Results of Operations, Financial Position and Net Assets of Covestro AG

Covestro AG is the parent company and strategic management holding company of the Covestro Group. The principal management functions for the entire Group are performed by the Board of Management. These include strategic planning for the Group, resource allocation and executive and financial management. Covestro AG’s net assets, financial position and results of operations are largely determined by the business performance of its subsidiaries.

The financial statements of Covestro AG are prepared in accordance with the German Commercial Code (HGB) and the German Stock Corporation Act (AktG). The company, headquartered in Leverkusen (Germany), is registered in the commercial register of the Local Court of Cologne under No. HRB 85281.

Covestro AG performs energy-specific services for Covestro Brunsbüttel Energie GmbH, Brunsbüttel, (affiliated power and gas grid operator) and therefore prepares activity reports in the areas of electricity supply and gas supply pursuant to Section 6b (3) Sentence 1 Nos. 2 and 4 of the German Energy Industry Act (EnWG).

There is a control and profit and loss transfer agreement between Covestro AG and Covestro Deutschland AG, Leverkusen (Germany). All profit not subject to a prohibition on transfer is transferred in full to Covestro AG at the end of the year. Losses are absorbed in full. Other retained earnings recognized during the term of the agreement must be released upon request by Covestro AG and used to compensate a net loss for the year or transferred as profit.

Results of Operations

In fiscal 2020, Covestro AG generated a net loss for the period of €45 million (previous year: net income of €623 million). This is due to factors including the reduced income from investments in affiliated companies of €77 million (previous year: €695 million). Income from investments in affiliated companies was solely attributable to income from the control and profit and loss transfer agreement with Covestro Deutschland AG.

General administration expenses totaling €46 million (previous year: €48 million) mainly consisted of personnel expenses for the employees of the Group holding company and members of the Board of Management. The interest result included interest expense of €20 million for the euro bonds issued. Other financial income and expenses mainly comprised bank fees totaling €15 million. These included fees for the provision of credit lines, one-time fees associated with the issue of the new euro bonds, the pro rata reversal of the discount on the euro bonds issued, and ancillary costs for the capital increase performed in fiscal 2020. Other operating income of €19 million related almost solely to the reversal of provisions for settling possible tax claims by Bayer AG in connection with the contribution, indemnification, and post-formation agreement. Other operating expenses mainly resulted from expenses associated with the announced acquisition of the Resins & Functional Materials (RFM) business from Koninklijke DSM N.V., Heerlen (Netherlands), in the amount of €30 million. Other income and expense items had no notable effect on earnings.

The result of operations was €–16 million (previous year: €629 million) and led to income taxes of €29 million (previous year: €6 million). After adding retained earnings brought forward from prior year of €220 million (previous year: €1 million) and withdrawing an amount of €76 million from other retained earnings (previous year: allocation of €185 million to other retained earnings), distributable profit amounted to €251 million (previous year: €439 million).

For fiscal 2020, net income was expected to be well below the level in fiscal 2019 in line with our forecast from the Annual Report 2019. With a net loss of €45 million this forecast was met. The Board of Management and the Supervisory Board are proposing a dividend of €1.30 per share carrying dividend rights for the 2020 fiscal year to the Annual General Meeting.

Net Assets and Financial Position

Covestro AG had total assets of €7,189 million as of December 31, 2020 (previous year: €5,779 million). The net assets and financial position of Covestro AG are dominated by its role as a holding company in managing subsidiaries and financing corporate activities. This is primarily reflected in the levels of financial assets (24.6% of total assets), of receivables from affiliated companies (74.2% of total assets) and of the liabilities.

Receivables from affiliated companies increased by €1,435 million to €5,337 million (previous year: €3,902 million). This was primarily due to a higher intercompany loan to Covestro Deutschland AG.

All receivables and other assets have maturities of less than one year.

Property, plant, equipment, and intangible assets were of secondary importance. Current other receivables of €30 million (previous year: €7 million) and deferred income of €12 million (previous year: €5 million) were also immaterial in relation to total assets. Other assets of €34 million (previous year: €90 million) mainly included income tax and VAT receivables.

Covestro AG’s equity amounted to €4,823 million (previous year: €4,636 million). This corresponds to an equity ratio of 67.1% (previous year: 80.2%). The October 2020 capital increase lifted capital stock by €10 million and capital reserves by €437 million. In addition, capital reserves increased by €4 million due to the issue of treasury shares to employees as part of the Covestment stock participation program. In contrast, the payment of the dividend for the 2019 fiscal year in the amount of €219 million and the net loss for the period of €45 million reduced equity.

In contrast to equity, provisions amounted to €90 million (previous year: €125 million) and other liabilities totaled €2,276 million (previous year: €1,018 million).

Provisions comprised provisions for pensions and other post-employment benefits of €4 million (previous year: €3 million), tax provisions of €77 million (previous year: €81 million), and other provisions of €9 million (previous year: €41 million).

The increase in liabilities was mainly due to the issue of euro bonds in June 2020 with a total volume of €1.0 billion. The bonds amounting to €2.0 billion have the following maturities: €500 million mature in 2021, another €500 million mature in one to five years, and €1.0 billion mature in 2026 or later. Moreover, liabilities to banks totaling €225 million are due in one to five years. All other liabilities are due within one year.