Overview of Sales, Earnings and Financial Position
Notes to the Interim Report
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Financial Statements
Notes to the Interim Report as of September 30, 2006
Accounting policies
The unaudited, consolidated interim financial statements as of September 30, 2006 have been prepared according to the rules of IAS 34. The statements comply with the International Financial Reporting Standards (IFRS) approved and published by the International Accounting Standards Board (IASB) and in effect at the closing date, and with their interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC). Reference should be made as appropriate to the notes to the 2005 financial statements, particularly with regard to recognition and valuation principles.
Information on earnings per share
The ordinary shares to be issued upon conversion of the mandatory convertible bond are treated as already issued shares. Diluted earnings per share are therefore equal to basic earnings per share.
| Calculation of Earnings per Share | ||||
| 3rd Quarter 2005 | 3rd Quarter 2006 | First Nine Months 2005 | First Nine Months 2006 | |
| From continuing operations | ||||
| Income from continuing operations after taxes (€ million)* | 454 | 269 | 1,446 | 1,294 |
| + financing expenses for the mandatory convertible bond, net of tax effects (€ million) | – | 25 | – | 48 |
| Adjusted income from continuing operations after taxes (€ million) | 454 | 294 | 1,446 | 1,342 |
| Weighted average number of issued ordinary shares (million)** | 730.34 | 760.28 | 730.34 | 740.43 |
| Potential shares to be issued upon conversion of the mandatory convertible bond (million) | – | 60.12 | – | 41.30 |
| Adjusted weighted average total number of issued and potential ordinary shares (million) | 730.34 | 820.40 | 730.34 | 781.73 |
| Basic earnings per share from continuing operations (€) | 0.62 | 0.36 | 1.98 | 1.72 |
| Diluted earnings per share from continuing operations (€) | 0.62 | 0.36 | 1.98 | 1.72 |
| From continuing and discontinued operations | ||||
| Net income (€ million) | 493 | 320 | 1,551 | 1,372 |
| + financing expenses for the mandatory convertible bond, net of tax effects (€ million) | – | 25 | – | 48 |
| Adjusted net income (€ million) | 493 | 345 | 1,551 | 1,420 |
| Weighted average number of issued ordinary shares (million)** | 730.34 | 760.28 | 730.34 | 740.43 |
| Potential shares to be issued upon conversion of the mandatory convertible bond (million) | – | 60.12 | – | 41.30 |
| Adjusted weighted average total number of issued and potential ordinary shares (million) | 730.34 | 820.40 | 730.34 | 781.73 |
| Basic earnings per share from continuing and discontinued operations (€) | 0.68 | 0.42 | 2.12 | 1.82 |
| Diluted earnings per share from continuing and discontinued operations (€) | 0.68 | 0.42 | 2.12 | 1.82 |
2005 figures restated
* excluding minority interest
** including newly issued shares from the capital increase pro rata temporis
* excluding minority interest
** including newly issued shares from the capital increase pro rata temporis
Changes in the Bayer Group
Scope of consolidation
As of September 30, 2006, the Bayer Group comprised 430 fully or proportionately consolidated companies, compared with 283 companies as of December 31, 2005. The increase of 147 is largely due to the first-time inclusion of the Schering group companies in the second quarter of 2006.
Consolidation of Schering
With effect from June 23, 2006, Bayer acquired a majority of the shares of Schering AG, which is fully consolidated in the Bayer Group financial statements as of that date. As of September 30, 2006, Bayer held 96.1 percent of the outstanding shares of Schering AG. In addition to the purchase price of €16,237 million for these shares, ancillary acquisition costs of €61 million were incurred up to that date. The acquisition was paid for in cash.
The assets, liabilities and contingent liabilities acquired from Schering were reflected in the balance sheet at the following fair values:
As of September 30, 2006, the Bayer Group comprised 430 fully or proportionately consolidated companies, compared with 283 companies as of December 31, 2005. The increase of 147 is largely due to the first-time inclusion of the Schering group companies in the second quarter of 2006.
