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 September 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 October 31, 2002
----- ----------------
Common Stock, $0.01 par value 261,407,808 shares
================================================================================
MONSANTO COMPANY AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Statement of Consolidated Operations 2
Condensed Statement of Consolidated Financial Position 3
Statement of Consolidated Cash Flows 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19
Results of Operations 19
Third Quarter 2002 Compared with Third Quarter 2001 20
First Nine Months of 2002 Compared with First Nine Months of 2001 24
Restructuring and Other Special Items 29
Changes in Financial Condition as of Sept. 30, 2002 32
Outlook - Update 33
Our Agreement with The Scotts Company 37
Critical Accounting Policies 37
New Accounting Standards 38
Cautionary Statements Regarding Forward Looking Information 39
Item 3. Quantitative and Qualitative Disclosures About Market Risk 43
Item 4. Controls and Procedures 44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 45
Item 5. Other Information 49
Item 6. Exhibits and Reports on Form 8-K 51
SIGNATURE 52
CERTIFICATIONS 53
EXHIBIT INDEX 55
EXHIBIT 99 - Computation Of Ratio Of Earnings To Fixed Charges
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The Statement of Consolidated Operations of Monsanto Company and
subsidiaries for the three months and nine months ended Sept. 30,
2002, and Sept. 30, 2001, the Condensed Statement of Consolidated
Financial Position as of Sept. 30, 2002, and Dec. 31, 2001, the
Statement of Consolidated Cash Flows for the nine months ended Sept.
30, 2002, and Sept. 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 (loss) per share" and "per share" mean
diluted earnings (loss) per share. In tables, all dollars are in
millions, except share and per share amounts.
1
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(Dollars in millions, except per share amounts)
Unaudited
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
------------------------ ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $ 679 $ 936 $ 3,453 $4,253
Cost of Goods Sold 478 552 1,830 2,073
---- ---- ---- ----
Gross Profit 201 384 1,623 2,180
Operating Expenses:
Selling, general and administrative expenses 260 252 792 874
Bad debt expense 16 23 183 29
Research and development expenses 130 140 386 410
Amortization and adjustments of goodwill ---- 30 -- 91
Restructuring charges - net 18 9 75 61
---- ---- ---- ----
Total Operating Expenses 424 454 1,436 1,465
Income (Loss) From Operations (223) (70) 187 715
Interest Expense (21) (16) (59) (73)
Interest Income 7 5 16 18
Other Income (Expense) - net (11) 4 (47) (28)
---- ---- ---- ----
Income (Loss) Before Income Taxes and Cumulative Effect of
Accounting Change (248) (77) 97 632
Income tax benefit (provision) 83 32 (29) (233)
---- ---- ---- ----
Income (Loss) Before Cumulative Effect of Accounting Change (165) (45) 68 399
Cumulative effect of a change in accounting principle -
net of tax benefit of $162 -- -- (1,822) --
---- ---- ---- ----
Net Income (Loss) $ (165) $ (45) $(1,754) $ 399
==== ==== ==== ====
Basic Earnings (Loss) per Share:
Income (loss) before cumulative effect of accounting change $(0.63) $(0.17) $ 0.27 $ 1.55
Cumulative effect of a change in accounting principle -- -- (7.00) --
---- ---- ---- ----
Net Income (Loss) $(0.63) $(0.17) $ (6.73) $ 1.55
==== ==== ==== ====
Diluted Earnings (Loss) per Share:
Income (loss) before cumulative effect of accounting change $(0.63) $(0.17) $ 0.26 $ 1.51
Cumulative effect of a change in accounting principle -- -- (6.93) --
---- ---- ---- ----
Net Income (Loss) $(0.63) $(0.17) $ (6.67) $ 1.51
==== ==== ==== ====
Weighted Average Shares Outstanding:
Basic 261.3 258.1 260.4 258.1
Diluted 261.3 258.1 263.0 263.6
Dividends per Share $ 0.12 $ 0.12 $ 0.36 $ 0.36
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
Sept. 30, Dec. 31,
2002 2001
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 136 $ 307
Trade receivables, net of allowances of $285 in 2002 and $177 in 2001 2,023 2,307
Miscellaneous receivables 399 449
Related-party loan receivable -- 30
Related-party receivable -- 44
Deferred tax assets 227 251
Inventories 1,353 1,357
Other current assets 51 52
-------- ---------
Total Current Assets 4,189 4,797
Property, Plant and Equipment - net 2,330 2,627
Goodwill - net 745 2,748
Other Intangible Assets - net 663 691
Other Assets 672 566
-------- ---------
Total Assets $ 8,599 $ 11,429
======== =========
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Short-term debt $ 356 $ 563
Related-party short-term loans payable -- 254
Accounts payable 300 457
Related-party payable -- 87
Accrued liabilities 712 1,016
-------- ---------
Total Current Liabilities 1,368 2,377
Long-Term Debt 1,134 893
Postretirement Liabilities 752 365
Other Liabilities 249 311
Shareowners' Equity:
Common stock (Authorized: 1,500,000,000 shares, par value $0.01)
Issued: 261,385,808 shares in 2002 and 258,112,408 in 2001 3 3
Additional contributed capital 8,056 8,056
Retained earnings (deficit) (1,674) 173
Accumulated other comprehensive loss (1,259) (716)
Reserve for ESOP debt retirement (30) (33)
-------- ---------
Total Shareowners' Equity 5,096 7,483
-------- ---------
Total Liabilities and Shareowners' Equity $ 8,599 $ 11,429
======== =========
See the accompanying notes to consolidated financial statements.
3
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
Unaudited
Nine Months Ended
Sept. 30,
------------------------
2002 2001
---- ----
Operating Activities:
Net Income (Loss) $(1,754) $ 399
Adjustments to reconcile cash provided (required) by operations:
Items that did not require (provide) cash:
Pretax cumulative effect of a change in accounting principle 1,984 --
Depreciation and amortization 348 414
Bad debt expense 183 29
Noncash restructuring and other special items 40 38
Deferred income taxes (153) (54)
Gain on disposal of investments and property, net (51) (8)
Equity loss, net 31 29
Write-off of retired assets 15 17
Changes in assets and liabilities that provided (required) cash:
Trade receivables (328) (1,016)
Inventories (32) (129)
Accounts payable and accrued liabilities (119) (15)
Related-party transactions (47) 178
Tax benefit on employee stock options 11 --
Deferred revenue on supply agreements 48 --
Other Items 25 (21)
---- ----
Net Cash Provided (Required) by Operations 201 (139)
---- ----
Cash Flows Provided (Required) by Investing Activities:
Property, plant and equipment purchases (149) (292)
Acquisitions and investments (77) (92)
Investment and property disposal proceeds 63 --
Loans with related-party 30 38
---- ----
Net Cash Flows Required by Investing Activities (133) (346)
---- ----
Cash Flows Provided (Required) by Financing Activities:
Net change in short-term financing (697) 854
Loans from related-party (254) (197)
Long-term debt proceeds 850 39
Long-term debt reductions (93) (77)
Debt issuance costs (10) --
Payments on vendor financing (5) --
Stock option exercises 63 --
Dividend payments (93) (85)
---- ----
Cash Flows Provided (Required) by Financing Activities (239) 534
---- ----
Net Increase (Decrease) in Cash and Cash Equivalents (171) 49
Cash and Cash Equivalents Beginning of Year 307 131
---- ----
Cash and Cash Equivalents at End of Period $ 136 $ 180
==== ====
See Note 13 - Supplemental Cash Flow Information - for further details.
See the accompanying notes to consolidated financial statements.
4
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Note 1 - Background and 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.
Monsanto was originally incorporated in February 2000 as a
subsidiary of Pharmacia Corporation. In October 2000, Monsanto sold
approximately 15 percent of its common stock at $20 per share in an
initial public offering (IPO). On Aug. 13, 2002, Pharmacia completed a
spinoff of Monsanto by distributing its entire ownership interest via
a tax-free dividend to Pharmacia's shareowners.
