4. Segment and Regional Reporting

The Board of Management of Covestro AG, as the chief operating decision maker of the Covestro Group, allocates resources to the operating segments and assesses their performance. The reportable segments and regions are identified, and the disclosures selected, in line with the internal financial reporting system (management approach). These are based on the same accounting policies as described for the Covestro Group in note 3.

As of December 31, 2018, the Covestro Group comprises three reportable segments with the following activities:

Polyurethanes

The Polyurethanes segment develops, produces and markets high-quality precursors for polyurethanes. These precursors are isocyanates (MDI, TDI) and polyether polyols. Flexible polyurethane foam is used primarily in the furniture and automotive industries (e.g. in upholstered furniture, mattresses and car seats). Rigid foam is used mainly in the construction industry as an insulating material as well as along the entire refrigeration chain. The segment operates production facilities worldwide as well as systems houses for formulating and supplying customized polyurethane systems.

Polycarbonates

The Polycarbonates segment develops, produces and markets the high-performance plastic polycarbonate in the form of granules, composite materials and semifinished products (sheets). The material is used primarily in the automotive industry (e.g. in the passenger compartment and for vehicle lighting) and in the construction industry (e.g. for roof structures). It is also used in the electrical and electronics industry (e.g. for connector housings, computer cases and DVDs), the medical technology sector and the lighting industry (e.g. for LED components). The Covestro Group produces polycarbonate all around the world and processes it at compounding centers to meet specific customer requirements.

Coatings, Adhesives, Specialties

The Coatings, Adhesives, Specialties segment develops, produces and markets precursors for coatings, adhesives and sealants as well as specialties – primarily for polyurethane systems. They include polymer materials and aqueous dispersions based on the isocyanates HDI and IPDI, which are produced at facilities located throughout the world. The main areas of application are automotive and transportation, infrastructure and construction, wood processing, and furniture. The specialties comprise elastomers, high-quality films and precursors for the cosmetics, textiles and health care sectors.

Business activities that cannot be allocated to any of the aforementioned segments are reported under “All other segments”. The external sales from these activities are generated mainly from by-products of chlorine production and use.

The costs of Corporate Center functions and higher or lower expenses for long-term stock-based compensation arising from fluctuations in the performance of Covestro AG stock are presented in the segment reporting as “Corporate Center and reconciliation”.

The segment data are calculated as follows:

• Core volume growth³ refers to the core products in the Polyurethanes, Polycarbonates and Coatings, Adhesives, Specialties segments. It is calculated as the percentage change in externally sold volumes in thousand metric tons compared with the prior year. Covestro also takes advantage of business opportunities outside its core business, for example the sale of precursors and by-products such as hydrochloric acid, sodium hydroxide solution, and styrene. These transactions are not included in core volume growth.
• EBIT and EBITDA are not defined in the International Financial Reporting Standards. EBIT is equal to income after income taxes plus financial result and income tax expense. EBITDA is the EBIT as reported in the income statement plus depreciation and impairment losses on property, plant and equipment and amortization and impairment losses on intangible assets, less impairment loss reversals.
• Free operating cash flow is the operating cash flows less cash outflows for additions to property, plant and equipment and intangible assets. As a component of operating cash flows, income taxes paid are not directly attributed to any particular unit of the company. For purposes of calculating operating cash flows, the income taxes paid of a reporting segment are determined according to the management approach by multiplying the effective tax rate (ETR) expected for the fiscal year by that segment’s EBIT.
• Working capital comprises inventories plus trade accounts receivable less trade accounts payable.

The following tables show the segment reporting data for fiscal 2018 and as of December 31, 2018, respectively:

Information by geographical areas

The following table shows information by geographical area. The EMLA region consists of Europe, the Middle East, Africa and Latin America except Mexico, which together with the United States and Canada forms the NAFTA region. The APAC region includes Asia and the Pacific region.

The following table provides a breakdown by countries of external sales by market and of property, plant and equipment as well as intangible assets:

Information on major customers

Revenues from transactions with a single customer in no case exceeded 10% of Covestro Group sales in fiscal 2018 or the previous year.

Reconciliation

The following table shows the reconciliation of EBITDA of the segments to income before income taxes of the Group.