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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-16167
MONSANTO COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 43-1878297
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 NORTH LINDBERGH BLVD., ST. LOUIS, MO 63167
(Address of principal executive offices)
(Zip Code)
(314) 694-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---------- -----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class August 9, 2002
----- --------------
Common Stock, $0.01 par value 261,265,808 shares
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The Statement of Consolidated Income (Loss) of Monsanto Company and
subsidiaries for the three months and six months ended June 30, 2002, and June
30, 2001, the Condensed Statement of Consolidated Financial Position as of June
30, 2002, and Dec. 31, 2001, the Condensed Statement of Consolidated Cash Flows
for the three months and six months ended June 30, 2002, and June 30, 2001, and
related Notes to Consolidated Financial Statements follow. Unless otherwise
indicated, "Monsanto," "Monsanto Company" and "the company" are used
interchangeably to refer to Monsanto Company or to Monsanto Company and
consolidated subsidiaries, as appropriate to the context. With respect to the
time period prior to the separation of Monsanto's businesses from those of
Pharmacia Corporation (Pharmacia) on Sept. 1, 2000, references to "Monsanto" or
"the company" also refer to the agricultural division of Pharmacia. See Note 1 -
Background and Basis of Presentation - of Notes to Consolidated Financial
Statements for further details. Unless otherwise indicated, "earnings per share"
and "per share" mean diluted earnings per share. In tables, all dollars are in
millions, except share and per share amounts.
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME (LOSS)
(Dollars in millions, except per share amounts)
Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $ 1,553 $ 2,011 $ 2,774 $ 3,317
Cost of Goods Sold 735 822 1,352 1,521
-------- -------- ------- -------
Gross Profit 818 1,189 1,422 1,796
Operating Expenses:
Selling, general and administrative expenses 237 315 532 622
Bad debt expense 164 3 167 6
Research and development expenses 137 136 256 270
Amortization and adjustments of goodwill -- 30 -- 61
Restructuring charges - net 57 31 57 52
-------- -------- -------- -------
Total Operating Expenses 595 515 1,012 1,011
Income From Operations 223 674 410 785
Interest Expense (20) (34) (38) (57)
Interest Income 5 9 9 13
Other Income (Expense) - net 7 (28) (36) (32)
-------- -------- -------- -------
Income Before Income Taxes and Cumulative Effect of Accounting
Change 215 621 345 709
Income tax provision (68) (232) (112) (265)
-------- -------- -------- -------
Income Before Cumulative Effect of Accounting Change 147 389 233 444
Cumulative effect of a change in accounting principle -
net of tax benefit of $162 -- -- (1,822) --
-------- -------- -------- -------
Net Income (Loss) $ 147 $ 389 $(1,589) $ 444
======== ======== ======== =======
Basic Earnings (Loss) per Share:
Income before cumulative effect of accounting change $ 0.56 $ 1.51 $ 0.90 $ 1.72
Cumulative effect of a change in accounting principle -- -- (7.01) --
-------- -------- -------- -------
Net Income (Loss) $ 0.56 $ 1.51 $ (6.11) $ 1.72
======== ======== ======== =======
Diluted Earnings (Loss) per Share:
Income before cumulative effect of accounting change $ 0.56 $ 1.47 $ 0.88 $ 1.68
Cumulative effect of a change in accounting principle -- -- (6.90) --
-------- -------- -------- -------
Net Income (Loss) $ 0.56 $ 1.47 $ (6.02) $ 1.68
======== ======== ======== =======
Weighted Average Shares Outstanding:
Basic 261.2 258.1 260.0 258.1
Diluted 264.3 263.5 263.8 263.5
Dividends per Share $ 0.12 $ 0.12 $ 0.24 $ 0.24
See the accompanying notes to consolidated financial statements.
2
MONSANTO COMPANY AND SUBSIDIARIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Dollars in millions, except share amounts)
Unaudited
June 30, Dec. 31,
2002 2001
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 277 $ 307
Trade receivables, net of allowances of $318 in 2002 and $177 in 2001 2,913 2,307
Miscellaneous receivables 485 449
Related-party loan receivable 16 30
Related-party receivable 13 44
Deferred tax assets 253 251
Inventories 1,239 1,357
Other current assets 43 52
-------- ---------
Total Current Assets 5,239 4,797
Property, Plant and Equipment - net 2,477 2,627
Goodwill - net 758 2,748
Other Intangible Assets - net 670 691
Other Assets 700 566
-------- ---------
Total Assets $ 9,844 $ 11,429
======== =========
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Short-term debt $ 1,027 $ 563
Related-party short-term loan payable 194 254
Accounts payable 339 457
Related-party payable 19 87
Accrued liabilities 888 1,016
-------- ---------
Total Current Liabilities 2,467 2,377
Long-Term Debt 881 893
Postretirement and Other Liabilities 783 676
Shareowners' Equity:
Common stock (Authorized: 1,500,000,000 shares, par value $0.01)
Issued: 261,265,808 shares in 2002 and 258,112,408 in 2001 3 3
Additional contributed capital 8,055 8,056
Retained earnings (deficit) (1,478) 173
Accumulated other comprehensive loss (837) (716)
Reserve for ESOP debt retirement (30) (33)
-------- ---------
Total Shareowners' Equity 5,713 7,483
-------- ---------
Total Liabilities and Shareowners' Equity $ 9,844 $ 11,429
======== =========
See the accompanying notes to consolidated financial statements.
3
MONSANTO COMPANY AND SUBSIDIARIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
Unaudited
Six Months Ended
June 30,
------------------------
2002 2001
Total Cash Required by Operations $(347) $(384)
------ -----
Cash Flows Provided (Required) by Investing Activities:
Property, plant and equipment purchases (101) (205)
Acquisitions and investments (60) (80)
Investment and property disposal proceeds 63 --
Loans with related-party 14 38
----- -----
Net Cash Flows Required by Investing Activities (84) (247)
----- -----
Cash Flows Provided (Required) by Financing Activities:
Net change in short-term financing 488 700
Loans from related-party (59) 148
Long-term debt proceeds 41 --
Long-term debt reductions (70) (58)
Stock option exercises 63 --
Dividend payments (62) (54)
----- -----
Cash Flows Provided by Financing Activities 401 736
----- -----
Net Increase (Decrease) in Cash and Cash Equivalents (30) 105
Cash and Cash Equivalents Beginning of Year 307 131
----- -----
Cash and Cash Equivalents at End of Period $ 277 $ 236
===== =====
The effect of exchange rate changes on cash and cash equivalents was not
material. Cash payments for interest and taxes for the six months ended June 30,
2002, were $38 million and $27 million, respectively. Cash payments for interest
and taxes for the six months ended June 30, 2001, were $54 million and $93
million, respectively.
Noncash transactions with Pharmacia during the six months ended June 30, 2002,
included approximately $75 million, primarily associated with the assumed net
pension liabilities and related deferred tax assets. (See Note 12 -
Related-Party Transactions - for further details.) Noncash transactions with
Pharmacia during the six months ended June 30, 2001 included approximately $20
million.
In connection with the acquisition of biotechnology intellectual property assets
from Ceres, Inc. (Ceres) the company recorded intangible assets and the related
obligations, in excess of amounts paid, of $35 million in noncash transactions
in the second quarter of 2002. (See Note 5 - Goodwill and Other Intangible
Assets - for further details.)
See the accompanying notes to consolidated financial statements.
4
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
Note 1 - Basis of Presentation
Monsanto Company and its subsidiaries is a global provider of
technology-based solutions and agricultural products for growers and
downstream customers, such as grain processors and food companies. Monsanto
produces leading seed brands, including DEKALB and ASGROW, and provides its
seed partners with biotechnology traits for insect protection and herbicide
tolerance. The company's herbicides, seeds, and related genetic trait
products can be combined to provide growers with integrated solutions that
help them produce higher-yield crops, while controlling weeds, insects and
diseases more efficiently and cost effectively. The company also provides
lawn and garden herbicide products for the residential market and animal
agricultural products focused on improving dairy cow productivity and swine
genetics.
Monsanto manages its business in two segments: Agricultural
Productivity, and Seeds and Genomics. The Agricultural Productivity segment
consists of the crop protection products, animal agriculture, lawn and
garden herbicide products, and environmental technologies businesses. The
Seeds and Genomics segment consists of the global seeds and related traits
businesses, and genetic technology platforms.
In October 2000, Monsanto sold 38,033,000 shares of its common stock
at $20 per share in an initial public offering (IPO). Subsequent to the
IPO, Pharmacia owned 220 million shares of common stock, representing 84.2
percent ownership of Monsanto as of June 30, 2002. On Aug. 13, 2002,
Pharmacia released its 220 million shares of Monsanto's common stock to
Pharmacia's distribution agent for the purpose of completing a spinoff of
Monsanto, via a tax-free dividend to Pharmacia's shareowners. The
distribution is based upon a ratio of approximately 0.17 Monsanto shares
for each share of Pharmacia common stock for which a Pharmacia shareowner
was the holder of record at the close of business on July 29, 2002.
The accompanying consolidated financial statements have not been
audited, but have been prepared in conformity with accounting principles
generally accepted in the United States for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In
the opinion of management, these unaudited consolidated financial
statements contain all adjustments necessary to present fairly the
financial position, results of operations and cash flows for the interim
periods reported. This quarterly report on Form 10-Q should be read in
conjunction with the audited consolidated financial statements as presented
in Monsanto's annual report on Form 10-K for the year ended Dec. 31, 2001,
and the quarterly report on Form 10-Q for the period ended March 31, 2002.
Financial information for the first six months of 2002 should not be
annualized. Monsanto has historically generated the majority of its sales
during the first half of the year, primarily because of the timing of the
planting and growing season in the Northern Hemisphere.
Note 2 - New Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB)
simultaneously approved SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations
initiated after June 30, 2001, thereby eliminating the pooling-of-interests
method. SFAS No. 141 also provides broader criteria for identifying which
types of acquired intangible assets must be recognized separately from
goodwill and those which must be included in goodwill. Monsanto adopted the
provisions of SFAS No. 141 on Jan. 1, 2002, with the exception of the
immediate requirement to use the purchase method of accounting for all
business combinations initiated after June 30, 2001. SFAS No. 141 also
required the company to evaluate its existing goodwill and other intangible
assets and to make any reclassifications necessary to conform with the new
separation requirements at the date of adoption.
SFAS No. 142 changes the accounting for goodwill from an amortization
method to an impairment-only method. Under SFAS No. 142, all goodwill
amortization ceased effective Jan. 1, 2002. Monsanto's goodwill was tested
for impairment in conjunction with a transitional goodwill impairment test
performed in 2002 and will be tested at least annually thereafter. Under
the new rules, Monsanto's recorded goodwill is tested for impairment at a
level of reporting referred to as reporting units, which are components of
the Agricultural Productivity and Seeds and Genomics reporting segments.
See Note 5 - Goodwill and Other Intangible Assets - for further discussion
of the transitional impairment test and additional details on Monsanto's
goodwill and other intangible assets.
5
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 addresses financial accounting for and
reporting of costs and obligations associated with the retirement of
tangible long-lived assets. This statement will become effective for
Monsanto on Jan. 1, 2003. Monsanto has not yet determined the effect
adoption of this standard will have on its consolidated financial position
or its results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which replaces SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. SFAS No. 144, which was effective for Monsanto on
Jan. 1, 2002, establishes an accounting model for long-lived assets to be
disposed of by sale. It applies to all long-lived assets and discontinued
operations. The adoption of SFAS No. 144 did not have a material effect on
Monsanto's consolidated financial position or results of operations.
In April 2002, the FASB approved for issuance SFAS No. 145, Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. SFAS No. 145 rescinds, updates, clarifies and
simplifies existing accounting pronouncements. Among other things, SFAS No.
145 rescinds SFAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. Under SFAS No. 145,
the criteria in Accounting Principles Board (APB) No. 30 will now be used
to classify those gains and losses. The adoption of SFAS No. 145 resulted
in a reclassification of the extraordinary loss related to the
extinguishment of Employee Stock Ownership (ESOP) debt recorded in the
second quarter of 2001 ($2 million, net of taxes), to increase other
expense - net ($4 million) and to decrease the income tax provision ($2
million). The adoption of the remaining provisions of SFAS No. 145 did not
have a material effect on Monsanto's consolidated financial position or
results of operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 replaces Emerging
Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment
to an exit or disposal plan. This statement will become effective for exit
or disposal activities initiated after Dec. 31, 2002. Monsanto has not yet
determined the effect adoption of this standard will have on its
consolidated financial position or its results of operations.
Note 3 - Customer Financing Program
In the second quarter of 2002, Monsanto established a new $500 million
revolving financing program for selected customers through a third-party
specialty finance company. Under the financing program, Monsanto originates
customer loans on behalf of the lender, a special purpose entity (SPE),
pursuant to Monsanto's credit and other underwriting guidelines approved by
the lender. Monsanto services the loans and provides a first loss guarantee
of up to $100 million. Following origination, the lender transfers the
loans to multi-seller commercial paper conduits through a non-consolidated
qualifying special purpose entity (QSPE) in a transaction accounted for as
a sale in accordance with SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities.
Monsanto has no ownership interest in the lender, the QSPE or the
loans. However, because Monsanto substantively originates through the SPE
(that it consolidates) and partially guarantees and services the loans,
Monsanto accounts for the program as the originator of the loans and the
transferor selling the loans to the QSPE.
Monsanto records its guarantee liability at a value that approximates
fair value (except that it does not discount credit losses because of the
short term of the loans), primarily related to expected future credit
losses. Monsanto does not recognize any servicing asset or liability
because the servicing fee represents adequate compensation for the
servicing activities. Discounts on the sale of the customer loans, and
servicing revenues collected and earned were not significant for the
quarter ended June 30, 2002.
6
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
As of June 30, 2002, customer loans outstanding that were sold through
the financing program totaled $63 million. Loans are considered delinquent
when payments are 31 days past due. As of June 30, 2002, no loans sold
through this financing program were delinquent. As of June 30, 2002,
Monsanto's recorded guarantee liability was less than $1 million, based on
the company's historical collection experience with these customers and the
company's current assessment of credit exposure. Adverse changes in the
actual loss rate would increase the liability.
Note 4 - Inventories
Components of inventories as of June 30, 2002, and Dec. 31, 2001, were
as follows:
June 30, Dec. 31,
2002 2001
--------------- ---------------
Finished Goods $ 579 $ 700
Goods In Process 349 357
Raw Materials and Supplies 340 329
------- -------
Inventories, at FIFO Cost 1,268 1,386
Excess of FIFO over LIFO Cost (29) (29)
------- -------
Total $ 1,239 $ 1,357
======= =======
Note 5 - Goodwill and Other Intangible Assets
As described in Note 2 - New Accounting Standards - Monsanto adopted
SFAS No. 141 and SFAS No. 142 effective Jan. 1, 2002. The company has
completed the SFAS No. 142 transitional goodwill impairment test, which
resulted in a $2.0 billion pretax impairment charge. The first step of the
transitional test, which compared the fair value of Monsanto's reporting
units to their net book values (including goodwill), identified potential
impairments in two reporting units. The second step of the transitional
impairment test, which was completed in the second quarter, determined the
$2.0 billion pretax ($1.8 billion aftertax) impairment. The resulting
impairment charge was specific to the corn and wheat reporting units,
relating to goodwill that resulted primarily from Monsanto's 1998 and, to a
lesser extent, 1997 seed company acquisitions. Unanticipated delays in
biotechnology acceptance and regulatory approvals, and a change in
valuation method (from an undiscounted cash flow methodology under APB
Opinion No. 17, Intangible Assets, to a discounted cash flow methodology
required by SFAS No. 142) were the primary factors leading to the
impairment. As required by SFAS No. 142, the transitional impairment charge
was recorded as an accounting change in accordance with APB Opinion No. 20,
Accounting Changes, effective Jan. 1, 2002. The impairment charge had no
effect on Monsanto's liquidity or cash flow.
Changes in the net carrying amount of goodwill for the six months
ended June 30, 2002, by segment, are as follows:
Agricultural Seeds and
Productivity Genomics Total
------------ --------- -----
Balance as of Jan. 1, 2002 $74 $ 2,669 $ 2,743
Transitional impairment charge -- (1,983) (1,983)
Effect of foreign currency translation adjustments -- (3) (3)
Additions 1 -- 1
--- ------- -------
Balance as of June 30, 2002 $75 $ 683 $ 758
=== ======= =======
7
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Information regarding the company's other intangible assets is as
follows:
As of June 30, 2002 As of Jan. 1, 2002
------------------------------------ -------------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
-------- ------------ --- -------- ------------ ---
Germplasm $ 601 $(286) $315 $ 602 $(251) $351
Acquired biotechnology
intellectual property 363 (119) 244 320 (101) 219
Trademarks 117 (23) 94 115 (19) 96
Other 46 (29) 17 53 (34) 19
--------- ------ ---- ------ ----- ----
Total $1,127 $(457) $670 $1,090 $(405) $685
====== ====== ==== ====== ===== ====
The acquired biotechnology intellectual property assets represent
acquisitions and licenses, whereby Monsanto has acquired the rights to
various research and discovery technologies encompassing enabling
processes, data libraries and patents necessary to support the integrated
genomics and biotechnology platforms. The increase in acquired
biotechnology intellectual property from Jan. 1, 2002, to June 30, 2002,
relates primarily to the previously announced collaboration with Ceres.
This product discovery and development collaboration is focused on applying
genomics technologies to provide improvements in and to accelerate the time
to commercialization of certain agricultural crops. Under the
collaboration, Monsanto has acquired rights to certain of Ceres' existing
technologies in exchange for payments totaling $40 million over the next
five years. This existing technology has a weighted-average useful life of
10 years. Ceres will also receive additional payments subject to meeting
specified objectives for developing additional related technology, as part
of its continuing commitment to genomics-based product discovery. Monsanto
will also fund a jointly implemented research program and has made a
minority equity investment in Ceres. Total payments to Ceres under the
collaboration (subject to performance by Ceres) are expected to approximate
$137 million over the next five years, plus potential royalties. Through
June 30, 2002, Monsanto has made payments of approximately $28 million.
