Annual Report (ESEF) • Feb 16, 2022
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A/S Vigerslev Allé 77 DK-2500 Valby CVR No. 58180912 ANNUAL REPORT 2021 FLSmidth Annual Report 2021 2 Management review Highlights Management review Highlights 3 4 6 7 8 9 Business 11 12 13 14 15 19 22 Financial performance 27 30 34 35 Governance 37 40 44 48 49 Financial statements 52 57 109 117 118 Integrated reports Sustainability report Corporate governance report Remuneration report CONTENTS HIGHLIGHTS 2021 Group order intake (DKKbn) 4% up over 2020 17.6 2021 Group revenue (DKKbn) 5.9% 2021 Group EBITA margin 19.2 proceeds raised from issue of new shares (DKKbn) in 2021 (DKKbn) 1.41.4 thyssenkrupp Mining acquisition announced pending regulatory approval Positive mining industry outlook Mikko Keto, Group CEO Mid-term recovery expected for cement Science Based Targets validated driven by global economic development and increased demand for minerals for the green transition as of 1 January 2022 short-term the cement industry remains impacted by overcapacity Group guidance 2022 Mining guidance 2022 Cement guidance 2022 12.0-13.0 Revenue (DKKbn) 8.5-9.5% EBITA margin 1 5.5-6.0 Revenue (DKKbn) 1-2% EBITA margin 17.5-19.0 Revenue (DKKbn) 6-7% EBITA margin 1 1) Including DKK 110m in acquisition related costs FLSmidth ■ Annual Report 2021 HighlightsManagement review 3 FLSmidth delivered a solid performance in 2021. Despite the challenges presented by the pandemic and the global supply chain constraints, order intake, revenue and EBITA increased substantially over 2020 and cash ow performance was strong. On behalf of the Board of Directors and Group Executive Management, we would like to thank all the employees of FLSmidth for an extraordinary Our employees’ resilience, ingenuity and passion for serving our customers, even under challenging conditions, have been the driving factors for the solid performance of FLSmidth in 2021. A year to remember First and foremost, we signed an agreement to make one of the biggest acquisitions in our LETTER TO SHAREHOLDERS history, namely acquiring thyssenkrupp’s Mining business. Pending customary authority approvals, the transaction is expected to close during the second half of 2022. This will position FLSmidth as one of the strongest suppliers to the mining solutions driving sustainable productivity. To fund the acquisition, we successfully issued new shares raising proceeds of DKK 1.4bn in 2021. We appreciate the trust shown by our long-term growth potential from this acquisition, which will transform FLSmidth into predominantly being a mining company. That said, our Cement business has seen good improvement in 2021 following a challenging 2020. With the urgent need to accelerate the global society towards a greener future, we believe our Cement business holds attractive potential in the mid- to long-term. Following more than eight years of tenure, Thomas Schulz stepped down as the Group CEO of FLSmidth. As of 1 January 2022, Mikko Keto took over the helm as Group CEO. This has been a well-planned and seamless transition. Mikko’s leadership skills, comprehensive industry insights be a competitive advantage for FLSmidth and help unfold the full MissionZero potential. Our strategy remains unchanged, as we are on the right strategic path. We continue to be the leading supplier of sustainable productivity solutions to the global mining and cement industries. In 2021 we have experienced increased interest in is essential for driving the green transition within the mining and cement industries as 99% of total CO 2 emissions in our value chain is downstream with our customers’ use of our products. In 2021 we introduced the visionary MissionZero Mine. This serves as the roadmap for our R&D work towards zero emissions in mining. Our Mining business has received large orders for a new concentrator to a gold mine in Russia, a new lithium extraction facility in Argentina and key mineral processing technologies for a major copper producer in Chile. Further, we have been selected as the technical partner and supplier to a progress for sustainability solutions in 2021. This includes accelerating our carbon capture solutions through new partnerships with Carbon8 and Chart Industries and a collaboration with capture installation in cement in Norway. Further, full-scale clay calcination system in Europe aimed at cutting 16% CO 2 emissions. In addition, India, a waste-to-energy solution in Indonesia, digitalisation of three cement lines in West Africa and a new pyro line in Peru. Market conditions and pandemic impact Compared to many other industries, the mining industry has continued to be largely resilient against the pandemic. Despite several waves of lockdowns and global supply chain from high commodity prices and high production rates. This is driven by global economic development and increasing demand for minerals for the green transition. Many customers have throughout 2021 continued to enforce safety protocols and restricted site access for external service providers to safeguard production and employees. This has impacted demand for on-site technical services including We see attractive opportunities from this once the market normalises. The cement industry has been more hit by the pandemic and remains impacted by overcapacity and underutilisation leading to subdued activity for new investments. Sentiment in the cement industry remains sensitive to the general enhanced by the pandemic. We see increasing interest in solutions for decarbonisation and debottlenecking of cement plants. Solid performance in 2021 Despite challenging market conditions, we have delivered a solid performance in 2021 with revenue and EBITA growth of 7% and 34% over 2020, respectively. Revenue exceeded our guidance range and EBITA margin ended at the high end of our guided range. We have secured six large orders in 2021 and a book-to-bill of 109% for the year. Cash remains a core focus, and with a net working capital ratio of operations of DKK 1.4bn in 2021. The key drivers behind the 2021 performance are continued good momentum in Mining, and improvements in our Cement business, which in the second I would like to thank Thomas Schulz for his strong leadership in the past eight years. Thanks to Thomas and his team, FLSmidth is today a better and more focused company which holds a promising long-term growth potential. Vagn Ove Sørensen, Chair FLSmidth ■ Annual Report 2021 HighlightsManagement review 4 Vagn Ove Sørensen Chair which are expected to increase the demand for green solutions in the cement industry. Beyond managing our two businesses, which each pursue a strategy and cost structure most appropriate to their market environment, we are deeply committed to ensuring a smooth integration of thyssenkrupp’s Mining business into FLSmidth and on building an even stronger brand for the green future. In addition, we will focus on driving operational excellence to deliver Walking the talk Our value proposition to our customers and the global society is more relevant than ever before in our 140-year history. As a global society, we – governments, businesses, and privates – need to translate our pledges into actions in the coming years, if we are to succeed with the green transition. The mining and cement industries are right in the centre of this. We look forward to continued success and sustainable productivity together with all our employees, partners and customers in 2022. opportunity with our MissionZero programme. This year, we are reporting our eligibility for the has progressed on several areas during 2021 including diversity, safety and carbon intensity from our own operations. Minerals are driving the green transition During 2021 the climate agenda has been elevated to a new level, and rightfully so. The global society stands at a critical juncture in the above pre-industrial levels by the end of the century. Many governments and companies have increased their carbon emission reduction pledges and commitments. While a clear step in the right direction, even more decisive actions are required. This was also witnessed at COP26 at the end of 2021, where FLSmidth MissionZero programme. Acceleration of the green transition, whether being for electric vehicles or renewable energy, will drive greater demand for more sustainably mined minerals such as copper, gold, lithium, and other battery metals as well as green cement. The global cement industry is among the world's most carbon intensive industries accounting for 7-8% of global CO 2 emissions. Cement infrastructure needed in 2050 is yet not built. FLSmidth considers these challenges a great opportunity, and together with partners and our customers, we relentlessly work to help decarbonise these hard to abate industries by bringing new technologies and innovations to the global mining and cement industries. Exciting times ahead of us Going into 2022, the outlook for our two end- on the mining industry, where commodity prices are at high levels and mine sites are running at high production levels. Global economic development and the green transition will require the mining industry to scale up on investments to meet the long-term demand for minerals. In the short-term, the cement industry continues to face overcapacity and slow recovery. We see good opportunities in the mid- to long-term fuelled by large economic stimulus packages, Mikko Keto Group CEO half of 2021 returned to positive EBITA for successful in managing the global supply chain between suppliers and use localised sourcing, resulting in a relatively low impact from the capacity constraints in global transportation. In addition, the impact of increased raw materials input costs and freight costs has been largely mitigated through the close collaboration with our suppliers and customers. Ambitious sustainability performance Sustainability is an embedded part of our culture and business model. In 2021 our Science Based 2030 we aim to be carbon neutral in our own operations (Scope 1 and 2) and cut our Scope 3 downstream economic intensity by 56% versus 2019. We will do this by delivering MissionZero solutions that will reduce customer-associated CO 2 emissions. The new EU Taxonomy will drive more investments towards sustainable projects, and this presents a strong business I am honoured to have been given the opportunity to lead FLSmidth. Despite challenging market conditions, we leave 2021 with a positive sentiment. It is an exciting time to be part of FLSmidth, and as an organisation we have a busy year ahead of us. Mikko Keto, Group CEO HighlightsManagement review 5 FLSmidth Annual Report 2021 6 Management review Highlights FINANCIAL PERFORMANCE HIGHLIGHTS 2021 Order intake DKKm Revenue DKKm EBITA & EBITA margin DKKm - % Cash flow from operating activities DKKm 1,449 from DKKm 1,421 in 2020 GROUP 19,233 4% 17,581 7% 1,030 5.9% 34% Earnings per share DKK 6.9 from DKK 4.2 in 2020 Net working capital ratio 6.0% from 10.7% end of 2020 NIBD/EBITDA -0.6x from 1.6x end of 2020 Order intake DKKm Revenue DKKm EBITA & EBITA margin DKKm - % Revenue split by service & capital % MINING 13,281 4% 11,715 10% 1,049 9.0% 18% Order intake DKKm Revenue DKKm EBITA & EBITA margin DKKm - % Revenue split by service & capital % CEMENT 5,952 4% 5,866 1% (19) -0.3% 84% 18,524 19,233 2020 2021 16,441 17,581 2020 2021 771 1,030 2020 2021 12,811 13,281 2020 2021 10,620 11,715 2020 2021 888 1,049 2020 2021 59% 2020: 63% 41% 2020: 37% Service Capital 5,713 5,952 2020 2021 5,821 5,866 2020 2021 (118) (19) 2020 2021 54% 2020: 55% 46% 2020: 45% Service Capital FLSmidth Annual Report 2021 7 Management review Highlights SUSTAINABILITY PERFORMANCE HIGHLIGHTS 2021 Spend with SBT-committed suppliers % of total supplier spend Scope 1 & 2 GHG Emissions tCO 2 e (market-based) Scope 3 economic intensity (use of sold products) tCO 2 e/DKKm order intake Water withdrawal m 3 201,997 ▼ 2% deterioration Freshwater reduction target at 187.479 m 3 was challenging to achieve due to the increase of operational activity and the limited number of initiatives targeted on the reduction of water on sites. Suppliers assessed for sustainability No. 641 ▲ 64% improvement Easing of travel restrictions during 2021 in most areas re- lated to the pandemic allowed us to finally visit suppliers again – enabling completion of sustainability screenings. Combined with the increased focus on sustainability throughout FLSmidth, this led to a good result in 2021. 4.9 34,737 ▲ 16% improvement 10,979 ▼ 3% deterioration Our upstream Scope 3 SBT (Science Based Target) is to have 30% of our spend with SBT-committed suppliers by 2025. We tracked this data for the first time in 2021. We have started a process to onboard suppliers to collabo- rate on reducing greenhouse gas emissions. We met our 2021 target to improve our combined Scope 1 and Scope 2 CO 2 e emissions by 10% versus 2020. This improvement was mostly due to our continued renewable energy purchasing programme, which im- proved our Scope 2 emissions and offset a slight increase in our Scope 1 emissions. We introduced a new target in 2021 to reduce our eco- nomic intensity by 56% between 2019 and 2030. This tar- get measures GHG emissions from customers’ use of our products per DKKm order intake. We are in the early stages of implementing actions and expect to accelerate progress as we implement our MissionZero programme. baseline year Safety (TRIR) Total Recordable Incident Rate/million working hours Women managers % Quality (DIFOT) % 1.9 0.9 deterioration 14.3 1.2%-point improvement 85.1 ▼ 3.2% point deterioration Despite strong focus on mitigating actions, total number of incidents increased during the first half year, and we did not achieve the target of 10% improvement from 2020. We increased our efforts during H2 2021 to maintain and improve our best-in-class record. Our 2030 target is to have 25% of women managers, and due to our active recruitment and career development strategy, we increased our share of women managers in 2021. We have seen a slight decline in our ability to deliver to customers to original agreed time due to some chal- lenges in planning and logistic execution. 197,346 201,997 2020 2021 390 641 2020 2021 N/A 4.9 2020 2021 41,155 34,737 2020 2021 10,663 10,979 2019 2021 1.0 1.9 2020 2021 13.1 14.3 2020 2021 88.3 85.1 2020 2021 FLSmidth Annual Report 2021 8 Management review Highlights * 5 YEAR KEY FIGURES DKKm 2017 2018 2019 2020 2021 INCOME STATEMENT ORDERS EARNING RATIOS CASH FLOW BALANCE SHEET Use of alternative performance measures DKKm 2017 2018 2019 2020 2021 FINANCIAL RATIOS SHARE RATIOS SUSTAINABILITY KEY FIGURES Cement The short-term outlook for the cement industry remains impacted by overcapacity and slow recovery. Following a year of reshaping, we expect the Cement business to return to positive EBITA in 2022. Cement EBITA margin is expected to Mid-term recovery is expected in the cement industry driven by increased demand for sustainability solutions. Mining The outlook for the mining industry remains positive driven by global economic development and increased demand for minerals required for the green transition. For 2022, the Mining business revenue and EBITA is expected to grow. Mining EBITA margin is expected to be impacted by a higher includes around DKK 110m in integration costs until closing of the thyssenkrupp Mining business transaction. The transaction is expected to close in the second half of 2022. Group standalone and excludes the impact from the combination with thyssenkrupp’s Mining business. It includes around DKK 110m in integration costs until closing of the thyssenkrupp Mining guidance after the transaction closes. The transaction is expected to close in the second half of 2022. Guidance for 2022 is subject to uncertainty due to the pandemic, global supply chain situation and geopolitical turmoil. 17.5-19.012.0-13.0 5.5-6.0 6-7 %8.5-9.5% 1-2% 17.611.7 5.9 16-17.0 5.9 %9.0% -0.3% 5-6% Revenue (DKKbn)Revenue (DKKbn) Revenue (DKKbn) 2021 Realised 2021 Realised 2021 2021 Realised Guidance EBITA marginEBITA margin EBITA margin 2022 Guidance 1 2022 Guidance 1 2022 Guidance FINANCIAL GUIDANCE 2022 1) Separate guidance for Mining and Cement introduced in connection with the Annual Report 2021 FLSmidth ■ Annual Report 2021 HighlightsManagement review 9 FLSmidth ■ Annual Report 2021 10 BUSINESS In this section Management review Business We are a leading supplier of productivity and sustainability solutions to the global mining and cement industries. We enable our customers in mining and cement to move towards zero emissions by 2030. 1882 10,117 150 + 60 + 17.6bn Danish company founded in 1882 with 140 years of discovering potential Our more than 10,000 employees use their unique knowledge to meet our customers’ needs We serve customers in more than 150 countries across most continents A truly global company with local presence in more than 60 countries Group revenue of DKK 17.6bn in 2021 AT A GLANCE 11 FLSmidth Annual Report 2021 Management review Business FLSMIDTH IN THE WORLD North America Europe, North Africa & Russia South America Asia Sub-Saharan Africa, Middle East & South Asia 1 Australia 18%22% 11%21% 10%18% Share of revenue 2020: 19% Share of revenue 2020: 21% Share of revenue 2020: 9% Share of revenue 2020: 23% Share of revenue 2020: 9% Share of revenue 2020: 19% Share of employees 2020: 25% Share of employees 2020: 16% Share of employees 2020: 5% Share of employees 2020: 18% Share of employees 2020: 5% Share of employees 2020: 31% Reported revenue growth Reported revenue growth Reported revenue growth Reported revenue growth Reported revenue growth Reported revenue growth 2%12% 30% 4 % 20%2% 22%17% 5%20% 6%30% 1) As of 1 January 2021, the two regions, Sub-Saharan Africa and Middle East (SSAME) and Sub-Continental India (SCIndia), have been merged. FLSmidth ■ Annual Report 2021 12 Management review Business Capex trend in mining USDbn Source: Bloomberg, FLSmidth estimates Source: Bloomberg, FLSmidth estimates Global copper consumption Million tonnes 5 0 10 15 20 25 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 20 40 60 80 100 120 During 2021, copper prices hit an all-time high of more than USD 10,000 per tonne, driven by expectations of a post-pandemic recovery and increased demand for commodities to support global economic development and the green transition. Concerns about debt problems of Chinese property developers, along with pressure on the iron ore price during the second half of the year. Prices have though margins. Prices for most other minerals have stayed high throughout the year. The outlook for investments in mining remains positive. The sustainability agenda continues to gather steam with the large mining companies aligning their business models to the Paris Agreement. Miners are generating good cash low capex levels in recent years. In the fourth quarter, industry conditions remained largely stable compared to previous quarters. Some miners are increasingly replacing equipment as they catch up on certain maintenance that has been postponed during the pandemic. Activity in South America has been accelerated by the strong copper price and the quantity of enquiries has returned to pre-pandemic levels in Africa, Middle East and India. Iron ore has been a strong commodity driver for new projects in India, whereas copper and gold continued to dominate in Africa as well as in the Middle East. Activity in Asia (ex-China) in the beginning of the year, but has gradually recovered in the second half of the year indicating a slightly positive trend. In North America and Europe, we see increased market activity despite the fact that direct due to the pandemic. The surge in demand and subsequent bottlenecks in global supply chains also continue to cause challenges across markets and we are still seeing delays in some regions. In Australia, service demand is strong, but logistics remain a challenge as the pandemic continues to create uncertainty around the supply of labour due to hard border closures. The mining industry has remained largely resilient during the course of 2021 aided by high commodity prices and solid industry fundamentals. The global mining market is expected to grow over the coming years and the long-term outlook remains positive driven by global economic development and increased demand for minerals required the green transition. MINING MARKET FLSmidth ■ Annual Report 2021 13 Management review Business Capex trend in cement USDbn Global cement consumption Billion tonnes Source: Bloomberg, FLSmidth estimates Source: Bloomberg 0 3 6 9 12 15 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 0 1 2 3 4 5 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 There is growing demand for green solutions in the cement industry. While the short-term industry outlook remains unchanged with signicant overcapacity, we expect a mid-term recovery fuelled by large economic stimulus packages requiring green and carbon neutral infrastructure. During 2021, the cement industry started to recover with improved service activity, however travel restrictions in the second quarter, the increase in infection numbers towards the end of the year has put renewed strain on site visits due to preventative measurements taken by authorities and plant operators. At the same time, the global construction supply chain challenge has triggered higher costs, labour and materials shortages as well as delays across regions. In addition, energy costs are surging on global shortages of gas and coal. While this threatens to derail the emerging recovery for the cement industry, it also reinforces the need for greener solutions and alternative fuels. In Europe, increasing focus on emission regulations and carbon taxes highlights the risk of adding costs to non-sustainable production. We have a healthy pipeline for upgrade projects driven by ongoing conversion to alternative cement production with improved environmental footprint. However, the new virus variant Omicron quickly surged to dominance during the last months of the year and many customers started to delay plant visits, which complicated on-site technical services. Market activity in Africa, Middle East and India was hampered by lockdowns in the beginning of 2021. Activity stabilised towards the end of the year and the higher level of plant utilisation parts business in the fourth quarter. During the year, the successful vaccination programme and improvement in business sentiment started to remove some of the uncertainty that held back investments in North America. In the fourth quarter, demand in the region was strong with high project activity, and we have a solid pipeline America, high infection rates slowed the activity increasing interest rates are concurrently adding pressure on infrastructure investments. In Asia, China has been the main driver throughout 2021, whereas the rest of the region remained challenged by pandemic restrictions which tightened during the second half of the year. Cement producers in Australia and New Zealand continue to operate all their plants, and there are some signs of growth driven by proposed government infrastructure projects. Overall, we see increased demand for solutions that can decarbonise and debottleneck cement plants. Demand for new capacity remains subdued, and the pandemic situation casts added uncertainty over the speed of recovery in the cement industry. CEMENT MARKET FLSmidth ■ Annual Report 2021 14 Management review Business FLSmidth Annual Report 2021 15 Management review Business Our vision is to drive success through sustainable productivity enhancement in the global mining and cement industries. FLSmidths vision, strategy and business model remain unchanged. To successfully deliver on this, our core values competence, cooperation, and responsibility are essential to earn the trust and respect of our customers, business partners, suppliers, employees, shareholders and stake- holders in all the communities in which we live and operate. We are already well-positioned to deliver on our strategic vision. We aim to outgrow the market by helping our customers to increase their pro- duction, lower their operating costs and reduce their environmental footprint. One of our key strategic pillars to achieve this is sustainability through our MissionZero programme, which we launched in 2019. This is an integral part of our business strategy. Another of our key strategic pillars is digitalisation which serves as a key ena- bler for our sustainability agenda both inter- nally and towards our customers. With a local presence in more than 60 countries and customers in more than 150 countries, FLS- midth is truly a global company. Our geograph- ical footprint reflects our diverse customer base comprised by mining and cement companies, which invest in new capacity or in expanding, up- grading, maintaining and servicing existing pro- duction facilities. Our business model is anchored around a unique combination of services, products and projects. Our key strategic focus is to expand the share of services and standardised products rela- tive to the share of large projects, while simulta- neously de-risking the project portfolio. This fo- cus will help us obtain a more profitable business mix and a less cyclical business with a lower level of risk. While projects provide us with process expertise that is key to deliver productivity im- provements to our customers and provides ac- cess to a large installed base for our service and aftermarket business, we remain selective in tak- ing on large projects to ensure that terms and conditions support our profitability targets. We have several strategic focus areas with clear prioritisation of what we want to achieve to fur- ther strengthen our position as a leading sustain- able productivity provider. First and foremost, we continue to have an overarching focus on profita- ble order intake, cash and engagement across both our industries. STRATEGY AND BUSINESS MODEL FLSmidth Annual Report 2021 16 Management review Business Within our Mining business we are especially fo- cused on driving profitable growth and full flow- sheet leadership to ensure operational excel- lence. In our Cement business we are especially fo- cused on improving profitability, developing a winning portfolio, being the leading plant produc- tivity partner and leading supplier of sustainability solutions. Customers FLSmidth has vast experience in working with a broad range of customers around the world. Our customers range from global conglomerates to small-to-mid-sized regional players. The latter ac- count for a relatively large amount of our Capital sales, whereas the global conglomerates account for a considerable share of our service business. Given the nature of our businesses, being close to our customers is key. Combining local pres- ence with global support and expertise makes it possible to deliver premium solutions where our customers need them. Our large number of local sales and service offices ensures frequent cus- tomer interaction. Despite cyclical end-markets, we consistently prioritise maintaining and devel- oping a strong and competent sales force, ever aware that the strength of our customer relation- ships during any downturns will help define our success during upturn cycles. We constantly seek to minimise administrative functions and al- locate resources to sales and service. As a result, a large proportion of our employees has direct contact with customers, and our customers gen- erally recognise us for our high quality and relia- bility. While localising our service footprint, we con- tinue to pursue a strategy of consolidating our supply chain and project centres to ensure the leanest possible organisation and high speed of delivery. Sustainability FLSmidths relatively asset-light business model means that the environmental footprint from our own operations is very modest compared to that of our customers. A large cement producer has a carbon footprint about 2,000 times that of FLS- midth, and our annual water consumption equals roughly two weeks of water consumed by a cop- per mine that produces around 100,000 tonnes of copper per year. Therefore, our approach to sustainability is to take responsibility for our own environmental footprint while helping our cus- tomers reduce theirs, where we can have a much greater positive impact on emissions reduction via our MissionZero programme. Read more about MissionZero on page 19-21. Innovation and digitalisation Our efforts in innovation and digitalisation are im- portant enablers for our sustainability agenda. Greater scarcity of resources such as energy, wa- ter and raw materials leads to more complex and costly operations that challenges the perfor- mance of our mining and cement customers. This calls for innovation, digitalisation and high-end technical solutions, which is where FLSmidth has a leading position and a competitive edge. Our strong digital capabilities are founded on our ex- tensive experience in automating plants, which positions us as a market leader in analysing and FLSmidth Annual Report 2021 17 Management review Business understanding performance data. An increasing share of our products and solutions offered to the cement and mining industries is becoming ar- tificially intelligent and self-learning. Mining and cement have historically been conservative in- dustries, but the needs of our customers are changing more rapidly today. Their constant hunt for productivity, reduced environmental footprint and higher returns makes them more receptive to innovation and new ways of working, which is fuelling a growing interest in digitalisation. Digitalisation offers huge potential and has be- come a natural and integral part of our product portfolio, where the benefits to our customers are clear: increased productivity through optimi- sation, more reliable operations, increased up- time as well as proactive, predictive and increas- ingly prescriptive maintenance. Site connectivity to drive data-driven decision making is an example of how our digital efforts can enhance customer productivity. In 2018, the first customer site was connected to the FLS- midth Internet of Things (IoT) platform. During 2021 we reached the milestone of having more than 100 customer sites connected globally. These sites are sending more than 140,000,000 measurements daily, which is an increase of 33% compared to 2020. These unique data sets are processed to provide insights on availability, reli- ability and sustainable optimisation services to our customers using our various digital solutions. This includes real-time asset performance in- sights at anytime and anywhere to the plant and service personnel via the SiteConnect App. Due in part to the pandemic, our customers in both mining and cement have accelerated their adoption of many of our digitally enabled solu- tions. As a result, we can now provide online condition monitoring and optimisation solutions to most of our key assets and systems. A highlight in 2021 was the delivery of the digital LoadIQ solution to a customer in New Zealand, resulting in 30% improvement in process stability and increased mill utilisation and throughput by 17%, while at the same time optimising power consumption. Following this success, the cus- tomer has since requested a second LoadIQ sys- tem for installation on a larger mill. We now have 60 units installed at customer sites across the globe. While we already offer many flagship Mission- Zero solutions that provide increased productiv- ity while reducing environmental impact, we will not be successful in driving the green transition unless we relentlessly focus on developing more ground-breaking technologies. In 2021, we have launched several new innovations either on our own or through collaboration with partners and customers. Key milestones include the de- velopment of the MissionZero Mine (launched at MINExpo in September 2021) and the Future Ce- ment plant, which serve as our core R&D roadmaps for developing future technologies for the green transition. The pending acquisition of thyssenkrupps Mining business will also further complement our sustainability offerings to our customers in the mining industry. Read more about our innovations in Mining and Cement on page 22-25. People and engagement People are and have always been important for FLSmidth. To deliver our growth ambitions and to help lead the green transition within the mining and cement industries, we will continue to need talented and diverse people who share the FLS- midth values and ambitions. As we operate a global business with more than 100 nationalities, finding the right people, developing them and re- taining them is key to FLSmidths future success. Diversity, equality and inclusion are therefore im- portant elements in our continuous hunt for inno- vation and drive for operational excellence across all regions. The industries we operate in are challenged by the ability to attract enough high-skilled and high- performing staff. The pending thyssenkrupp Min- ing business acquisition will build an even stronger mining organisation by bringing the two together, as this acquisition will onboard more than 2,000 new skilled employees to FLSmidth. We continue to have a strong focus on our global employer branding, in-house talent development and on the well-being of our employees. In 2021, we made significant progress in personal and performance development for all employees, supported by succession planning and a dou- bling of training hours per employee. Around 25% of our open positions were filled internally during the 12 months. Monthly wellbeing and en- gagement surveys have been rolled out globally to obtain dynamic feedback. In addition, we made good progress in our efforts to ensure liv- ing wages and address gender pay inequality. Many parameters are considered as we endeav- our to keep diversity in balance in our organisa- tion. All managers and employees have a role in creating a diverse and inclusive organisation and contribute to various initiatives within our agenda. During 2021, 25% of all new hires were women, which is a higher share than the current gender split across the company (at the end of FLSmidth Annual Report 2021 18 Management review Business 2021, women accounted for 17% of total employ- ees). In 2020, we had to learn how to navigate our business during a pandemic. In 2021, we have leveraged these learnings and implemented hy- brid working arrangements globally. Employees have remained in focus and contributed with quality performance despite the pandemic. Standardisation Through value engineering and modularisation, we re-think and improve the designs of our prod- ucts to increase reliability and reduce cost and complexity without compromising on quality and functionality. Our standardisation programme has yielded sub- stantial results without reducing functionality for our customers and ensuring high speed of deliv- ery. We have, in recent years, standardised prod- ucts such as our vertical roller mills, coolers, burners, feeders and concentrators allowing for a higher degree of configuration and less customi- sation. We will continue standardising more prod- ucts. Reducing our procurement costs through standardisation represents a huge potential. Pro- duction costs account for about 75% of our over- all revenue, of which 70-80% relates to procure- ment from sub-contractors. Smarter product design enables us to significantly reduce our pro- curement costs, and we achieve other benefits such as reduced engineering hours, enhanced product reliability and simpler maintenance pro- cedures to the benefit of our customers and ourselves. Life cycle and full flowsheet approach To achieve a sustainable productivity improve- ment, companies need to adopt an end-to-end process and integrate the whole value chain. Forces must be activated simultaneously from multiple directions and across the organisation to create the kind of momentum that leads to sus- tainable change. Through a life cycle approach, we enable our customers to lower their total cost of ownership. Our ability to deliver productivity improvements is anchored in a full flowsheet of premium sustainable offerings in both mining and cement (see page 22 and 24), combined with strong process knowhow and a broad range of services. Over the years, we have successfully built a large service business focusing on spare and wear parts, upgrades, retrofits and maintenance. Our digitalisation efforts will further pave the way for growing our spare and wear parts business in the years to come, as customers increasingly buy solutions rather than single parts and equipment. Our customers benefit from the most compre- hensive product portfolio in the industry, allowing them to increase the productivity of their com- plete value chain. A full flowsheet facilitates digi- tal access to all key processes and equipment. To be able to address issues before equipment breaks down, we create powerful connections between physical and digital systems which lay the foundation for analytics-driven predictive maintenance. We can then digitalise the entire production chain to provide proactive condition monitoring and data collection, identifying dam- age or wear ahead of any failure. Cement for construction and globally we need to construct 230 billion m 2 of buildings. Already today, the global average cement consumption per capita is 521 kg. Source: The Global Cement Report Copper for electricity Copper is essential for distributing electricity and electrical components. In the next decade, electric vehicles are expected to more than double the need for copper to 250,000 tonnes per year. By 2030, smart home systems are forecasted to need 1.5 million tonnes per year, up from 38,000 tonnes in 2018. Source: International Copper Association, Australian Government DISER Minerals for electronics Copper, lithium, nickel, rare earth minerals, silver, cobalt and manganese are all needed for wind and solar energy, smartphones, computers, home appliances and electric vehicles. Extended solar and wind capacity also requires more lithium. Source: Bloomberg Minerals and Cement for wind turbines An average 3 MW turbine requires 4.7t copper, 335t steel, 3t aluminium, 2t rare earth minerals and 1,200t concrete plus other materials. Sources: IRENA (2019), Future of Wind, World Bank (2019), Climate Smart Mining 75% 8x 31% 10X of the global infrastructure needed in 2050 has not yet been built expected increase in demand for lithium driven by electric vehicles alone by 2030 copper expected to increase by Global installed wind power capacity is expected to grow around by 2030 by 2050 compared to 2018 Global economic development and the green transition increase the demand for minerals and cement. For this development to be truly green, we must reduce the environmental impact from the production of these materials. GREEN TRANSITION RELIES ON MINERALS AND CEMENT FLSmidth ■ Annual Report 2021 19 Management review Business