Liquidity and Capital Resources


Operating cash flow	Financing cash flow
Investing cash flow	Liquid assets and net debt

Bayer Group Summary Cash Flow Statements	2007	2008
	€ million	€ million
Gross cash flow*	4,784	5,295
Changes in working capital/other non-cash items	(503)	(1,687)
Net cash provided by (used in) operating activities (net cash flow), continuing operations	4,281	3,608
Net cash provided by (used in) operating activities (net cash flow), discontinued operations	2	-
Net cash provided by (used in) operating activities (net cash flow) (total)	4,283	3,608
Net cash provided by (used in) investing activities (total)	3,186	(3,089)
Net cash provided by (used in) financing activities (total)	7,730)	(873)
Change in cash and cash equivalents due to business activities (total)	(261)	(354)
Cash and cash equivalents at beginning of period	2,915	2,531
Change due to exchange rate movements and to changes in scope of consolidation	(123)	(83)
Cash and cash equivalents at end of period	2,531	2,094
* 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 2008 rose by 10.7%, from €4,784 million in the prior year to €5,295 million. There was a significant improvement in gross cash flow at HealthCare and CropScience due to the gratifying business performance in those subgroups, more than offsetting the decline at MaterialScience. info

Net cash flow declined to €3,608 million (2007: €4,281 million), mainly due to a significant increase in cash tied up in working capital. Contributing particularly to this increase was a higher level of receivables and inventories at HealthCare and CropScience due to business growth. We also recorded high cash disbursements in connection with the utilization of provisions.

Investing cash flow

There was a net cash outflow of €3,089 million for investing activities in 2008. This total contained disbursements of €1,617 million for acquisitions, including €227 million in connection with the acquisition of U.S.-based Possis Medical, Inc., €265 million associated with the purchase of the eastern European OTC business of Sagmel, Inc., €109 million for the acquisition of the OTC business of the Chinese Topsun group and €185 million to acquire Direvo Biotech AG, Germany. Disbursements of €695 million were also made for the acquisition of the remaining interest in Bayer Schering Pharma AG, Berlin, Germany. With the entry of the squeeze-out in the commercial register, the remaining minority stockholders received cash compensation of €98.98 per share for their stock. The funds held in escrow accounts for this purpose were paid out to the stockholders at the beginning of October 2008. In the previous year there was a cash inflow of €3,186 million, mainly comprising the net proceeds from the divestitures of the diagnostics business, H.C. Starck and Wolff Walsrode.

Cash outflows for property, plant and equipment and intangible assets in 2008 totaled €1,759 million (2007: €1,860 million). This figure included the expenditures for the expansion of our polymers production facilities in Shanghai, China, and the acquisition of the hematology portfolio of Maxygen, Inc. Inflows comprised €553 million in “interest and dividends received” and €167 million in proceeds from the sale of property, plant, equipment and other assets.

Selected capital expenditures for property, plant and equipment made by the Bayer Group in the last two years are described in the following table:

Segment	Description
Capital expenditures 2008
Pharmaceuticals	Optimization of steroid production in Bergkamen, Germany
	New packaging lines in Weimar and Berlin, Germany, and Gaillard, France
	Expansion of the production site in Beijing, China
	Capacity expansion in Jakarta, Indonesia
Crop Protection	Capacity expansion for herbicidal active ingredients in Frankfurt and Knapsack, Germany
	Consolidation of formulating activities in Kansas City, Missouri, U.S.A.
	Expansion of formulating capacity for non-herbicides in Belford Roxo, Brazil
	New insecticide formulation plant in Hangzhou, China
	Modification of a herbicide production facility in Ankleshwar, India
BioScience	Construction of greenhouse, breeding and laboratory facilities for canola seed in Saskatoon, Canada
Systems	Construction of a world-scale integrated production facility for MDI in Shanghai, China
	Polyether capacity increases in Dormagen, Germany, and Santa Clara, Mexico
	Construction of a pilot plant for carbon nanotubes in Leverkusen, Germany
	Construction of a polyurethane systems house in Noida, India
Materials	Construction of the MacroColor Center in Noida, India
	Modification of a facility for the manufacture of high-purity polycarbonate in Antwerp, Belgium