Upon adoption of SFAS No. 141 and SFAS No. 142, the classification of
all identifiable and recognized intangible assets was reassessed, and any
necessary reclassifications were made effective Jan. 1, 2002. Total
amortization expense of other intangible assets for the three months ended
June 30, 2002 and June 30, 2001 was $34 million and $29 million,
respectively. Total amortization expense of other intangible assets for the
six months ended June 30, 2002 and June 30, 2001 was $67 million and $59
million, respectively. Intangible asset amortization expense in the first
six months of 2001 included $2 million related to intangible asset
impairments, as discussed in Note 8 - Restructuring and Other Special
Items.
Upon adoption of SFAS No. 142, the useful lives and residual values of
all identifiable and recognized other intangible assets were reassessed,
and any necessary prospective amortization period adjustments were made
Jan. 1, 2002. SFAS No. 142 requires recognized intangible assets with
definite useful lives to be amortized over their estimated lives and
reviewed for impairment in accordance with SFAS No. 144.
Estimated intangible asset amortization expense for each of the five
succeeding fiscal years is as follows:
Year ending Dec. 31, Amount
-------------------- ------
2002 $130
2003 130
2004 115
2005 95
2006 60
SFAS No. 142 did not require prior periods to be restated. The
following table sets forth on an aftertax pro forma basis what the earnings
and earnings per share would have been if the provisions of SFAS No. 142
had been applied in 2001. Had the new accounting standard been adopted
effective Jan. 1, 2001, Monsanto would not have recorded $30 million and
$61 million of pretax goodwill amortization expense in the second quarter
and first half of 2001, respectively, but pretax research and development
expenses would have increased by $2 million and $4 million in the second
quarter and first half of 2001, respectively, because of the reassessment
8
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
of useful lives and classifications. In addition and related to these
changes, the income tax provision would have decreased by $18 million and
$12 million for the second quarter and first half of 2001, respectively.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
---- ---- ---- ----
Reported Net Income (Loss) $ 147 $ 389 $(1,589) $ 444
Goodwill amortization, net of tax -- 42 -- 65
Effects of useful life adjustments, net of tax -- 4 -- 4
----- ----- ------- -----
Adjusted Net Income (Loss) $ 147 $ 435 $(1,589) 513
Cumulative effect of a change in accounting
principle, net of tax -- -- 1,822 --
----- ----- ------- -----
Adjusted Income Before Cumulative Effect of
Accounting Change $ 147 $ 435 $ 233 $ 513
===== ===== ======== =====
Basic Earnings (Loss) Per Share:
Reported Net Income (Loss) $0.56 $1.51 $ (6.11) $1.72
Goodwill amortization, net of tax -- 0.16 -- 0.25
Effects of useful life adjustments, net of tax -- 0.02 -- 0.02
----- ----- ------- -----
Adjusted Net Income (Loss) $0.56 $1.69 $ (6.11) $1.99
Cumulative effect of a change in accounting
principle, net of tax -- -- 7.01 --
----- ----- ------- -----
Adjusted Income Before Cumulative Effect of
Accounting Change $0.56 $1.69 $ 0.90 $1.99
===== ===== ======= =====
Diluted Earnings (Loss) Per Share:
Reported Net Income (Loss) $0.56 $1.47 $ (6.02) $1.68
Goodwill amortization, net of tax -- 0.16 -- 0.25
Effects of useful life adjustments, net of tax -- 0.01 -- 0.01
----- ----- ------- -----
Adjusted Net Income (Loss) $0.56 $1.64 $ (6.02) $1.94
Cumulative effect of a change in accounting
principle, net of tax -- -- 6.90 --
----- ----- ------ -----
Adjusted Income Before Cumulative Effect of
Accounting Change $0.56 $1.64 $ 0.88 $1.94
===== ===== ======= =====
Note 6 - Comprehensive Income (Loss)
Comprehensive income (loss) includes all non-shareowner changes in
equity and consists of net income (loss), foreign currency translation
adjustments, unrealized gains and losses on available-for-sale securities,
additional minimum pension liability adjustments and accumulated derivative
gains or losses on cash flow hedges not yet realized. Comprehensive income
(loss) for the three months ended June 30, 2002, and June 30, 2001, was $35
million and $320 million, respectively. Comprehensive income (loss) for the
six months ended June 30, 2002, and June 30, 2001, was $(1,710) million and
$205 million, respectively. The comprehensive loss for the six months ended
June 30, 2002, includes the cumulative effect of a change in accounting
principle.
Note 7 - Earnings (Loss) Per Share
On Oct. 23, 2000, Monsanto sold 38,033,000 shares of its common stock
at $20 per share in an IPO. The company issued 10,000 restricted shares at
the time of the IPO and an additional 45,000 restricted shares during 2001.
In connection with the company's employee stock option plans, through June
30, 2002, approximately 3.2 million shares have been issued since the IPO.
The majority of these shares were issued in the first half of 2002.
Subsequent to the IPO, Pharmacia owned 220 million shares of common stock,
representing 84.2 percent ownership of Monsanto as of June 30, 2002. On
Aug. 13, 2002, Pharmacia released its 220 million shares of Monsanto's
common stock to Pharmacia's distribution agent for the purpose of
completing a spinoff of Monsanto, via a tax-free dividend to Pharmacia's
shareowners. The distribution is based upon a ratio of approximately 0.17
Monsanto shares for each share of Pharmacia common stock for which a
Pharmacia shareowner was the holder of record at the close of business on
July 29, 2002.
9
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Basic earnings per share (EPS) for the three months and six months
ended June 30, 2002, and June 30, 2001, were computed using the
weighted-average number of common shares outstanding during the period
(261.2 million and 260 million shares for the three months and six months
ended June 30, 2002, respectively, and 258.1 million shares for both the
three months and six months ended June 30, 2001). Diluted EPS for the three
months and six months ended June 30, 2002, and June 30, 2001, were computed
taking into account the effect of dilutive potential common shares (3.1
million and 3.8 million shares for the three months and six months ended
June 30, 2002, respectively, and 5.4 million shares for both the three
months and six months ended June 30, 2001). These dilutive potential common
shares consist of outstanding stock options.
Note 8 - Restructuring and Other Special Items
The amounts related to the 2002 and 2000 restructuring plans were
recorded in the Statement of Consolidated Income (Loss) in the following
categories:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Cost of Goods Sold $ (9) $(10) $ (9) $(11)
Restructuring charges - net (57) (31) (57) (52)
Other Expense - net -- (6) -- (6)
----- ---- ---- ----
Income (Loss) Before Income Taxes (66) (47) (66) (69)
Income tax benefit 23 17 23 26
----- ---- ---- ----
Net Income (Loss) $ (43) $(30) $(43) $(43)
===== ==== ==== ====
2002 Restructuring Plan:
In April 2002, Monsanto's management approved a restructuring plan to
further rationalize (i.e., consolidate or shutdown) facilities and reduce
the work force. In connection with this plan, Monsanto recorded $66 million
pretax ($43 million aftertax) of net charges in the second quarter of 2002.
The pretax components of the restructuring for the three months and six
months ended June 30, 2002 were as follows:
Three Months and
Six Months Ended
June 30, 2002
----------------
Work Force Reductions $23
Facility Closures / Exit Costs 16
Asset Impairments:
Property, plant and equipment - net 27
----
Total Pretax Charge $66
===
These restructuring costs primarily relate to the closure of certain
research sites and certain manufacturing sites, as well as work force
reductions. The work force reductions include involuntary employee
separation costs for approximately 450 employees worldwide, including
positions in marketing, research and development, manufacturing and
administration. The affected employees are entitled to receive severance
benefits pursuant to established severance policies or by governmentally
mandated labor regulations. Facility closures and other exit costs included
expenses associated with contract terminations ($8 million), equipment
dismantling and disposal ($4 million) and other shutdown costs ($4 million)
resulting from the exit of certain research and manufacturing sites. The
asset impairments related to property, plant and equipment. Cash payments
to complete these restructuring actions will be funded from operations and
are not expected to significantly affect the company's liquidity.
10
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Activities related to restructuring during the second quarter of 2002,
were as follows:
Work Force Facility
Reductions Closures Total
Restructuring ---------- -------- -----
-------------
Additions $23 $16 $39
Costs charged against reserves (8) -- (8)
--- --- ---
June 30, 2002, reserve balance $15 $16 $31
=== === ===
During the second quarter of 2002, approximately 195 former employees
received cash severance payments totaling $8 million. The work force
reduction payments for the remaining 255 employees associated with these
actions will be completed by June 30, 2003.
2000 Restructuring Plan:
In 2000, Monsanto's management formulated a plan as part of the
company's overall strategy to focus on certain key crops and streamline
operations. In connection with this plan, Monsanto incurred $261 million of
net charges in 2000. Restructuring and other special items, primarily
associated with the implementation of this plan, were also recorded in
2001. These charges totaled $69 million pretax ($43 million aftertax) for
the first six months of 2001, with $47 million ($30 million aftertax)
recorded in the second quarter. The pretax components of the restructuring
and other special items for the three months and six months ended June 30,
2001, were as follows:
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
------------- -------------
Work Force Reductions $ 5 $20
Facility Closures / Exit Costs 14 18
Asset Impairments:
Inventories 10 11
Other current assets 4 4
Property, plant and equipment - net 8 8
Other intangible assets - net -- 2
Other Special Items 6 6
---- ---
Total Pretax Charge $ 47 $69
==== ===
The work force reduction costs for the three months and six months
ended June 30, 2001, included involuntary employee separation costs for
approximately 110 and 230 employees worldwide, respectively, including
positions in administration, manufacturing and research and development
related to noncore programs. The affected employees are entitled to receive
severance benefits pursuant to established severance policies or by
governmentally mandated labor regulations. Facility closures and other exit
costs included expenses associated with contract terminations, equipment
dismantling and disposal and other shutdown costs resulting from the exit
of certain research programs and noncore activities. The asset impairments
related to property, plant and equipment, other current assets and other
intangible assets. In addition, $10 million and $11 million related to the
write-off of inventories was recorded within cost of goods sold for the
three months and six months ended June 30, 2001, respectively. These
employee reductions, asset dispositions and other exit activities will be
substantially completed by Dec. 31, 2002. Cash payments to complete this
restructuring plan will be funded from operations and are not expected to
significantly affect the company's liquidity. The second quarter of 2001
also included a $6 million charge, recorded within other expense - net, for
the impairment of an equity security due to adverse business developments
of the investee.
11
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Activities related to restructuring and other special items for the
six months ended June 30, 2001, were as follows:
Work Force Facility
Reductions Closures Total
Restructuring and Other Special Items --------- -------- -----
-------------------------------------
Jan. 1, 2002, reserve balance $ 35 $ 34 $ 69
Costs charged against reserves (23) (13) (36)
---- ---- ----
June 30, 2002, reserve balance $ 12 $ 26 $ 33
==== ==== ====
During the first two quarters of 2002, $3 million was paid to former
employees whose involuntary termination benefits were recorded in 2001, but
elected to defer payment until 2002. For the first two quarters of 2002,
approximately 390 former employees received cash severance payments
totaling $20 million. The work force reduction payments for the remaining
130 employees associated with this plan will be completed by the end of
2002. Exit costs of $13 million associated with contract terminations,
equipment dismantling and disposal were also paid during the first half of
2002.
Note 9 - Commitments and Contingencies
Monsanto is defending and prosecuting litigation in its own name. In
addition, Monsanto is defending and prosecuting certain cases that were
brought in Pharmacia's name and for which Monsanto assumed responsibility
upon the separation of its businesses from those of Pharmacia. Such matters
relate to a variety of issues. Certain of the lawsuits and claims seek
damages in very large amounts, or seek to restrict the company's business
activities.
On March 20, 1998, a jury verdict was returned against Pharmacia in a
lawsuit filed in the California Superior Court. The lawsuit was brought by
Mycogen Corporation (Mycogen), Agrigenetics Inc., and Mycogen Plant Science
Inc. claiming that Pharmacia delayed providing access to certain gene
technology under a 1989 agreement with Lubrizol Genetics Inc., a company
which Mycogen subsequently purchased. The jury awarded $174.9 million in
future damages. This jury award was overturned on appeal by the California
Court of Appeals. On Aug. 8, 2002, the California Supreme Court upheld the
California Court of Appeals decision reversing the jury's verdict.
Although the results of litigation cannot be predicted with certainty,
it is management's belief that the final outcome of the litigation
discussed above will not have a material adverse effect on Monsanto's
financial position, profitability or liquidity.
On Feb. 3, 2002, the new government in Argentina announced several
reforms intended to stabilize the economic environment. The government's
programs continue to evolve. It is unclear what effect existing and new
regulations and conditions might have on the company's operations in
Argentina. While the company has prepared its 2001 and 2002 financial
statements relating to its Argentine operations on a U.S. dollar functional
basis, the functional currency designation in Argentina may change based on
future government economic reforms. The peso-to-U.S. dollar exchange rate
was 3.625-to-1.00 as of Aug. 9, 2002.
In the second quarter of 2002, the company established an allowance of
$154 million pretax for estimated uncollectible accounts receivable in
Argentina. While the company cannot determine how government actions in
Argentina will affect the outcome, it will aggressively pursue collection
of the net outstanding receivables (which were approximately $270 million
as of June 30, 2002) at full U.S. dollar value. However, the unfavorable
market and economic conditions could have further negative impact on the
company's collections, sales and earnings. In March 2002, the government
issued a decree establishing a 20 percent export tax on agricultural
exports and also ruled that the U.S. dollar-denominated contracts in
agriculture markets entered into prior to Jan. 6, 2002, must be honored at
the same exchange parity as the one obtained for exports of the
agricultural products that contain the agricultural inputs. This decree was
amended with the July 2, 2002, issuance of Resolution Number 143, which
states that the future settlement of such contracts on farm inputs for corn
and soybeans will be subject to a 25 percent reduction, including the 20
percent export tax discussed above, of the U.S. dollar price. Management's
estimate of the potential impact of these decrees on the company's
receivables has been included in the allowance for uncollectible
receivables. The Argentine agricultural markets continue to be primarily
export-oriented, and their export sales are generally denominated
12
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
in U.S. dollars. The exchange rate between the U.S. dollar and peso will
continue to fluctuate as the company continues its collection efforts.
Year-to-date collections in Argentina are down approximately 20
percent, due primarily to the impact of the export taxes levied on
agricultural exports. The company has been able to collect essentially all
of its receivables that were secured with grain, net of export taxes. Also,
a majority of the company's current sales in Argentina have been made for
either cash or grain. Management believes that the actions it has taken
thus far have reduced the risk related to the company's receivables.
In addition, the company's ability to repatriate funds from Argentina
may be restricted and the company may also have additional exposures. For
example, the company's sales, margins, and foreign-currency transactional
gains/losses, may be adversely affected based on fluctuations in
foreign-currency exchange rates and the level of inflation experienced.
Note 10 - Accounting for Derivative Instruments and Hedging Activities
Monsanto's business and activities expose it to a variety of market
risks, including risks related to the effects of changes in commodity
prices, foreign-currency exchange rates, interest rates, and to a lesser
degree securities prices. These financial exposures are monitored and
managed by the company as an integral part of its market risk management
program. This risk management program focuses on the unpredictability of
financial markets and seeks to reduce the potentially adverse effects that
the volatility of these markets could have on operating results. Monsanto's
overall objectives for holding derivatives are to minimize the risks using
the most effective methods to eliminate or reduce the impacts of these
exposures.
In accordance with SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, all derivatives, whether designated in hedging
relationships or not, are recognized in the Statement of Consolidated
Financial Position at their fair value. At the time a derivative contract
is entered into, Monsanto designates the derivative as: (1) a hedge of the
fair value of a recognized asset or liability (a fair-value hedge); (2) a
hedge of a forecasted transaction or of the variability of cash flows that
are to be received or paid in connection with a recognized asset or
liability (a cash-flow hedge); (3) a foreign-currency fair-value or
cash-flow hedge (a foreign-currency hedge); (4) a foreign-currency hedge of
the net investment in a foreign subsidiary; or (5) a derivative that does
not qualify for hedge accounting treatment. From time to time, the company
may also use natural gas swaps to manage energy input costs. There were no
open gas swaps as of June 30, 2002. Monsanto does not use derivative
financial instruments for trading purposes, nor does it engage in commodity
or interest rate speculation.
Changes in the fair value of a derivative that is highly effective as,
and that is designated and qualifies as a fair-value hedge, along with
changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk, are recorded currently in earnings.
Changes in the fair value of a derivative that is highly effective as, and
that is designated and qualifies as a cash-flow hedge, to the extent that
the hedge is effective, are recorded in accumulated other comprehensive
income (loss), until earnings are affected by the variability from cash
flows of the hedged item. Any hedge ineffectiveness is included in
current-period earnings. Changes in the fair value of a derivative that is
highly effective as, and that is designated and qualifies as a
foreign-currency hedge are recorded in either current-period earnings or
accumulated other comprehensive income (loss), depending on whether the
hedging relationship satisfies the criteria for a fair-value or cash-flow
hedge. Changes in the fair value of a derivative that is highly effective
as, and that is designated as a foreign-currency hedge of the net
investment in a foreign subsidiary are recorded in the accumulated foreign
currency translation. Changes in the fair value of derivative instruments
not designated as hedges are reported currently in earnings.
Fair-Value Hedges
Monsanto uses futures and option contracts to manage the value of the
corn and soybean seed inventories that it buys from growers. Generally, the
company hedges from 70 percent to 100 percent of the corn and soybean
inventory value, depending upon the crop and grower pricing.
