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(14) Other non-current and current provisions

On the closing date, the LANXESS Group had other current provisions of €440 million (2011: €446 million) and other non-current provisions of €304 million (2011: €331 million). The maturity structure of other provisions can be seen from the table:

Other Provisions
                 
€ million Dec. 31, 2011 Dec. 31, 2012
                 
  Up to 1 year 1–5 years Over 5 years Total Up to 1 year 1–5 years Over 5 years Total
                 
Personnel 172 85 30 287 218 82 32 332
Environmental protection 23 34 77 134 13 18 77 108
Trade-related commitments 115 11 126 74 5 79
Restructuring 23 31 6 60 20 22 3 45
Miscellaneous 113 45 12 170 115 55 10 180
  446 206 125 777 440 182 122 744
 

Overall, other provisions declined from €777 million to €744 million in fiscal 2012. While personnel-related provisions and miscellaneous provisions increased, provisions for environmental protection, trade-related commitments and restructuring decreased. Provisions changed as follows in 2012:

Changes in Other Provisions in 2012
               
€ million Jan. 1, 2012 Allocations Interest effect Utilization Reversals Exchange differences Dec. 31, 2012
               
Personnel 287 211 3 (143) (19) (7) 332
Environmental protection 134 5 3 (14) (19) (1) 108
Trade-related commitments 126 45 0 (44) (47) (1) 79
Restructuring 60 12 0 (17) (10) 0 45
Miscellaneous 170 81 0 (16) (47) (8) 180
  777 354 6 (234) (142) (17) 744
 

Personnel-related provisions

Personnel-related provisions mainly relate to annual performance-related compensation and multi-year compensation programs.

Multi-year compensation programs

Stock-based compensation

LANXESS AG offers a stock-based compensation program to members of the Management Board and certain other managers. The program provides for cash settlement. Following the granting of rights under two consecutive three-year Long Term Incentive Plans (LTIP) launched in 2005, a new Long Term Stock Performance Plan (LTSP) was introduced in 2010 under which rights are granted for the years 2010-2013. The date of issue of the rights granted and still outstanding and the rights from the outstanding tranches is February 1 each year. Participation in the programs is conditional upon each manager making a personal investment in LANXESS stock, depending on his/her base salary. Awards are based on the performance of LANXESS stock relative to the Dow Jones STOXX 600 ChemicalsSM Index.

LTIP 2005 – 2007

If LANXESS stock performs in line with this index, a payment of €0.75 per right is made. For each percentage point up to 10% by which the stock outperforms the index, €0.025 is paid in addition. For each percentage point above 10%, €0.05 is paid in addition. The maximum possible payment per right, however, is €1.50.

LTIP 2008 – 2010

If LANXESS stock outperforms the index, a payment of at least €0.75 per right is made. For each percentage point up to 5% by which the stock outperforms the index, €0.05 is paid in addition. For each percentage point above 5%, €0.06667 is paid in addition. The maximum possible payment per right, however, is €2.00.

LTSP 2010 – 2013

If LANXESS stock outperforms the index, a payment of at least €0.75 per right is made. For each percentage point by which the stock outperforms the index, €0.125 is paid in addition. The maximum possible payment per right, however, is €2.00.

Obligations arising from the stock-based compensation are valued on the basis of the following principal parameters:

Principal Parameters as of Dec. 31
     
% 2011 2012
     
Expected share price volatility 41.0 41.0
Expected dividend payment 2.0 2.0
Expected index volatility 23.0 23.0
Correlation between LANXESS stock and the index 81.0 82.0
Risk-free interest rate 0.4 0.0
 

n view of the general reduction in interest rates, the risk-free interest rate was 0.02% in 2012 (2011: 0.40%).

The expected volatilities are based on the historical volatility of LANXESS stock and the Dow Jones STOXX 600 ChemicalsSM Index in the past three years.

The following table provides information on the tranches outstanding as of December 31, 2012:

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LTIP and LTSP
               
  LTIP 2005–2007 LTIP 2008–2010 LTIP 2010–2013
               
  Tranche 2007 Tranche 2008 Tranche 2009 Tranche 2010 Tranche 2010 Tranche 2011 Tranche 2012
               
