Chairman’s Letter
Notes
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Financial Statements
26. Other provisions
 26.1 Stock-based compensation |
| 26.2 Environmental protection |
| 26.3 Restructuring charges |
The various categories of provisions changed as follows in 2006:
| Taxes | Personnel commit- ments | Environ- mental protec- tion | Restruc- turing | Trade- related commit- ments | Litigation | Miscella-neous | Total | |
| € million | ||||||||
| December 31, 2005 | 803 | 1,485 | 279 | 92 | 648 | 663 | 379 | 4,349 |
| of which current | 431 | 837 | 81 | 83 | 641 | 588 | 348 | 3,009 |
| Changes in the scope of consolidation | 347 | 447 | 19 | 11 | 103 | 63 | 197 | 1,187 |
| Additions | 616 | 1,090 | 43 | 172 | 896 | 150 | 771 | 3,738 |
| Utilization | (488) | (1,005) | (44) | (55) | (745) | (383) | (463) | (3,183) |
| Reversal | (133) | (89) | (9) | (9) | (78) | (39) | (125) | (482) |
| Reclassifications to current liabilities | (13) | (86) | (8) | (7) | (10) | (1) | (43) | (168) |
| Exchange differences | (43) | (50) | (18) | (8) | (45) | (19) | (29) | (212) |
| December 31, 2006 | 1,089 | 1,792 | 262 | 196 | 769 | 434 | 687 | 5,229 |
| of which current | 870 | 1,081 | 38 | 149 | 763 | 328 | 536 | 3,765 |
The expected disbursements out of the provisions recognized in the 2005 and 2006 balance sheets are as follows:
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The provisions are partly offset by claims for refunds in the amount of €90 million (2005: €116 million), which are recognized as receivables. They relate mainly to environmental measures and to claims out of the provisions for legal risks. Further details of legal risks are given in Note [32].
Personnel commitments mainly include annual bonus payments, vacation entitlements, service awards and other personnel costs. Also reflected here are the obligations under the stock-based compensation programs.
Personnel commitments mainly include annual bonus payments, vacation entitlements, 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 stock price or future stock price trends. Awards under such agreements may be contingent upon the attainment of agreed targets, or they may be based solely on 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 managers were 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 below. For other managers and non-managerial employees, a stock participation program has been offered since 2005 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:
Individual agreements enable the company to link remuneration components to stock price or future stock price trends. Awards under such agreements may be contingent upon the attainment of agreed targets, or they may be based solely on 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 managers were 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 below. For other managers and non-managerial employees, a stock participation program has been offered since 2005 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 Participation Program | Aspire I | Aspire II | Total | |
| € million | ||||||
| December 31, 2005 | 13 | 3 | 11 | 11 | 23 | 61 |
| Allocations | 7 | 2 | 5 | 22 | 29 | 65 |
| Utilization | (7) | (2) | (4) | (4) | (8) | (25) |
| Reversal | 0 | 0 | 0 | 0 | 0 | 0 |
| Reclassifications to current liabilities | - | - | - | (2) | (5) | (7) |
| Exchange differences | - | - | - | (1) | (1) | (2) |
| December 31, 2006 | 13 | 3 | 12 | 26 | 38 | 92 |
Total expenses for stock-based compensation programs in 2006 were €65 million (2005: €51 million), including €51 million (2005: €34 million) for the Aspire programs and €4 million in subsidies for the 2006 short-term stock participation program (2005: €2 million in subsidies for the 2005 short-term stock participation program).
In 2006, provisions of €8 million were recorded in the financial statements at the fair value of obligations entered into under individual stock-based compensation agreements. The obligations were measured in the same way as those incurred under the standard programs. Expenses for individual stock-based compensation agreements in 2006 were €6 million (2005: €4 million).
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:
In 2006, provisions of €8 million were recorded in the financial statements at the fair value of obligations entered into under individual stock-based compensation agreements. The obligations were measured in the same way as those incurred under the standard programs. Expenses for individual stock-based compensation agreements in 2006 were €6 million (2005: €4 million).
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:
| 2005 | 2006 | |
| Dividend yield | 2.27% | 2.29% |
| Risk-free interest rate | 2.92% | 3.83% |
| Volatility of Bayer stock | 38.00% | 21.52% |
| Volatility of the Euro Stoxx 50SM | 19.55% | 13.14% |
| Correlation between Bayer stock price and the Euro Stoxx 50SM | 0.56 | 0.61 |
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 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 percent 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 (2006) for other managers and non-managerial employees
Under this program, Bayer offered employees the opportunity to purchase shares at a discount of 15 percent on the lowest stock price for the day on August 15, 2006. Employees could invest an amount of up to 10 percent of their annual base salary, but not more than €5,000.