Interest rate swap agreements are used to reduce interest rate risks
and to manage interest exposure. Monsanto uses interest rate swaps to
convert its fixed-rate debt to variable-rate debt. The resulting cost of
13
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
funds may be lower or higher than it would have been if variable-rate debt
had been issued directly. Under the interest rate swap contracts, the
company agrees with other parties to exchange, at specified intervals, the
difference between fixed-rate and floating-rate interest amounts, which is
calculated based on an agreed-upon notional amount.
The difference between the carrying value and fair value of hedged
items classified as fair-value hedges was offset by the change in fair
value of the related derivatives. Accordingly, hedge ineffectiveness for
fair-value hedges, determined in accordance with SFAS No. 133, had no
effect on earnings for the three months or six months ended June 30, 2002,
or June 30, 2001, respectively.
Cash-Flow Hedges
The company enters into contracts with a number of its seed growers to
purchase their output at the market prices in effect when the individual
growers elect to fix their contract prices. As a hedge against possible
commodity price fluctuations, the company purchases futures and options
contracts for corn and soybeans. The futures contracts hedge the commodity
price paid for these commodity purchases while the options contracts limit
the unfavorable effect that price changes could have on these purchases.
Monsanto recognized a net loss of $1 million in cost of goods sold for
the six-month period ended June 30, 2002, which represented the
ineffectiveness of all cash-flow hedges. For the three months and six
months ended June 30, 2001, losses recorded in cost of goods sold totaled
$1 million and $2 million, respectively. No cash-flow hedges were
discontinued during the three months or six months ended June 30, 2001, or
June 30, 2002.
As of June 30, 2002, $4 million of aftertax deferred net gains on
derivative instruments accumulated in other comprehensive income (loss) are
expected to be reclassified to earnings during the next 12 months. The
actual sales of the inventory, which are expected to occur over the next 12
months, will necessitate the reclassification of the derivative losses into
earnings. The maximum term over which the company is hedging exposures to
the variability of cash flow (for all forecasted transactions, excluding
interest payments) is 18 months.
In May 2002, the Company filed a shelf registration with the U.S.
Securities and Exchange Commission (SEC) that allows the company to issue
debt of up to $2 billion in the future. On June 26, 2002, the Company
entered into a treasury rate lock agreement with several banks to hedge
against changes in long-term interest rates on a portion of the planned
debt issue. Monsanto has designated this rate lock agreement as a cash-flow
hedge. Since this rate lock is designated as a cash-flow hedge, the changes
in fair value, to the extent the swap is effective, are recognized in other
comprehensive income until the hedged interest costs are recognized in
earnings. As of June 30, 2002, the market value of this rate lock was a
gain of $2 million. (See Note 13 - Subsequent Events - for further
details.)
Foreign-Currency Hedges
Monsanto is exposed to currency exchange rate fluctuations related to
certain intercompany and third-party transactions. The company sometimes
purchases foreign-exchange options and forward-exchange contracts as hedges
against anticipated sales and/or purchases denominated in foreign
currencies. The company enters into these contracts to protect itself
against the risk that the eventual dollar-net-cash flows will be adversely
affected by changes in exchange rates. The company purchases
foreign-currency exchange contracts to hedge the adverse effects that
fluctuations in exchange rates may have on foreign-currency-denominated
third-party and intercompany receivables and payables. Financial
instruments are neither held nor issued by the company for trading
purposes.
The company hedges a portion of its net investment in Brazilian
subsidiaries. The change in the fair value of these hedges at June 30,
2002, was an accumulated foreign currency translation gain of $6 million
included in accumulated other comprehensive income.
14
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Note 11 - Segment Information
Monsanto manages its business in two segments: Agricultural
Productivity, and Seeds and Genomics. The Agricultural Productivity segment
consists of crop protection products, animal agriculture, lawn and garden
herbicide products, and environmental technologies businesses. The Seeds
and Genomics segment consists of the global seeds and related traits
businesses, and genetic technology platforms. Sales between segments were
not significant. Segment data, as well as reconciliation of total Monsanto
Company EBIT (earnings (loss) before cumulative effect of accounting
change, interest and income taxes) to income before cumulative effect of
accounting change for the three months and six months ended June 30, 2002,
and June 30, 2001, is presented in the table that follows.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales:
Agricultural Productivity $1,339 $1,574 $1,975 $2,382
Seeds and Genomics 214 437 799 935
------ ------ ------ ------
Total Monsanto $1,553 $2,011 $2,774 $3,317
====== ====== ====== ======
EBIT:
Agricultural Productivity $ 426 $ 632 $ 457 $ 771
Seeds and Genomics (196) 14 (80) (18)
------ ------ ------ ------
Total Monsanto 230 646 374 753
Interest expense - net of interest income (15) (25) (29) (44)
Income tax provision (68) (232) (112) (265)
------ ------ ------ ------
Income Before Cumulative Effect of
Accounting Change $ 147 $ 389 $ 233 $ 446
====== ====== ====== ======
Note 12 - Related-Party Transactions
On Sept. 1, 2000, Monsanto entered into a master transition services
agreement with Pharmacia, its majority shareowner. Some terms under this
master agreement expired on Dec. 31, 2001. New terms were negotiated in
2002, which do not differ materially from previously agreed terms. These
agreements will continue to be effective after Pharmacia's distribution of
its ownership interest in Monsanto. Under these agreements, Monsanto
provides certain administrative support services to Pharmacia, and
Pharmacia primarily provides information technology support for Monsanto.
In addition, the two companies pay various taxes, capital project costs and
payroll charges that are associated with the business activities of the
other. Monsanto and Pharmacia also rent research and office space from each
other. Since Sept. 1, 2000, each party has charged the other entity rent
based on a percentage of occupancy times the cost to operate the
facilities. During the three months and six months ended June 30, 2002,
Monsanto recognized expenses of $10 million and $18 million, respectively
and recorded a reimbursement of $9 million and $22 million, respectively,
for costs incurred on behalf of Pharmacia. During the three months and six
months ended June 30, 2001, Monsanto recognized expenses of $16 million and
$33 million, respectively, and recorded a reimbursement of $11 million and
$23 million, respectively, for costs incurred on behalf of Pharmacia. As of
June 30, 2002, and Dec. 31, 2001, the company had a net payable balance
(excluding dividends payable) of $6 million and $43 million, respectively,
with Pharmacia. Transition services, employee benefits, fees for treasury
transactions, capital project costs, and information technology costs
comprised the outstanding balances.
Since the IPO closing date, Pharmacia manages the loans and deposits
of Monsanto's ex-U.S. subsidiaries. Effective June 30, 2001, certain
Monsanto subsidiaries entered into an agency agreement to have a Pharmacia
subsidiary act as their agent for certain ex-U.S. loans, which were
previously reflected as related-party loans receivable and payable, and are
now reflected as Monsanto intercompany transactions.
Pharmacia is the counterparty for some of Monsanto's foreign-currency
exchange contracts. As of June 30, 2002, and Dec. 31, 2001, the fair value
of the company's outstanding foreign-currency exchange contracts with
Pharmacia was a gain of $2 million and a loss of $7 million, respectively.
Fees were comparable to those that Monsanto would have incurred with a
third party.
15
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
As of June 30, 2002, and Dec. 31, 2001, Monsanto was in a net
borrowing position of $178 million and $224 million, respectively, with
Pharmacia. Interest rates were comparable to those that Monsanto would have
incurred with a third party. (See Note 13 - Subsequent Events - for further
details.)
Monsanto and Pharmacia have separated their noncontributory pension
plans into Monsanto-only and Pharmacia-only sponsored plans. Effective Jan.
1, 2002, the sponsorship of a plan, in which Monsanto and Pharmacia
employees participated, was transferred from Pharmacia to Monsanto. The
assets attributable to Pharmacia employees and former Pharmacia employees
were transferred to a new Pharmacia-sponsored plan. The approximate fair
value of assets, projected benefit obligation, accumulated benefit
obligation, net pension liabilities, and related deferred tax assets
assumed by Monsanto as of Jan. 1, 2002, were approximately $1.0 billion,
$1.3 billion, $1.2 billion, $120 million, and $45 million, respectively.
The net offset of the assumed net pension liabilities and related deferred
tax assets was reflected as a reduction of additional contributed capital
in the Statement of Consolidated Shareowners' Equity, as of Jan. 1, 2002.
On June 27, 2002, Monsanto declared a quarterly dividend of $0.12 per
share and recorded a related dividend payable to Pharmacia of $26 million,
which was recorded in accrued liabilities. The $26 million first quarter
dividend was paid to Pharmacia during the second quarter of 2002.
Note 13 - Subsequent Events
On Aug. 9, 2002, Monsanto entered into an agreement with its
underwriters to issue $600 million of 7-3/8% Senior Notes due Aug. 15,
2012. The transaction is scheduled to close on Aug. 14, 2002, and proceeds
will be used to reduce commercial paper borrowings. Monsanto has also
announced that it anticipates seeking additional long-term debt capital in
the near future.
On Aug. 13, 2002, Monsanto repaid its outstanding short-term debt to
Pharmacia and entered into a new short-term debt arrangement with Pharmacia
for $150 million. This short-term debt is scheduled to mature on Nov. 15,
2002, or earlier to the extent that Monsanto receives proceeds from the
issuance of additional debt or of equity.
When Monsanto entered into the agreement with its underwriters on Aug.
9, 2002, the company closed its position in the treasury rate lock
agreement that is described in Note 10 - Accounting for Derivitive
Instruments and Hedging Activities. The closing of this agreement resulted
in a loss of $26 million, due to decreases in interest rates. As the rate
lock agreement was designated a cash-flow hedge, this loss will be recorded
in other comprehensive income until the hedged interest costs are
recognized in earnings. (See Note 10 - Accounting for Derivative
Instruments and Hedging Activities - for further details.)
Effective Aug. 13, 2002, Monsanto and Pharmacia entered into an
agreement whereby Pharmacia will pay Monsanto approximately $40 million,
and will transfer certain assets, as payment for certain of Monsanto's
expenses relating to its separation from Pharmacia and to the spinoff of
Monsanto by Pharmacia.
16
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Monsanto Company and its subsidiaries is a leading global provider of
agricultural products and integrated solutions for farmers. We make ROUNDUP
herbicide and other crop protection products. We produce leading seed
brands, including DEKALB and ASGROW, and we provide our seed partners with
biotechnology traits for insect protection and herbicide tolerance. Our
herbicides, seeds, and related genetic trait products can be combined to
provide growers with integrated solutions that help them produce
higher-yield crops, while controlling weeds, insects and diseases more
efficiently and cost-effectively. We also provide lawn and garden herbicide
products for the residential market and animal agricultural products
focused on improving dairy cow productivity and swine genetics.
We manage our business in two segments: Agricultural Productivity, and
Seeds and Genomics. The Agricultural Productivity segment consists of the
crop protection products, animal agriculture, lawn and garden herbicide
products, and environmental technologies businesses. The Seeds and Genomics
segment consists of the global seeds and related traits businesses, and
genetic technology platforms.
In October 2000, Monsanto sold approximately 38 million shares of its
common stock at $20 per share in an initial public offering (IPO).
Subsequent to the IPO, Pharmacia owned 220 million shares of common stock,
representing 84.2 percent ownership of Monsanto as of June 30, 2002. On
Aug. 13, 2002, Pharmacia released its 220 million shares of our common
stock to Pharmacia's distribution agent for the purpose of completing a
spinoff of Monsanto, via a tax-free dividend to Pharmacia's shareowners.
The distribution is based upon a ratio of approximately 0.17 Monsanto
shares for each share of Pharmacia common stock for which a Pharmacia
shareowner was the holder of record at the close of business on July 29,
2002.
The primary operating performance measure for our two segments is
earnings (loss) before cumulative effect of accounting change, interest and
income taxes (EBIT). Our seed company acquisitions in 1998 and 1997
affected results by substantially increasing amortization expense
associated with intangible assets recorded at the time of acquisition. EBIT
in 2001 included amortization expense related to goodwill and other
intangible assets, a majority of which related to these seed company
acquisitions. However, since the adoption on Jan. 1, 2002 of Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets, we no longer amortize our goodwill. (See Note 2 - New
Accounting Standards - of Notes to Consolidated Financial Statements - for
further details.) Thus, EBIT in 2002 only reflects amortization related to
other intangible assets. Accordingly, management believes that earnings
(loss) before cumulative effect of accounting change, interest, income
taxes, depreciation and amortization (EBITDA) is an appropriate measure for
evaluating the operating performance of our business. EBITDA eliminates,
among other things, the effects of depreciation of tangible assets and
amortization of intangible assets, most of which resulted from the seed
company acquisitions accounted for under the purchase method of accounting.
The presentation of EBITDA is intended to supplement investors'
understanding of our operating performance. EBITDA may not be comparable to
other companies' EBITDA performance measures. EBITDA is not intended to
replace net income (loss), cash flows, financial position, or comprehensive
income (loss), as determined in accordance with accounting principles
generally accepted in the United States.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) should be read in conjunction with Monsanto's
consolidated financial statements, the accompanying notes and the
Quantitative and Qualitative Disclosures About Market Risk following this
section. This quarterly report on Form 10-Q should be read in conjunction
with Monsanto's annual report on Form 10-K for the year ended Dec. 31,
2001, and quarterly report on Form 10-Q for the period ended March 31,
2002. Financial information for the first six months of 2002 should not be
annualized. Monsanto has historically generated the majority of its sales
during the first half of the year, primarily because of the concentration
of sales due to the timing of the planting and growing season in the
Northern Hemisphere.
Unless otherwise indicated, "Monsanto," "Monsanto Company" and "the
company", and references to "we", "our" and "us," are used interchangeably
to refer to Monsanto Company or to Monsanto Company and consolidated
subsidiaries, as appropriate to the context. With respect to the time
period prior to the separation of Monsanto's businesses from those of
Pharmacia on Sept. 1, 2000, references to "Monsanto" or "the company" also
refer to the agricultural business of Pharmacia.
17
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
See Note 1 - Background and Basis of Presentation - of Notes to
Consolidated Financial Statements. Unless otherwise indicated, "earnings
per share" and "per share" mean diluted earnings per share. In the tables,
all dollar amounts are in millions, except for per share amounts.
Trademarks owned or licensed by Monsanto or its subsidiaries are shown in
all capital letters. Unless otherwise indicated, references to ROUNDUP
herbicides mean ROUNDUP branded and other branded glyphosate-based
herbicides excluding all lawn and garden herbicides; references to ROUNDUP
and other glyphosate-based herbicides mean both branded and non-branded
glyphosate-based herbicides, excluding all lawn and garden herbicide
products.
Results of Operations - Second Quarter 2002 Compared with Second Quarter 2001
Net income declined to $147 million, or $0.56 per share, for the
second quarter of 2002, compared with net income of $389 million, or $1.47
per share, for the second quarter 2001. The following factors affected the
quarter-to-quarter comparison:
o Lower volumes and prices of ROUNDUP herbicides, particularly in
the United States
o Establishment of a $154 million pretax bad debt reserve related
to Argentine receivables
o Last year's change to a royalty system for our biotechnology
traits, which shifted revenues from the second quarter of 2002 to
the last half of 2001 and the first quarter of 2002
o Actions in 2002 to reduce risk in Latin America, due to continued
economic and market uncertainties
o Higher-than-anticipated Latin America (primarily Brazil) corn
seed returns in 2001
o Absence of goodwill amortization in 2002, as a result of adopting
a new accounting standard
o Gain from sales of certain herbicide assets for use in certain
ex-U.S. markets
o Slightly higher restructuring charges in 2002 when compared with
2001
Three Months Ended
June 30,
-----------------------
Total Monsanto Company and Subsidiaries: 2002 2001
---------------------------------------- ---- ----
Net sales $1,553 $2,011
====== ======
Income before cumulative effect of
accounting change $ 147 $ 389
Add: Interest expense - net of interest income 15 25
Income tax provision 68 232
------ ------
EBIT(1) 230 646
Add: Depreciation and amortization 119 132
------ ------
EBITDA(2) $ 349 $ 778
====== ======
(1) Earnings (loss) before cumulative effect of accounting change, interest and
income taxes
(2) Earnings (loss) before cumulative effect of accounting change, interest,
income taxes, depreciation and amortization
Net sales declined 23 percent to $1.6 billion in the second quarter of
2002 from second quarter 2001 net sales of $2.0 billion. Sales from both
the Agricultural Productivity and Seeds and Genomics segments declined due
to a variety of factors. Wet spring weather conditions in key U.S. planting
regions reduced sales of ROUNDUP herbicides, as did lower prices, partially
reflecting the mix of products sold. Second quarter 2002 net sales were
also negatively affected by our move from a technology fee system to a
royalty system. Under this new business model, certain trait revenues that
were previously recognized in the second quarter were recognized in the
third and fourth quarters of the previous year and the first quarter of the
current year.
We have begun to implement certain actions and changes to our business
model to address the continued economic uncertainty and unfavorable market
conditions in Latin America. These actions have affected and will continue
to affect sales and EBIT in 2002, and are intended to reduce working
capital levels and reduce our credit risk and exposure in Argentina and
Brazil. In Argentina, we continue to sell primarily in cash or grain, which
we expect will delay farmers' purchasing decisions and move sales even
closer to the use season. In the second quarter, these actions reduced
ROUNDUP sales in Argentina. Corn seed sales in Argentina also declined, as
18
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
we recorded additional return accruals in response to the declining corn
market that has been affected by economic conditions and last year's
flooding. Higher-than-anticipated returns of relatively high-priced corn
seed in Latin America (primarily in Brazil) negatively affected second
quarter sales in 2001. For a more detailed discussion of these and other
factors affecting segment sales, see "Agricultural Productivity Segment"
and "Seeds and Genomics Segment."
