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26. Other provisions
 26.1 Taxes |
| 26.2 Environmental protection |
| 26.3 Restructuring |
| 26.4 Trade-related commitments |
| 26.5 Litigations |
| 26.6 Personnel commitments |
| 26.7 Miscellaneous |
The various categories of provisions changed as follows in 2008:
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€ million | € million | € million | € million | € million | € million | € million | € million | |
December 31, |
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Changes in the scope of |
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Additions | 817 | 80 | 88 | 728 | 245 | 1,086 | 518 | 3,562 |
Utilization | (819) | (34) | (49) | (537) | (227) | (1,154) | (599) | (3,419) |
Reversal | (94) | (15) | (16) | (134) | (57) | (100) | (134) | (550) |
Interest cost | 12 | 5 | - | 1 | 5 | 24 | 3 | 50 |
Exchange |
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December 31, 2008 |
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The expected disbursements out of the provisions recognized in the 2008 balance sheets are as follows:
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| Trade- |
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€ million | € million | € million | € million | € million | € million | € million | € million | |
2009 | 633 | 53 | 101 | 801 | 141 | 1,097 | 337 | 3,163 |
2010 | 18 | 8 | 65 | 1 | 82 | 77 | 43 | 294 |
2011 | - | 14 | 4 | - | 17 | 82 | 19 | 136 |
2012 | - | 2 | 1 | - | - | 31 | 12 | 46 |
2013 | - | 3 | - | - | 1 | 27 | 25 | 56 |
2014 or later | 85 | 218 | 4 | 4 | 100 | 375 | 33 | 819 |
Total | 736 | 298 | 175 | 806 | 341 | 1,689 | 469 | 4,514 |
The provisions are partly offset by claims for refunds in the amount of €69 million (2007: €59 million), which are recognized as receivables. They relate principally to environmental measures.
26.1 Taxes
Provisions for taxes comprise provisions for income taxes amounting to €676 million (2007: €774 million) and provisions for other types of taxes amounting to €60 million (2007: €89 million).
Further income tax commitments according to IAS 12 existed at year-end in the amount of €65 million (2007: €56 million), recognized on the balance sheet as income tax liabilities.
26.2 Environmental protection
Provisions for environmental remediation mainly relate to the rehabilitation of contaminated land, recultivation of landfills, and redevelopment and water protection measures.
26.3 Restructuring
Provisions for restructuring included €139 million for severance payments and €36 million for other expenses, which mainly comprised demolition and other costs related to the closure of production facilities.
The principal restructuring charges in 2008 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. According to current planning, the project will be completed during 2010. Total restructuring expenses related to the THR project in 2008 came to €32 million, including €1 million in severance payments and €31 million in other restructuring expenses. Provisions for restructuring amounted to €1 million on December 31, 2008.
The “RIVER” restructuring project initiated by the Bayer MaterialScience subgroup in fall 2007 to optimize cost structures and achieve a lasting improvement in efficiency was continued as planned in 2008. The central focus was on North America and Europe. In North America, in addition to many individual projects, efficiency was improved significantly at the facilities in Pittsburgh, Pennsylvania, and in the administrative functions. The reduction of capacity for methylenediphenyl diisocyanate at the facility in New Martinsville, West Virginia, proceeded on schedule. In Germany, the optimization mainly affected administrative functions at the Leverkusen site. Total restructuring expenses for this project amounted to €49 million in 2008, comprising €21 million in severance payments, €2 million in write-downs and €26 million in other restructuring expenses. Restructuring provisions amounted to €30 million as of December 31, 2008.
The implementation of the “NEW” restructuring program, instigated in August 2006 to ensure a sustained improvement in the efficiency of the Bayer CropScience subgroup, continued as planned in 2008. This resulted in restructuring expenses of €166 million in 2008, including €51 million for personnel-related measures, €13 million for write-downs and €102 for other restructuring expenses. The restructuring provisions amounted to €73 million as of December 31, 2008.
Important measures were implemented in the United States, France and Germany. These included, in particular, the concentration of U.S. production capacity at the facilities in Kansas City, Missouri, and Institute, West Virginia. In addition, consolidation of the global research activities continued, leading to restructuring expenses in France. In Germany, restructuring as part of the “NEW” project mainly comprised the divestment of the formulating and packaging facility and the logistics center in Wolfenbüttel.
