Statements of Income
Liquidity and Capital Resources
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Management Report
Liquidity and Capital Resources
Operating cash flow
Gross cash flow advanced in the third quarter of 2006 by 35.6 percent to €1,170 million (Q3 2005: €863 million), largely as a result of the positive business trend and the inclusion of Schering. This increase was achieved in spite of higher income tax payments, which arose from the fact that income for the prior-year quarter included a €244 million tax-free gain from changes to our pension systems, whereas the charges to earnings in the third quarter of 2006 related to the purchase price allocation were not tax-deductible.
Net cash flow from continuing operations rose by 10.7 percent to €1,521 million (Q3 2005: €1,374 million). This figure contains an outflow of approximately €100 million for the existing stock option plans of Schering employees. A corresponding inflow from the sale of hedging options was recorded in the second quarter, so the effects on the two quarters’ cash flows were more or less mutually offsetting.
Net cash flow from continuing operations rose by 10.7 percent to €1,521 million (Q3 2005: €1,374 million). This figure contains an outflow of approximately €100 million for the existing stock option plans of Schering employees. A corresponding inflow from the sale of hedging options was recorded in the second quarter, so the effects on the two quarters’ cash flows were more or less mutually offsetting.
| Cash Flow Key Data | ||||
| € million | 3rd Quarter 2005 | 3rd Quarter 2006 | First Nine Months 2005 | First Nine Months 2006 |
| Gross cash flow* | 863 | 1,170 | 2,790 | 3,260 |
| Changes in working capital | 511 | 351 | (707) | (780) |
| Net cash provided by (used in) operating activities (net cash flow), continuing operations | 1,374 | 1,521 | 2,083 | 2,480 |
| Net cash provided by (used in) operating activities (net cash flow), discontinued operations | 52 | (26) | 110 | 145 |
| Net cash provided by (used in) operating activities (net cash flow), total | 1,426 | 1,495 | 2,193 | 2,625 |
| Net cash provided by (used in) investing activities (total) | (392) | (1,313) | (1,092) | (15,341) |
| Net cash provided by (used in) financing activities (total) | 154 | 235 | (1,623) | 12,368 |
| Change in cash and cash equivalents due to business activities (total) | 1,188 | 417 | (522) | (348) |
2005 figures restated
* for definition see Bayer Group Key Data
* for definition see Bayer Group Key Data
Investing cash flow
There was a net cash outflow of €1,313 million for investing activities (Q3 2005: €392 million). Disbursements for acquisitions amounted to €1,164 million, including €1.1 billion to purchase additional shares of Schering AG. We also acquired the U.S. company Metrika, which manufactures and markets the A1CNow+® device for monitoring the long-term blood glucose value HbA1c, thus expanding the product range of our Diabetes Care Division.
Cash outflows for additions to property, plant and equipment (€282 million) and intangible assets (€43 million) declined by a total of €21 million to €325 million. Depreciation of property, plant and equipment came to €317 million. The outflows included the capital expenditures for our Caojing site near Shanghai, China. In September 2006 we inaugurated at that site a worldscale polycarbonate production facility with an initial capacity of 100,000 tons per year, a plant for the manufacture of the polyurethane raw materials monomeric and polymeric MDI (diphenylmethane diisocyanate) with an annual capacity of 80,000 tons, and a production unit for hexamethylene diisocyanate with a planned initial capacity of 30,000 tons.
We received €56 million from the sale of marketable securities, against disbursements of €34 million in the prior-year quarter.
Cash outflows for additions to property, plant and equipment (€282 million) and intangible assets (€43 million) declined by a total of €21 million to €325 million. Depreciation of property, plant and equipment came to €317 million. The outflows included the capital expenditures for our Caojing site near Shanghai, China. In September 2006 we inaugurated at that site a worldscale polycarbonate production facility with an initial capacity of 100,000 tons per year, a plant for the manufacture of the polyurethane raw materials monomeric and polymeric MDI (diphenylmethane diisocyanate) with an annual capacity of 80,000 tons, and a production unit for hexamethylene diisocyanate with a planned initial capacity of 30,000 tons.
We received €56 million from the sale of marketable securities, against disbursements of €34 million in the prior-year quarter.
Financing cash flow
Financing activities resulted in a net cash inflow of €235 million (Q3 2005: €154 million). The proceeds from the placement of 34 million new shares amounted to €1,177 million. Net loan repayments resulted in an outflow of €671 million, while interest payments rose to €265 million (Q3 2005: €190 million) primarily as a result of borrowings made to finance the Schering acquisition.
| Net Debt | Dec. 31, 2005 | June 30, 2006 | Sept. 30, 2006 |
| € million | |||
| Noncurrent financial liabilities as per balance sheets (including derivatives) | 7,185 | 10,373 | 14,447 |
| of which mandatory convertible bond | – | 2,271 | 2,273 |
| of which hybrid bond | 1,268 | 1,242 | 1,255 |
| Current financial liabilities as per balance sheets (including derivatives) | 1,767 | 12,053 | 7,361 |
| - Derivative receivables | 188 | 212 | 161 |
| Financial liabilities | 8,764 | 22,214 | 21,647 |
| - Liquid assets as per balance sheets less amount not freely available* | 3,270 | 2,269 | 2,626 |
| Net debt | 5,494 | 19,945 | 19,021 |
* In view of the restriction on its use, the €310 million liquidity in the escrow accounts was not deducted when calculating net debt. September 30, 2006: €2,626 million = €2,936 million - €310 million.
Liquid assets and net debt
Including marketable securities and other instruments, the Bayer Group had liquid assets of €2,936 million as of September 30, 2006. Of this amount, €310 million was held in escrow accounts to be used exclusively for payments relating to civil law settlements in antitrust proceedings.
Net debt, which increased in the second quarter due to the Schering acquisition, was already down by €0.9 billion to €19.0 billion at the end of the third quarter. The net debt should be viewed in light of the fact that the noncurrent financial liabilities include in their entirety both the 100-year hybrid bond issued in 2005 and the mandatory convertible bond. In computing debt indicators, rating agencies assign hybrid bonds partly, and mandatory convertible bonds wholly, to stockholders’ equity. These bonds thus support the Group‘s rating-specific debt indicators.
In July 2006, Standard & Poor‘s altered Bayer AG’s long-term issuer rating from A with stable outlook to BBB+ with positive outlook, citing the debt increase associated with the Schering acquisition. Also in July 2006, Moody’s confirmed its current A3 rating for Bayer AG, changing the outlook from stable to negative.
Net debt, which increased in the second quarter due to the Schering acquisition, was already down by €0.9 billion to €19.0 billion at the end of the third quarter. The net debt should be viewed in light of the fact that the noncurrent financial liabilities include in their entirety both the 100-year hybrid bond issued in 2005 and the mandatory convertible bond. In computing debt indicators, rating agencies assign hybrid bonds partly, and mandatory convertible bonds wholly, to stockholders’ equity. These bonds thus support the Group‘s rating-specific debt indicators.
In July 2006, Standard & Poor‘s altered Bayer AG’s long-term issuer rating from A with stable outlook to BBB+ with positive outlook, citing the debt increase associated with the Schering acquisition. Also in July 2006, Moody’s confirmed its current A3 rating for Bayer AG, changing the outlook from stable to negative.
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