For the three-month period ended June 30, 2002, cost of goods sold
declined 11 percent to $735 million from cost of goods sold of $822 million
for the same period in 2001. The 11 percent cost of goods sold percentage
decline is significantly less than the 23 percent sales percentage decline
because of the relatively low cost of goods sold (and correspondingly
relatively high gross profit) related to trait revenues. Therefore, the
shift in trait revenues did not affect cost of goods sold to the same
extent that it affected net sales. Gross profit declined 31 percent, to
$818 million for the second quarter of 2002 from $1.2 billion for the
second quarter of 2001. This gross profit decline reflects the sales
declines discussed above. Gross profit as a percent of sales declined six
percentage points, from 59 percent in the second quarter of 2001 to 53
percent during the same period this year. This decline was principally
because of lower average ROUNDUP selling prices and the shift in relatively
high-margin trait revenues to earlier quarters.
Selling, general and administrative (SG&A) expenses decreased 25
percent to $237 million for the second quarter of 2002, compared with $315
million for the same period in 2001. SG&A expenses as a percent of sales
declined one percentage point from 16 percent to 15 percent. The decline in
SG&A reflects lower employee-related costs and continued cost management
efforts. SG&A expenses in 2002 also reflect an approximate $25 million
reduction of costs stemming from our agreement to sell certain Monsanto
herbicide assets to Nissan Chemical Industries, Ltd. (Nissan). The
transaction, which closed in the second quarter of 2002, included the
transfer of certain Monsanto herbicide product registrations and trademarks
to Nissan for use in the Japanese market. The agreement also included the
transfer of related labels, and certain other assets for use in Japan, as
well as a long-term supply agreement whereby Monsanto will be the supplier
of these herbicides to Nissan for at least five years. This arrangement
continues our strategy of forming alliances with partners to serve farmers
in certain geographic areas, while allowing Monsanto to focus its efforts
in these areas on its seed business and biotechnology initiatives.
Excluding the effect of the Nissan transaction, SG&A as a percent of sales
would have increased one percentage point compared to the prior year's
second quarter, reflecting of lower sales in the second quarter of 2002.
In the second quarter of 2002, we recorded $164 million of bad debt
expense, $154 million of which relates to estimated uncollectible trade
receivables in Argentina. This allowance was established because of the
continued economic deterioration and market conditions in Argentina. For
further discussion of the economic conditions in Argentina and their effect
on our business, see "Outlook - Update."
Research and development (R&D) expenses remained relatively unchanged
from the second quarter of 2001. As a percent of sales, R&D expenses
increased two percentage points, reflecting lower sales in the second
quarter of 2002. The majority of planned savings in R&D from our prior
restructuring plans have been substantially realized in our second quarter
2001 and 2002 results, and we have not yet begun to realize the full
savings from our 2002 restructuring plan. For further details, see
"Restructuring and Other Special Items."
Operating results for the second quarter of 2002 include the positive
effect of SFAS No. 142, the new accounting standard related to the
amortization of goodwill. In the second quarter of 2001, we recorded $30
million of goodwill amortization expense. Since adoption of SFAS No. 142 on
Jan. 1, 2002, we no longer amortize our goodwill.
We recognized expenses totaling $66 million in the second quarter of
2002 relating to our 2002 restructuring plan, $57 million of which were
recorded as restructuring charges - net. In the second quarter of 2001, we
recorded $31 million in restructuring charges - net related to our 2000
restructuring plan to focus on key crops. For further details on both
plans, see "Restructuring and Other Special Items."
Interest expense, net of interest income, decreased nearly 40 percent
to $15 million for the second quarter of 2002, compared with $25 million
for the second quarter of 2001. The lower interest expense reflects the
19
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
benefit of lower average interest rates throughout the second quarter of
2002, when compared with the second quarter of 2001, as well as lower
average borrowing levels in 2002.
We recognized other income - net of $7 million in the second quarter
2002, compared with $28 million of net other expense in the same period
last year. In 2002, we recorded approximately $20 million of other income
related to sales of certain herbicide assets for use in ex-U.S. markets,
including the Nissan transaction in Japan and a smaller transaction in the
Australia and New Zealand markets. We also recognized $10 million of other
income related to gains that were realized upon the sale of equity
securities. These gains were slightly offset by currency losses reflecting
the further devaluation of our net assets denominated in Argentine pesos.
In 2001, we recognized other expense resulting from the impairment of an
equity investment. Other expense in 2001 also includes $4 million related
to the early extinguishment of Employee Stock Ownership (ESOP) debt that
was previously classified as an extraordinary loss. See "New Accounting
Standards" for further details.
Income tax provision decreased to $68 million for the second quarter
of 2002 compared with $232 million for the same period in 2001. This
decrease was largely due to the decline in pretax income (before cumulative
effect of accounting change) in the second quarter of 2002 compared with
the second quarter of 2001. The effective tax rate decreased to 32 percent
for the three months ended June 30, 2002, from 37 percent for the three
months ended June 30, 2001. The absence of goodwill amortization has led to
an improvement in the effective tax rate in 2002 because the majority of
our historical goodwill amortization was not deductible for tax purposes.
Agricultural Productivity Segment
Our Agricultural Productivity segment consists of our crop protection
products (ROUNDUP and other glyphosate-based herbicides and selective
chemistries) and our animal agriculture, lawn and garden herbicide
products, and environmental technologies businesses. We are a leading
worldwide developer, producer and marketer of crop protection products,
including ROUNDUP herbicides.
Three Months Ended
June 30,
------------------------------
2002 2001
---- ----
Net sales $1,339 $1,574
====== ======
EBIT(1) $ 426 $ 632
Add: depreciation and amortization 62 50
------ ------
EBITDA(2) $ 488 $ 682
====== ======
(1) Earnings (loss) before cumulative effect of accounting change, interest and
income taxes
(2) Earnings (loss) before cumulative effect of accounting change, interest,
income taxes, depreciation and amortization
In the Agricultural Productivity segment, net sales decreased 15
percent to $1.3 billion for the second quarter of 2002, compared with $1.6
billion in the second quarter of 2001. The quarter-to-quarter decrease was
due primarily to lower ROUNDUP sales in the U.S., Canada and Argentina. Net
sales increases in our lawn and garden and animal agriculture businesses
slightly offset these ROUNDUP sales declines.
Worldwide net sales for our ROUNDUP and other glyphosate-based
herbicides decreased 20 percent to $845 million for the second quarter of
2002 from $1.1 billion for the same period last year. Worldwide volumes
decreased 15 percent and prices declined 6 percent.
In the United States, net sales of ROUNDUP herbicides experienced a
double-digit decline, with volumes and prices declining 7 percent and 13
percent, respectively. Wet weather during spring months delayed planting of
corn and soybeans, which reduced over-the-top applications of ROUNDUP
herbicides. This wet weather was followed by hot, dry weather in June and
July, which will reduce the number of ROUNDUP applications and the
application rate in the second half of the year. Average selling prices
were affected by a move in the market place to lower-tier products of
Monsanto and other glyphosate suppliers for pre-plant and burn-down
20
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
applications. To date, these price declines are consistent with our global
post-patent pricing experience.
Lower sales of ROUNDUP herbicides in Canada also contributed to the
sales decline quarter-over-quarter, albeit to a much lesser extent than the
U.S. decline. Unfavorable, dry weather conditions led to lower volumes in
Canada. Economic conditions and the actions we are taking to reduce our
risk affected ROUNDUP sales performance in Argentina, as we continue to
operate with primarily cash-or-grain sales terms in that country. Even
under tightened credit terms, ROUNDUP sales in Brazil increased on higher
volumes. This sales improvement was in response to increased applications
of ROUNDUP, which led to higher demand. Competitive pricing of generic
products affected sales in Asia. Volumes of glyphosate that we manufacture
and supply to third parties declined.
Net sales of our other Agricultural Productivity products decreased 4
percent, to $495 million in 2002 compared with net sales of $516 million in
2001. Sales of our other herbicides declined, but sales in our lawn and
garden and animal agriculture businesses increased. As expected, lawn and
garden sales increased quarter-over-quarter. As previously announced by The
Scotts Company (Scotts), retailers are focused on minimizing their
inventory levels by more closely matching the timing of orders to
anticipated sales to their customers. As a result, certain sales that
historically would have occurred in the first quarter of 2002 took place in
the second quarter of 2002. On a year-to-date comparison, lawn and garden
sales increased slightly. Sales in our environmental technologies business
declined, while higher sales in our animal agriculture business were led by
an increase in volumes of POSILAC bovine somatotropin.
EBIT for the Agricultural Productivity segment decreased 33 percent,
to $426 million for the three-month period ended June 30, 2002, as compared
with EBIT of $632 million for the same period last year. Lower sales of
ROUNDUP (especially in the United States, Canada and Argentina) and the
segment's portion of the Argentine bad debt reserve were the primary
contributors to the EBIT decline. These effects were somewhat mitigated by
lower SG&A spending (including lower employee-related costs) and a
reduction to SG&A expenses related to the sale of certain Japanese assets
to Nissan. Charges relating to our restructuring plans declined slightly
quarter-over-quarter; last year we recorded $27 million of restructuring
charges in the second quarter, while this year we recorded $16 million.
Segment EBIT also included other income related to sales of certain
herbicide assets for use in ex-U.S. markets. Gross profit as a percent of
sales for the segment declined by 2 percentage points, reflective of lower
average selling prices of ROUNDUP products.
Seeds and Genomics Segment
The Seeds and Genomics segment consists of our global seeds and
related trait business, and genetic technology platforms. We produce
leading seed brands, including DEKALB and ASGROW, and we provide our seed
partners with biotechnology traits for herbicide tolerance and insect
protection.
Three Months Ended
June 30,
------------------------------
2002 2001
---- ----
Net sales $ 214 $437
===== ====
EBIT(1) $(196) $ 14
Add: Depreciation and amortization 57 82
----- ----
EBITDA(2) $(139) $ 96
===== ====
(1) Earnings (loss) before cumulative effect of accounting change, interest and
income taxes
(2) Earnings (loss) before cumulative effect of accounting change, interest,
income taxes, depreciation and amortization
Net sales for the Seeds and Genomics segment decreased to $214 million
for the second quarter of 2002 from net sales of $437 million in the same
period in 2001. The lower sales in the second quarter of 2002 reflect a
shift in the timing of revenues for our biotechnology traits from the
second quarter of 2002 to earlier quarters. Starting with the 2002-selling
season, we have eliminated the technology fee paid by growers who plant
crops containing certain of our technologies and replaced it with a royalty
paid by the seed companies licensed to market those products. This change
resulted in trait revenues being recognized earlier. Certain trait revenues
21
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
that would have previously been recognized in the second quarter of 2002
were recognized in the third and fourth quarters of 2001 and the first
quarter of 2002.
Although this quarter's sales were negatively affected by the change
to a royalty system, U.S. acreage for our biotechnology traits in 2002 is
estimated to have increased 5 percent, to 89.5 million acres. The
percentages of corn and soybean acres with a Monsanto trait are expected to
increase, with strong demand for ROUNDUP READY and insect-protected
technologies.
In Argentina, we recorded additional return accruals in response to
the contracting corn market that has been affected by economic conditions
and last year's flooding. In Brazil, corn seed sales improved slightly from
year-ago levels, but prior year sales were affected by approximately $80
million in higher-than-anticipated returns of high-priced corn seed. In
2002, the continued deterioration of the Brazilian corn market has
negatively affected sales.
In the United States, corn sales increased reflecting an increase in
planted acreage of corn this year, and strong market performance by our
DEKALB and ASGROW brands. The gain in corn sales was more than offset by a
decline in U.S. soybean sales. Despite the market dynamics of lower acres
and increased supply, our soybean brands maintained price and market share.
The factors above led to a significant decline in Seeds and Genomics
gross profit and gross profit as a percent of sales. The effect of the
shift in trait revenue on gross profit is magnified because traits are
relatively high-margin contributors. Thus, the shift in trait revenues out
of the second quarter of 2002 has negatively affected gross profit. Our
actions in Brazil to respond to the oversupply of seed in a contracting
corn market also affected margins in the second quarter of this year.
Continued cost management and lower employee costs contributed to
lower SG&A expenses, while R&D spending for the segment increased slightly.
A portion of the Argentine bad debt reserve was recorded in the Seeds and
Genomics segment. Restructuring charges - net in the second quarter of 2002
more than doubled when compared with last year's second quarter. Last year,
we recorded $20 million in charges related to our 2000 restructuring plan.
This year, we recorded $50 million related to our 2002 restructuring plan.
On a quarter-over-quarter comparison, other expense - net declined. In
2002, we recognized other income related to gains realized upon the sale of
equity securities. In 2001, we recognized other expense because of an
equity investment impairment.
EBIT for the Seeds and Genomics segment declined to a loss of $196
million in the second quarter of 2002 versus earnings of $14 million in the
second quarter 2001. Last year's second quarter EBIT included approximately
$135 million related to traits that were not recognized in the second
quarter of this year. Lower seed gross profit in Latin America was slightly
offset by the benefit of no longer amortizing our goodwill.
Results of Operations - First Six Months of 2002 Compared with First Six Months
of 2001
We recognized a net loss of $1.6 billion, or $6.02 per share, for the
first six months of 2002. For the first six months of 2001, we recognized
net income of $444 million, or $1.68 per share. The following factors
affected the year-to-date comparison:
o $1.8 billion aftertax goodwill impairment upon adoption of SFAS
No. 142, which was recorded as of Jan. 1, 2002, as a cumulative
effect of a change in accounting principle (see "New Accounting
Standards")
o Lower volumes and prices of ROUNDUP herbicides, particularly in
the United States
o Establishment of a $154 million pretax bad debt reserve related
to Argentine receivables
o Actions in 2002 to reduce risk in Latin America, due to continued
economic and market uncertainties
o Last year's change to a royalty system for our biotechnology
traits, which shifted revenues from the second quarter of 2002 to
the last half of 2001 and the first quarter of 2002
o Higher-than-anticipated Latin America (primarily Brazil) corn
seed returns in 2001
o Absence of goodwill amortization in 2002, as a result of adopting
SFAS No. 142
o Gain from sales of certain herbicide assets for use in certain
ex-U.S. markets 22
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
Six Months Ended
June 30,
-----------------------------
Total Monsanto Company and Subsidiaries: 2002 2001
---------------------------------------- ---- ----
Net sales $2,774 $3,317
====== ======
Income before extraordinary item and cumulative
effect of accounting change $ 233 $ 444
Add: Interest expense - net of interest income 29 44
Income tax provision 112 265
------ ------
EBIT(1) 374 753
Add: Depreciation and amortization 229 269
------ ------
EBITDA(2) $ 603 $1,022
====== ======
(1) Earnings (loss) before cumulative effect of accounting change, interest and
income taxes
(2) Earnings (loss) before cumulative effect of accounting change, interest,
income taxes, depreciation and amortization
Net sales declined 16 percent to $2.8 billion in the first half of
2002 from first half 2001 net sales of $3.3 billion. Sales from the
Agricultural Productivity and, to a lesser extent, the Seeds and Genomics
segments declined due to a variety of factors. In the Agricultural
Productivity segment, sales declined due to lower volumes and lower average
selling prices of our ROUNDUP and other glyphosate-based herbicides. The
lower volumes were due in part to wet spring weather conditions in key U.S.
planting regions. In the Seeds and Genomics segment, first half 2002 net
sales were lower than first half 2001 net sales because of our move last
year from a technology fee system to a royalty system. Under this new
model, certain trait revenues that would have previously been recognized in
the second quarter were recognized in the third and fourth quarters of the
previous year and the first quarter of the current year.
We have begun to implement certain actions and changes to our business
model to address the continued economic uncertainty and unfavorable market
conditions in Latin America. These actions have affected and will continue
to affect sales and EBIT in 2002, and are intended to reduce working
capital levels and reduce our credit risk and exposure in Argentina and
Brazil. In Argentina, we continue to sell primarily for cash or grain,
which we expect will delay farmers' purchasing decisions and move sales
even closer to the use season. The economic conditions, coupled with our
actions in the second quarter, reduced ROUNDUP sales in Argentina. Corn
seed sales in Argentina also declined, as we recorded additional return
accruals in response to the declining corn market that has been affected by
economic conditions and last year's flooding. Higher-than-anticipated
returns of relatively high-priced corn seed in Latin America (primarily
Brazil) negatively affected first-half sales in 2001. For a more detailed
discussion of these and other factors affecting first-half segment sales,
see "Agricultural Productivity Segment" and "Seeds and Genomics Segment."
Cost of goods sold declined 11 percent to $1.4 billion for the first
six months of 2001 from $1.5 billion for the same period in 2001,
reflecting lower sales in the segment. Gross profit decreased 21 percent to
$1.4 billion for the six months ended June 30, 2002, compared with gross
profit of $1.8 billion for the six months ended June 30, 2001. This decline
was attributable to lower ROUNDUP sales, and to a lesser extent, lower
Seeds and Genomics gross profit. As a percent of sales, gross profit
declined three percentage points, from 54 percent in the first half of 2001
to 51 percent during the same period this year. This decline was
principally because of lower average ROUNDUP selling prices and the shift
in relatively high-margin trait revenues to earlier quarters.
SG&A expenses for the first half of 2002 decreased 14 percent when
compared with the same period in 2001, and remained relatively unchanged as
a percentage of sales. We have achieved these lower spending levels through
our continued emphasis on cost management. SG&A expenses also reflect lower
employee-related costs, as well as an approximate $25 million reduction of
costs stemming from our agreement to sell certain Monsanto herbicide assets
to Nissan. Excluding the effect of the Nissan transaction, SG&A as a
percent of sales would have increased one percentage point, reflective of
lower sales in the first half of 2002, when compared with the first half of
2001.
23
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
In the first half of 2002, we recorded $167 million of bad debt
expense, $154 million of which relates to estimated uncollectible trade
receivables in Argentina. This allowance was established because of the
continued economic deterioration and market conditions in Argentina. For
further discussion of the economic conditions in Argentina and their effect
on our business, see "Outlook - Update." Bad debt expense for the first
half of 2001 was minimal.
R&D expenses for the first six months of 2002 decreased 5 percent when
compared with the same period last year. As a percent of sales, R&D
spending increased approximately 1 percentage point, reflective of lower
sales in 2002. The majority of planned savings in R&D from our prior
restructuring plans have been substantially realized in our 2001 and 2002
results, and we have not yet begun to realize the full savings from our
2002-restructuring plan.
