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26. Other provisions
 26.1 Taxes |
| 26.2 Personnel commitments |
| 26.3 Environmental protection |
| 26.4 Restructuring |
| 26.5 Trade-related commitments |
| 26.6 Litigations |
| 26.7 Miscellaneous provisions |
The various categories of provisions changed as follows in 2007:
| Taxes | Personnel commit- ments | Environ- mental protec- tion | Restruc- turing | Trade- related commit- ments | Litiga- tions | Miscella- neous provi- sions | Total | |
| € million | ||||||||
| December 31, 2006 | 1,089 | 1,792 | 262 | 196 | 769 | 434 | 687 | 5,229 |
| Changes in the scope of consolidation | (46) | (30) | - | 1 | 9 | (3) | 30 | (39) |
| Additions | 617 | 1,387 | 49 | 128 | 191 | 133 | 613 | 3,118 |
| Utilization | (697) | (1,168) | (18) | (134) | (149) | (114) | (538) | (2,818) |
| Reversal | (97) | (89) | (13) | (31) | (45) | (46) | (87) | (408) |
| Other reclassifications | - | (39) | - | - | 3 | - | 1 | (35) |
| Interest cost | 9 | 19 | 3 | 3 | 2 | - | - | 36 |
| Exchange differences | (12) | (47) | (13) | (9) | (38) | - | (44) | (163) |
| December 31, 2007 | 863 | 1,825 | 270 | 154 | 742 | 404 | 662 | 4,920 |
The expected disbursements out of the provisions recognized in the 2007 balance sheets are as follows:
| Taxes | Personnel commit- ments | Environ- mental protec- tion | Restruc- turing | Trade- related commit- ments | Litiga- tions | Miscella- neous provi- sions | Total | |
| € million | ||||||||
| 2008 | 817 | 1,194 | 35 | 100 | 728 | 367 | 513 | 3,754 |
| 2009 | 26 | 222 | 42 | 51 | 9 | 31 | 89 | 470 |
| 2010 | - | 91 | 11 | 3 | - | - | 4 | 109 |
| 2011 | 15 | 71 | 2 | - | - | - | 1 | 89 |
| 2012 | - | 25 | 11 | - | - | - | 30 | 66 |
| 2013 or later | 5 | 222 | 169 | - | 5 | 6 | 25 | 432 |
| Total | 863 | 1,825 | 270 | 154 | 742 | 404 | 662 | 4,920 |
The provisions are partly offset by claims for refunds in the amount of €59 million, which are recognized as receivables. They relate principally to environmental measures.
26.1 Taxes
Provisions for taxes mainly comprise of provisions for income taxes, but also include provisions for other types of taxes.
26.2 Personnel commitments
Provisions for personnel commitments mainly include those for variable and individual one-time payments, surpluses on long-term accounts, service awards and other personnel costs. Also reflected here are the obligations under the stock-based compensation programs.
Stock-based compensation in the Bayer Group is granted primarily under standard programs and also on an individual agreement basis. Individual agreements enable the company to link remuneration components to the stock price or future stock price trends. Awards under such agreements may be contingent upon the attainment of agreed targets, or may be based solely on the length of service. Standard programs exist for different groups of employees. The program offered to members of the Board of Management and other senior executives from 2001 through 2004 was essentially a stock option program with variable stock-based awards. This program provides for cash payments. Middle management was offered a stock incentive program, while other groups of employees were offered a stock participation program. A stock-based compensation program for top and middle management known as “Aspire” was introduced in 2005. It comprises two variants, which are described here. For other managers and non-managerial employees, an annual stock participation program has been offered since 2005 (“ABP 2007” in the year under report), under which Bayer subsidizes employee purchases of shares in the company.
As with other remuneration systems involving cash settlement, awards to be made under the stock-based programs are covered by provisions in the amount of the fair value of the obligations existing as of the date of the financial statements vis-à-vis the respective employee group. Adjustments to provisions relating to all existing stock-based compensation programs are recognized in the income statement.
The table below shows the change in provisions for the various programs:
Stock-based compensation in the Bayer Group is granted primarily under standard programs and also on an individual agreement basis. Individual agreements enable the company to link remuneration components to the stock price or future stock price trends. Awards under such agreements may be contingent upon the attainment of agreed targets, or may be based solely on the length of service. Standard programs exist for different groups of employees. The program offered to members of the Board of Management and other senior executives from 2001 through 2004 was essentially a stock option program with variable stock-based awards. This program provides for cash payments. Middle management was offered a stock incentive program, while other groups of employees were offered a stock participation program. A stock-based compensation program for top and middle management known as “Aspire” was introduced in 2005. It comprises two variants, which are described here. For other managers and non-managerial employees, an annual stock participation program has been offered since 2005 (“ABP 2007” in the year under report), under which Bayer subsidizes employee purchases of shares in the company.