Mining and cement operations have a signicant impact on the environment. MissionZero is our sustainability programme to enable zero emissions in mining and cement by 2030. With around 99% of our overall emissions derived from customers’ use of our sold products, MissionZero is our opportunity to have the greatest positive impact on emissions reduction. Over the last two years, we have been actively working on integrating MissionZero into our business activities. Technological innovation is at the core of this programme. Achieving transformative goals requires rethinking of organisational processes, reinventing business models and deepening customer relationships. We have made good progress in these areas, but we need to further Where we are on our journey To achieve our MissionZero ambition of delivering all the technologies needed for our customers to operate with zero emissions by 2030, we have started to develop R&D solution roadmaps, which help us assess the technology gaps that we need to close to achieve our goal, and subsequently develop the pipeline of solutions needed for both the mining and cement industries. During 2021, we introduced the MissionZero Mine and the Green Cement Plant, which outlines how we bring the MissionZero ambition to life from a technology point of view between now and 2030. We are excited to already have introduced some of the technologies from these roadmaps to our customers this year, such as the calcined clay solution, which enables a reduction of CO 2 emissions from cement production of up to 40%. Achieving MissionZero also requires us to rethink our approach to partnerships in order to fast-track the development and deployment of breakthrough solutions at the same time as bridging our competence gap. Examples include the Carbon capture and storage (CCS) collaboration with Carbon8 Systems and the the University of Newcastle, Australia. Integrating and measuring progress On the product and service side, we are integrating sustainability metrics as a standardised element into our numerous product and service lines. This process enables a broader, sustainability-based dialogue with our customers, who are increasingly setting ambitious targets. We have seen tremendous potential in applying our digital solutions to a sustainability context, especially in the areas of performance management and real-time data collection. Our pilot projects have demonstrated how digital solutions can bring value to customers that are aiming to decarbonise activities. ~ 99% Of our overall emissions are derived from customers’ use of our sold products (Scope 3) PROGRESS ON MISSIONZERO FLSmidth ■ Annual Report 2021 20 HOW OUR SCIENCE BASED TARGETS HELP US TRACK OUR MISSIONZERO PROGRESS The Science Based Targets (SBTs) have been adopted as a framework to guide and measure our progress in delivering MissionZero. At an organisational level, we have introduced a series of KPIs at functional, commercial and management levels to further integrate MissionZero across our organisation. In April 2021, our Science Based Targets (SBTs) were validated by the Science Based Targets Initiative. Our targets address the emissions from our supply chain (upstream – scope 3), our own operations (scope 1 + 2) and at our customers (downstream – scope 3). By setting these targets and implementing corresponding actions we commit to reduce global greenhouse gas emissions in line with the Paris Agreement to a temperature rise of maximum 1.5 C versus pre-industrial levels. To meet our supplier engagement target, we have also started a process to onboard suppliers to collaborate to reduce greenhouse gas emissions in our supply chain. emissions from our own operations (Scope 1 and 2) and met our target for 2021. However, we carbon neutrality target. Our economic intensity target indicates whether we are successful in decoupling the growth of our business from the growth in emissions resulting from the use of our products by our customers. It is an important indicator to demonstrate whether MissionZero is successful. By 2030, we aim to reduce our economic intensity by 56% vs a 2019 baseline. Following the approval of this target in 2021, we are now in the early days of implementing actions to achieve this target. While our 2021 economic intensity was 3% higher than our 2019 baseline, we expect to see progress as we develop and expand our MissionZero solutions. A key focus in 2022 will be on the further integration of sustainability parameters at a product level, as well as on the collaboration with suppliers, customers and other relevant stakeholders to improve our footprint across the value chain. The SBTs will also be embedded in our incentive structure, including the incentive scheme for our Group Executive Management. EU TAXONOMY Eligibility 2021 The EU Taxonomy framework is part of the EU Green Deal and serves as a core enabler to deliver on EU’s ambitious climate goals towards 2030. The EU Taxonomy is of environmentally sustainable economic activities. The goal is to redirect investments towards sustainable projects. opportunity for us to support our customers in reducing their environmental footprint, while demonstrating the environmental performance of our MissionZero portfolio. Part of the taxonomy is a mandatory reporting requirement to identify our business activities “in scope”, also known as “eligible” activities, across our revenue, CAPEX and OPEX. Eligibility is not a measure of our sustainability Taxonomy framework, which remains work in progress. The framework contains six planned environmental goals. Only two of these goals are in scope for our initial assessment. The reducing greenhouse gas emissions or adapting to climate change. Consequently, a yet in scope for assessment. Based on the current EU Taxonomy revenue associated with our MissionZero products and digital portfolio supporting a substantial reduction in greenhouse gas emissions for our customers. Our eligible activities supporting these products. We expect the percentage of our eligible when the four remaining environmental goals and the full EU Taxonomy framework have been implemented, and as our MissionZero solutions develop and expand. 16.2% 17.5% 23.5% of revenue of OPEX of CAPEX Read about our progress on sustainability FLSmidth ■ Annual Report 2021 21 Management review Business Low Impact Grinding Circuit reduces overall plant water demand and can deliver power savings of 20-30% vs traditional SAG mill circuits. High-Pressure Grinding Rolls (HPGRs) or Vertical Roller Mills (VRM) technology can minimise environmental impact by replacing the traditional SAG and ball mills and deliver a 100% water-free comminution circuit. In-Pit Crushing and Conveying Loading and hauling with diesel-fuelled mobile plants can be the single biggest source of greenhouse gas emissions from the mine. Our solutions allow crushing ore in the pit and transportation on belt conveyors powered with electric drives. Improved recovery of coarse valuable particles energy input for grinding can be reduced by up technology delivers improved recovery at coarse grind sizes. Water and Tailings Management waste, miners can eliminate the need for wet as the AFP2525, that incorporate high-pressure and low-cycle times, handle entire plant throughput. Operators can expect an average of 90% availability and up to 95% recovery of process water. Digital Optimisation Digital technology is key to meeting the industry's goals of reducing environmental impact and improving productivity. For instance, FLSmidth’s SiteConnect™ app allows our customers to monitor and provide real-time insights about the operation and performance of the plant assets from their mobile phones. Demand for minerals is expected to increase signicantly. It is essential that governments and industries ensure that minerals supply is reliable and sustainable, as the urgency to deal with climate change accelerates. See our MissionZero mine in action MissionZeroMine.com INNOVATIONS IN MINING THE MISSIONZERO MINE FLSmidth ■ Annual Report 2021 22 Management review Business HIGH PRESSURE GRINDING ROLLS AND VERTICAL ROLLER MILLS High Pressure Grinding Rolls (HPGRs) and Vertical Roller Mills (VRM) have proven to be They minimise the environmental impact horizontal grinding mills that produce a lot of random actions inside mills causing a lot of wasted energy. Both are dry grinding machines. LOADIQ – OPTIMAL MILL LOADING WITH SMART SENSOR TECHNOLOGY Comminution (crushing, milling and grinding) accounts for over 30% of a mine’s total energy consumption. Via smart sensor technology and machine learning, the digital solution LoadIQ can determine the optimum mill load and thereby increase throughput by 3-6%. This can help mines reduce power consumption, extend the life of wear parts and increase operational stability. REFLUX™ FLOTATION CELL Flotation systems consumes a high amount of of the REFLUX™ Flotation Cell (RFC™), a ground breaking technology that reduces plant footprint as well as water, air and energy requirements. The RFC™ reduces CAPEX by 35% and with no direct power input to the RFC™, this can help miners use up to 60% less energy in their also reduces the amount of water used in the recovery process. AFP2525 AUTOMATIC FILTER PRESS As ore grades decline, more water is needed to process more material just to keep up with production rates. This creates more water use and tailings to manage and a greater environmental impact. In a typical mine installation will recover enough process water to The AFP2525 Automatic Filter Press allow water, as it achieves 93% availability and up to 95% recovery of process water. increase in throughput towards a zero water waste comminution circuit less energy use in a otation circuit recovery of process water 3-6% 100% 60% 95% INNOVATIONS IN MINING FLSmidth ■ Annual Report 2021 23 Management review Business Clinker substitution – FLSmidth Clay Calcination System Most of the CO 2 emissions coming from the cement processes occurs during the limestone calcination. With the new FLSmidth Clay Calciner System, cement producers can reduce emissions from the calcination process by up to 40%. Unleashing Alternative Fuels – The HOTDISC As the cement industry transitions away from carbon dioxide-intensive fuels such as coal, the introduction of waste-to-energy solutions are becoming increasingly attractive, both to handle a wide range of alternative fuels MissionZero programme. 2 reduction services No stone is left unturned in the pursuit of MissionZero. The most recent initiative is a new 6-month sustainability service package that optimises the mill operation. This focuses on reducing power consumption, increasing the availability factor and optimising mill capacity. Basically, a sustainability overhaul with the purpose of minimising the environmental footprint of the OK Mill. Enabling Carbon Capture – Joint-innovation with Carbon8 Systems Carbon capture technology is essential in reaching our MissionZero goals of decarbonising cement production. Through new partnerships, we give customers access to solutions tailored to the cement industry. The proven and readily available Accelerated Carbonation Technology (ACT) enables the in products for the construction industry, while The production of cement accounts for 7-8% of global CO 2 emissions and demand for cement is expected to increase in line with increasing industrialisation. With MissionZero, we have made the promise to develop all the solutions needed to achieve zero emissions in the cement industry by 2030. INNOVATIONS IN CEMENT THE GREEN CEMENT PLANT FLSmidth ■ Annual Report 2021 24 Management review Business CARBON CAPTURE The development of new carbon capture solutions is progressing rapidly. Through new industry partnerships, we provide customer sustainability ambitions for the industry. The 2021 launch of Carbon8 Systems to cement customers is the result of such a partnership. The proven and readily decarbonise. In 2021 we also announced a partnership with Chart Industries, which has developed a promising pilot phase cryogenic carbon capture technology. ALTERNATIVE WASTE TO ENERGY SOLUTION As the cement industry transitions away from carbon dioxide intensive fuels such as coal, the introduction of waste to energy solutions are becoming increasingly attractive environmentally and waste management. With its ability to handle a wide range of alternative fuels the With a redesign it allows cement producers operating separate line calciners to install the HOTDISC beneath the calciner. Donghae and Yeongwol plants in Korea with results surpassing expectations. The guarantee of 85% waste fuel replacement in the calciner with solid recovered fuel was exceeded at both sites’ commissioning. CLAY CALCINATION SYSTEM Most of the CO 2 emissions coming from the cement processes occurs during the limestone calcination. Clay is a widely available, naturally occurring mineral, which can be activated into a supplementary cementitious material and can replace 30% of calcined limestone. With the new FLSmidth Clay Calciner System, cement producers can reduce emissions from the calcination process by up to 40% colour standards all while reducing operating costs. calcination installation. replacement of calcinated limestone minimum waste fuel replacement 30% 85% INNOVATIONS IN CEMENT FLSmidth ■ Annual Report 2021 25 Management review Business FINANCIAL PERFORMANCE In this section 26 FLSmidth Annual Report 2021 Management review Financial Performance FLSmidth Annual Report 2021 27 Management review Financial Performance GROWTH Group order intake increased 6% organically, driven by Mining. Both Mining and Cement order intake included a large project order. Ser- vice orders increased 20% driven by positive sentiment in the mining industry. Group revenue increased 19% organically, attributable to both Mining and Cement as well as both capital and service business. Order intake Order intake in Q4 2021 increased by 8% to DKK 5,084m, which is the highest fourth quarter level in several years. Currency effects had a 2% posi- tive impact on order intake in the quarter. Service order intake increased by 20% y-o-y, whereas capital order intake decreased by 3% y- o-y. Service represented 54% of total order in- take, which is an increase compared to Q4 2020 where service represented 49% of total order in- take. The growth in order intake was entirely driven by Mining, which increased by 35% organically and represented 71% of total order intake. Q4 2021 in- cludes a large Mining order for a gold project val- ued at around DKK 350m. Cement order intake decreased 31% organically compared to Q4 2020, which was an especially strong compari- son quarter that included a large order valued at around DKK 750m. Q4 2021 included a large greenfield project order valued at around DKK 200m. Order backlog and maturity The order backlog was largely unchanged com- pared to prior quarter (Q3 2021: DKK 16,548m). 69% of the backlog is expected to be converted to revenue in 2022, mainly due to scheduled de- liveries of large capital projects in Mining. 21% of the backlog is expected to be converted into rev- enue in 2023, and 10% in 2024 and beyond. Revenue Revenue increased by 21%, attributable to both Mining and Cement. Currency effects had a 2% positive impact on revenue in the quarter. Reve- nue growth was mainly driven by a 39% increase in capital revenue, reflecting a few large mining capital orders which started to convert into reve- nue. Revenue from capital orders represented 46% of total revenue compared to 40% in Q4 2020. A better-than-expected execution was achieved in the fourth quarter, thanks to our previous ef- forts to establish strategic partnerships with our suppliers. This has allowed us to largely mitigate the global supply chain pressure as we have had the flexibility to switch between suppliers and use localised sourcing, resulting in a relatively low impact from the capacity constraints in global transportation. QUARTERLY FINANCIAL PERFORMANCE Order intake DKKm 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 Q4 Q1 2020 Q2 Q3 Q4 Q1 2021 Q2 Q3 Q4 Mining Cement Growth in order intake in Q4 2021 (vs. Q4 2020) Mining Cement FLSmidth Group Total growth 38% -29% 8% Growth in revenue in Q4 2021 (vs. Q4 2020) Mining Cement FLSmidth Group Total growth 21% 22% 21% Group – continued activities (DKKm) Q4 2021 Q4 2020 Change 2021 2020 Change Order intake (gross) 5,084 4,695 8% 19,233 18,524 4% Order backlog 16,592 14,874 12% 16,592 14,874 12% Revenue 5,135 4,236 21% 17,581 16,441 7% Gross profit 1,151 1,022 13% 4,180 3,865 8% SG&A cost (714) (685) 4% (2,779) (2,731) 2% EBITA 338 235 44% 1,030 771 34% EBIT 239 145 65% 668 428 56% FLSmidth Annual Report 2021 28 Management review Financial Performance PROFIT Gross profit increased as a result of the higher level of revenue. Gross margin declined due to a higher share of capital revenue. Group EBITA increased by 44% compared to Q4 2020, and the corresponding EBITA margin in- creased to 6.6% from 5.5%. Gross profit and margin Gross profit increased by 13%, as a result of the higher revenue. Gross margin, however, declined to 22.4% primarily due to the increased share of capital revenue. In Q4 2021, total research and development costs (R&D) represented 1.6% of revenue (Q4 2020: 2.7%). R&D costs in Q4 was related to sev- eral projects, including new and improved sus- tainable and digital cement and mining technolo- gies as well as a range of new mining products and upgrades to improve productivity and safety. In addition, project-financed developments are taking place in cooperation with customers. Research & development costs (DKKm) Q4 2021 Q4 2020 SG&A costs Sales, general and administrative costs (SG&A) and other operating items increased by 4% y-o-y. As the increase in revenue was relatively higher, the SG&A ratio decreased 2.3%-points to 13.9%. Sales cost and administrative cost increased compared to Q4 2020. The increase in adminis- trative cost mainly related to the pending acquisi- tion of thyssenkrupps Mining business at DKK 37m for the quarter. Other operating items were positively impacted by gains on a sale of a build- ing in Germany. EBITA and margin EBITA increased by 44% attributable to the in- creased gross profit. Impact from increased special non-recurring expenses was offset by a lower level of depreciations for the quarter. The EBITA margin increased to 6.6%, the highest quarterly EBITA margin since the beginning of the pandemic. Cement continued the positive development from Q3 2021 with a positive EBITA in Q4 2021. Adjusted for the costs related to the acquisition of thyssenkrupps Mining business the EBITA margin was 7.3%. Amortisation of intangible assets amounted to DKK 99m (Q4 2020: DKK 90m). The effect of purchase price allocations amounted to DKK 23m (Q4 2020: DKK 24m) and other amortisation to DKK 76m (Q4 2020: DKK 66m). Earnings before interest and tax (EBIT) increased 65% to DKK 239m. Financial items Net financial items amounted to DKK -2m (Q4 2020: DKK 6m), all of which was explained by foreign exchange and fair value adjustments. Net interest was zero for the quarter (Q4 2020: DKK -12m). Tax Tax in Q4 2021 totalled DKK -77m (Q4 2020: DKK -65m), corresponding to an effective tax rate of 32.5% (Q4 2020: 43.6%). Tax in Q4 2021 was positively affected by an adjustment to prior year. The effective tax in Q4 2020 was adversely im- pacted by impairments to deferred tax assets in Denmark. Profit for the period As a result of the increase in EBIT, profit for the period increased by 106% to DKK 161m (Q4 2020: DKK 78m). Discontinued activities had next to no impact on profit and loss in Q4 2021. Backlog DKKm Revenue & EBITA margin DKKm EBITA% EBITA DKKm 0 3,000 6,000 9,000 12,000 15,000 18,000 Q4 Q1 2020 Q2 Q3 Q4 Q1 2021 Q2 Q3 Q4 Mining Cement 0% 2% 4% 6% 8% 10% 12% 0 1,500 3,000 4,500 6,000 7,500 9,000 Q4 Q1 2020 Q2 Q3 Q4 Q1 2021 Q2 Q3 Q4 Service Capital EBITA margin (100) 0 100 200 300 400 500 600 Q4 Q1 2020 Q2 Q3 Q4 Q1 2021 Q2 Q3 Q4 Mining Cement FLSmidth Annual Report 2021 29 Management review Financial Performance CAPITAL Net working capital decreased to DKK 1,058m and the net working capital ratio declined to 6.0%. Strong cash flow from operations reached DKK 849m, driven by an increase in EBITDA and a positive contribution from net working capi- tal. Net working capital Net working capital decreased to DKK 1,058m in Q4 2021, which is the lowest level in several years. This reduction was a result of an increase in prepayments from customers and a reduction in net work in progress. The corresponding net working capital ratio declined from 10.4% of reve- nue in Q3 2021 to 6.0% of revenue in Q4 2021. Driven by a higher activity level, the utilisation of supply chain financing increased in line with pre- vious quarters to DKK 490m (see note 3.6). Cash flow from operations Cash flow from operations (CFFO) in Q4 2021 reached DKK 849m, driven by an increase in EBITDA and a positive contribution from net working capital. Discontinued activities impacted CFFO by DKK -18m in Q4 2021 (Q4 2020: DKK -32m) due to the timing difference between cash paid and cash received related to net working capital and provi- sion balances (see note 2.11). Cash flow effect from provisions was DKK 30m in Q4 2021 (Q4 2020: DKK 66m). The change re- lated to recognition of additional uncertainties in the execution of the project portfolio. The impact on provisions from discontinued activities was DKK -17m in Q4. Cash flow from investments Cash flow from investing activities amounted to DKK -97m (Q4 2020: DKK -97m), which included disposals of property, plant and equipment of DKK 28m. Free cash flow Free cash flow increased DKK 752m in the quar- ter (Q4 2020: DKK 232m) as a result of the im- proved net working capital. Net interest-bearing debt Due to the strong free cash flow, net interest- bearing debt (NIBD) improved further from DKK 16m at the end of Q3 2021 to DKK 889m at the end of Q4 2021. Financial gearing was -0.6x, which is well below our internal long-term capital structure target to stay below two times NIBD to EBITDA. Financial position By the end of 2021, FLSmidth had DKK 6.8bn of available committed credit facilities of which DKK 6.1bn was undrawn. The committed credit facili- ties have a weighted average time to maturity of 4.3 years. DKK 1.6bn of credit facilities will mature in 2023 and the majority, DKK 5.0bn, will mature in 2027. The remaining DKK 0.2bn matures in later years. In addition, FLSmidth has a credit facility commit- ment specifically for the purpose of funding the acquisition of thyssenkrupps Mining business, in combination with the proceeds from the com- pleted issue of new shares. Equity ratio Equity at the end of Q4 2021 increased to DKK 10,368m (end of Q3 2021: DKK 9,983m), driven by the increase in profit and currency adjust- ments regarding translation of entities. The pri- mary contributor to the positive translation effect was USD, CNY and AUD. The equity ratio was 45.0% (end of Q3 2021: 45.6%), well above the long-term capital structure target of minimum 30%. Group Executive Management In November 2021, it was announced that the Mining Industry President, Mikko Keto, would succeed Thomas Schulz as FLSmidths Group CEO effective 1 January 2022. In response to the growing size of the Mining business that will re- sult from the thyssenkrupp Mining integration, the Mining President position has been merged with the Group CEO role. Cash flow DKKm Net interest-bearing debt DKKm Net working capital DKKm NWC% (400) (200) 0 200 400 600 800 1,000 Q4 Q1 2020 Q2 Q3 Q4 Q1 2021 Q2 Q3 Q4 Cash flow from operating activities (3,000) (2,500) (2,000) (1,500) (1,000) (500) 0 500 1,000 Q4 Q1 2020 Q2 Q3 Q4 Q1 2021 Q2 Q3 Q4 Net interest bearing debt (NIBD) 0.0% 3.0% 6.0% 9.0% 12.0% 15.0% 18.0% 0 1,000 2,000 3,000 Q4 Q1 2020 Q2 Q3 Q4 Q1 2021 Q2 Q3 Q4 Net working capital Net working capital ratio, end FLSmidth Annual Report 2021 30 Management review Financial Performance GROWTH Organic order intake exceeded prior year by 5%, with growth in both Mining and Cement. Despite challenging market conditions, we have delivered a solid perfor- mance in 2021 with revenue growth of 7%. Order intake Order intake grew 5% organically in 2021, as a result of an easing pandemic impact and im- proved site access compared to 2020. Currency effects had a 1% negative impact on order intake in the year. Mining and Cement contributed equally to the or- der intake growth, with service being the driving factor. Service order intake increased by 14%, whereas capital orders decreased by 7%. Service accounted for 58% of the order intake. Mining order intake increased by 4% in 2021, driven by a 12% increase in service order intake, partly offset by a 6% decrease in capital order in- take. This year included four large Mining capital orders with a combined value of around DKK 950m, whereas the comparison period included three large orders with a combined value of around DKK 2.4bn. Cement order intake increased 4%, driven by an 18% increase in service order intake, partly offset by a 10% decrease in capital order intake. Growth in order intake in 2021 (vs. 2020) Mining Cement FLSmidth Group Total growth 4% 4% 4% Order backlog and maturity In 2021, the order backlog increased by 12%, comprising a 17% increase in Mining and a 4% in- crease in Cement. The book-to-bill was 109%, supported by large orders with maturity in subse- quent years. Revenue 2021 has seen challenging market conditions due to the pandemic and the global supply chain crisis. Handling this has however become an in- tegrated part of how we do business. By leverag- ing our flexible supply chain coupled with easing pandemic restrictions during the second half of 2021, full year 2021 organic revenue increased by 8%. The increase was driven mostly by Min- ing. Currency effects had a 1% negative impact on revenue in the year. Revenue from capital orders increased 14%, pri- marily driven by Mining capital revenue which in- creased 21%. Service revenue increased by 2%, reflecting the challenging market conditions especially in the beginning of 2021 where re- stricted access to customer sites and lockdowns challenged order execution. Service revenue ac- counted for 57% of total revenue, compared to 60% in 2020. Growth in revenue in 2021 (vs. 2020) Mining Cement FLSmidth Group Total growth 10% 1% 7% ANNUAL FINANCIAL PERFORMANCE Mining and Cement revenue DKKm Order intake and book-to-bill DKKm % Order intake by commodity % Backlog maturity DKKm 0 5,000 10,000 15,000 20,000 25,000 2017 2018 2019 2020 2021 Mining Cement 0% 20% 40% 60% 80% 100% 120% 0 5,000 10,000 15,000 20,000 25,000 2017 2018 2019 2020 2021 Order intake Book-to-bill 31% 23% 13% 7% 10% 1% 15% Cement Copper Gold Coal Iron ore Fertilizer Other 9,519 11,449 4,313 3,484 1,042 1,659 0 3,000 6,000 9,000 12,000 15,000 18,000 2020 2021 Later than next year +1 Within next year +1 Within next year FLSmidth Annual Report 2021 31 Management review Financial Performance PROFIT Gross profit increased by 8% and EBITA increased by 34% as a result of higher revenue and operating leverage. The EBITA margin im- proved to 5.9%, with improve- ments in both Mining and Cement. Gross profit and margin Gross profit increased by 8% in 2021, due to the increase in revenue. During the year, we have successfully managed the increased pressure on raw materials input costs and freight costs through close collaboration with our suppliers and customers. Gross margin increased 0.3%- points to 23.8%. The positive development was in spite of the low gross margin in Q4 and the higher full year share of capital revenue that has a lower profitability. Research and development costs included in production cost were largely unchanged. The R&D costs related to several innovations, includ- ing new sustainable cement technologies, tail- ings management, digital solutions, and various equipment across the mining value chain. Research & development costs (DKKm) 2021 2020 SG&A costs Sales, general and administrative costs and other operating items increased by 2% in 2021. The small increase in SG&A was due to positive im- pact from our business improvement programme in 2020, partly offset by an increase in admin- istration cost due to the pending acquisition of thyssenkrupps Mining business of DKK 107m. The corresponding SG&A ratio decreased by 0.8%-points to 15.8%. Cement reshaping In addition to the previously implemented busi- ness improvement programme, we took addi- tional steps during the year to simplify our Ce- ment business. EBITA and margin EBITA increased by 34% as a result of the com- bined effect from the increased gross profit, lim- ited increase in SG&A costs as well as increased special non-recurring items offset by reduced de- preciation. The corresponding EBITA margin in- creased to 5.9% from 4.7%. Adjusted for the costs related to the acquisition of thyssenkrupps Mining business the EBITA margin was 6.5%. Cement was slightly loss-making for the full year, whereas profitability in Mining was solid consid- ering the global market conditions throughout 2021. In the second half of 2021, Cement re- turned to positive EBITA for the first time since early 2020, driven by higher revenue, lower costs related to the reshaping of Cement as well as improvements from already executed reshap- ing activities. Financial items Net financial items amounted to a cost of DKK -81m (2020: DKK -47m), of which net interest cost including interest from leasing amounted to DKK -60m (2020: DKK -59m) and foreign exchange and fair value adjustments accounted for the remaining cost. Tax The effective tax rate for the year was 36.3%, a decrease of 4.4%-points compared to prior year. The effective tax rate in 2020 was negatively af- fected by an adjustment to prior years. Reduced tax credits on withholding taxes and an increase in the profit before tax derived from countries with higher base corporate tax rate as well as non-deductible tk transaction costs causes the effective tax rate to be relatively high. Profit for the year Profit for the year increased 74% to DKK 357m as a result of the solid revenue performance and EBITA margin. Loss from discontinued activities was reduced by 19% to DKK -17m. The cost in discontinued activi- ties relate to wind-down legacy projects in our non-mining bulk material handling business. The projects were from a revenue perspective com- pleted at year-end 2018. Subsequent handling of claims and collection of receivables is ongoing (refer to note 2.11). Earnings per share As a result of the higher profit, earnings per share increased from DKK 4.2 per share in 2020 to DKK 6.9 in 2021. Employees The number of employees decreased by 522 to 10,117 at the end of 2021. The main reduction was in Q1 2021 where the number of employees were reduced by 450 due to a phase-out of a Cement operation and maintenance contract. Return on capital employed Return on capital employed (ROCE) increased to 7.2% (2020: 5.1%) as a result of the higher EBITA and reduced net working capital for the year. Gross profit and Gross margin DKKm % SG&A cost and SG&A ratio DKKm % EBITA by Mining and Cement DKKm 20% 22% 24% 26% 28% 3,000 3,500 4,000 4,500 5,000 2017 2018 2019 2020 2021 Gross profit Gross margin 12% 14% 16% 18% 20% 1,500 2,000 2,500 3,000 3,500 2017 2018 2019 2020 2021 SG&A cost SG&A ratio (500) 0 500 1,000 1,500 2,000 2017 2018 2019 2020 2021 Mining Cement FLSmidth Annual Report 2021 32 Management review Financial Performance CAPITAL A strong cash focus led to a signifi- cant reduction in net working capi- tal and net debt. As a result of the completed issue of new shares, fi- nancial gearing decreased to -0.6x from 1.6x in 2020. Balance sheet Total assets increased by DKK 2.6bn. Mainly due to the issue of shares our cash balances had in- creased by DKK 1.0bn to DKK 1.9bn as of 31 De- cember 2021. High prepayments to subcontrac- tors used for new projects as well as trade receivables increase from high activity level in Q4 2021 also led to the increase in current as- sets. Assets and liabilities held for sale at the end of 2020 have been sold in the beginning of 2021. Capital employed Average capital employed decreased to DKK 14,384m (2020: DKK 15,195m) as a result of the decrease in working capital. At the end of 2021, capital employed amounted to DKK 14,248m, consisting primarily of intangible assets of DKK 10,882m, which is mostly goodwill as well as patents and rights and customer rela- tions. Property, plant and equipment including lease assets were largely unchanged and net working capital declined to DKK 1,058m by the end of 2021. Net working capital Net working capital decreased by DKK 694m at the end of 2021 to DKK 1,058m. Cash focus in general contributed to the lower level of net working capital. The reduction at year end re- lated to prepayments from customers which have increased due to higher activity and from prepayments on new projects. Increased activity also led to higher trade receivables that were partly offset by net work in progress liabilities. Currency effect on net working capital was DKK 14m. Supply chain financing Utilisation of supply chain financing has in- creased during 2021, driven by a higher level of activity. Consequently, the supply chain financing programme amounted to DKK 490m at the end of 2021 (2020: DKK 273m). Net interest-bearing debt As a result of the completed issue of new shares in Q3 2021, raising proceeds of DKK 1,4bn, net in- terest-bearing debt turned to net asset. At the end of 2021 net interest-bearing debt has further improved to a net asset of DKK 889m due to the strong free cash flow. Excluding the effect from the issue of shares NIBD was improved by DKK 1.3bn for the year, from DKK -1,808m at 31 De- cember 2020 to DKK -545m. Financial gearing (NIBD/EBITDA) was -0.6x (end of 2020: 1.6x). Compared to last year, excluding the effect from the issue of shares the financial gearing improved to 0.4x. Equity Equity increased by DKK 2.2bn mainly related to the issue of new shares and the improved profit for the year. Currency adjustments regarding translation of foreign entities added to the equity as well. The equity ratio was 45.0% (2020: 39.7%), well above the long-term capital structure target of minimum 30%. Adjusted for the issue of new shares, the equity ratio was 38.8%. Treasury shares The holding of treasury shares was 924,568 shares at the end of 2021 (2020: 1,097,718 shares), representing 1.6% of the total share capi- tal (2020: 2.1%). Adjusted for the issue of new shares treasury shares represented 1.8% of the total share capital. Treasury shares are used to hedge our share-based incentive programmes. Dividend The Board of Directors will propose at the Annual General Meeting that a dividend of DKK 3 per share corresponding to a dividend yield of 1.2% and a pay-out ratio of 48%, will be distributed for 2021. The total dividend proposed amounts to DKK 173m. Return on capital employed DKKm % Net working capital DKKm % Net interest-bearing debt DKKm Equity ratio and target % 0% 4% 8% 12% 16% 0 5,000 10,000 15,000 20,000 2017 2018 2019 2020 2021 Capital employed, average ROCE 0% 3% 6% 9% 12% 15% 18% 0 500 1,000 1,500 2,000 2,500 3,000 2017 2018 2019 2020 2021 Net working capital NWC as % of revenue (1,000) 0 1,000 2,000 3,000 4,000 5,000 2017 2018 2019 2020 2021 Net interest-bearing debt 0% 10% 20% 30% 40% 50% 2017 2018 2019 2020 2021 Equity ratio Target FLSmidth Annual Report 2021 33 Management review Financial Performance Cash flow from operating activities Cash flow from operating activities (CFFO) was largely unchanged compared to 2020. Cash in- flow from the higher adjusted EBITDA and the improved net working capital was spent on tax payments leaving the CFFO largely unchanged compared to last year. CFFO was negatively im- pacted by discontinued activities of DKK -188m primarily relating to upfront payment of an unsub- stantiated claim, see note 2.11. Cash flow from investing activities Cash flow from investing activities (CFFI) amounted to DKK -273m in 2021 (2020: DKK -376m). Acquisition and disposal of enterprises and activities had nearly no impact in 2021 con- trary to the past four years with the acquisition of Sandvik Mining Systems, IMP Automation Group and Knowledge-Scape as well as divestments in the Cement business. Free cash flow Free cash flow increased to DKK 1,176m (2020: DKK 1,045m) as a result of the slightly higher cash flow from operating activities and the slightly lower level of investments. Cash flow from financing activities Cash flow from financing activities was DKK -276m (2020: DKK -956m), a result of significant repayment of debt and payment of dividend pri- marily offset by the cash inflow from issue of new shares of DKK 1.4bn. Cash position As a consequence of the issue of new shares cash and cash equivalents increased by DKK 1.0bn to DKK 1.9bn. Restricted cash Cash and cash equivalents included cash with currency restrictions amounting to DKK 868m (2020: DKK 781m). The increase in restricted cash compared to 2020 related mainly to India and South Africa. The cash and cash equivalents with currency restrictions were primarily related to bank deposits located in countries with cur- rency restrictions. The deposits are part of local daily cash management in countries where we have operating activities. Acquisitions On 29 July, FLSmidth and thyssenkrupp Indus- trial Solutions AG reached an agreement that FLSmidth will acquire thyssenkrupps Mining business (tk Mining). Closing of the transaction is expected in H2 2022 and is subject to customary approvals from relevant authorities. On 6 September, it was announced that thyssenkrupps mining activities in India are ex- cluded from the final transaction. Consequently, the total consideration (enterprise value) for tk Mining will be reduced by EUR 45 million (ap- proximately DKK 335 million) to EUR 280 million (approximately DKK 2.1 billion). FLSmidth already has a strong presence in India and the tk Mining activities in India are not strategically important for the transaction. The exclusion of the tk Mining activities in India will not affect the transfer of tk Minings key IP and technologies to FLSmidth as part of the overall transaction. The exclusion of the tk Mining activities in India has no impact on the expected synergies and integration costs. The acquisition of tk Mining is a transformational deal which will add around 50% to FLSmidths Mining revenue and create one of the worlds largest and strongest suppliers to the mining in- dustry. Funding of the acquisition has been se- cured through a combination of debt facilities and proceeds from the issue of new shares which was completed on 10 September 2021. CFFO DKKm CFFI DKKm Free cash flow DKKm Net cash flow from business acquisitions and disposals DKKm 0 200 400 600 800 1,000 1,200 1,400 1,600 2017 2018 2019 2020 2021 Cash flow from operating activities -700 -600 -500 -400 -300 -200 -100 0 2017 2018 2019 2020 2021 Cash flow from investing activities -100 100 300 500 700 900 1,100 1,300 2017 2018 2019 2020 2021 Free cash flow Free cash flow adjusted for business acquisitons and disposals -400 -300 -200 -100 0 100 200 2017 2018 2019 2020 2021 Net cash flow from acquisition and disposal of activities FLSmidth Annual Report 2021 34 Management review Financial Performance Financial performance in Q4 2021 Mining order intake grew organically 35% com- pared to Q4 2020. Including currency effects, the order intake in Q4 2020 increased by 38%. This was driven by a 52% increase in capital orders and a 29% increase in service orders. The in- crease in order intake reflects a continuing im- provement in activity levels and positive market sentiment, compared to Q4 2020, which was sig- nificantly impacted by the pandemic. Q4 2021 in- cluded a large announced order for a gold pro- ject in Russia valued at around DKK 350m, whereas no large orders were announced in Q4 2020. During the quarter, service orders and capital orders represented 55% and 45% of Mining or- der intake, respectively. Revenue increased 19% organically and by 21% including currency effects. Capital revenue in- creased by 48% and accounted for 85% of the share of revenue growth. This was driven by the higher backlog and largely stable market condi- tions compared to Q3 2021 in terms of site ac- cess and order execution ability. Service revenue increased by 5%, also supported by the largely stable market conditions. Q4 2021 service reve- nue is nearly on par with averagely quarterly rev- enue prior to the pandemic. Gross profit, before allocation of shared cost in- creased by 16%. The corresponding gross margin decreased to 24.1% due to the higher share of capital revenue, slightly higher logistic costs and impairments of inventory. EBITA increased by 18% as a result of the higher revenue, and de- spite the lower share of service revenue in the quarter. The corresponding EBITA margin de- creased by 0.2%-point to 9.1%. EBITA was im- pacted by costs related to the acquisition of thyssenkrupp Mining of DKK 37m. Adjusted for these costs, the EBITA margin was 10.2%. Financial performance in 2021 Mining order intake grew 5% organically, despite the strong comparison period which includes three large capital orders with a combined value of around DKK 2.4bn in Q1 2020. 