3.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 reportable segments and assesses their performance. The reportable segments are identified, and the disclosures selected, in line with the internal management and reporting system (management approach).

The segments pursue the following activities:

Performance Materials

The Performance Materials segment focuses on developing, producing, and reliably supplying high-performance materials such as standard polyurethanes and polycarbonates, as well as base chemicals. These include i.a. diphenylmethane diisocyanate (MDI), toluene diisocyanate (TDI), long-chain polyols, and polycarbonate resins. Those materials are used in sectors such as the furniture and wood processing industry, the construction industry as well as the automotive and transportation industry. These materials are used in roof structures, insulation for buildings and refrigerators, mattresses, and car seats, among other applications.

Solutions & Specialties

The Solutions & Specialties segment consolidates Covestro’s solutions and specialties businesses, and combines chemical products with application technology services. A fast pace of innovation is a key success factor since customer requirements change quickly. Covestro’s Solutions & Specialties business comprises a variety of polymer products including polycarbonates, precursors for coatings and adhesives, MDI specialties and polyols, thermoplastic polyurethanes, specialty films, and elastomers. They are used in sectors such as the automotive and transportation industry; the electrical, electronics and household appliances industry; the construction industry; and the healthcare industry. These materials include composite resins for wind turbine rotor blades; precursors for coatings and adhesives; laptop cases; floodlights; and high-quality specialty films.

Business activities that cannot be allocated to any of the aforementioned segments, costs associated with central corporate functions, and higher or lower expenses resulting from more or less favorable Covestro share performance as part of long-term variable compensation are reported in “Others/ Consolidation.” External sales are generated primarily from the sale of energy, site management services, and rentals and leasing.

As a rule, the segment data is calculated in accordance with the International Financial Reporting Standards (IFRSs) listed in note 3 of the Annual Report 2021 “Accounting Policies and Valuation Principles” with the following specifics:

• Intersegment sales are based on arm’s length transactions between the units that make up Covestro’s segments.
• EBIT and EBITDA are not defined in the IFRSs. EBIT is equal to income after income taxes plus financial result and income taxes. EBITDA is EBIT plus amortization and impairment losses on intangible assets, and depreciation and impairment losses on property, plant and equipment, less impairment loss reversals. EBIT and EBITDA per segment include intersegment sales and, in each case, the effects of the allocation of property, plant and equipment and intangible assets, including noncurrent assets used jointly by both segments, and the associated depreciation, amortization, impairment losses, and impairment loss reversals.
• Trade working capital includes inventories plus trade accounts receivable and contract assets, less trade accounts payable, contract liabilities and refund liabilities.

The following tables show the segment reporting data for the second quarter and for the first half year (as of June 30), respectively:

Covestro’s market capitalization fell below the carrying amount of the Group’s equity in the second quarter of 2022. As a consequence of this and due to a significant rise in the risk-free interest rate, the assumptions used for impairment testing of the cash generating units in fiscal 2021 were reviewed. With regard to the Standard Polyether Polyols (SPET) cash generating unit in the Performance Materials Segment, the impairment test conducted on the basis of the available planning data identified an impairment. As of June 30, 2022, the fair value less costs of disposal was determined using a cost of capital rate of 7.14%. The measurement methodology and growth assumptions are unchanged compared with the annual impairment test conducted in fiscal 2021. In accordance with IAS 36 (Impairment of Assets), impairment losses of €18 million were recognized in EBIT, including €16 million for goodwill previously recognized by SPET and €2 million for miscellaneous noncurrent assets of this cash generating unit.

Information on Geographical Areas

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

The following tables show the regional reporting data for the second quarter and for the first half year:

Reconciliation

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