As with other remuneration systems involving cash settlement, awards to be made under the stock-based programs are covered by provisions in the amount of the fair value of the obligations existing as of the date of the financial statements vis-à-vis the respective employee group. Adjustments to provisions relating to all existing stock-based compensation programs are recognized in the income statement.
The table below shows the change in provisions for the various programs:
| Stock Option Program | Stock Incentive Program | Stock Par- ticipation Program | Aspire I | Aspire lI | Total | |
| € million | ||||||
| December 31, 2006 | 13 | 3 | 12 | 26 | 38 | 92 |
| Allocations | 12 | 3 | 9 | 41 | 40 | 105 |
| Utilization | (14) | (2) | (4) | (7) | (13) | (40) |
| Reversal | - | - | - | - | - | - |
| Exchange differences | - | - | - | (2) | (5) | (7) |
| December 31, 2007 | 11 | 4 | 17 | 58 | 60 | 150 |
An additional amount of €12 million (2006: €4 million) in expenses was recorded for the 2007 short-term stock participation program.
Provisions of €11 million existed at the end of 2007 (2006: €8 million) for obligations entered into under individual stock-based compensation agreements, of which €8 million (2006: €6 million) were recognized in income. The obligations were measured in the same way as those incurred under the standard programs.
The fair value of obligations under the standard stock-based compensation programs and individual agreements has been calculated using the Monte Carlo simulation method and the following key parameters:
Provisions of €11 million existed at the end of 2007 (2006: €8 million) for obligations entered into under individual stock-based compensation agreements, of which €8 million (2006: €6 million) were recognized in income. The obligations were measured in the same way as those incurred under the standard programs.
The fair value of obligations under the standard stock-based compensation programs and individual agreements has been calculated using the Monte Carlo simulation method and the following key parameters:
| 2006 | 2007 | |
| Dividend yield | 2.29% | 1.91% |
| Risk-free interest rate | 3.83% | 4.06% |
| Volatility of Bayer stock | 21.52% | 22.19% |
| Volatility of the Euro Stoxx 50SM | 13.14% | 13.83% |
| Correlation between Bayer stock price and the Euro Stoxx 50SM | 0.61 | 0.54 |
The expected exercise period is three to five years.
Long-term incentive program for members of the Board of Management and other senior executives (Aspire I)
To participate in Aspire, members of the Board of Management and other senior executives are required to purchase a certain number of Bayer shares determined on the basis of specific guidelines and to retain them for the full term of the program.
A percentage of their annual base salary is defined as a target for variable payments (“Aspire target opportunity”). Depending on the performance of Bayer stock, both in absolute terms and relative to the EURO STOXX 50SM benchmark index, participants are granted an award of between 0 and 200 percent of their individual target opportunity.
Participants may ask for their Aspire award to be paid out in cash immediately at the end of the three-year performance period, or they may convert it into “performance units.” These can then be redeemed within a two-year exercise period for a cash payment that depends on the Bayer stock price on the exercise date.
Long-term incentive program for middle management (Aspire II)
A variant of the Aspire program with the following modifications is offered to middle management:
This variant of the Aspire program is not linked to the EURO STOXX 50SM index.
Stock Participation Program (2007) for other managers and non-managerial employees
Under this program, Bayer offered employees the opportunity to purchase shares at a discount of 15 percent of the lowest stock price on July 31, 2007. Employees could invest a maximum of €7,500 in discounted shares, depending on their base salary and salary grade. The shares purchased under the 2007 Stock Participation Program may not be sold prior to December 31, 2008. In 2007, employees acquired a total of 732,837 Bayer shares under the Stock Participation Program.
Stock-based compensation programs 2000-2004
The stock-based compensation programs offered to the different employee groups in 2000 through 2004 were all similar in their respective structures. Provisions for the obligations under these programs are recorded in the balance sheet and recognized in the income statement at fair value. Entitlement to awards under these programs is conditioned on retention of the Bayer stock designated under the program for a certain time period.
The following table shows the programs applicable through December 31, 2004:
To participate in Aspire, members of the Board of Management and other senior executives are required to purchase a certain number of Bayer shares determined on the basis of specific guidelines and to retain them for the full term of the program.