2021 order in- take includes four large orders in the Middle East, Chile, Argentina and Russia with a com- bined value around DKK 950m. Service orders and capital orders accounted for 54% and 46% of Mining order intake. During the year, currency had a 1% negative impact on order intake. Based on a book-to-bill of 113%, the Mining order back- log increased by 17% to DKK 10,599m. Revenue increased 11% organically with service revenue and capital revenue increasing by 4% and 21%, respectively. EBITA increased by 18% to DKK 1,049m and the corresponding EBITA mar- gin increased by 0.6%-point owing to an im- proved gross margin and operating leverage from the increase in revenue. EBITA included costs related to the acquisition of thyssenkrupp Mining of DKK 107m. Adjusted for these costs the EBITA margin was 9.9%. MINING Growth in order intake and revenue in Q4 2021 (vs. Q4 2020) Order intake Revenue Total growth 38% 21% Q4 order intake split by Region and Commodity % Revenue and EBITA margin DKKm EBITA % 20% 21% 29 % 15% 5% 10% by Region NAMER SAMER ENAR SSAMESA Asia AUS 31% 31% 9% 1% 9% 19% by Commodity Copper Gold Coal Fertilizer Iron ore Other 0% 2% 4% 6% 8% 10% 12% 14% 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 Q4 Q1 2020 Q2 Q3 Q4 Q1 2021 Q2 Q3 Q4 Capital revenue Service revenue EBITA margin Adjust. for tk costs Mining (DKKm) Q4 2021 Q4 2020 Change 2021 2020 Change Order intake (gross) 3,611 2,608 38% 13,281 12,811 4% Order backlog 10,599 9,085 17% 10,599 9,085 17% Revenue 3,321 2,749 21% 11,715 10,620 10% Gross profit before allocation of shared cost 801 689 16% 3,004 2,688 12% EBITA before allocation of shared cost 562 452 24% 1,881 1,710 10% EBITA 303 256 18% 1,049 888 18% EBIT 238 199 20% 802 655 22% FLSmidth Annual Report 2021 35 Management review Financial Performance Financial performance in Q4 2021 Cement order intake in Q4 2021 decreased by 31% organically. Including currency effects, the order intake in Q4 2021 decreased by 29%, mainly explained by a 48% decrease in capital or- ders. Q4 2020 included a large capital order val- ued at around DKK 750m. Service order intake increased 2% reflecting largely unchanged mar- ket conditions compared to Q4 2020. Service or- ders and capital orders represented 54% and 46% of cement order intake, respectively. Revenue increased by 21% organically and by 22% including currency effects, driven by execu- tion on capital orders and increased demand for service. Service accounted for 54% of revenue in Q4 2021 compared to 47% in Q3 2021. Gross profit, before allocation of shared cost, in- creased by 10%, despite a largely unchanged service revenue share. Gross profit before alloca- tion of shared cost as well as the corresponding gross margin was negatively impacted by discon- tinuation of an operational and maintenance con- tract in Egypt and lower margin in upgrade and retrofit business. EBITA in Cement amounted to DKK 35m in Q4 2021 driven by the higher revenue, and improve- ments from already executed reshaping activi- ties. Financial performance in 2021 Cement order intake grew organically by 6% to DKK 5,952m, driven by an 18% increase in ser- vice orders. This reflects a strong development considering the challenging market circum- stances, and an increasing demand for green so- lutions. 2021 includes two large orders in France and India with a combined value of DKK 400m plus a series of small to medium-sized sustaina- bility-related orders. Service orders and capital orders accounted for 58% and 42% of Cement order intake. Order backlog increased by 4% to DKK 5,993m. Revenue increased by 3% organically, and by 1% including currency effects. Service revenue de- clined by 2% and capital revenue increased by 4%. The first half of the year was impacted by a low backlog and site restrictions. Conditions gradually improved during the year with easing pandemic impact and increased site access, sup- porting improved performance in the second half of 2021. EBITA improved compared to prior year but re- mained slightly loss making for full year 2021. This reflects the largely flat revenue develop- ment and Cement reshaping activities during the year. The corresponding EBITA margin was - 0.3% compared to -2.0% in prior year. CEMENT Growth in order intake and revenue in Q4 2021 (vs. Q4 2020) Order intake Revenue Total growth -29% 22% Q4 order intake split by Region and Category % Revenue and EBITA margin DKKm EBITA % 23% 13% 16% 33% 14% 1% by Region NAMER SAMER ENAR SSAMESA Asia AUS 23% 23% 54% by Category Projects Products Services -6% -4% -2% 0% 2% 4% 6% 8% 0 500 1,000 1,500 2,000 2,500 3,000 3,500 Q4 Q1 2020 Q2 Q3 Q4 Q1 2021 Q2 Q3 Q4 Service revenue Capital revenue EBITA margin Cement (DKKm) Q4 2021 Q4 2020 Change 2021 2020 Change Order intake (gross) 1,473 2,087 -29% 5,952 5,713 4% Order backlog 5,993 5,789 4% 5,993 5,789 4% Revenue 1,814 1,487 22% 5,866 5,821 1% Gross profit before allocation of shared cost 383 347 10% 1,281 1,255 2% EBITA before allocation of shared cost 188 144 31% 502 515 -3% EBITA 35 (28) 225% (19) (118) 84% EBIT 1 (61) 102% (134) (228) 41% GOVERNANCE Management review Governance In this section 36 FLSmidth Annual Report 2021 FLSmidth Annual Report 2021 37 Management review Governance The 2021 risk review revealed changes to the company’s top 10 risks compared to 2020. ‘Supply chain’ was the top risk derived from the post-pandemic surge in demand and subsequent global supply chains bottlenecks. Risk management framework FLSmidths risk management framework is out- lined on the company website: www.fls- midth.com/en-gb/company/investors/govern- ance/managing-risks. The Board of Directors has the overall responsi- bility for deciding the Groups risk appetite and reviews the Groups top risks and key mitigation strategies annually. 2021 risk review risk review resulted in the identifica- tion of 10 top risks and opportunities that have the potential to significantly impact the entire business and organisation. The top risks - supply chain, cybersecurity, compliance and geopolitical - were all different from 2020. During 2021, the world economy has been faced with logistics and supply chain challenges. As a global company this has impacted FLSmidth too. We have, however, been successful in mitigating most of the impact based on our flexibility to switch between suppliers and our regionalised sourcing and setup for the service business. Also, artificial intelligence has been a key lever to continuously track the fastest and cheapest transport routes. Compliance was another identified risk in 2021 with a high potential impact. Investors and other stakeholders increasingly expect companies to account for not only their own operations but focus area is modern slavery and the risk from unknowingly supporting the use of forced labour as part of the extended supply chain. We proac- tively manage this risk through due diligence, and we show our commitment by seeking full and progressive alignment with the UN Guiding Principles on Business and Human Rights. Attracting and retaining employees was the sec- ond highest risk in 2020 and fifth highest risk in 2021. The industries we operate in are chal- lenged by the ability to attract enough high- skilled and high-performing staff. However, the pending thyssenkrupp Mining business acquisi- tion holds great potential to solve the talent chal- lenge in our Mining business, as this acquisition will onboard more than 2,000 skilled employees. identified risks were Cement Mar- ket conditions and Projects. Our Cement busi- ness reshaping efforts coupled with the increas- ing demand for sustainability offerings have helped to significantly mitigate and reduce this risk. In Mining, our focus on increased standardi- sation and modularisation, balancing project scope with profitability and the integration of en- gineering departments into the business have all contributed to confining project related risks. This is crucial as we concurrently see a more liti- gious environment developing with customers being more willing to activate remedies in con- tracts to their advantage. In response to this trend, we are tightening up our terms and condi- tions to help mitigate the financial impact. For information on financial risks and mitigation activities, including liquidity, credit and foreign exchange rates and tax see note 4.5 and 5.3. Turning risks into opportunities The biggest risk of doing business is often the risk of inaction as companies fail to adapt to the changing business environment. If appropriate action is taken, such risks can be minimised and turned into even larger business opportunities. This is the case for a number of the risks identi- and digitalisation are two of tegic priorities. While both constitute a risk of in- creased niche competition, we see them as even greater business opportunities considering our strong efforts to maintain and develop a leading position within both areas. Integration of the pending thyssenkrupp Mining business acquisition is another example of a risk which, if managed properly, represents a signifi- cant long-term business potential. RISK MANAGEMENT Risk grid FLSmidth Annual Report 2021 38 Management review Governance RISK MITIGATION Risk Potential impact Mitigation 1 Supply Chain The supply chain has been more challenged during the year with high demands on internal and external trusted supply chains that could result in customer delivery delays, which could lead to penalties and disruptions in executing projects. Group Procurement is on a strong path towards increasing operational efficiencies through new tools and more uniform processes. The Group's global sourcing strategy allows us to maintain resilience and flexibility within our global supply chain and the ability to source from suppliers across all regions. Suppliers are evenly split across the regions to reduce transportation and lead time helping to alleviate potential disruptions. 2 Cybersecurity As our business evolves, the threat of cybersecurity, data leakage and data security means that cyber risk remains a key risk. The number of attempts to breach continues to increase and we recognise that a sophisticated cyber-attack could result in an extended period of down-time, potentially resulting in delays to customers and additional costs for the organisation. The Group is focused on IT Security and awareness, conducting regular audits and continuous analysis of current controls and regular security updates. Migration to cloud-based solutions, continuous cyber awareness training across the organisation, multifactor authentication, anti-virus and patch management, behavioural analysis as well as an IT Security Committee all help to mitigate the potential impact of this risk. 3 Compliance Compliance has top-priority in FLSmidth and despite all our efforts to mitigate the risk, we have the understanding that one mishap could negatively impact our brand and reputation with customers. As we continue to expand through acquisition and have local offices in challenging environments, focus on monitoring and mitigating compliance risks remains high. The Group has a dedicated Compliance Department that has established rules and procedures to ensure a common understanding of ethical behaviour. There are policies in place to support the organisation with day- to-day compliance issues such as the Code of Business Conduct, Anti-Bribery policy and Export Control, as well as tools and procedures to identify individual issues that may pose a threat including the Whistle Blower Hotline, screening of third-party agents and sign-off protocols. Online training continues to be a key part of our mitigation strategy with a catalogue of compulsory compliance training for all employees. 4 Geopolitical This risk continues to evolve due to instability, polarisation in many countries and tensions between major world economies. This poses a threat to our project execution ability in some regions, increase the risk of delays and disruptions, or prohibits us from carrying out our contracts in certain jurisdictions. Threats of sanctions in specific markets that are critical to our growth may force customers to purchase from local suppliers. The company's local footprint continues to expand with strategic investments, placing FLSmidth closer to customers around the world. Group Procurement optimisation continues to focus on strategic, global sourcing and building relationships with multiple suppliers to protect supply chain and logistics operations. 5 Attracting and retaining employees Formerly defined as Workplace Engagement. This has evolved into how we build up our brand to attract new employees as well as our collective ability to keep our existing workforce engaged and adaptable to the ever-evolving industry landscape to drive the organisation forward. We need to mitigate the risk of losing employees and their engagement to be able to compete and achieve strong business performance. Actions are focused on four main areas: communicating our vision and strategy in a clear and compelling way, strengthening our growth and development opportunities through actionable development plans and consistent performance feedback, monitor and act on dynamic feedback coming through monthly engagement surveys/exit interviews, ensuring fair and competitive total rewards, and lastly, improving our employer brand FLSmidth Annual Report 2021 39 Management review Governance Risk Potential impact Mitigation 6 Digitalisation Digitalisation is a major driver for change, representing a huge opportunity for sustainable productivity improvements. We continue our strong focus on sustainable innovations that ena- bles customers to improve their operations and helps us to ex- pand to mid-market and single-equipment suppliers enabling us to capture a larger share of the market for services. With the launch of digitally enabled products and digital offerings aimed at increasing productivity at cus- tomer sites and the appointment of Regional Product Line Managers as well as implementation of artificial intelligence in parts of Procurement, Finance and other Group Functions, the company continues to improve sustainable productivity in-house. Through our own technology centres, collaborations with customers at their sites and partnerships with third parties, we are working together to co-create new solutions. 7 Safety The pandemic continues to pose safety challenges for our em- ployees and non-critical business travel remains minimised. We have seen an increase in the number of injuries during 2021. This is a serious issue that could result in a loss of trust and ulti- mately business for FLSmidth. The domino effect that such an event potentially could have on the organisation's reputation as a premium supplier could be significant. The Group has zero tolerance for safety risks both at third party sites as well as its own. Safety is a high prior- ity for everyone. Safety audits are conducted by management, all employees are required to participate in safety training annually, safety shares and recording of near misses are mandatory. A pandemic Security Team meets regularly to review the latest developments and each Region continues to follow the guidance as defined by the local health and government authorities. Communication to our employees has top priority as we continuously evaluate and navigate around the pandemic as it has become a part of our everyday lives. 8 Acquisition integration With the pending thyssenkrupp Mining acquisition it is im- portant that the integration runs as smooth and efficient as possible whilst at the same time does not distract the current base business from delivering on its primary objectives. The Integration Management Office is already well underway with the planning and preparation for the deal closing. Each workstream has a detailed integration plan with owners of the action steps to ensure a smooth acquisition integration. The new business will integrate into the existing FLSmidth business model and oper- ating model from day one. 9 Sustainability As a key driver for the mining and cement industries, the suc- cess of our business depends on our ability to develop sustain- able products and solutions. With increased global awareness on health, safety and the environment, sustainable solutions represent a huge opportunity as our largest environmental im- MissionZero is an integral part of our risk mitigation strategy and presents a great opportunity to reduce emissions in both the mining and cement industries. To better understand and evaluate climate-related risks and opportunities, we have started to implement the recommendations from the Task Force on Climate-re- lated Financial Disclosures (TCFD). This is an ongoing process. More information on how we evaluate risks using the TCFD can be found in our Sustainability Report. For information on our position on coal mining please see the Sustainability Report. 10 Cement market conditions & Projects Increased demand for sustainability offerings in the cement in- dustry coupled with internal reshaping efforts have significantly reduced the risk associated with our Cement business. In addition, increased focus on standardisation and modularisa- tion, balancing projects scope with profitability and integrating engineering departments into the business have all contrib- uted to confining project related risks. During 2021, we have reshaped our Cement business to mitigate the challenging market conditions charac- terised by lack of global growth and overcapacity in the market, while at the same time repositioning our Ce- ment business for the green transition. This is an ongoing process. To minimise the risks from projects, we have tightened up our terms and conditions to help mitigate any un- expected financial impact. This is an ongoing process. In addition, we have a strategic focus on expanding the share of services and standardised relative to the share of large projects. This will help us obtain a more profitable business mix and a less cyclical business with a lower risk level. FLSmidth Annual Report 2021 40 Management review Governance The Board of Directors continually evaluates the work of the Group Executive Management by specifying targets and assessing at what level or degree such targets have been met. The following statutory statement (including the Corporate Governance section, the Remunera- tion section, as well as the overview of the Board of Directors and Group Executive Management) is provided pursuant to the Danish Financial Statements Act Sections 99d and 107b. The adoption of a resolution to amend the Com- panys Articles of Association or to wind up the Company requires that the resolution is passed by not less than two thirds of the votes cast as well as of the share capital represented at the General Meeting. Management structure According to general practice in Denmark, FLSmidth maintains a clear division of responsi- bility and separation between the Board of Direc- tors and the Group Executive Management. The Group Executive Management is responsible for the day-to-day business of the company, and the Board of Directors oversees the Group Exec- utive Management and handles overall manage- rial issues of a strategic nature. For additional information please refer to: www.flsmidth.com/en-gb/company/inves- tors/governance. The Board of Directors The Board of Directors is elected at the Annual General Meeting apart from the Board members who are elected pursuant to the provisions of the Danish Companies Act on employee representa- tion. Board members elected at the Annual General Meeting constitute no less than five and no more than eight members, currently six mem- bers, in order to maintain a small, competent and quorate Board. The members of the Board elected at the Annual General Meeting retire at each Annual General Meeting. Re-election may take place. The Nomination Committee identifies and recommends candidates to the Board of Directors. Pursuant to the provisions of the Danish Compa- nies Act regarding employee representation, FLSmidths employees are currently represented on the Board by three members who are elected for terms of four years. The most recent election took place in 2021, where two new members joined the Board. Immediately after the Annual General Meeting, the Board of Directors elects, among its own members, a Chair and a Vice chair. A job and task description has been created and outlines the duties and responsibilities of the Chair and the Vice chair. Board meetings are called and held in accord- ance with the Board rules of procedure and its annual plan. In general, between six and eight or- dinary Board meetings are held every year. How- ever, when deemed necessary, additional meet- ings may be held. Due to the pandemic, the meeting frequency has been higher in recent years. To enhance Board meeting efficiency, the Chair conducts a planning meeting with the Group CEO and Group CFO prior to each Board meeting. 15 Board meetings were held in 2021. Apart from contemporary business issues, the most important issues dealt with in 2021 were: impact from the pandemic on our business, cash flow, capital structure, financial risks, sustainabil- ity, reshaping of our Cement business, diversity and the acquisition of thyssenkrupp Mining business. All members of the Board of Directors participated, physically or virtually, in all relevant board and committee meetings in 2021, except one member who was unable to attend one of the Technology Committee meetings due to a conflicting appointment. To achieve a highly informed debate with Group Executive Management, the Company strives for CORPORATE GOVERNANCE Corporate governance highlights 2021 2020 FLSmidth governance structure Annual General Meeting Group Executive Management Group CEO Board of Directors Nomination Committee Audit Committee Compensation Committee Technology Committee FLSmidth Annual Report 2021 41 Management review Governance Board membership profiles that reflects substan- tial managerial experience from internationally operating industrial companies. At least one member of the Board must have CFO experience from a major listed company, and all other members should preferably have CEO experience from a major internationally op- erating and preferably listed company. The com- position of the Board of Directors reflects that the majority of members elected at the Annual Gen- eral Meeting hold competencies in acquisition and sale of companies, financing and stock mar- ket issues, international contracts and account- ing. In addition, it is preferable that Board mem- bers have a background in construction contracting and possess technical expertise on process plants and process technology, includ- ing cement and/or minerals. Five of the six members of the Board elected at the Annual General Meeting are independent in the opinion of the Board of Directors and accord- ing to the criteria specified by the Committee on Corporate Governance, which is an independent Danish body promoting corporate governance best practice in Danish listed companies. The Chair, Vagn Ove Sørensen, has in 2021 been a member for more than 12 years and can thus not be regarded as independent according to the cri- teria. The Chair, Vagn Ove Sørensen, will not be running for re- March 2022. As part of its annual plan, the Board of Directors performs an annual self-evaluation to evaluate the contribution, engagement, and competencies of its individual members. The Chair is responsi- ble for the evaluation. The Nomination Committee The Nomination Committee consists of Vagn Ove Sørensen (Chair), Tom Knutzen and Thrasyv- oulos Moraitis. In 2021, the Nomination Commit- tee met three times. Its main activities in 2021 have been related to assessing the composition and competencies of the Board of Directors and the new Group CEO. The Compensation Committee The Compensation Committee consists of Vagn Ove Sørensen (Chair), Tom Knutzen and Thrasyv- oulos Moraitis. The Compensation Committee met five times in 2021. The committees main ac- tivities in 2021 were related to the approval of in- centive plans and overall remuneration schemes for Group Executive Management and the man- agement layer reporting to the Group Executive Management, as well as on the recruitment of the new Chief Executive Officer. The Audit Committee The Audit Committee consists of Tom Knutzen (Chair), Anne Louise Eberhard and Gillian Dawn Winckler who are all independent and have con- siderable insight and experience in financial mat- ters, accounting and auditing in listed companies. In 2021, the Audit Committee met six times and the committees main activities were to consider specific financial risk, including tax risk, account- ing and auditing matters, as well as paying spe- cial attention to financial processes, internal con- trol environment and cyber security. A particular focus area in 2021 has been to as- sess the financial risks associated with the pan- demic and the financial impact of the acquisition of thyssenkrupps Mining business. Meeting attendance in 2021 Board of directors Board meetings attended Audit Committee meetings attended Compensation Committee meetings attended Nomination Committee meetings attended Technology Committee meetings attended 1) Voluntary participation (not member of Audit Committee) 2) Committee Chair FLSmidth Annual Report 2021 42 Management review Governance The Technology Committee The Technology Committee consists of three Board members, Richard Robinson Smith (Chair), Thrasyvoulos Moraitis and Carsten Hansen, who replaced Søren Dickow Quistgaard. The Tech- nology Committee met three times in 2021. With a clear focus on sustainability, the main tasks in 2021 were to monitor the major development projects across the two industries, to ensure the right and appropriate KPIs are set for R&D pro- jects, as well as to evaluate the key IP and com- plementary technologies of thyssenkrupp Mining. Group Executive Management The officially registered Executive Management of FLSmidth consists of the Group CEO and the Group CFO. Group Executive Management holds the overall responsibility for the day-to-day operations and consisted of eight Group Executive Vice Presidents, including the Group CEO, at the end of 2021. The members of the Group Executive Management are all experienced business executives, each possessing insights and hands- on experience that match the operational issues and challenges currently facing FLSmidth. In November 2021 it was announced that the Mining Industry President, Mikko Keto, would succeed Thomas Schulz as FLSmidths Group CEO effective 1 January 2022. In response to the growing size of the Mining business that will re- sult from the thyssenkrupp Mining integration, the Mining President position has been merged with the Group CEO role. Mikko Keto joined FLSmidth in January 2021 from Metso Outotec, where he worked for 10 years of which the last two years as President, Minerals Services and Pumps, where he delivered growth in Services along with profitability improvements. He also served as a member of the companys Executive Team. Thomas Schulz will stay with FLSmidth un- til the end of February 2022 as a special advisor to support any remaining transition actions be- fore he will leave for an outside role. Effective 1 January 2022, Mark Clifford took on the role as Chief Operating Officer, responsible for managing day-to-day operations between the Regions and the Mining and Cement Industries. Mark Clifford has possessed various leadership roles over his many years in FLSmidth, most re- cently as the Head of Regions. As COO, Mark Clifford will draw from his in-depth experience and understanding of our business. Diversity in Board and Management The Board of Directors of FLSmidth continually evaluates the diversity of the Board and the Group Executive Management as well as among managers and employees. In connection with recommendations and appointments, diversity is deliberately taken into account when considering the profiles and qualifications of potential candi- dates. At the end of 2021, women accounted for 33% (end 2020: 33%) of the shareholder-elected Board members, fulfilling the target that a mini- mum of 25% of the members elected at the An- nual General Meeting should be women. At the end of 2021, women accounted for 17% (end 2020: 16%) of the total workforce, while 14% of all managers were women (end 2020: 13%). By 2030, we target 25% of our entire workforce and people managers to be women. When filling management vacancies externally, at least one female candidate must be in the short list. Due to FLSmidths global presence in over 60 countries, the overall workforce naturally reflects a multitude of cultures and nationalities. The Board of Directors has set a long-term goal ac- cording to which global managers should to a greater extent reflect the representation of na- tionalities among all employees and the geo- graphical location of FLSmidths technology cen- tres in Denmark (9% of the total workforce), the USA (15% of the total workforce) and India (22% of the total workforce). Today 50% (2020: 56%) of Group Executive Man- agement and 91% (end 2020: 90%) of the total number of employees have a nationality other than Danish. FLSmidth is a learning organisation, and our peo- ple are our most valuable resource. 48% of the workforce is below the age of 40. 46% have less than 5 years seniority, which reflects the transi- tion FLSmidth has gone through over the past several years. Presentation of financial statements and internal controls To ensure the high quality of the Groups finan- cial reporting, the Board of Directors and the Group Executive Management have adopted a number of policies, procedures and guidelines for the presentation of the financial statements and internal controls which can be found at: www.flsmidth.com/en-gb/company/inves- tors/governance Policy on Data Ethics During 2021, FLSmidth issued its Policy on Data Ethics. The policy addresses the data ethic princi- ples applied by FLSmidth and describes the ap- proach to data processing covering all data types. When using artificial intelligence and the FLSmidth Annual Report 2021 43 Management review Governance like, we strive to ensure that the results are not discriminatory or biased. The short- and long- term consequences of data processing activities, especially when new technology is applied, are considered and the impact on the data subjects are taken into account. Security of data is im- portant to us. FLSmidth adheres to the six funda- mental ethical values developed by the expert group on data ethics to the Danish Data Ethics Council. Group Legal is the owner of the policy. For additional information please refer to: www.flsmidth.com/data-ethics Sustainability Report Concurrently with the Annual Report, FLSmidth has published its annual Sustainability Report, covering non-financial performance related to environmental and socio-economic impacts. The 2021 Sustainability Report is in full compliance with both Sections 99a, 99b and 107d of the Danish Financial Statements Act and in accord- ance to the Global Reporting Initiative (GRI) core requirements, and also serves as the Advanced Communication on Progress to the United Na- tions Global Compact. The report has been sub- ject to limited assurance performed by Ernst & Young. The report is available at: www.flsmidth.com/SustainabilityReport2021 Compliance with recommendations for corporate governance Pursuant to Section 4.3 of the rules for issuers of shares listed on Nasdaq Copenhagen, Danish companies must provide a statement on how they address the recommendations on Corpo- rate Governance issued by the Committee on Corporate Governance in December 2020 based on the comply or explainprinciple (https://corporategovernance.dk/english). mmen- dation is summarised in the corporate govern- ance statement available at: www.flsmidth.com/en-gb/company/inves- tors/governance/governance-reports In the Board all recommendations on corporate governance applicable to Danish listed companies, except 3.5.1 related to external assistance in connection with evaluation of the performance of the Board of Directors, where the company only complies partially. Employees Geographical distribution Employees Length of service Employees Age distribution 17% 20% 22% 30% 5% 6% North America South America Europe, North Africa, Russia Sub-Saharan Africa, Middle East & South Asia Asia Australia 19% 27% 19% 35% <2 years 2-4 years 5-10 years >10 years 13% 35% 28% 17% 7% <30 years 30-39 years 40-49 years 50-59 years >59 years FLSmidth Annual Report 2021 44 Management review Governance Name Vagn Ove Sørensen, Chair Tom Knutzen, Vice chair Richard Robinson Smith Anne Louise Eberhard Gillian Dawn Winckler Age 62 59 56 58 59 Nationality Danish Danish German/American Danish British/Canadian Gender Male Male Male Female Female Member of the Board since 2009, Chair since 2011 (elected at the AGM). Chair of the Nomination and Compensation Committees 2012 (elected at the AGM). Chair of the Audit Committee. Member of the Nomination and Compensation Com- mittees 2016 (elected at the AGM). Chair of the Technology Committee 2017 (elected at the AGM). Member of the Audit Committee 2019 (elected at the AGM). Member of the Audit Committee Number of shares in FLS- midth 16,965 25,000 500 2,000 1,000 Executive and non-executive positions in Denmark Chair of the Boards of Directors of Scandlines. Member of the Board of Directors of CP Dyvig & Co. A/S. Sen- ior Advisor to EQT Partners Chair of the Board of Directors of Tiv- oli A/S and Chr. Augustinus Fabrikker A/S None Chair of the Boards of Directors of Moneyflow Group A/S and Moneyflow 1 A/S. Vice Chair of the Boards of Di- rectors of Finansiel Stabilitet SOV. Member of the Board of Directors of Bavarian Nordic A/S, Topdanmark A/S, Topdanmark Forsikring A/S, Knud Højgaards Fond, Knud Højgaards Hus A/S, Højgaard Ejendomme A/S, Chr. Hansen Natural Colors A/S and group companies (Oterra), Unicef Danmark and VL52 ApS . Faculty Member at Copenhagen Business School (CBS Executive, Board Education). Director EA Advice ApS None Executive and non-executive positions outside Denmark Chair of the Board of Directors of Air Canada (CA). Member of the Board of Directors of Braganza AS (SE), Parques Reunidos SA (ES), Royal Car- ibbean Cruises Ltd. (US), VFS Global (CH) and CNH industrial (NL), and Big Bus Tours (UK). Member of the Strate- gic Advisory Board of Nordic Aviation Capital (IR). Senior Advisor to Morgan Stanley CEO at Jungbunzlauer Suisse AG (CH) Chief Executive Officer of KION Group AG (DE) None Chair of the Board of Directors of Pan American Silver Corporation (CA). Member of the Board of Directors of West Fraser Timber Limited (CA), and BC Parks Foundation (CA), a non-profit organisation BOARD OF DIRECTORS FLSmidth Annual Report 2021 45 Management review Governance Name Thrasyvoulos Moraitis Claus Østergaard Leif Gundtoft Carsten Hansen Age 59 55 60 58 Nationality British/Greek Danish Danish Danish Gender Male Male Male Male Member of the Board since 2019 (elected at the AGM). Member of the Tech- nology Committee, Nomination Committee and Compensation Committee. 