Management Report

Liquidity and Capital Resources

Bayer Group Summary Statements of Cash Flows	2nd Quarter 2008	2nd Quarter 2009	1st Half 2008	1st Half 2009
	€ million	€ million	€ million	€ million
Gross cash flow*	1,322	1,248	2,973	2,457
Changes in working capital/other non-cash items	(433)	151	(1,556)	(365)
Net cash provided by (used in) operating activities (net cash flow), continuing operations	889	1,399	1,417	2,092
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)	889	1,399	1,417	2,092
Net cash provided by (used in) investing activities (total)	(321)	(158)	(785)	(236)
Net cash provided by (used in) financing activities (total)	(1,227)	(3,770)	(1,096)	(2,118)
Change in cash and cash equivalents due to business activities (total)	(659)	(2,529)	(464)	(262)
Cash and cash equivalents at beginning of period	2,717	4,365	2,531	2,094
Change due to exchange rate movements and to changes in scope of consolidation	0	(2)	(9)	2
Cash and cash equivalents at end of period	2,058	1,834	2,058	1,834
* 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 moved back by 5.6% year on year in the second quarter of 2009 to €1,248 million (Q2 2008: €1,322 million), mainly because of the weak business performance at MaterialScience. Net cash flow rose 57.4% to €1,399 million (Q2 2008: €889 million). The increase was attributable in part to significantly lower net income tax payments of €114 million (Q2 2008: €560 million) and also to a decline in cash tied up in inventories at HealthCare and MaterialScience.

Gross cash flow in the first half of 2009 fell by 17.4% year on year to €2,457 million (H1 2008: €2,973 million), due largely to the lower operating result. Net cash flow rose to €2,092 million (H1 2008: €1,417 million).

Investing cash flow

Net cash outflow for investing activities in the second quarter of 2009 totaled €158 million (Q2 2008: €321 million). Cash outflows for additions to property, plant, equipment and intangible assets rose 6.6% to €370 million. This figure included disbursements related to the expansion of our polymers production facilities in Shanghai, China, and the acquisition of a license to develop and market MEK inhibitors for cancer therapy. The cash outflows for acquisitions totaling €42 million comprised mainly the purchase of the remaining interests in Berlimed, Spain (49%) and Bayer Polymers Shanghai, China (10%). The prior-year figure of €306 million consisted primarily of payments in connection with the acquisition of Possis Medical, Inc., and the OTC business of Sagmel. The principal cash inflows were €251 million (Q2 2008: €224 million) in interest and dividends and a total of €51 million in divestment proceeds related to the agreement with U.S.-based Genzyme, the sale of the Thermoplastics Testing Center in Krefeld, Germany, and the divestment of our 51% interest in Justesa Imagen, Spain.

Net cash outflow for investing activities in the first six months of 2009 totaled €236 million (H1 2008: €785 million). Cash outflows for additions to property, plant, equipment and intangible assets, at €660 million, exceeded those of the prior-year period (+3.9%). Of this figure, HealthCare accounted for €179 million (H1 2008: €168 million), CropScience for €144 million (H1 2008: €95 million) and MaterialScience for €244 million (H1 2008: €299 million). The cash outflows for acquisitions totaling €42 million comprised mainly the purchase of the remaining interests in Berlimed, Spain (49%) and Bayer Polymers Shanghai, China (10%). The prior-year figure of €552 million consisted primarily of payments in connection with the acquisition of Possis Medical, Inc., and the OTC business of Sagmel. The principal cash inflow item was €315 million (H1 2008: €298 million) in interest and dividends received.

Financing cash flow

Net cash outflow for financing activities in the second quarter of 2009 amounted to €3,770 million (Q2 2008: €1,227 million). This figure includes interest expense of €650 million and, in particular, an amount of €1,600 million for the redemption of the floating-rate EMTN note. There was a €969 million outflow for “dividend payments and withholding tax on dividends” (Q2 2008: €1,031 million), comprising the balance of 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.

Net cash outflow for financing activities in the first half of 2009 amounted to €2,118 million (H1 2008: €1,096 million). This total contained net loan repayments of €326 million. Interest payments increased to €819 million (H1 2008: €756 million). There was a €973 million outflow for “dividend payments and withholding tax on dividends” (H1 2008: €1,040 million).

Liquid assets and net financial debt

Net Financial Debt	Dec. 31, 2008	March 31, 2009	June 30, 2009
	€ million	€ million	€ million
Bonds and notes	10,729	12,226	8,305
of which hybrid bond	1,245	1,261	1,254
of which mandatory convertible bond	2,296	2,298	0
Liabilities to banks	4,438	4,596	4,287
Liabilities under finance leases	535	549	567
Liabilities from derivatives	612	808	529
Other financial liabilities	333	624	291
Positive fair values of hedges of recorded transactions	(454)	(522)	(463)
Financial debt	16,193	18,281	13,516
Cash and cash equivalents*	(2,037)	(4,306)	(1,790)
Current financial assets	(4)	(8)	(11)
Net financial debt from continuing operations	14,152	13,967	11,715
Net financial debt from discontinued operations	0	0	0
Net financial debt (total)	14,152	13,967	11,715
* In view of the restriction on its use, the €44 million liquidity in escrow accounts in the 2nd quarter of 2009 (March 31, 2009: €59 million; Dec. 31, 2008: €57 million) was not deducted when calculating net financial debt. June 30, 2009: €1,790 million = €1,834 million - €44 million (March 31, 2009: €4,306 million = €4,365 million - €59 million; Dec. 31, 2008: €2,037 million = €2,094 million - €57 million).

Net financial debt (total) of the Bayer Group declined by €2.3 billion in the second quarter, amounting to €11.7 billion on June 30, 2009. This was largely due to the conversion of the mandatory convertible bond issued in 2006 into 62,605,888 new shares with a value of €2,299 million. As of June 30, 2009 the Group had cash and cash equivalents of €1,834 million. Financial liabilities amounted to €13.5 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 June 30, 2009 amounted to €11.8 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.

Net Pension Liability

	Dec. 31, 2008	March 31, 2009	June 30, 2009
	€ million	€ million	€ million
Provisions for pensions and other post-employment benefits	6,347	6,094	6,480
Prepaid benefit assets	(351)	(306)	(106)
Net pension liability	5,996	5,788	6,374

The net pension liability increased from €5.8 billion to €6.4 billion in the second quarter of 2009, due especially to lower long-term capital market interest rates. Provisions for pensions and other post-employment benefits rose from €6.1 billion to €6.5 billion. At the same time prepaid benefit assets, reflected in the statement of financial position as other receivables, fell to €0.1 billion.