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Financial condition and capital expenditures

Changes in the statement of cash flows

Net operating cash flow in the first six months of 2012 amounted to €80 million, against €248 million in the prior-year period. With income before income taxes amounting to €477 million, the increase in net working capital compared to December 31, 2011 resulted in a cash outflow of €434 million. The corresponding cash outflow in the prior-year period was €366 million. The development in both periods was mainly attributable to a business-driven increase in inventories and receivables and preparations for maintenance shutdowns, along with higher raw material prices. The changes in other assets and liabilities relate in part to payments that had to be made to counterparties under roll-over hedges for intra-Group foreign currency loans due to the marked decrease in the value of the euro. These payments did not affect earnings.

There was a €202 net cash inflow from investing activities in the first six months of 2012, compared with a €351 net cash outflow in the same period a year ago. Cash inflows in the reporting period mainly comprised receipts of €431 million from financial assets. These were mainly attributable to the sale of near-cash assets and were partially offset by the disbursements for the 3.4% stake in BioAmber Inc., United States. Cash outflows for purchases of intangible assets, property, plant and equipment totaled €229 million, which was €52 million more than in the prior-year period. Depreciation and amortization came to €181 million. Cash outflows for the acquisition of subsidiaries, less acquired cash and adjusted for subsequent purchase price adjustments, amounted to €9 million. The company acquired was Tire Curing Bladders, LLC, Little Rock, United States.

Financing activities resulted in a net cash outflow of €225 million, compared with a €234 million inflow from financing activities in the first half of 2011. Cash outflows in the reporting period related mainly to the scheduled redemption of the Euro Benchmark Bond issued in 2005, interest payments, and the dividend payment to LANXESS AG stockholders for fiscal 2011. These were partially offset by the issuance of two long-term bonds with a volume of €100 million each and a Chinese off-shore renminbi bond with a volume of CNH 500 million, equivalent to about €60 million.

Financing and liquidity

The principles and objectives of financial management discussed in the Annual Report 2011 remained valid during the first half of 2012. They are centered on a conservative financial policy built on long-term, secured financing.

Cash and cash equivalents increased by €56 million compared with the end of 2011, to €234 million. The €350 million of instant-access investments in money market funds reported under near-cash assets at year end 2011 was liquidated in connection with the redemption in the reporting period of the remaining €402 million of the Euro Benchmark Bond issued in 2005.

LANXESS made two private placements under its debt issuance program at the beginning of April 2012. Each of these issues has a volume of €100 million, a term of 10 or 15 years and a coupon of 3.5% or 3.95%, respectively. The proceeds contribute to safeguarding long-term liquidity and further improving the maturity profile of the company’s financial debt.

Net financial liabilities totaled €1,738 million as of June 30, 2012, compared with €1,515 million as of December 31, 2011. The near-cash assets of €350 million recognized in the statement of financial position as of December 31, 2011, were sold. Cash and cash equivalents, however, rose slightly by €56 million.

Net Financial Liabilities
     
€ million Dec. 31, 2011 June 30, 2012
     
Non-current financial liabilities 1,465 1,729
Current financial liabilities 633 267
less    
Liabilities for accrued interest (55) (24)
Cash and cash equivalents (178) (234)
Near-cash assets (350) 0
  1,515 1,738

Financing instruments off the statement of financial position

As of June 30, 2012, we had no material financing items not reported in the statement of financial position, such as factoring, asset-backed structures or sale-and-lease-back transactions.

Significant capital expenditure projects

Significant capital expenditures in the Performance Polymers segment in the first half of the year were related to the construction of the new butyl rubber facility in Singapore for the Butyl Rubber business unit. This facility is due on stream in the first quarter of 2013. Also in Singapore, the Performance Butadiene Rubbers business unit is building the world’s largest production facility for high-performance neodymium-catalyzed polybutadiene rubber (Nd-PBR), which will have an annual capacity of 140,000 tons. This facility is due on stream in the first half of 2015. At the Leverkusen, Germany, and Orange, United States, sites of our Technical Rubber Products business unit, we will expand production capacities for hydrogenated acrylonitrile butadiene rubber (HNBR) by 40% before the end of 2012. At the site in Geleen, Netherlands, 50% of production will be converted to the innovative Keltan ACE technology. This work is due for completion in 2013. Our High Performance Materials (formerly Semi-Crystalline Products) business unit has invested in a new plant for the manufacture of high-tech plastics in Gastonia, United States. Production at the new facility is planned to start later this year. In addition, the business unit and U.S. chemical company DuPont are doubling the capacity of their joint compounding facility for polybutylene terephthalate (PBT) in Hamm-Uentrop, Germany. Capacity expansions for glass fibers are taking place at the Antwerp site, where we are also investing in a new world-scale facility for polyamide plastics with an annual capacity of around 90,000 tons. Completion of that facility is expected in the first quarter of 2014.

The Advanced Intermediates segment’s Advanced Industrial Intermediates business unit is expanding cresol production at the Leverkusen site. Completion is expected in mid-2013. At the site in Krefeld-Uerdingen, Germany, menthol production has been expanded and the new formalin plant has come on stream.

In the Performance Chemicals segment’s Rhein Chemie business unit, work is underway in Argentina to increase production capacity for vulcanization bladders used in tire production, while a production facility for rubber additives and release agents is being built in Lipetsk, Russia. The latter is scheduled to start production in the first half of 2013. In addition, a plant for release agents and additives has been commissioned at the site in Jhagadia, India.

Also in Jhagadia, the Material Protection Products business unit has completed the construction of a production plant for biocides. The Leather business unit is investing in the construction of a facility for leather chemicals at the site in Changzhou, China. With an annual capacity of up to 50,000 tons, this plant will feature the latest technology and is due on stream in the first half of 2013. A further investment relates to the construction of a CO2 concentration unit at the site in Newcastle, South Africa, which is scheduled to start up in the second half of 2013.

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