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 reports on Form 10-Q for the periods ended March 31, 2002
and June 30, 2002.
Financial information for the first nine 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.
Certain prior-year amounts have been reclassified to conform with the
current year presentation.
Note 2 - New Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB)
simultaneously approved Statement of Financial Accounting Standards
(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 Sept. 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 Sept. 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 changed 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 in the third quarter. 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
5
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Agricultural Productivity and Seeds and Genomics reporting segments.
See Note 5 - Goodwill and Other Intangible Assets - for further
discussion of the transitional impairment test, the annual impairment
test, and additional details on Monsanto's goodwill and other
intangible assets.
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 Plan (ESOP) debt recorded
in the first nine months 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 may 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 (which is a
special purpose entity (SPE) that Monsanto consolidates), 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 (which 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.
6
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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 or nine months ended Sept. 30, 2002.
Through the nine months ended Sept. 30, 2002, customer loans sold
through the financing program totaled $113 million, with $100 million
outstanding as of Sept. 30, 2002. Loans are considered delinquent when
payments are 31 days past due. As of Sept. 30, 2002, no loans sold
through this financing program were delinquent. As of Sept. 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 Sept. 30, 2002, and Dec. 31,
2001, were as follows:
Sept. 30, Dec. 31,
2002 2001
--------------- ---------------
Finished Goods $ 579 $ 700
Goods In Process 537 357
Raw Materials and Supplies 259 329
------ ------
Inventories, at FIFO Cost 1,375 1,386
Excess of FIFO over LIFO Cost (22) (29)
------ ------
Total $1,353 $1,357
====== ======
The excess of FIFO over LIFO cost decreased $7 million primarily
due to lower costs, which favorably affected income by $7 million.
This favorable income impact was slightly offset as the reduced
inventory value liquidated approximately $1 million of certain LIFO
inventories that were carried at higher costs prevailing in prior
years.
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.
The company has completed the required annual goodwill impairment
test in the third quarter, and there are no indications of a goodwill
impairment for any of the reporting units.
7
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Changes in the net carrying amount of goodwill for the nine
months ended Sept. 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 (1) (15) (16)
Additions 1 -- 1
-------- -------- -------
Balance as of Sept. 30, 2002 $ 74 $ 671 $ 745
======== ======== =======
Information regarding the company's other intangible assets is as
follows:
As of Sept. 30, 2002 As of Jan. 1, 2002
------------------------------------ -------------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
-------- ------------ --- -------- ------------ ---
Germplasm $ 596 $ (302) $ 294 $ 602 $(251) $ 351
Acquired biotechnology
intellectual property 374 (131) 243 320 (101) 219
Trademarks 117 (25) 92 115 (19) 96
Other 69 (35) 34 53 (34) 19
------ ------ ----- ------ ----- -----
Total $1,156 $ (493) $ 663 $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 during 2002 relates
primarily to the previously announced collaboration with Ceres, Inc.
(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 Sept. 30, 2002, Monsanto has made payments to Ceres
of approximately $34 million.
Other intangible assets include a $26 million non-amortizing
intangible asset associated with the recognition of minimum pension
liabilities, the majority of which was recognized in the third quarter
of 2002. Further information on the third quarter minimum pension
liability adjustment is discussed in Note 7 - Comprehensive Income
(Loss).
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 Sept. 30, 2002 and Sept. 30, 2001
was $34 million for both periods. Total amortization expense of other
intangible assets for the nine months ended Sept. 30, 2002 and Sept.
30, 2001 was $101 million and $93 million, respectively. Intangible
asset amortization expense in the first nine months of 2001 included
$2 million related to intangible asset impairments, as discussed in
Note 9 - Restructuring and Other Special Items.
8
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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 $135
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 $91 million of pretax goodwill amortization expense in
the third quarter and first nine months of 2001, respectively, but
pretax research and development expenses would have increased by $2
million and $6 million in the third quarter and first nine months of
2001, respectively, because of the reassessment of useful lives and
classifications. In addition and related to these changes, the income
tax provision would have increased by $11 million for the third
quarter of 2001 and would have decreased by $1 million for the first
nine months of 2001.
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
--------------------------- ---------------------------
2002 2001 2002 2001
---- ---- ---- ----
Reported Net Income (Loss) $(165) $ (45) $(1,754) $ 399
Goodwill amortization, net of tax -- 18 -- 83
Effects of useful life adjustments, net of tax -- (1) -- 3
----- ----- ------ -----
Adjusted Net Income (Loss) $(165) $ (28) $(1,754) 485
Cumulative effect of a change in accounting
principle, net of tax -- -- 1,822 --
----- ----- ------ -----
Adjusted Income (Loss) Before Cumulative Effect of
Accounting Change $(165) $ (28) $ 68 $ 485
====== ===== ====== =====
Basic Earnings (Loss) Per Share:
Reported Net Income (Loss) $(0.63) $(0.17) $ (6.73) $1.55
Goodwill amortization, net of tax -- 0.06 -- 0.32
Effects of useful life adjustments, net of tax -- -- -- 0.01
----- ----- ----- -----
Adjusted Net Income (Loss) $(0.63) $(0.11) $ (6.73) $1.88
Cumulative effect of a change in accounting
principle, net of tax -- -- 7.00 --
----- ----- ------ -----
Adjusted Income (Loss) Before Cumulative Effect of
Accounting Change $(0.63) $(0.11) $ 0.27 $1.88
======= ===== ====== =====
9
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
--------------------------- ---------------------------
2002 2001 2002 2001
---- ---- ---- ----
Diluted Earnings (Loss) Per Share:
Reported Net Income (Loss) $(0.63) $(0.17) $(6.67) $1.51
Goodwill amortization, net of tax -- 0.06 -- 0.32
Effects of useful life adjustments, net of tax -- -- -- 0.01
----- ----- ----- ----
Adjusted Net Income (Loss) $(0.63) $(0.11) $(6.67) $1.84
Cumulative effect of a change in accounting
principle, net of tax -- -- 6.93 --
----- ----- ----- ----
Adjusted Income (Loss) Before Cumulative Effect of
Accounting Change $(0.63) $(0.11) $ 0.26 $1.84
===== ===== ===== ====
Note 6 - Debt Issuance
In May 2002, the company filed a $2 billion shelf registration
with the Securities and Exchange Commission; as of Sept. 30, 2002,
$1.2 billion remains available for future debt issuances. On Aug. 14,
2002, Monsanto issued $600 million of 7-3/8% Senior Notes under this
shelf registration. On Aug. 23, 2002, the aggregate principal amount
of the outstanding notes was increased to $800 million. These notes
are due on Aug. 15, 2012. The net proceeds received from the sale of
these notes were used to reduce commercial paper borrowings and to
repay short-term debt owed to Pharmacia.
During 2002, Monsanto issued approximately $50 million of
additional debt, primarily medium term debt with floating interest
rates based on the Brazil Development Bank funding interest rate and
the long-term interest rate as set quarterly by the Central Bank of
Brazil. During the quarter, the $500 million of commercial paper that
was previously classified as long-term debt was reclassified to
short-term debt as the company no longer intends to have commercial
paper balances outstanding for more than 12 months.
Note 7 - 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 loss for the three months ended
Sept. 30, 2002, and Sept. 30, 2001, was $587 million and $168 million,
respectively. The comprehensive loss for the three months ended Sept.
30, 2002, includes the additional minimum pension liability
adjustment, as discussed below, and an increase of approximately $150
million of net foreign currency translation adjustments over the same
period in 2001. Comprehensive income (loss) for the nine months ended
Sept. 30, 2002, and Sept. 30, 2001, was $(2,297) million and $38
million, respectively. The comprehensive loss for the nine months
ended Sept. 30, 2002, includes the cumulative effect of a change in
accounting principle and the additional minimum pension liability
adjustment.
