Alternative Performance Measures

Throughout its financial reporting, Covestro uses alternative performance measures (APMs) to assess the business performance of the Group. These are not defined in the (IFRSs). They should be considered a supplement to, not a replacement for, the performance measures determined in accordance with IFRSs. The calculation methods and reconciliation of the non-IFRS sales and earnings APMs to the figures reported in the financial statements are presented below. The calculation methods for the APMs may vary from those of other companies, thus limiting the extent of the overall comparability. These alternative performance measures should not be viewed in isolation or employed as an alternative to the financial indicators determined in accordance with IFRSs and presented in the consolidated financial statements for purposes of assessing Covestro’s net assets, financial position and results of operations.

The following are the alternative performance measures relevant to the Covestro Group:

Covestro uses ROCE to assess profitability in the context of the company’s internal management system. EBITDA is also calculated as an additional indicator of profitability. FOCF is a key factor in the presentation of the liquidity position that indicates the company’s ability to generate a cash surplus and finance its activities. Net financial debt gauges the Group’s financial condition and financing requirements.

EBITDA

is a measure used in the calculation of EBITDA. EBIT represents the share of the income after income taxes plus financial result and income tax expense attributable to Covestro’s core business after elimination of the influence of variable tax rates and/or various financing activities.

Calculation of EBIT

 

 

 

 

 

 

 

2017

 

2018

 

 

€ million

 

€ million

Sales

 

14,138

 

14,616

Cost of goods sold

 

(9,308)

 

(9,918)

Gross profit

 

4,830

 

4,698

Selling expenses

 

(1,352)

 

(1,408)

Research and development expenses

 

(274)

 

(276)

General administration expenses

 

(481)

 

(491)

Other operating income

 

145

 

123

Other operating expenses

 

(60)

 

(66)

EBIT

 

2,808

 

2,580

Financial result

 

(150)

 

(104)

Income before income taxes

 

2,658

 

2,476

Income taxes

 

(641)

 

(647)

Income after income taxes

 

2,017

 

1,829

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. In addition, EBITDA is adjusted for possible distortions arising from various depreciation/amortization methods and measurement options, and therefore represents earnings from operating business activities.

Calculation of EBITDA

 

 

 

 

 

 

 

2017

 

2018

 

 

€ million

 

€ million

EBIT

 

2,808

 

2,580

Depreciation, amortization, impairment losses and impairment loss reversals

 

627

 

620

EBITDA

 

3,435

 

3,200

Return on capital employed (ROCE)

The foremost objective of the Covestro Group is to steadily increase enterprise value. Value is generated if Group earnings exceed the cost of capital. Covestro uses return on capital employed (ROCE) as the central value-based management metric. ROCE measures profitability and is calculated as the ratio of EBIT, adjusted for special items as needed, after taxes ( = net operating profit after taxes) to the average capital employed. If ROCE exceeds the (WACC), the company is earning a premium on its cost of capital.

Calculation of the Return on Capital Employed

Calculation of the Return on Capital Employed (graphic)

Calculation of the
Value Contribution

Calculation of the Value Contribution (bar chart)

Calculation of average capital employed

The capital employed is the interest-bearing capital required by the company for its operations. It is calculated from operating noncurrent and current assets less non-interest-bearing liabilities. Non-interest-bearing liabilities include, for example, trade accounts payable and current provisions. The average is determined using the capital employed at the beginning and end of the relevant period.

Calculation of Average Capital Employed

 

 

 

 

 

 

 

 

 

 

 

 

 

Dec. 31, 2016/Jan. 01, 20171

 

Dec. 31, 20171

 

Effects of IFRS 9 and IFRS 15

 

Jan. 01, 2018

 

Dec. 31, 2018

 

 

€ million

 

€ million

 

€ million

 

€ million

 

€ million

1 Reference information has not been restated, see note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.”

2 Other noncurrent financial assets were adjusted for nonoperating and financial assets.

3 Other receivables were adjusted for nonoperating and financial receivables.

4 Deferred taxes were adjusted for deferred taxes from defined benefit plans and similar obligations.

5 Other provisions were adjusted for provisions for interest payments.

6 Other liabilities were adjusted for nonoperating and financial liabilities.

7 Deferred tax liabilities were adjusted for deferred tax liabilities from defined benefit plans and similar obligations.

Goodwill

 

264

 

253

 

 

253

 

256

Other intangible assets

 

97

 

81

 

 

81

 

77

Property, plant and equipment

 

4,655

 

4,296

 

 

4,296

 

4,409

Investments accounted for using the equity method

 

230

 

208

 

 

208

 

214

Other noncurrent financial assets2

 

9

 

8

 

 

8

 

8

Other receivables3

 

341

 

297

 

61

 

358

 

361

Deferred taxes4

 

187

 

224

 

4

 

228

 

256

Inventories

 

1,721

 

1,913

 

(33)

 

1,880

 

2,213

Trade accounts receivable

 

1,674

 

1,882

 

(18)

 

1,864

 

1,786

Claims for income tax refunds

 

119

 

138

 

 

138

 

55

Gross capital employed

 

9,297

 

9,300

 

14

 

9,314

 

9,635

Other provisions5

 

(886)

 

(755)

 

28

 

(727)

 

(721)

Other liabilities6

 

(207)

 

(215)

 

(65)

