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Wärtsilä Interim report January-September 2019

This interim financial report is prepared in accordance with IAS 34 (Interim Financial Reporting) using the same accounting policies and methods of computation as in the annual financial statements for 2018, except for the IFRS amendments stated below. All figures in the accounts have been rounded and consequently the sum of individual figures can deviate from the presented sum figure.

Use of estimates

The preparation of the financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the valuation of the reported assets and liabilities and other information, such as contingent liabilities and the recognition of income and expenses in the statement of income. Although the estimates are based on the management’s best knowledge of current events and actions, actual results may differ from the estimates.

Segment information

As of 1 January 2019, Wärtsilä is organised into two business areas, Wärtsilä Marine Business and Wärtsilä Energy Business, according to its two main customer markets. The Businesses cover both new equipment sales and services for their respective markets. The new organisational structure enables Wärtsilä to accelerate growth and the implementation of its Smart Marine and Smart Energy strategies. Integrating newbuild and service activities enhances customer value by strengthening the focus on complete lifecycle solutions tailored to specific market needs. Wärtsilä Marine Business and Wärtsilä Energy Business constitute Wärtsilä’s operating and reportable segments.

Wärtsilä's highest operative decision maker (CODM, Chief Operating Decision Maker) is the President and CEO, with the support of the Board of Management and in some cases the Board of Directors.

Marine Business and Energy Business are both led by Presidents of respective business area and both are supported by Business management teams. Discrete financial information for the Businesses is provided to the CODM to support decision-making. The segment information presented by Wärtsilä reflects the internal management reporting. The segment information is reported to the level of operating result, as items below the operating result are not allocated to segments.

Internal sales between segments is not reported in the management reporting, revenue and costs of sales are booked directly to the respective customer projects and orders. The main factors affecting the allocation of indirect and administration costs to the segments are net sales and personnel amount. Management considers these allocation principles the most suitable to reflect the cost carried by each segment. The allocation principles are reviewed regularly.

Wärtsilä Energy Business

Wärtsilä Energy Business is leading the transition towards a 100% renewable energy future. As an energy systems integrator, Wärtsilä understands, designs, builds and serves optimal power systems for future generations. Its offering includes flexible internal combustion engine-based power plants, hybrid solar power plants, energy storage and integration solutions, as well as gas to power systems. Wärtsilä supports its customers throughout the lifecycle of their installations with services that enable increased efficiency and guaranteed performance.

Wärtsilä’s three main customer segments in the energy markets are utilities, independent power producers and industrial customers. Wärtsilä’s energy solutions are used for a wide variety of applications. These include baseload generation, capacity for grid stability, peaking and load-following generation, and for the integration of wind and solar power. Wärtsilä provides its customers with a comprehensive understanding of energy systems, including fully integrated assets and software, complete with value adding lifecycle services.

Wärtsilä Marine Business

Wärtsilä’s aim is to lead the industry’s transformation towards a Smart Marine Ecosystem. Building on a sound foundation of being a leading provider of innovative products, integrated solutions and lifecycle services to the marine and oil & gas industries, Wärtsilä Marine aims to unlock new customer values through connectivity, digitalisation and smart technology.

Wärtsilä provides marine power solutions, processing solutions and voyage solutions, which are supported by a broad scope of services ranging from spare part delivery to optimising customer operations, providing performance guarantees and offering cyber intelligence and incident support.

Marine Power Solutions Processing Solutions Voyage Solutions
· Power Supply · Water and waste treatment · Automation, navigation & communication
· Power conversion · Gas solutions for marine and · Simulation & training solutions
· Propulsion land based applications · Fleet operations solutions
· Exhaust treatment · Ship traffic control solutions
· Special products
· Entertainment systems

Wärtsilä’s marine customer base covers all the main vessel segments, including traditional merchant vessels, gas carriers, cruise & ferry, navy, and special vessels. In the oil & gas industry, Wärtsilä is active in serving offshore installations and related industry vessels, as well as land-based gas installations. Wärtsilä’s customers comprise ship owners, shipyards and ship management companies.

Entity wide information

In addition to segment information, Wärtsilä reports the services revenue and order intake for both segments.

Wärtsilä continues to report information for the geographical areas Finland, other European countries, Asia, the Americas, and other continents. In the geographical information net sales are split by customer destination and non-current assets by customer origin. Non-current assets consist of goodwill, intangible assets, property, plant and equipment, and investments in associates and joint ventures.

IFRS amendments

In 2019, the Group has adopted the following new standards and interpretation issued by the IASB.

IFRS 16 Leases (effective for financial periods beginning on or after 1 January 2019) addresses the definition, recognition and measurement of lease agreements and notes related to leases. The standard replaced IAS 17 Leases.

IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. Under IFRS 16, the companies are required to recognise right-of-use assets (ROU) and lease liabilities in the statement of financial position. These are initially measured at the present value of unavoidable future lease payments. The right-of-use assets are depreciated and interest on lease liabilities recognised in the statement of income over the lease term. Whether a contract contains a lease is determined based on whether the customer has the right to control the use of an identified asset for a period of time. Exemptions regarding recognition of leases apply to short-term leases with lease period less than 12 months and to assets of low value. The lessor accounting remains similar to IAS 17.