2016 (elected by the employees) 2021 (elected by the employees) 2021 (elected by the employees) Member of the Technology Committee. Number of shares in FLS- midth 1,000 429 128 16 Executive and non-executive positions in Denmark None None None None Executive and non-executive positions outside Denmark Member of the Board of Directors of Reload Greece Foundation (GR). CIO of ESM Acquisition Corporate (US). Advisor and principal in Vision Blue Resources None None None BOARD OF DIRECTORS - CONTINUED Board competencies Board of directors CEO (operatio- nal) experience Finance, Audit Committee, Accounting, Treasury Strategy Develop- ment M&As, Joint ventures, Alliances Capital markets, Listed company experience Risk Manage- ment, Legal, Compliance HR, Total Rewards & Labour Safety, Health, Environ- ment, Sustaina- bility Digital transfor- mation, Technology advance- ment Cement and Mining Industry Knowledge/ Experience Commercial and Project excellence Related Industrial experience Service, Aftermarket experience FLSmidth Annual Report 2021 46 Management review Governance GROUP EXECUTIVE MANAGEMENT Name Mikko Keto Roland M. Andersen Mark Clifford Carsten Lund Title Group Chief Executive Officer Employed by FLSmidth since 2021 Group Chief Financial Officer Employed by FLSmidth since 2020 Chief Operating Officer Employed by FLSmidth since 2014 Cement Industry President Employed by FLSmidth since 1988 Age 54 53 59 59 Nationality Finnish Danish Australian Danish Gender Male Male Male Male Education MSc Economics from Helsinki School of Eco- nomics MSc Corporate Finance, Executive Management Programme, London Business School Studied BSc Mining Engineering at University of NSW Sydney, IFL executive education, IMD strategic development Executive MBA, Scandinavian International Man- agement Institute (SIMI) B.Sc. in Mechanical and Process Engineering, Danish Technical University Number of shares in FLSmidth 600 0 2,619 11,214 Past experience Numerous senior management positions with Metso 2010-2020, most recently President for Services and Pumps business areas. Head of Sales, KONE corporation 2008-2010. Various management positions in multiple countries with Nokia Networks 1994-2008 CFO with NKT (2015-2020), Interim CEO with NKT (2018-2019). Prior to that various CFO roles in A.P. Moller Maersk, Telenor/Cybercity and Torm President of Regions, Country Head Australia, FLSmidth (2014-2018), Numerous manage- ment roles with Sandvik Mining and Construc- tion: Vice President, Underground hard rock & Surface Mining Region Australia (2012-2014), Global Aftermarket Manager, Sandvik Con- struction Division (2008-2012), General Man- ager underground Hard Rock Mining Region Australia (2005-2008) Regional President, Europe, North Africa and CIS. Managing Director & CEO, FLSmidth India Private Limited. President Material Handling Division, FLS- midth A/S. CEO, FLSmidth Airtech a/s Non-Executive positions Member of Board of Directors Normet Group None None Member of the Board of Directors Dinex a/s. Mem- ber of the Board of Directors Dall Energy ApS. * Registered with Erhvervsstyrelsen (The Danish Business Authority). Trading in FLSmidth shares by executives and associated persons is only reported for executives registered with Erhvervsstyrelsen (The Danish Business Authority) FLSmidth Annual Report 2021 47 Management review Governance GROUP EXECUTIVE MANAGEMENT - CONTINUED Name Annette Terndrup Cori Petersen Asger S.B. Lauritsen Mikko Tepponen Title Chief Legal and Strategy Officer Employed by FLSmidth since 2004 Chief HR Officer Employed by FLSmidth since 2016 Chief Procurement Officer Employed by FLSmidth since 2016 Chief Digital Officer Employed by FLSmidth since 2020 Age 52 52 55 42 Nationality Danish American Danish Finnish Gender Female Female Male Male Education Master of Law (Denmark) and LLM (England) B.S. in Business administration: Human Resource management, Senior Professional in Human Re- sources. Certified by Human Resource Certifica- tion Institute MSc University of Copenhagen, MBA (IMD), GMP (INSEAD) MSc Automation Technology Number of shares in FLSmidth 2,546 918 1,335 0 Past experience Head of Group Legal (2013-2016). Various managerial positions in FLSmidth (2006-2013). Corporate counsel FLSmidth (2004-2006). Lawyer Ashurst 1998-2003. Trainee lawyer Lett, Vilstrup & Partnere 1994-1997 Director Human Resources, US, FLSmidth (2016), Director, Human Resources, North America, FLSmidth (2017). Various managerial positions in Rio Tinto (2011 2016). Various managerial and specialist positions (1987-2011) Various managerial positions; Head of Operations, Technical, and Supply Chain in DS NORDEN (2014-2016); Executive Committee, Danish Shipowners Association and Intertanko (2014-2016); Maersk Line (2006-2014) - CPO, Head of Operations Exe- cution & Supply Chain; A.P. Møller-Maersk (2004-2006), e.g., CEO of regional cluster Pa- kistan/Afghanistan; CEO, ROSTI Containers (2001-2004); Executive Vice president, Sales & Marketing, DISA (1997-2001); Company Sec- retary, Business Unit Head of various A.P. Møller-Maersk entities (1992-1997) Vice President, Digital Product Development at Wartsila. Director Digitalisation at Wartsila. Senior Manager, Product Management, Digital Services at Outotec Non-Executive positions None Member of Board of Directors AmCham Den- mark None Member of Board of Directors Etteplan Oyj FLSmidth Annual Report 2021 48 Management review Governance Total management remuneration increased compared to 2020 due to improved financial performance. In 2020, the remuneration was low primarily due to the impact on incentive programmes from the pandemic severely impacting the financial perfor- mance and target fulfilling. In 2021, the remuner- ation increased due to target fulfilling on incen- tive programmes being above target and from the severance package agreed with the former Group CEO. Base salary An adjustment of +2.4% to registered Group Ex- ecutive Managements monthly base salary was made in 2021. Short-term incentive programme The pay-out under the short-term incentive pro- gramme is above target based on an average achievement on the financial KPIs (order intake, revenue contribution margin, EBITA margin and CFFO). Long-term incentive programme In 2021, management received no pay-out for the long-term incentive programme (LTIP) for the per- formance period 2018-2020. The KPIs for the 2021 LTIP grant are: EBITA-mar- gin, total shareholder return and a sustainability- linked KPI, which is a change to the years before. Remuneration of Group Executive Management The Board has adopted overall guidelines for in- centive pay for the Group Executive Manage- ment establishing a framework for variable salary components in order to support the companys short- and long-term goals. The purpose is to en- sure that the remuneration structure does not lead to imprudence, short-term behaviour or un- reasonable risk acceptance on the part of the Group Executive Management. The Boards Compensation Committee considers on a regular basis the Group Executive Manage- ments remuneration. The total remuneration of the Group Executive Management consists of the following compo- nents: Base salary Short-term incentives in the form of a cash bo- nus (up to 75% of annual base salary) Long-term incentives in the form of perfor- mance shares (up to 100% of base salary) Other incentives of up to 150% of the annual base salary in cash and/or in shares Up to 18 months notice in the event of termina- tion of employment and severance payment of a maximum of 6 months base salary Customary benefits such as company car, tele- phone, etc. Remuneration of the Board of Directors The Board of Directors total remuneration con- sists of an annual cash payment for the current fi- nancial year, which is submitted for approval at the Annual General Meeting. The Board of Direc- -approved by the Gen- eral Meeting for the year in question and then fi- nally approved by the shareholders at the following years General Meeting. In approving the final fees, shareholders may take unexpected workload into consideration and increase the preliminarily approved fees for all or some mem- bers of the Board of Directors. The Board of Di- -based re- muneration. Cash payment currently consists of a base fee of DKK 450,000 to each Board member, graded in line with additional tasks and responsibilities as follows: Ordinary Board members 100% of the base fee Board Vice chair 200% of the base fee Board Chair 300% of the base fee Committee Chair fee DKK 225,000 Committee members fee DKK 125,000 The Chair and Vice chair do not receive payment for committee work. The fee structure was last adjusted in 2017. The remuneration report can be found here: www.flsmidth.com/RemunerationReport2021 REMUNERATION Remuneration facts A detailed description of the remuneration of individual members of the Board of Directors and Executive Management is disclosed in the remuneration report. Total remuneration of the Board of Directors, DKKm Total remuneration of Executive Management registered with The Danish Business Authority, DKKm 6.4 6.4 6.5 2019 2020 2021 25.2 18.6 39.0 2019 2020 2021 FLSmidth Annual Report 2021 49 Management review Governance Total shareholder return was 6% in 2021. Dividend of DKK 3 per share is proposed. Capital and share structure FLSmidth & Co. A/S is listed on Nasdaq Copen- hagen. The share capital is DKK 1,153,000,000 (end of 2020: DKK 1,025,000,000) and the total number of issued shares is 57,650,000 (end of 2020: 51,250,000). In 2021, the company com- pleted a direct issue and private placement of 6,400,000 new shares to support financing the Each share entitles the holder to 20 votes. The FLSmidth & Co. A/S share is included in approxi- mately 160 Danish, Nordic, European and global share indices, including the leading Danish stock index C25. The company had approximately 54,000 share- holders at the end of 2021 (end of 2020: approxi- mately 46,000). In addition, around 1,670 present and former employees hold shares in the com- pany (end of 2020: approximately 1,750). The FLSmidth & Co. A/S share has a free float of around 90%. At the end of 2021, FLSmidth had one major shareholder. Lundbeckfond Invest A/S has disclosed holdings of voting rights exceed- ing 10% of total outstanding voting rights. The methodology for differentiating between Danish retail and institutional investors was changed in 2021, identifying a larger share of in- stitutional shareholders than previously. The combined share of Danish retail and institu- tional investors excluding Lundbeckfond Invest, remains unchanged at around 35% in 2021. FLS- of treasury shares declined to 1.6% (2020: 2.1%). Return on the FLSmidth share in 2021 The total return on the FLSmidth & Co. A/S share in 2021 was 6% (2020: -12%), calculated as share price appreciation and dividend paid. The share price ended 2021 at 244.3 compared to 232.8 at the end of 2020, having traded be- tween 207.1 and 282.3 during the year. Total shareholder return was included as a KPI in the long-term incentive program during 2021. SHAREHOLDER INFORMATION Development in shareholder structure % Share price development in 2021 Volume, 1,000 Share price DKK Financial calendar 2022 Change in methodology for differentiating between Danish retail and institutional investors 0 10 20 30 40 50 60 70 80 90 100 2017 2018 2019 2020 2021 Bestinver Gestión S.A SGIIC Novo A/S Lundbeckfond Invest A/S Foreign FLSmidth & Co. A/S Non-registered Danish (institutional) Danish (retail) 200 220 240 260 280 300 0 400 800 1,200 1,600 2,000 01-01-2021 01-02-2021 01-03-2021 01-04-2021 01-05-2021 01-06-2021 01-07-2021 01-08-2021 01-09-2021 01-10-2021 01-11-2021 01-12-2021 Daily volume Share price FLSmidth Annual Report 2021 50 Management review Governance Capital structure and allocation FLSmidth takes a conservative approach to capi- tal structure with an emphasis on relatively low debt, gearing and financial risk. The Board of through- the-cycle is as follows: Leverage (NIBD/EBITDA < 2) Dividend pay-out ratio (30-50% of net profit) Equity ratio > 30% capital allocation is to invest in organic growth and value adding M&A, and under special cir- cumstances share buyback or special dividend. As announced on 29 July 2021, FLSmidth and thyssenkrupp have reached an agreement that FLSmidth will business. Closing of the transaction is expected in H2 2022 and is subject to customary approv- als from relevant authorities. The Board of Directors will propose at the Annual General Meeting that a dividend of DKK 3 per share (2020: DKK 2 per share), corresponding to a dividend yield of 1.2% and a pay-out ratio of 48%, in line with our targeted pay-out ratio, to be distributed in 2022. FLSmidth Investor Relations Through the Investor Relations function, the Board of Directors maintains an ongoing dia- logue between the company and the stock mar- ket and ensures that the positions and views of the shareholders are reported back to the Board. The purpose of FLSmidths Investor Relations function is to contribute to ensuring and facilitat- ing that: All shareholders have equal and sufficient ac- cess to timely, relevant and price-sensitive in- formation The share price reflects FLSmidth’s underlying financial results and a fair market value The liquidity and the day-to-day trading turno- ver of the FLSmidth share is sufficiently attrac- tive for both short- and long-term investors The shareholder structure is appropriately di- versified in terms of geography, investment profile and time horizon. To achieve these goals, an open and active dia- logue is maintained with the stock market through investor presentations, investor meet- ings, webcasts, teleconferences, roadshows, the Annual General Meeting and Capital Markets Days and through FLSmidths website and elec- tronic communication services. The pandemic has changed the way Investor Re- lations and Management interacts with the finan- cial markets, as pandemic restrictions and travel bans have limited travel activity. In 2021, the ma- jority of investor and analyst meetings have been conducted virtually. We have remained con- nected and engaged with investors through high- definition video and audio. We plan to resume travel activity when the pandemic allows for it, however virtual meetings will continue to be an integrated part of how we engage with the finan- cial markets. FLSmidth & Co. A/S is generally categorised as a capital goods or industrial company and is cur- rently being covered by 17 equity analysts, 10 of which are based outside Denmark. For further details regarding analyst coverage, please see the company website: www.FLSmidth.com/analysts All investor relations materials and investor rela- tions contact information are available to inves- tors at the company website: www.FLSmidth.com/investor Share information Market Symbol ISIN Number of shares Sector ICB Code Segment Share and dividend key figures 2017 2018 2019 2020 2021 FINANCIAL STATEMENTS In this section FLSmidth Annual Report 2021 51 FLSmidth Annual Report 2021 52 Consolidated financial statements Consolidated financial statements Primary statements Notes Key accounting estimates and judgements 57 1. Operating profit & segments 59 2. Capital employed and other balance sheet items 67 3. Working capital 80 4. Tax 85 5. Financial risks & capital structure 90 6. Other notes 99 7. Basis of reporting 104 CONSOLIDATED FINANCIAL STATEMENTS Consolidated financial statements FLSmidth Annual Report 2021 53 Consolidated financial statements Consolidated financial statements Notes DKKm 2021 2020 1.4 Revenue 17,581 16,441 Production costs (13,401) (12,576) Gross profit 4,180 3,865 Sales costs (1,314) (1,367) Administrative costs (1,506) (1,400) Other operating income 41 36 EBITDA before special non-recurring items 1,401 1,134 1.7 Special non-recurring items (57) (24) 2.4, 2.5 Depreciation and impairment of property, plant and equipment and lease assets (314) (339) EBITA 1,030 771 2.2 Amortisation and impairment of intangible assets (362) (343) EBIT 668 428 5.4 Financial income 870 952 5.4 Financial costs (951) (999) EBT 587 381 4.1 Tax for the year (213) (155) Profit for the year, continuing activities 374 226 1.2, 2.11 Loss for the year, discontinued activities (17) (21) Profit for the year 357 205 Attributable to: Shareholders in FLSmidth & Co. A/S 358 210 Minority interests (1) (5) 357 205 5.2 Earnings per share (EPS): Continuing and discontinued activities per share (DKK) 6.9 4.2 Continuing and discontinued activities per share, diluted (DKK) 6.9 4.2 Continuing activities per share (DKK) 7.2 4.6 Continuing activities per share, diluted (DKK) 7.2 4.6 5.1 Proposed dividends per share (DKK) 3.0 2.0 Notes DKKm 2021 2020 Profit for the year 357 205 Items that will not be reclassified to profit or loss: Actuarial gains and losses on defined benefit plans 70 (19) 4.3, 4.4 Tax of actuarial gains and losses on defined benefit plans (15) 1 Items that are or may be reclassified subsequently to profit or loss: Currency adjustments regarding translation of entities 467 (832) Cash flow hedging: - Value adjustments for the year (39) 35 - Value adjustments transferred to work in progress (11) (11) 4.3, 4.4 Tax hereof 15 (7) Other comprehensive income for the year after tax 487 (833) Comprehensive income for the year 844 (628) Attributable to: Shareholders in FLSmidth & Co. A/S 844 (622) Minority interests 0 (6) 844 (628) INCOME STATEMENT STATEMENT OF COMPREHENSIVE INCOME FLSmidth Annual Report 2021 54 Consolidated financial statements Consolidated financial statements Accounting policy The cash flow statement is presented using the indirect method and shows the composition of cash flow divided into operating, investing and fi- nancing activities for both continued and discon- tinued activity and the changes in cash and cash equivalents during the year. Cash flow from operating activities consists of earnings before depreciation, amortisation and impairment (EBITDA) adjusted for non-cash oper- ating items, changes in provisions and net work- ing capital, financial items as interests paid from the lease liabilities and taxes paid. Cash flow from investing activities comprises payments made in connection with the acquisi- tion and disposal of businesses and non-current assets. Cash flow from financing activities comprises changes in the size or composition of equity and loans, repayment of interest-bearing debt includ- ing lease liabilities, acquisitions and disposal of non-controlling interests, movements in treasury shares and payment of dividend to shareholders. Cash and cash equivalents mainly consist of bank deposits. CASH FLOW STATEMENT Notes DKKm 2021 2020 1.2 EBITDA before special non-recurring items 1,401 1,134 1.2 EBITDA, discontinued activities (19) (15) Adjustment for special non-recurring items, gain on sale of property, plant and equipment and non-cash items (56) (48) Adjusted EBITDA 1,326 1,071 2.7 Change in provisions, pension and employee benefits 117 63 3.1 Change in net working capital 612 706 Cash flow from operating activities before financial items and tax 2,055 1,840 5.4 Financial items received and paid (69) (51) 4.2 Taxes paid (537) (368) Cash flow from operating activities 1,449 1,421 2.10 Acquisition of enterprises and activities (11) (99) 2.2 Acquisition of intangible assets (179) (178) 2.4 Acquisition of property, plant and equipment (116) (171) Acquisition of financial assets (8) (7) Prepayment related to disposal of enterprises and activities 0 62 2.12 Disposal of enterprises and activities 2 0 Disposal of property, plant and equipment 39 3 Disposal of financial assets 0 7 2.6 Dividend from associates 0 7 Cash flow from investing activities (273) (376) Dividend paid (101) (14) 5.1 Issue of shares, net of costs 1,434 0 Addition of minority interests 3 0 Exercise of share options 43 0 5.7 Repayment of lease liabilities (125) (120) 5.7 Repayment of debt (1,530) (822) Cash flow from financing activities (276) (956) Change in cash and cash equivalents 900 89 Cash and cash equivalents at 1 January 976 1,001 Foreign exchange adjustment, cash and cash equivalents 59 (114) Cash and cash equivalents at 31 December 1,935 976 The cash flow statement cannot be inferred from the published financial information only Specification of cash and cash equivalents Notes DKKm 2021 2020 2.12 Cash and cash equivalents included in assets held for sale 0 30 Cash and cash equivalents 1,935 946 Cash and cash equivalents at 31 December 1,935 976 Free cash flow DKKm 2021 2020 Free cash flow 1,176 1,045 Free cash flow, adjusted for acquisitions and disposals of enterprises and activities 1,185 1,082 FLSmidth Annual Report 2021 55 Consolidated financial statements Consolidated financial statements Notes DKKm 31-12-2021 31-12-2020 ASSETS Goodwill 4,364 4,194 Patents and rights 784 875 Customer relations 401 466 Other intangible assets 165 172 Completed development projects 233 234 Intangible assets under development 310 299 2.2 Intangible assets 6,257 6,240 Land and buildings 1,792 1,674 Plant and machinery 383 378 Operating equipment, fixtures and fittings 112 132 Tangible assets in course of construction 21 137 2.4, 2.5 Property, plant and equipment 2,308 2,321 4.3 Deferred tax assets 1,490 1,248 2.6 Investments in associates 162 159 Other securities and investments 49 43 Other non-current assets 1,701 1,450 Non-current assets 10,266 10,011 3.2 Inventories 2,464 2,368 3.3 Trade receivables 4,112 3,453 3.4 Work in progress 2,358 2,175 Prepayments 871 333 Income tax receivables 248 178 3.5 Other receivables 799 868 Cash and cash equivalents 1,935 946 Current assets 12,787 10,321 2.12 Assets classified as held for sale 0 124 Total assets 23,053 20,456 Notes DKKm 31-12-2021 31-12-2020 EQUITY AND LIABILITIES 5.1 Share capital 1,153 1,025 Foreign exchange adjustments (665) (1,131) Cash flow hedging (54) (4) 5.1 Retained earnings 9,937 8,246 Shareholders in FLSmidth & Co. A/S 10,371 8,136 Minority interests (3) (6) Equity 10,368 8,130 4.3 Deferred tax liabilities 169 200 2.8 Pension obligations 320 375 2.7 Provisions 450 426 5.7 Lease liabilities 200 209 5.7 Bank loans and mortgage debt 726 2,250 Prepayments from customers 587 240 Income tax liabilities 119 139 3.7 Other liabilities 55 125 Non-current liabilities 2,626 3,964 2.8 Pension obligations 2 3 2.7 Provisions 697 589 5.7 Lease liabilities 104 113 5.7 Bank loans and mortgage debt 17 183 Prepayments from customers 1,903 1,026 3.4 Work in progress 2,373 1,834 3.6 Trade payables 3,367 3,055 Income tax liabilities 193 162 3.7 Other liabilities 1,403 1,306 Current liabilities 10,059 8,271 2.12 Liabilities associated with assets classified as held for sale 0 91 Total liabilities 12,685 12,326 Total equity and liabilities 23,053 20,456 BALANCE SHEET FLSmidth Annual Report 2021 56 Consolidated financial statements Consolidated financial statements EQUITY STATEMENT 2021 2020 DKKm Share capital Curren- cy adjust- ments Cash flow hedging Retained earnings Shareholders in FLSmidth & Co A/S Minority interests Total Share capital Curren- cy adjust- ments Cash flow hedging Retained earnings Shareholders in FLSmidth & Co A/S Minority interests Total Equity at 1 January 1,025 (1,131) (4) 8,246 8,136 (6) 8,130 1,025 (300) (28) 8,082 8,779 14 8,793 Comprehensive income for the year Profit/loss for the year 358 358 (1) 357 210 210 (5) 205 Other comprehensive income Actuarial gain/loss on defined benefit plans 70 70 70 (19) (19) (19) Currency adjustments regarding translation of entities 466 466 1 467 (831) (831) (1) (832) Cash flow hedging: - Value adjustments for the year (39) (39) (39) 35 35 35 - Value adjustments transferred to work in progress (11) (11) (11) (11) (11) (11) Tax on other comprehensive income 0 0 0 (6) (6) (6) Other comprehensive income for the year 0 466 (50) 70 486 1 487 0 (831) 24 (25) (832) (1) (833) Comprehensive income for the year 0 466 (50) 428 844 0 844 0 (831) 24 185 (622) (6) (628) Transactions with owners: Dividend paid (101) (101) (101) 0 (14) (14) Issue of shares, net of costs 128 1,306 1,434 1,434 0 0 Share-based payment 15 15 15 (21) (21) (21) Exercise of share options 43 43 43 0 0 Addition of minority interests 0 3 3 0 0 Equity at 31 December 1,153 (665) (54) 9,937 10,371 (3) 10,368 1,025 (1,131) (4) 8,246 8,136 (6) 8,130 FLSmidth Annual Report 2021 57 Consolidated financial statements Consolidated notes When preparing the financial statements, we are required to make several estimates and judge- ments. These affect the carrying amounts of bal- ance sheet items and income and expenses for the financial year. This note includes the areas that involve a higher degree of judgement or complexity and where changes in assumptions and estimates will likely have a significant impact on the financial statements. These areas are cat- egorised as key accounting estimates and judge- ments. The significance of the impact on the fi- nancial statements of those estimates and judgements is categorised into three levels: low, medium and high. Impact significance Key accounting estimate The determination of the carrying amount of some assets and liabilities requires the estima- tion of the effect of uncertain future events on those assets and liabilities and actual results may differ from the estimates made. Making the esti- mates involve developing expectations of the fu- ture based on assumptions, that we to the extent possible support by historical trends or reasona- ble expectations. We believe that our estimates are the most likely outcome of future events. Key accounting judgements Key accounting judgements are made when ap- plying accounting policies. Key accounting judgements are the judgements made, that can have a significant impact on the amounts recog- nised in the financial statements. The areas that are categorised as key accounting estimates and judgements are unchanged from last years. The description of the key accounting estimates and judgements has been included in the individ- ual notes as shown below. At the end of 2021, the COVID-19 pandemic ex- posed the Group to significant increased uncer- tainty in relation to the financial statements. The emergence of new virus variants continuously re- quires us and our customers to adapt to govern- ment imposed restrictions etc. Bottlenecks in global supply chains have led to increases in prices/costs for both us and our customers. The resulting uncertainties have impacted our key ac- counting estimates and judgements as described below. In general, climate-related changes have not im- posed significant uncertainty on the financial statement but poses opportunities to the Group for delivering solutions to our current and future customers to succeed on the green transition. Valuation of inventories During 2021, we have remained focused on the active measures taken in 2020 to ensure a sound inventory turn and appropriate inventory level. The valuation of inventories is no longer as- sessed to be subject to significant increased un- certainty. For additional description of the estimates, please refer to note 3.2 Inventories. Valuation of receivables The economic situation and the outlook for our customers improved during 2021 as the impact from the pandemic decreased. This positively im- pacted the percentage of our trade receivable being past due. In line with this development, the impairment ratio (impairment as a percentage of the gross carrying amount) decreased to 7.5% compared to 8.4% at the end of 2020 as the im- pact on expected credit losses from forward- looking estimates decreased during 2021. The uncertainty related to the impact from the in creases in prices and costs on our customers is incorporated through the forward-looking esti- mates. For additional description of the estimates, please refer to note 3.3 Trade receivables. KEY ACCOUNTING ESTIMATES AND JUDGEMENTS Consolidated notes Key accounting estimates and judgements Note Key accounting estimates and judgements Nature of accounting impact Impact of estimates and judgements FLSmidth Annual Report 2021 58 Consolidated financial statements Consolidated notes Estimate total cost to complete The impacts from increases in costs following the supply chain challenges have been covered through reassessments of our projects to reflect estimated implications on project financials. This includes updating of project costs to ensure that significant cost increases are reflected in the esti- mate of the total cost to complete. Compared to the uncertainties at the end of 2020 following the unpredictable development in logistics and execution as a consequence of the outbreak of the COVID-19 pandemic, the uncertainties at the end of 2021 have decreased. For additional description of the estimates, please refer to note 3.4 Work in progress. Deferred tax assets The recoverability of the deferred tax assets is dependent on the generation of sufficient future taxable income to utilise tax losses. The uncer- tainty on the future income is related to the mac- roeconomic development, including the demand for environmental investments by our customers, not least within the Cement industry. For additional description of the estimates, please refer to note 4.3 Deferred tax. FLSmidth Annual Report 2021 59 Consolidated financial statements Consolidated notes FLSmidth Annual Report 2021 59 SECTION 1 OPERATING PROFIT & SEGMENTS In this section FLSmidth Annual Report 2021 60 Consolidated financial statements Consolidated notes 1.1 INCOME STATEMENT BY FUNCTION It is our policy to prepare the income statement based on an adjusted classification of the cost by function in order to show the earnings before special non-recurring items, depreciation, amorti- sation and impairment. Special non-recurring items, depreciation, amortisation, and impairment are therefore separated from the individual func- tions and presented in separated lines. The income statement prepared on the basis of cost by function is shown below: 1.2 SEGMENT INFORMATION Mining and Cement Industries are our operating and reporting segments. Our Industries have technology ownership and develop and drive the life cycle offering and product portfolio. This is supported by a six region structure driving cus- tomer relations, sales and service for both Indus- tries. The organisational structure helps create a productivity-driven organisation with a strong, unified digital approach and fewer touchpoints strengthening our local presence, customer ori- entation, and life cycle offering in order to cap- ture growth. The Mining and Cement Industries front our cus- tomers in the global industries with all the knowhow technologies, products, processes and systems used to separate commercially viable minerals from their ores and to cement produc- tion. With the responsibility of our total life cycle offer- ings firmly anchored in the Mining and Cement Industries, we are capable of improving our cus- tomer specific offerings. Offerings range from first time sale of single products to turnkey pro- jects, subsequent services, operation & mainte- nance, upgrades and rebuilds of existing equip- ment, plants and sale of spare parts and wear parts. The segmentation reflects the internal reporting and management structure applied. The seg- ments are primarily managed on EBITA before al- location of shared costs. Accounting policy Segment income and costs include transactions between industries. Such transactions are carried out on market terms. The transactions are elimi- nated upon consolidation. Administrative functions such as finance, HR, IT and legal are shared by the two industries. Additionally, the industries are supported by Group Functions related to procurement, logis- tics and marketing. Shared costs are allocated to business segments based on assessment of usage. Other companies consist of eliminations, compa- nies with no activities, real estate and the parent company, while discontinued activities consist of bulk material handling activities and run-off on activities sold in previous years. Geographical information is based on the six Re- gions that support the Industries. Revenue is pre- sented in the Region in which delivery takes place. Non-current assets and employees are presented in the Region in which they belong. Income Statement by function DKKm 2021 2020 Gross profit 3,837 3,521 EBIT 668 428 Special non-recurring items, depreciation, amortisation and impairment consist of: (733) (706) Special non-recurring items, depreciation, amortisation and impairment are divided into: (733) (706) FLSmidth Annual Report 2021 61 Consolidated financial statements Consolidated notes 1.2 SEGMENT INFORMATION continued 2021 2020 FLSmidth Group FLSmidth Group DKKm Mining Cement Shared costs Other compa- nies Continuing activities Discontinued activities Mining Cement Shared costs Other compa- nies Continuing activities Discontinued activities INCOME STATEMENT Revenue 11,715 5,866 0 0 17,581 0 10,620 5,821 0 0 16,441 0 Gross profit 3,004 1,281 (105) 0 4,180 0 2,688 1,255 (78) 0 3,865 0 EBITDA before special non-recurring items 2,009 625 (1,235) 2 1,401 (19) 1,860 607 (1,335) 2 1,134 (15) EBITA before allocation of shared costs 1,881 502 (1,355) 2 1,030 (19) 1,710 515 (1,456) 2 771 (16) EBITA 1,049 (19) 0 0 1,030 (19) 888 (118) 0 1 771 (16) EBIT 802 (134) 0 0 668 (19) 655 (228) 0 1 428 (16) Gross margin 25.6% 21.8% 23.8% 25.3% 21.6% 23.5% EBITDA margin before special non-recurring items 17.1% 10.7% 8.0% 17.5% 10.4% 6.9% EBITA margin before allocation of shared costs 16.1% 8.6% 5.9% 16.1% 8.8% 4.7% EBITA margin 9.0% -0.3% 5.9% 8.4% -2.0% 4.7% EBIT margin 6.8% -2.3% 3.8% 6.2% -3.9% 2.6% Number of employees at 31 December 5,351 3,405 1,361 10,117 0 5,176 4,118 1,345 10,639 0 Reconciliation of profit/(loss) for the year EBT 587 (19) 381 (18) Profit/(loss) for the year 374 (17) 226 (21) FLSmidth Annual Report 2021 62 Consolidated financial statements Consolidated notes 1.3 GEOGRAPHICAL INFORMATION NORTH AMERICA, NAMER Revenue: DKK 3,850m (2020: DKK 3,440m) Non-current assets: DKK 3,630m (2020: DKK 3,435m) Employees: 1,678 (2020: 1,672) USA Revenue: DKK 2,258m (2020: DKK 2,258m) Non-current assets: DKK 3,002m (2020: DKK 2,840m) Canada Revenue: DKK 902m (2020: DKK 568m) Non-current assets: DKK 613m (2020: DKK 577m) 1 EUROPE, NORTH AFRICA & RUSSIA, ENAR Revenue: DKK 3,124m (2020: DKK 3,067m) Non-current assets: DKK 3,410m (2020: DKK 3,540m) Employees: 2,206 (2020: 2,628) Denmark Revenue: DKK 37m (2020: DKK 35m) Non-current assets: DKK 1,198m (2020: DKK 1,275m) 3 SOUTH AMERICA, SAMER Revenue: DKK 3,731m (2020: DKK 3,875m) Non-current assets: DKK 230m (2020: DKK 265m) Employees: 2,074 (2020: 1,905) Chile Revenue: DKK 1,726m (2020: DKK 1,780m) Non-current assets: DKK 96m (2020: DKK 132m) Brazil Revenue: DKK 896m (2020: DKK 612m) Non-current assets: DKK 73m (2020: DKK 73m) 2 SUB-SAHARAN AFRICA, MIDDLE EAST & SOUTH ASIA, SSAMESA Revenue: DKK 3,134m (2020: DKK 3,063m) Non-current assets: DKK 403m (2020: DKK 406m) Employees: 3,048 (2020: 3,345) India Revenue: DKK 1,108m (2020: DKK 1,136m) Non-current assets: DKK 245m (2020: DKK 247m) 4 AUSTRALIA Revenue: DKK 1,870m (2020: DKK 1,558m) Non-current assets: DKK 783m (2020: DKK 818m) Employees: 582 (2020: 582) 6 ASIA Revenue: DKK 1,872m (2020: DKK 1,438m) Non-current assets: DKK 108m (2020: DKK 99m) Employees: 529 (2020: 507) 5 Revenue, non-current assets and number of employees are disclosed for all Regions, home country of our Headquarter and countries that account for more than 5% of Group revenue. This region was until 2021 presented as two regions, 1) Sub-Saharan Africa & Middle East and 2) Subcontinental India FLSmidth Annual Report 2021 63 Consolidated financial statements Consolidated notes 1.4 REVENUE Revenue arises from sale of life cycle offerings to our customers. We sell a broad range of goods and services within the Mining and Cement In- dustries split into the main categories of projects, products, and services. Products The sale of products comprises sale of standard- ised and customised equipment, such as pre- heaters, cyclones, mills and kilns. Products will usually have a lead time of less than one year. Each product is considered as one performance obligation. Most of the products are sold at a fixed price. Revenue from the sale of products is usually rec- ognised over time, applying the percentage of completion cost-to-cost method. However, reve- nue from products that are standardised or cus- tomised to a low degree are recognised at the point in time when control of the products trans- fers to the customers, usually upon delivery. Highly customised product sales will often entitle us to receive a down payment from the cus- tomer, followed by several progress payments linked to our performance progress. Upon com- pletion or delivery, we will usually be entitled to the final payment. To the extent possible we ob- tain payment guarantees to minimise the credit risk during execution. For standardised products we will usually be en- titled to payment upon delivery. Projects The sale of projects comprises sale of plants, plant extensions, process systems and process system extensions. Projects are usually significant in amount, have a long lead time affecting the financial statements in more than one financial year, have a high de- gree of project management and involve more than one FLSmidth entity in the delivery to the customer. A project is usually considered one performance obligation as a project typically includes highly in- terrelated and interdependent physical assets and services, like engineering, installation, and supervision. Dependent on the contract structure one performance obligation can consist of more than one contract. Most of the projects are sold as fixed price con- tracts and revenue from projects is usually recog- nised over time; applying the percentage of com- pletion cost-to-cost method. A project contract will often entitle us to receive a down payment from the customer, followed by several progress payments linked to our perfor- mance progress. Upon completion and customer acceptance we will usually be entitled to the final payment. To the extent possible we obtain pay- ment guarantees to minimise the credit risk dur- ing execution. Services Services comprise various service elements to support the life cycle offerings portfolio. The sale can consist of spare parts, wear parts, service hours, long-term maintenance contracts, opera- tion & maintenance contracts and sale of up- grades and retrofits. The sale of service hours in- cludes amongst others sale of supervision, elec- tronic or mechanical service of equipment or plants. Each spare part and wear part is considered one performance obligation. The sale is usually agreed at a fixed price and revenue is usually recognised at the point of delivery. We are nor- mally entitled to payment once we have deliv- ered the parts. Revenue split by Regions Revenue by Revenue stream Revenue by Mining and Cement 60% 57% 24% 26% 16% 17% 0% 20% 40% 60% 80% 100% 2020 2021 Products Projects Service 35% 33% 65% 67% 0% 20% 40% 60% 80% 100% 2020 2021 Mining Cement Revenue split on industry and category 2021 2020 DKKm Mining Cement Group Mining Cement Group Capital business 4,775 2,712 7,487 3,944 2,613 6,557 Service business 6,940 3,154 10,094 6,676 3,208 9,884 Total revenue 11,715 5,866 17,581 10,620 5,821 16,441 9% 10% 9% 11% 19% 18% 19% 18% 23% 21% 21% 22% 0% 20% 40% 60% 80% 100% 2020 2021 North America South America Europe, North Africa & Russia Sub-Saharan Africa, Middle East & South Asia Asia Australia FLSmidth Annual Report 2021 64 Consolidated financial statements Consolidated notes 1.4 REVENUE - continued The performance obligation for service sales and maintenance contracts is either each service hour or the full contract, depending on the con- tract wording. Most service contracts are fixed price contracts, if not for the full service, then for the hourly rate. Service sales are recognised over time as the services are provided to the cus- tomer based on the cost-to-cost method. We are normally entitled to payment once the service has been provided or on a monthly basis. Each operation & maintenance contract is deter- mined as one performance obligation. The trans- action price is usually variable, depending on the produced output, and revenue is recognised over time, using the cost-to-cost method. In cases of significant uncertainties with measuring the revenue reliably we recognise revenue upon cash receipt. We are usually entitled to payment on a monthly basis. Upgrades and retrofits are defined as one perfor- mance obligation. The transaction price is usually fixed and revenue is typically recognised over time using the cost-to-cost method. The payment pattern for upgrades and retrofits are very similar to the pattern for projects and products. Backlog The order backlog on 31 December 2021 amounts to DKK 16,592m (2020: DKK 14,874m) and represents the value of outstanding perfor- mance obligations on effective contracts, where we will transfer control at a future point in time and the remaining performance obligations on contracts where we transfer control over time. A contract is effective when it becomes binding for both parties depending on the specific condi- tions of the contract. This usually means that the contract has been signed and the prepayment (if any) has been received. Based on the order backlog maturity profile, the majority, 69% (2020: 64%) of the order backlog is expected to be converted into revenue in 2022, while 31% (2020: 36%) is expected to be con- verted to revenue in subsequent years. Besides the key accounting judgments de- scribed in the box, revenue is impacted by key accounting estimate related to the estimate of the percentage of completion (estimate of total cost to complete). The key accounting estimates are further explained in note 3.4. Backlog maturity DKKm Accounting policy Revenue comprises sale of projects, products and service within the Mining and Cement In- dustries. Revenue from contracts with customers is recognised when control of the goods or ser- vices are transferred to our customers at an amount that reflects the transaction price to which we expect to be entitled in exchange for these goods or services. Revenue from projects, products, and ser- vices (except for sale of service hours) is rec- ognised over time, using the cost-to-cost method, when 1) we have no alternative use for the goods or services to be delivered and 2) we have an enforceable right to payment for work completed. If we do have an alternative use for the goods or services to be delivered, e.g. products with a low degree of customisation, such sales will be recognised at the point in time when con- trol transfers to the customer, usually upon delivery. 