COVID-19, Brexit and possible US tariffs;
- Forecast vehicles volumes – the 5-year volumes have been validated against industry standard external data for market segment and geography and adjusted to reflect historical experience and latest Cycle Plan assumptions;
- Terminal value variable profit – the 5-year variable profit forecasts are comprised of revenue, variable marketing, warranty costs, material costs and other variable costs. These values have been validated against historical performance rather than internal targets and adjusted for execution risk by further constraining cash flow estimates. The business has a range of vehicles and models at different stages in their product lifecycle. This variability drives different contribution levels for each product throughout the assessment period. When considering the cash flows to model into perpetuity, it is therefore necessary to derive a steady-state variable profit value based on the 5-year volume set and associated implied variable profit levels;
- Terminal value SG&A expenses – SG&A expenses comprise a combination of fixed and variable costs and are subject to ambitious current business plans. For the 5-year cash flow forecasts the ambition has been constrained by adjusting cashflows to reflect historical levels i.e. not including all of management’s planned actions for continued cost control. The terminal value assumption is held at similar levels to the 5-year forecast period;
- Terminal value capital expenditure – the 5-year cash flows timing and amount are prepared based on the latest Cycle Plan. The terminal value has been derived based the directors best estimate of a maintenance levels of capital expenditure which has been derived from depreciation and amortisation expectations and longer-term trends which are included in the VIU calculation. Expenditure on new models is excluded as “expansionary capital” unless expenditure is committed and substantively incurred as at the reporting date.
Sensitivity to key assumptions
The key assumptions that impact the value in use are those that (i) involve a significant amount of judgement and estimation and (ii) drive significant changes to the recoverable amount when flexed under reasonably possible outcomes. As noted above, with a small level of headroom the VIU is sensitive to many reasonably possible changes, however, as a significant portion of the recoverable amount lies in the VIU terminal value, management have focussed disclosures on reasonably possible changes that impact the terminal value.
Given the inherent uncertainty about how risk may arise, and the interaction of volumes and cost management, management consider a net impact on terminal period cash flows to be the best means of indicating the sensitivity of the model to such changes in the terminal period. The value of key assumptions used to calculate the recoverable amount are as follows:
The table below shows the amount by which the value assigned to the key assumptions must change for the recoverable amount of the CGU to be equal to its carrying amount:
(1)For the year ended 31 March 2019, the recoverable amount of the CGU was equal to its carrying amount, therefore the above disclosure is not applicable. For the year ended 31 March 2018, the recoverable amount of the CGU was higher than its carrying amount by £11,371m and it was not identified any reasonably possible change in the key assumptions that would cause the recoverable amount of the CGU to be equal to its carrying amount.
FY19 disclosures with no FY20 equivalent
In the impairment assessment performed by Management as at 31 March 2019, the recoverable value was determined based on value in use (“VIU”), which was marginally higher than the fair value less cost of disposal (“FVLCD”) of the relevant assets of the CGU. The recoverable amount was lower than the carrying value of the CGU, and this resulted in an exceptional impairment charge of £3,105 million being recognised within “Other expenses” as at 31 March 2019.
The impairment loss of £3,105 million has been allocated initially against goodwill of £1 million and the relevant assets, and thereafter the residual amount has been allocated on a prorated basis. This has resulted in £1,396 million allocated against tangible assets and £1,709 million allocated against intangible assets.