Management Report

Liquidity and Capital Resources

Bayer Group Summary Statements of Cash Flows	3rd Quarter 2008	3rd Quarter 2009	First Nine Months 2008	First Nine Months 2009
	€ million	€ million	€ million	€ million
Gross cash flow*	1,171	1,172	4,144	3,629
Changes in working capital/other non-cash items	63	345	(1,493)	(20)
Net cash provided by (used in) operating activities (net cash flow), continuing operations	1,234	1,517	2,651	3,609
Net cash provided by (used in) operating activities (net cash flow), discontinued operations	0	0	0	0
Net cash provided by (used in) operating activities (net cash flow), (total)	1,234	1,517	2,651	3,609
Net cash provided by (used in) investing activities (total)	(667)	(238)	(1,452)	(474)
Net cash provided by (used in) financing activities (total)	(332)	(508)	(1,428)	(2,626)
Change in cash and cash equivalents due to business activities (total)	235	771	(229)	509
Cash and cash equivalents at beginning of period	2,058	1,834	2,531	2,094
Change due to exchange rate movements and to changes in scope of consolidation	(12)	(10)	(21)	(8)
Cash and cash equivalents at end of period	2,281	2,595	2,281	2,595
* Gross cash flow = income from continuing operations after taxes, plus income taxes, plus/minus non-operating result, minus income taxes paid or accrued, plus depreciation, amortization and write-downs, minus write-backs, plus/minus changes in pension provisions, minus gains/plus losses on retirements of noncurrent assets, plus non-cash effects of the remeasurement of acquired assets. The change in pension provisions includes the elimination of non-cash components of the operating result. It also contains benefit payments during the year.

Operating cash flow

Gross cash flow in the third quarter of 2009, at €1,172 million, was level with the prior-year period (+0.1%). Net cash flow advanced by 22.9% to €1,517 million (Q3 2008: €1,234 million). This increase was mainly due to a substantial reduction in cash tied up in working capital at HealthCare and CropScience.

Gross cash flow in the first three quarters of 2009 fell by 12.4% year on year to €3,629 million (9M 2008: €4,144 million), due largely to the lower operating result. Net cash flow rose by 36.1% to €3,609 million (9M 2008: €2,651 million). This was mainly the result of improved working capital management. Significantly lower net income tax payments of €327 million (9M 2008: €946 million) also contributed to the growth in net cash flow.

Investing cash flow

Net cash outflow for investing activities in the third quarter of 2009 totaled €238 million (Q3 2008: €667 million). Cash outflows for additions to property, plant, equipment and intangible assets were 14.6% below the prior-year period, at €420 million. This figure included disbursements related to the expansion of our polymers production facilities in Shanghai, China, and for marketing rights in the pharmaceuticals field. Disbursements for acquisitions came to €6 million. The prior-year figure of €367 million mainly comprised payments related to the purchase of the OTC business of the Chinese-based Topsun group (€109 million) and the acquisition of German-based Direvo Biotech AG (€185 million). The principal cash inflow item was €120 million (Q3 2008: €126 million) in interest and dividends received.

Net cash outflow for investing activities in the first nine months of 2009 totaled €474 million (9M 2008: €1,452 million). Cash outflows for property, plant and equipment and intangible assets were 4.2% lower at €1,080 million (9M 2008: €1,127 million). Of this figure, HealthCare accounted for €349 million (9M 2008: €368 million), CropScience for €223 million (9M 2008: €173 million) and MaterialScience for €356 million (9M 2008: €450 million). The cash outflows for acquisitions totaling €48 million related mainly to the purchase of the remaining interests in Berlimed, Spain (49%) and Bayer Polymers Shanghai, China (10%). The prior-year amount of €919 million included disbursements for acquisitions in the third quarter of 2008 and, in particular, payments in connection with the acquisition of Possis Medical, Inc., and the OTC business of Sagmel, Inc. The principal cash inflow item was €435 million (9M 2008: €424 million) in interest and dividends received.