A percentage of their annual base salary is defined as a target for variable payments (“Aspire target opportunity”). Depending on the performance of Bayer stock, both in absolute terms and relative to the EURO STOXX 50SM benchmark index, participants are granted an award of between 0 and 200 percent of their individual target opportunity.
Participants may ask for their Aspire award to be paid out in cash immediately at the end of the three-year performance period, or they may convert it into “performance units.” These can then be redeemed within a two-year exercise period for a cash payment that depends on the Bayer stock price on the exercise date.
Long-term incentive program for middle management (Aspire II)
A variant of the Aspire program with the following modifications is offered to middle management:
- No personal investment in Bayer shares is required.
- The amount of the award in relation to the employee’s personal Aspire target opportunity is based entirely on the absolute performance of Bayer stock during the performance period.
- The award varies between 0 and 150 percent of the Aspire target opportunity.
This variant of the Aspire program is not linked to the EURO STOXX 50SM index.
Stock Participation Program (2007) for other managers and non-managerial employees
Under this program, Bayer offered employees the opportunity to purchase shares at a discount of 15 percent of the lowest stock price on July 31, 2007. Employees could invest a maximum of €7,500 in discounted shares, depending on their base salary and salary grade. The shares purchased under the 2007 Stock Participation Program may not be sold prior to December 31, 2008. In 2007, employees acquired a total of 732,837 Bayer shares under the Stock Participation Program.
Stock-based compensation programs 2000-2004
The stock-based compensation programs offered to the different employee groups in 2000 through 2004 were all similar in their respective structures. Provisions for the obligations under these programs are recorded in the balance sheet and recognized in the income statement at fair value. Entitlement to awards under these programs is conditioned on retention of the Bayer stock designated under the program for a certain time period.
The following table shows the programs applicable through December 31, 2004:
| Stock Option Programs | Stock Incentive Programs | Stock Par- ticipation Programs | |
| Year of issue | 2002–2004 | 2000–2004 | 2000–2004 |
| Original term in years | 5 | 10 | 10 |
| Retention period/distribution date in years from issue date | 3 | 2/6/10 | 2/6/10 |
| Reference price | 0 | 0 | 0 |
| Performance criteria | Yes | Yes | No |
Stock Option Program (2002-2004)
A maximum personal investment in Bayer stock was defined for each Board of Management member or other senior executive who wished to participate in the Stock Option Program.
The Stock Option Program contains a three-year retention condition. The retention period is followed by a two-year exercise period, after which any option rights not exercised expire. Eligibility to exercise option rights and the award to which the holder is entitled depend on the absolute and relative performance of Bayer stock.
For the tranche issued in 2002, every participant received one option for every 20 shares of their personal investments placed in a special account. Each option originally could reach a maximum value of 200 shares during the term of the tranche, depending on the performance of Bayer stock, both in absolute terms and relative to the EURO STOXX 50SM index. For the tranches issued in 2003 and 2004, participants received up to three options per share for every share of their personal investments placed in the special account. For each option, a cash payment – equivalent to the market price of one Bayer share – and an outperformance premium are awarded at the exercise date subject to the attainment of certain performance and outperformance targets, respectively.
All stock options under the 2002 tranche, which expired on May 15, 2007, were exercised. Stock options under the 2003 and 2004 tranches were partially exercised and are currently still exercisable. As of December 31, 2007 their intrinsic value was €12 million.
Stock Incentive Program (2000-2004)
This program was offered to middle management. Each participant was required to deposit shares up to a maximum number defined on the basis of his/her individual performance-related bonus and the share price at the start of the program. Unlike the Stock Option Program, participants are permitted to sell their shares during the term of the program, although any shares sold no longer count for purposes of calculating the incentive awards on subsequent distribution dates. The Stock Incentive Program runs for a ten-year period, during which there are three incentive payment dates.
Incentive payments under the program are only made if Bayer stock has outperformed the EURO STOXX 50SM index on the respective incentive payment dates. For every ten Bayer shares originally placed in their special account and retained until the incentive payment date, participants receive payments equal to the value of two shares after two years, the value of four shares after six years, and the value of an additional four shares after ten years.
Stock Participation Program (2000-2004)
This program was for all other managerial employees and non-managerial employees. The incentive payments made on the three incentive payment dates amount to one half of those under the Stock Incentive Program. Payments are not contingent upon the performance of Bayer stock.
A maximum personal investment in Bayer stock was defined for each Board of Management member or other senior executive who wished to participate in the Stock Option Program.
The Stock Option Program contains a three-year retention condition. The retention period is followed by a two-year exercise period, after which any option rights not exercised expire. Eligibility to exercise option rights and the award to which the holder is entitled depend on the absolute and relative performance of Bayer stock.