Operating results in 2002 include the positive effect of SFAS No. 142,
the new accounting standard related to the amortization of goodwill. In the
first half of 2001, we recorded $61 million of goodwill amortization
expense. Since adoption of SFAS No. 142 on Jan. 1, 2002, we no longer
amortize our goodwill.
Results for the first half of 2002 include charges relating to our
2002 restructuring plan, while 2001 results include charges relating to our
2000 restructuring plan to focus on key crops. Of the $66 million of
expenses recognized to-date relating to our 2002 plan, $57 million were
recognized as restructuring charges - net. Of the $69 million of expenses
realized in the first half of 2001 relating to our 2000 restructuring plan,
$52 million were recognized as restructuring charges - net. For further
details on both plans, see "Restructuring and Other Special Items."
Interest expense, net of interest income, decreased 34 percent. This
decline can be attributed to lower interest rates and lower average
borrowing levels throughout 2002.
Other expense - net increased $4 million from $32 million for the
first half of 2001 to $36 million for the first half of 2002. Other expense
- net for both periods was affected by a number of items. In 2002, we
recorded:
o Currency losses reflecting the further devaluation of our net
assets denominated in Argentine pesos
o Approximately $20 million of other income related to sales of
certain herbicide assets for use in ex-U.S. markets, including
the Nissan transaction in Japan and a smaller transaction in the
Australia and New Zealand markets
o Other income of $10 million related to gains that were realized
upon the sale of equity securities
o Other expense related to a broad-reaching business agreement
between Monsanto and certain subsidiaries, E.I. du Pont de
Nemours (DuPont) and DuPont's Pioneer Hi-Bred International Inc.
subsidiary, resolving a number of important business and patent
disputes between them, and also agreeing to new business
arrangements, including the granting of licenses
In 2001, we recognized:
o Other income from a deferred payout provision related to a past
business divestiture
o The impairment of an equity investment
o A loss related to the early extinguishment of Employee Stock
Ownership (ESOP) debt that was previously classified as an
extraordinary loss (see "New Accounting Standards" for further
details)
Income tax provision for the first six months of 2002 decreased
approximately 58 percent, reflective of the lower pretax income during the
period. The effective tax rate decreased to 32 percent for the first half
of 2002, from 37 percent for the first half of 2001. The absence of
goodwill amortization has led to an improvement in the effective tax rate
in 2002 because the majority of our historical goodwill amortization was
not deductible for tax purposes.
Agricultural Productivity Segment
Our Agricultural Productivity segment consists of our crop protection
products (ROUNDUP and other glyphosate-based herbicides and selective
chemistries) and our animal agriculture, lawn and garden herbicide
24
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
products, and environmental technologies businesses. We are a leading
worldwide developer, producer and marketer of crop protection products,
including ROUNDUP herbicides.
Six Months Ended
June 30,
------------------------------
2002 2001
---- ----
Net sales $1,975 $2,382
====== ======
EBIT(1) $ 454 $ 771
Add: Depreciation and amortization 117 108
------ ------
EBITDA (2) $ 571 $ 879
====== ======
(1) Earnings (loss) before cumulative effect of accounting change, interest and
income taxes
(2) Earnings (loss) before cumulative effect of accounting change, interest,
income taxes, depreciation and amortization
Net sales for the Agricultural Productivity segment declined 17
percent from $2.4 billion for the first six months of 2001 to $2.0 billion
for the first six months of 2002. Lower sales of ROUNDUP and other
glyphosate-based herbicides and to a much lesser extent, our selective
herbicides drove the decline in sales. These net sales declines were
slightly offset by higher sales of our lawn and garden herbicide products
and a net sales increase in our animal agricultural business.
Worldwide net sales of our ROUNDUP and other glyphosate-based
herbicides were $1.2 billion during the first six months of 2002 as
compared with $1.5 billion during the first six months of 2001. Lower
volumes and prices led to the decline, with worldwide volumes down 13
percent and worldwide prices down 9 percent. The United States and
Argentina experienced the largest net sales declines. Volumes of glyphosate
that we manufacture and supply to third parties also declined.
In the United States, volumes and average selling prices of ROUNDUP
herbicides each experienced 13 percent declines, leading to a significant
overall decrease in net sales. Wet weather during spring months delayed
planting of corn and soybeans, which reduced over-the-top applications of
ROUNDUP herbicides. This wet weather was followed by hot, dry weather in
June and July, which will reduce the number of ROUNDUP applications and the
application rate in the second half of the year. Prices were affected by
the mix of products sold. In the first half of 2002 (our second year
post-patent), the mix of products sold included more lower-priced
glyphosate products when compared with the first half of 2001. To date,
these price declines are consistent with our global post-patent pricing
experience.
Economic conditions and the actions we are taking to reduce our risk
affected ROUNDUP herbicides' sales performance in Argentina. Even under
tightened credit terms, ROUNDUP sales in Brazil increased on higher
volumes. This sales improvement was in response to increased applications
of ROUNDUP herbicides, which led to higher demand. Competitive pricing of
generic products decreased sales in Asia.
Our other Agricultural Productivity products experienced an overall
decline in net sales, from $862 million for the first half of 2001 to $770
million for the first half of 2002. Sales of our acetanilide products, in
particular our U.S. acetanilide products, decreased because of higher
product sales earlier in the 2002 selling season (which began in the third
quarter of 2001) when compared with the 2001 selling season. In addition,
despite a strong corn market in the U.S., fewer pre-treatment acetanilide
applications (shifting to competitive post treatments) occurred because of
the wet spring weather across a significant portion of the U.S. corn belt.
Full-year 2002 sales of acetanilide products are expected to be lower than
2001 levels. Sales in our environmental technologies business also
declined, but sales in our lawn and garden and animal agriculture
businesses increased.
Agricultural Productivity segment EBIT declined from $771 million for
the first half of 2001 to $454 million for the first half of 2002. Overall
gross profit for the segment declined 21 percent, while gross profit as a
percent of sales declined 2 percentage points. Lower ROUNDUP volumes and
prices were the primary reasons for the decline. Segment EBIT was also
negatively affected by the bad debt expense relating to estimated
uncollectible accounts receivable in Argentina. Lower operating expenses
slightly mitigated these margin shortfalls. The sales of certain herbicide
assets contributed to EBIT, through reduced SG&A expenses and other income.
25
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
SG&A expenses also declined because of lower employee-related costs and
continued cost management. We also recorded lower restructuring charges in
the first half of this year versus the first half of last year. In
addition, our R&D spending was lower in the first half of 2002.
Seeds and Genomics Segment
The Seeds and Genomics segment consists of our global seeds and
related trait business, and genetic technology platforms. We produce
leading seed brands, including DEKALB and ASGROW, and we provide our seed
partners with biotechnology traits for herbicide tolerance and insect
protection.
Six Months Ended
June 30,
------------------------------
2002 2001
---- ----
Net sales $799 $935
==== ====
EBIT(1) $(80) $(18)
Add: Depreciation and amortization 112 161
---- ----
EBITDA (2) $ 32 $143
==== ====
(1) Earnings (loss) before cumulative effect of accounting change, interest and
income taxes
(2) Earnings (loss) before cumulative effect of accounting change, interest,
income taxes, depreciation and amortization
First-half 2002 net sales for the Seeds and Genomics segment totaled
$799 million, down 15 percent to $935 million for the first-half of 2001.
Our first half sales were negatively affected by our new approach to the
market. In 2001, we eliminated the technology fee paid by growers who plant
crops containing our technologies and replaced it with a royalty fee paid
by the seed companies licensed to market those products. This has resulted
in trait revenues being recognized earlier - certain trait revenues that
would have previously been recognized in the first half of 2002 were
recognized in the last half of 2001. Since a portion of these trait
revenues was recognized in the first quarter of 2002, the effect of the
shift on the first half of 2002 was less significant than the effect on the
second quarter of 2002. Sales of our corn traits increased, led by strong
performance of our insect-protected corn trait. An increasingly higher
percentage of our seed sales contain a biotechnology trait, demonstrating
growing demand for our biotechnology products.
In Argentina, we recorded additional return accruals in response to
the contracting corn market that has been affected by economic conditions
and last year's flooding. In Brazil, corn seed sales improved slightly from
year-ago levels, but approximately $100 million in higher-than-anticipated
returns of high-priced corn seed affected prior year sales. In 2002, the
continued deterioration of the Brazilian corn market has negatively
affected sales.
In the United States, corn sales increased reflecting an increase in
planted acreage of corn this year, and strong market performance by our
DEKALB and ASGROW brands. The gain in corn sales was more than offset by a
decline in U.S. soybean sales. Despite the market dynamics of lower acres
and increased supply, our brands maintained price and market share.
Seeds and Genomics EBIT for the first half of 2002 declined to a loss
of $80 million from a loss of $18 million for the comparable period last
year. Gross profit for the segment declined 21 percent, and gross profit as
a percentage of sales also declined. The shift in trait revenues negatively
affected the segment gross profit comparison, as did our actions taken in
Latin America. Charges relating to our restructuring plans affected EBIT in
both periods. Charges related to our 2002 restructuring plan (recorded in
2002) were higher than the charges related to our 2000 plan recorded in
2001. While Seeds and Genomics EBIT was negatively affected by a portion of
the bad debt expense related to estimated uncollectible accounts receivable
in Argentina, lower operating expenses had a positive effect on EBIT. SG&A
spending was lower due to lower employee-related costs and a continued
focus on cost management. EBIT also benefited from the fact that we no
longer amortize our goodwill in 2002. Several items affected other expense
- net during the six-month periods in both years. In 2002, we recognized
other expense related to the broad-reaching business agreement with Pioneer
and DuPont, and other income related to gains that were realized upon the
sale of equity securities. In 2001, we recognized other income from a
26
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
deferred payout provision related to a past business divestiture and the
impairment of an equity investment.
Our Agreement with The Scotts Company
In 1998, Monsanto entered into an agency and marketing agreement with
Scotts with respect to our lawn and garden herbicide business. Under the
agreement, beginning in the fourth quarter of 1998, Scotts was obligated to
pay us a $20 million fixed fee each year to defray costs associated with
the lawn and garden business. Scotts' payment of a portion of this fee owed
in each of the first three years of the agreement was deferred and is
required to be paid at later dates, with interest. Monsanto is accruing the
$20 million fixed fee per year owed by Scotts ratably over the periods
during which it is being earned as a reduction of SG&A expenses. We are
also accruing interest on the amounts owed by Scotts and including such
amounts in interest income. The total amount owed by Scotts, including
accrued interest, was $50 million as of June 30, 2002, and $48 million as
of Dec. 31, 2001. Scotts is required to begin paying these deferred amounts
at $5 million per year in monthly installments beginning Oct. 1, 2002.
Events Affecting Comparability
The amounts related to the 2002 and 2000 restructuring plans were
recorded in the Statement of Consolidated Income (Loss) in the following
categories:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Cost of Goods Sold $ (9) $(10) $ (9) $(11)
Restructuring charges - net (57) (31) (57) (52)
Other expense - net -- (6) -- (6)
--- ---- -- ---
Income (Loss) Before Income Taxes (66) (47) (66) (69)
Income tax benefit 23 17 23 26
---- ---- ---- ---
Net Income (Loss) $(43) $(30) $(43) $(43)
==== ==== ==== ====
2002 Restructuring Plan:
In April 2002, Monsanto's management approved a restructuring plan to
further rationalize (i.e., consolidate or shut down) facilities and reduce
the work force. In connection with this plan, Monsanto recorded $66 million
pretax ($43 million aftertax) of net charges in the second quarter of 2002.
The pretax components of the restructuring for the three months and six
months ended June 30, 2002 were as follows:
Three Months and
Six Months Ended
June 30, 2002
----------------
Work Force Reductions $23
Facility Closures / Exit Costs 16
Asset Impairments:
Property, plant and equipment - net 27
----
Total Pretax Charge $66
===
These restructuring costs primarily relate to the closure of certain
research sites and certain manufacturing sites, as well as work force
reductions. The work force reductions include involuntary employee
separation costs for approximately 450 employees worldwide, including
positions in marketing, research and development, manufacturing and
administration. The affected employees are entitled to receive severance
benefits pursuant to established severance policies or by governmentally
mandated labor regulations. Facility closures and other exit costs included
expenses associated with contract terminations ($8 million), equipment
dismantling and disposal ($4 million) and other shutdown costs ($4 million)
resulting from the exit of certain research sites and certain manufacturing
sites. The asset impairments related to property, plant and equipment. Cash
payments to complete the actions related to this plan will be funded from
operations and are not expected to significantly affect our liquidity. We
anticipate that the actions related to this plan will yield annual cash
savings of more than $50 million.
27
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
During the second quarter of 2002, approximately 195 former employees
received cash severance payments totaling $8 million. The work force
reduction payments for the remaining 255 employees associated with these
actions will be made by June 30, 2003.
2000 Restructuring Plan:
In 2000, Monsanto's management formulated a plan as part of the
company's overall strategy to focus on certain key crops and streamline
operations. In connection with this plan, Monsanto incurred $261 million of
net charges in 2000. Restructuring and other special items, primarily
associated with the implementation of this plan, were also recorded in
2001. These charges totaled $69 million pretax ($43 million aftertax) for
the first six months of 2001, with $47 million ($30 million aftertax)
recorded in the second quarter. The pretax components of the restructuring
and other special items for the three months and six months ended June 30,
2001, were as follows:
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
------------- -------------
Work Force Reductions $ 5 $20
Facility Closures / Exit Costs 14 18
Asset Impairments:
Inventories 10 11
Other current assets 4 4
Property, plant and equipment - net 8 8
Other intangible assets - net ---- 2
Other Special Items 6 6
---- ---
Total Pretax Charge $ 47 $69
==== ===
The work force reduction costs for the three months and six months
ended June 30, 2001, included involuntary employee separation costs for
approximately 110 and 230 employees worldwide, respectively, including
positions in administration, manufacturing and research and development
related to noncore programs. The affected employees are entitled to receive
severance benefits pursuant to established severance policies or by
governmentally mandated labor regulations. Facility closures and other exit
costs included expenses associated with contract terminations, equipment
dismantling and disposal and other shutdown costs resulting from the exit
of certain research programs and noncore activities. The asset impairments
related to property, plant and equipment, other current assets and other
intangible assets. In addition, $10 million and $11 million related to the
write-off of inventories was recorded within cost of goods sold for the
three months and six months ended June 30, 2001, respectively. These
employee reductions, asset dispositions and other exit activities will be
substantially completed by Dec. 31, 2002. Cash payments to complete this
restructuring plan will be funded from operations and are not expected to
significantly affect the company's liquidity. We anticipate that these
actions will yield annual cash savings of more than $100 million. The
second quarter of 2001 also included a $6 million charge, recorded within
other expense - net, for the impairment of an equity security due to
adverse business developments of the investee.
During the first two quarters of 2002, $3 million was paid to former
employees whose involuntary termination benefits were recorded in 2001, but
elected to defer payment until 2002. For the first two quarters of 2002,
approximately 390 former employees received cash severance payments
totaling $20 million. The work force reduction payments for the remaining
130 employees associated with this plan will be completed by the end of
2002. Exit costs of $13 million associated with contract terminations,
equipment dismantling and disposal were also paid during the first half of
2002.
See Note 8 - Restructuring and Other Special Items - of Notes to
Consolidated Financial Statements for further details regarding our
restructuring plans.
28
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
Changes in Financial Condition as of June 30, 2002
Working Capital and Financial Condition
June 30, 2002 Dec. 31, 2001
------------- -------------
Working capital $2,772 $2,420
Current ratio 2.12:1 2.02:1
Our working capital at June 30, 2002, increased $352 million from Dec.
31, 2001, working capital to $2.8 billion. Consistent with the seasonality
of our business, current assets and current liabilities increased from Dec.
31, 2001, levels. Higher receivables and short-term borrowings were offset
somewhat by lower accrued liabilities and accounts payable. Accrued
liabilities declined from Dec. 31, 2001, because of payments of customer
marketing allowances and payments to growers for corn and soybean
inventories.
Trade receivables increased due to the seasonality of our business.
However, this seasonal increase was partially offset by the establishment
of a $154 million allowance for doubtful accounts in Argentina. Lower sales
and fluctuations in currency related to the Brazilian real also decreased
the net trade receivable balances in Latin America. Net accounts receivable
in Brazil and Argentina totaled approximately $580 million as of June 30,
2002, down from approximately $1 billion at year-end. Worldwide
year-to-date collections improved slightly from first-half 2001
collections. Collections in Brazil were relatively unchanged, while
collections in Argentina declined approximately 20 percent, primarily
because of the effect of the 20 percent tax levied on exports. However, we
were more successful in collecting receivables that were secured with
grain, net of export taxes.
Collections in the United States improved, in part because of a new
financing option we now have in place for certain of our customers. Under
this agreement, we collected $63 million in the second quarter. This new
$500 million revolving credit and liquidity facility allows certain major
U.S. customers to borrow to finance product purchases, and allows us to
reduce our reliance on commercial paper borrowings. The company originates
these loans on behalf of a third-party specialty finance company using
Monsanto's credit guidelines approved by the lender, a special purpose
entity. The loans are sold to multi-seller commercial paper conduits
through a non-consolidated qualifying special purpose entity (QSPE).
Monsanto has no ownership interest in the lender, the QSPE or the loans.
The company services the loans and provides a first loss guarantee of up to
$100 million. We have not issued, and are not obliged to issue, any debt or
equity securities in connection with this arrangement.
As of June 30, 2002, customer loans held by the QSPE totaled $63
million and the QSPE's liability to the conduits was $63 million. The
lender or the conduits may restrict or discontinue the facility at any
time. If the facility were to terminate, existing sold loans would be
collected by the QSPE over their remaining terms, which are generally six
months or less, and we would revert to past practice of providing customers
with direct credit purchase terms. Cash received from these loans sales
totaled $63 million during the second quarter of 2002, and servicing fee
revenues were not significant. As of June 30, 2002, Monsanto's recorded
guarantee liability was less than $1 million, based on our historical
collection experience with these customers and our current assessment of
credit exposure. Adverse changes in the actual loss rate would increase the
liability.