9,519 11,449 4,313 3,484 1,042 1,659 0 3,000 6,000 9,000 12,000 15,000 18,000 2020 2021 Within next year Within next year +1 Later than next year +1 Revenue split on timing of revenue recognition principle 2021 2020 DKKm Mining Cement Group Mining Cement Group Total revenue 11,715 5,866 17,581 10,620 5,821 16,441 Key accounting judgements Judgement regarding performance obligations Judgement is performed when determin- ing if a contract for sale of projects, prod- ucts or services, or a combination hereof, involves one or more performance obliga- tions. The complexity arises when selling bun- dled goods and services, and the conse- quence of the key accounting judgement is related to the timing of revenue recog- nition, especially for point in time sales. Judgement regarding recognition method Judgements are made when determining if revenue on a project, product or service is recognised over time or at a point in time. The judgements relate to if we have an alternative use of the assets being pro- duced and if we have an enforceable right to payment throughout the contrac- tual term. When assessing if an asset being pro- duced has no alternative use to FLSmidth, we estimate the alternative use cost amount. We have limited historical data as we rarely redirect our assets. The esti- mate is based on the specifics of each contract. When assessing if we are entitled to pay- ment throughout the contract term, a judgement is made based on the contract wording, legal entitlement and profit esti- mates. FLSmidth Annual Report 2021 65 Consolidated financial statements Consolidated notes 1.4 REVENUE - continued Additionally, if we do not have an enforceable right to payment for work completed throughout the contract term, such sales will also be recog- nised at the point in time when the control trans- fers to the customer, usually upon customer ac- ceptance. In the case of significant uncertainties with the collectability of contract consideration, revenue is recognised upon cash receipt. Service sales (sale of service hours) are recog- nised over time, using the cost-to-cost method, as the customer receives and consumes the ben- efits as we perform the services. In determining the transaction price revenue is reduced by probable penalties, payment of liqui- dated damages and any other claims that are payments to our customers. The transaction price is also adjusted for any variable elements, where we estimate the amount of the variable transaction price. The variable amount is estimated at contract in- ception and re-estimated periodically throughout the contract term. The variable amount is recog- nised as revenue when it is highly probable that reversal will not occur. Warranties are granted in connection with the sale of equipment and systems and are classified as assurance-type warranties that are not ac- counted for as separate performance obligations. Please refer to note 2.7, Provisions, for account- ing policy on warranties provisions. Revenue is recognised less rebates, cash dis- counts, value added tax and duties and gross of foreign withholding taxes. 1.5 STAFF COSTS Staff costs consist of direct wages and salaries, remuneration, pension costs, share-based pay- ments, training etc. related to the continuing ac- tivities. The decrease in staff costs is positively affected by change in currencies of approximately DKK 30m. Composition of staff costs DKKm 2021 2020 4,159 4,541 4,159 4,541 Average number of employees in continuing activities 10,339 11,567 During 2021 the remuneration of the Board of Di- rectors and Group Executive Management was as follows: Remuneration Board of Directors DKKm 2021 2020 Total 6.5 6.4 Remuneration Group Executive Management DKKm 2021 2020 Total 71 51 Two members of the Group Executive Manage- ment are registered with The Danish Business Authority. During 2021, the registered members of the Group Executive Management earned re- muneration as follows including the severance package for Thomas Schulz who resigned from the Group Executive Management by the end of 2021. Number of employees per region % Staff cost per region % Remuneration of Group Executive Management % 17% 20% 22% 30% 5% 6% North America South America Europe, North Africa, Russia Sub-Saharan Africa, Middle East & South Asia Asia Australia 25% 15% 33% 13% 4% 10% North America South America Europe, North Africa, Russia Sub-Saharan Africa, Middle East & South Asia Asia Australia 0% 20% 40% 60% 80% 100% 2020 2021 Wages and salaries Bonus Benefits Severance package Incentive programmes FLSmidth Annual Report 2021 66 Consolidated financial statements Consolidated notes 1.5 STAFF COSTS - continued Remuneration registered executives DKKm 2021 2020 Total 39 19 Each member of the Group Executive Manage- ment is, other than the base salary, entitled to customary benefits. Additionally, the members of Group Executive Management participate in a short-term- and a long-term incentive pro- gramme. The short- and the long-term incentive programmes are capped at 75% and 100%, re- spectively, of the annual base salary. In addition tion, receive an additional incentive of up to 150% of the annual base salary, which can be cash and/or share based. The individual maxi- mum and target levels are fixed as part of the on- going remuneration adjustment cycle. The members of the Group Executive Manage- of termination of employment and severance pay- ment may correspond to a maximum of 6 For details related to the remuneration of the Board of Directors and Group Executive Manage- ment, please refer to the Remuneration Report 2021: www.flsmidth.com/RemunerationReport2021. Accounting policy Staff costs include wages and salaries, cash bo- nuses, share-based payments, pension costs, benefits and social security costs. In general, staff costs are expensed when the services are ren- dered by the employee. When long-term incen- tive programmes are provided, the costs are ac- crued over the period that makes the employees entitled to the payment. Termination benefits are expensed when an agreement has been reached between the Group and the employee and no future service is rendered by the em- ployee in exchange for the termination payment. fined contribution plans and defined benefit plans. The accounting policy for pension plans can be found in note 2.8. Share-based payments are granted as part of the long-term incentive programme. The accounting policy for share-based payments can be found in note 6.1. 1.6 GOVERNMENT GRANTS Governments in many countries have introduced measures to support entities during the pan- demic. During 2021 we have been entitled to the below government grants and fulfilled the condi- tions attached to receiving the grants. The grants have primarily been received to compensate for salary expenses and the majority of the 2021 grants have been received in Switzerland. The COVID-19 related government grants have been included in the following line items in the income statement: COVID-19 related government grants DKKm 2021 2020 9 21 During 2021 we have received a few other gov- ernment grants, which are not COVID-19 related of DKK 7m (2020: DKK 24m). The grants are in- cluded in other operating income and relate to export grants out of India. During 2021, the grants were discontinued. Accounting policy Government grants are recognised when there is reasonable assurance that the grant will be re- ceived and all attaching conditions will be com- plied with. The government grants are recog- nised according to their purpose. Government grants intended to compensate for costs are recognised in the income statement over the periods in which the entity recognises the related costs. The government grant is de- ducted in the related expense. Government grants not directly related to compensation for costs incurred are included within other operat- ing income. 1.7 SPECIAL NON-RECURRING ITEMS Special non-recurring items in 2021 and 2020 relate to closedown of production facilities within the US and consist primarily of severance costs and relocation costs. For the split on industries, refer to note 1.2. No further similar costs are ex- pected for 2022. Accounting policy Special non-recurring items consist of costs and income of a special nature in relation to the main activities of the continued activities, including closedown of facilities, gains and losses from dis- posal of enterprises and activities. FLSmidth Annual Report 2021 67 Consolidated financial statements Consolidated notes FLSmidth Annual Report 2021 SECTION 2 CAPITAL EMPLOYED AND OTHER BALANCE SHEET ITEMS In this section FLSmidth Annual Report 2021 68 Consolidated financial statements Consolidated notes 2.1 RETURN ON CAPITAL EMPLOYED Capital employed is determined as the sum of fixed assets and net working capital. Capital em- ployed is used for determining the key perfor- mance indicator Return on capital employed (ROCE). The table below shows the decomposi- tion of capital employed. Capital employed DKKm 2021 2020 Capital employed, total 14,248 14,520 Capital employed, average 14,384 15,195 ROCE DKKm 2021 2020 ROCE, average 7.2% 5.1% ROCE is calculated based on average capital em- ployed to reflect the annual development. ROCE has increased during the year, driven by both the decreased average capital employed and in- creased EBITA. 2.2 INTANGIBLE ASSETS Goodwill arising from business acquisitions is recognised in the financial statements. The carry- ing amount of goodwill per segment is shown in note 2.3. Patents and rights acquired through business ac- quisitions are recognised in the financial state- ments. The patents and rights include patents, trademarks, technology, and other rights. Our intangible assets under development con- sist of research and development (R&D) projects and software. Much of the knowhow/R&D we generate, originate from work for customers, of which some is expensed and some is capitalised. In 2021, R&D costs expensed totalled DKK 152m (2020: DKK 160m). The expense is included in production costs. The addition of intangible as- sets under development amounts to DKK 179m (2020: DKK 177m) where capitalised R&D cost amounts to DKK 142m (2020: DKK 150m) and the remaining capitalisation relates to IT related pro- jects. Of those capitalised costs, DKK 114m (2020: DKK 115m) are internally generated. In the table on the next page, intangible assets are shown by type. Other intangible assets con- sist of software and completed software imple- mentation projects, whereas completed develop- ment projects primarily consist of R&D costs (developments in relation to production tech- niques, processes, and similar). Until completed, internally developed assets are presented in a separate column. Accounting policy Goodwill At initial recognition, goodwill arising from busi- ness combinations is measured at cost being the excess of the purchase price over the fair value of the net assets acquired, including contingent liabilities. Goodwill is expressed in the functional currency of the entity acquired. Internally gener- ated goodwill is not capitalised. Goodwill is allo- cated to the cash generating units as defined by Management. The determination of cash gener- ating units complies with the managerial struc- ture and the internal financial reporting in the Group. Subsequently, goodwill is not amortised but is tested for impairment at least once a year or sooner if impairment indication arises. Further information on the impairment test and the recognition of a potential impairment loss on goodwill can be found in note 2.3. Intangible assets other than goodwill Patents and rights, including trademarks, cus- tomer relations, software applications and other intangible assets are measured at cost less accu- mulated amortisation and impairment losses. Customer relations are acquired in business combinations, only, while patents and rights, in- cluding trademarks, software applications and other intangible assets can be acquired as part of business combinations, in separate acquisitions or be internally developed. The Group uses significant resources on innova- tion in relation to production techniques/pro- cesses, software solutions and the like. For ac- counting purposes, the innovation activities are classified into a research phase and a develop- ment phase. Projects within the development phase are capitalised if it can be demonstrated that the Group has the technical feasibility, inten- tion, and sufficient resources to complete the de- velopment and provided that the cost to develop can be determined reliably and it is probable that the future earnings or the net selling price will cover production, sales, and administrative costs plus development costs. Other development costs and costs in the research phase are recog- nised in the income statement when incurred. Development costs consist of salaries and other costs that are directly attributable to develop- ment activities. Development projects in progress are not amor- tised but are tested for impairment at least once a year. Once a development project has been com- pleted it is amortised on a straight-line basis over the estimated useful life. Similarly, other intangi- ble assets are amortised on a straight-line basis over the estimated useful life of the assets which is as follows: Patents and rights, including trademarks, up to 30 years Customer relations up to 30 years Other intangible assets up to 20 years; primar- ily consist of software applications with useful life up to 5 years Completed development projects (R&D pro- jects) up to 8 years Intangible assets are written down to recovera- ble amount if lower. Further information can be found in note 2.3. FLSmidth Annual Report 2021 69 Consolidated financial statements Consolidated notes 2.2 INTANGIBLE ASSETS continued Carrying amount of intangible assets 2021 DKKm Goodwill Patents and rights Customer relations Other intangible assets Completed development projects Intangible assets under development Total Cost at 31 December 2021 4,364 2,127 1,925 884 1,272 310 10,882 Amortisation and impairment at 31 December 2021 0 (1,343) (1,524) (719) (1,039) 0 (4,625) Carrying amount at 31 December 2021 4,364 784 401 165 233 310 6,257 2020 DKKm Goodwill Patents and rights Customer relations Other intangible assets Completed development projects Intangible assets under development Total Cost at 31 December 2020 4,194 2,108 1,832 850 1,164 299 10,447 Amortisation and impairment at 31 December 2020 0 (1,233) (1,366) (678) (930) 0 (4,207) Carrying amount at 31 December 2020 4,194 875 466 172 234 299 6,240 FLSmidth Annual Report 2021 70 Consolidated financial statements Consolidated notes 2.3 IMPAIRMENT OF ASSETS Result of annual impairment test We perform an annual impairment test of good- will and intangible assets under development. Neither in 2021 nor in 2020 did the test reveal an impairment need. Intangible assets relate primar- ily to business combinations, software and devel- opment projects. The annual impairment test is an assessment of whether the cash generating units will be able to generate sufficient positive net cash flow in the future to support the carrying amount of the assets related to the units. Management believes that no reasonable changes in the key assumptions are likely to re- duce the excess value in any of the cash gener- ating units to zero or less. Carrying amounts of intangible assets included in the impairment test are specified in the table be- low. Cash generating units The cash generating units equal our operating and reportable segments, Mining and Cement, these being the smallest group of assets which together generate incoming cash flow from con- tinued use of the assets and which are independ- ent of cash flow from other assets or groups of assets. The definition of the cash generating units is reconsidered once a year, and the defini- tion is unchanged compared to last year. Key assumptions The recoverable amount determined in the im- pairment test is based on a value-in-use calcula- tion. To determine the value-in-use, management is required to estimate the present value of the future free net cash flow based on budgets and strategy for the coming eight years as well as projections for the terminal period. The eight year period is used to reflect a full business cy- cle. The expected future free net cash flow does not include cash flows from tk Mining. Significant parameters in the estimate of the present value are discount rate, revenue growth, EBITA margin, expected investments and growth expectations for the terminal period. The discount rate is determined separately for Mining and Cement to reflect the risks specific to each CGU. The discount rate applied is the weighted average cost of capital (WACC) and re- flects the latest market assumptions for the cost of equity and the cost of debt. The cost of equity is determined assuming that investors are holding a global equity exposure, with the risk-free rate determined as a 10-year US treasury rate and the equity premium determined on the US market. The weighting of the cost of debt and cost of equity is based on the capital structure for relevant peer groups for the two in- dustries. The expected annual growth rate and the ex- pected margins in the budget period are based on historical experience and the assumptions about expected market developments. The long- term growth rate for the terminal period is based on the expected growth in the world economy, specifically for the industries. Due to the current low interest rate environment, a conservative approach regarding the long-term growth rate for the terminal period has been ap- plied. This methodology has been applied to en- sure consistency with the level of the risk-free rate applied as a basis for the estimation of WACC and the long-term growth rate. Based on these factors, a long term annual growth rate for the terminal period of 1.5% has been applied. Investments reflect both maintenance and ex- pectations of organic growth. Mining The mining industry has remained largely resili- ent during the course of 2021 aided by high com- modity prices and solid industry fundamentals. The global mining industry is expected to grow over the coming years and the long-term outlook remains positive for minerals required for global economic development and to enable the green transition. The outlook for investments in mining remains positive, particularly for minerals that are re- quired for global economic development and to enable the green transition. The sustainability agenda continues to gather stream with the large mining companies aligning their business models to the Paris Agreement. Miners are generating good cash flows and are well capitalised to in- vest following low capex levels in recent years. Cement There is growing demand for green solutions in the cement industry. While the short-term indus- try outlook remains unchanged with significant overcapacity, we expect a mid-term recovery fuelled by large economic stimulus packages re- quiring green and carbon neutral infrastructure. Carrying amounts of intangible assets 2021 2020 DKKm Mining Cement Group Mining Cement Group Total 5,398 858 6,257 5,374 866 6,240 FLSmidth Annual Report 2021 71 Consolidated financial statements Consolidated notes 2.3 IMPAIRMENT OF ASSETS continued During 2021, the cement industry started to re- cover with improved service activity, however with significant regional differences. The increase in COVID-19 infection numbers towards the end of the year has put renewed strain on site visits due to preventive measurements taken by au- thorities and plant operators. At the same time, the global construction supply chain challenge has triggered higher costs, labour and materials shortages as well as delays across regions. Increasing focus on emission regulations and carbon taxes are adding costs to non-sustainable production and we have a healthy pipeline for upgrade projects driven by ongoing conversion to alternative cement production with improved environmental footprint. Overall, we see increased demand for solutions that can decarbonise and debottleneck cement plants. Demand for new capacity remains sub- dued and the pandemic situation casts uncer- tainty over the speed of recovery in the cement industry. Sensitivity analysis Based on current assumptions we see no impair- ment indications, and our key assumptions are not sensitive to reasonable changes to an extent that will result in an impairment loss neither indi- vidually or in combination. Accounting policy Goodwill and intangible assets not yet available for use are tested for impairment at least once a year, irrespective of whether there is any indica- tion that they may be impaired. Assets that are subject to amortisation, such as and other non-current assets are reviewed for impairment whenever events or changes in cir- cumstances indicate that the carrying amount may not be recoverable. Factors that could trigger an impairment test in- clude the following: Changes of R&D project expectations Lower than predicted sales related to particular technologies Changes in the economic lives of similar assets Relationship with other intangible assets or property, plant and equipment For impairment testing, assets are grouped into the smallest group of assets that generates largely independent cash inflows (cash generat- ing unit) as determined based on the manage- ment structure and the internal financial report- ing. If the carrying amount of intangible assets ex- ceeds the recoverable amount based on the ex- istence of one or more of the above indicators of impairment, any impairment is measured based on the net present value of expected future cash flows. Impairments are reviewed at each report- ing date for possible reversal. However, impair- ment of goodwill may not subsequently be re- versed. Recognition of impairment of other assets is reversed to the extent that changes have taken place in the assumptions and esti- mates that led to the recognition of impairment. Key assumptions 2021 2020 Mining Cement Mining Cement FLSmidth Annual Report 2021 72 Consolidated financial statements Consolidated notes 2.4 PROPERTY, PLANT AND EQUIPMENT Land and buildings with a carrying amount of DKK 48m (2020: DKK 48m) are pledged against mortgage debt of DKK 241m (2020: DKK 256m). The fair value of land and buildings pledged ex- ceeds the value of the mortgage debt. Accounting policy Property, plant and equipment are measured at cost less accumulated depreciation and impair- ment losses. The cost of self-constructed assets includes the cost of materials and direct labour costs. From 2021, property, plant and equipment include lease assets, see further in note 2.5. The comparative information in the balance sheet has been restated. Depreciation is charged on a straight-line basis over the estimated useful life of the assets until they reach the estimated residual value. Estimated useful life is as follows: Buildings, 20-40 years Plant and machinery, 3-15 years Operating equipment and fixtures and fittings, 3-15 years Leasehold improvements, mainly related to land and buildings, up to 5 years or following the corresponding lease agreement Land is not depreciated. Newly acquired assets and assets of own con- struction are depreciated from the time they are available for use. Where acquisition or use of the asset places the Group under an obligation to incur the costs of re-establishing the asset, the estimated costs for this purpose are recognised as part of the cost of useful life Carrying amount of property, plant and equipment 2021 2020 DKKm Land and buildings Plant and machinery Operating equipment, fixtures and fittings Property, plant and equipment under construction Total Land and buildings Plant and machinery Operating equipment, fixtures and fittings Property, plant and equipment under construction Total Cost at 31 December 2,529 1,661 886 21 5,097 2,306 1,543 892 137 4,878 Depreciation and impairment at 31 December (989) (1,286) (811) 0 (3,086) (892) (1,174) (803) 0 (2,869) Carrying amount at 31 December, owned assets 1,540 375 75 21 2,011 1,414 369 89 137 2,009 Carrying amount at 31 December, leased assets, note 2.5 252 8 37 0 297 260 9 43 0 312 Carrying amount at 31 December, property, plant and equipment 1,792 383 112 21 2,308 1,674 378 132 137 2,321 FLSmidth Annual Report 2021 73 Consolidated financial statements Consolidated notes 2.5 LEASES We are party to several lease contracts as le see, by which we lease offices, warehouses, manufacturing facilities and vehicles. We enter into lease contracts due to the flexibility it pro- vides as it may ease the scalability to always adapt the asset base to the operational activity From 2021, the lease assets are included in the same line item in the balance sheet as that within which the corresponding underlying asset would be presented if they were owned, cf. note 2.4. The majority of the lease assets relate to land and buildings and the lease contracts are typi- cally made for fixed periods of 1 to 10 years, with a weighted average lease term of 5 years. The average discount rate applied for land and build- ings is 3.19% at the end of 2021 (2020: 3.13%). The amounts included in the income statement related to expensed leases are presented in the table. During 2021 cash outflows for capitalised leases were DKK 135m (2020: DKK 131m). Interest re- lated to leases was DKK 11m (2020: DKK 11m) and impacted CFFO negatively, and the remaining DKK 124m (2020: DKK 120m) was repayment of lease debt included in CFFF. Please refer to note 5.8 Financial assets and liabilities for maturity analysis of lease liabilities Further to the above cash outflow, DKK 14m (2020: DKK 11m) was included in CFFO for costs relating to short term, low-value and variable lease payments not recorded on the balance sheet. FLSmidth is currently looking into a potential lease of a new headquarter near our current headquarter in Valby, Denmark. It has therefore been decided not to move forward with a previ- ous conditional agreement to sell and lease back parts of the current headquarter in Valby. Final decisions on leasing a new headquarter and de- ciding what to do with our current headquarter, is expected during the first half of 2022. We are not party to any significant lease con- tracts as lessor. Accounting policy Assets and liabilities arising from a lease are ini- tially measured on a present value basis. Lease liabilities include the net present value of the payments, which are fixed or variable dependent on an index or a rate. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the lease asset. Service components are excluded from the lease liability. The lease payments are discounted using an in- cremental country specific borrowing rate, based margin. The lease payments have been split into an inter- est cost and a repayment of the lease liability. Lease assets are measured at cost comprising the following: The amount of the initial measurement of lease liability Any lease payments made at or before the commencement date less any lease incentives received Any initial direct costs, and Restoration costs Carrying amount of leases 2021 DKKm Land and buildings Plant and machinery Operating equipment Total Carrying amount at 31 December 2021 252 8 37 297 2020 DKKm Land and buildings Plant and machinery Operating equipment Total Carrying amount at 31 December 2020 260 9 43 312 Expensed leases DKKm 2021 2020 Expensed lease costs in the income statement 14 11 Expensed lease costs in the income statement 14 11 FLSmidth Annual Report 2021 74 Consolidated financial statements Consolidated notes 2.5 LEASES continued The lease assets are depreciated over the term of the lease contract on a straight-line basis. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). The following factors are normally the most rele- vant: How the asset supports the direction of the Group, from a strategic standpoint, location of the asset, timing of the option being exercisa- ble If there are significant penalties to terminate (or not extend), the Group is typically reasonably certain to extend (or not terminate) If any leasehold improvements are expected to have a significant remaining value, the Group is typically reasonably certain to extend (or not terminate) Payments associated with short-term and low value leases are recognised on a straight-line ba- sis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT equipment and small items of office furniture at a low value. 2.6 INVESTMENTS IN ASSOCIATES Investments in associates includes investment in Intertek Robotic Laboratories Pty Ltd, Australia, with a 50% share. The investment is accounted for in accordance with the equity method. Although we hold 50% of the shares and voting rights, we do not share the control, hence the investment is not treated as a joint venture. As we do have significant influence the investment is treated as an investment in as- sociates. Name of associate Country Date of acqui- sition Owner- ship interest Voting share The primary activity of the company is to provide automated and robotic sample preparation, fu- sion and analytical testing services, including the procurement, construction and commissioning of laboratories. Carrying value of investments in associates, FLSmidth share DKKm 2021 2020 Carrying value at 31 December 162 159 Financial information of 100% of Intertek Robotic Laboratories Pty Ltd, prepared in accordance with FLSmidth accounting policies, is as follows : Intertek Robotic Laboratories Pty Ltd DKKm 2021 2020 Equity 178 176 Investments in associates, FLSmidth share DKKm 2021 2020 Carrying value at 31 December 162 159 2.7 PROVISIONS Provisions are liabilities of uncertain timing or amount. Our provisions consist of: Provision for warranty claims in respect of goods or services already delivered Provisions for cost related to restructuring Provisions for loss-making contracts (included in other provisions) Provisions for losses resulting from disputes and lawsuits (included in other provisions) Provisions for indirect tax risks (included in other provisions) Total provisions have increased compared to last year reflecting the increased activity level and certain specific project risks. Warranty provisions cover expected costs to remedy warranty claims during the warranty pe- riod. For projects, the warranty provision is built up during the production phase. The warranty period starts once the project has been finalised and runs seldomly for more than two years and often only up to one year. The increase is mainly a result of the higher activity level. Restructuring provisions relate to costs expected to be incurred when executing restructurings de- cided and communicated by management. In most cases, the restructuring will occur in the near future. The increase in other provisions relate to a com- bination of increase in the provision for loss mak- ing contracts due to additional uncertainties in the execution of the project portfolio and from in- crease in provisions for ongoing legal disputes. FLSmidth Annual Report 2021 75 Consolidated financial statements Consolidated notes 2.7 PROVISIONS continued shown below. The provisions from continued and discontinued activities add up to our total provi- sions. In our cash flow statement, the changes in provi- sions are combined with the changes in pensions and employee benefits. The impact on cash flows from changes in provisions, pensions and employee benefits (adjustment to the amounts recognised in the income statement) is shown in the table to the right. Cash flow effect from change in provisions, pension and employee benefits DKKm 2021 2020 Cash flow effect 117 63 Accounting policy Provisions are recognised when we, due to an event occurring before or at the balance sheet date, have a legal or constructive obligation and outflow of resources is expected to settle the ob- ligation. Provisions for warranty claims are estimated on a project-by-project basis based on historical real- ised costs to handle warranty claims. The provi- sion covers also unsettled claims from customers or subcontractors. Provisions for restructuring costs are made only if the restructuring has been decided at the bal- ance sheet date in accordance with a specific plan, and only provided that the parties involved have been informed about the overall plan. Provisions for loss-making contracts cover pro- jects expected to result in a loss as the expected cost to complete the project exceeds revenue. The expected cost overrun that is not covered by revenue is recognised as a provision. Provisions regarding disputes and lawsuits are outcome settling the cases based on the infor- mation at hand at the balance sheet date. Provisions 2021 2020 DKKm Warranties Restructuring Other Total Warranties Restructuring Other Total Provisions at 31 December 543 47 557 1,147 496 60 459 1,015 Key accounting estimates Estimated warranty provision When estimating the warranty provision we take into consideration several years of warranty cost information, any spe- cific project related risks, knowledge about defects and functional errors in the product portfolio, risks associated with newly launched products as well as customer losses in connection with sus- pension of operation. We include all of these factors as relevant, to estimate a warranty provision that to the best of our knowledge reflects our responsibil- ity towards our customers in the future. Provisions related to continued activities DKKm 2021 2020 Continued activities share of Group provisions 999 833 FLSmidth Annual Report 2021 76 Consolidated financial statements Consolidated notes 2.8 PENSION OBLIGATIONS Defined contribution plans The majority of our pension plans are defined contribution plans and we have no further pay- ment obligations once the contributions are paid. Under these pension plans, we recognise regular payments, e.g. a fixed amount or a fixed percent- age of the salary. Pension costs related to de- fined contribution plans are recognised in staff costs (note 1.5) and amounted to DKK 441m (2020: DKK 439m). Defined benefit plans We also have defined benefit plans where the re- sponsibility for the pension obligation towards the employees rests with us. Under a defined benefit plan, we have an obligation to pay a spe- cific benefit, e.g. retirement pension in the form of a fixed proportion of the exit salary. Under these plans, we carry the risk in relation to future developments in interest rates, inflation, mortal- ity, etc. A change in the assumptions upon which the calculation is based results in a change in the present value of the pension obligation. Such ac- tuarial gains and losses are recognised in other comprehensive income. The majority of the total pension obligations are partially funded with assets placed in pension funds and through insurance. In 2022 we expect to make a contribution to the defined benefit plans of DKK 9.1m (2021: 8.5m). The weighted av- erage duration of the obligations is 15 years (2020: 13 years). Actuarial assumptions 2021 2020 Pension contributions by plan types % Pension obligations by country % Fair value of plan assets by Instruments 0% 20% 40% 60% 80% 100% 2020 2021 Defined contribution plans Defined benefit plans 0% 20% 40% 60% 80% 100% 2020 2021 USA Switzerland Germany India Other 0% 20% 40% 60% 80% 100% 2020 2021 Equity instruments Debt instruments Other assets Pension obligations 2021 2020 DKKm Present value of pension obligations Fair value of plan assets Net obligations Present value of pension obligations Fair value of plan assets Net obligations Recognised in the income statement (46) 15 (31) (51) 20 (31) Recognised in other comprehensive income 35 35 70 (66) 47 (19) Other changes 22 (5) 17 139 (105) 34 Value at 31 December (1,116) 794 (322) (1,127) 749 (378) FLSmidth Annual Report 2021 77 Consolidated financial statements Consolidated notes 2.8 PENSION OBLIGATIONS continued Sensitivity analysis Below shows a sensitivity analysis based on changes in the discount rate, all other things be- ing equal. A change in the discount rate will result in the fol- lowing changes in the net pension obligation: Sensitivity DKKm 2021 2020 Accounting policy Contributions to defined contribution plans are recognised in staff costs when the related ser- vice is provided. Any contributions outstanding are recognised in the balance sheet as other lia- bilities. For defined benefit plans, annual actuarial calcu- lations are made of the present value of future benefits payable under the pension plan using the projected unit credit method. The present value is calculated based on as- sumptions about future developments in varia- bles such as salary levels, interest, inflation and mortality rates. The present value is only calcu- lated for benefits earned by the employees through their employment with the Group to date. The actuarial calculation of present value less the fair value of any plan assets is recog- nised in the balance