For the tranche issued in 2002, every participant received one option for every 20 shares of their personal investments placed in a special account. Each option originally could reach a maximum value of 200 shares during the term of the tranche, depending on the performance of Bayer stock, both in absolute terms and relative to the EURO STOXX 50SM index. For the tranches issued in 2003 and 2004, participants received up to three options per share for every share of their personal investments placed in the special account. For each option, a cash payment – equivalent to the market price of one Bayer share – and an outperformance premium are awarded at the exercise date subject to the attainment of certain performance and outperformance targets, respectively.
All stock options under the 2002 tranche, which expired on May 15, 2007, were exercised. Stock options under the 2003 and 2004 tranches were partially exercised and are currently still exercisable. As of December 31, 2007 their intrinsic value was €12 million.
Stock Incentive Program (2000-2004)
This program was offered to middle management. Each participant was required to deposit shares up to a maximum number defined on the basis of his/her individual performance-related bonus and the share price at the start of the program. Unlike the Stock Option Program, participants are permitted to sell their shares during the term of the program, although any shares sold no longer count for purposes of calculating the incentive awards on subsequent distribution dates. The Stock Incentive Program runs for a ten-year period, during which there are three incentive payment dates.
Incentive payments under the program are only made if Bayer stock has outperformed the EURO STOXX 50SM index on the respective incentive payment dates. For every ten Bayer shares originally placed in their special account and retained until the incentive payment date, participants receive payments equal to the value of two shares after two years, the value of four shares after six years, and the value of an additional four shares after ten years.
Stock Participation Program (2000-2004)
This program was for all other managerial employees and non-managerial employees. The incentive payments made on the three incentive payment dates amount to one half of those under the Stock Incentive Program. Payments are not contingent upon the performance of Bayer stock.
26.3. Environmental protection
Provisions for environmental remediation as of December 31, 2007 amounted to €270 million. The material components of these provisions relate to the rehabilitation of contaminated land, recultivation of landfills and redevelopment and water protection measures. The expected future payments for environmental remediation amounting to €340 million have been discounted at average risk-free interest rates of between 3.0% and 13.8% and a provision equal to their present value of €270 million has been recognized.
26.4. Restructuring
Provisions for restructuring totaled €154 million on December 31, 2007. These charges include €124 million for severance payments and €30 million for other expenses, mainly demolition and other costs related to the closure of production facilities.
The principal restructuring charges in 2007 related to four major projects.
The “Transforming Human Resources” (THR) project initiated in 2005 is designed to harmonize the human resources function worldwide by introducing an innovative operating model. The new structures provide better, and at the same time more efficient, support for employees and thus make a greater contribution to the company’s performance. The new operating model and the related organizational units have been gradually introduced at 162 Bayer Group companies worldwide starting in October 2006. Current planning anticipates that the rollout of this project will be completed in 2009. Total restructuring expenses for the THR project in 2007 were €31 million, including €2 million in severance payments and €29 million in other restructuring expenses.
Bayer MaterialScience introduced a restructuring program, named the RIVER project, in the fall of 2007 to optimize cost structures and raise efficiency. This project mainly affects North America and Europe and principally comprises reducing methylenediphenyl diisocyanate capacity at the facility in New Martinsville, West Virginia, in the United States and optimizing cost structures at the production site in Antwerp, Belgium. In Germany, the optimization affects administrative functions at the Leverkusen site. Total restructuring expenses in connection with this project amounted to €75 million, comprising €29 million in severance payments, €11 million in accelerated depreciation and write-downs and €35 million in other restructuring expenses.
The implementation of the NEW restructuring program, adopted in August 2006 to ensure a sustained improvement in the efficiency of the Bayer CropScience subgroup, continued as planned in 2007. This program centered on restructuring in the United Kingdom, India, North America and Germany. Production of the active ingredient ethofumesate at the facility in Widnes, U.K., will cease in mid-2008 and it will be produced in India in the future. An agreement has been reached with LANXESS, which also has production facilities at the Thane site in India, on the closure of this site, so the restructuring plan can now proceed as scheduled. In Germany the shutdown of the Griesheim plant took place on schedule and is now virtually complete. In North America a number of individual measures were undertaken to improve efficiency, including the transfer of several compounding operations to Kansas City. Total restructuring expenses for this project amounted to €97 million, comprising €21 million in severance payments, €10 million in write-downs and €66 million in other restructuring expenses.