Due to the decline in the equity markets, the fair value of the
Monsanto's pension fund assets has decreased. In accordance with SFAS
No. 87, Employers' Accounting for Pensions, the company recorded an
additional minimum pension liability adjustment during the third
quarter of 2002. The effect of this noncash adjustment increased
postretirement liabilities by $261 million, increased deferred income
tax assets by $83 million, increased intangible assets for prior
service costs by $23 million and decreased shareowners' equity by $155
million aftertax. The charge to shareowners' equity did not affect
Monsanto's results of operations, but is reflected in other
comprehensive income (loss).
10
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Note 8 - Earnings (Loss) Per Share
The company issued 55,000 restricted shares in 2000 and 2001. In
September 2002, the company issued an additional 120,500 restricted
shares. In connection with the company's employee stock option plans,
through Sept. 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.
Basic earnings per share (EPS) for the three months and nine
months ended Sept. 30, 2002, and Sept. 30, 2001, were computed using
the weighted-average number of common shares outstanding during the
period (261.3 million and 260.4 million shares for the three months
and nine months ended Sept. 30, 2002, respectively, and 258.1 million
shares for both the three months and nine months ended Sept. 30,
2001). Diluted EPS for the three months ended Sept. 30, 2002 and Sept.
30, 2001, were computed excluding the effect of dilutive potential
common shares, as Monsanto recognized a loss from continuing
operations for the quarters. Diluted EPS for the nine months ended
Sept. 30, 2002, and Sept. 30, 2001, were computed taking into account
the effect of dilutive potential common shares (2.6 million and 5.5
million shares for the nine months ended Sept. 30, 2002, and Sept. 30,
2001, respectively). These dilutive potential common shares consist of
outstanding stock options.
Note 9 - Restructuring and Other Special Items
The amounts related to the 2002 and 2000 restructuring plans were
recorded in the Statement of Consolidated Operations in the following
categories:
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
------------------------------ ----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Cost of Goods Sold $ (9) $ (2) $ (18) $ (13)
Restructuring charges - net(1) (18) (9) (75) (61)
Other Expense - net -- (1) -- (7)
---- ---- ---- -----
Income (Loss) Before Income Taxes (27) (12) (93) (81)
Income tax benefit 9 4 32 30
---- ---- ----- -----
Net Income (Loss) $(18) $ (8) $ (61) $ (51)
==== ===== ===== =====
(1) Net of reversals of $1 million related to the 2000 Plan for the
three months and nine months ended Sept. 30, 2002.
2002 Restructuring Plan:
-------------------------
In 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
$94 million pretax ($61 million aftertax) of net charges in the first
nine months of 2002, with $28 million pretax ($18 million aftertax)
recorded in the third quarter. The pretax components of the
restructuring for the three months and nine months ended Sept. 30,
2002 were as follows:
11
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Three Months Ended Nine Months Ended
Sept. 30, 2002 Sept. 30, 2002
-------------- --------------
Work Force Reductions $ 12 $ 35
Facility Closures / Exit Costs 5 21
Asset Impairments:
Property, plant and equipment - net 10 37
Inventories 3 3
Recoverable amount from third party (2) (2)
---- ----
Total Pretax Charge $ 28 $ 94
==== ====
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 for the three months and nine months
ended Sept. 30, 2002, include involuntary employee separation costs for
approximately 290 and 740 employees worldwide, respectively, 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 (less than $1 million for
the three months and $8 million for the nine months ended Sept. 30, 2002),
equipment dismantling and disposal ($3 million for the three months and $7
million for nine months ended Sept. 30, 2002) and other shutdown costs ($2
million for the three months and $6 million for the nine months ended Sept.
30, 2002) resulting from the exit of certain research and manufacturing
sites. The write-off of inventories was recorded within cost of goods sold.
The recoverable amount from a third party represents a portion of the work
force reduction and exit costs that will be reimbursed to Monsanto. Cash
payments to complete these restructuring actions will be funded from
operations and are not expected to significantly affect the company's
liquidity.
Activities related to the 2002 restructuring plan during 2002, were as
follows:
Work Force Facility
Reductions Closures Total
---------- -------- -----
Restructuring
-------------
Additions
Second quarter 2002 actions $23 $16 $39
Third quarter 2002 actions 12 5 17
Costs charged against reserves (16) (4) (20)
--- --- ---
Sept. 30, 2002, reserve balance $19 $17 $36
=== === ===
During the first nine months of 2002, approximately 330 former
employees received cash severance payments totaling $16 million. The work
force reduction payments for the remaining 410 employees associated with
these actions will be completed by Sept. 30, 2003. Exit costs of $4 million
associated with contract terminations, equipment dismantling and disposal,
and other shutdown costs were also paid during the first nine months of
2002.
12
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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, also were recorded in
2001. These charges totaled $81 million pretax ($51 million aftertax) for
the first nine months of 2001, with $12 million ($8 million aftertax)
recorded in the third quarter. The fourth quarter of 2001 included $132
million of pretax restructuring and other special items to complete the
2000 Restructuring Plan at a total of $474 million of pretax charges.
The pretax components of the restructuring and other special items for
the three months and nine months ended Sept. 30, 2001, were as follows:
Three Months Ended Nine Months Ended
Sept. 30, 2001 Sept. 30, 2001
-------------- --------------
Work Force Reductions $ 1 $ 21
Facility Closures / Exit Costs 4 22
Asset Impairments:
Inventories 2 13
Other current assets 2 6
Property, plant and equipment - net 2 10
Other intangible assets - net -- 2
Other Special Items 1 7
--- ---
Total Pretax Charge $ 12 $ 81
=== ===
The work force reduction costs for the three months and nine months
ended Sept. 30, 2001, included involuntary employee separation costs for
approximately 30 and 260 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
were related to property, plant and equipment, other current assets and
other intangible assets. In addition, $2 million and $13 million related to
the write-off of inventories was recorded within cost of goods sold for the
three months and nine months ended Sept. 30, 2001, respectively. The
company expects these employee reductions, asset dispositions and other
exit activities to be completed by March 31, 2003. Cash payments to
complete this restructuring plan will be funded from operations and are not
expected to significantly affect the company's liquidity. For the nine
months ended Sept. 30, 2001, a total charge of $7 million was recorded
within other expense - net, for the impairment of equity securities caused
by adverse business developments of the investees.
Activities related to restructuring and other special items for the
nine months ended Sept. 30, 2002, 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 (25) (18) (43)
Reversals (1) -- (1)
--- --- ---
Sept. 30, 2002, reserve balance $ 9 $ 16 $ 25
=== === ===
13
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
During the first three 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 three quarters of 2002,
approximately 400 former employees received cash severance payments
totaling $22 million. Restructuring reversals were required as
approximately 20 positions originally contemplated in the plan were
eliminated through attrition. The work force reduction payments for the
remaining 95 employees associated with this plan will be completed by March
31, 2003. Exit costs of $18 million associated with contract terminations,
equipment dismantling and disposal were also paid during the first nine
months of 2002.
Note 10 - 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. Although the results of litigation cannot be predicted with
certainty, it is management's belief that the final outcome of this
litigation will not have a material adverse effect on Monsanto's financial
position, profitability or liquidity.
The Company plans to post an appeal bond on behalf of Solutia Inc.
(see Part II - Item 5 - Other Information.)
On Feb. 3, 2002, the new government in Argentina announced several
reforms intended to stabilize the economic environment. These reforms
continue to have an effect on the company's operations in Argentina. 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. While the
company has prepared its 2001 and 2002 financial statements relating to its
Argentine operations on a U.S. dollar functional basis, the company could
be required to change its functional currency designation in Argentina
based on future government economic reforms. The peso-to-U.S. dollar
exchange rate is 3.52-to-1.00 as of Oct. 31, 2002.
