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Financial Statements
24. Stockholders’ equity
Stockholders’ equity amounted to €16,821 million as of December 31, 2007. The principal objectives of financial management are to achieve a sustained rise in the value of the Bayer Group and to safeguard its liquidity and credit standing. The pursuit of these goals means reducing the cost of capital, improving the cash flow from financing activities, optimizing the capital structure and operating an effective risk management system.
The rating agencies retained by Bayer assess our creditworthiness as follows:
The rating agencies retained by Bayer assess our creditworthiness as follows:
| Long-term rating | Outlook | Short-term rating | |
| Standard & Poor’s | BBB+ | positive | A-2 |
| Moody’s | A 3 | negative | P-2 |
Bayer’s financial strategy is geared to achieving an A rating, indicating that the company is able to meet its payment obligations and giving it access to financing from a broad investor base. The Group’s capital management strategy is based on the various debt ratios issued by the rating agencies, which look at the cash flow for a given period in relation to debt. Since the acquisition of Schering in 2006, the proceeds of a capital increase, a mandatory convertible bond issue and divestitures, along with the cash flow from our operating activities, have been used mainly to reduce net debt in line with that strategy.
Bayer’s Articles of Incorporation do not stipulate capital ratios. Based on the price of Bayer AG shares on December 31, 2007, the number of issued shares will increase by a minimum of approximately 59.6 million and a maximum of approximately 69.7 million by 2009 at the latest as a result of the conversion of the mandatory convertible bond issued in 2006.
The components of stockholders’ equity and their changes during 2006 and 2007 are shown in the following table.
Bayer’s Articles of Incorporation do not stipulate capital ratios. Based on the price of Bayer AG shares on December 31, 2007, the number of issued shares will increase by a minimum of approximately 59.6 million and a maximum of approximately 69.7 million by 2009 at the latest as a result of the conversion of the mandatory convertible bond issued in 2006.
The components of stockholders’ equity and their changes during 2006 and 2007 are shown in the following table.
| Capital stock of Bayer AG | Capital reserves of Bayer AG | Other reserves | Equity attribut- able to Bayer AG stockholders | Equity attributable to minority interest | Stock- holders’ equity | |
| € million | ||||||
| December 31, 2005 | 1,870 | 2,942 | 6,265 | 11,077 | 80 | 11,157 |
| Capital contributions | 87 | 1,086 | - | 1,173 | - | 1,173 |
| Other changes | - | - | 517 | 517 | 4 | 521 |
| December 31, 2006 | 1,957 | 4,028 | 6,782 | 12,767 | 84 | 12,851 |
| Capital contributions | - | - | - | - | - | - |
| Other changes | - | - | 3,967 | 3,967 | 3 | 3,970 |
| December 31, 2007 | 1,957 | 4,028 | 10,749 | 16,734 | 87 | 16,821 |
The capital stock of Bayer AG totals €1,957 million, as in the previous year, and is divided into 764,341,920 (2006: 764,341,920) no-par bearer shares. Each share confers one voting right.
Authorized capital of €465 million was approved by the Annual Stockholders’ Meeting on April 28, 2006. It expires on April 27, 2011. It can be used to increase the capital stock by issuing new no-par bearer shares against cash contributions or contributions in kind, but capital increases against contributions in kind may not exceed a total of €370 million (Authorized Capital I). Stockholders must normally be granted subscription rights. However, subject to the approval of the Supervisory Board, the Board of Management is authorized to exclude subscription rights for the stockholders with respect to any excess shares remaining after rights have been allocated (fractional amounts) and also to the extent necessary to grant subscription rights for new shares to holders of convertible bonds or bonds with attached warrants or mandatory convertible bonds issued by Bayer AG or its Group companies, who would be entitled to subscription rights upon exercise of the conversion rights or warrants. In addition, the Board of Management is authorized to exclude stockholders’ subscription rights, subject to the approval of the Supervisory Board, in cases where an increase in capital against contributions in kind is carried out for the purpose of acquiring companies, parts of companies, participating interests in companies or other assets.
Further authorized capital was also approved by the Annual Stockholders’ Meeting on April 27, 2007. The Board of Management is authorized until April 26, 2012 to increase the capital stock, subject to the approval of the Supervisory Board, by up to a total of €195 million in one or more installments by issuing new no-par bearer shares against cash contributions (Authorized Capital II). Under the resolution adopted by the Annual Stockholders’ Meeting, stockholders must normally be granted subscription rights. However, the Board of Management is authorized to exclude subscription rights for stockholders with respect to one or more capital increases out of the Authorized Capital II, subject to the approval of the Supervisory Board, provided that such capital increase does not exceed 10 percent of the capital stock existing at the time this authorization becomes effective or the time this authorization is exercised, for purposes of issuing new shares against cash contributions at a price that is not significantly below the market price of shares in the company that are already listed on the stock exchange at the time the issue price is finally determined. Shares acquired on the basis of an authorization of the Stockholders’ Meeting and sold pursuant to Section 71, Paragraph 1, No. 8, Sentence 5 of the German Stock Corporation Act in conjunction with Section 186, Paragraph 3, Sentence 4 of that Act during the term of this authorization shall count toward the above 10 percent limit. Shares issued or to be issued to service bonds with conversion rights, attached warrants or mandatory conversion rights shall also count toward this limit where such bonds were issued during the term of this authorization and stockholders’ subscription rights were excluded by application of Section 186, Paragraph 3, Sentence 4 of the German Stock Corporation Act.
