Financial condition

  • Business-related decline in operating cash flow to below prior-year level
  • Inflow from reduction in cash tied up in working capital due to lower inventories
  • Cash used for investing activities reflects extensive capital expenditures for growth projects
  • Liquidity position remains sound

The cash flow statement shows inflows and outflows of cash and cash equivalents by type of business operation.

Cash Flow Statement
 
€ million 2012 2013 Change
       
Income before income taxes 660 (239) (899)
Depreciation and amortization 378 717 339
Other items (82) 53 135
Net cash provided by operating activities before change in working capital 956 531 (425)
Change in working capital (118) 110 228
Net cash provided by operating activities 838 641 (197)
Net cash used in investing activities (674) (342) 332
Net cash provided by (used in) financing activities 46 (260) (306)
Change in cash and cash equivalents from business activities 210 39 (171)
Cash and cash equivalents as of December 31 386 427 41
2012 figures restated

Cash provided by operating activities, before changes in working capital, decreased by €425 million to €531 million in fiscal 2013. This was mainly due to the €899 million decrease in income before income taxes to minus €239 million. Due to the expanded asset base, resulting from our extensive investment activities in recent years, and write-downs recognized especially in the Keltan Elastomers, High Performance Elastomers and Rubber Chemicals business units, depreciation and amortization increased from €378 million to €717 million. The other items in 2012 included 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.

The decrease in working capital compared to December 31, 2012 resulted in a cash inflow of €110 million. The outflow from the change in working capital in 2012 was €118 million. The development during the reporting period was mainly attributable to changes in inventories resulting from lower raw material prices and the specific reduction of inventories. This was offset in part by a decrease in trade payables. The net cash provided by operating activities was €641 million, against €838 million in 2012.

LANXESS’s investing activities in fiscal 2013 resulted in a cash outflow of €342 million, down from €674 million in the previous year. Disbursements for intangible assets and property, plant and equipment came to €624 million, which was below the prior-year level of €696 million. The cash outflows for the acquisition of subsidiaries and other businesses, net of acquired cash and cash equivalents and subsequent purchase price adjustments, amounted to €15 million, against €44 million the previous year. The acquisitions made in the reporting year were PCTS Specialty Chemicals Pte. Ltd.. Singapore, and the phosphorus chemicals portfolio of Thermphos France S.A.R.L., Epierre, France. Cash inflows from financial assets came to €290 million and mainly comprised the proceeds from the sale of shares in money market funds. These were diminished by a cash outflow to offset the loss reported by Currenta GmbH & Co. OHG, Leverkusen, Germany.

Free cash flow – the difference between the cash inflows from operating activities and the cash used in investing activities – increased by €135 million to €299 million.

Net cash used in financing activities came to €260 million, against a net inflow of €46 million the year before. Cash outflows of €58 million were attributable to the net repayment of borrowings. Interest payments and other financial disbursements of €119 million were comparable with the previous year’s amount of €123 million. An outflow of €83 million was accounted for by the dividend paid to the stockholders of LANXESS AG for fiscal 2012 (2012: €71 million).

The net change in cash and cash equivalents from business activities in fiscal 2013 was €39 million, against €210 million the previous year. After taking into account currency-related and other changes in cash and cash equivalents of €2 million, cash and cash equivalents at the closing date amounted to €427 million, against €386 million at the previous year’s closing date. Taken together with near-cash assets (short-term investment of liquid assets in money market funds) of €106 million, against €411 million the previous year, the Group retained a sound liquidity position of €533 million as of December  31, 2013, compared to €797 million at the end of 2012.

Principles and objectives of financial management

LANXESS pursues a conservative financial policy characterized by the forward-looking management of financial risks. Our aim is to be able to provide sufficient liquidity to our business operations at all times, regardless of cyclical fluctuations in the real economy or financial markets. The debt level is largely aligned to the ratio systems of the leading rating agencies for investment-grade companies. Measured as the ratio of net financial debt to EBITDA pre exceptionals, the debt level should stay within a range of 1.0 to 1.5 through a normal business cycle. In addition to liquidity risk, financial management also covers other financial risks, such as interest and foreign exchange risks. Here too, we aim to mitigate the financial risks that arise and increase planning reliability, partly by using derivative financial instruments. Detailed information about the management of these risks is contained in the “Risk report” in this combined management report and under Note [35], “Financial instruments,” to the consolidated financial statements.