In March 2002, the Argentine government issued a decree establishing a
20 percent export tax on agricultural exports. It also ruled that U.S.
dollar-denominated contracts in agricultural markets entered into prior to
Jan. 6, 2002 (Predevaluation Contracts), must be honored at the same
exchange rate as the one obtained for exports of the agricultural products
that contain the agricultural inputs. This decree was amended on July 2,
2002, with the issuance of Resolution Number 143, which states that the
future settlement of the Predevaluation Contracts on farm inputs will be
subject to a 25 percent reduction (including the 20 percent export taxes
discussed above) on the U.S. dollar price. In the second quarter of 2002,
the company established an allowance of $154 million pretax for estimated
uncollectible accounts receivable in Argentina, of which $44 million has
been written off against accounts receivable as of Sept. 30, 2002. 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 continue to fluctuate
as the company continues its collection efforts.
Year-to-date collections in Argentina are down approximately 23
percent, primarily due to lower sales and the effect of the 25 percent
reduction of amounts owed for farm inputs for agricultural exports. The
company has been able to collect essentially all of its Predevaluation
Contracts that were secured with grain, net of the 25 percent reduction.
Also, a significant portion of year-to-date sales in Argentina has been
made for either cash or grain. While the company cannot determine how
government actions and economic conditions in Argentina will affect the
value of the $230 million of net receivables outstanding as of Sept. 30,
2002, the company continues to aggressively pursue customer collections.
Management's current assessment of the situation is that the collectibility
of the accounts receivable has improved and the allowance balance is
adequate.
Note 11 - 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
14
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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 effects 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 was one
open gas swap as of Sept. 30, 2002, with a market value of less than $1
million. 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
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 an
immaterial effect on earnings for the three months or nine months ended
Sept. 30, 2002, or Sept. 30, 2001.
15
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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 and $2 million in cost of
goods sold for the three-month and nine-month periods ended Sept. 30, 2002,
respectively, which represented the ineffectiveness of all cash-flow
hedges. For the three months and nine months ended Sept. 30, 2001, losses
recorded in cost of goods sold totaled $1 million and $3 million,
respectively. No cash-flow hedges were discontinued during the three months
or nine months ended Sept. 30, 2001, or Sept. 30, 2002.
As of Sept. 30, 2002, $9 million of aftertax deferred net gains on
commodity 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
gains or 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. In June 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.
The closing of this agreement in August 2002 resulted in a loss of $26
million, due to a decrease in interest rates. Monsanto has designated this
rate lock agreement as a cash-flow hedge. Since this rate lock is
designated as a cash-flow hedge, the net loss on the rate lock, to the
extent the swap is effective, is recognized in other comprehensive income
(loss) until the hedged interest costs are recognized in earnings. As of
Sept. 30, 2002, $16 million of aftertax deferred net losses on the interest
rate lock accumulated in other comprehensive income (loss) are expected to
be reclassified into earnings during the next 10 years, which is the term
of the underlying debt.
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 Sept. 30,
2002, was an accumulated foreign currency translation aftertax gain of
approximately $20 million included in accumulated other comprehensive
income.
Note 12 - 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
16
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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 (loss) before cumulative
effect of accounting change for the three months and nine months ended
Sept. 30, 2002, and Sept. 30, 2001, is presented in the table that follows.
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
----------------------- -----------------------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales:
---------
Agricultural Productivity $ 505 $ 691 $2,480 $3,073
Seeds and Genomics 174 245 973 1,180
------ ----- ------ ------
Total Monsanto $ 679 $ 936 $3,453 $4,253
====== ===== ====== ======
EBIT:
----
Agricultural Productivity $ (77) $ 91 $ 377 $ 862
Seeds and Genomics (157) (157) (237) (175)
------ ----- ------ ------
Total Monsanto (234) (66) 140 687
Interest expense - net of interest income (14) (11) (43) (55)
Income tax provision 83 32 (29) (233)
------ ----- ------ ------
Income (Loss) Before Cumulative Effect of
Accounting Change $ (165) $ (45) $ 68 $ 399
====== ===== ====== ======
Net Restructuring and Other Special Items:
-----------------------------------------
Agricultural Productivity $ 20 $ 8 $ 36 $ 48
Seeds and Genomics 7 4 57 33
------ ----- ------ ------
Total Monsanto $ 27 $ 12 $ 93 $ 81
====== ===== ====== ======
Note 13 - Supplemental Cash Flow Information
The effect of exchange rate changes on cash and cash equivalents was
not material. Cash payments for interest and taxes for the nine months
ended Sept. 30, 2002, were $77 million and $74 million, respectively. Cash
payments for interest and taxes for the nine months ended Sept. 30, 2001,
were $81 million and $112 million, respectively.
Noncash transactions with Pharmacia during the nine months ended Sept.
30, 2002, included approximately $75 million primarily associated with the
assumed net pension liabilities and related deferred tax assets. (See Note
14 - Related-Party Transactions - for further details.) Noncash
transactions with Pharmacia during the nine months ended Sept. 30, 2001,
included approximately $20 million.
In connection with the acquisition of biotechnology intellectual
property assets from 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.) Payments on the related
obligation will be included in vendor financing payments as they are made.
Note 14 - Related-Party Transactions
On Sept. 1, 2000, Monsanto entered into a master transition services
agreement with Pharmacia, its then 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 continue to be effective after Pharmacia's Aug. 13, 2002 spinoff
of Monsanto. During the period from July 1, 2002 to Aug. 13, 2002, and the
period from Jan. 1, 2002 to Aug. 13, 2002, Monsanto recognized expenses of
$4 million and $22 million, respectively, and recorded a reimbursement of
$5 million and $27 million, respectively, for costs incurred on behalf of
Pharmacia. During the three months and nine months ended Sept. 30, 2001,
17
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Monsanto recognized expenses of $16 million and $49 million, respectively,
and recorded a reimbursement of $11 million and $34 million, respectively,
for costs incurred on behalf of Pharmacia. As of Sept. 30, 2002, the
company had a net receivable balance of $5 million with Pharmacia. As of
Dec. 31, 2001, the company had a net payable balance (excluding dividends
payable) of $43 million with Pharmacia. Transition services, employee
benefits, capital project costs, and information technology costs comprised
both balances.
From the IPO closing date until the Aug. 13, 2002 spinoff, Pharmacia
managed the loans and deposits of Monsanto's ex-U.S. subsidiaries. Until
Aug. 13, 2002, Pharmacia was also the counterparty for some of Monsanto's
foreign-currency exchange contracts. As of Dec. 31, 2001, the fair value of
the company's outstanding foreign-currency exchange contracts with
Pharmacia was a loss of $7 million. In addition, Monsanto pays a fee to
Pharmacia because Pharmacia is the named party on a guarantee of debt of a
Monsanto subsidiary, which was issued prior to Monsanto's separation from
Pharmacia on Sept. 1, 2000. Fees for these services are comparable to those
that Monsanto would have incurred with a third party.
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 new short-term debt was repaid with a portion of the
proceeds received from the issuance of the senior notes in August. As of
Dec. 31, 2001, Monsanto was in a net borrowing position of $224 million
with Pharmacia. Interest rates were comparable to those that Monsanto would
have incurred with a third party.
Effective Aug. 13, 2002, Monsanto and Pharmacia entered into an
agreement whereby Pharmacia paid Monsanto approximately $40 million, and
transferred certain assets, as payment for certain of Monsanto's expenses
relating to its separation from Pharmacia and to the spinoff of Monsanto by
Pharmacia.
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 second quarter dividend was
paid to Pharmacia during the third quarter of 2002. As a result of the Aug.
13, 2002 spinoff, Pharmacia is no longer a shareowner of Monsanto.
18
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS 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.
