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Liquidity and Capital Resources
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Liquidity and Capital Resources
 Operating cash flow |
Liquid assets and net debt |
| Investing cash flow |
Financial strategy |
| Financing cash flow |
| Bayer Group Summary Cash Flow Statements | 2006 | 2007 |
| € million | ||
| Gross cash flow* | 3,913 | 4,784 |
| Changes in working capital/other non-cash items | 15 | (503) |
| Net cash provided by (used in) operating activities (net cash flow), continuing operations | 3,928 | 4,281 |
| Net cash provided by (used in) operating activities (net cash flow), discontinued operations | 275 | 2 |
| Net cash provided by (used in) operating activities (net cash flow) (total) | 4,203 | 4,283 |
| Net cash provided by (used in) investing activities (net cash flow) (total) | (14,730) | 3,186 |
| Net cash provided by (used in) financing activities (net cash flow) (total) | 10,199 | (7,730) |
| Change in cash and cash equivalents due to business activities (total) | (328) | (261) |
| Cash and cash equivalents at beginning of period | 3,290 | 2,915 |
| Change due to exchange rate movements and to changes in scope of consolidation | (47) | (123) |
| Cash and cash equivalents at end of period | 2,915 | 2,531 |
* for definition see Bayer Group Key Data
Operating cash flow
Gross cash flow improved in 2007 by 22.3 percent year on year to €4,784 million (2006: €3,913 million) due to the strong business performance and the full-year inclusion of Schering AG, Berlin, Germany. Net cash flow rose by only €353 million to €4,281 million (2006: €3,928 million) due to an increase in cash tied up in working capital.
Investing cash flow
In 2007 there was a net cash inflow of €3,186 million for investing activities (2006: €14,730 million outflow), including divestment proceeds totaling €4.6 billion (after taxes) for the diagnostics business, H.C. Starck and Wolff Walsrode.
The €4.3 billion transaction volume for the diagnostics business comprised an initial payment of €0.4 billion at the end of 2006 and a further purchase price payment of €3.9 billion received in 2007. After deducting approximately €0.2 billion in divested cash and €0.4 billion in tax payments made on the divestment gain, net proceeds from the divestiture of the diagnostics business totaled €3.3 billion. Further tax payments of approximately €0.1 billion will arise in 2008 in connection with this divestiture.
The proceeds of the divestitures of H.C. Starck and Wolff Walsrode amounted to €1.3 billion after compensation for financial liabilities and the assumption of pension obligations by the acquirers.
Cash outflows for acquisitions included the US$ 314 million (approx. €232 million) purchase price for U.S. cotton seed producer Stoneville. In June 2007, Bayer CropScience acquired Stoneville Pedigreed Seed Company from Monsanto in order to strengthen the position of the BioScience business unit in the U.S. cotton seed market. In September 2007, Bayer HealthCare completed the agreed acquisition of a biologics production facility in Emeryville, California, from Novartis and made a purchase price payment of US$ 183 million (approx. €137 million). On July 1, 2007, Bayer MaterialScience completed the acquisition of the Ure-Tech group, Taiwan, a supplier of TPU resins and films, at a purchase price of US$ 85 million (approx. €63 million). Cash outflows for acquisitions in the prior-year period were largely attributable to the acquisition of Schering, Berlin, Germany.
Cash outflows for property, plant and equipment in 2007 came to €1,546 million (2006: €1,534 million) and those for intangible assets to €314 million (2006: €342 million), giving a total of €1,860 million (2006: €1,876 million). This figure included the expenditures for the expansion of our polymers production facilities in Caojing, China. Depreciation of property, plant and equipment came to €1,140 million (2006: €1,086 million), and amortization of intangible assets to €1,338 million (2006: €1,000 million). Write-downs of €286 million were made in addition.
Major capital expenditures made by the Bayer Group in the past two years are listed in the following table:
The €4.3 billion transaction volume for the diagnostics business comprised an initial payment of €0.4 billion at the end of 2006 and a further purchase price payment of €3.9 billion received in 2007. After deducting approximately €0.2 billion in divested cash and €0.4 billion in tax payments made on the divestment gain, net proceeds from the divestiture of the diagnostics business totaled €3.3 billion. Further tax payments of approximately €0.1 billion will arise in 2008 in connection with this divestiture.
The proceeds of the divestitures of H.C. Starck and Wolff Walsrode amounted to €1.3 billion after compensation for financial liabilities and the assumption of pension obligations by the acquirers.
Cash outflows for acquisitions included the US$ 314 million (approx. €232 million) purchase price for U.S. cotton seed producer Stoneville. In June 2007, Bayer CropScience acquired Stoneville Pedigreed Seed Company from Monsanto in order to strengthen the position of the BioScience business unit in the U.S. cotton seed market. In September 2007, Bayer HealthCare completed the agreed acquisition of a biologics production facility in Emeryville, California, from Novartis and made a purchase price payment of US$ 183 million (approx. €137 million). On July 1, 2007, Bayer MaterialScience completed the acquisition of the Ure-Tech group, Taiwan, a supplier of TPU resins and films, at a purchase price of US$ 85 million (approx. €63 million). Cash outflows for acquisitions in the prior-year period were largely attributable to the acquisition of Schering, Berlin, Germany.