In 2008 the Bayer Schering Pharma Division continued the restructuring program introduced following the acquisition of Schering AG, Berlin, Germany, in 2006. The aim is to consolidate Bayer’s pharmaceutical activities in parallel with the integration progress and ensure uniform management of the business in the interests of the Bayer Group as a whole. Restructuring provisions of €54 million were recognized as of December 31, 2008 for these and other measures.
The integration of local subsidiaries of Bayer Schering Pharma AG into existing Bayer subsidiaries was very largely completed. Sales forces and marketing functions at the Bayer and former Schering companies were merged, facilities were amalgamated and IT systems harmonized. The consolidation of the global research and development activities at the Berlin and Wuppertal sites in Germany and at Berkeley, California, United States, continued.
Total expenses for the integration of Schering amounted to €157 million in 2008, including €53 million in severance payments, €46 million in accelerated depreciation and write-downs and €58 million in other restructuring expenses.
26.4 Trade-related commitments
Provisions for trade-related commitments comprise provisions for rebates, discounts and other price adjustments, provisions for product returns, outstanding invoices, pending losses and onerous contracts.
26.5 Litigations
The legal risks currently considered to be material are described in Note [32] .
26.6 Personnel commitments
Provisions for personnel commitments mainly include those for variable and individual one-time payments, credit balances 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 movements. 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 on the following pages. For other managers and non-managerial employees, an annual stock participation program has been offered since 2005 (“ABP 2008” 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:
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€ million | € million | € million | € million | € million | € million | |
December 31, 2007 | 11 | 4 | 17 | 58 | 60 | 150 |
Allocations | 2 | - | 1 | 12 | 3 | 18 |
Utilization | (8) | (1) | (6) | (27) | (29) | (71) |
Reversal | (3) | (1) | (3) | (3) | (2) | (12) |
Exchange differences | - | - | - | 1 | 1 | 2 |
December 31, 2008 | 2 | 2 | 9 | 41 | 33 | 87 |
Provisions of €10 million existed at the end of 2008 (2007: €11 million) for obligations entered into under individual stock-based compensation agreements. 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 based on the following key parameters:
2007 | 2008 | |
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Dividend yield | 1.91% | 3.80% |
Risk-free interest rate | 4.06% | 1.93% |
Volatility of Bayer stock | 22.19% | 31.56% |
Volatility of the Euro Stoxx 50SM | 13.83% | 25.72% |
Correlation between Bayer stock price and the Euro Stoxx 50SM | 0.54 | 0.68 |
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 I, members of the Board of Management and other senior executives are required to purchase a certain number of Bayer shares that is predetermined according to specific guidelines and to retain them for the full term of the program. A percentage of the executive’s annual base salary – based on his/her position – 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 Dow Jones EURO STOXX 50SM benchmark index over a three-year performance period, participants are granted an award of up to 200% of their individual Aspire target opportunity at the end of the program.
Long-term incentive program for middle management (Aspire II)
Other senior managers are offered Aspire II, a variant of Aspire I that does not require a personal investment in Bayer shares. In this case the amount of the award is based entirely on the absolute performance of Bayer stock. The maximum award is 150% of each manager’s Aspire target opportunity.
Stock Participation Program (2008) for other managers and non-managerial employees
Under this program, Bayer offered employees the opportunity to purchase shares at a discount of 15% on the lowest stock price on August 11, 2008. Employees could invest a maximum of €10,000 in discounted shares, depending on their base salary and salary grade. The shares purchased under the 2008 Stock Participation Program may not be sold prior to December 31, 2009. In 2008, employees subscribed for a total of 632,117 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:
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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 contained 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 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 2003 tranche, which expired on August 31, 2008, were exercised. Stock options under the 2004 tranche were partially exercised and are currently still exercisable. As of December 31, 2008 their intrinsic value was €2 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.
26.7 Miscellaneous
Miscellaneous provisions comprise those for guarantees, product liability, asset retirement obligations (other than those included in environmental provisions), contingent liabilities relating to acquisitions, and provisions for miscellaneous liabilities.
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