Wärtsilä Group's capitalised lease agreements consist mainly of office premise and machinery and equipment lease agreements. Based on the applied accounting policy, the Group recognises the lease agreements as lease liabilities and as ROU assets in its statement of financial position. Lease payments are presented as repayments of liabilities and related interest expenses. The lease payments are presented in the cash flow from financing activities and the interest related to leases are presented in the cash flow from operating activities. Lease payments related to short-term leases, low-value assets and variable payments are presented in the cash flow from operating activities.

The Group applied the modified approach in the transition. The Group applies the two available exemptions, which relate to either short-term contracts, in which the lease term is less than 12 months, or low-value assets, which are expensed to other operating expenses. Based on the Group's calculation, the net present value of the capitalised lease liability amounts to EUR 212 million according to the following bridge calculation:

MEUR
Nominal amount of rents according to leasing contracts on 31 December 2018 284
Variable lease payments -23
Residual value -3
Expenses relating to short-term leases and leases of low-value assets -15
Leases not yet commenced to which Wärtsilä is committed -3
Nominal amount of lease liability on 1 January 2019 240
Present value 212

The nominal lease liability is initially measured at the present value of the lease payments. The lease payments exclude variable elements. Variable lease payments not included in the initial measurement of the lease liability are recognised directly in the statement of income. The lease term is the non-cancellable period of the lease plus period covered by an option to extend or option to terminate if the lessee is reasonably certain to excercise the extension option. Management judgment based on realistic estimates is used when determining the lease term for artificially short-term and leasing agreements with non-fixed terms. At transition, the lease payments were discounted by using the Group's incremental borrowing rate. The incremental borrowing rates used are the sum of relevant interbank rates and average margin of group loan portfolio and are currency specific.

The Group recognised at transition ROU assets amounting to EUR 213 million, non-current lease liabilities amounting to EUR 169 million, and current lease liabilities amounting to EUR 43 million. The lease expense reduction during 2019 arising from the lease agreements is estimated to be approximately EUR 53 million and increase of interest expense is estimated to be approximately EUR 5 million. The total depreciation expense for the financial period 2019 in the statement of income is estimated to increase by EUR 49 million due to ROU asset depreciations. The comparison figures have not been restated.

Condensed statement of financial position
MEUR 31.12.2018 IFRS 16
adjustment
1.1.2019
Non-current assets
Intangible assets 1 747 1 747
Property, plant and equipment 324 -2 321
Right-of-use assets 215 215
Investments in associates and joint ventures 66 66
Other investments 16 16
Deferred tax assets 129 129
Other receivables 86 86
Total non-current assets 2 369 213 2 581
Current assets
Inventories 1 165 1 165
Other receivables 2 038 2 038
Cash and cash equivalents 487 487
Total current assets 3 690 -1 3 690
Total assets 6 059 212 6 271
Equity
Share capital 336 336
Other equity 2 082 2 082
Total equity attributable to equity holders of the parent company 2 418 2 418
Non-controlling interests 14 14
Total equity 2 432 2 432
Non-current liabilities
Interest-bearing debt 748 169 917
Deferred tax liabilities 99 99
Other liabilities 245 245
Total non-current liabilities 1 092 169 1 261
Current liabilities
Interest-bearing debt 74 43 117
Other liabilities 2 461 2 461
Total current liabilities 2 535 43 2 578
Total liabilities 3 627 212 3 839
Total equity and liabilities 6 059 212 6 271

Amendments to IAS 28 Long-term Interests in Associates and Joint Ventures (effective for financial periods beginning on or after 1 January 2019). The amendments clarify that IFRS 9 Financial Instruments is applied to the accounting for long-term interest in an associate or joint venture to which the equity method is not applied. The amendments have no impact on the consolidated financial statements.

Amendment to IAS 19 Plan Amendment, Curtailment or Settlement (effective for financial periods beginning on or after 1 January 2019). This amendment clarifies the accounting when a plan amendment, curtailment or settlement occurs during a reporting period. The amendment specifies that when a plan amendment, curtailment or settlement occurs during the annual reporting period, an entity is required to use updated assumptions to determine the current service cost and net interest. The interpretation has an impact on the consolidated financial statements in the case of curtailments or settlements.

Amendments to IFRS 9 Prepayment Features with Negative Compensation (effective for financial periods beginning on or after 1 January 2019). Prepayment Features with Negative Compensation amends the existing requirements in IFRS 9 regarding termination rights in order to allow measurement at amortised cost (or, depending on the business model, at fair value through other comprehensive income) even in the case of negative compensation payments. Without the amendment these financial assets would have had to be measured at FVPL. The amendments have no impact on the consolidated financial statements.

IFRIC 23 Uncertainty over income tax treatment (effective for financial periods beginning on or after 1 January 2019). This interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12. The key matter is whether the tax authority will accept the chosen tax treatment. When considering this, the assumption is that tax authorities will have full knowledge of all relevant information in assessing the proposed tax treatment. The interpretation does not have any significant impact on the consolidated financial statements.

Annual improvements to IFRSs 2015-2017 cycle: The improvements that include smaller amendments to four standards do not have an impact on the consolidated financial statements.  

Adoption of new and updated IFRS standards

IFRS 17 Insurance contracts* (effective from financial periods beginning on or after 1 January 2021). IFRS 17 applies to all types of insurance contracts (direct insurance and re-insurance) regardless of the type of entities that issue them, as well as to certain guarantees and financial instruments with discretionary participation features. The overall objective is to provide a consistent accounting model for insurance contracts. The impact is under review within the Group.

 * Not yet endorsed for use by the European Union as of 30 September 2019

 

This interim report is unaudited. 

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