LANXESS Group ratings

Access to the capital markets and good relations with German and international commercial banks are essential for achieving our financial management objectives. Accordingly, ongoing dialogue and communication with banks, investors and rating agencies are of crucial importance. In fiscal 2013, the latter assessed LANXESS’s creditworthiness with ratings of BBB and Baa2, but with a negative outlook. Justifying this change in outlook, the rating agencies cited factors such as the currently weaker financial data and the uncertainty as to how soon these can be brought back into line with their specifications.

Development of LANXESS Ratings and Rating Outlook Since 2009
 
  2009 2010 2011 2012 2013
           
Standard & Poor’s BBB/stable
May 28, 2009
BBB/stable
Sep. 1, 2010
BBB/stable
Aug. 23, 2011
BBB/stable
Aug. 31, 2012
BBB/negative
 June 27, 2013
Moody’s Investors Service Baa2/stable
May 26, 2009
Baa2/stable
May 19, 2010
Baa2/stable
Nov. 23, 2011
Baa2/stable
Sep. 26, 2012
Baa2/negative
Aug. 14, 2013
Fitch Ratings BBB/stable
July 20, 2009
BBB/stable
Dec. 17, 2010
BBB/stable
Nov. 22, 2011
BBB/stable
Sep. 13, 2012
BBB/negative
Aug. 15, 2013
 

Financing analysis

LANXESS started fiscal 2013 with a very sound financial and liquidity position.

Over the course of 2013, we made no significant changes to our financial portfolio, which we had already substantially improved in fiscal 2012. These improvements included the timely creation of financial reserves for redemption of the €500 million bond that matures in April 2014. We funded our growth program from business operations and using existing liquidity and credit lines.

LANXESS launched a €2.5 billion debt issuance program in March 2009. On this basis and aligned with the prevailing market conditions, bonds can be placed on the capital market very flexibly with respect to timing and volume. As of December 31, 2013, just under €2.0 billion of the €2.5 billion financing facility had been utilized to issue bonds and private placements. Utilization will be correspondingly reduced after redemption of our €500 million bond when it matures in April 2014. Capital market financing is an important component in LANXESS’s financing mix and ensures the diversification of our financing sources.

Current financial liabilities increased from €167 million in 2012 to €668 million at December 31, 2013. This increase was primarily due to the reclassification from non-current into current financial liabilities of the €500 million bond which matures in April 2014.

We made only limited use of finance leases, which are reported as financial liabilities in the statement of financial position. As of December  31, 2013, the financial liabilities from finance leases amounted to €49 million, against €78 million in the previous year. The LANXESS Group uses operating leases mainly for operational reasons and not as a means of financing. Minimum future payments relating to operating leases totaled €492 million, against €496 million the previous year.

As of December 31, 2013, LANXESS had no material financing items not reported in the statement of financial position in the form of factoring, asset-backed structures or project financing, for example.

LANXESS’s total financial liabilities, net of accrued interest, declined from €2,280 million in 2012 to €2,264 million at December 31, 2013. Net financial liabilities – the total financial liabilities net of cash and near-cash assets – rose by €248 million, from €1,483 million to €1,731 million.

Of the total financial liabilities, 98% bear a fixed interest rate over the term of the financing, which is almost level with the previous year. Interest rate changes therefore do not have a material effect on LANXESS’s financial condition considering the current financing structure. The proportion of loans and bonds denominated in euros averaged 96% in the reporting year, which was level with the prior year. The weighted average interest rate for our financial liabilities was unchanged at 4.8% at year end 2013.

The overview on the following page shows LANXESS’s financing structure as of December 31, 2013 in detail, including its principal liquidity reserves.