Cash outflows for property, plant and equipment in 2007 came to €1,546 million (2006: €1,534 million) and those for intangible assets to €314 million (2006: €342 million), giving a total of €1,860 million (2006: €1,876 million). This figure included the expenditures for the expansion of our polymers production facilities in Caojing, China. Depreciation of property, plant and equipment came to €1,140 million (2006: €1,086 million), and amortization of intangible assets to €1,338 million (2006: €1,000 million). Write-downs of €286 million were made in addition.
Major capital expenditures made by the Bayer Group in the past two years are listed in the following table:
| Capital expenditures 2007 | |
| Segment | Description |
| 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 Schering integration | |
| Expansion of production facility for contrast media application systems in Warrendale, Pennsylvania, U.S.A. | |
| Crop Protection | Capacity extension at the active ingredient and formulating facilities in Hangzhou, China |
| Formulation site consolidation project, U.S.A. | |
| Modification of existing manufacturing units for 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 |
| Materials | Expansion of the polycarbonate facility in Map Ta Phut, Thailand |
| Expansion of the polycarbonate facility in Caojing, China | |
| Construction of a new logistics center for polycarbonate compounds in Krefeld-Uerdingen, Germany | |
| Systems | Construction of a world-scale MDI production facility in Caojing, China |
| Construction of a plant for polyurethane dispersions in Caojing, China | |
| Construction of a world-scale plant for polymer polyols in Antwerp, Belgium | |
| Capital expenditures 2006 | |
| Segment | Description |
| Pharmaceuticals | Construction of a clinical manufacturing facility for Kogenate® in Berkeley, California, U.S.A. |
| Expansion of a production facility in Beijing, China | |
| Consumer Health | Expansion of a production facility in Jakarta, Indonesia |
| Crop Protection | Insourcing of intermediates in Knapsack, Germany |
| Expansion of warehouse, manufacturing and formulation plants in Frankfurt and Dormagen, Germany | |
| Expansion of fungicide production capacity in Dormagen, Germany | |
| Site consolidation in Baranquilla, Colombia | |
| Environmental Science, BioScience | Construction of a seed processing facility in Lethbridge, Canada |
| Materials | Expansion of the polycarbonate facility in Map Ta Phut, Thailand |
| Capacity expansion projects for polycarbonate in Caojing, China | |
| Systems | Construction of a world-scale MDI production facility in Caojing, China |
| Installation of a new plant for MDI specialty products in Baytown, Texas, U.S.A. | |
Financing cash flow
Net cash outflow for financing activities in 2007 amounted to €7,730 million (2006: €10,199 million net inflow). Net loan repayments totaled €5,613 million, including €2.1 billion for the scheduled redemption of our 2002/2007 Eurobond in April 2007. The Bayer AG dividend for 2006, paid in the second quarter of 2007, and dividend payments to minority stockholders of consolidated companies accounted for a further €773 million (2006: €535 million). The item “Bayer AG dividend, dividend payments to minority stockholders” in the prior year contained an inflow of €176 million from the reimbursement of advance capital gains tax payments made on intragroup dividends in 2004.
Liquid assets and net debt
As of December 31, 2007 the Bayer Group held cash and cash equivalents of €2,531 million, including €755 million held in escrow accounts. These are earmarked for payments to be made in connection with the squeeze-out of the remaining minority stockholders of Bayer Schering Pharma AG and civil law settlements of antitrust proceedings. Pursuant to a resolution of the Extraordinary Stockholders’ Meeting of Bayer Schering Pharma AG on January 17, 2007, the shares in that company that are still held by minority stockholders will be transferred to the main stockholder, Bayer Schering GmbH, a wholly owned subsidiary of Bayer AG, in return for cash compensation of €98.98 per share. Dissenting stockholders are seeking to have the stockholder resolution set aside or to have it declared null and void. In view of the restriction on its use, the liquidity held in escrow accounts was not deducted when calculating net debt.
| Net Debt | Dec. 31, 2006 | Dec. 31, 2007 |
| € million | ||
| Noncurrent financial liabilities as per balance sheets (including derivatives) | 14,723 | 12,911 |
| of which mandatory convertible bond | 2,276 | 2,285 |
| of which hybrid bond | 1,247 | 1,237 |
| Current financial liabilities as per balance sheets (including derivatives) | 5,078 | 1,287 |
| Derivative receivables | (185) | (230) |
| Financial liabilities | 19,616 | 13,968 |
| Cash and cash equivalents* | (2,116) | (1,776) |
| Current financial assets | (27) | (8) |
| Net debt from continuing operations | 17,473 | 12,184 |
| Net debt from discontinued operations | 66 | 0 |
| Net debt (total) | 17,539 | 12,184 |
* In view of the restriction on its use, the €755 million (2006: €799 million) liquidity in escrow accounts was not deducted when calculating net debt. December 31, 2007: €1,776 million = €2,531 million - €755 million (December 31, 2006: €2,116 million = €2,915 million - €799 million).
