Coronavirus: How did Conti manage to pass Q1-Reporting without Goodwill Impairments?
Continental AG (Conti) did not show any goodwill impairments in Q1/2020 (only some minor asset impairmets). However, in contrast to this, the big German automobile supplier popped-up top of our analytical screen in terms of Q1/2020 goodwill impairment necessities. How can one brigde these two sets of information?
Source: Quarterly Report Q1/2020, p. 32.
This is the topic of our today’s blog post. We explain why the alarm in our screen was triggered, what the potential problems are with the Conti-approach, but also what could be possible explanations for its proceeding.
Preface 1: As a consequence of our screen results, we addressed several questions to Conti IR to get some clarification but the company informed us that it could not answer these questions because of its disclosure policy. This is well tolerated here. But we also want to highlight that we only asked for information which the company would have given anyway if it had published a full annual report at the end of Q1/2020, i.e. only for information that we could find in the annual report (AR) 2019, but in an updated Q1/2020 version. We certainly did not at all want to bring the company into the position of giving out information which could somehow be seen as non-public in general or even as insider information – far from it! However, we also understand that Q1/2020 is not the time of delivering an annual report, so everything ok for us.
Let’s go with our analysis. First of all, the reasons for the accounting alarm of our screen are mainly the following:
- Conti recorded noticeable goodwill impairments in the fiscal year 2019, particularly on 30 September 2019.
- For some of the Cash Generating Units (CGUs) subject to these impairments the goodwill has not been written down to zero in 2019.
- Conti’s stock price decreased in Q1/2020 by 43.1%. This compares to the Euro Stoxx ‘only’ losing 25.6% and the Stoxx Europe Automobiles & Parts Sector Index ‘only’ losing 37.5% (we use the information given by Conti here, our numbers differ a bit but not in a meaningful way)
- Conti bond yields increased massively during Q1/2020. Amongst others, this has been reinforced by a downgrading of both credit rating agencies S&P’s and Moody’s from BBB+ (Baa1) to BBB (Baa2) during this quarter.