The extensive restructuring program introduced in the Bayer Schering Pharma Division following the acquisition of Schering, Berlin, Germany, in 2006 continued in 2007. The aim is to consolidate Bayer’s pharmaceutical activities in parallel with the integration progress and ensure uniform operation of the business in the interests of the Bayer Group as a whole. During 2007 the local subsidiaries of Bayer Schering Pharma AG were integrated into the established Bayer organization in most countries. The field forces and marketing functions of these Bayer Schering Pharma subsidiaries and the Pharmaceuticals division of Bayer HealthCare were merged in each case to form local Bayer Schering Pharma divisions. The global research and development activities are being consolidated in the future at the Berlin and Wuppertal sites in Germany and at Berkeley, California, United States. Total expenses for the restructuring related to the Bayer Schering Pharma integration amounted to €506 million in 2007 and included €159 million in severance payments, €88 in accelerated depreciation and write-downs and €259 million in other restructuring expenses.
The principal restructuring charges in 2007 related to four major projects.
The “Transforming Human Resources” (THR) project initiated in 2005 is designed to harmonize the human resources function worldwide by introducing an innovative operating model. The new structures provide better, and at the same time more efficient, support for employees and thus make a greater contribution to the company’s performance. The new operating model and the related organizational units have been gradually introduced at 162 Bayer Group companies worldwide starting in October 2006. Current planning anticipates that the rollout of this project will be completed in 2009. Total restructuring expenses for the THR project in 2007 were €31 million, including €2 million in severance payments and €29 million in other restructuring expenses.
Bayer MaterialScience introduced a restructuring program, named the RIVER project, in the fall of 2007 to optimize cost structures and raise efficiency. This project mainly affects North America and Europe and principally comprises reducing methylenediphenyl diisocyanate capacity at the facility in New Martinsville, West Virginia, in the United States and optimizing cost structures at the production site in Antwerp, Belgium. In Germany, the optimization affects administrative functions at the Leverkusen site. Total restructuring expenses in connection with this project amounted to €75 million, comprising €29 million in severance payments, €11 million in accelerated depreciation and write-downs and €35 million in other restructuring expenses.
The implementation of the NEW restructuring program, adopted in August 2006 to ensure a sustained improvement in the efficiency of the Bayer CropScience subgroup, continued as planned in 2007. This program centered on restructuring in the United Kingdom, India, North America and Germany. Production of the active ingredient ethofumesate at the facility in Widnes, U.K., will cease in mid-2008 and it will be produced in India in the future. An agreement has been reached with LANXESS, which also has production facilities at the Thane site in India, on the closure of this site, so the restructuring plan can now proceed as scheduled. In Germany the shutdown of the Griesheim plant took place on schedule and is now virtually complete. In North America a number of individual measures were undertaken to improve efficiency, including the transfer of several compounding operations to Kansas City. Total restructuring expenses for this project amounted to €97 million, comprising €21 million in severance payments, €10 million in write-downs and €66 million in other restructuring expenses.
The extensive restructuring program introduced in the Bayer Schering Pharma Division following the acquisition of Schering, Berlin, Germany, in 2006 continued in 2007. The aim is to consolidate Bayer’s pharmaceutical activities in parallel with the integration progress and ensure uniform operation of the business in the interests of the Bayer Group as a whole. During 2007 the local subsidiaries of Bayer Schering Pharma AG were integrated into the established Bayer organization in most countries. The field forces and marketing functions of these Bayer Schering Pharma subsidiaries and the Pharmaceuticals division of Bayer HealthCare were merged in each case to form local Bayer Schering Pharma divisions. The global research and development activities are being consolidated in the future at the Berlin and Wuppertal sites in Germany and at Berkeley, California, United States. Total expenses for the restructuring related to the Bayer Schering Pharma integration amounted to €506 million in 2007 and included €159 million in severance payments, €88 in accelerated depreciation and write-downs and €259 million in other restructuring expenses.
26.5 Trade-related commitments
Provisions for trade-related commitments amounted to €742 million on December 31, 2007 and comprised provisions for rebates, discounts and other price adjustments, provisions for product returns, outstanding invoices, pending losses and onerous contracts.
26.6 Litigations
Provisions for litigation-related expenses amounted to €404 million on December 31, 2007. The legal risks currently considered to be material are outlined in Note [32].
26.7 Miscellaneous provisions
Miscellaneous provisions comprise those for guarantees, product liability, asset retirement obligations (except where these are included in environmental provisions), contingent liabilities relating to acquisitions and provisions for miscellaneous liabilities.
Miscellaneous provisions amounted to €662 million on December 31, 2007.
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Miscellaneous provisions amounted to €662 million on December 31, 2007.
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