Management Report

Liquidity and Capital Resources

Bayer Group Summary Statements of Cash Flows	1st Quarter 2008	1st Quarter 2009
	€ million	€ million
Gross cash flow*	1,651	1,209
Changes in working capital/other non-cash items	(1,123)	(516)
Net cash provided by (used in) operating activities (net cash flow), continuing operations	528	693
Net cash provided by (used in) operating activities (net cash flow), discontinued operations	0	0
Net cash provided by (used in) operating activities (net cash flow) (total)	528	693
Net cash provided by (used in) investing activities (total)	(464)	(78)
Net cash provided by (used in) financing activities (total)	131	1,652
Change in cash and cash equivalents due to business activities (total)	195	2,267
Cash and cash equivalents at beginning of period	2,531	2,094
Change due to exchange rate movements and to changes in scope of consolidation	(9)	4
Cash and cash equivalents at end of period	2,717	4,365
*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 26.8% year on year in the first quarter of 2009 to €1,209 million (Q1 2008: €1,651 million) due to the weak business performance at MaterialScience. Net cash flow rose by €165 million to €693 million (Q1 2008: €528 million), thanks to a significant overall decline in cash tied up in working capital. This in turn resulted mainly from lower inventories and trade accounts receivable. Net cash flow in the first quarter also reflects cash outflows of €19 million (Q1 2008: €239 million) related to income taxes.

Investing cash flow

Net cash outflow for investing activities in the first three months of 2009 totaled €78 million (Q1 2008: €464 million). Cash outflows for additions to property, plant, equipment and intangible assets remained nearly level, at €290 million. This figure included disbursements related to the expansion of our polymers production facilities in Shanghai, China, and for the acquisition of developmental products for biological pest control. Whereas there were no cash outflows for acquisitions in the first quarter of 2009, the figure for the prior-year period mainly contained payments in connection with the acquisition of Possis Medical, Inc. Cash inflows included, in particular, €137 million (Q1 2008: €27 million) in receipts pertaining to noncurrent financial assets, such as repayments of loans granted.

Financing cash flow

Net cash inflow for financing activities in the first quarter of 2009 amounted to €1,652 million (Q1 2008: €131 million). It mainly comprised net borrowings of €1,825 million, a larger amount than in the prior year, serving primarily to refinance the €1,600 million floating rate EMTN note that will mature in the second quarter of 2009. Interest payments increased to €169 million (Q1 2008: €137 million). There was a €4 million outflow for “dividend payments and withholding tax on dividends” (Q1 2008: €9 million).

Liquid assets and net financial debt

Net Financial Debt	Dec. 31, 2008	March 31, 2009
	€ million	€ million
Bonds and notes	10,729	12,226
of which hybrid bond	1,245	1,261
of which mandatory convertible bond	2,296	2,298
Liabilities to banks	4,438	4,596
Liabilities under finance leases	535	549
Liabilities from derivatives	612	808
Other financial liabilities	333	624
Positive fair values of hedges of recorded transactions	(454)	(522)
Financial debt	16,193	18,281
Cash and cash equivalents*	(2,037)	(4,306)
Current financial assets	(4)	(8)
Net financial debt from continuing operations	14,152	13,967
Net financial debt from discontinued operations	0	0
Net financial debt (total)	14,152	13,967
*In view of the restriction on its use, the €59 million liquidity in escrow accounts in the first quarter of 2009 (Dec. 31, 2008: €57 million) was not deducted when calculating net financial debt. 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) declined in the first quarter by €0.2 billion to €14.0 billion. As of March 31, 2009 the Bayer Group held cash and cash equivalents of €4,365 million. Financial liabilities amounted to €18.3 billion, including both the €1.3 billion subordinated hybrid bond issued in July 2005 and the €2.3 billion mandatory convertible bond maturing in June 2009. 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. 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. Our noncurrent financial liabilities as of March 31, 2009 amounted to €12.7 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

The net pension liability decreased from €6.0 billion to €5.8 billion in the first quarter, due especially to higher long-term capital market interest rates. Provisions for pensions and other post-employment benefits declined from €6.3 billion to €6.1 billion. At the same time prepaid benefit assets, reflected in the balance sheet as other receivables, fell slightly to €0.3 billion.

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