Conditional capital of €186.88 million, corresponding to 73,000,000 shares, exists to service the conversion rights contained in a mandatory convertible bond issued by Bayer Capital Corporation B.V., Netherlands, on April 6, 2006.
The individual components of other reserves and their changes during 2006 and 2007 are shown in the following table.
Authorized capital of €465 million was approved by the Annual Stockholders’ Meeting on April 28, 2006. It expires on April 27, 2011. It can be used to increase the capital stock by issuing new no-par bearer shares against cash contributions or contributions in kind, but capital increases against contributions in kind may not exceed a total of €370 million (Authorized Capital I). Stockholders must normally be granted subscription rights. However, subject to the approval of the Supervisory Board, the Board of Management is authorized to exclude subscription rights for the stockholders with respect to any excess shares remaining after rights have been allocated (fractional amounts) and also to the extent necessary to grant subscription rights for new shares to holders of convertible bonds or bonds with attached warrants or mandatory convertible bonds issued by Bayer AG or its Group companies, who would be entitled to subscription rights upon exercise of the conversion rights or warrants. In addition, the Board of Management is authorized to exclude stockholders’ subscription rights, subject to the approval of the Supervisory Board, in cases where an increase in capital against contributions in kind is carried out for the purpose of acquiring companies, parts of companies, participating interests in companies or other assets.
Further authorized capital was also approved by the Annual Stockholders’ Meeting on April 27, 2007. The Board of Management is authorized until April 26, 2012 to increase the capital stock, subject to the approval of the Supervisory Board, by up to a total of €195 million in one or more installments by issuing new no-par bearer shares against cash contributions (Authorized Capital II). Under the resolution adopted by the Annual Stockholders’ Meeting, stockholders must normally be granted subscription rights. However, the Board of Management is authorized to exclude subscription rights for stockholders with respect to one or more capital increases out of the Authorized Capital II, subject to the approval of the Supervisory Board, provided that such capital increase does not exceed 10 percent of the capital stock existing at the time this authorization becomes effective or the time this authorization is exercised, for purposes of issuing new shares against cash contributions at a price that is not significantly below the market price of shares in the company that are already listed on the stock exchange at the time the issue price is finally determined. Shares acquired on the basis of an authorization of the Stockholders’ Meeting and sold pursuant to Section 71, Paragraph 1, No. 8, Sentence 5 of the German Stock Corporation Act in conjunction with Section 186, Paragraph 3, Sentence 4 of that Act during the term of this authorization shall count toward the above 10 percent limit. Shares issued or to be issued to service bonds with conversion rights, attached warrants or mandatory conversion rights shall also count toward this limit where such bonds were issued during the term of this authorization and stockholders’ subscription rights were excluded by application of Section 186, Paragraph 3, Sentence 4 of the German Stock Corporation Act.
Conditional capital of €186.88 million, corresponding to 73,000,000 shares, exists to service the conversion rights contained in a mandatory convertible bond issued by Bayer Capital Corporation B.V., Netherlands, on April 6, 2006.
The individual components of other reserves and their changes during 2006 and 2007 are shown in the following table.