Cash Flow
Six Months Ended June 30,
2002 2001
---- ----
Cash required by operations $ (347) $ (384)
Cash required by investing activities (84) (247)
Cash provided by financing activities 401 736
Free cash flow (representing cash flows from operations and investing
activities) for the first half of 2002 improved $200 million from the same
period last year, from negative free cash flows of $631 million last year
to negative free cash flows of $431 million this year. Our free cash flow
for the first half of the year is historically negative, as we use cash to
fund the seasonal fluctuations in our business. Worldwide collections
improved slightly, in part because of our new customer financing
arrangement discussed above. Capital expenditures in the first half of 2002
29
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
declined over $100 million from the first half of 2001, as we continue to
manage our capital expenditures. We also received proceeds of approximately
$90 million associated with the sale of certain herbicide assets to Nissan
for use in the Japanese market and a long-term supply agreement with
Nissan. Approximately half of the proceeds related to the sale of these
herbicide assets and were included in cash provided by investing
activities; the proceeds from the long-term supply agreement were included
in cash flows from operations. In the second quarter of 2002, $22 million
aftertax was recognized as other income and a reduction of SG&A expenses,
and the proceeds from the long-term supply agreement were recorded as
unearned revenue to be recognized over the next five years. These cash flow
improvements were offset slightly by a $65 million payment to Aventis
CropScience S.A. as part of a legal judgment.
Capital Resources and Liquidity
June 30, 2002 Dec. 31, 2001
------------- -------------
Debt-to-total capitalization 27% 19%
Total debt as of June 30, 2002, and consequently debt-to-total
capitalization, increased when compared with Dec. 31, 2001 debt and
debt-to-total capitalization levels. This increase is consistent with the
seasonality of our business. The debt-to-capitalization ratio was also
affected by the $2 billion pretax ($1.8 billion aftertax) goodwill
impairment charge. At June 30, 2002, our borrowings included a related
party loan payable of $194 million, a $60 million decrease from year-end,
reflecting short-term loans from Pharmacia.
Under our present debt structure, we use short-term commercial paper
and loans from Pharmacia to fund our operating cash requirements. Pharmacia
has announced it will spin off its remaining ownership interest in Monsanto
on August 13, 2002, and after such spinoff, we do not expect to have access
to new borrowings from Pharmacia. This could affect our liquidity, as our
capital structure will likely be affected by a shift from short-term to
longer-term borrowings and a resulting increase in interest costs.
As of June 30, 2002, we had unused committed external borrowing
facilities amounting to $1.5 billion. These facilities exist largely to
support our commercial paper borrowings. In July, we finalized an
$800-million 364-day facility that replaces a $1 billion facility that was
scheduled to expire in August of this year. We reduced the amount of the
credit facility from $1 billion to $800 million because we expect to have
reduced reliance on commercial paper compared with the prior year. The
remaining $500-million facility expires in 2005.
On Aug. 9, 2002, we entered into an agreement with our underwriters to
issue $600 million of 7-3/8% Senior Notes due Aug. 15, 2012, pursuant to a
shelf registration filed in May 2002. The transaction is scheduled to
close on Aug. 14, 2002, and proceeds will be used to reduce commercial
paper borrowings. We have also announced that we anticipate seeking
additional long-term debt capital in the near future. To the extent that we
are unable to access long-term debt financing, we will continue to be
exposed to refinancing risks including changes in prevailing interest
rates.
On Aug. 13, 2002, Monsanto repaid its outstanding short-term debt to
Pharmacia and entered into a new short-term debt arrangement with Pharmacia
for $150 million. This short-term debt is scheduled to mature on Nov. 15,
2002, or earlier to the extent that Monsanto receives proceeds from the
issuance of additional debt or of equity.
When we entered into the agreement with our underwriters on Aug. 9,
2002, we closed our position in a treasury rate lock agreement, resulting
in a loss of $26 million, due to decreases in interest rates. As the rate
lock agreement was designated a cash-flow hedge, this loss will be recorded
in other comprehensive income until the hedged interest costs are
recognized in earnings. (See Note 10 - Accounting for Derivative
Instruments and Hedging Activities - of Notes to Consolidated Financial
Statements for further details.)
Effective Aug. 13, 2002, we entered into an agreement with Pharmacia
whereby Pharmacia will pay us approximately $40 million, and will transfer
certain assets, as payment for certain of our expenses relating to our
separation from Pharmacia and to the spinoff of Monsanto by Pharmacia.
Critical Accounting Policies
Monsanto regularly reviews its selection and application of
significant accounting policies and related financial disclosures. The
discussion of past performance in MD&A is based upon Monsanto's
30
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. Our
significant accounting policies are described in Note 2 - Significant
Accounting Policies - of Notes to Consolidated Financial Statements
contained in our annual report on Form 10-K for the year ended Dec. 31,
2001. The application of these accounting policies requires that management
make estimates and judgments. On an ongoing basis, Monsanto evaluates its
estimates, which are based on historical experience, market and other
conditions, and on assumptions that we believe to be reasonable. Actual
results may differ from these estimates due to actual market and other
conditions, and assumptions being significantly different than was
anticipated at the time of the preparation of these estimates. Such
differences may affect financial results. The estimates that affect the
application of our most critical accounting policies and require our most
significant judgments are outlined in Management's Discussion and Analysis
of Financial Condition and Results of Operations - "Critical Accounting
Policies"- contained in our annual report on Form 10-K for the year ended
Dec. 31, 2001.
New Accounting Standards
SFAS No. 141, Business Combinations, requires that the purchase method
of accounting be used for all business combinations initiated after June
30, 2001, thereby eliminating the pooling-of-interests method. It also
provides broader criteria for identifying which types of acquired
intangible assets must be recognized separately from goodwill and which
must be included in goodwill. We adopted the provisions of SFAS No. 141 on
Jan. 1, 2002, with the exception of the immediate requirement to use the
purchase method of accounting for all business combinations initiated after
June 30, 2001. SFAS No. 141 also required Monsanto to reassess the useful
lives, residual values, and classification of all identifiable and
recognized intangible assets. Any necessary prospective amortization period
adjustments were made Jan. 1, 2002.
On Jan. 1, 2002, Monsanto adopted SFAS No. 142, which changes the
accounting for goodwill from an amortization method to an impairment-only
method. Under SFAS No. 142, all goodwill amortization ceased effective Jan.
1, 2002. Monsanto's goodwill was tested for impairment in conjunction with
a transitional goodwill impairment test in 2002 and will be tested at least
annually thereafter. The transitional goodwill impairment test resulted in
a $2 billion impairment charge relating to our corn and wheat reporting
units, relating to goodwill that resulted primarily from our 1998 and, to a
lesser extent, 1997 seed company acquisitions. The resulting impairment
charge was recorded as a cumulative effect of accounting change, effective
Jan. 1, 2002.
SFAS No. 142 did not require that prior periods be restated to reflect
the nonamortization provision of the standard. Had Monsanto adopted the new
accounting standard as of Jan. 1, 2001, Monsanto earnings per share for the
second quarter, first half, and full year would have increased by $0.17 per
share, $0.26 per share, and $0.40 per share, respectively. For further
details see Note 5 - Goodwill and Other Intangible Assets - of Notes to
Consolidated Financial Statements. Because of the seasonality of the
agricultural business, quarterly financial information should not be
annualized.
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 addresses financial accounting for and
reporting of costs and obligations associated with the retirement of
tangible long-lived assets. This statement will become effective for
Monsanto on Jan. 1, 2003. Monsanto has not yet determined the effect
adoption of this standard will have on its consolidated financial position
or its results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which replaces SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. SFAS No. 144, which was effective for Monsanto on
Jan. 1, 2002, establishes an accounting model for long-lived assets to be
disposed of by sale. It applies to all long-lived assets, including
discontinued operations. The adoption of SFAS No. 144 did not have a
material effect on our consolidated financial position or results of
operations.
In April 2002, the FASB approved for issuance SFAS No. 145, Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. SFAS No. 145 rescinds, updates, clarifies and
simplifies existing accounting pronouncements. Among other things, SFAS No.
145 rescinds SFAS No. 4, which required all gains and losses from
31
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. Under SFAS No. 145,
the criteria in Accounting Principles Board (APB) No. 30 will now be used
to classify those gains and losses. The adoption of SFAS No. 145 resulted
in a reclassification of the extraordinary loss related to the
extinguishment of Employee Stock Ownership (ESOP) debt recorded in the
second quarter of 2001 ($2 million, net of taxes), to increase other
expense - net ($4 million) and to decrease the income tax provision ($2
million). The adoption of the remaining provisions of SFAS No. 145 did not
have a material effect on Monsanto's consolidated financial position or
results of operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 replaces Emerging
Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring. SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan. This statement will become effective for exit or disposal
activities initiated after Dec. 31, 2002. We have not yet determined the
effect adoption of this standard will have on our consolidated financial
position or its results of operations.
Outlook - Update
Focused Strategy
We believe that our focused approach to the business and the value we
bring to our customers will allow us to maintain an industry leadership
position. We continue to face a difficult agricultural and economic
environment, especially in Latin America. While growth from our traditional
products will be challenged in these conditions, we believe that our
portfolio of integrated products and services continues to offer farmers
cost-effective and value-added solutions. Our current business, building on
a restructured Latin American business, and continued cost management are
important in the near-term, while gaining biotechnology acceptance and
continued development of our research pipeline are important to our future
growth. Near-term cost savings initiatives will also be necessary to
mitigate the decline in U.S. sales of ROUNDUP herbicides. We will also
continue to pursue strategic alliances involving the sale of herbicide
assets in certain ex-U.S. geographic areas, where appropriate.
We remain committed to managing our operating costs and improving our
cash position through working capital and capital expenditure management.
As part of our emphasis on working capital, we have focused on receivables
collections and also have instituted more restrictive credit policies
(particularly in Latin America) to improve the overall quality of our
receivables going forward. We will continue to seek new external financing
alternatives for our customers to supplement our new customer financing
program discussed in "Changes in Financial Condition." Our primary working
capital challenges in 2002 will be receivables management in Latin America,
particularly in Argentina and Brazil.
Latin America
We recently announced changes in how we approach our Latin American
business, due to continued economic and market uncertainties. These actions
are intended to improve the longer-term viability of our business there and
to reduce overall risk. We will continue to operate primarily with cash or
grain sales terms in Argentina. We also are reducing our working capital in
Brazil and Argentina and, because of market conditions in Argentina, in
certain cases we will exercise our right to use collateralized products to
settle receivables there as appropriate. While we expect these steps will
reduce sales and earnings for the year, we believe that they are
appropriate for our business because they are designed to substantially
reduce our credit risk exposure and working capital in Brazil and
Argentina.
We have been affected by significant changes in Argentine monetary
legislation and a decline in the value of the Argentine peso. The economic
situation in Argentina continues to evolve. It is unclear what effect
existing and new regulations and conditions might have on our business in
Argentina. While we have prepared our 2001 and 2002 financial statements
32
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
relating to our Argentine operations on a U.S. dollar functional basis, the
functional currency designation in Argentina may change based on future
government economic reforms. The peso-to-U.S. dollar exchange rate was
3.625-to-1.00 as of Aug. 9, 2002.
In the second quarter of 2002, we established an allowance of $154
million pretax for estimated uncollectible accounts receivable in
Argentina. While we cannot determine how government actions in Argentina
will affect the outcome, we will aggressively pursue collection of the net
outstanding receivables (which were approximately $270 million as of June
30, 2002) at full U.S. dollar value. However, the unfavorable market and
economic conditions could have further negative impact on our collections,
sales and earnings. In March 2002, the government issued a decree
establishing a 20 percent export tax on agricultural exports and also ruled
that the U.S. dollar-denominated contracts in agriculture markets entered
into prior to Jan. 6, 2002, must be honored at the same exchange parity, as
the one obtained for exports of the agricultural products that contain the
agricultural inputs. This decree was amended with the July 2, 2002,
issuance of Resolution Number 143, which states that the future settlement
of such contracts on farm inputs for corn and soybeans will be subject to a
25 percent reduction, including the 20 percent export tax discussed above,
of the U.S. dollar price. Management's estimate of the potential impact of
these decrees on the company's receivables has been included in the
allowance for uncollectible receivables. The Argentine agricultural markets
continue to be primarily export-oriented, and their export sales are
generally denominated in U.S. dollars. The exchange rate between the U.S.
dollar and peso will fluctuate as we continue our collection efforts.
Year-to-date collections in Argentina are down approximately 20
percent, due primarily to the impact of the export taxes levied on
agricultural exports. We have been able to collect essentially all of our
receivables that were secured with grain, net of export taxes. We also plan
to continue to operate with primarily cash-or- grain sales terms in that
country. Management believes that the actions it has taken thus far have
reduced the risk related to our receivables.
In addition, our ability to repatriate funds from Argentina may be
restricted and we also have additional exposures. For example, our sales,
margins, and foreign-currency transactional gains/losses, may be adversely
affected based on fluctuations in foreign-currency exchange rates and the
level of inflation experienced.
The Brazilian real has fluctuated considerably during recent months.
While the majority of net current assets are protected against future
fluctuation, further devaluation and other economic concerns could have an
adverse effect on our sales.
Due to the changing economic conditions, we are changing the method by
which we account for our Latin American grain sales program to no longer
record revenues and cost of goods sold of essentially the same amount on
the conversion of grain to cash. Under the nature of the current program,
we no longer take ownership of the grain, thereby eliminating the
associated inventory risk. Full-year results for 2001 included net sales of
approximately $65 million related to this program, with minimal
contribution to gross margin and EBIT.
ROUNDUP Herbicide
ROUNDUP herbicide is key to our integrated strategy. Primary
opportunities for ROUNDUP volume growth in the future will be ROUNDUP use
in conjunction with conservation tillage systems and growth in ROUNDUP
READY crops. Conservation tillage helps farmers reduce soil erosion by
replacing plowing with the judicious use of herbicides to control weeds. We
believe that there is significant value yet to be gained through
conservation tillage and applications of ROUNDUP over the top of ROUNDUP
READY crops. We intend to maintain our leadership position by providing new
and unique formulations (such as ROUNDUP WEATHERMAX herbicide) and services
to growers, and by offering integrated seed, biotech and chemistry
solutions. We expect to continue to benefit from our logistics and
manufacturing capabilities, our increased capacity and our decreased
production costs. We also sell glyphosate to other herbicide producers.
We plan to build on our advantages as we face increased competition
for our ROUNDUP business. Without patent protection worldwide, ROUNDUP
herbicide continues to face competition from generic producers and
marketers, whose pricing policies in most instances cause downward pressure
on our prices. Since the expiration of our glyphosate patent in 2000, we
also face these pressures in the United States, where our market share has
declined over the past two years. ROUNDUP prices are expected to decline in
33
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
the United States. To date, this decline has been consistent with our
global pricing experience. The current plan for the ROUNDUP herbicide
business in the United States assumes that price and volume declines for
ROUNDUP herbicides in the future will be consistent with our previous
experience in other parts of the world. However, if price or volume
declines deviate significantly from our previous experience, we will need
to consider additional changes to our business model.
We expect to continue to selectively reduce average prices through new
formulations, discounts, rebates or other promotional strategies to
encourage new uses and to increase our sales volumes. This strategy likely
will result in a reduction in our gross margin, consistent with the
reduction in recent years, as we have implemented a price-elasticity
strategy in certain segments. For example, in 2001 we introduced RT MASTER
herbicide, which is formulated and priced for conservation tillage use in
the highly elastic wheat market.
In certain regions, particularly the United States and Latin America,
distribution channel inventories for ROUNDUP herbicide have increased.
Distribution channel inventories have increased significantly in the United
States within the past three years. In the United States, our goal is that,
in the future, sales of ROUNDUP herbicides will approximate usage on a
seasonal basis. However, many factors that are not within our control may
affect usage of ROUNDUP herbicides. Higher product levels at our
distributors could materially adversely affect our future results of
operations, particularly in the event of an unanticipated rate of reduction
in prices of competitive glyphosate products, or of sales volumes of
ROUNDUP. In addition, if distributors elect to reduce their inventory
levels from current levels, sales volumes of ROUNDUP herbicides would be
materially adversely affected. We recently announced a plan to reduce
channel inventories in Latin America as a part of our plan to reduce our
risk in that region. This plan has affected, and will continue to affect
sales and EBIT in 2002.
Seed Biotechnology
We are investing in the growth segment of agriculture. As the seed and
biotechnology segments of the industry have become more important, we have
increased our marketing and R&D focus in this area. Biotechnology traits
offer growers several benefits: lower costs, greater convenience and
flexibility, higher yields, and the ability to adopt environmentally sound
practices like conservation tillage. ROUNDUP and other glyphosate-based
herbicides can be applied over the top of our ROUNDUP READY crops,
controlling weeds without injury to the crop. This integration of
agricultural chemicals and enhanced seeds offers growers a cost-effective
solution for weed control.
To date, we have introduced ROUNDUP READY traits for soybeans, corn,
canola and cotton. In 2001, approximately 103 million acres were planted
with ROUNDUP READY crops. In addition, we have developed insect-resistance
seed traits such as YIELDGARD for corn and BOLLGARD for cotton, which serve
as pest control alternatives to chemical pesticides. We currently estimate
that acreage planted with our seed traits grew from approximately 3 million
in 1996 to approximately 123 million in 2001. We currently estimate that
our insect-resistant and ROUNDUP READY biotechnology traits were used on
approximately 90 million acres in the United States during the 2002 growing
season, compared with approximately 85 million acres in the previous year.