The shares purchased under the 2006 Stock Participation Program must be held in a special deposit account and may not be sold prior to December 31, 2007. In 2006, employees acquired a total of 474,003 Bayer shares under the 2006 Stock Participation Program, leading to additional compensation expenses in an amount of €3 million.
Currenta GmbH & Co. OHG, held by Bayer AG (60 percent) and by LANXESS (40 percent), offered a different stock participation program. BIS offered its managers and non-managerial employees the opportunity to purchase Bayer shares and LANXESS shares in a ratio of 3:2, at a discount of 50 percent on the lowest stock price for the day on August 14, 2006. The total discounted purchase of shares purchased by any one manager or non-managerial employee under this stock participation program was capped at an amount ranging between €600 and €2,000 depending on the contract level of that manager or non-managerial employee. The total granted discount per manager or non-managerial employee ranged between €300 and €1,000.
The shares purchased under the bis stock participation program must be held in special deposit accounts and may not be sold prior to December 31, 2008. In 2006, BIS managers and non-managerial employees acquired a total of 34,512 Bayer shares under the BIS stock participation program, leading to additional compensation expense for us in an amount of €1 million.
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:
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 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 percent 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 percent 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 (2006) for other managers and non-managerial employees
Under this program, Bayer offered employees the opportunity to purchase shares at a discount of 15 percent on the lowest stock price for the day on August 15, 2006. Employees could invest an amount of up to 10 percent of their annual base salary, but not more than €5,000.
The shares purchased under the 2006 Stock Participation Program must be held in a special deposit account and may not be sold prior to December 31, 2007. In 2006, employees acquired a total of 474,003 Bayer shares under the 2006 Stock Participation Program, leading to additional compensation expenses in an amount of €3 million.
Currenta GmbH & Co. OHG, held by Bayer AG (60 percent) and by LANXESS (40 percent), offered a different stock participation program. BIS offered its managers and non-managerial employees the opportunity to purchase Bayer shares and LANXESS shares in a ratio of 3:2, at a discount of 50 percent on the lowest stock price for the day on August 14, 2006. The total discounted purchase of shares purchased by any one manager or non-managerial employee under this stock participation program was capped at an amount ranging between €600 and €2,000 depending on the contract level of that manager or non-managerial employee. The total granted discount per manager or non-managerial employee ranged between €300 and €1,000.
The shares purchased under the bis stock participation program must be held in special deposit accounts and may not be sold prior to December 31, 2008. In 2006, BIS managers and non-managerial employees acquired a total of 34,512 Bayer shares under the BIS stock participation program, leading to additional compensation expense for us in an amount of €1 million.
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 Program | Stock Incentive Program | Stock Participation Program | |
| Year of issue | 2001 – 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 (2001-2004)
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 also 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 tranches issued in 2001-2002, 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.
None of the stock options issued under the 2001 tranche, which expired on May 15, 2006, were exercised. Stock options under the 2002 and 2003 tranches where partially exercised and are currently still exercisable. As of December 31, 2006 their intrinsic value was €4 million.
Stock Incentive Program (2000-2004)
To participate in this program, each participant was required to deposit shares with a maximum aggregate value of 50 percent of his or her performance-related bonus for the preceding fiscal year. The incentive award depends on the number of Bayer shares deposited at the launch of each tranche and the overall performance of Bayer stock. The Stock Incentive Program differed from the Stock Option Program in that participants were permitted to sell their shares during the term of the program, although any shares sold did not 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)
Under the Stock Participation Program, only half as many shares as under the Stock Incentive Program are awarded per ten shares deposited, but the award is not conditioned on any performance criteria.
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 also 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 tranches issued in 2001-2002, 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.
None of the stock options issued under the 2001 tranche, which expired on May 15, 2006, were exercised. Stock options under the 2002 and 2003 tranches where partially exercised and are currently still exercisable. As of December 31, 2006 their intrinsic value was €4 million.