Monsanto was originally incorporated in February 2000 as a subsidiary
of Pharmacia Corporation. In October 2000, Monsanto sold approximately 15
percent of its common stock at $20 per share in an initial public offering
(IPO). On Aug. 13, 2002, Pharmacia completed a spinoff of Monsanto by
distributing its entire ownership interest via a tax-free dividend to
Pharmacia's shareowners.
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 reports on Form 10-Q for the periods ended March 31,
2002 and June 30, 2002. Financial information for the first nine 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
19
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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. For more information, see
Note 1 - Background and Basis of Presentation - of Notes to Consolidated
Financial Statements. Unless otherwise indicated, "earnings (loss) per
share" and "per share" mean diluted earnings (loss) 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 - Third Quarter 2002 Compared with Third Quarter 2001
Monsanto reported a net loss of $165 million, or $0.63 per share for
the third quarter of 2002, compared with a net loss of $45 million, or
$0.17 per share for the third quarter of 2001. The factors affecting the
quarter-to-quarter comparison are discussed below.
Three Months Ended
Sept. 30,
------------------------
Total Monsanto Company and Subsidiaries: 2002 2001
--------------------------------------- ---- ----
Net sales $ 679 $ 936
====== =======
Gross profit $ 201 $ 384
====== =======
Loss before cumulative effect of accounting change $ (165) $ (45)
Add: Interest expense - net of interest income 14 11
Income tax provision (benefit) (83) (32)
------ -------
EBIT(1) (234) (66)
Add: depreciation and amortization 119 145
------ -------
EBITDA(2) $ (115) $ 79
====== =======
(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 27 percent to $679 million for the three-month
period ended Sept. 30, 2002, compared with $936 million for the same period
last year. Lower sales in Latin America affected both the Agricultural
Productivity segment and the Seeds and Genomics segment. We are continuing
to implement changes to our business model and certain actions in
conjunction with our customers to address the continued economic
uncertainty and unfavorable market conditions in Latin America. These
actions, which have affected and will continue to affect sales and EBIT in
2002, are intended to reduce working capital levels and reduce our credit
risk and exposure in Argentina and Brazil. Our results in the third quarter
of 2002 reflect lower sales in Latin America, and higher product returns
and currency losses in Argentina stemming from the economic crisis in that
country. In the United States, sales of ROUNDUP herbicides were negatively
affected by continued competitive pressures and unusually dry weather in
the Midwest and the Plains. For a more detailed discussion of these and
other factors affecting the third quarter net sales comparison, see
"Agricultural Productivity Segment" and "Seeds and Genomics Segment."
Third quarter 2001 net sales included approximately $50 million of net
sales and related cost of goods sold related to our grain sales program in
Latin America. In 2002, we changed the way we account for the program to no
longer record revenues and cost of goods sold of essentially the same
20
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
amount. Under the nature of the current program, we no longer take
ownership of the grain, thereby eliminating the associated inventory risk.
For the three-month period ended Sept. 30, 2002, cost of goods sold
declined 13 percent to $478 million, from cost of goods sold of $552
million for the three months ended Sept. 30, 2001. As discussed above, last
year's third quarter included approximately $50 million of cost of goods
sold related our grain sales program. The 13 percent decline in cost of
goods sold is less than the 27 percent decline in sales due to a number of
items that increased cost of goods sold this year. Reducing our production
volumes in connection with changes to our Latin American business model led
to higher cost of goods sold due to higher manufacturing variances, as did
higher seed obsolescence. Restructuring expenses recorded in cost of goods
sold were also slightly higher in 2002 than in 2001. As a result of the net
sales and cost of goods sold factors described above, gross profit declined
to $201 million for the third quarter of 2002, from $384 million for the
third quarter of 2001.
Total operating expenses for the third quarter of 2002 declined $30
million from the same period last year. Third quarter 2002 selling, general
and administrative (SG&A) expenses increased slightly when compared with
the third quarter of 2001. Savings realized from continued cost management
efforts were offset by higher employee benefit-related expenses. Also
contributing to the increase in SG&A expenses were agency fees payable to
The Scotts Company (Scotts) because of higher lawn and garden net sales in
2002. On a quarter-to-quarter comparison, bad debt expense declined because
of allowances established last year related to receivables from customers
in the Commonwealth of Independent States. However, on a year-to-date
comparison, 2002 bad debt expense is significantly higher because of the
$154 million allowance for doubtful accounts we established in the second
quarter related to estimated uncollectible trade receivables in Argentina.
Research and development (R&D) expenses for the third quarter 2002
declined from last year's third quarter levels as we continue to control
spending. We have not yet realized the full savings from our 2002
restructuring plan. For further details, see "Restructuring and Other
Special Items."
Operating results for the third quarter of 2002 include the positive
effect of SFAS No. 142, the new accounting standard related to the
amortization of goodwill. In the third 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 are continuing to recognize expenses related to our 2002
restructuring plan, with $28 million recorded in the third quarter of 2002.
Approximately $19 million of these expenses were recorded as restructuring
expenses - net. In 2001, we recorded a total of $12 million of expenses
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 and capitalized interest,
increased slightly to $14 million for the third quarter of 2002. Our cash
flow improvement led to lower interest expense because of lower debt
levels, and we also benefited from slightly higher interest income.
However, the completion of our Camacari, Brazil, facility also affects the
comparison, as it reduced net interest expense last year through
capitalized interest credits.
We recognized $11 million of net other expense in the third quarter of
2002, compared with net other income of $4 million in the third quarter of
2001. The difference is caused primarily by the other income we recognized
last year resulting from gains that were realized upon the sale of equity
securities.
Income tax benefit increased to $83 million for the third quarter of
2002 compared with $32 million for the same period in 2001. This higher tax
benefit corresponds to the larger pretax loss (before cumulative effect of
accounting change) in the third quarter of 2002 compared with the third
quarter of 2001. The effective tax rate decreased to 33 percent for the
three months ended Sept. 30, 2002, from 42 percent for the three months
21
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
ended Sept. 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
Sept. 30,
------------------------------
2002 2001
---- ----
Net Sales
ROUNDUP and other glyphosate-based herbicides $281 $489
All other 224 202
---- ----
Total Net Sales $505 $691
==== ====
Gross Profit
ROUNDUP and other glyphosate-based herbicides $ 79 $219
All other 64 78
---- ----
Total Gross Profit $143 $297
==== ====
EBIT(1) $(77) $ 91
Add: depreciation and amortization 60 59
---- ----
EBITDA(2) $(17) $150
==== ====
(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, third quarter 2002 net sales
declined $186 million from the same period a year ago. The majority of this
decline is attributable to lower sales of ROUNDUP and other
glyphosate-based herbicides, primarily in North America and Latin America.
Worldwide, volumes and net selling prices of these products declined.
Economic conditions in Latin America and the resulting operational
decisions we have made there to reduce our business risk affected 2002
sales. In Argentina, we continue to operate with primarily cash-or-grain
sales terms, and our current experience is that a larger percentage of
third quarter sales were made on a cash basis. While these sales reduce our
credit risk, they carry a lower net selling price than sales made on grain
terms to reflect our lower credit risk and financing costs. In Argentina,
returns under a one-time exception to our policy regarding crop protection
products reduced sales of ROUNDUP and other glyphosate-based herbicides by
approximately $60 million in the third quarter of 2002. Because of the
economic conditions in Argentina brought on by the economic crisis earlier
in the year, we allowed crop protection product returns on a case-by-case
basis to maintain long-term customer relationships and reduce risks for
both parties. Tightened credit terms also affected net sales of ROUNDUP and
other glyphosate-based herbicides in Brazil, though the market there for
glyphosate is strong.
In the United States, net selling prices of ROUNDUP and other
glyphosate-based herbicides increased slightly, while the volume sold
decreased significantly. As a result, net sales declined 37 percent. The
lower volumes were due in part to market share loss and adverse weather
conditions. These weather conditions diminished the overall growth of the
U.S. glyphosate market. The dry weather conditions in the summer and early
fall reduced the growth of weeds and thus the need for herbicides.