Duration 5 years 6 years 6 years 6 years 7 years 7 years 7 years
Vesting period 3 years 3 years 3 years 3 years 4 years 4 years 4 years
Holding period for personal investment shares Jan. 31, 2010 Feb. 1, 2013 Feb. 1, 2013 Feb. 1, 2013 Jan. 31, 2017 Jan. 31, 2017 Jan. 31, 2017
Initial LANXESS share price  €40.79  €24.03  €12.86  €27.28  €27.28  €55.60  €44.54
Initial Dow Jones STOXX 600 ChemicalsSM index price 431.50 points 465.97 points 317.39 points 432.44 points 432.44 points 564.17 points 533.45 points
Fair value per right as of December 31, 2011 €0.04 €2.00 €2.00 €1.20 €1.04 €0.27
Fair value per right as of December 31, 2012 €2.00 €2.00 €1.81 €0.55 €0.71
Change in number of outstanding rights              
Outstanding rights as of January 1, 2012 362,205 538,500 11,123,992 12,288,645 10,706,954 11,706,098 0
Rights granted 12,631,238
Rights exercised 362,205 538,500 10,976,291
Rights compensated 20,907 207,451 291,553 251,582 146,431
Rights forfeited 228,732 182,519 241,064 208,741
Outstanding rights as of December 31, 2012 0 0 126,794 11,852,462 10,232,882 11,213,452 12,276,066
 

LANXESS shares were trading at €66.27 at year-end 2012, and the reference index stood at 662.98 points.

The net expense in 2012 totaled €27 million (2011: €13 million). While rights from the 2007 tranche were exercised at an average value of €0.53, the rights from the 2008 and 2009 tranches were exercised at the maximum value. As of December 31, 2012 a provision of €41 million (2011: €38 million) had been established. Of this amount, the intrinsic value of rights exercisable as of the closing date accounted for €0 million (2011: €1 million).

LANXESS stock plan

This is an employee stock plan under which LANXESS staff may purchase shares in the company at a 50% discount. Employees acquired a total of 165,446 LANXESS shares under this program in 2012 (2011: 118,445 shares). These shares must be retained for at least three years. Since there are no further conditions attached to this stock plan, the discount was expensed immediately. Expense of €5 million was recognized for the stock plan in 2012 (2011: €3 million). Participation in this program does not confer any right to similar benefits in the future.

Environmental provisions

The Group’s activities are subject to extensive legal requirements in the jurisdictions in which it does business. Compliance with environmental laws may require LANXESS to remove or mitigate the effects of the release or disposal of chemical substances at various sites. Under some of these laws, a current or previous site owner or plant operator may be held liable for the costs of removing hazardous substances from the soil or groundwater on its property or neighboring areas, or rendering them harmless, without regard to whether the owner or operator knew of, or caused the presence of the contaminants, and often regardless of whether the practices that resulted in the contamination were legal at the time they occurred. As many of LANXESS’s production sites have a long history of industrial use, it is not always possible to accurately predict the effects such situations may have on the LANXESS Group in the future.

Since LANXESS is a chemical company, the possibility therefore cannot be excluded that soil or groundwater contamination may have occurred at its locations in the past. Claims in this regard could be brought by government agencies, private organizations or individuals. Such claims would then relate to the remediation of sites or other land that the LANXESS Group acquired from the Bayer Group or from third parties, where materials were produced specifically for third parties under contract manufacturing agreements or where waste from production facilities operated by the LANXESS Group was treated, stored or disposed of.

Potential liabilities exist with respect to various sites under legislation such as the U.S. environment law commonly known as “Superfund.” At locations in the U.S., numerous companies, including LANXESS, have been notified that the U.S. authorities or private individuals consider such companies to be potentially responsible parties under Superfund or related laws. At some sites, LANXESS may be the sole responsible party. Remediation measures have already been initiated at most of the sites concerned.

The existing provisions for environmental remediation costs relate primarily to the rehabilitation of contaminated sites, recultivation of landfills, and redevelopment and water protection measures. The provisions for environmental remediation costs are stated at the present value of the expected commitments 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. Costs are estimated based on significant factors such as previous experience in similar cases, environmental assessments, current cost levels and new circumstances affecting costs, our understanding of current environmental laws and regulations, the number of other potentially responsible parties at each site and the identity and financial position of such parties in light of the joint and several nature of the liability, and the remediation methods likely to be employed.

It is difficult to estimate the future costs of environmental protection and remediation because of many uncertainties concerning the legal requirements and the information available about conditions in the various countries and at specific sites. Subject to these factors, but taking into consideration experience gained to date with matters of a similar nature, we believe our provisions to be adequate based upon currently available information. However, the possibility that additional costs could be incurred beyond the amounts accrued cannot be excluded. LANXESS nevertheless estimates that such additional costs, should they occur, would not materially impact the Group’s financial position or results of operations.

Trade-related commitments

Provisions for trade-related commitments mainly comprise those for rebates, customer discounts, product returns, outstanding invoices, impending losses and onerous contracts.

Provisions for restructuring

Provisions for restructuring totaled €45 million on December 31, 2012 (2011: €60 million). Of this amount, €27 million (2011: €45 million) comprised provisions for severance payments and other personnel expenses, and €18 million (2011: €15 million) comprised provisions for demolition and other expenses.

Sundry provisions

The sundry provisions contain provisions for guarantees and product liability, and provisions for other liabilities. Provisions for waste management that are not included in environmental provisions or provisions for legal risks that are not included in a different category within other provisions are also included in sundry provisions.

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