Financing Structure
 
Instrument Amount
 € million
Term Interest
rate %
Financial
covenant 1)
 
Eurobond 2009/2014
(€500 million)
500 April
2014
7.750 no
Eurobond 2009/2016
(€200 million)
199 September
2016
5.500 no
Eurobond 2011/2018
(€500 million)
497 May
2018
4.125 no
Eurobond 2012/2022
(€500 million)
493 November
2022
2.625 no
Private placement 2012/2022
(€100 million)
100 April
2022
3.500 no
Private placement 2012/2027
(€100 million)
99 April
2027
3.950 no
CNH bond 2012/2015
(CNH 500 million)
60 February
2015
3.950 no
Investment loan 55 December
2017
  no
Development bank loan 109 September
2018
  no
Other loans 103 n/a   no
Finance lease 49 n/a   no
Total financial liabilities 2,264      
Cash and cash equivalents 427 ≤ 3 months    
Near-cash assets 106 ≤ 3 months    
Total liquidity 533      
Net financial liabilities 1,731      
1) Ratio of net financial liabilities to EBITDA pre exceptionals

Due to extensive financing measures taken in past fiscal years, we have continually improved the maturity structure of our financial liabilities. At the time this combined management report was finalized, LANXESS was not exposed to any refinancing risks as it had taken early action to refinance those financial liabilities that are due to mature. The other loans related mainly to the use of credit facilities by subsidiaries in Brazil, China, India and Argentina, some of which mature in 2014 and are extended on a regular, e.g. annual, basis.

Maturity Profile of LANXESS Financial Liabilities
Graphic: Maturity Profile of LANXESS Financial Liabilities

Liquidity analysis

In addition to cash of €427 million and investments in highly liquid AAA money market funds of €106 million, LANXESS has additional sizeable liquidity reserves in the form of undrawn credit facilities. The investments in money market funds are undertaken only at European Group companies that are not subject to restrictions on foreign exchange and capital transfers. We can therefore freely dispose of the funds. Around 90% of our cash is held in Group companies in countries with no restrictions on foreign exchange and capital transfers. Only about 10% of our cash is held in companies in regulated capital markets where cash transfers are restricted.

Thanks to our good liquidity position, our solvency was assured at all times in fiscal 2013. This is an aspect that was assessed positively by the rating agencies in their credit ratings in 2013.

By far the most important of LANXESS’s credit lines is the syndicated credit facility of €1.25 billion, which has not been significantly drawn upon to date. In February 2014, we extended this facility by one year until February 2019, with the option to extend for a further year. This credit facility is designed as an operating line of credit and to provide funds for capital investment. It corresponds to market requirements in the European syndicated loan market for investment-grade companies with a BBB rating. Another important credit line is the €200 million facility we have with the European Investment Bank. None of our major loan agreements contains a financial covenant. LANXESS had unused credit lines totaling around €1.5 billion as of December 31, 2013, unchanged against the end of the previous year.

The total of liquid assets and undrawn credit lines gives us a liquidity scope of around €2.0 bilion, compared to €2.3 bilion in the prior year. In view of our growth targets and the prevailing evonomic environment, this liquidity reserve is an expression of our forward-looking and conservative financial policy. Our solvency is safeguarded for the short and long term.

Bond performance – evolution of credit spread in 2013

An important indicator for corporate bonds, apart from the absolute change in price, is the relative valuation of the risk specific to the issuer in comparison to a reference interest rate. This credit risk premium is expressed in what is known as the credit spread. Due to the higher default risk associated with longer bond maturity, long-term bonds generally feature a wider credit spread. This, and factors such as liquidity and trading volume, also apply to the various LANXESS bonds. The chart below shows the evolution of the credit spreads of our bonds and the average credit spread of corporate bonds with a BBB rating and a five-year maturity in comparison to the interest rate swap curve.

LANXESS Eurobond Spreads vs BBB Corporates Index
Graphic: LANXESS Eurobond Spreads vs BBB Corporates Index

The credit risk premiums on corporate bonds were less volatile in 2013 and declined year on year, reflecting the overall positive situation on Europe’s capital markets.

The credit risk premiums on LANXESS bonds moved laterally throughout much of the fiscal year, putting them below or on the same level as those for the BBB-rated reference group. The development of our credit spreads underscores the fact that we have good access to the capital market at costs lower than or similar to those of other BBB-rated companies.