Monsanto's sales of ROUNDUP herbicide for weed control in ROUNDUP READY
crops and the fallow market were particularly hurt by these conditions. In
22
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
addition, 2002 sales in preparation for the 2003 growing season are lower
than 2001 sales were for the 2002 growing season, as our operating plan is
to keep year-end distribution inventory levels flat relative to last year's
distribution inventory levels. Average net selling prices in the third
quarter benefited from a new product launch; however, on an annual basis,
average net selling prices of ROUNDUP in the United States are expected to
be down approximately 7 to 8 percent, which includes the effect of the
shift in mix to lower-priced glyphosate products. For the full year,
volumes of ROUNDUP in the United States are expected to be down
approximately 15 to 20 percent.
In Canada, net sales were also affected by the unfavorable, dry
weather conditions. Net sales in Asia declined, while sales in Europe
increased. The sales decline in Asia resulted from our agreement earlier in
the year to sell certain herbicide business assets. Volumes of glyphosate
that we manufacture and supply to third parties also declined, for the same
reasons discussed above.
Net sales of our other Agricultural Productivity segment products
improved, led by a sales increase in our lawn and garden herbicide
business. This sales improvement reflects an increase in demand, as well as
a shift in timing as 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 and
third quarters of 2002. Good weather on weekends in key suburban selling
areas for residential lawn and garden products and a successful new
competitive advertising campaign have led to higher sales on a year-to-date
comparison. The lawn and garden sales increase was slightly offset by lower
sales of our other herbicides, while sales in our animal agriculture
business remained relatively unchanged.
EBIT for the segment totaled a loss of $77 million for the third
quarter of 2002, versus a gain of $91 million for the same period last
year. The lower net sales in 2002 generated less gross profit. In addition,
changes to production volumes in connection with our new Latin American
business model negatively affected cost of goods sold due to higher
manufacturing variances. Third-quarter restructuring expenses related to
this segment were also higher this year when compared with the same period
last year ($20 million in 2002, compared with $8 million in 2001).
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
Sept. 30,
------------------------------
2002 2001
---- ----
Net Sales $ 174 $ 245
===== =====
Gross Profit $ 58 $ 87
===== =====
EBIT(1) $(157) $(157)
Add: Depreciation and amortization 59 86
----- -----
EBITDA(2) $ (98) $ (71)
===== =====
(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 Seeds and Genomics segment, third quarter 2002 net sales
totaled $174 million, compared with $245 million for the same period last
year. Net sales gains in the United States were offset by a net sales
23
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
decline in Latin America as we continue to carry out our operational
changes to improve our business model in a region which is troubled by poor
economic conditions. As discussed earlier in MD&A, third quarter 2001 net
sales included approximately $50 million of net sales and related cost of
goods sold related to our grain sales program in Latin America. Because we
changed the nature of the program, we also changed the way we account for
the program to no longer record revenues and cost of goods sold of
essentially the same amount.
Corn sales in the United States increased, reflecting an increase in
planted acreage of corn this year and continued strong market performance
by our DEKALB and ASGROW brands during the 2002-selling season. We also
benefited from lower return experience this quarter, driven by higher
demand and effective product placement to match the needs of farmers. As
expected, seed sales in Argentina for the third quarter of 2002 declined as
a result of the economic crisis in that country. The continued
deterioration of the Brazilian corn market has negatively affected sales in
2002, and in 2001 we experienced approximately $20 million of
higher-than-anticipated returns of corn seed. The current economic
conditions favor soybeans, which require lower input costs. As we reduce
our risk in that region, the sales that take place will occur closer to the
time that the farmers use the product.
Third quarter EBIT for the segment remained unchanged at a loss of
$157 million. Lower gross profit in Latin America and additional seed
obsolescence charges were offset by a more profitable U.S. seed and trait
business. The segment also benefited from no longer amortizing goodwill, a
result of adopting SFAS No. 142. EBITDA, which excludes the goodwill
amortization expense recorded in 2001, was a loss of $98 million for 2002,
compared with a loss of $71 million last year.
Results of Operations - First Nine Months of 2002 Compared with First Nine
Months of 2001
We recognized a net loss of $1.8 billion, or $6.67 per share, for the
first nine months of 2002. For the first nine months of 2001, we recognized
net income of $399 million, or $1.51 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 in the
second quarter related to Argentine receivables
o Operational changes in 2002 to reduce risk in Latin America
(which reduced earnings per share by $0.61), caused by continued
economic and market uncertainties
o Higher-than-anticipated Latin American (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 assets for use in certain ex-U.S.
markets
Nine Months Ended
Sept. 30,
---------------------------
Total Monsanto Company and Subsidiaries: 2002 2001
--------------------------------------- ---- ----
Net Sales $3,453 $4,253
====== ======
Gross Profit $1,623 $2,180
====== ======
Income before cumulative effect of accounting
change $ 68 $ 399
Add: Interest expense - net of interest income 43 55
Income tax provision 29 233
------ ------
EBIT(1) 140 687
Add: Depreciation and amortization 348 414
------ ------
EBITDA(2) $ 488 $1,101
====== ======
24
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
(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 19 percent to $3.5 billion in the first nine months
of 2002 from net sales of $4.3 billion for the first nine months of 2001.
Sales from the Agricultural Productivity and, to a lesser extent, the Seeds
and Genomics segments declined because of several factors. In the
Agricultural Productivity segment, sales declined due to lower volumes and
lower average net selling prices of our ROUNDUP and other glyphosate-based
herbicides. The lower volumes were due primarily to market share loss and
to unfavorable weather conditions in key U.S. planting regions.
Both segments were affected by economic conditions in Latin America
(including the economic crisis in Argentina that originated at the
beginning of the year), and by operational changes to our business model to
address the continued economic uncertainty and unfavorable market
conditions there, and by the actions we are taking in conjunction with our
customers in that region. These changes and actions, which have affected
and will continue to affect sales and EBIT in 2002, are intended to reduce
investments in working capital and reduce our credit risk and other
exposures in Argentina and Brazil. The resulting lower sales in Latin
America, and higher product returns and currency losses in Argentina, have
negatively affected 2002 earnings per share by $0.61 per share. In 2001,
higher-than-anticipated returns of corn seed in Latin America (primarily
Brazil) negatively affected sales by approximately $120 million and
earnings per share by approximately $0.20 per share. For a more detailed
discussion of these and other factors affecting the first nine months of
2001 and 2002, see "Agricultural Productivity Segment" and "Seeds and
Genomics Segment."
Cost of goods sold declined 12 percent to $1.8 billion for the first
nine months of 2002 from $2.1 billion for the same period in 2001,
reflective of lower sales in the segment. In addition, a reduction of
production volumes in connection with changes to our Latin American
business model led to higher cost of goods sold. Higher seed obsolescence
in Latin America increased cost of goods sold as well. The combination of
the aforementioned net sales and cost of goods sold factors led to a 26
percent decline in gross profit. As a percent of sales, gross profit
declined 4 percentage points.
Operating expenses for the first nine months of 2002 declined when
compared with operating expenses for the same period in 2001, as a
significant increase in bad debt expense related to Argentina was more than
offset by the benefit of no longer amortizing goodwill and a decline in
SG&A expenses. SG&A expenses for the first nine months of 2002 declined 9
percent when compared with the first nine months of 2001. 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 Chemical
Industries, Ltd. (Nissan).
In 2002, we have recorded $183 million of bad debt expense, $154
million of which relates to the allowance we established in the second
quarter for 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." Excluding the Argentine bad debt allowance established in the
second quarter, year-to-date bad debt expense in 2002 is in line with 2001
year-to-date bad debt expense of $29 million.