Gaining global acceptance of biotechnology is another key part of our
strategy. In March 2002, our seed partner in India, Maharashtra Hybrid Seed
Company Limited, received commercial approval for BOLLGARD insect-protected
cotton. This is the first biotechnology crop approved by India, one of the
world's largest cotton producing countries, and commercialization has
begun. Proceedings are pending before the Indian courts seeking to overturn
the government's authorization for the commercial release of
insect-protected cotton. To date, the courts have denied applications for
injunctive relief and planting is occurring. We believe that the challenges
are without merit and that commercialization of our technology will be
allowed to continue. We are continuing our efforts to obtain approval in
Brazil for planting of ROUNDUP READY soybeans, and in Europe for importing
corn that may contain a ROUNDUP READY trait.
We are also working to commercialize our R&D pipeline of new
biotechnology traits. We have two new biotechnology traits ready to enter
the market in 2003, pending successful completion of U.S. regulatory
reviews. We have completed the Food and Drug Administration (FDA)
consultation on BOLLGARD II cotton, and are in the process of obtaining
United States Department of Agriculture (USDA) and Environmental Protection
Agency (EPA) clearance prior to commercialization. We have received
34
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
Japanese food and feed approval of YIELDGARD rootworm-protected corn, and
have completed consultation with the FDA. The USDA and EPA are in the final
stages of their regulatory review.
We continue to address concerns raised by consumers and public
interest groups and questions raised by government regulators regarding
agricultural and food products developed through biotechnology. We are
committed to addressing these issues, and to achieving greater acceptance,
efficient regulation, and timely commercialization of biotechnology
products.
We also continue to address concerns about the unintended or
adventitious presence of biotechnology materials in seed, crops or food. We
expect these types of issues to continue. We are addressing the issue of
adventitious presence through our own seed quality programs, by working
with others in seed, feed and food industry associations, by developing
information to improve both understanding and management of seed quality,
and by continuing to press for regulations which recognize and accept the
adventitious presence of biotechnology traits.
Other Information
As discussed in Note 9 - Commitments and Contingencies - of Notes to
the Consolidated Financial Statements, Monsanto is involved in a number of
lawsuits and claims relating to a variety of issues. Many of these lawsuits
relate to intellectual property disputes. We expect that such disputes will
continue to occur as the agricultural biotechnology industry evolves.
This Outlook section should be read in conjunction with outlook
information in our annual report for the year ended Dec. 31, 2001, which is
incorporated by reference into our annual report on Form 10-K. For
additional information about the outlook for Monsanto, see "Cautionary
Statements Regarding Forward Looking Information," below.
Cautionary Statements Regarding Forward Looking Information
Under the Private Securities Litigation Reform Act of 1995, companies
are provided with a "safe harbor" for making forward-looking statements
about the potential risks and rewards of their strategies. We believe it is
in the best interest of our shareowners to use these provisions in
discussing future events. However, we are not required to, and you should
not rely on us to, revise or update these statements or any factors that
may affect actual results, whether as a result of new information, future
events or otherwise. Forward-looking statements include: statements about
our business plans; statements about the potential for the development,
regulatory approval, and public acceptance of new products; estimates of
future financial performance; predictions of national or international
economic, political or market conditions; statements regarding other
factors that could affect our future operations or financial position; and
other statements that are not matters of historical fact. Such statements
often include the words "believes," "expects," "anticipates," "intends,"
"plans," "estimates," or similar expressions.
Our ability to achieve our goals depends on many known and unknown
risks and uncertainties, including changes in general economic and business
conditions. These factors could cause our actual performance and results to
differ materially from those described or implied in forward-looking
statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below.
Competition for ROUNDUP Herbicides: ROUNDUP herbicide is a major
product line. Patents protecting ROUNDUP herbicides in several countries
expired in 1991, and compound per se patent protection for the active
ingredient in ROUNDUP herbicides expired in the United States in 2000. As a
result, ROUNDUP herbicides will face increasing competition in the future,
including in the United States. In order to compete in this environment, we
rely on a combination of (1) marketing and logistics strategies, including
new and improved formulations, (2) pricing strategy, and (3) decreased
production costs.
Marketing and Logistics Strategies: We intend to respond to
increasing competition by encouraging new uses (especially
conservation tillage), providing unique formulations and services, and
offering integrated seed and biotech solutions. The success of our
35
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
ROUNDUP marketing and logistics strategies will depend on the
continued expansion of conservation tillage practices and of ROUNDUP
READY seed acreage, on our ability to develop services and marketing
programs that are attractive to our customers, and on the continued
success of our unique logistics and distribution systems and
practices.
Pricing Strategy: Historically, we have reduced the average net
sales price of ROUNDUP herbicides in selected markets in order to
increase volumes, penetrate new markets, and compete effectively. In
addition to reduced list prices, price reductions may include
discounts, rebates or other promotional strategies, as well as the
development of new and lower-cost formulations for specific uses.
However, there can be no guarantee that price reductions will
stimulate enough volume growth to offset the price reductions and
increase revenues. In the past, price reductions have not always
stimulated volume growth and, where volumes have increased, the
increases have not always been adequate to offset the price reductions
and to increase revenues.
Production Cost Decreases: We also believe that increased volumes
and technological innovations will lead to efficiencies that will
reduce the production cost of glyphosate. As part of this strategy, we
have entered into agreements to supply glyphosate to other herbicide
producers. Such cost reductions will depend on realizing such
increased volumes and technological innovations.
Realization and Introduction of New Products: Our ability to develop
and introduce new products to market, particularly new agricultural
biotechnology products, will depend on, among other things, the
availability of sufficient financial resources to fund research and
development needs; the success of our research and development efforts; our
ability to gain acceptance through the chain of commerce (e.g., by
processors, food companies, and consumers); our ability to obtain
regulatory approvals; the demonstrated effectiveness of our products; our
ability to produce new products on a large scale and to market them
economically; our ability to develop, purchase or license required
technology; and the existence of sufficient distribution channels.
Governmental and Consumer Acceptance: The commercial success of
agricultural and food products developed through biotechnology will depend
in part on government and public acceptance of their cultivation,
distribution and consumption. We continue to work with consumers, customers
and regulatory bodies to encourage understanding of modern biotechnology,
crop protection and agricultural biotechnology products. Biotechnology has
enjoyed and continues to enjoy substantial support from the scientific
community, regulatory agencies and many governmental officials around the
world. However, public attitudes may be influenced by claims that
genetically modified plant products are unsafe for consumption or pose
unknown risks to the environment or to traditional social or economic
practices, even if such claims have little or no scientific basis. The
development and sales of our products have been, and may in the future be,
delayed or impaired because of adverse public perception or extreme
regulatory caution in assessing the safety of our products and the
potential effects of these products on other plants, animals, human health
and the environment.
Securing governmental approvals for, and consumer confidence in,
products developed through biotechnology poses numerous challenges,
particularly outside the United States. If crops grown from seeds that were
developed through biotechnology are not yet approved for import into
certain markets, growers in other countries may be restricted from
introducing or selling their grain. In addition, because some markets have
not approved these products, some companies in the food industry have
sought to establish supplies of non-genetically-modified crops, or have
refused to purchase crops grown from seeds developed through biotechnology.
Resulting concerns about trade and marketability of these products may
deter farmers from planting them, even in countries where planting and
consumption have been fully approved.
Regulatory Approvals: The field testing, production and marketing of
our products are subject to extensive regulations and numerous government
approvals, which vary widely among jurisdictions. Obtaining necessary
regulatory approvals can be time consuming and costly, and there can be no
guarantee of the timing or granting of approvals. Regulatory authorities
can block the sale or import of our products, order recalls, and prohibit
planting of seeds containing our technology. As agricultural biotechnology
continues to evolve, new unanticipated restrictions and burdensome
regulatory requirements may be imposed. In addition, international
agreements may also affect the treatment of biotechnology products.
36
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
Seed Quality and Adventitious Presence: Because the global acceptance
and regulation of biotechnology-derived agricultural products is not
consistent or harmonized, the detection of unintended (adventitious)
biotechnology traits in precommercial seed, commercial seed varieties, or
the crops and products produced can negatively affect our business or
results of operations. The detection of adventitious presence can result in
the withdrawal of seed lots from sale, or in governmental regulatory
compliance actions such as crop destruction or product recalls in some
jurisdictions. Concerns about seed quality related to biotechnology could
also lead to additional requirements such as seed labeling and
traceability. Concerns about unintended biotechnology traits in grain or
food could lead to additional government regulations and to consumer
concerns about the integrity of the food supply chain from the farm to the
finished product. Together with other seed companies and industry
associations, we are actively seeking sound, science-based rules and
regulatory interpretations that would clarify the legal status of trace
adventitious amounts of biotechnology traits in seed, crops and food. This
may involve the establishment of threshold levels for the adventitious
presence of biotechnology traits, and standardized sampling and testing
methods. Although we believe that such thresholds are already implicit in
existing seed quality and other laws, the establishment of appropriate
regulations would provide the basis for recognition and acceptance of the
adventitious presence of biotechnology traits.
Intellectual Property: We have devoted significant resources to
obtaining and maintaining our intellectual property rights, which are
material to our business. We rely on a combination of patents, copyrights,
trademarks and trade secrets, confidentiality provisions, Plant Variety
Protection Act registrations, and licensing arrangements to establish and
protect our intellectual property. We seek to preserve our intellectual
property rights and to operate without infringing the proprietary rights of
third parties. Intellectual property positions are extremely important
within the agricultural biotechnology industry.
There is some uncertainty about the value of available patent
protection in certain countries outside the United States, and patent
protection may not be available in some countries. For example, we do not
have patent protection for our ROUNDUP READY soybean traits in Argentina.
Moreover, the patent positions of biotechnology companies involve complex
legal and factual questions. Rapid technological advances and the number of
companies performing such research can create an uncertain environment.
Patent applications in the United States may be kept secret, or if
published like those outside the United States, published 18 months after
filing. Accordingly, competitors may be issued patents from time to time
without any prior warning to us. That could decrease or eliminate the value
of similar technologies that we are developing. Because of this rapid pace
of change, some of our products may unknowingly rely on key technologies
already patent-protected by others. If that should occur, we must obtain
licenses to such technologies to continue to use them.
Certain of our seed germplasm and other genetic material, patents, and
licenses are currently the subject of litigation, and additional future
litigation is anticipated. Although the outcome of such litigation cannot
be predicted with certainty, we will continue to defend and litigate our
positions vigorously. We believe that we have meritorious defenses and
claims in the pending suits.
Technological Change and Competition: A number of companies are
engaged in plant biotechnology research. Technological advances by others
could render our products less competitive. In addition, the ability to be
first to market a new product can result in a significant competitive
advantage. We believe that competition will intensify, not only from
agricultural biotechnology firms but also from major agrichemical, seed and
food companies with biotechnology laboratories. Some of our agricultural
competitors have substantially greater financial, technical and marketing
resources than we do.
Planting Decisions and Weather: Our business is subject to weather
conditions and natural disasters that affect commodity prices, seed yields,
and grower decisions about purchases of seeds, traits and herbicides. In
addition, crop commodity prices continue to be at very low levels. There
can be no assurance that this trend will not continue. These lower
commodity prices affect growers' decisions about the types and amounts of
crops to plant and may negatively influence sales of our herbicide, seed
and biotechnology products.
Need for Short-Term Financing: Like many other agricultural companies,
we regularly extend credit to our customers to enable them to acquire
agricultural chemicals and seeds at the beginning of the growing season.
Our credit practices, combined with the seasonality of our sales, make us
dependent on our ability to obtain substantial short-term financing to fund
our cash flow requirements, our ability to collect customer receivables,
37
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
and our ability to repatriate funds from ex-U.S. operations. Our need for
short-term financing typically peaks in the second quarter. Downgrades in
our credit rating or other limitations on our ability to access short-term
financing, including our ability to refinance our short-term debt as it
becomes due, would increase our interest costs and adversely affect our
sales and our profitability.
Litigation and Contingencies: We are involved in numerous major
lawsuits regarding contract disputes, intellectual property issues,
biotechnology issues, antitrust allegations and other matters. Adverse
outcomes could subject us to substantial damages or limit our ability to
sell our products. In addition, in connection with the separation of our
businesses from those of Pharmacia Corporation on Sept. 1, 2000, and
pursuant to a Separation Agreement entered into on that date (as amended,
the "Separation Agreement"), we assumed, and agreed to indemnify Pharmacia
for, any liabilities primarily related to Pharmacia's former agricultural
or chemical businesses. Under the Separation Agreement, we agreed to
indemnify Pharmacia for any liabilities that Solutia Inc. ("Solutia") had
assumed from Pharmacia in connection with the spinoff of Solutia on Sept.
1, 1997, to the extent that Solutia fails to pay, perform or discharge
those liabilities. This indemnification obligation applies to litigation,
environmental, retiree and all other Pharmacia liabilities that were
assumed by Solutia.
Distribution of Products: In order to successfully market our
products, we must estimate growers' needs, and successfully match the level
of product at our distributors to those needs. If distributors do not have
enough inventory of our products at the right time, our current sales will
suffer. On the other hand, high product inventory levels at our
distributors may cause revenues to suffer materially in future periods as
these distributor inventories are worked down, particularly in the event of
unanticipated price reductions.
Cost Management: Our ability to meet our short- and long-term
objectives requires that we manage our costs successfully, without
adversely affecting our performance. Changing business conditions or
practices may require us to reduce costs to remain competitive. If we are
unable to identify cost savings opportunities and successfully reduce costs
and maintain cost reductions, our profitability will be affected. Our
profitability will also be affected to the extent that we incur cost
increases which we are not able to offset through price increases in our
products.
Accounting Policies and Estimates: In accordance with generally
accepted accounting principles, we adopt certain accounting policies, such
as policies related to the timing of revenue recognition and other policies
described in our financial statements. Changes to these policies may affect
future results. There may also be changes to generally accepted accounting
principles, which may require adjustments to financial statements for prior
periods and changes to the company's accounting policies and financial
results prospectively. In addition, we must use certain estimates,
judgments and assumptions in order to prepare our financial statements. For
example, we must estimate matters such as levels of returns, collectibility
of receivables, and the probability and amount of future liabilities. If
actual experience differs from our estimates, adjustments will need to be
made to financial statements for future periods, which may affect revenues
and profitability. Finally, changes in our business practices may result in
changes to the way we account for transactions, and may affect
comparability between periods.
Operations Outside the United States: Sales outside the United States
make up a substantial portion of our revenues, and we intend to continue to
actively explore international sales opportunities. In addition, we engage
in manufacturing, seed production, sales, and/or research and development
in many parts of the world. Although we have operations in virtually every
region, our ex-U.S. sales are principally in Argentina, Brazil, Canada,
France, Mexico, Australia and Japan. Accordingly, developments in those
parts of the world generally have a more significant effect on our
operations than developments in other places. Operations outside the United
States are potentially subject to a number of unique risks and limitations,
including, among others, fluctuations in currency values and
foreign-currency exchange rates; exchange control regulations; changes in a
specific country's or region's political or economic conditions; weather
conditions; import and trade restrictions; import or export licensing
requirements and trade policy; unexpected changes in regulatory
requirements; restrictions on the ability to repatriate funds; and other
potentially detrimental domestic and foreign governmental practices or
policies affecting United States companies doing business abroad. Weakened
economies may cause future sales to decrease because customers may purchase
fewer goods in general, and also because imported products could become
more expensive for customers to purchase in their local currency. Changes
in exchange rates may affect our earnings, the book value of our assets
outside the United States, and our equity.
38
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS (continued)
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except as noted below, there are no material changes related to market
risk from the disclosures in Monsanto's annual report on Form 10-K for the
year ended Dec. 31, 2001.
In May 2002, the company filed a shelf registration with the SEC that
would allow the company to issue debt of up to $2 billion in the future. On
June 26, 2002, the Company entered into a treasury rate lock agreement with
several banks to hedge against changes in long-term interest rates on a
portion of the planned debt issue. On June 30, 2002, the market value of
this agreement was $2 million. The market value of the treasury rate lock
agreement rises or falls with the yield on 10-year U.S. Treasury notes. A
one-percentage point change in interest rates would change the fair value
of the Treasury lock by approximately $39 million. See Note 13 - Subsequent
Events - of Notes to Consolidated Financial Statements for further details.
39
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Pursuant to the Separation Agreement between Monsanto Company and
Pharmacia Corporation, effective Sept. 1, 2000, as amended (the "Separation
Agreement"), we assumed responsibility for legal proceedings primarily
related to the agricultural business that Pharmacia transferred to us on
that date. As a result, although Pharmacia may remain the named defendant
or plaintiff in some of these cases, we manage and are responsible for the
litigation. In the proceedings where Pharmacia is the defendant, we will
indemnify Pharmacia for costs, expenses and any judgments or settlements;
and in the proceedings where Pharmacia is the plaintiff, we will pay the
fees and costs of, and receive any benefits from, this litigation. The
discussion below includes certain proceedings to which Pharmacia is a party
and which we are defending or prosecuting, as well as proceedings to which
Monsanto is a party in its own name. Monsanto is also involved in other
legal proceedings arising in the ordinary course of business. While the
results of litigation cannot be predicted with certainty, we do not believe
that the resolution of the proceedings that we are defending or
prosecuting, either individually or taken as a whole, will have a material
adverse effect on our financial position, profitability or liquidity. We
have meritorious legal arguments and will continue to represent our
interests vigorously in all of these proceedings.
In addition to the proceedings described below, to which Pharmacia or
we are a party and which we are defending or prosecuting, pursuant to the
Separation Agreement we have assumed, and agreed to indemnify Pharmacia
for, any liabilities primarily related to Pharmacia's former agricultural
or chemical businesses. Under the Separation Agreement, we agreed to
indemnify Pharmacia for any liabilities that Solutia Inc. ("Solutia") had
assumed from Pharmacia in connection with the spinoff of Solutia on Sept.