sheet as pension obliga- tions. The pension costs (service costs) for the year, based on actuarial estimates and financial fore- casts at the beginning of the year, are recog- nised in the income statement within staff costs. The interest on the net pension obligation is rec- ognised in the income statement within financial costs. The difference between the forecast de- velopment in pension assets and liabilities and the realised values is called actuarial gains or losses and is recognised in other comprehensive income. If a pension plan constitutes a net asset, the as- set is recognised only to the extent that it equals the value of future repayments under the plan or it leads to a reduction of future contributions to the plan. 2.9 CONTRACTUAL COMMITMENTS AND CONTINGENT LIABILITIES Contractual commitments The capital commitment of DKK 2.1b related to ness (subject to customary authority approvals) is described in note 2.10. As part of our digital strategy, FLSmidth has made a fund investment in Chrysalix, a venture capital firm that specialises in transformational in- dustrial innovation. Our participation provides priority access, builds capabilities and shares risk when working with early stage start-ups across the globe. Our objec- tive of engaging with disruptive and deep tech- nology start-ups is to create differentiated value propositions and accelerate being Productivity Provider #1, while delivering strategic and finan- cial returns. We have made a capital commitment of USD 10m. The capital can be called up until 2029, in- vestment period being the first 5 years. The tim- ing and amounts of each capital call are un-cer- tain. The undrawn part of the capital commitment at 31 December 2021 amounted to DKK 43m (2020: DKK: 52m). Contingent liabilities Contingent liabilities at the end of 2021 amounted to DKK 3,117m (2020: DKK 2,660m). Contingent liabilities cover guarantees and other contingent liabilities related to legal disputes etc. Guarantees To cover project-related risks, such as perfor- mance, payment, quality and delay, we issue usual security in the form of performance and payment guarantees for projects and supplies to- wards our customers. At 31 December 2021, the volume of such guarantees amounted to DKK 2,254m (2020: DKK: 2,376m). In the event a guarantee is expected to materialise, a provision is recognised to cover the risk. Such provisions are covered by note 2.7, either within warranty provisions or other provisions. Other contingent liabilities We are involved in legal disputes, certain of which are already pending with courts or other authorities and other disputes which may or may not lead to formal legal proceedings being insti- gated against us. Other contingent liabilities amount to DKK 863m (2020: DKK 284m). The outcome of such proceedings and disputes is by nature unknown, but is not expected to have sig- nificant impact on our financial position. On 22 July 2021, a customer informed that it in- tends to initiate arbitration against FLSmidth and certain partners for an amount of DKK 208m, for Contingent liabilities in 2021 further include DKK unsubstantiated cash withdrawal on a perfor- mance guarantee, see note 2.11 for more infor- mation. FLSmidth Annual Report 2021 78 Consolidated financial statements Consolidated notes 2.10 BUSINESS ACQUISITIONS Acquisitions in 2021 In 2021, FLSmidth did not acquire any new busi- nesses. On 29 July and 6 September 2021, it was an- nounced that FLSmidth and thyssenkrupp Indus- trial Solution AG have reached an agreement business, excluding the activities in India, for a to- tal consideration of EUR 280m corresponding to approximately DKK 2.1 billion. Closing is ex- pected in H2 2022 and is conditional upon cus- tomary regulatory approvals and formal approval by the supervisory board of thyssenkrupp AG and the supervisory board of thyssenkrupp Industrial Solution AG. Acquisition related costs amounted to DKK 107m and are recognised in the income statement as administrative cost. For 2021, the costs include costs incurred both before and after signing of the agreement to acquire the tk mining business. Acquisitions in 2020 On 31 January 2020, FLSmidth acquired 100% the business Mill-Ore Group. On 30 October 2020, FLSmidth acquired 100% the business KnowledgeScape LLC. The acquisition price for the two businesses is DKK 97m and lead to the recognition of goodwill of DKK 58m. The accounting for the acquisitions has been fi- nalised during 2021 and did not lead to adjust- ments to the purchase price allocation deter- mined at the end of 2020, refer to Annual Report 2020 page 85. During 2021 and as anticipated, FLSmidth paid DKK 11m (2020: 8m DKK) in deferred payments on the IMP Automation Group acquisition in 2019 and the KnowledgeScape LLC acquisition in 2020. Accounting policy Newly acquired or newly established businesses are included in the consolidated financial state- ments from the acquisition date or formation. The acquisition date is the date when control of the business is transferred to the Group. Upon acquisition of the business of which we ob- tain control, the acquisition method is applied, according to which the identified assets, liabilities and contingent liabilities are measured at their fair values. The purchase price consists of the fair value of the consideration payable/receivable. This in- cludes the fair value of the consideration already paid/received, deferred consideration and con- tingent consideration. Any subsequent adjustment of contingent con- sideration is recognised directly in the income statement, unless the adjustment is the result of new information about conditions prevailing at the acquisition date, and this information be- comes available before the initial accounting is terminated no later than 12 months after the ac- quisition date (the measuring period). Transaction costs are recognised directly in the income statement when incurred as administra- tive costs. When the purchase price differs from the fair val- ues of the assets, liabilities and contingent liabili- ties identified on acquisition, any positive differ- ences (goodwill) are recognised in the balance sheet under intangible assets and any negative differences (a gain from a bargain purchase) are recognised in the income statement. If, on the acquisition date, there are any uncer- tainties with respect to identifying or measuring acquired assets, liabilities or contingent liabilities or uncertainty with respect to determining their cost, the initial recognition will be made on the basis of estimated values. Such estimated values may be adjusted, or additional assets or liabilities may be recognised during the measurement pe- riod, if new information becomes available about conditions prevailing on the acquisition date, which would have affected the calculation of val- ues on that day, had such information been known. The adjustments are made to the initial purchase price allocation as a restatement of prior information, including to the amount of goodwill or gain on a bargain purchase. FLSmidth Annual Report 2021 79 Consolidated financial statements Consolidated notes 2.11 DISCONTINUED ACTIVITIES Discontinued activities include the remaining re- sponsibilities to finalise legacy projects, handling of claims, etc. retained on the sale of the non- mining bulk material handling business in 2019. Progress on projects has been delayed, amongst others, due to the COVID-19 pandemic. The segment note 1.2 shows the full disclosure of income statement for discontinued activities. ash flow from operating activities is presented in the table be- low. The cash outflow related to net working cap- withdrawal of DKK 130m on a performance guar- antee. We have rejected the claim and recog- nised the cash withdrawal as a receivable as of 31 December 2021. disclosed in note 2.7 is shown in the table below: Discontinued activities share of provisions DKKm 2021 2020 Provisions 148 182 In addition to the provisions of DKK 148m, dis- continued activities include DKK 350m (2020: shown in note 3.1. Accounting policy Discontinued activities comprise disposal groups, which have been disposed of, ceased or are classified as held for sale and represents a sepa- rate major line of business or geographical area. Discontinued activities are presented in the in- come statement as profit/loss for the year, dis- continued activities and consists of operating in- come after tax. Gains or losses from disposal of the assets related to the discontinued activities and adjustments hereto are likewise presented as discontinued activities in the income state- ment. In the consolidated cash flow statement, cash flow from discontinued activities is included in cash flow from operating, investing and financing activities together with cash flow from continuing activities. 2.12 ASSETS AND LIABILITIES CLASSIFIED AS HELD FOR SALE At the end of 2021, no assets and liabilities are classified as held for sale. In the first quarter of 2021, the two disposals that were announced in December 2020 became ef- fective. The sale of advanced fabric filter technology and of Möller pneumatic conveying systems business to REEL had no ma- terial income statement effect in 2021. The assets related to the disposals were in- cluded in assets classified as held for sale as of 31 December 2020. Accounting policy Non-current assets as well as assets and liabili- ties expected to be sold as a group in a single transaction are classified as held for sale, if their carrying value is likely to be recovered by sale within 12 months in accordance with a formal plan. Assets held for sale are measured at the lower of the carrying value at the time of classification as held for sale and the fair value less costs to sell. Assets are not depreciated from the time they are reclassified as held for sale. Discontinued activities share of CFFO DKKm 2021 2020 Adjusted EBITDA (19) (15) Cash flow from operating activities before financial items and tax (187) (48) Cash flow from operating activities (188) (52) FLSmidth Annual Report 2021 80 Consolidated financial statements Consolidated notes FLSmidth Annual Report 2021 80 SECTION 3 WORKING CAPITAL In this section FLSmidth Annual Report 2021 81 Consolidated financial statements Consolidated notes 3.1 NET WORKING CAPITAL Net working capital represents the assets and lia- operations and includes the following items. The impact working capital is also showed in table below. Despite the increased activity level during the second half of 2021 following the global easing of pandemic restrictions the collection of prepay- ments from customers and invoicing in excess of work in progress completed led to decreased net working capital compared to the end of 2020. Currency impacts increased the net working cap- ital balance at 31 December 2021 by DKK 14m (2020: a reduction of DKK 158m). 3.2 INVENTORIES Inventories net of impairment DKKm 2021 2020 Inventories 2,464 2,368 Impairment of inventories DKKm 2021 2020 Impairment at 31 December 353 272 Reported inventory level has increased by 4% in 2021 due to higher foreign currency exchange rates by year end 2021. Adjusted for currency the inventory marginally decreased during 2021. Accounting policy Inventories are measured at cost based on weighted average cost prices. In the event that cost of inventories exceeds the expected selling price less cost of completion and selling costs, the inventories are impaired to the lower net realisable value. The net realisable value of inventories is measured as the expected sales price less costs of completion and costs to finalise the sale. Impairment assessment of the inventory is per- formed item by item including: Test for slow moving stock Test for aging of inventory Assessment of expected market (pricing and market potential) Assessment of strategic inventory items Key accounting estimates Estimated valuation of inventories When assessing the net realisable value of inventories we take marketability, obsolescence and development in expected selling prices into account. Also inventory turnover, quantities and the nature and condition of the inventory items including the classification as strategic inventory are considered in the assessment. We include all of these factors as relevant, to ensure that our in- ventory is reflected at the expected selling price, if lower than cost. Net working capital DKKm 2021 2020 1,058 1,752 Cash flow effect from change in NWC DKKm 2021 2020 612 706 FLSmidth Annual Report 2021 82 Consolidated financial statements Consolidated notes 3.2 INVENTORIES continued Obsolete items are impaired to the value of zero. Management considers part of the inventories as strategic. Strategic items are held in inventory, even if slow moving, because they are consid- ered key equipment to the customers, that we need to be able to deliver with very short notice. Raw materials and consumables include pur- chase costs of materials and consumables, du- ties and freight. Work in progress, finished goods and goods for resale include cost of manufactur- ing including materials consumed and labour costs plus an allowance for production over- heads. Production overheads include operating costs, maintenance of production facilities as well as administration and factory management di- rectly related to manufacturing. 3.3 TRADE RECEIVABLES Our trade receivables relate to the sale of both service and capital business. Trade receivables net of impairment specified according to aging DKKm 2021 2020 Trade receivables 4,112 3,453 Impairment of trade receivables specified ac- cording to aging is shown below. The impairment in 2021 is based on historical ob- served default rates adjusted for estimates of un- certainties in project related activities and market conditions. Impairment of trade receivables DKKm 2021 2020 Impairment at 31 December 333 317 Accounting policy Trade receivables are initially measured at fair value and subsequently measured at amortised cost. A credit loss allowance is made upon initial recognition based on historical observed default rates adjusted for forward looking estimates. The cost of the credit loss allowances is included in administration costs. A loss is considered real- ised when it is certain that we will not recover the receivable, e.g. in case of bankruptcy or similar. Key accounting estimates Estimated level of expected losses When estimating the level of receivables that in the future is expected not to be collected we take the following infor- mation into account; historical losses on receivables, ageing of the receivables, access to payment securities and possi- bilities to off-set assets against claims. When making the assessment we also evaluate the expected development in macro-economic and political environ- ments that could impact the recoverabil- ity. We have made estimates of our expecta- tion to the future losses on receivables by applying a consistent methodology. The calculation of expected credit losses (ECL) incorporate forward-looking esti- mates. These estimates are mainly based on historical experience on losses and adjusted to reflect the current situation. The impact from the adjustments to re- flect the current situation has decreased compared to at the end of 2020. The de- crease is based on an assessment of an improvement in credit risk following the more stable macroeconomic situation. Impairment of trade receivables specified according to aging 2021 2020 DKKm Expected loss rate Gross carrying amount Impairment Expected loss rate Gross carrying amount Impairment Total 4,445 333 3,770 317 FLSmidth Annual Report 2021 83 Consolidated financial statements Consolidated notes 3.4 WORK IN PROGRESS Work in progress relates to contracts with cus- tomers where revenue is recognised over time. As the costs to produce the output under a con- tract are incurred, the costs are recognised as work in progress and revenue reflecting the share of costs incurred compared to total ex- pected costs to fulfil the contract (percentage of completion) is recognised (gross work in pro- gress). Balances on a specific contract is re- moved from work in progress once the work is completed and accepted by the customer. Espe- cially for projects, the work typically extends over several financial years. The total amount of work in progress therefore includes accumulated reve- nue for several years for contracts where the work has not been finalised and/or accepted by the customer. During the project execution, invoices are issued according to the invoice structure for each trans- action. The invoiced amounts reduce the balance on work in progress (Net work in progress in the table). Depending on the invoice structure, the work in progress balance on a specific project can change from being presented as an asset (a contract asset) in one period to being presented as a liability (a contract liability) in the next peri- od. In the balance sheet and as shown in the ta- ble, net work in progress on contracts where work performed exceeds the invoiced amount are presented as assets while projects where the invoiced amount exceeds the work performed are presented as liabilities. In general, the invoicing structure for projects re- flects the progress on the projects and work in progress liabilities are, therefore, usually con- verted into revenue in the next year. Composition of work in progress DKKm 2021 2020 Gross work in progress 33,338 30,179 Net work in progress (15) 341 Net work in progress (15) 341 Note 1.4 include information on the order backlog reflecting effective contracts with customers where we will transfer control at future point in time and the remaining performance obligations on contracts where we transfer control over time. In addition to work in progress liabilities contract liabilities include prepayments received from customers of DKK 2,490m (2020: DKK 1,266m). The prepayments are recognised separately in the balance sheet as current and non-current lia- bilities. Prepayments presented as current reflect amounts that are expected to be recognised as revenue during the following year. When assessing impairment on the work in pro- gress net balances we evaluate on a project by project basis. If an impairment on a project is probable we recognise the expected loss and a related provision. Accounting policy Work in progress consists of contract assets and contract liabilities for contracts with customers where revenue is recognised over time. For contracts included as work in progress reve- nue reflecting the percentage of completion is recognised when the outcome of the contracts can be estimated reliably. The percentage of completion is calculated based on a cost-to-cost basis (input method) and is the ratio between the cost incurred and the total estimated cost. The contracts are measured at an amount equal to the selling price of the work performed (per- centage of completion) less progress billings and expected losses. The selling price is the total expected income from the individual contracts. If variability is in- cluded in the selling price, we use the most likely amount method. An expected loss is recognised when it is deemed probable that the total contract costs will exceed the total revenue from individual con- tracts. The expected loss is recognised immedi- ately as a cost and as a provision for a loss-mak- ing contract. Further information can be found in note 2.7. When the selling price of the work performed ex- ceeds progress billings and expected losses, work in progress is presented as an asset and re- late to unbilled work in progress. Work in pro- gress assets have substantially the same risk characteristics as the trade receivables for the same types of contracts. Expected credit loss on work in progress assets is included within the loss allowance for trade receivables as manged together. When progress billings and expected losses ex- ceed the selling price of the work performed, work in progress is presented as a liability. Prepayments from customers are recognised as a liability. Key accounting estimates Estimated total cost to complete We estimate the total expected costs for our contracts. The estimates primarily relate to the level of contingencies to cover unforeseen costs, such as cost changes due to changes in fu- ture supplies of raw materials, subcontractor products and services as well as unforeseen costs related to execution and hand-over. The estimates are based on the specifics for each contract while taking historical data into ac- count. For contracts sold to customers in politically and economically unstable countries, the estimates include additional risk coverage due to a higher level of uncertainty. With the increasing costs due to the global supply chain challenges and the risk of further cost increases, we have reassessed our project financials, including update of expected project costs, to ensure that cost increases are appropriately reflected in the estimated cost to com- plete. Nevertheless, it is assessed that the uncertainties have decreased compared to the un- certainties at the end of 2020. FLSmidth Annual Report 2021 84 Consolidated financial statements Consolidated notes 3.5 OTHER RECEIVABLES Specification of other receivables DKKm 2021 2020 799 868 3.6 TRADE PAYABLES To improve the relationship with our suppliers and minimise the finance cost in the value chain, we facilitate a supply chain financing programme hosted by a credit institute. When participating in this programme, the supplier has the option to receive early payment from the credit institution based on the invoices approved by us through a factoring arrangement between the supplier and the credit institution, where the invoices are transferred to the credit institution without re- course. The amounts payable to suppliers included in the supply chain financing programme are classified as trade payables in the balance sheet as well as in the cash flow statement (working capital within cash flow from operations). The trade payables covered by the supply chain financing pro- gramme arise in the ordinary course of business from supply of goods and services and the pay- ment terms are not significantly extended com- pared to trade payables not part of the supply change financing programme. At the end of 2021, trade payables covered by the programme amounted to DKK 490m (2020: DKK 273m). After a low level of activity during 2020 the utilisation of supply chain financing increased during 2021. 3.7 OTHER LIABILITIES Specification of other liabilities DKKm 2021 2020 1,458 1,431 FLSmidth Annual Report 2021 85 Consolidated financial statements Consolidated notes FLSmidth Annual Report 2021 SECTION 4 TAX In this section FLSmidth Annual Report 2021 86 Consolidated financial statements Consolidated notes 4.1 INCOME TAX The income tax expense for the year amounted to DKK 213m (2020: DKK 155m), corresponding to an effective tax rate of 36.3% (2020: 40.7%). The income tax expense was negatively affected by the value of non-deductible costs partly offset by a positive adjustment due to a partial reversal of the impairment of deferred tax assets in Ger- many. In 2020, the tax rate was negatively af- fected by an adjustment regarding prior years. The non-deductible costs mainly increased due to acquisition costs in Germany in respect of the acquiring of the thyssenkrupp Mining division. Withholding taxes not subject to credit relief added to the tax expense. Uncertain tax positions reflect the annual assess- ment by management of the risk of a position taken by the Group being disputed by a tax au- thority. The assessment considers the inherent risk and uncertainty of undertaking complex pro- jects and operating in a variety of developed and developing countries. The assessment includes the most likely outcome of both ongoing and po- tential future tax audits but also an assessment of whether the most likely outcome differs signifi- cantly for other possible outcomes. Accounting policy Tax for the year comprises current tax and changes in deferred tax including valuation of deferred tax assets, adjustments to previous years, foreign paid withholding taxes including available credit relief and changes in provisions for uncertain tax positions. Tax for the year is recognised in the Income Statement, however, tax attributable to items recognised in other comprehensive income is recognised in other comprehensive income. Ex- change rate adjustments of deferred tax are in- cluded as part of the years adjustments to deferred tax. Current tax comprises tax calculated on the basis of the expected taxable income for the year, using the applicable tax rates for the financial year. Uncertain tax positions are measured at the amount estimated to be required to settle such potential future obligations. We measure these uncertain tax positions on a yearly basis through interviews with key stakeholders in the main Group entities. The measurement addresses the accounting for income taxes when tax treatments involve uncer- tainty that affects the application of IAS 12 and IFRIC 23. We determine whether to consider each uncer- tain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty will be followed. Management has assessed that for uncertain tax positions the most likely outcome method will in most circum- stances best predict the resolution of uncertainty. The liability is recognised under income tax liabil- ities or deferred tax liabilities, depending in how the realisation of the tax position will affect the fi- nancial statements. Tax receivables and tax liabilities comprise tax on expected taxable income less tax paid on ac- count in the year and previous years taxes. Cur- rent tax is recognised in the balance sheet as ei- ther a receivable or a liability. Composition of tax for the year and effective tax rates 2021 2020 DKKm Tax Effective tax rate Tax Effective tax rate Total tax for the year and effective tax rate (213) 36.3% (155) 40.7% Composition of tax for the year DKKm 2021 2020 Tax for the year, continuing activities (213) (155) Total earnings before tax 568 363 FLSmidth Annual Report 2021 87 Consolidated financial statements Consolidated notes 4.2 PAID INCOME TAX Income tax paid in 2021 amounted to DKK 537m (2020: DKK 368m). Most of these payments are attributable to Group enterprises in the countries shown in the graph. Many countries had COVID- 19 measures in place in 2020 allowing to post- pone our tax payments into 2021. Besides income tax, Group activities generate sales taxes, customs duties, personal income taxes paid by the employees, etc. which are ex- cluded from income tax. 4.3 DEFERRED TAX Deferred tax assets at the end of 2021 amount to DKK 1,490m (2020: DKK 1,248m) and deferred tax liabilities amount to DKK 169m (2020: DKK 200m). The net deferred tax assets amount to DKK 1,321m (2019: DKK 1,048m). Income tax paid DKKm Significant deferred tax assets DKKm 0 30 60 90 120 150 180 Denmark USA Ghana Brazil Russia Australia Mexico Peru Austria China Canada Egypt Other 2020 2021 - 100 200 300 400 500 600 700 800 Share of assets and tax losses valued at nil Deferred tax assets 2020 21 USA 2020 21 Chile 2020 21 Germany 2020 21 Denmark 2020 21 India Composition of deferred tax 2021 Included in Income Statement within Tax for the year DKKm Balance sheet 1 January Currency adjustment Adjustment to previous years Changed tax rate Change in deferred tax Included in other compre- hensive income Transfer from assets held for sale Balance sheet 31 December Net deferred tax assets/(liabilities) 1,048 9 (19) 4 280 (1) 0 1,321 2020 Included in Income Statement within Tax for the year DKKm Balance sheet 1 January Currency adjustment Adjustment to previous years Changed tax rate Change in deferred tax Included in other compre- hensive income Transfer from assets held for sale Balance sheet 31 December Net deferred tax assets/(liabilities) 894 (26) 22 54 103 (6) 7 1,048 FLSmidth Annual Report 2021 88 Consolidated financial statements Consolidated notes 4.3 DEFERRED TAX continued Deferred tax assets valued at nil amounting to DKK 151m (2020: DKK 189m) relate to tax losses and tax assets mainly in discontinued and dormant entities. Temporary differences regarding future repatria- tion of profit from entities in foreign countries are estimated at DKK 325-375m in 2021 (2020: DKK 300-350m). These liabilities are not recognised because the Group is able to control when the li- ability is released and it is considered probable that the liability will not be triggered in the fore- seeable future. Net deferred tax DKKm 2021 2020 1,321 1,048 DKK 92m (2020: DKK 72m) of foreign paid with- holding taxes in the USA are not recognised as a future benefit due to uncertainties relating to the ability to recoup the asset within in the foreseea- ble future. Maturity profile of tax assets valued at nil DKKm 2021 2020 Base value of tax assets valued at nil 830 962 Tax value 151 189 830 962 The deferred tax assets in Germany and Den- mark are not fully recognized as, based on man- not likely to be fully utilized within the foreseea- ble future. As of 31 December 2021, the non-recognised part of the tax asset in Germany amounts to DKK 66m (2020: DKK 105m) and relates to discontin- ued activities and dormant entities. The non-rec- ognised tax asset in Denmark amounts to DKK 25m (2020: DKK 25m). Recognising tax assets is a key accounting estimate and is based on man- agements forecast of earnings incorporating cost savings and the recovery of the market. Accounting policy Deferred tax is calculated using the balance sheet liability method on all temporary differ- ences between the carrying amounts for financial reporting purposes and the amounts used for taxation purposes, except differences relating to initial recognition of goodwill. Deferred tax is cal- culated based on the applicable tax rates for the individual financial years. The effect of changes in the tax rates is stated in the income statement unless they are items pre- viously recognised in the statement of other comprehensive income. The tax value of losses that are more likely than not to be available for utilisation against future taxable income in the same legal tax unit and ju- risdiction is included in the measurement of de- ferred tax. If companies in the Group have deferred tax lia- bilities, they are valued independently of the time when the tax, if any, becomes payable. A deferred tax liability is recognised to cover re- taxation of losses in foreign enterprises if shares in the enterprises concerned are likely to be sold and to cover expected additional future tax liabili- ties related to the financial year or previous years. No deferred tax liabilities regarding invest- ments in subsidiaries are recognised if the shares are unlikely to be sold in the short-term. Deferred tax assets/liabilities and tax receiva- bles/payables are offset if the Group: has a legal right to offset these, intends to settle these on a net basis or to realise the assets and settle the li- abilities simultaneously. Key accounting estimates Estimated value of deferred tax assets The value of deferred tax assets is recognised to the extent that it is deemed likely that taxable income in the future can utilise the tax losses. For this purpose the income from the coming five years is estimated, based on forecasts. In assessing the probability of the future realisation of deferred tax assets, we have considered the economic outlook in our forecasts of taxable income and reversals of taxable temporary differences. . The uncertainty of forecasts is related to macroeconomic developments, includ- ing the demand for environmental investments by our customers, not least within the Cement industry. FLSmidth Annual Report 2021 89 Consolidated financial statements Consolidated notes 4.4 TAX ON OTHER COMPREHENSIVE INCOME Tax recognised in other comprehensive income by the components of other comprehensive in-come to which it relates is shown in the table below. 4.5 OUR APPROACH TO TAX AND TAX RISK Being a responsible taxpayer is important to us, and this means that we will pay the correct amount of taxes at the right time in all countries where we do business. We strive to accomplish this by having a strong focus on compliance with applicable tax laws as well as generally agreed principles of international taxation. We are a global company undertaking complex projects and operating in a variety of developed and de- veloping economies. Inherent risk and uncer- tainty in regards to compliance requirements and double taxation are common issues faced by our business. We actively work to identify and miti- gate tax risk and uncertainties. Our Group Tax Policy, which has been approved by the Board of Directors of FLSmidth, is availa- ble on: https://www.flsmidth.com/en-gb/company/sus- tainability/policies-and-priorities Tax on other comprehensive income 2021 2020 DKKm Deferred tax Current tax Tax income/ cost Deferred tax Current tax Tax income/ cost Tax on other comprehensive income (1) 1 0 (6) 0 (6) FLSmidth Annual Report 2021 90 Consolidated financial statements Consolidated notes FLSmidth Annual Report 2021 90 SECTION 5 FINANCIAL RISKS & CAPITAL STRUCTURE In this section FLSmidth Annual Report 2021 91 Consolidated financial statements Consolidated notes 5.1 SHARES AND CAPITAL STRUCTURE Shares On 10 September 2021, an issue of 6,400,000 new shares of DKK 20 each at a price of DKK 228 per share was completed. Hereafter, share capital is DKK 1,153m (2020: DKK 1,025m) and the total number of authorised and issued shares is 57,650,000 (2020: 51,250,000). Each share entitles the holder to 20 votes and no shares have special rights attached to it. The issue in- creases shareholders equity by the proceed re- ceived net of costs of DKK 25m. Shareholders at the end of 2021 At the end of 2021, FLSmidth had one major shareholder. Lundbeckfond Invest A/S has dis- closed holdings of voting rights exceeding 10% of total outstanding voting rights. No other share- holders have reported a participating interest above 5%. Capital structure FLSmidth take a conservative approach to capital structure, with the emphasis on relatively low debt, gearing and financial risk. ture and capital allocation is as follows: Leverage (NIBD/EBITDA < 2) Dividend pay-out ratio (30-50% of net profit) Equity ratio > 30% For further information please refer to Share- holder information section page 50. re-serves: Share capital (nominal value of shares issued) Foreign exchange adjustments (accumulated currency adjustments regarding translation of foreign entities) Cash flow hedging (fair value of derivatives that hedge the currency risks on expected future cash flows and meet the criteria for cash flow hedging) Retained earnings (all other components of sharehol Treasury shares Our holding of treasury shares at the end of 2021 accounted for 1.6 % of the share capital (2020: 2.1%). The Board of Directors is authorised until the next Annual General Meeting to let the Company acquire treasury shares up to a total nominal accordance with Section 12 of the Danish Com- panies Act. The treasury shares are used to hedge employ- -based incentive pro- grammes, and are recognised directly in equity in retained earnings (zero value in the balance sheet). The reduction in treasury shares during 2021 relates to exercise of share options granted to employees. Refer to note 6.1 for further infor- mation. Dividend per share The Board of Directors will propose at the Annual General Meeting that a dividend of DKK 3 per share (2020: DKK 2) corresponding to a dividend yield of 1.2% (2020: 0.9%) and a pay-out ratio of 48% (2020: 50%) will be distributed for 2021. The total dividend proposed amounts to DKK 173m (2020: DKK 103m). Movements in shares and share capital 2021 2020 Number of shares (1,000) Nominal value (DKKm) Number of shares (1,000) Nominal value (DKKm) Share capital at 31 December 57,650 1,153 51,250 1,025 Outstanding shares net of Treasury shares (1,000): 2021 2020 Treasury shares at 31 December 925 1,098 Outstanding shares net of Treasury shares at 31 December 56,725 50,152 FLSmidth Annual Report 2021 92 Consolidated financial statements Consolidated notes 5.2 EARNINGS PER SHARE Earnings per share from continuing activities in- creased to DKK 7.2 in 2021 (2020: DKK 4.6) pri- marily driven by increased profit for the year. Earnings per share from discontinued activities remained at the same level DKK -0.3 in 2021 (2020: DKK -0.4). There is no dilutive effect of share base pay- ments in 2021 (2020: 0.0%). As of 31 December 2021 none of the share op- tions were in-the-money (2020: none). 