Financing cash flow

Net cash outflow for financing activities in the third quarter of 2009 amounted to €508 million (Q3 2008: €332 million). This total contained net loan repayments of €249 million (Q3 2008: €63 million). Interest payments were slightly lower at €259 million (Q3 2008: €267 million).

Net cash outflow for financing activities in the first three quarters of 2009 amounted to €2,626 million (9M 2008: €1,428 million). Interest expense totaled €1,078 million (9M 2008: €1,023 million). Net loan repayments amounted to €575 million, the main item here being the €1,600 million disbursement to redeem the floating-rate EMTN note in the second quarter of 2009. In the prior-year period there was a €637 million inflow from net borrowings. There was a €973 million outflow for “dividend payments and withholding tax on dividends” (9M 2008: €1,042 million), including Bayer AG’s €1,070 million dividend payment made in May 2009 and €101 million in refunds of withholding tax on intra-Group dividend payments.

Liquid assets and net financial debt

Net Financial Debt	Dec. 31, 2008	June 30, 2009	Sept. 30, 2009
	€ million	€ million	€ million
Bonds and notes	10,729	8,305	8,301
of which hybrid bond	1,245	1,254	1,268
of which mandatory convertible bond	2,296	0	0
Liabilities to banks	4,438	4,287	4,077
Liabilities under finance leases	535	567	551
Liabilities from derivatives	612	529	540
Other financial liabilities	333	291	238
Positive fair values of hedges of recorded transactions	(454)	(463)	(441)
Financial debt	16,193	13,516	13,266
Cash and cash equivalents*	(2,037)	(1,790)	(2,595)
Current financial assets	(4)	(11)	(6)
Net financial debt from continuing operations	14,152	11,715	10,665
Net financial debt from discontinued operations	0	0	0
Net financial debt (total)	14,152	11,715	10,665
* In view of the restriction on its use, €0 million of the liquidity in escrow accounts as of September 30, 2009 (June 30, 2009: €44 million; Dec. 31, 2008: €57 million) was not deducted when calculating net financial debt.

Net financial debt (total) of the Bayer Group declined by €1,050 million in the third quarter, amounting to €10.7 billion on September 30, 2009. Net financial debt decreased by €3.5 billion compared with the end of 2008. Of this amount, €2,299 million resulted from the conversion of the mandatory convertible bond issued in 2006 into 62,605,888 new shares. As of September 30, 2009 the Group had cash and cash equivalents of €2,595 million. Financial liabilities amounted to €13.3 billion, including the €1.3 billion subordinated hybrid bond issued in July 2005. Net financial debt should be viewed against the fact that Moody’s and Standard & Poor’s treat 75% and 50%, respectively, of the hybrid bond as equity. Unlike conventional borrowings, the hybrid bond thus only has a limited effect on the Group’s rating-specific indicators. Our noncurrent financial liabilities as of September 30, 2009 amounted to €11.7 billion.

Standard & Poor’s gives Bayer a long-term issuer rating of A- with negative outlook, while Moody’s gives the company a rating of A3 with stable outlook. The short-term ratings are A-2 (Standard & Poor’s) and P-2 (Moody’s). These investment-grade ratings document good creditworthiness. Standard & Poor’s confirmed its rating on September 14, 2009.

Net Pension Liability

	Dec. 31, 2008	June 30, 2009	Sept. 30, 2009
	€ million	€ million	€ million
Provisions for pensions and other post-employment benefits	6,347	6,480	7,101
Prepaid benefit assets	(351)	(106)	(102)
Net pension liability	5,996	6,374	6,999

The net pension liability increased from €6.4 billion to €7.0 billion in the third quarter of 2009, due especially to lower long-term capital market interest rates. Provisions for pensions and other post-employment benefits rose from €6.5 billion to €7.1 billion.

In the first nine months of 2009, the net pension liability increased from €6.0 billion to €7.0 billion, due especially to lower long-term capital market interest rates. Provisions for pensions and other post-employment benefits rose from €6.4 billion to €7.1 billion. At the same time prepaid benefit assets, reflected in the statement of financial position as other receivables, fell to €0.1 billion.