1, 1997 (the "Solutia Spinoff"), to the extent that Solutia fails to pay,
perform or discharge those liabilities. This indemnification obligation
applies to litigation, environmental, retiree and all other liabilities
that were assumed by Solutia, and which are not included in the discussion
below. For example, pursuant to the Distribution Agreement entered into in
connection with the Solutia Spinoff, as amended (the "Distribution
Agreement"), Solutia assumed responsibility for litigation currently
pending in state and federal court in Alabama brought by several thousand
plaintiffs, alleging property damage, anxiety and emotional distress and
personal injury arising from exposure to polychlorinated biphenyls (PCB's),
which were discharged from an Anniston, Alabama plant site that was
formerly owned by Pharmacia and that was transferred to Solutia as part of
the Solutia Spinoff. This litigation includes but is not limited to the
Abernathy litigation described in Item 5 - Other Information - Solutia Inc.
Pursuant to the terms of the Distribution Agreement, Solutia is required to
indemnify Pharmacia and us for liabilities that Pharmacia and we incur in
connection with this litigation. Pursuant to the terms of the Separation
Agreement, Monsanto is required to indemnify Pharmacia for any losses
relating to, arising out of or due to Solutia's failure to pay or discharge
such liabilities when due or required to be paid, performed or discharged,
or to indemnify Pharmacia therefor. See Item 5 - Other Information -
Solutia Inc. for certain additional information relating to Solutia.
The following updates certain proceedings to which Pharmacia or we are
a party and for which we are responsible. In that discussion, we use the
phrase "the former Monsanto Company" to refer to Pharmacia Corporation
prior to the date of the Separation Agreement. Other information with
respect to legal proceedings appears in our annual report on Form 10-K
report for the year ended Dec. 31, 2001 and in our Form 10-Q report for the
quarterly period ended March 31, 2002.
On July 25, 2002, Syngenta Biotechnology, Inc. ("SBI") filed a suit
against Monsanto and Delta and Pine Land Company in the United States
District Court for Delaware alleging infringement of a patent issued in
April 2000, under which SBI is a licensee, and which allegedly relates to
certain agro-transformed cotton technology products. SBI seeks injunctive
relief and monetary damages. Monsanto has substantial defenses to the
claims, including non-infringement and invalidity of the patent. This
litigation is at its inception and Monsanto plans to vigorously defend the
litigation.
Also, on July 25, 2002, Syngenta Seeds, Inc. ("SSI") filed a suit
against Monsanto, DEKALB Genetics Corporation, Pioneer Hi-Bred
International, Inc., Dow Agrosciences, L.L.C. and Mycogen Plant Sciences,
Inc. ("MPS") and Agrigenetics, Inc., collectively d.b.a. Mycogen Seeds, in
the United States District Court for Delaware alleging infringement of
three patents issued between June 2000 and June 2002. The patents allegedly
pertain to insect resistant transgenic corn. SSI seeks injunctive relief
40
and monetary damages. The defendants have substantial defenses to the
claims, including non-infringement and invalidity of the various patents.
This litigation is at its inception and Monsanto plans to vigorously defend
the lawsuit.
As described in our Form 10-K report for the year ended Dec. 31, 2001
and in our Form 10-Q report for the quarterly period ended March 31, 2002,
since the 1984 termination of the class action litigation against various
manufacturers, including the former Monsanto Company, of the herbicide
Agent Orange used in the Vietnam War, Monsanto and the former Monsanto
Company have successfully defended against various lawsuits associated with
injuries allegedly caused by the herbicide's use. A few matters remain
pending, including three separate actions (now consolidated) brought by
approximately 13,000 Korean veterans and initially filed against the former
Monsanto Company and The Dow Chemical Company in Seoul, Korea, in October
1999. The plaintiffs seek damages of 300 million won (approximately
$250,000) each. On May 23, 2002, the Seoul District Court ruled in favor of
the defendants and dismissed all claims by plaintiffs due to lack of
causation and failure to meet the applicable statute of limitations. On
June 14, 2002, plaintiffs lodged their notice of de novo appeal.
As described in our Form 10-K report for the year ended Dec. 31, 2001
and in our Form 10-Q report for the quarterly period ended March 31, 2002,
on Dec. 2, 1999, a class action lawsuit was filed against the former
Monsanto Company and five other herbicide manufacturers in the United
States District Court for the Eastern District of Pennsylvania. The
plaintiffs purport to represent a class of over 9,000 Korean and 1,000
United States service persons allegedly exposed to the herbicide Agent
Orange and other herbicides sprayed from 1967 to 1970 in or near the
demilitarized zone separating North Korea from South Korea. The complaint
did not assert any specific causes of action or demand a specified amount
in damages. This suit was dismissed by the District Court in November 2001.
In addition, two suits filed by individual U.S. veterans contesting their
denial of claims subsequent to the class action settlement have been
consolidated in the multidistrict litigation proceeding that was
established in 1977 in the United States District Court for the Eastern
District of New York, to coordinate Agent Orange-related litigation in the
United States. These suits were dismissed by the District Court. In an
opinion dated Nov. 30, 2001 the United States Court of Appeals for the
Second Circuit vacated the District Court's dismissal claims and remanded
the cases to the District Court for further proceedings. On June 20, 2002,
the District Court announced that it would stay further proceedings pending
a ruling by the United States Supreme Court on defendants' petition for
certiorari.
As described in our Form 10-K report for the year ended Dec. 31, 2001
and in our Form 10-Q report for the quarterly period ended March 31, 2002,
since the late 1990's, the EPA has focused attention on the presence of
dioxin in the Kanawha River in West Virginia. As part of its efforts in
this regard, the EPA is conducting preliminary assessments at over twenty
sites identified as potential sources of dioxin in the Kanawha River. Among
these sites are three landfills - the Heizer Creek landfill, the Poca Strip
Mine landfill, and the Manila Creek landfill - that the former Monsanto
Company used in the late 1950's to dispose of plant waste from its former
Nitro, West Virginia, manufacturing location. Through the preliminary
assessment work, the EPA identified an elevated dioxin level in one soil
sample taken at the Heizer Creek landfill, and notified the former Monsanto
Company of its potential liability at that landfill. Pursuant to a
September 1999 consent order with the EPA, the former Monsanto Company and
(after Sept. 1, 2000) Monsanto prepared and submitted to the EPA an
Engineering Evaluation/Cost Analysis (EE/CA) Report, which contained an
investigation of the dioxin contamination at the Heizer Creek landfill, a
risk assessment, an evaluation of remedial action options, and our
recommended remedy. The cost to implement the recommended remedy was
estimated at $1.5 million, and funds were reserved for this amount. The EPA
has published and solicited comments on its decision that the EE/CA
Report's recommended remedy was protective of human health and the
environment and is now developing responses to the public comments. As of
this time, the EPA has not identified elevated dioxin levels at the Poca
Strip Mine or Manila Creek landfills. Also with regard to the EPA's focus
on dioxin in the Kanawha River, the EPA sent Monsanto a "notice of
potential liability and offer to negotiate for removal action" regarding
the Kanawha River Sediment Site in Putnam County, West Virginia in May
2002. The basis for this notice is elevated dioxin levels that the EPA
found in sediments located in certain areas of the Kanawha River. At this
point, the nature and extent of the response activities that the EPA is
seeking as well as the degree, if any, to which the Monsanto is responsible
for associated costs is unclear.
As described in our Form 10-K report for the year ended Dec. 31, 2001
and in our Form 10-Q report for the quarterly period ended March 31, 2002,
on March 7, 2000, the United States Department of Justice filed suit on
behalf of the EPA in United States District Court for the District of
Wyoming against the former Monsanto Company, Solutia and P4 Production, LLC
("P4 Production") seeking civil penalties for alleged violations of
Wyoming's environmental laws and regulations, and of an air permit issued
in 1994 by the Wyoming Department of Environmental Quality. The permit had
41
been issued for a coal coking facility in Rock Springs, Wyoming, that is
currently owned by P4 Production. The United States sought civil penalties
of up to $25,000 per day (or $27,500 per day for violations occurring after
Jan. 30, 1997) for the air violations, and immediate compliance with the
air permit. The companies have already paid a $200,000 fine covering the
same Clean Air Act violations pursuant to a consent decree entered in the
First Judicial District Court in Laramie County, Wyoming, on June 25, 1999.
On April 21, 2000, the companies filed a motion for dismissal or summary
judgment on the grounds of claim preclusion, including the doctrines of res
judicata and release. In an opinion dated March 29, 2002, the court denied
the companies' motion for summary judgment. On July 22, 2002, the District
Court denied the companies' April 19, 2002 motion for certification of an
appeal of the order denying the motion for summary judgment. Any liability
would be shared by Monsanto and Solutia, based upon the purchases from P4
Production.
As described in our Form 10-K report for the year ended Dec. 31, 2001,
in June 1996, Mycogen Corporation ("Mycogen"), MPS and Agrigenetics, Inc.
filed suit against the former Monsanto Company in California State Superior
Court in San Diego alleging that the former Monsanto Company had failed to
license, under an option agreement, technology relating to Bt corn and
glyphosate-tolerant corn, cotton and canola. On Oct. 20, 1997, the court
construed the agreement as a license to receive genes rather than a license
to receive germplasm. Jury trial of the damage claim for lost future
profits from the alleged delay in performance ended March 20, 1998, with a
verdict against the former Monsanto Company awarding damages totaling
$174.9 million. On June 28, 2000, the California Court of Appeals for the
Fourth Appellate District issued its opinion reversing the jury verdict and
related judgment of the trial court, and directed that judgment should be
entered in favor of the former Monsanto Company. On Aug. 8, 2002, the
California Supreme Court upheld the California Court of Appeals decision
reversing the jury's verdict.
As described in our Form 10-K report for the year ended Dec. 31, 2001,
on May 19, 1995, MPS filed suit against Monsanto in the United States
District Court in California alleging infringement of its patent involving
synthetic Bt genes, and seeking unspecified damages and injunctive relief.
Monsanto prevailed on summary judgment in dismissing all claims. On May 30,
2001, the United States Court of Appeals for the Federal Circuit affirmed
the summary judgment finding that current products of Monsanto do not
infringe the MPS patent. The appellate court also determined that certain
factual issues prevented complete entry of summary judgment on the issue of
prior invention by Monsanto and remanded the matter to District Court.
Monsanto has moved for summary judgment on all remaining claims on the
basis that a prior judgment won by Monsanto against MPS in United States
District Court in Delaware, is dispositive of all claims asserted by MPS.
The District Court has denied Monsanto's renewed request for summary
judgment.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the company's Annual Meeting of Stockholders on May 1, 2002, three matters
were submitted to a vote of stockholders.
1. The following directors were elected, each to hold office until the
Annual Meeting to be held in 2003 or until a successor is elected and
has qualified or until his or her earlier death, resignation or
removal. Votes were cast as follows:
Votes Votes
Name "For" "Withhold Authority"
---- ----- --------- ----------
Frank V. AtLee III 255,157,329 544,576
Christopher J. Coughlin 247,389,479 8,322,426
Michael Kantor 255,100,170 611,735
Gwendolyn S. King 255,590,336 121,569
Sharon R. Long, Ph.D. 255,602,477 109,448
C.Steven McMillan 255,256,982 454,923
Philip Needleman, Ph.D. 247,430,330 8,281,575
William U. Parfet 255,256,382 455,523
John S. Reed 255,257,002 454,903
Hendrik A. Verfaillie 247,401,815 8,310,090
42
2. The appointment by the Board of Directors of Deloitte & Touche LLP as
principal independent auditors for the year 2002 was ratified by the
stockholders. A total of 254,619,724 votes were cast in favor of
ratification, 1,083,090 votes were cast against it, and 9,091 votes
were counted as abstentions.
3. The approval of the 2000 Management Incentive Plan was submitted to a
vote of stockholders. The Board recommended a vote for the proposal. A
total of 246,870,126 votes were cast in favor, a total of 5,451,970
votes were cast against it, 124,587 votes were counted as abstentions,
and 3,274,222 were counted as broker non-votes.
Under New York Stock Exchange rules, brokerage firms that hold shares as nominee
may vote shares for which the beneficial owners do not provide voting
instructions on certain "routine" matters. When a proposal is not a routine
matter and the nominee does not receive voting instructions from the beneficial
owner of the shares with respect to the proposal, the nominee cannot vote the
shares on that proposal. This is called a "broker non-vote." With respect to the
matters submitted to a vote of the Company's stockholders at its Annual Meeting
of Stockholders on May 1, 2002, (i) the election of directors and the
ratification of auditors were considered routine matters under applicable rules
for which nominees were permitted to vote uninstructed shares; and (ii) the
approval of the 2000 Management Incentive Plan was not considered routine under
applicable rules, which resulted in the broker non-votes indicated above.
Item 5. OTHER INFORMATION
Solutia Inc.
We have recently entered into additional agreements relating to
Solutia Inc.
On Sept. 1, 1997, the former Monsanto Company, now known as Pharmacia
Corporation, spun off its chemical businesses into a separate, independent
company called Solutia Inc. In connection with that spinoff, Solutia
assumed and agreed to indemnify Pharmacia for certain liabilities related
to those chemicals businesses. We, Pharmacia and Solutia entered into an
agreement dated as of July 1, 2002, to provide that Solutia will also
indemnify us for the same liabilities for which it had agreed to indemnify
Pharmacia, and to clarify the parties' rights and obligations.
On Sept. 1, 2000, Pharmacia transferred certain assets and liabilities
associated with its agricultural business to us. We agreed to indemnify
Pharmacia for any liabilities primarily related to Pharmacia's former
agricultural or chemical businesses. We agreed to indemnify Pharmacia for
any liabilities assumed by Solutia as referred to above, to the extent that
Solutia fails to pay, perform or discharge those liabilities. We and
Pharmacia have entered into an agreement dated as of July 1, 2002 to
clarify our respective rights and obligations in this regard.
The liabilities for which we have agreed to indemnify Pharmacia
include litigation, environmental, retiree and all other Pharmacia
liabilities that were assumed by Solutia. These include liabilities that
were Pharmacia liabilities prior to the Solutia spinoff, and from which
Pharmacia could not be released, either by operation of law, because of the
unavailability of third-party consents, or otherwise. They include, for
example, liabilities relating to litigation currently pending in state and
federal court in Alabama and described in Item 1 - Legal Proceedings. In
addition, Solutia assumed any liability that Pharmacia had with respect to
certain unfunded post-retirement benefits for Pharmacia employees and
former Pharmacia employees who were assigned to Solutia in connection with
the spinoff. To the extent that Solutia encounters material liquidity or
other financial constraints, the risk that it would be unable to pay,
perform or discharge its assumed liabilities or to satisfy its indemnity
obligations to Pharmacia, and that we would be called upon to do so, would
increase. We have no obligation to provide financing support for Solutia.
Solutia is defending itself and Pharmacia in connection with Sabrina
Abernathy, et al. v. Monsanto Company, et al., currently pending in state
court in Alabama. The jury has found Solutia and Pharmacia liable with
respect to certain claims in this litigation, and proceedings have
commenced to determine damages. Solutia has requested that Pharmacia commit
to posting any appeal bond that may be required to stay execution of any
judgment in this litigation pending an appeal. Pursuant to an agreement
dated as of July 1, 2002, we, Pharmacia and Solutia have agreed that, if
Solutia does not post a bond sufficient to stay the execution of any
judgment in the litigation pending an appeal, Pharmacia will post such a
bond if it is able to do so on commercially reasonable terms. The agreement
also specifies which party or parties would control any decisions regarding
settlement of the Abernathy litigation, depending upon whether or not
collateral must be provided to secure the bond and, if so, which party
provides it. We have no obligation to post an appeal bond or provide any
43
related collateral with respect to the Abernathy litigation. Under our
agreement, the continued defense of the Abernathy litigation and the
prosecution of any appeal will continue to be managed by Solutia, at
Solutia's expense.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits: See Exhibit Index
(B) Reports on Form 8-K:
The Company furnished a report on Form 8-K (Item 9) on April 4,
2002, pursuant to Regulation FD, relating to slide presentations
prepared for use by the Company's executives at an investor
meeting in New York.
44
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONSANTO COMPANY
-------------------
(Registrant)
/s/ Richard B. Clark
----------------------
RICHARD B. CLARK
Vice President and Controller
(On behalf of the Registrant and
as Principal Accounting Officer)
Date: August 13, 2002
45
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
2 First Amendment to Separation Agreement, dated as of
July 1, 2002, by and between Pharmacia Corporation and
Monsanto Company (incorporated herein by reference to
Exhibit 99.2 of the Company's Report on Form 8-K,
filed July 30, 2002, Commission File No. 1-16167)
3 Omitted - Inapplicable
4 Omitted - Inapplicable
10.1 364-Day Credit Agreement dated July 17, 2002
10.2 Amendment to Distribution Agreement, dated as of July
1, 2002, among Pharmacia Corporation, Solutia Inc.
and Monsanto Company (incorporated herein by
reference to Exhibit 99.1 of the Company's Report on
Form 8-K, filed July 30, 2002, Commission File No.
1-16167)
10.3 Protocol Agreement, dated as of July 1, 2002,
among Pharmacia Corporation, Solutia Inc. and Monsanto
Company (incorporated herein by reference to Exhibit 99.3
of the Company's Report on Form 8-K, filed July 30, 2002,
Commission File No. 1-16167)
10.4 Tax Sharing and Indemnification Agreement, dated as of
July 19, 2002 by and between Pharmacia Corporation and
Monsanto Company
10.5 U.S. $150,000,000 Promissory Note Issued by Monsanto
Company to Pharmacia Corporation, dated August 13, 2002
10.6 Letter Agreement between Monsanto Company and Pharmacia
Corporation, effective August 13, 2002
11 Omitted - Inapplicable; see Note 7 of Notes to
Consolidated Financial Statements
15 Omitted - Inapplicable
18 Omitted - Inapplicable
19 Omitted - Inapplicable
22 Omitted - Inapplicable
23 Omitted - Inapplicable
24 Omitted - Inapplicable
99 Computation of Ratio of Earnings to Fixed Charges