R&D expenses for the first nine months of 2002 decreased 6 percent
when compared with the same period last year, as we continue to focus our
spending. The majority of planned savings in R&D from the 2000
25
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
restructuring plan have been substantially realized in our 2001 and 2002
results, and we have not yet realized 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 nine months of 2001, we recorded $91 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 nine months 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 $93 million of
expenses recognized to date relating to our 2002 plan, $75 million was
recognized as restructuring charges - net. Of the $81 million of expenses
realized in the first nine months of 2001 relating to our 2000
restructuring plan, $61 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 and capitalized interest,
declined $12 million. We benefited from lower interest rates during most of
the year, as well as lower average borrowing levels throughout 2002.
However, lower interest capitalized on construction reduced last year's net
interest expense. A majority of this capitalized interest related to the
construction of our Camacari, Brazil, facility, which was completed last
year.
Other expense - net increased $19 million from $28 million for the
first nine months of 2001 to $47 million for the first nine months of 2002.
In both periods, other expense includes equity affiliate expense associated
with our Renessen LLC joint venture. Both periods also include gains that
were realized upon the sale of equity securities ($10 million in 2002, and
$8 million in 2001). On a year-over-year comparison, the other expense -
net was affected by a number of items.
In 2002, we recorded:
o Approximately $20 million of higher currency losses when compared
with the same period last year, reflecting the further
devaluation of our net assets denominated in Argentine pesos,
which were partially offset by currency gains in Brazil
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 related
to the Australian and New Zealand markets
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.
(Pioneer) 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 Plan (ESOP) debt that was previously classified as an
extraordinary loss (see "New Accounting Standards" for further
details)
Income tax provision for the first nine months of 2002 decreased
significantly when compared with income tax provision for the same period
last year. This decrease is consistent with the lower pretax income during
the period. The effective tax rate decreased to 30 percent for the
year-to-date period, from 37 percent for the first nine months 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
26
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
products, and environmental technologies businesses. We are a leading
worldwide developer, producer and marketer of crop protection products,
including ROUNDUP herbicides.
Nine Months Ended
Sept. 30,
------------------------------
2002 2001
---- ----
Net Sales
ROUNDUP and other glyphosate-based herbicides $1,487 $2,009
All other 993 1,064
------ -----
Total Net Sales $2,480 $3,073
====== ======
Gross Profit
ROUNDUP and other glyphosate-based herbicides $ 717 $1,093
All other 437 477
------ ------
Total Gross Profit $1,154 $1,570
====== ======
EBIT(1) $ 377 $ 862
Add: Depreciation and amortization 177 167
------ ------
EBITDA (2) $ 554 $1,029
====== ======
(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 19
percent from $3.1 billion for the first nine months of 2001 to $2.5 billion
for the first nine 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.
The overall decline in worldwide net sales of our ROUNDUP and other
glyphosate-based herbicides was driven by a decline in both volumes and
average net selling prices, with the largest declines in the United States
and Argentina. In the United States, net sales of ROUNDUP and other
glyphosate-based herbicides declined 26 percent, primarily resulting from
lower volumes. A decline in average net selling prices also contributed to
the lower net sales. Market share loss, particularly in the burndown and
over-the-top markets, contributed to the lower volumes. In addition,
adverse weather conditions throughout the year reduced the amount of
ROUNDUP used in the over-the-top, fallow, and post-harvest markets. As a
result, the overall growth of the U.S. glyphosate market was lower than
expected. 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 late summer and early
fall, which further reduced the number and rate of ROUNDUP applications in
2002. In addition, 2002 sales in preparation for the 2003 growing season
are lower than 2001 sales were for the 2002 growing season, as our
operating plan is to keep year-end distribution inventory levels flat
relative to last year's distribution inventory levels. Prices of ROUNDUP
herbicides were affected by the mix of products sold and other competitive
factors. For the full year, average net selling prices of ROUNDUP in the
United States are expected to be down approximately 7 to 8 percent, which
includes the effect of the shift in mix to lower-priced glyphosate
products. For the full year, volumes of ROUNDUP in the United States are
expected to be down approximately 15 to 20 percent.
Economic conditions and the actions we are taking with our customers
to reduce our risk in Latin America affected the sales of ROUNDUP and other
glyphosate-based herbicides in Argentina. In Argentina, returns under a
one-time exception to our policy regarding crop protection products reduced
sales of ROUNDUP and other glyphosate-based herbicides by approximately $60
million in 2002. Because of the economic conditions in Argentina brought on
by the economic crisis earlier in the year, we allowed crop protection
product returns on a case-by-case basis to maintain long-term customer
27
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
relationships and reduce risks for both parties. Even under tightened
credit terms, sales of ROUNDUP and other glyphosate-based herbicides in
Brazil increased on higher volumes. This sales improvement was in response
to higher demand and increased applications of these herbicides.
Competitive pricing of generic products decreased sales in Asia early in
the year. In the third quarter, sales in Asia declined as a result of the
agreement in the second quarter of 2002 to sell certain of our herbicide
assets to Nissan for use in Japanese markets. Volumes of glyphosate that we
manufacture and supply to third parties declined, for the same reasons
described above.
Overall sales of our other agricultural productivity businesses
declined, though our lawn and garden herbicides and animal agriculture
businesses experienced sales increases. 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 United States, fewer pre-treatment
acetanilide applications occurred because of the wet spring weather across
a significant portion of the U.S. corn belt. Sales in our environmental
technologies business also declined.
The factors above led to an overall decline in EBIT for the segment,
though the most notable effects were from the lower U.S. ROUNDUP volumes
and prices, and from our actions to reduce risk in Latin America. These
actions led to lower production volumes, which in turn led to unfavorable
cost of goods sold manufacturing variances. 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.
SG&A expenses also declined because of lower employee-related costs and
continued cost management. In addition, our R&D spending was lower in 2002,
as we continue to focus our spending.
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.
Nine Months Ended
Sept. 30,
------------------------------
2002 2001
---- ----
Net sales $ 973 $1,180
===== ======
Gross Profit $ 469 $ 610
===== ======
EBIT(1) $(237) $ (175)
Add: Depreciation and amortization 171 247
----- ------
EBITDA(2) $ (66) $ 72
===== ======
(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 totaled $973 million for
the first nine months of 2002, compared with $1.2 billion for the same
period last year. Corn seed and biotechnology trait revenues in the United
States increased, reflecting an increase in planted acreage of corn this
year and strong market performance by our DEKALB and ASGROW brands during
the 2002-selling season. Grower acceptance of our biotechnology traits
continues to grow, as demonstrated by the growth in total acres planted
with our traits. A decline in U.S. soybean seed and trait revenues offset
the corn increase. Despite the market dynamics of lower acres and increased
28
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
supply, our soybean brands maintained price and market share. In the first
nine months of 2001, sales in this segment benefited from a shift in timing
related to the royalty sales for our corn and soybean traits.
Our Latin American grain sales program also affected the year-to-year
comparison. Net sales for the first nine months of 2002 included
approximately $50 million of net sales and related cost of goods sold
related to this program. In 2002, we changed the way we account for the
program to no longer record revenues and cost of goods sold of essentially
the same amount. Under the nature of the current program, we no longer take
ownership of the grain, thereby eliminating the associated inventory risk.
While this change affects our net sales and cost of goods sold comparison,
the effect on the EBIT comparison is minimal.
Seeds and Genomics segment results for the first nine months of 2002
were significantly affected by the changes in our business model in Latin
America. The goal of this new business model is to reduce working capital
levels and reduce our credit risk and exposure in Argentina and Brazil in
reaction to the continued economic uncertainty in that region. In
Argentina, we experienced approximately $75 million of
higher-than-anticipated seed returns (primarily corn seed) due to the
economic crisis that originated at the beginning of the year and last
year's flooding. Through the first nine months of 2001, we experienced
approximately $120 million of higher-than-anticipated returns of
high-priced corn seed, primarily in Brazil. These 2001 seed returns
resulted from a strategic decision in 2000 to sell higher performance corn
seed. However, farmers chose not to plant that seed, resulting in
substantial returns of relatively high-priced corn seed in 2001. In 2002,
the continued deterioration of the Brazilian corn market has negatively
affected sales, as farmers have switched toward lower priced soybeans
because of their lower input costs.