| Retained earnings | Accumulated other comprehensive income | ||||||
| € million | Revalu- ation surplus | Other retained earnings | Net income | Exchange differences | Fair-value measure- ment of securities | Cash flow hedges | Other reserves |
| December 31, 2005 | 62 | 5,347 | 1,597 | (775) | 23 | 11 | 6,265 |
| Changes in stockholders’ equity not recognized in net income | |||||||
| Changes in fair value of securities and cash flow hedges | (7) | (59) | (66) | ||||
| Changes in actuarial gains/losses on defined benefit obligations for pensions and other post-employment benefits | 448 | 448 | |||||
| Exchange differences on translation of operations outside the euro zone | (720) | (720) | |||||
| Deferred taxes on valuation adjustments offset directly against stockholders’ equity | (166) | 2 | 16 | (148) | |||
| Other changes in stockholders’ equity | (4) | 4 | 0 | ||||
| Transfer of changes recognized in income | - | 14 | 14 | ||||
| 58 | 5,633 | 1,597 | (1,495) | 18 | (18) | 5,793 | |
| Dividend payments | (694) | (694) | |||||
| Allocations to retained earnings | 903 | (903) | 0 | ||||
| 903 | (1,597) | (694) | |||||
| Changes in stockholders’ equity recognized in net income | |||||||
| Net income 2006 | 1,683 | 1,683 | |||||
| 1,683 | 1,683 | ||||||
| December 31, 2006 | 58 | 6,536 | 1,683 | (1,495) | 18 | (18) | 6,782 |
| Changes in stockholders’ equity not recognized in net income | |||||||
| Changes in fair value of securities and cash flow hedges | 31 | 157 | 188 | ||||
| Changes in actuarial gains/losses on defined benefit obligations for pensions and other post-employment benefits | 1,406 | 1,406 | |||||
| Exchange differences on translation of operations outside the euro zone | (822) | (822) | |||||
| Deferred taxes on valuation adjustments offset directly against stockholders’ equity | (627) | (11) | (41) | (679) | |||
| Other changes in stockholders’ equity | (4) | 4 | 0 | ||||
| Transfer of changes recognized in income | (6) | (67) | (73) | ||||
| 54 | 7,319 | 1,683 | (2,317) | 32 | 31 | 6,802 | |
| Dividend payments | (764) | (764) | |||||
| Allocations to retained earnings | 919 | (919) | 0 | ||||
| 919 | (1,683) | (764) | |||||
| Changes in stockholders’ equity recognized in net income | |||||||
| Net income 2007 | 4,711 | 4,711 | |||||
| 4,711 | 4,711 | ||||||
| December 31, 2007 | 54 | 8,238 | 4,711 | (2,317) | 32 | 31 | 10,749 |
The effect of the revaluation of assets relating to acquisitions made in stages is recognized in equity in compliance with IFRS 3 (Business Combinations). If an enterprise is acquired in several stages, all assets and liabilities of the company have to be completely revalued on the date on which the acquiring company gains control and recognized at fair value. If the new fair value of the assets already held by the acquiring company exceeds their carrying amount, the carrying amount must be increased accordingly. This adjustment is recognized in a separate equity item (revaluation surplus) and thus has no effect on net income. The revaluation surplus of €58 million reported under stockholders’ equity in 2006 was entirely due to the acquisition of the remaining 50 percent interest in an OTC joint venture with Roche in the United States that was established in 1996. In 2007 the €4 million portion of the revaluation surplus that relates to scheduled amortization/depreciation of the respective assets was transferred to retained earnings.
The retained earnings contain prior years’ undistributed income of consolidated companies.
Under IAS 19 (Employee Benefits), which contains an option for the accounting treatment of actuarial gains and losses from defined benefit plans, all such gains and losses are recognized in the retained earnings of the Bayer Group. Changes in fair values of cash flow hedges and available-for-sale financial assets are recognized in other comprehensive income.
The components of third-party minority interests in Group equity and their changes during 2007 and 2006 are shown in the following table.
The retained earnings contain prior years’ undistributed income of consolidated companies.
Under IAS 19 (Employee Benefits), which contains an option for the accounting treatment of actuarial gains and losses from defined benefit plans, all such gains and losses are recognized in the retained earnings of the Bayer Group. Changes in fair values of cash flow hedges and available-for-sale financial assets are recognized in other comprehensive income.
The components of third-party minority interests in Group equity and their changes during 2007 and 2006 are shown in the following table.
| Equity attributable to minority interest | ||
| € million | 2006 | 2007 |
| January 1 | 80 | 84 |
| Changes in stockholders’ equity not recognized in net income | ||
| Changes in fair value of securities and cash flow hedges | 0 | 0 |
| Changes in actuarial gains/losses on defined benefit obligations for pensions and other post-employment benefits | 0 | 0 |
| Exchange differences on translation of operations outside the euro zone | (5) | (3) |
| Deferred taxes on valuation adjustments offset directly against stockholders’ equity | 0 | 0 |
| Other changes in stockholders’ equity | 14 | 4 |
| 89 | 85 | |
| Dividend payments | (15) | (11) |
| Allocations to retained earnings | (2) | 8 |
| (17) | (3) | |
| Changes in stockholders’ equity recognized in net income | 12 | 5 |
| December 31 | 84 | 87 |
Minority stockholders’ interest mainly comprises third parties’ shares in the equity of the consolidated subsidiaries Sumika Bayer Urethane Co. Ltd., Japan; Bayer CropScience Limited, India; Berlimed, S.A., Spain; Justesa Imagen, S.A., Spain; Bayer CropScience Nufarm Ltd., United Kingdom; Bayer Polymers Co. Ltd., China and BaySystems Pearl, Dubai.
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