Stock Incentive Program (2000-2004)
To participate in this program, each participant was required to deposit shares with a maximum aggregate value of 50 percent of his or her performance-related bonus for the preceding fiscal year. The incentive award depends on the number of Bayer shares deposited at the launch of each tranche and the overall performance of Bayer stock. The Stock Incentive Program differed from the Stock Option Program in that participants were permitted to sell their shares during the term of the program, although any shares sold did not 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)
Under the Stock Participation Program, only half as many shares as under the Stock Incentive Program are awarded per ten shares deposited, but the award is not conditioned on any performance criteria.
The Group’s activities are subject to extensive laws and regulations in the jurisdictions in which it does business and maintains properties. Compliance with environmental laws and regulations may require Bayer to remove or mitigate the effects of the disposal or release of chemical substances at various sites. Under some of these laws and regulations, a current or previous owner or operator of property may be held liable for the costs of removal or remediation of hazardous substances on, under, or in its property, without regard to whether the owner or operator knew of, or caused the presence of the contaminants, and regardless of whether the practices that resulted in the contamination were legal at the time they occurred. As many of the production sites have an extended history of industrial use, it is impossible to predict precisely what effect these laws and regulations will have on the Group in the future.
As is typical for companies involved in the chemical and related industries, soil and groundwater contamination has occurred in the past at some of the sites, and might occur or be discovered at other sites. Group companies are subject to claims brought by United States Federal or State regulatory agencies and other private entities and individuals regarding the remediation of sites that they own, formerly owned or operated, where materials were produced specifically for them by contract manufacturers or where waste from their operations was treated, stored or disposed of.
In particular, a potential liability exists under the U.S. Federal Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as “Superfund”, the U.S. Resource Conservation and Recovery Act and related state laws for investigation and remediation costs at a number of sites. At most of these sites, numerous companies, including Bayer, have been notified that the U.S. Environmental Protection Agency, state governing body or private individuals consider such companies to be potentially responsible parties under Superfund or related laws. At other sites, Bayer is the sole responsible party. The proceedings relating to these sites are in various stages. In most cases remediation measures have already been initiated.
Provisions for environmental remediation as of December 31, 2006 amounted to €262 million (2005: €279 million). The material components of the provisions for environmental remediation costs primarily relate to land reclamation, rehabilitation of contaminated sites, recultivation of landfills, and redevelopment and water protection measures. The provisions for environmental remediation costs are recorded on a discounted basis where environmental assessments or clean-ups are probable, the costs can be reasonably estimated and no future economic benefit is expected to arise from these measures. The above amount of provisions represents anticipated future remediation payments totaling €345 million (2005: €363 million), discounted at risk-free average rates of between 3.0 percent and 10.0 percent.
These discounted amounts will be paid out over the period of remediation of the relevant sites, which is expected to be 40 years. Further information on the inherent difficulties involved in accurately estimating environmental obligations is provided in Note [5].
As is typical for companies involved in the chemical and related industries, soil and groundwater contamination has occurred in the past at some of the sites, and might occur or be discovered at other sites. Group companies are subject to claims brought by United States Federal or State regulatory agencies and other private entities and individuals regarding the remediation of sites that they own, formerly owned or operated, where materials were produced specifically for them by contract manufacturers or where waste from their operations was treated, stored or disposed of.
In particular, a potential liability exists under the U.S. Federal Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as “Superfund”, the U.S. Resource Conservation and Recovery Act and related state laws for investigation and remediation costs at a number of sites. At most of these sites, numerous companies, including Bayer, have been notified that the U.S. Environmental Protection Agency, state governing body or private individuals consider such companies to be potentially responsible parties under Superfund or related laws. At other sites, Bayer is the sole responsible party. The proceedings relating to these sites are in various stages. In most cases remediation measures have already been initiated.
Provisions for environmental remediation as of December 31, 2006 amounted to €262 million (2005: €279 million). The material components of the provisions for environmental remediation costs primarily relate to land reclamation, rehabilitation of contaminated sites, recultivation of landfills, and redevelopment and water protection measures. The provisions for environmental remediation costs are recorded on a discounted basis where environmental assessments or clean-ups are probable, the costs can be reasonably estimated and no future economic benefit is expected to arise from these measures. The above amount of provisions represents anticipated future remediation payments totaling €345 million (2005: €363 million), discounted at risk-free average rates of between 3.0 percent and 10.0 percent.
These discounted amounts will be paid out over the period of remediation of the relevant sites, which is expected to be 40 years. Further information on the inherent difficulties involved in accurately estimating environmental obligations is provided in Note [5].