5.3 FINANCIAL RISKS Due to the international activities and the indus- try characteristics, risks are an embedded part of doing business. We are exposed to financial risks, that can have a material impact to the finan- cial statements of the Group. The financial risks are to the extent possible managed centrally for the Group and are gov- erned by the Treasury Policy, which is approved by the Board of Directors. The Treasury Policy is updated on an annual basis to address any changes in the risk picture. The main financial risks that we are exposed to are currency, credit, interest and liquidity risks. During 2021, COVID-19 no longer had a signifi- cant impact on the currency and interest rate risks, as volatility decreased. Interest rate risk Interest rate risks arise from interest-bearing as- sets and liabilities. Interest-bearing items consist primarily of cash and cash equivalents, bank loans and mortgage debt. According to the Treasury Policy, hedging of in- terest rates is governed by a duration range and is managed by using derivatives such as interest rate swaps. No interest derivatives have been used during 2021 or 2020. As of 31 December 2021, the majority of our in- terest-bearing debt is carrying a floating rate. A 1%-point increase in the interest rate will not in- crease interest costs (2020: DKK 18m, calculated as 1% of the net interest bearing debt as of 31 De- cember 2020. The sensitivity to changes in the interest rate has decreased in 2021 due to the debt reduction and all other things being equal. The interest rate benchmark reform (called IBOR reform) is not expected to have any significant Currency risk The Treasury Policy aims to reduce the most sig- nificant currency risks to better predict the im- pact on the income statement as well as the cash flows to be paid or received and to protect the EBITDA of the individual entities from changes in exchange rates. The risks are managed through hedging activities by entering commonly used derivatives such as forward contracts. The cur- rency risks, which is transaction risk, arise primar- ily from purchase and sale in foreign currencies compared to the functional currency of each of the Group entities. The Treasury Policy sets forth thresholds and re- quirements for the hedging strategy to be ap- plied. Hedge accounting is applied for the largest project transactions. For other project transac- tions, the currency risk is either not hedged or economically hedged, dependent on the signifi- cance of the risk. We are, to a large extent, carrying out transac- tions in EUR and USD as these currencies are preferred in the Mining and Cement industries. EUR against DKK is currently not considered an exposure due to the Danish Kroner being pegged to the Euro. Earnings per share from continuing and discontinuing activities DKKm 2021 2020 FLSmidth's share of profit, continuing activities 375 231 FLSmidth's share of loss, discontinuing activities (17) (21) FLSmidth's share of profit 358 210 Number of shares (1,000) 2021 2020 Average number of outstanding shares 52,080 50,153 Average diluted number of outstanding shares 52,080 50,153 DKK 2021 2020 Earnings per share from continuing and discontinued activities 6.9 4.2 DKK 2021 2020 Diluted earnings per share from continuing and discontinued activities 6.9 4.2 FLSmidth Annual Report 2021 93 Consolidated financial statements Consolidated notes 5.3 FINANCIAL RISKS continued The project nature of the business changes the foreign currency risk picture towards and against specific currencies from one year to another, de- pending on the area in which we have activities. In the analysis is provided. The analysis assumes that all other variables, exposures and interest rates in particular, remain constant. The sensitivity analysis shows the gain/loss on net profit and other comprehensive income of a 5% percent in- crease in the specified currencies towards DKK. The analysis includes the transactional impact from monetary items and derivatives used to hedge the currency risk. The impact on net profit for the year includes monetary items in foreign currencies that are cur- rency adjusted through the income statement as well as any derivatives used for economic hedg- ing. The impact on other comprehensive income in- cludes the value adjustment on derivatives des- ignated as hedge accounting in effective cash flow hedges. The value adjustments are trans- ferred to the income statement as the hedged cash flows through the work in progress are rec- ognised in the income statement. In addition to the transactional effects, in the event of currency developments, we will also be impacted by translation effects from the Group entities with net assets in functional currencies other than Danish Kroner and Euro. A 5 % in- crease in the specified currencies towards Dan- ish Kroner will have the following effect on other comprehensive income. Translation impact DKKm Change 2021 2020 Credit risk We are exposed to credit risks arising from cash and cash equivalents, derivatives and receiva- bles including work in progress. At 31 December 2021, total credit risk was meas- ured as DKK 9,236m (2020: DKK 7,455m) as shown in the table below. The Treasury Policy sets forth authority limits for the credit risk exposure related to cash and cash equivalents as well as derivatives. The limits are based on the counterparty credit rating. We have entered into netting agreements with the counterparties used for trading of derivatives, which means that the credit risk for derivatives is limited to the net assets per counterparty. We aim at using banks of high quality in the countries we operate in. However, due to the na- ture of our business and operations in emerging markets, we are sometimes exposed to banks where the credit rating and quality can be lower than what we typically see in developed coun- tries. Risk Policy. For receivables the credit risk is man- aged by continuous risk assessments and credit evaluations of customers and trading partners; having country specific risk factors in mind. To the extent possible, the credit risks are mitigated through use of payment securities, such as let- ters of credit and guarantees issued by first class rated banks, or by securing positive cash flow throughout the project execution. At the end of 2021, 13% (2020: 17%) of our work in progress as- set and 7% (2020: 6%) of our trade receivables balance were covered by payment securities. Transaction impact DKKm 2021 2020 Currency Change Net profit for the year Other compre- hensive income Net profit for the year Other compre- hensive income Total exposure to credit risk DKKm 2021 2020 Total non-financial counterparties 7,287 6,474 Total financial counterparties 1,949 981 Total exposure to credit risk 9,236 7,455 FLSmidth Annual Report 2021 94 Consolidated financial statements Consolidated notes 5.3 FINANCIAL RISKS continued Our customers and trading partners mainly con- sist of companies within the Cement and Mining industry. Credit risk is among other things de- pendent on the development in these industries. We consider the maximum credit risk to financial counterparties to be DKK 1,949m (2020: DKK 981m). All financial assets, excluding other securi- ties and investments, are expected to be settled during 2022. Liquidity risk The objective of the Treasury Policy is to ensure that the Group always has sufficient and flexible financial resources at our disposal to ensure con- tinuous operations and to honour liabilities when they become due. The financial resources are continuously moni- tored and consist of cash and cash equivalents and undrawn committed facilities. During 2021, a 1-year extension-option for the DKK 5bn facility was exercised, extending the ex- piry to 2027. Total committed facilities by the end of 2021 were DKK 6,821m (2020: DKK 6,970m), of which DKK 726m (2020: DKK 2,251m) was uti- lised. The committed facilities will mature during the years 2023-2027. Short-term liquidity risks are managed through a cash pool in various cur- rencies and by having short-term overdraft facili- ties in place with various financial institutions, mainly on a committed basis, but also through uncommitted facilities. In addition, FLSmidth has a credit facility commit- ment specifically for the purpose of funding the acquisition of tk Mining, in combination with the proceeds from the completed issue of new shares. According to the Treasury Policy the available fi- nancial resources must not be lower than DKK 2bn at any point. The liquidity position is moni- tored daily. As of 31 December 2021, the financial resources are well above the threshold. The committed facilities contain standard clauses such as pari passu, negative pledge, change of control and a leverage financial covenant. The Group did not default or fail to fulfil any of its fi- nancial covenants, in neither 2020 nor 2021. Having activities in various emerging markets im- plies additional risks due to specific restrictions and requirements. Mitigating actions are there- fore considered on a case-by-case basis. It re- quires thorough dedicated efforts to reduce re- lated risks to an acceptable level. Restricted cash Restricted cash is cash, that is considered either very difficult or expensive to transfer from some of the countries, that FLSmidth subsidiaries oper- ate in, to the Group. Restricted cash, amounting to DKK 868m (2020: DKK 781m), is however available for local daily operations. A cross border cash pool was established in China during 2021. Cash in China is therefore no longer classified as restricted cash, but instead available to the group. Contrarily, both India and South Africa have an increase of restricted cash, which contributes to the overall increase of re- stricted cash amount. Credit risk ratings per financial institution % Maturity profile of Group funding facilities DKKm Group restricted cash DKKm 0% 20% 40% 60% 80% 100% 2020 2021 AA A BBB BB B Not rated 0 1,000 2,000 3,000 4,000 5,000 6,000 < 1 year 1-5 years > 5 year 2020 2021 0 50 100 150 200 250 300 China India South Africa Egypt Brazil Ghana Angola Mongolia Morocco Other 2020 2021 FLSmidth Annual Report 2021 95 Consolidated financial statements Consolidated notes 5.4 FINANCIAL INCOME AND COSTS Net financial costs DKKm 2021 2020 Total financial income 870 952 Total financial costs (951) (999) Net financial costs (81) (47) Cash flow effect from financial income and costs DKKm 2021 2020 (69) (51) Foreign exchange adjustments, net of hedging effect, amounted to DKK -18m (2020: DKK 11m), primarily related to the cost of hedging the loan portfolio to the functional currency of the borrow- ing entity (forward points) and exposures in non- hedgeable emerging market currencies, as well as timing differences between cash flows and hedges. The net interest cost totalled DKK 49m (2020: DKK 48m) related to loans and deposits. Lease interest cost amounted to DKK 11m (2020: DKK 11m). Fair value adjustment of shares of net DKK -2m (2020: DKK 1m) relates to shareholdings in ce- ment companies. Accounting policy Financial income and costs comprise interest in- come and costs, realised and unrealised foreign exchange gains and losses arising from mone- tary items, and fair value adjustments of shares and derivatives where hedge accounting is not applied. 5.5 DERIVATIVES hedge the currency risk and accounted for as hedge accounting or economic hedges. Economic hedge We use derivatives to hedge currency risks aris- ing from monetary items recognised in the bal- ance sheet. Fair value adjustments recognised in financial items in the income statement amounted to DKK 112m (2020: DKK -48m). At 31 December 2021 the fair value of our hedge agreements that are not recognised as hedge accounting amounted to DKK 4m (2020: DKK 1m). Cash flow hedge We use forward exchange contracts to hedge currency risks regarding expected future cash flows that meet the criteria for cash flow hedging. The fair value reserve of the derivatives is recog- nised in other comprehensive income until the hedged items are included in work in progress. The fair value of derivatives is recognised in other receivables and other liabilities. The major- ity of the cash flow hedge instruments are ex- pected to settle and affect the income statement within one year. Carrying amount, net fair value DKKm 2021 2020 Econo- mic hedge Cash flow hedge Total hedge Econo- mic hedge Cash flow hedge Total hedge Total 4 (6) (2) 1 29 30 Economic Hedge DKKm 2021 2020 Currency Notional amount Net fair value Notional amount Net fair value Total 4 1 A negative notional amount represents a sale of the currency FLSmidth Annual Report 2021 96 Consolidated financial statements Consolidated notes 5.5 DERIVATIVES continued At 31 December 2021, the fair value of our cash flow hedge instruments amounted to DKK -6m (2020: DKK 29m). Changes in the cash flow hedging reserve DKKm 2021 2020 Accounting policy Derivatives are initially recognised in the balance sheet at fair value and subsequently measured at fair value. Fair value of derivatives is included in other receivables or other liabilities respectively. Fair value changes of derivatives used for cash flow hedging are recognised in other compre- hensive income. Any ineffective portions of the cash flow hedges are recognised as a financial item. Upon settle- ment of the cash flow hedges, the fair value is transferred from other comprehensive income into the line item of the hedged item. Any changes in the fair value of derivatives not used for hedge accounting are recognised in the income statement as financial items. Certain contracts contain conditions that corre- spond to derivatives. In case the embedded de- rivatives deviate significantly from the overall contract, they are recognised and measured as separate instruments at fair value. That is unless the contract concerned as a whole is recognised and measured at fair value. 5.6 FAIR VALUE MEASUREMENT Financial instruments measured at fair value are measured on a recurring basis and categorised into the following levels of the fair value hierar- chy: Level 1: Observable market prices for identical instruments (quoted prices) Level 2: Valuation techniques primarily based on observable prices or traded prices for com- parable instruments Level 3: Valuation techniques primarily based on non-observable input Securities and investments consist primarily of in- vestments in shares . The fair value is either de- termined as the quoted price in an active market for the same type of instrument (level 1) or at fair value based on available data which include val- uation based on multiple of earnings or equity from the latest available financial statements (level 3). The derivatives are forward exchange contracts not traded on an active market. The fair value is therefore estimated using a valuation technique, where all significant inputs are based on observable market data; such as exchange rates, interest rates, credit risk and volatilities (level 2). There have been no transfers between the levels in 2021 or 2020. Financial instruments measured at fair value 2021 DKKm Level 1 Level 2 Level 3 Total 6 (2) 43 47 2020 DKKm Level 1 Level 2 Level 3 Total 9 30 34 73 Cash flow hedge DKKm 2021 2020 Currency Notional amount Net fair value Notional amount Net fair value Total (6) 29 A negative notional amount represents a sale of the currency FLSmidth Annual Report 2021 97 Consolidated financial statements Consolidated notes 5.7 NET INTEREST BEARING DEBT 5.8 FINANCIAL ASSETS AND LIABILITIES All financial assets and liabilities, except for hedging instruments, securities and investments, are measured at amortised cost. For the mort- gage debt, the fair value is determined as the quoted price of the underlying mortgage bonds funding the debt. The carrying amount for the other items is a reasonable approximation of fair value. The financial assets are classified based on the contractual cash flow characteristics of the finan- cial asset as well as our intention with the finan- cial asset according to our business model. If cash flows from a financial asset are solely pay- ments of principal and interests the classification is either: Amortised cost, for financial assets, where the objective is to hold the financial asset to collect the contractual cash flows Fair value through profit/loss, for other financial assets Hedging instruments designated as hedge ac- counting are classified separately and are meas- ured at fair value. 2021 DKKm Effective interest rate Carrying amount 1 January 2021 Cash flows Additional lease liability during the year Foreign exchange effect Transferred to assets classified as held for sale Carrying amount 31 December 2021 Interest bearing debt 2,755 (1,618) 99 (189) 0 1,047 Interest bearing assets 947 930 0 59 0 1,936 Net interest bearing debt / (assets) 1,808 (2,548) 99 (248) 0 (889) The cash flow movements do not include cash in- and outflow related to assets and liabilities associated with assets held for sale. 2020 DKKm Effective interest rate Carrying amount 1 January 2020 Cash flows Additional lease liability during the year Foreign exchange effect Transferred to assets classified as held for sale Carrying amount 31 December 2020 Interest bearing debt 3,493 (942) 147 115 (58) 2,755 Interest bearing assets 1,001 90 0 (114) (30) 947 Net interest bearing debt 2,492 (1,032) 147 229 (28) 1,808 FLSmidth Annual Report 2021 98 Consolidated financial statements Consolidated notes 5.8 FINANCIAL ASSETS AND LIABILITIES continued 2021 2020 Assets DKKm Maturity of cash flows Total cash flows Fair value Carrying amount Maturity of cash flows Total cash flows Fair value Carrying amount < 1 year 1-5 years > 5 year < 1 year 1-5 years > 5 year Hedging instruments (hedge accounting) 10 2 0 12 12 12 54 2 0 56 56 56 Fair value through profit and loss 19 0 49 68 68 68 9 0 43 52 52 52 Amortised costs 9,173 0 0 9,173 9,173 9,173 6,957 0 0 6,957 6,957 6,957 Total financial assets 9,202 2 49 9,253 9,253 9,253 7,020 2 43 7,065 7,065 7,065 2021 2020 Liabilities DKKm Maturity of cash flows Total cash flows Fair value Carrying amount Maturity of cash flows Total cash flows Fair value Carrying amount < 1 year 1-5 years > 5 year < 1 year 1-5 years > 5 year Hedging instruments (hedge accounting) (18) 0 0 (18) (18) (18) (27) 0 0 (27) (27) (27) Fair value through profit and loss (15) 0 0 (15) (15) (15) (8) 0 0 (8) (8) (8) Amortised cost (4,894) (807) (209) (5,910) (5,874) (5,872) (4,469) (952) (1,751) (7,172) (7,027) (7,027) Total financial liabilities (4,927) (807) (209) (5,943) (5,907) (5,905) (4,504) (952) (1,751) (7,207) (7,062) (7,062) FLSmidth Annual Report 2021 99 Consolidated financial statements Consolidated notes FLSmidth Annual Report 2021 99 SECTION 6 OTHER NOTES In this section FLSmidth Annual Report 2021 100 Consolidated financial statements Consolidated notes 6.1 SHARE-BASED PAYMENT At the beginning of 2021, two different share- based incentive programmes were outstanding, a share-option programme and a performance share programme. During 2021, the exercise pe- riod for the last share option programme expired. Performance shares The performance shares units (PSU) are based on a three year performance period and the per- formance measurement is based on key financial performance indicators as well as continued em- ployment. For the programme granted in 2021, the key performance indicators are EBITA mar- gin, total shareholder return (TSR) and progress on MissionZero (MZ). For programmes prior years, the key performance indicators were EBITA margin and net working capital ratio. Under the programmes, the number of PSUs (shares) that will eventually vest depends on the level of achievement of the key performance in- dicators. The purpose of the performance share programme is to ensure common goals for Group Executive Management, key employees and shareholders. The value of the PSUs at grant date is measured at fair value (market price) of the shares adjusted for the expected performance under the TSR KPI. The market price is not adjusted for dividend as participants of the programme will be compen- sated for any dividend pay-outs in the perfor- mance period. For the 2021 plan, a maximum of 70,108 shares (2020: 52,242 shares) were granted to Executive Management at the grant date. In 2021, the expense recognised for services provided by employees in return for the fair value of performance shares granted amounted to DKK 15m. For 2020, an income of DKK 21m was recog- nised reflecting a reversal of costs previously recognised on programmes where the financial KPIs were no longer expected to be achieved. The total number of outstanding performance shares at the end of 2021 was 549,172 (2020: 478,038) of which 149,098 are expected to vest (2020: 114,174). Accounting policy The performance share programme is classified as equity based, as the schemes settle in shares. The value of the services received in exchange for the granting of performance share units (PSUs), is measured as the fair value of the per- formance share units at grant date. The fair value of the PSUs is determinated based on the quoted share price adjusted for the expected performance under the TSR KPI, both deter- mined at grant date. The fair value is recognised in staff cost in the in- come statement and in equity over the vesting period which is three years. On initial recognition of the PSUs, the number of PSUs expected to vest are estimated. Subse- quently, the estimate is revised so that the total cost recognised is based on the actual number of PSUs expected to vest. 2021 2020 Specification of performance shares expected to vest Group Executive Management Key employees Total number Group Executive Management Key employees Total number Outstanding performance shares 31 December expected to vest 37,106 111,992 149,098 28,420 85,754 114,174 Performance shares 2021 2020 DKK/DKKm 2021 2020 FLSmidth Annual Report 2021 101 Consolidated financial statements Consolidated notes 6.1 SHARE-BASED PAYMENT continued Share options 2015 was the last year where share options were granted. The share option programme had from the grant date a three year vesting period fol- lowed by a three year exercise period. The last options vested in 2018 and the exercise period expired in 2021. The options exercised during The exercise price was DKK 250.63 compared to an weighted average share of DKK 258.67 when the options were exercised. 6.2 RELATED PARTY TRANSACTIONS Related parties to FLSmidth are determined as members of the Board of Directors and Group Executive Management, their close family mem- bers, or companies in which these persons have significant influence and the associated entities over which FLSmidth has significant influence. During 2021, FLSmidth has had ordinary sales transactions of DKK 14m (2020: DKK 12m) with its associate Intertek Robotic Laboratories Pty Ltd. Other than that, there were no significant trans- actions between FLSmidth and any of its related parties, other than ordinary remuneration of the Board of Directors and Group Executive Manage- ment in 2020 and 2021. Please refer to note 1.5 Staff cost and the Remuneration report 2021. 6.3 AUDIT FEE Fees to independent auditor DKKm 2021 2020 Total audit related services 17 16 Total non-audit services 1 2 Total fees to independent auditor 18 18 In addition to statutory audit, EY Godkendt Revi- sionspartnerselskab, the Group auditors ap- pointed at the Annual General Meeting, provided other assurance engagements, primarily consist- ing of limited assurance report on the Sustaina- bility Report and reasonable assurance report on the Remuneration Report for FLSmidth & Co. A/S. All non-audit services have been approved by the Audit Committee. 6.4 EVENTS AFTER THE BALANCE SHEET DATE We are not aware of any subsequent matters, that could be of material importance to the position. Share options Group Executive Management Key employees Total number Outstanding options 31 December 2020 65,049 479,197 544,246 Outstanding options 31 December 2021 0 0 0 Total fair value of outstanding options DKKm FLSmidth Annual Report 2021 102 Consolidated financial statements Consolidated notes 6.5 LIST OF GROUP COMPANIES Company name Country Direct Group holding (pct.) FLSmidth & Co. A/S ○ ○ ○ ○ ○ ○ ⌂ ○ FLSmidth Global Services A/S ○ ○ ○ FLSmidth A/S ○ ○ ○ ⌂ ○ ○ ○ ○ ○ ○ ○ ⌂ ○ ○ ○ ○ ○ ○ Company name Country Direct Group holding (pct.) ○ ○ ○ ○ ○ ○ ⌂ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ⌂ FLS US Holdings, Inc. ○ ⌂ ⌂ ⌂ ⌂ ⌂ ⌂ FLSmidth Annual Report 2021 103 Consolidated financial statements Consolidated notes 6.5 LIST OF GROUP COMPANIES continued Company name Country Direct Group holding (pct.) FLS Germany Holding GmbH ⌂ ⌂ ⌂ ⌂ FLSmidth Minerals Holding ApS ○ ⌂ ⌂ ⌂ ⌂ ⌂ ⌂ ⌂ ⌂ ⌂ ⌂ ○ ○ ○ ○ Company name Country Direct Group holding (pct.) ○ ⌂ ⌂ ⌂ ⌂ ⌂ ⌂ Associate All other enterprises are Group enterprises FLSmidth Annual Report 2021 104 Consolidated financial statements Consolidated notes FLSmidth Annual Report 2021 104 SECTION 7 BASIS OF REPORTING In this section FLSmidth Annual Report 2021 105 Consolidated financial statements Consolidated notes 7.1 INTRODUCTION This section provides an overview of our princi- pal accounting policies and judgements as well as new and amended IFRS standards and inter- pretations. The following sections provide an overall de- scription of the accounting policies applied to the consolidated financial statements. We provide a more detailed description of the accounting poli- cies and key estimates and judgements in the notes. An overview of key accounting estimates and judgements are provided in a separate sec- tion after the primary financial statements. The descriptions of accounting policies in the statements and notes form part of the overall de- scription of accounting policies. The annual report has been approved by the Board of Directors at its meeting 16 February 2022. The annual report will be presented to the shareholders of FLSmidth & Co. A/S for approval at the Annual General Meeting. 7.2 BASIS OF PREPARATION The consolidated financial statements of FLSmidth Group have been prepared in accord- ance with IFRS as adopted by the EU and further requirements in the Danish Financial Statements Act for listed companies in class D. We have pre- pared the consolidated financial statements in accordance with all the IFRS standards effective at 31 December 2021. The financial year for the Group is January 1 December 31. The consolidated financial statements have been prepared on a going concern basis and under the historical cost convention, except for deriva- tives and securities, which are measured at fair value. The accounting policies are unchanged from last year except from changes included in note 7.6. Regulation (EU) 2019/815 (ESEF Regulation), FLS- pean Single Electronic Format (ESEF). The pri- mary statements in the consolidated financial statements are tagged using inline eXtensible Business Reporting Language (iXBRL). FLSmidth taxonomy included in the ESEF Regulation and developed based on the IFRS taxonomy pub- lished by the IFRS Foundation. Where a financial statement line item is not defined in the ESEF taxonomy, an extension to the taxonomy has been created, except for extensions which are subtotals. The annual report submitted to the Danish Financial Supervisory Authority consists of a zip-file (213800G7EG4156NNPG91-2021-12- 31-en.zip) that includes an XHTML file, that can be opened in standard web browers and a num- ber of technical XBRL files that make automated extracts of the incorporated XBRL data possible. 7.3 DEFINING MATERIALITY The annual report is based on the concept of ma- teriality, to ensure that the content is material and relevant to the readers. The consolidated finan- cial statements consist of many transactions. These transactions are aggregated into classes according to their nature or function, and pre- sented in classes of similar items in the financial statements and in the notes as required by IFRS. If items are individually immaterial, they are ag- gregated with other items of a similar nature in the primary financial statements or in the notes. The disclosure requirements throughout IFRS are substantial, and we provide the specific disclo- sures required by IFRS unless the information is considered immaterial to the economic decision- making of the readers of these financial state- ments. 7.4 ALTERNATIVE PERFORMANCE MEASURES We present financial measures in the consoli- dated financial statements which are not defined according to IFRS. We use these alternative per- formance measures (APM) as we believe that these financial measures provide valuable infor- mation to our stakeholders and management. The financial measures should not be considered as a replacement for performance measures as defined under IFRS, but rather as supplementary information. The alternative performance measures may not be comparable to similarly titled measures pre- sented by other companies, as the definitions and calculations may be different. Our definitions of the financial measures are included in note 7.8 Definition of terms. We use several alternative performance measures throughout the report. The most com- monly used are: Growth We use different alternative performance measures related to growth, such as order in- take, order backlog and growth. We use these measures in the daily management of our busi- ness, as order intake and order backlog are part of the main indicators of our future activity level. Profit We use different alternative performance measures related to profit, such as EBIT, EBITA and EBITDA before special non-recurring items. EBITA is a measure which is commonly used within the industry and included in our calculation of return of capital employed. Note 1.7 provides further information on Special non-recurring items. Cash flow We use different alternative performance measures related to cash flow, such as free cash flow. We use free cash flow to measure how much cash we generate from our operations af- ter maintaining our capital employed. Financial position We use different alternative performance measures related to the financial position, such as capital employed, net working capital and net interest-bearing debt. Capital employed and net working capital are included in our calculation of return of capital employed. Net working capital is also a measure we use in the daily management of our business, as it is closely related to the ac- tivity. FLSmidth Annual Report 2021 106 Consolidated financial statements Consolidated notes 7.5 ACCOUNTING POLICIES The descriptions of accounting policies in the notes form part of the overall description of ac- counting policies. Consolidation The consolidated financial statements comprise the financial statements of FLSmidth & Co. A/S (the parent company) and subsidiaries controlled by FLSmidth & Co. A/S, prepared in accordance with Group accounting policies. The consolidated financial statements are prepared by combining items of a uniform nature and subsequently elimi- nating intercompany transactions, internal share- holdings and balances and unrealised intercom- pany profits and losses. Foreign currencies The consolidated financial statements are pre- sented in Danish Kroner (DKK). Foreign currency transactions are translated into the functional currency defined for each com- pany using the prevailing exchange rates at the transaction date. Monetary items denominated in foreign currencies are translated into the func- tional currency at the prevailing exchange rates at the reporting date. Financial statements of foreign subsidiaries are translated into Danish Kroner at the prevailing exchange rates at the reporting date for assets and liabilities, and at average exchange rates for income statement items. All exchange rate differences are recognised as financial income or financial costs, except for the following, that are recognised in other compre- hensive income, translated at the prevailing ex- change rates at the reporting date: Translation of foreig at the beginning of the year statements from average exchange rates to the exchange rates prevailing at the reporting date Translation of long-term intercompany bal- ances, which are considered to form part of the net investment in subsidiaries Goodwill arising from the acquisition of new com- panies is treated as an asset belonging to the new foreign subsidiaries and translated into Dan- ish Kroner at prevailing exchange rates at the re- porting date. Unrealised gain/loss relating to hedging of future cash flow is recognised in other comprehensive income. 7.6 IMPACT FROM NEW IFRS We have implemented all new or amended ac- counting standards and interpretations as adopted by the EU and applicable for the 2021 fi- nancial year. Besides a change to IFRS 4 not rel- evant for the Group and a prolongment of the availability of the practical expedient to the accounting for COVID-19 related rent conces- sions, the changes consist of: Interest Rate Benchmark Reform - Phase 2 pro- ject. (amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16) (issued August 2020) The amendments in the Interest Rate Benchmark Reform phase 2 - address issues following the changes to the interest rate benchmarks. The amendments have not had impact on the finan- cial statements. 7.7 NEW IFRS NOT YET ADOPTED Generally, we expect to implement all new or amended accounting standards and interpreta- tions when they become mandatory and have been endorsed by the EU. IASB has issued new or amended accounting standards, which be- come effective after 31 December 2021. The following amendments are relevant for FLSmidth, but none of these are expected to have a significant impact on the financial state- ments: IFRS Description Effective date *Other changes included in the Annual improvements 2018-2020 to other standards will not have an impact on our financial statements. FLSmidth Annual Report 2021 107 Consolidated financial statements Consolidated notes 7.8 DEFINITION OF TERMS Acquisition development Development as a consequence of business ac- quisition, disregarding development from cur- rency. After 12 months business acquisitions are included in the development from organic growth. Alternative performance measure A financial measure of historical or future finan- cial performance, financial position or cash flows, other than a financial measure defined or speci- fied according to IFRS. Book-to-bill Order intake as a percentage of revenue. BVPS (Book value per share) FLSmidth & Co. A/S´ share of equity excluding minorities divided by year-end number of shares. Capital employed, average (Capital employed, end of period + capital em- ployed end of same period last year)/2. Capital employed, end of period Intangible assets (cost) + property, plant and equipment (carrying amount) + lease assets + net working capital. Capital expenditure (CAPEX) Investment in intangible assets as well as prop- erty, plant and equipment and leased assets. Ex- cluding impact from acquisitions. CFFF Cash flow from financing activities. CFFI Cash flow from investing activities. CFFO Cash flow from operating activities. CFFO / Revenue nue. CFPS (cash flow per share), (diluted) CFFO as a percentage of average number of shares (diluted). Currency development The difference between the current figure re- ported and the same figure had the exchange rates towards DKK been the same as in the com- parison period. DIFOT Delivery in full on time. Dividend yield Dividend as percent of share price end of year. EBIT Earnings before interest and tax and impairments of investments in associated companies. EBIT margin EBIT as a percentage of revenue. EBITA Earnings before, interest, tax, amortisation and impairments of investments in associated compa- nies. EBITA margin EBITA as a percentage of revenue. EBITDA before special non-recurring items Earnings before special non-recurring items, in- terest, tax, depreciation, amortisation and impair- ments of investments in associated companies. EBITDA margin before special non- recurring items EBITDA before special non-recurring items as a percentage of revenue. EBT Earnings before tax. EBT margin EBT as a percentage of revenue. Effective tax rate Income tax expenses as a percentage of EBT. EPC projects Engineering, procurement and construction. EPS projects Engineering, procurement and supervision. EPS (earning per share) Net profit/(loss) divided by the average number of shares outstanding (adjusted for treasury shares). EPS (earnings per share), (diluted) Net profit/(loss) divided by the average number of shares outstanding (adjusted for treasury shares) less share options in-the-money. Equity ratio Equity as a percentage of total assets. Financial gearing (NIBD/EBITDA) Net interest-bearing debt (NIBD) divided by EBITDA. Free cash flow CFFO + CFFI. Free cash flow adjusted for acquisitions and disposals of enterprises and activities CFFO + CFFI + acquisitions of enterprises and ac- tivities - disposals of enterprises and activities. Free cash flow adjusted for acquisitions and disposals of enterprises and activities and IFRS 16, Leases CFFO + CFFI + acquisitions of enterprises and ac- tivities - disposals of enterprises and activities + repayment of lease liabilities. Gross margin Gross profit as a percentage of revenue. Growth decomposition Increase/decrease in percentage compared to last year. Currency effect is current year amount foreign exchange rate. Organic effect is growth +/- currency effect and acquisition effect. Market capitalisation The share price multiplied by the number of shares issued end of year. Net interest-bearing debt (NIBD) Interest-bearing debt less interest-bearing assets and bank balances. Net working capital, average (Net working capital, end of year + net working capital, end of last year)/2. Net working capital, end Inventories + trade receivables + work in pro- gress for third parties, net + prepayments, net + financial instruments, net + other receivables other liabilities trade payables. FLSmidth Annual Report 2021 108 Consolidated financial statements Consolidated notes 7.8 DEFINITION OF TERMS continued Net working capital ratio, average Net working capital, average as a percentage of last 12 months revenue. Net working capital ratio, end Net working capital as a percentage of last 12 months´ revenue. Number of shares outstanding The total number of shares, holding of treasury shares. NIBD/EBITDA Net interest-bearing debt (NIBD) divided by last One-offs Costs/income assessed by Management to be non-recurring by nature. Operational expenditure (OPEX) External costs, personal cost and other income and costs. Order backlog The value of outstanding performance obliga- tions on current contracts at end of year. On O&M contracts entered into after 2014, the order backlog includes the next 12 months´ expected revenue. Order backlog / Revenue Order backlog as a percentage of last 12 months´ revenue. Order intake Orders are included as order intake when an or- der becomes effective, meaning when the con- tract becomes binding for both parties depend- ent on the specific conditions of the contract. On O&M contracts entered into after 2014, the order intake includes the next 12 months´ expected revenue, and subsequently order intake will be included on a monthly rolling basis. Organic development Development as a consequence of growth in al- ready existing business, disregarding develop- ment from currency. Other comprehensive income All items recognised in equity other than those related to transactions with owners of the com- pany. Pay-out ratio The total dividends for the year as a percentage of profit/(loss) for the year. Return on equity Profit/(loss) for the last 12 months´ as a percent- age of equity ((Equity, end of year + equity, end of last year)/2). ROCE (return on capital employed) EBITA as a percentage of capital employed, aver- age. Sales, General & Administrative costs (SG&A costs) Sales cost + Administrative cost ± other operating items. Special non-recurring items Costs and income of a special nature in relation to the main activities of the continued activities, including gains and losses from disposals of en- terprises and activities. Total shareholder return Share price increase and paid dividend. Sustainability related definition of terms ´ EU Taxonomy – eligible CAPEX FLSmidth CAPEX linked to economic activities currently defined in the EU Taxonomy as a per- centage of total additions to tangibles and intan- gibles, before depreciation, amortisations or any remeasurements. EU Taxonomy – eligible OPEX FLSmidth OPEX linked to economic activities cur- rently defined in the EU Taxonomy as a percent- age of direct OPEX costs. These relate to day-to- day servicing, maintenance and repair of assets used for production, as well as non-capitalised R&D costs. EU Taxonomy – eligible revenue FLSmidth revenue linked to economic activities currently defined in the EU Taxonomy as a per- centage of total revenue. FLSmidth defines reve- nue-generating eligible equipment and technolo- gies as those aimed at substantial GHG emission reductions in the value proposition of the product offerings. Number of suppliers screened for sustainability Count of suppliers screened. Both active and po- tential new suppliers. A screening includes re- view of the suppliers Health and Safety, Environ- mental and Social performance. Scope 1 greenhouse gas emissions (in tonnes CO 2 -equivalents) Scope 1 emissions are direct emissions of green- house gases and are measured as -equiva- lents. Scope 1 emissions for FLSmidth comprise fuel and gas use for various operational activities. Scope 2 greenhouse gas emissions (in tonnes CO 2 -equivalents) Scope 2 emissions include indirect emissions from electricity, heat, steam and cooling pur- chased and consumed by FLSmidth. Scope 3 economic intensity, use of sold prod- ucts (tCO 2 e/DKKm order intake) Downstream scope 3 greenhouse gas emissions from lifetime use of sold products sold in the re- porting year, divided by order intake for the same period. Spend with SBT-committed suppliers FLSmidth purchase spend in direct categories with companies noted as committed to SBT on https://sciencebasedtargets.org/ versus the total purchase spend of FLSmidth in direct categories. Total Recorded Incident Rate (including con- tractors) TRIR TRIR accidents include fatalities, Lost time inci- dent ( LTI) , medically treated injuries (MTI) and Restricted Work cases (RWC) .The total recorda- ble incident frequency rate (TRIR) is calculated as the number of TRI accidents per one million hours worked. Water withdrawal (m 3 ) Water withdrawal includes all resources FLSmidth withdraws from groundwater or con- sumes from waterworks. The latest assessment was carried out in January 2022. Women managers, % Women Employees with one or more direct re- ports. Share of Women managers by year-end di- vided by all managers at year-end.