Consolidation of Schering
With effect from June 23, 2006, Bayer acquired a majority of the shares of Schering AG, which is fully consolidated in the Bayer Group financial statements as of that date. As of September 30, 2006, Bayer held 96.1 percent of the outstanding shares of Schering AG. In addition to the purchase price of €16,237 million for these shares, ancillary acquisition costs of €61 million were incurred up to that date. The acquisition was paid for in cash.
The assets, liabilities and contingent liabilities acquired from Schering were reflected in the balance sheet at the following fair values:
| Schering Acquisition | |||
| € million | Net carrying amount prior to the acquisition | Adjustment for the first-time consolidation* | Net carrying amount after the acquisition |
| Goodwill | 364 | 5,861 | 6,225 |
| Other intangible assets | 297 | 10,411 | 10,708 |
| Property, plant and equipment | 1,124 | 498 | 1,622 |
| Inventories | 840 | 945 | 1,785 |
| Financial liabilities | (241) | – | (241) |
| Liquid assets | 1,025 | – | 1,025 |
| Other assets and liabilities | (292) | (100) | (392) |
| Deferred taxes | 292 | (4,381) | (4,089) |
| Net assets | 3,409 | 13,234 | 16,643 |
| Minority interests | (406) | ||
| Acquisition price | 16,237 | ||
| of which ancillary acquisition costs | 61 | ||
* The adjustment for the first-time consolidation reflects the differences between the previous net carrying amounts in the balance sheet of Schering and the respective fair values in the acquirer’s balance sheet at the date of acquisition.
The average expected useful life of the acquired intangible assets is approximately 13 years.
The purchase price allocation has not yet been completed, therefore changes may yet be made in the allocation of the purchase price to the individual assets.
The goodwill remaining after the purchase price allocation is attributable to a number of factors. Apart from general synergies in administration processes and infrastructures, such factors also include significant cost savings in the areas of marketing, sales, procurement and production, most of which can now be initiated following the entry into force of the domination and profit and loss transfer agreement with Schering AG on October 27, 2006. In addition, the acquisition strengthens the Bayer Group’s global market position in the pharmaceuticals business. Details of the legal form of the merger are still in the planning stage.
The purchase price allocation has not yet been completed, therefore changes may yet be made in the allocation of the purchase price to the individual assets.
The goodwill remaining after the purchase price allocation is attributable to a number of factors. Apart from general synergies in administration processes and infrastructures, such factors also include significant cost savings in the areas of marketing, sales, procurement and production, most of which can now be initiated following the entry into force of the domination and profit and loss transfer agreement with Schering AG on October 27, 2006. In addition, the acquisition strengthens the Bayer Group’s global market position in the pharmaceuticals business. Details of the legal form of the merger are still in the planning stage.
The income and expenses for the Schering business, including pro-rata effects from the purchase price allocation, were recognized as follows from the date of the first-time consolidation (June 23, 2006):
| Schering Key Data | June 23 – September 30, 2006 | |
| € million | ||
| Sales | 1,554 | |
| EBITDA* | 111 | |
| EBITDA before special items | 422 | |
| EBIT* | 3 | |
| EBIT before special items | 84 | |
| Income after taxes | (4) | |
* for definition see Bayer Group Key Data
Discontinued operations
Bayer has entered into an agreement with Siemens AG concerning the divestiture of the Diagnostics Division. The Diagnostics business is thus reported as a discontinued operation. The prior-year data in the income and cash flow statements have been restated accordingly.
In the prior year, the spin-off of Lanxess from Bayer AG was entered into the commercial register on January 28, 2005 and thus became legally effective. The Plasma business of the Bayer HealthCare subgroup in the United States was divested in March 2005. Both these businesses are reported for 2005 as discontinued operations.
This information, which is provided from the standpoint of the Bayer Group, is to be regarded as part of the reporting for the entire Bayer Group by analogy with our segment reporting and is not intended to portray either the discontinued operations or the remaining operations of Bayer as separate entities. The presentation is thus in line with the principles for reporting discontinued operations.
In the prior year, the spin-off of Lanxess from Bayer AG was entered into the commercial register on January 28, 2005 and thus became legally effective. The Plasma business of the Bayer HealthCare subgroup in the United States was divested in March 2005. Both these businesses are reported for 2005 as discontinued operations.
