5. Earnings; Asset and Financial Position of Bayer AG

Bayer AG is the parent corporation of the Bayer Group and functions as a management holding company. The principal management functions for the entire Group are performed by the Board of Management of Bayer AG. These include strategic planning, resource allocation, executive management and financial management. The performance of Bayer AG is largely determined by the economic success of the Bayer Group.

The financial statements of Bayer AG were prepared in accordance with the German Commercial Code (HGB) and Stock Corporation Act (AktG). The provisions of the German Accounting Law Modernization Act (BiIMoG), which came into force in 2009, were applied for the first time.

5.1 Earnings Performance of Bayer AG

Bayer AG Income Statements according to the German Commercial Code	[Table 3.25]
	2008	2009
	€ million	€ million
Income from investments in affiliated companies – net	2,711	2,984
Interest expense – net	(1,092)	(683)
Other non-operating income (expense) – net	(84)	276
Other operating income	209	169
General administration expenses	194	177
Other operating expenses	266	142
Income before income taxes	1,284	2,427
Income taxes	(123)	(201)
Net income	1,161	2,226
Allocation to retained earnings	(91)	(1,068)
Distributable profit	1,070	1,158
2008 figures restated

The earnings performance of Bayer AG essentially depends on the earnings of its subsidiaries and on the income and expenses relating to corporate financing activities.

In fiscal 2009, income from investments in affiliated companies was €2,984 million (2008: €2,711 million). Of this amount, Bayer Schering Pharma AG accounted for €2,349 million (2008: €564 million), Bayer CropScience AG for €604 million (2008: €725 million) and Bayer MaterialScience AG for minus €234 million (2008: minus €80 million). It should be noted that the previous year’s results were diminished by expenses resulting from the remeasurement of pension obligations. The jump in earnings at Bayer Schering Pharma AG was partly due to a €608 million gain in connection with the agreement with Genzyme Corp., United States. In 2008 income from investments in affiliated companies included one-time income of €1,348 million in connection with a capital decrease at Bayer MaterialScience AG.

Net interest expense amounted to €683 million, which was €409 million less than in the previous year. While the reduction in financial debt played a part in this improvement, the main factor was the significant drop in interest rates. Of the decrease in net interest expense, €117 million was attributable to transactions with third parties and €292 million to intra-Group transactions.

Other non-operating income and expenses yielded a positive balance of €276 million in 2009, compared with a negative balance of €84 million in 2008. The improvement of €360 million was principally attributable to a better result from the translation of foreign currency receivables and payables and from currency derivatives.

The balance of miscellaneous operating income and expenses related to the performance of Bayer AG’s functions as a holding company was plus €27 million (2008: minus €57 million) while general administration expenses amounted to €177 million (2008: €194 million). The year-on-year improvement of €101 million in the balance of these income and expense items resulted mainly from the fact that in 2008 expenses of €108 million were recognized in connection with the remeasurement of pension obligations for employees of the holding company.

Pre-tax income grew by €1,143 million to €2,427 million. Tax expense amounted to €201 million (2008: €123 million). After deduction of taxes, net income came in at €2,226 million. Of this amount, €1,068 million was allocated to other retained earnings and €1,158 million was recognized as the distributable profit.

The Board of Management and Supervisory Board will propose to the Annual Stockholders’ Meeting on April 30, 2010 that the distributable profit be used to pay an unchanged dividend of €1.40 per share (826,947,808 shares) on the capital stock of €2,117 million entitled to the dividend for 2009.

5.2 Asset and Financial Position of Bayer AG

Bayer AG Summary Statements of Financial Position according to the German Commercial Code	[Table 3.26]
	Dec. 31, 2008	Dec. 31, 2009
	€ million	€ million
ASSETS

Noncurrent assets
Intangible assets, property, plant and equipment	381	395
Financial assets	34,532	34,594
	34,913	34,989

Current assets
Receivables from subsidiaries	1,697	1,928
Remaining receivables, other assets	624	400
Cash and cash equivalents, marketable securities	1,306	1,862
	3,627	4,190

Total assets	38,540	39,179
EQUITY AND LIABILITIES

Equity	10,782	14,391

Provisions	3,547	3,258

Other liabilities
Bonds and notes, liabilities to banks	8,378	7,029
Payables to subsidiaries	15,110	13,965
Remaining liabilities	723	536
	24,211	21,530

Total equity and liabilities	38,540	39,179

The asset and liability structure of Bayer AG is dominated by its role as a holding company in managing the subsidiaries and financing corporate activities. This is primarily reflected in the high level of investments in affiliated companies and of receivables from, and payables to, Group companies.

Total assets of Bayer AG grew in 2009 by €0.7 billion to €39.2 billion, the increase being almost entirely due to a €0.6 billion increase in cash and cash equivalents.

Financial assets included investments in subsidiaries amounting to €34.1 billion (2008: €34.1 billion), or 87.1% (2008: 88.4%) of total assets. Receivables from subsidiaries amounted to €1.9 billion (2008: €1.7 billion) while payables to subsidiaries totaled €14.0 billion (2008: €15.1 billion). These amounts accounted for 4.9% of total assets and 35.6% of total equity and liabilities, respectively.

Of the €39.2 billion in total assets as of December 31, 2009 (2008: €38.5 billion), €14.4 billion (2008: €10.8 billion) was equity-financed. The equity ratio therefore rose from 28.0% to 36.7%. The conversion of the €2.3 billion mandatory convertible bond issued by Bayer Capital Corporation B.V., Netherlands, in 2006 contributed to the €3.6 billion increase in equity, while €2.2 billion came from net income. Equity was diminished by the €1.1 billion dividend payment for 2008. A further €0.2 billion resulted from reversals of provisions allocated directly to retained earnings upon first-time application of the German Accounting Law Modernization Act (BilMoG).

Provisions declined by €0.3 billion to €3.3 billion in 2009. This decline relates to provisions for pensions and other post-employment benefits, with €0.2 billion being due to the first-time application of the new German accounting legislation mentioned above.

Liabilities decreased by €2.7 billion to €21.5 billion as of December 31, 2009. External financial debt, in particular, was reduced by €1.5 billion, comprising €1,600 million in bond redemptions, €369 million in repayments of liabilities to banks, and €110 million in repayments relating to a commercial paper program that was no longer required. Promissory notes were issued in the amount of €620 million.