(Year-end or respective quarter end). FLSmidth Annual Report 2021 109 Parent company financial statements Parent company financial statements Parent Company Financial statements Notes PARENT COMPANY FINANCIAL STATEMENTS FLSmidth Annual Report 2021 110 Parent company financial statements Parent company financial statements Management’s review Parent company activities include holding of shares in Group enterprises activities. Dividend from Group enterprises to the parent company, FLSmidth & Co. A/S, was DKK 44m in 2021 (2020: DKK 0m) and the profit for the year was DKK 61m (2020: DKK -6m). Decrease in financial income and cost is re- lated to foreign exchange gains and losses. Net financial income is DKK 64m (2020: DKK 79m). The result is impacted by write downs of invest- ments in Group enterprises. Total assets at year-end amounted to DKK 10,187m (2020: DKK 8,445m) and the equity was DKK 3,952m (2020: DKK 2,516m). Man- agement consider the result to be in line with the expected level. For financial guidance of 2022 for the Group please refer to page 9. INCOME STATEMENT Parent company financial statements Notes DKKm 2021 2020 EBIT (3) (62) EBT 61 17 Profit for the year 61 (6) (112) (109) 173 103 FLSmidth Annual Report 2021 111 Parent company financial statements Parent company financial statements Notes DKKm 2021 2020 ASSETS Property, plant and equipment 8 9 Financial assets 2,639 2,531 Total non-current assets 2,647 2,540 Receivables 6,952 5,816 Cash and cash equivalents 588 89 Total current assets 7,540 5,905 Total assets 10,187 8,445 Notes DKKm 2021 2020 EQUITY AND LIABILITIES Equity 3,952 2,516 Provisions 9 8 Total non-current liabilities 499 2,008 Total current liabilities 5,727 3,913 Total liabilities 6,235 5,929 Total equity and liabilities 10,187 8,445 BALANCE SHEET FLSmidth Annual Report 2021 112 Parent company financial statements Parent company financial statements On 10 September 2021, an issue of 6,400,000 new shares of DKK 20 each at a price of DKK 228 per share was completed. Hereafter, share capital is DKK 1,153m (2020: DKK 1,025m) and the total number of authorised and issued shares is 57,650,000 (2020: 51,250,000). Each share entitles its holder to 20 votes, and there are no special rights attached to the shares. The issue increases share- received net of costs of DKK 25m. Profit for the year DKK 61m (2020: DKK -6m) is transferred to retained earnings, of which DKK 173m (2020: DKK 103m) is proposed as dividend. EQUITY DKKm Share capital Retained earnings Proposed dividend Total Equity at 1 January 2020 1,025 1,497 0 2,522 Equity at 31 December 2020 1,025 1,388 103 2,516 Equity at 31 December 2021 1,153 2,626 173 3,952 Number of shares (1,000): 2021 2020 2019 2018 2017 Share capital at 31 December 57,650 51,250 51,250 51,250 51,250 FLSmidth Annual Report 2021 113 Parent company financial statements Parent company financial statements 1. OTHER OPERATING INCOME DKKm 2021 2020 1 1 2. STAFF COSTS DKKm 2021 2020 8 4 Average number of employees 8 8 Remuneration of the Board of Direc- tors for 2021 amounts to DKK 7m (2020: DKK 6m), including DKK 0m (2020: DKK 0m), which was incurred by the parent company. The total remuneration of the Executive Manage- ment amounted to DKK 71m (2020: DKK 51m), of which DKK 8m (2020: DKK 4m) was incurred by the parent company. 3. FINANCIAL INCOME DKKm 2021 2020 808 1,177 4. FINANCIAL COST DKKm 2021 2020 744 1,098 5. TAX FOR THE YEAR DKKm 2021 2020 Tax for the year 0 (23) 6. DISTRIBUTION OF PROFIT FOR THE YEAR Proposed distribution of profit: DKKm 2021 2020 Profit for the year 61 (6) 7. PROPERTY, PLANT AND EQUIPMENT DKKm Land and buildings Operating equipment, fixtures and fittings Total Cost at 31 December 2021 23 2 25 Depreciation and impairment at 31 December 2021 (15) (2) (17) Carrying amount at 31 December 2021 8 0 8 DKKm Land and buildings Operating equipment, fixtures and fittings Total Cost at 31 December 2020 23 2 25 Depreciation and impairment at 31 December 2020 (14) (2) (16) Carrying amount at 31 December 2020 9 0 9 FLSmidth Annual Report 2021 114 Parent company financial statements Parent company financial statements 8. FINANCIAL ASSETS For specification of investments in Group enter- prises, see note 6.5 in the consolidated financial statements. Result of annual impairment test At the end of 2021, the cost price of the invest- ments in subsidiaries was tested for impairment. The impairment test based on value in use identi- fied impairment losses for 2021 amounting to DKK 18m (2020: DKK 54m). The impairment was related to the subsidiary FLSmidth Global Ser- vices A/S amounted to DKK 0m (2020: DKK 7m). Key assumptions The impairment test has been based on a five year forecast for FLSmidth Global Services A/S. The applied discount rate after tax is 8.5% and reflects the latest market assumptions for the risk free rate based on a 10-year US government bond, the equity risk premium and the cost of debt. The long-term growth rate for the terminal period is based on the expected growth in the world economy as well as input from current long-term swaps. Based on these factors, a long- term annual growth rate for the terminal period of 1.5% has been applied. 9. DEFERRED TAX ASSETS AND LIABILITES Deferred tax relates to the following items: DKKm 2021 2020 Net value of deferred tax assets 27 23 10. OTHER RECEIVABLES Other receivables mainly include fair value of fi- nancial contracts (positive value) of DKK 55m (2020: DKK 67m), receivable from Canadian tax authorities DKK 18m (2020: DKK 17m) and tax on account for the Danish jointly taxed enterprises. 11. DERIVATIVES The currency exposure is hedged according to the Financial Policy. At 31 December 2021 the fair value of our hedge agreements amounted to DKK 3m (2020: DKK -1m). Economic hedge, DKKm 2021 Currency Notional amount Net fair value Total 3 A negative notional amount represents a sale of the currency Economic hedge, DKKm 2020 Currency Notional amount Net fair value Total (1) A negative notional amount represents a sale of the currency 12. PROVISIONS DKKm 2021 2020 Provisions at 31 December 9 8 DKKm Investments in Group enterprises Other securities and investments Total Cost at 31 December 2021 3,245 37 3,282 Impairment at 31 December 2021 (627) (16) (643) Carrying amount at 31 December 2021 2,618 21 2,639 DKKm Investments in Group enterprises Other securities and investments Total Cost at 31 December 2020 3,121 37 3,158 Impairment at 31 December 2020 (609) (18) (627) Carrying amount at 31 December 2020 2,512 19 2,531 FLSmidth Annual Report 2021 115 Parent company financial statements Parent company financial statements 13. OTHER LIABILITIES Other liabilities include fair value of financial contracts (negative value) of DKK 52m (2020: DKK 68m). 14. MATURITY PROFILE OF CURRENT AND NON- CURRENT LIABILITIES Maturity profile of liabilities: DKKm 2021 2020 Within one year 5,727 3,913 Within one to five years 499 2,008 After five years 0 0 Total 6,226 5,921 15. AUDIT FEE In addition to statutory audit, EY Godkendt Revi- sionspartnerselskab, the Parent company audi- tors provided other assurance engagements to the Parent company. DKKm 2021 2020 Total audit related services 3 3 Total fees to independent auditor 3 3 16. CONTRACTUAL AND CONTINGENT LIABILITIES The parent company has provided guarantees primarily to financial institutions at a total amount of DKK 13,094m (2020: DKK 13,088m) of which DKK 5,200m have been utilised in 2021 (2020: DKK 4,208m). Of the total amount of guarantees, DKK 5,840m (2020: DKK 5,656m) are provided on behalf of our subsidiaries. In connection with disposal of enterprises, nor- mal guarantees, etc. are issued to the acquiring enterprise. Provisions are made for estimated losses on such items. The parent company is the administration com- pany of the Danish joint taxation. According to the Danish corporate tax rules, as of 1 July 2012, the Company is obliged to withhold taxes on in- terest, royalty and dividend for all companies subjected to the Danish joint taxation scheme. The parent company has issued letter of support for certain Group companies. There are no significant contingent assets or lia- bilities apart from the above. See also note 2.9 in the consolidated financial statements. 17. RELATED PARTY TRANSACTIONS Board of Directors and Group Executive Manage- ment and the Group companies and associates that are part of the Group. There has been no transactions with related par- ties in 2021 and 2020, apart from Group Execu- tive Management´s remuneration stated in note 2, dividend and Treasury activities as mentioned below. Capital transactions with subsidiaries are included in note 8 and balances are disclosed separately in the balance sheet. managerial services and insurance services. The parent company´s purchase of services mainly consists of legal and tax assistance provided by FLSmidth A/S. Financial income and costs are attributable to the -house Treasury function, which is performed by the parent company, FLS- midth & Co. A/S. Receivables and payables are mainly attributable to this activity. These transactions are carried out on market terms and at market prices. For guarantees provided by the parent company for related parties, please see note 16 in the par- ent company financial statements FLSmidth Annual Report 2021 116 Parent company financial statements Parent company financial statements 18. SHAREHOLDERS At the end of 2021: One shareholder has reported a participating in- terest above 10%: Lundbeckfond Invest A/S, Denmark. No other shareholders have reported a partici- pating interest above 5%. 19. ACCOUNTING POLICIES PARENT COMPANY Accounting policy The financial statements of the parent company (FLSmidth & Co. A/S) are presented in conformity with the provisions of the Danish Financial State- ments Act for reporting class D enterprises. To ensure uniform presentation, the terminology used in the consolidated financial statements has as far as possible been applied in the parent s accounting policies on recognition and measurement are generally consistent with those of the Group. The instances in which the parent those of the Group have been described below. The accounting policies for the parent company are unchanged from 2020. from Group enterprises, is presented first in the income statement. Dividend from Group enterprises Dividend from investments in subsidiaries is rec- ognised as income come statement in the financial year in which the dividend is declared. This will typically be at the time of the approval by the Annual General Meeting of distribution from the company con- cerned. When the dividend distributed exceeds the accumulated earnings after the date of acqui- sition, the dividend is recognised in the income statement, however, this will trigger an impair- ment test of the investment. Property, plant and equipment Depreciation is charged on a straight line basis over the estimated useful life of the assets until they reach the estimated residual value. In the preciation period and the residual value are de- termined at the time of acquisition and are reas- sessed every year. Financial assets Investments in Group enterprises are measured at cost less impairment. Where the cost exceeds the recoverable amount, an impairment loss is recognised to this lower value. To the extent the distributed dividend exceeds the accumulated earnings after the date of acquisition, an impair- ment test of the investment is triggered. Other securities and investments Other securities and investments consist of shares in cement plants that are acquired in con- nection with the signing of contracts and are measured at fair value. Value adjustments are recognised in the income statement as financial items. Cash flow statement As the consolidated financial statements include a cash flow statement for the whole Group, no in- dividual statement for the parent company has been included, see the exemption provision, sec- tion 86(4) of the Danish Financial Statements Act. FLSmidth Annual Report 2021 117 Statements Statement by Management The Board of Directors and the Executive Board have today considered and approved the annual report for the financial year 1 January 31 December 2021. The consolidated financial statements are pre- sented in accordance with International Financial Reporting Standards as adopted by the EU. The parent company financial statements are pre- pared in accordance with the Danish Financial Statements Act. Further, the annual report is pre- pared in accordance with additional require- ments of the Danish Financial Statements Act. In our opinion, the consolidated financial state- ments and the parent company financial state- ments give a true and fair view of the Groups and the Parent companys financial position at 31 December 2021 as well as of the results of their operations and the consolidated cash flows for the financial year 1 January 31 December 2021. In our opinion, the managements review gives a fair review of the development in the Groups and the Parent companys activities and financial matters, results of operations, consolidated cash flows and financial position as well as a descrip- tion of material risks and uncertainties that the Group and the Parent company face. In our opinion, the annual report for the financial year 1 January 31 December 2021 with the file name 213800G7EG4156NNPG91-2021-12-31- en.zip is prepared, in all material respects, in compliance with the ESEF Regulation. We recommend the annual report for adoption at the Annual General Meeting. Valby, 16 February 2022 Executive management Mikko Juhani Keto Group CEO Roland M. Andersen Group CFO Board of directors Vagn Ove Sørensen Chair Tom Knutzen Vice chair Gillian Dawn Winckler Thrasyvoulos Moraitis Richard Robinson Smith Anne Louise Eberhard Carsten Hansen Leif Gundtoft Claus Østergaard STATEMENT BY MANAGEMENT Statement By management FLSmidth Annual Report 2021 118 Statements Independent Auditor’s Report To the shareholders of FLSmidth & Co. A/S Report on the audit of the consolidated financial statements and parent company financial statements Opinion We have audited the consolidated financial state- ments and the parent company financial state- ments of FLSmidth & Co. A/S for the financial year 1 January 31 December 2021, which com- prise income statement, balance sheet, state- ment of changes in equity and notes, including accounting policies, for the Group and the Parent Company, and a consolidated statement of com- prehensive income and a consolidated cash flow statement. The consolidated financial statements are prepared in accordance with International Fi- nancial Reporting Standards as adopted by the EU and additional requirements of the Danish Fi- nancial Statements Act, and the parent company financial statements are prepared in accordance with the Danish Financial Statements Act. In our opinion, the consolidated financial state- ments give a true and fair view of the financial position of the Group at 31 December 2021 and of the results of the Groups operations and cash flows for the financial year 1 January 31 Decem- ber 2021 in accordance with International Finan- cial Reporting Standards as adopted by the EU and additional requirements of the Danish Finan- cial Statements Act. Further, in our opinion the parent company finan- cial statements give a true and fair view of the financial position of the Parent Company at 31 December 2021 and of the results of the Parent Companys operations for the financial year 1 January 31 December 2021 in accordance with the Danish Financial Statements Act. Our opinion is consistent with our long-form audit report to the Audit Committee and the Board of Directors. Basis for opinion We conducted our audit in accordance with Inter- national Standards on Auditing (ISAs) and addi- tional requirements applicable in Denmark. Our responsibilities under those standards and re- quirements are further described in the "Auditors responsibilities for the audit of the consolidated financial statements and the parent company financial statements" (hereinafter collectively re- ferred to as "the financial statements") section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the International Ethics Standards Board for Accountants International Code of Ethics for Pro- fessional Accountants (IESBA Code) and the ad- ditional ethical requirements applicable in Den- mark, and we have fulfilled our other ethical responsibilities in accordance with these require- ments and the IESBA Code. To the best of our knowledge, we have not provided any prohibited non-audit services as described in article 5(1) of Regulation (EU) no. 537/2014. Appointment of auditor We were initially appointed as auditor of FLSmidth & Co. A/S on 30 March 2017 for the fi- nancial year 2017. We have been reappointed annually by resolution of the general meeting for a total consecutive period of 5 years including the financial year 2021. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most signifi- cance in our audit of the financial statements for the financial year 2021. These matters were ad- dressed during our audit of the financial state- ments as a whole and in forming our opinion thereon. We do not provide a separate opinion on these matters. For each matter below, our de- scription of how our audit addressed the matter is provided in that context. We have fulfilled our responsibilities described in the "Auditor's responsibilities for the audit of the financial statements" section, including in relation to the key audit matters below. Our audit in- cluded the design and performance of proce- dures to respond to our assessment of the risks of material misstatement of the financial state- ments. The results of our audit procedures, in- cluding the procedures performed to address the matters below, provide the basis for our audit opinion on the financial statements. Accounting for projects The accounting principles and disclosures about revenue recognition related to projects are in- cluded in notes 1.4, 2.7 and 3.4 to the consoli- dated financial statements. FLSmidth Cement and Mining industries deliver long term projects, which typically extends over more than one financial year. Due to the nature of these projects and in accordance with the ac- counting principles, FLSmidth recognises and measures revenue from such long term projects over time based on the cost-to-cost method. Accounting for projects involve significant man- agement judgments in respect of estimating the cost to complete the projects, including risk con- tingencies, warranties, liquidated damages, claims and the expected time to completion as well as the risk of credit losses. Together with the impact from executing projects in parts of the world where macro-economic and political fac- tors as well as COVID-19 related challenges may have an adverse effect, changes in these esti- mates during the execution of projects can signif- icantly impact the revenue, cost and contribution recognised. Accordingly, we considered the ac- counting for projects to be a key audit matter for the consolidated financial statements. As part of our procedures, we obtained an un- derstanding of the process for how project cost are estimated and risk evaluated. We evaluated the judgments made by management regarding the estimated costs to complete and the assump- tions made in assessment of warranty provisions. We evaluated the changes in estimated project INDEPENDENT AUDITOR'S REPORT Independent auditor’s report FLSmidth Annual Report 2021 119 Statements Independent Auditor’s Report cost and risk contingencies, and discussed these with project accounting, project management and group management. We evaluated manage- to claims and liquidated damages for projects and provisions to mitigate contract-specific finan- cial risks as well as the risk of credit losses. For those balances subject to claims, we made in- quiries of external and internal legal counsel. Valuation of inventory The accounting principles and disclosures about inventory are included in note 3.2 to the consoli- dated financial statements. FLSmidth carries inventory in the balance sheet at the lower of cost and net realisable value. The inventory includes strategic items, which are held in inventory, even if slow moving, because they are considered key equipment for the customers that FLSmidth needs to be able to deliver with short notice. The valuation of inventory involves significant management judgements to deter- mine whether inventory is still technical relevant when demand for the inventory items is ex- pected. The current market conditions are also considered. Accordingly, we considered this to be a key audit matter for the consolidated finan- cial statements. As part of our procedures, we obtained an un- derstanding of FLSmidths process for monitoring inventory and recording write-down for obsolete items. We analysed the inventory recorded in the balance sheet and obtained evidence regarding valuation of slow moving items. Further, we evaluated managements assessment of the ex- pected market demand and expected sales price for significant aged items. Valuation of trade receivables The accounting principles and disclosures about trade receivables are included in note 3.3 to the consolidated financial statements. FLSmidth carries trade receivables in the balance sheet at the amortised costs net of impairment losses, which is the original invoice amount less an estimated loss allowance for lifetime expected credit losses. FLSmidth has significant trade re- ceivables from a wide range of customers across the world. Trade receivables include inherent risk of credit losses influenced by specific character- istics and circumstances of the customer, e.g. the customers ability to pay, access to securities and payment guarantees, as well as the ageing of the receivable. The current market conditions and any country specific matters are also considered. Accordingly, we considered this to be a key audit matter for the consolidated financial statements. As part of our procedures, we obtained an un- derstanding of FLSmidths process for monitoring receivables and recording allowances for lifetime expected credit losses. We analysed the trade receivables recorded in the balance sheet and obtained evidence regarding the expected credit losses from items with particular risk characteris- tics. We evaluated managements assessment of recoverability particularly for significant aged items by corroborating them against internal and external evidence regarding the likelihood of payment. Statement on the Management’s review Management is responsible for the Manage- ments review. Our opinion on the financial statements does not cover the Managements review, and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial state- ments, our responsibility is to read the Manage- ments review and, in doing so, consider whether the Managements review is materially incon- sistent with the financial statements or our knowledge obtained during the audit, or other- wise appears to be materially misstated. Moreover, it is our responsibility to consider whether the Managements review provides the information required under the Danish Financial Statements Act. Based on the work we have performed, we con- clude that the Managements review is in accord- ance with the financial statements and has been prepared in accordance with the requirements of the Danish Financial Statements Act. We did not identify any material misstatement of the Man- agements review. Management’s responsibilities for the financial statements Management is responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with Interna- tional Financial Reporting Standards as adopted by the EU and additional requirements of the Danish Financial Statements Act and for the preparation of parent company financial state- ments that give a true and fair view in accord- ance with the Danish Financial Statements Act. Moreover, Management is responsible for such internal control as Management determines is necessary to enable the preparation of financial statements that are free from material misstate- ment, whether due to fraud or error. In preparing the financial statements, Manage- ment is responsible for assessing the Groups and the Parent Companys ability to continue as a going concern, disclosing, as applicable, mat- ters related to going concern and using the go- ing concern basis of accounting in preparing the financial statements unless Management either intends to liquidate the Group or the Parent Com- pany or to cease operations, or has no realistic alternative but to do so. FLSmidth Annual Report 2021 120 Statements Independent Auditor’s Report Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assur- ance as to whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an Auditors report that includes our opinion. Rea- sonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and additional require- ments applicable in Denmark will always detect a material misstatement when it exists. Misstate- ments can arise from fraud or error and are con- sidered material if, individually or in the aggre- gate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. As part of an audit conducted in accordance with ISAs and additional requirements applicable in Denmark, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material mis- statement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks and ob- tain audit evidence that is sufficient and appro- priate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one re- sulting from error, as fraud may involve collu- sion, forgery, intentional omissions, misrepre- sentations or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circum- stances, but not for the purpose of expressing an opinion on the effectiveness of the Groups and the Parent Companys internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of ac- counting estimates and related disclosures made by Management. Conclude on the appropriateness of Manage- ments use of the going concern basis of ac- counting in preparing the financial statements and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Groups and the Parent Com- panys ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our audi- tors report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclu- sions are based on the audit evidence ob- tained up to the date of our auditors report. However, future events or conditions may cause the Group and the Parent Company to cease to continue as a going concern. Evaluate the overall presentation, structure and contents of the financial statements, including the note disclosures, and whether the financial statements represent the underlying transac- tions and events in a manner that gives a true and fair view. Obtain sufficient appropriate audit evidence re- garding the financial information of the entities or business activities within the Group to ex- press an opinion on the consolidated financial statements. We are responsible for the direc- tion, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with gov- ernance regarding, among other matters, the planned scope and timing of the audit and signifi- cant audit findings, including any significant defi- ciencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding inde- pendence, and to communicate with them all re- lationships and other matters that may reasona- bly be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the au- dit of the consolidated financial statements and the parent company financial statements of the current period and are therefore the key audit matters. We describe these matters in our audi- tors report unless law or regulation precludes public disclosure about the matter or when, in ex- tremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on compliance with the ESEF Regulation As part of our audit of the financial statements of FLSmidth & Co. A/S we performed procedures to express an opinion on whether the annual report for the financial year 1 January - 31 December 2021 with the file name 213800G7EG4156NNPG91-2021-12-31-en.zip is prepared, in all material respects, in compliance with the Commission Delegated Regulation (EU) 2019/815 on the European Single Electronic For- mat (ESEF Regulation) which includes require- ments related to the preparation of the annual re- port in XHTML format and iXBRL tagging of the consolidated financial statements. Management is responsible for preparing an an- nual report that complies with the ESEF Regula- tion. This responsibility includes: The preparing of the annual report in XHTML format; The selection and application of appropriate iXBRL tags, including extensions to the ESEF taxonomy and the anchoring thereof to ele- ments in the taxonomy, for financial information required to be tagged using judgement where necessary; Ensuring consistency between iXBRL tagged data and the consolidated financial statements presented in human readable format; and For such internal control as Management de- termines necessary to enable the preparation of an annual report that is compliant with the ESEF Regulation. FLSmidth Annual Report 2021 121 Statements Independent Auditor’s Report Our responsibility is to obtain reasonable assur- ance on whether the annual report is prepared, in all material respects, in compliance with the ESEF Regulation based on the evidence we have obtained, and to issue a report that includes our opinion. The nature, timing and extent of proce- dures selected depend on the auditors judge- ment, including the assessment of the risks of material departures from the requirements set out in the ESEF Regulation, whether due to fraud or error. The procedures include: Testing whether the annual report is prepared in XHTML format; Obtaining an understanding of the companys iXBRL tagging process and of internal control over the tagging process; Evaluating the completeness of the iXBRL tag- ging of the consolidated financial statements; Evaluating the appropriateness of the com- panys use of iXBRL elements selected from the ESEF taxonomy and the creation of exten- sion elements where no suitable element in the ESEF taxonomy has been identified; Evaluating the use of anchoring of extension elements to elements in the ESEF taxonomy; and Reconciling the iXBRL tagged data with the au- dited consolidated financial statements. In our opinion, the annual report for the financial year 1 January - 31 December 2021 with the file name 213800G7EG4156NNPG91-2021-12-31- en.zip is prepared, in all material respects, in compliance with the ESEF Regulation. Copenhagen, 16 February 2022 EY Godkendt Revisionspartnerselskab CVR no. 30 70 02 28 Henrik Kronborg Iversen State Authorised Public Accountant mne24687 Jens Thordahl Nøhr State Authorised Public Accountant mne32212 FLSmidth Annual Report 2021 122 Statements Forward Looking Statements the form of annual reports or interim reports, filed with the Danish Business Authority and/or an- NASDAQ Copenhagen, as well as any presenta- tions based on such financial reports, and any other written information released, or oral state- ments made, to the public based on this report or in the future on behalf of FLSmidth & Co. A/S, may contain forward looking statements. other words and terms of similar meaning in con- nection with any discussion of future operating or financial performance identify forward-looking statements. Examples of such forward-looking statements include, but are not limited to: Statements of plans, objectives or goals for fu- ture operations, including those related to FLS- search and product development. Statements containing projections of or targets for revenues, profit (or loss), CAPEX, dividends, capital structure or other net financial items. Statements regarding future economic perfor- mance, future actions and outcome of contin- gencies such as legal proceedings and state- ments regarding the underlying assumptions or relating to such statements. Statements regarding potential merger & acquisition activities. These forward-looking statements are based on current plans, estimates and projections. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, which may be outside FLSmidth & fect such forward-looking statements. FLSmidth & Co. A/S cautions that a number of im- portant factors, including those described in this report, could cause actual results to differ materi- ally from those contemplated in any forward- looking statements. Factors that may affect future results include, but are not limited to, global as well as local political and economic conditions, including interest rate and exchange rate fluctuations, delays or faults in project execution, fluctuations in raw material prices, delays in research and/or development of new products or service concepts, interruptions of supplies and production, unexpected breach or termination of contracts, market-driven price and/or services, introduction of competing prod- ucts, reliance on information technology, current and new products, exposure to product liability and legal proceedings and investigations, changes in legislation or regulation and interpre- tation thereof, intellectual property protection, perceived or actual failure to adhere to ethical marketing practices, investments in and divesti- tures of domestic and foreign enterprises, unex- pected growth in costs and expenses, failure to recruit and retain the right employees and failure to maintain a culture of compliance. Unless re- quired by law FLSmidth & Co. A/S is under no duty and undertakes no obligation to update or revise any forward-looking statement after the distribution of this report. FORWARD LOOKING STATEMENTS Forward looking statement MAIN CONCLUSIONS – continued 5 Interim report Q3 2017 FLSMIDTH Annual Report 1 January – 31 December 2021 FLSmidth & Co. A/S Vigerslev Allé 77 DK-2500 Valby Denmark Tel.: +45 36 18 18 00 Fax: +45 36 44 11 46 [email protected] www.flsmidth.com CVR No. 58180912 213800G7EG4156NNPG912021-01-012021-12-31cmn:ConsolidatedMember213800G7EG4156NNPG912021-01-012021-12-31213800G7EG4156NNPG912020-01-012020-12-31213800G7EG4156NNPG912020-12-31213800G7EG4156NNPG912021-12-31213800G7EG4156NNPG912019-12-31213800G7EG4156NNPG912020-12-31ifrs-full:IssuedCapitalMember213800G7EG4156NNPG912021-01-012021-12-31ifrs-full:IssuedCapitalMember213800G7EG4156NNPG912021-12-31ifrs-full:IssuedCapitalMember213800G7EG4156NNPG912020-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember213800G7EG4156NNPG912021-01-012021-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember213800G7EG4156NNPG912021-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember213800G7EG4156NNPG912020-12-31ifrs-full:ReserveOfCashFlowHedgesMember213800G7EG4156NNPG912021-01-012021-12-31ifrs-full:ReserveOfCashFlowHedgesMember213800G7EG4156NNPG912021-12-31ifrs-full:ReserveOfCashFlowHedgesMember213800G7EG4156NNPG912020-12-31ifrs-full:RetainedEarningsMember213800G7EG4156NNPG912021-01-012021-12-31ifrs-full:RetainedEarningsMember213800G7EG4156NNPG912021-12-31ifrs-full:RetainedEarningsMember213800G7EG4156NNPG912020-12-31ifrs-full:EquityAttributableToOwnersOfParentMember213800G7EG4156NNPG912021-01-012021-12-31ifrs-full:EquityAttributableToOwnersOfParentMember213800G7EG4156NNPG912021-12-31ifrs-full:EquityAttributableToOwnersOfParentMember213800G7EG4156NNPG912020-12-31ifrs-full:NoncontrollingInterestsMember213800G7EG4156NNPG912021-01-012021-12-31ifrs-full:NoncontrollingInterestsMember213800G7EG4156NNPG912021-12-31ifrs-full:NoncontrollingInterestsMember213800G7EG4156NNPG912019-12-31ifrs-full:IssuedCapitalMember213800G7EG4156NNPG912020-01-012020-12-31ifrs-full:IssuedCapitalMember213800G7EG4156NNPG912019-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember213800G7EG4156NNPG912020-01-012020-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember213800G7EG4156NNPG912019-12-31ifrs-full:ReserveOfCashFlowHedgesMember213800G7EG4156NNPG912020-01-012020-12-31ifrs-full:ReserveOfCashFlowHedgesMember213800G7EG4156NNPG912019-12-31ifrs-full:RetainedEarningsMember213800G7EG4156NNPG912020-01-012020-12-31ifrs-full:RetainedEarningsMember213800G7EG4156NNPG912019-12-31ifrs-full:EquityAttributableToOwnersOfParentMember213800G7EG4156NNPG912020-01-012020-12-31ifrs-full:EquityAttributableToOwnersOfParentMember213800G7EG4156NNPG912019-12-31ifrs-full:NoncontrollingInterestsMember213800G7EG4156NNPG912020-01-012020-12-31ifrs-full:NoncontrollingInterestsMember213800G7EG4156NNPG912020-01-012020-12-31cmn:ConsolidatedMember213800G7EG4156NNPG912021-01-012021-12-311cmn:ConsolidatedMember213800G7EG4156NNPG912021-01-012021-12-312cmn:ConsolidatedMember213800G7EG4156NNPG912021-01-012021-12-311cmn:ConsolidatedMember213800G7EG4156NNPG912021-01-012021-12-312cmn:ConsolidatedMember213800G7EG4156NNPG912021-01-012021-12-313cmn:ConsolidatedMember213800G7EG4156NNPG912021-01-012021-12-314cmn:ConsolidatedMember213800G7EG4156NNPG912021-01-012021-12-315cmn:ConsolidatedMember213800G7EG4156NNPG912021-01-012021-12-316cmn:ConsolidatedMember213800G7EG4156NNPG912021-01-012021-12-317cmn:ConsolidatedMember213800G7EG4156NNPG912021-01-012021-12-318cmn:ConsolidatedMember213800G7EG4156NNPG912021-01-012021-12-319cmn:ConsolidatedMember213800G7EG4156NNPG912021-01-012021-12-311cmn:ConsolidatedMember213800G7EG4156NNPG912021-01-012021-12-312cmn:ConsolidatedMemberiso4217:DKKiso4217:DKKxbrli:sharesxbrli:pureAnnual reportAuditor's report on audited financial statementsParsePort XBRL Converter2021-01-012021-12-312020-01-012020-12-31213800G7EG4156NNPG91Reporting class D213800G7EG4156NNPG9158180912FLSmidth & Co. A/SVigerslev Allé 772500 ValbyOpinionBasis for Opinion
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