This information, which is provided from the standpoint of the Bayer Group, is to be regarded as part of the reporting for the entire Bayer Group by analogy with our segment reporting and is not intended to portray either the discontinued operations or the remaining operations of Bayer as separate entities. The presentation is thus in line with the principles for reporting discontinued operations.
| Discontinued Operations | ||||||||
| € million | Diagnostics | Lanxess | Plasma | Total | ||||
| Third Quarter | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 |
| Net sales | 354 | 364 | 0 | 0 | 0 | 0 | 354 | 364 |
| EBIT* | 74 | 80 | 0 | 0 | (14) | 0 | 60 | 80 |
| Income after taxes | 48 | 51 | 0 | 0 | (9) | 0 | 39 | 51 |
| Gross cash flow* | 57 | 29 | 0 | 0 | 0 | 0 | 57 | 29 |
| Net cash flow* | 64 | (26) | 0 | 0 | (12) | 0 | 52 | (26) |
| Net investing cash flow | (21) | (26) | 0 | 0 | (46) | 0 | (67) | (26) |
| Net financing cash flow | (43) | 52 | 0 | 0 | 58 | 0 | 15 | 52 |
| First Nine Months | 2005 | 2006 | 2005** | 2006 | 2005 | 2006 | 2005 | 2006 |
| Net sales | 1,039 | 1,119 | 503 | 0 | 124 | 0 | 1,666 | 1,119 |
| EBIT* | 131 | 120 | 62 | 0 | (28) | 0 | 165 | 120 |
| Income after taxes | 85 | 78 | 38 | 0 | (18) | 0 | 105 | 78 |
| Gross cash flow* | 139 | 143 | 51 | 0 | 4 | 0 | 194 | 143 |
| Net cash flow* | 144 | 145 | (80) | 0 | 46 | 0 | 110 | 145 |
| Net investing cash flow | (69) | (72) | (19) | 0 | 180 | 0 | 92 | (72) |
| Net financing cash flow | (75) | (73) | 99 | 0 | (226) | 0 | (202) | (73) |
* for definition see Bayer Group Key Data
** figures for January only
** figures for January only
Notes to the statements of cash flows
A new line “Non-cash effects of the remeasurement of acquired inventories (work-down)” has been inserted in the cash flow statement in order to eliminate these effects of the Schering purchase price allocation from gross cash flow. For the third quarter of 2006, an amount of €275 million is transferred from “Decrease/increase in inventories” to this new line. These non-cash effects do not impact net cash flow.
Segment reporting
Our segment reporting is unchanged compared to the second quarter of 2006, when we adapted it to reflect the changes in our corporate structure that occurred during that reporting period. The acquired Schering business is included in the Pharmaceuticals segment together with that of the existing Pharmaceuticals Division.
The businesses of the Diabetes Care and Diagnostics divisions were previously combined for reporting purposes, while the Consumer Care and Animal Health divisions were reported as separate segments. Due to the agreed divestiture of the Bayer HealthCare subgroup’s Diagnostics Division, the segment reporting has been adjusted. As a discontinued operation, the Diagnostics Division is no longer part of the segment reporting. The remaining Diabetes Care Division is combined with the Consumer Care and Animal Health divisions to form the new Consumer Health segment in light of the similarities in their long-term financial performance and their focus on products that can be promoted directly to consumers. The previous year’s figures are restated accordingly.
Leverkusen, November 21, 2006
Bayer Aktiengesellschaft
The Board of Management
The businesses of the Diabetes Care and Diagnostics divisions were previously combined for reporting purposes, while the Consumer Care and Animal Health divisions were reported as separate segments. Due to the agreed divestiture of the Bayer HealthCare subgroup’s Diagnostics Division, the segment reporting has been adjusted. As a discontinued operation, the Diagnostics Division is no longer part of the segment reporting. The remaining Diabetes Care Division is combined with the Consumer Care and Animal Health divisions to form the new Consumer Health segment in light of the similarities in their long-term financial performance and their focus on products that can be promoted directly to consumers. The previous year’s figures are restated accordingly.
Leverkusen, November 21, 2006
Bayer Aktiengesellschaft
The Board of Management
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