Restructuring charges of €408 million were incurred in 2006 for closures of facilities and relocation of business activities. At year end, provisions of €196 million existed that are expected to be utilized as the respective restructuring measures are implemented. The total charges include €149 million in severance payments, a total of €87 million in accelerated amortization/depreciation and write-downs of intangible assets, property, plant and equipment, and €172 million in other expenses. Most of the charges taken for severance payments and other expenses in 2006 will lead to disbursements in 2007.
Bayer CropScience introduced a restructuring program, named the “NEW” project, in August 2006 to optimize cost structures and raise efficiency. Restructuring expenses of €74 million are recognized for this in 2006, including €19 million in write-downs and €22 million in personnel-related expenses. As of December 31, 2006 provisions for this program amounted to €38 million. The new project mainly affected North America, Japan and Germany, especially through capacity reductions at the production sites in Kansas City, Missouri, and Institute, West Virginia, in the United States and concentration of global research activities in the United States and Japan. In Germany, production plants were closed at the Dormagen and Griesheim sites.
During 2006 the Bayer HealthCare subgroup carried out the decision taken in the third quarter of 2005 to relocate the headquarters of its Diabetes Care Division from Elkhart, Indiana, U.S.A. to Tarrytown, New York, U.S.A. This resulted in total current expenditures of €14 million in 2006, comprising moving costs, refurbishments and expenses for the transformation of the global sales, marketing and procurement structures. In 2005, a write-off of €12 million was taken for the buildings in Elkhart used by this division, and provisions of €7 million were recorded for severance payments to employees.
In connection with the closure of the Bayer MaterialScience subgroup’s diphenylmethane diisocyanate production facility in New Martinsville, West Virginia, U.S.A., a write-down of €9 million was recorded for assets that are no longer required. Further expenses of €6 million were recognized for severance payments and other shutdown expenses.
The human resources function was reorganized effective October 2006 as part of our drive to make administrative functions more competitive. Expenses of €27 million were recognized in 2006 for the realignment of the human resources departments at Group companies and the establishment of an HR Shared Center Europe in Leverkusen.
Alongside this, the acquisition of Schering AG, Berlin, Germany, necessitates extensive restructuring measures in connection with the integration process, both now and in the future, in order to consolidate the Bayer Group’s pharmaceuticals activities and harmonize the operation of this business in the interests of the entire Group. This includes amalgamating all key functions, especially research and development, procurement, production, sales, marketing and administration. The principal integration activities are as follows:
The global research and development activities previously performed by Bayer Schering Pharma AG, Germany* and Bayer’s HealthCare subgroup at various sites are to be consolidated at the Berlin and Wuppertal sites in Germany and at Berkeley, California, in the United States.
Moreover, in most countries the local subsidiaries of Bayer Schering Pharma AG, Germany* will be transferred to the existing Bayer organizations. The field forces and marketing functions of these Bayer Schering Pharma AG, Germany* subsidiaries and the Pharmaceuticals division of Bayer HealthCare will be merged to form local Bayer Schering Pharma AG, Germany* divisions. Detailed plans are currently being drawn up and are dependent on the progress of the integration process.
The administrative structures of Bayer Schering Pharma AG, Germany* will be merged into the global structures of the Bayer Group. Following its integration into the Bayer Group, Bayer Schering Pharma AG, Germany* – in common with other Group companies – will utilize the central functions provided by the corporate center of Bayer AG in its role as holding company for the Group.
Total restructuring expenses for Schering amounted to €179 million in 2006. Of this, €109 million comprised provisions for measures to be taken as part of the restructuring. The restructuring provisions recorded in connection with the integration of the Schering group include severance payments of €85 million and other charges of €24 million. In addition, the restructuring measures for Schering in 2006 resulted in €19 million in accelerated amortization/depreciation and write-downs of intangible assets, property, plant and equipment.
We anticipate further restructuring expenses in the future as the integration process proceeds and the related projects are decided upon and implemented. These costs cannot be quantified accurately at present since they depend on detailed decisions that have not yet been made. A major part of the expenses for these projects is likely to be incurred in 2007. At present we assume possible future restructuring expenses of up to €1 billion for the restructuring of the acquired Schering business, but that could increase or decrease depending of future decisions. Restructuring provisions changed as follows during the year:
Bayer CropScience introduced a restructuring program, named the “NEW” project, in August 2006 to optimize cost structures and raise efficiency. Restructuring expenses of €74 million are recognized for this in 2006, including €19 million in write-downs and €22 million in personnel-related expenses. As of December 31, 2006 provisions for this program amounted to €38 million. The new project mainly affected North America, Japan and Germany, especially through capacity reductions at the production sites in Kansas City, Missouri, and Institute, West Virginia, in the United States and concentration of global research activities in the United States and Japan. In Germany, production plants were closed at the Dormagen and Griesheim sites.