Segment	Description
Capital expenditures 2007
Pharmaceuticals	Consolidation of biotech production facilities in Seattle, Washington, U.S.A.
	Integration of biotech production facilities in Emeryville, California, U.S.A.
	Consolidation of R&D activities in Germany and the U.S. due to the integration of Bayer Schering Pharma
	Expansion of production facility for contrast media application systems in Warrendale, Pennsylvania, U.S.A.
Crop Protection	Capacity expansion at the active ingredient and formulating facilities in Hangzhou, China
	Formulation site consolidation project, U.S.A.
	Modification of existing facilities for the production of intermediates and new active ingredients for insecticides in Dormagen, Germany
	Site consolidation projects in Thane, India, and Wolfenbüttel, Germany
	Reconstruction of an active ingredient unit in Belford Roxo, Brazil
BioScience	New greenhouse for vegetable seeds in ’s-Gravenzande, Netherlands
Systems	Construction of a world-scale MDI production facility in Shanghai, China
	Construction of a plant for polyurethane dispersions in Shanghai, China
	Construction of a world-scale facility for polymer polyols in Antwerp, Belgium
Materials	Expansion of the polycarbonate facility in Map Ta Phut, Thailand
	Expansion of the polycarbonate facility in Shanghai, China
	Construction of a new logistics center for polycarbonate compounds in Krefeld-Uerdingen, Germany

Financing cash flow

Net cash outflow for financing activities in 2008 amounted to €873 million. The outflow in the prior year came to €7,730 million. This figure included €5.6 billion for net loan repayments, which in turn included the scheduled redemption of our 2002/2007 Eurobond in April 2007 (€2.1 billion). We made net borrowings of €1,525 million in 2008. Interest payments dropped by 5.4% year on year to €1,272 million. The Bayer AG dividend and dividend payments to non-controlling stockholders of consolidated companies, along with payments of withholding tax, totaled €1,126 million (2007: €773 million).

Liquid assets and net debt

Net Debt	Dec. 31, 2007	Dec. 31, 2008
	€ million	€ million
Bonds and notes	10,411	10,729
of which hybrid bond	1,237	1,245
of which mandatory convertible bond	2,285	2,296
Liabilities to banks	3,032	4,438
Liabilities under finance leases	358	535
Liabilities from derivatives	235	612
Other financial liabilities	162	333
Positive fair values of hedges of recorded transactions	(230)	(454)
Financial debt	13,968	16,193
Cash and cash equivalents*	(1,776)	(2,037)
Current financial assets	(8)	(4)
Net debt from continuing operations	12,184	14,152
Net debt from discontinued operations	0	0
Net debt (total)	12,184	14,152
* In view of the restriction on its use, the €57 million liquidity in escrow accounts as of December 31, 2008 (December 31, 2007: €755 million) was not deducted when calculating net debt. December 31, 2008: €2,037 million = €2,094 million – €57 million.

Net debt (total) rose by €2.0 billion in 2008, to €14.2 billion. Contributing to this increase were significant growth in cash tied up in working capital, €0.9 billion in acquisition-related disbursements, a €0.6 billion effect of shifts in major currencies against the euro, a higher dividend payment and the granting of €0.3 billion in loan capital to Bayer-Pensionskasse for its effective initial fund. The €695 million for payments to minority stockholders of Bayer Schering Pharma AG, Berlin, Germany, did not affect net debt, as the amount held in escrow accounts for this purpose was not deducted when net debt was calculated in the past. As of December 31, 2008 the Group had cash and cash equivalents of €2,094 million. Financial debt on the closing date was €16.2 billion, including the €1.2 billion subordinated hybrid bond issued in July 2005 and the €2.3 billion mandatory convertible bond maturing in June 2009. Net 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. Both rating agencies consider the mandatory convertible bond wholly as equity. Unlike conventional borrowings, the hybrid bond thus only has a limited effect on the Group’s rating-specific indicators, while the mandatory convertible bond has no effect.

In light of their maturity dates, the mandatory convertible bond issued in 2006, the floating rate note of Bayer AG, also issued in 2006, and the Eurobonds of Bayer Corporation issued in 2004 were reclassified in 2008 from noncurrent to current financial liabilities. Our noncurrent financial liabilities as of December 31, 2008 amounted to €10.6 billion.