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Financial condition and capital expenditures

Changes in the statement of cash flows

Net operating cash flow in the first nine months of 2012 amounted to €424 million, compared with €411 million in the prior-year period. With income before income taxes amounting to €599 million, the increase in net working capital compared to December 31, 2011 resulted in a cash outflow of €339 million. The corresponding cash outflow in the prior-year period was €518 million. The development in both periods was mainly attributable to the 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 €17 million net cash inflow from investing activities in the first nine months of 2012, compared with a €540 million net cash outflow in the same period a year ago. Cash inflows in the reporting period mainly comprised receipts of €432 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 €381 million, following €325 million in the prior-year period. Depreciation and amortization came to €276 million. Cash outflows for the acquisition of subsidiaries, less acquired cash and adjusted for subsequent purchase price adjustments, amounted to €44 million. The companies acquired were Tire Curing Bladders, LLC, Little Rock, United States, and Bond-Laminates GmbH, Brilon, Germany.

Financing activities resulted in a net cash outflow of €316 million, compared with a €210 million net cash inflow from financing activities in the first nine months 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 €60 million.

Financing and liquidity

The principles and objectives of our financial management discussed in the Annual Report 2011 have remained valid during the current fiscal year. They are centered on a conservative financial policy built on long-term, secured financing.

Cash and cash equivalents increased by €124 million compared with the end of 2011, to €302 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.

At the beginning of April 2012 we made two private placements under our debt issuance program: a €100 million bond with a 10-year term and a 3.5% coupon, and a second €100 million bond with a 15-year term and a 3.95% coupon. The proceeds have contributed to safeguarding long-term liquidity and further improving the maturity profile of the company's financial debt.

Net financial liabilities totaled €1,606 million as of September 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 by €124 million.

Net Financial Liabilities
     
€ million Dec. 31, 2011 Sep. 30, 2012
     
Non-current financial liabilities 1,465 1,704
Current financial liabilities 633 236
less    
Liabilities for accrued interest (55) (32)
Cash and cash equivalents (178) (302)
Near-cash assets (350) 0
  1,515 1,606

Financing instruments off the statement of financial position

As of September 30, 2012, LANXESS 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 were related to the construction of the new butyl rubber facility in Singapore for the Butyl Rubber business unit. The facility is scheduled to go on stream in the first quarter of 2013. Also in Singapore, the Performance Butadiene Rubbers business unit broke ground for the world’s largest production facility for neodymium-catalyzed performance butadiene 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. In Changzhou, China, our Technical Rubber Products business unit is currently building the world's largest manufacturing plant for ethylene-propylene-diene (EPDM) rubber. This plant, which will utilize the innovative Keltan ACE technology, is also scheduled to start up in 2015. At the site in Geleen, Netherlands, 50% of production will be converted to the Keltan ACE technology. This work is due for completion in 2013. Our High Performance Materials (formerly Semi-Crystalline Products) business unit opened a new compounding plant in Gastonia, United States, in the third quarter. In addition, the business unit and U.S. chemical company DuPont doubled the capacity of their joint compounding facility for polybutylene terephthalate (PBT) in Hamm-Uentrop, Germany. We are also investing in a new world-scale facility for polyamide plastics with an annual capacity of around 90,000 tons at the site in Antwerp, Belgium. 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 site in Leverkusen, Germany. Completion is expected by mid-2013. This follows the expansion of menthol production in the first half of 2012 and the start-up of the new formalin plant at the site in Krefeld-Uerdingen, Germany.

The Rhein Chemie business unit in the Performance Chemicals segment is building a facility for manufacturing rubber additives and release agents in Lipetsk, Russia, with production scheduled to start in the first half of 2013. Another plant for release agents and additives was commissioned at the site in Jhagadia, India, at the beginning of 2012.

Also in Jhagadia, the Material Protection Products business unit completed the construction of a production plant for biocides. The Leather business unit is building a facility for leather chemicals with an annual capacity of up to 50,000 tons at the site in Changzhou, China. This plant, which is due on stream in the first half of 2013, will feature the latest technology. We are also investing in 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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