During 2006 the Bayer HealthCare subgroup carried out the decision taken in the third quarter of 2005 to relocate the headquarters of its Diabetes Care Division from Elkhart, Indiana, U.S.A. to Tarrytown, New York, U.S.A. This resulted in total current expenditures of €14 million in 2006, comprising moving costs, refurbishments and expenses for the transformation of the global sales, marketing and procurement structures. In 2005, a write-off of €12 million was taken for the buildings in Elkhart used by this division, and provisions of €7 million were recorded for severance payments to employees.
In connection with the closure of the Bayer MaterialScience subgroup’s diphenylmethane diisocyanate production facility in New Martinsville, West Virginia, U.S.A., a write-down of €9 million was recorded for assets that are no longer required. Further expenses of €6 million were recognized for severance payments and other shutdown expenses.
The human resources function was reorganized effective October 2006 as part of our drive to make administrative functions more competitive. Expenses of €27 million were recognized in 2006 for the realignment of the human resources departments at Group companies and the establishment of an HR Shared Center Europe in Leverkusen.
Alongside this, the acquisition of Schering AG, Berlin, Germany, necessitates extensive restructuring measures in connection with the integration process, both now and in the future, in order to consolidate the Bayer Group’s pharmaceuticals activities and harmonize the operation of this business in the interests of the entire Group. This includes amalgamating all key functions, especially research and development, procurement, production, sales, marketing and administration. The principal integration activities are as follows:
The global research and development activities previously performed by Bayer Schering Pharma AG, Germany* and Bayer’s HealthCare subgroup at various sites are to be consolidated at the Berlin and Wuppertal sites in Germany and at Berkeley, California, in the United States.
Moreover, in most countries the local subsidiaries of Bayer Schering Pharma AG, Germany* will be transferred to the existing Bayer organizations. The field forces and marketing functions of these Bayer Schering Pharma AG, Germany* subsidiaries and the Pharmaceuticals division of Bayer HealthCare will be merged to form local Bayer Schering Pharma AG, Germany* divisions. Detailed plans are currently being drawn up and are dependent on the progress of the integration process.
The administrative structures of Bayer Schering Pharma AG, Germany* will be merged into the global structures of the Bayer Group. Following its integration into the Bayer Group, Bayer Schering Pharma AG, Germany* – in common with other Group companies – will utilize the central functions provided by the corporate center of Bayer AG in its role as holding company for the Group.
Total restructuring expenses for Schering amounted to €179 million in 2006. Of this, €109 million comprised provisions for measures to be taken as part of the restructuring. The restructuring provisions recorded in connection with the integration of the Schering group include severance payments of €85 million and other charges of €24 million. In addition, the restructuring measures for Schering in 2006 resulted in €19 million in accelerated amortization/depreciation and write-downs of intangible assets, property, plant and equipment.
We anticipate further restructuring expenses in the future as the integration process proceeds and the related projects are decided upon and implemented. These costs cannot be quantified accurately at present since they depend on detailed decisions that have not yet been made. A major part of the expenses for these projects is likely to be incurred in 2007. At present we assume possible future restructuring expenses of up to €1 billion for the restructuring of the acquired Schering business, but that could increase or decrease depending of future decisions. Restructuring provisions changed as follows during the year:
| Severance payments | Other expenses | Total | |
| € million | |||
| Balance as of January 1, 2006 | 41 | 51 | 92 |
| Changes in the scope of consolidation | 11 | 0 | 11 |
| Additions | 124 | 48 | 172 |
| Utilization | (29) | (26) | (55) |
| Reversal | (4) | (5) | (9) |
| Reclassifications to current liabilities | (6) | (1) | (7) |
| Exchange differences | (1) | (7) | (8) |
| Balance as of December 31, 2006 | 136 | 60 | 196 |
The other costs are mainly demolition expenses and other charges related to the abandonment of production facilities.
*
The names "Bayer Schering Pharma" or "Schering" as used in this publication always refer to Bayer Schering Pharma AG, Berlin, Germany, or its predecessor, Schering AG, Berlin, Germany, respectively.
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