 

(280)

 

(234)

Deferred tax liabilities7

 

(157)

 

(160)

 

(6)

 

(166)

 

(153)

Trade accounts payable

 

(1,536)

 

(1,618)

 

37

 

(1,581)

 

(1,637)

Income tax liabilities

 

(73)

 

(235)

 

 

(235)

 

(279)

Capital employed

 

6,438

 

6,317

 

8

 

6,325

 

6,611

 

 

 

 

 

 

 

 

 

 

 

Average capital employed

 

 

 

6,378

 

 

 

 

 

6,468

Calculation of the cost of capital

WACC reflects the expected return on the company’s capital comprising both equity and debt. The cost of equity factors used in WACC are calculated by addition of the risk-free interest rate and the risk premium for an equity investment. Covestro uses the returns on long-term German government bonds as the risk-free interest rate. We derive this risk premium from capital market information for comparable listed companies. The cost of debt factors are calculated by addition of the risk-free interest rate and a risk premium on debt capital that Covestro calculates using the financing costs of comparable companies, less the tax benefit of interest incurred on borrowed capital. Calculation of the cost of capital generally has a long-term perspective; short-term fluctuations are evened out. The capital cost factor for the Covestro Group was 6.7% in fiscal 2018 (previous year: 6.6%).

Calculation of the net operating profit after taxes (NOPAT) and value contribution

The absolute value generation of the company is measured by the metric . This is the difference between NOPAT and the cost of capital. The latter is calculated by multiplying the average capital employed by . A positive value contribution means that value has been generated.

NOPAT is the operating result after taxes. Taxes are determined by multiplying the effective tax rate by .

Calculation of the Net Operating Profit After Taxes and Value Contribution

 

 

 

 

 

 

 

2017

 

2018

 

 

€ million

 

€ million

1 Adjusted EBITDA is not reported because no income or expense items were recognized as special items either in the reporting period or in the corresponding prior-year period.

2 The calculation of the effective tax rate is presented in note 11 “Taxes.”

EBIT1

 

2,808

 

2,580

Effective tax rate2

 

24.1%

 

26.1%

Taxes

 

(677)

 

(673)

NOPAT

 

2,131

 

1,907

WACC

 

6.6%

 

6.7%

Average capital employed

 

6,378

 

6,468

Cost of capital

 

(421)

 

(433)

Value contribution

 

1,710

 

1,474

ROCE

 

33.4%

 

29.5%

Free operating cash flow (FOCF)

FOCF is the operating cash flow less cash outflows for additions to property, plant, equipment and intangible assets. serves in particular to pay dividends and interest and to repay debt.

Calculation of Free Operating Cash Flow

 

 

 

 

 

 

 

2017

 

2018

 

 

€ million

 

€ million

EBITDA

 

3,435

 

3,200

Income taxes paid

 

(510)

 

(574)

Change in pension provisions

 

17

 

26

(Gains) losses on retirements of noncurrent assets

 

(45)

 

(45)

Change in other working capital, other noncash items

 

(536)

 

(231)

Operating cash flows

 

2,361

 

2,376

Cash outflows for additions to property, plant, equipment and intangible assets

 

(518)

 

(707)

Free operating cash flow

 

1,843

 

1,669

Net financial debt

Net financial debt equals the sum of all financial liabilities less cash and cash equivalents, current financial assets and receivables from financial derivatives.

Net Financial Debt

 

 

 

 

 

 

 

Dec. 31, 2017

 

Dec. 31, 2018

 

 

€ million

 

€ million

Bonds

 

1,495

 

996

Liabilities to banks

 

69

 

24

Liabilities under finance leases

 

223

 

193

Liabilities from derivatives

 

9

 

12

Receivables from derivatives

 

(15)

 

(12)

Financial liabilities

 

1,781

 

1,213

Cash and cash equivalents

 

(1,232)

 

(865)

Current financial assets

 

(266)

 

Net financial debt

 

283

 

348

IFRSs/International Financial Reporting Standards
International accounting standards as endorsed by the European Union
EBITDA/earnings before interest, taxes, depreciation and amortization
EBIT plus depreciation and amortization of property, plant, equipment, and intangible assets
ROCE/return on capital employed
Ratio of operating result after taxes to the capital employed
FOCF/free operating cash flow
Operating cash flows (pursuant to IAS 7) less cash outflows for additions to property, plant, equipment and intangible assets
Net financial debt
Interest-bearing liabilites (excluding pension obligations) less liquid assets
EBIT/earnings before interest and taxes
Income after income taxes plus financial result and income tax expense
NOPAT/net operating profit after taxes
Operating result (EBIT) after taxes
WACC/weighted average cost of capital
Weighted average cost of capital reflecting the expected return on the company’s equity and debt capital
Capital Employed
Capital employed is the sum of noncurrent and current assets less non-interest-bearing liabilities such as trade accounts payable.
VC/value contribution
The difference between the operating result after taxes and the cost of capital. A positive value contribution means that value has been created.
WACC/weighted average cost of capital
Weighted average cost of capital reflecting the expected return on the company’s equity and debt capital
EBIT/earnings before interest and taxes
Income after income taxes plus financial result and income tax expense
FOCF/free operating cash flow
Operating cash flows (pursuant to IAS 7) less cash outflows for additions to property, plant, equipment and intangible assets