Net debt showed a significant €5.4 billion decrease on the year, standing at €12.2 billion on December 31, 2007. This was due to cash inflows from the divestitures and also to an improvement in operating cash flow.
As of December 31, 2007 we had noncurrent financial liabilities of €12,911 million, including the €1.2 billion subordinated hybrid bond issued in July 2005 and the €2.3 billion mandatory convertible bond issued in April 2006. Net debt should be viewed against the fact that Moody’s and Standard & Poor’s treat 75 percent and 50 percent, 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 has only a limited effect on the Group’s rating-specific debt indicators, while the mandatory convertible bond has no effect.
In April 2007 we issued a three-year €0.3 billion floating-rate bond and a four-year €0.2 billion fixed-rate bond under the EMTN program. In the second quarter of 2007, we raised financing for the Japanese holding company founded at the end of 2006, which performs holding-company and service functions and provides financing for all Bayer subsidiaries in Japan. As well as borrowing from local banks, we launched three separate yen bonds in Japan with a total volume of ¥55 billion (approx. €0.3 billion) under the EMTN program.
We succeeded in significantly paying down the syndicated loan secured in connection with the acquisition of Schering AG by €4.4 billion to €1.3 billion, mainly through the cash flows received from the divestitures and our business operations. We also redeemed in full the €2.1 billion five-year Bayer AG bond due in April 2007.
As of December 31, 2007 we had noncurrent financial liabilities of €12,911 million, including the €1.2 billion subordinated hybrid bond issued in July 2005 and the €2.3 billion mandatory convertible bond issued in April 2006. Net debt should be viewed against the fact that Moody’s and Standard & Poor’s treat 75 percent and 50 percent, 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 has only a limited effect on the Group’s rating-specific debt indicators, while the mandatory convertible bond has no effect.
In April 2007 we issued a three-year €0.3 billion floating-rate bond and a four-year €0.2 billion fixed-rate bond under the EMTN program. In the second quarter of 2007, we raised financing for the Japanese holding company founded at the end of 2006, which performs holding-company and service functions and provides financing for all Bayer subsidiaries in Japan. As well as borrowing from local banks, we launched three separate yen bonds in Japan with a total volume of ¥55 billion (approx. €0.3 billion) under the EMTN program.
We succeeded in significantly paying down the syndicated loan secured in connection with the acquisition of Schering AG by €4.4 billion to €1.3 billion, mainly through the cash flows received from the divestitures and our business operations. We also redeemed in full the €2.1 billion five-year Bayer AG bond due in April 2007.
Financial strategy
The financial management of the Bayer Group is conducted by the strategic management holding company Bayer AG. Finance is a global resource, generally procured centrally and distributed within the Group. The foremost objectives of our financial management are to help bring about a sustained increase in corporate value and ensure the Group’s creditworthiness and liquidity. That means reducing our cost of capital, improving our financing cash flow, optimizing our capital structure and effectively managing risk. The management of currency, interest rate, raw material price and default risks helps to reduce the volatility of our earnings.
The rating agencies contracted by Bayer assess us as follows:
The rating agencies contracted by Bayer assess us as follows:
| Long-term rating | Outlook | Short-term rating | |
| Standard & Poor’s | BBB+ | positive | A-2 |
| Moody’s | A3 | negative | P-2 |
These credit ratings reflect the company’s good solvency and ensure access to a broad investor base for financing purposes. Our strategy is geared toward achieving the single-A rating category in order to maintain our financial flexibility. We therefore plan to use part of our operating cash flows to reduce net debt.
We pursue a prudent debt management strategy aimed at ensuring flexibility, drawing on a balanced financing portfolio. Chief among these resources are a multi-currency European Medium Term Note program, syndicated acquisition financing, a syndicated credit facility and a multi-currency commercial paper program. We also have various structured products, especially asset-backed securities programs.
We use financial derivatives to hedge against risks arising from business operations or financial transactions, but do not employ contracts in the absence of an underlying transaction. It is our policy to diminish the default risk by selecting trading partners with a high credit standing. We closely monitor the execution of all transactions, which are conducted according to Group-wide guidelines.
Further details of our risk management objectives and the ways in which we hedge all the major types of transaction to which hedge accounting is applied, along with procurement market, credit and liquidity risks, as they relate to our use of financial instruments, are given in the Risk Report.
We pursue a prudent debt management strategy aimed at ensuring flexibility, drawing on a balanced financing portfolio. Chief among these resources are a multi-currency European Medium Term Note program, syndicated acquisition financing, a syndicated credit facility and a multi-currency commercial paper program. We also have various structured products, especially asset-backed securities programs.
We use financial derivatives to hedge against risks arising from business operations or financial transactions, but do not employ contracts in the absence of an underlying transaction. It is our policy to diminish the default risk by selecting trading partners with a high credit standing. We closely monitor the execution of all transactions, which are conducted according to Group-wide guidelines.
Further details of our risk management objectives and the ways in which we hedge all the major types of transaction to which hedge accounting is applied, along with procurement market, credit and liquidity risks, as they relate to our use of financial instruments, are given in the Risk Report.
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