Seeds and Genomics EBIT for the first nine months of 2002 was a loss
of $237 million, as compared with an EBIT loss of $175 million for the same
period last year. Our actions in Latin America negatively affected both net
sales and gross profit in 2002 (primarily through higher obsolescence),
while higher-than anticipated returns of Brazilian corn seed affected EBIT
last year. Charges relating to our restructuring plans also 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 nine-month periods in both years. In 2002, we recognized
other expense related to the broad-reaching business agreement with Pioneer
and DuPont. In 2001, we recognized other income from a deferred payout
provision related to a past business divestiture and the impairment of an
equity investment. In both years, we recorded other income related to gains
that were realized upon the sale of equity securities.
Restructuring and Other Special Items
The amounts related to the 2002 and 2000 restructuring plans were
recorded in the Statement of Consolidated Operations in the following
categories:
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
------------------------------ ----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Cost of Goods Sold $ (9) $ (2) $ (18) $ (13)
Restructuring charges - net(1) (18) (9) (75) (61)
Other Expense - net -- (1) -- (7)
---- ----- ----- -----
Income (Loss) Before Income Taxes (27) (12) (93) (81)
Income tax benefit 9 4 32 30
---- ----- ----- -----
Net Income (Loss) $(18) $ (8) $ (61) $ (51)
==== ===== ===== =====
29
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
(1) Net of reversals of $1 million related to the 2000 Restructuring
Plan for the three months and nine months ended Sept. 30, 2002.
2002 Restructuring Plan:
-----------------------
In 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, we recorded $94 million
pretax ($61 million aftertax) of net charges in the first nine months of
2002, with $28 million pretax ($18 million aftertax) recorded in the third
quarter. The pretax components of the restructuring for the three months
and nine months ended Sept. 30, 2002 were as follows:
Three Months Ended Nine Months Ended
Sept. 30, 2002 Sept. 30, 2002
-------------- --------------
Work Force Reductions $ 12 $ 35
Facility Closures / Exit Costs 5 21
Asset Impairments:
Property, plant and equipment - net 10 37
Inventories 3 3
Recoverable amount from third party (2) (2)
---- ----
Total Pretax Charge $ 28 $ 94
==== ====
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 for the three months and nine months
ended Sept. 30, 2002, include involuntary employee separation costs for
approximately 290 and 740 employees worldwide, respectively, 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 (less than $1 million for
the three months and $8 million for nine months ended Sept. 30, 2002),
equipment dismantling and disposal ($3 million for the three months and $7
million for nine months ended Sept. 30, 2002) and other shutdown costs ($2
million for the three months and $6 million for nine months ended Sept. 30,
2002) resulting from the exit of certain research and manufacturing sites.
The write-off of inventories was recorded within cost of goods sold. The
recoverable amount from a third party represents a portion of the work
force reduction and exit costs that will be reimbursed to Monsanto. Cash
payments to complete these restructuring actions 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.
During the first nine months of 2002, approximately 330 former
employees received cash severance payments totaling $16 million. The work
force reduction payments for the remaining 410 employees associated with
these actions will be completed by Sept. 30, 2003. Exit costs of $4 million
associated with contract terminations, equipment dismantling and disposal,
and other shutdown costs were also paid during the first nine months of
2002.
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, we incurred $261 million of net
charges in 2000. Restructuring and other special items, primarily
associated with the implementation of this plan, also were recorded in
2001. These charges totaled $81 million pretax ($51 million aftertax) for
the first nine months of 2001, with $12 million ($8 million aftertax)
recorded in the third quarter. The fourth quarter of 2001 included $132
million of pretax restructuring and other special items to complete the
2000 Restructuring Plan at a total of $474 million of pretax charges.
30
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The pretax components of the restructuring and other special items for
the three months and nine months ended Sept. 30, 2001, were as follows:
Three Months Ended Nine Months Ended
Sept. 30, 2001 Sept. 30, 2001
-------------- --------------
Work Force Reductions $ 1 $21
Facility Closures / Exit Costs 4 22
Asset Impairments:
Inventories 2 13
Other current assets 2 6
Property, plant and equipment - net 2 10
Other intangible assets - net -- 2
Other Special Items 1 7
--- ---
Total Pretax Charge $ 12 $81
=== ===
The work force reduction costs for the three months and nine months
ended Sept. 30, 2001, included involuntary employee separation costs for
approximately 30 and 260 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
were related to property, plant and equipment, other current assets and
other intangible assets. In addition, $2 million and $13 million related to
the write-off of inventories was recorded within cost of goods sold for the
three months and nine months ended Sept. 30, 2001, respectively. We expect
these employee reductions, asset dispositions and other exit activities to
be completed by March 31, 2003. Cash payments to complete this
restructuring plan will be funded from operations and are not expected to
significantly affect our liquidity. These actions have yielded annual cash
savings of more than $100 million. For the nine months ended Sept. 30,
2001, a total charge of $7 million was recorded within other expense - net,
for the impairment of equity securities caused by adverse business
developments of the investees.
During the first three 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 three quarters of 2002,
approximately 400 former employees received cash severance payments
totaling $22 million. Restructuring reversals were required as
approximately 20 positions originally contemplated in the plan were
eliminated through attrition. The work force reduction payments for the
remaining 95 employees associated with this plan will be completed by March
31, 2003. Exit costs of $18 million associated with contract terminations,
equipment dismantling and disposal were also paid during the first nine
months of 2002.
See Note 9 - Restructuring and Other Special Items - of Notes to
Consolidated Financial Statements for further details regarding our
restructuring plans.
31
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Changes in Financial Condition as of Sept. 30, 2002
Working Capital and Financial Condition
---------------------------------------
Sept. 30, 2002 Dec. 31, 2001
-------------- -------------
Working capital $2,821 $2,420
Current ratio 3.06:1 2.02:1
Our working capital at Sept. 30, 2002, increased approximately $400
million from Dec. 31, 2001, to $2.8 billion, primarily attributed to our
reduction in short-term debt and short-term loans payable as a result of
our August 2002 long-term debt issuance. Current liabilities declined, as
did current assets. Trade receivables declined significantly, a result of
many factors. Lower sales in 2002 affected the year-to-year comparison, as
did the $154 million allowance for bad debt recorded in the second quarter
of 2002 related to estimated uncollectible accounts receivable in
Argentina. Trade receivables and accrued liabilities both decreased as we
changed our agreements with customers, which allow the company to net
marketing allowances against trade receivables. Currency devaluation in
Brazil also reduced the receivables balance as of Sept. 30, 2002 compared
to Dec. 31, 2001. Trade payables decreased consistent with the seasonality
of our business.
In connection with the new financing option in place for certain of
our customers, we collected $113 million during 2002. 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 Sept. 30, 2002, customer loans held by the QSPE totaled $100
million and the QSPE's liability to the conduits was $100 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 our past practice of providing
customers with direct credit purchase terms. Servicing fee revenues were
not significant. As of Sept. 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
---------
Nine Months Ended
Sept. 30,
------------------------------
2002 2001
---- ----
Cash provided (required) by operations $ 201 $(139)
Cash required by investing activities $ (133) $(346)
Cash provided (required) by financing activities $ (239) $ 534
Free cash flow (representing the sum total of cash flows from
operations and investing activities) for the first nine months of 2002
improved more than $550 million from the same period last year, from
negative free cash flow of $485 million last year to positive free cash
flow of $68 million this year. Historically, our free cash flow for the
first nine months of the year had been negative, as we used cash to fund
the seasonal fluctuations in our business. Reduced capital expenditures and
working capital are the primary drivers for positive free cash flow in
2002. Capital expenditures in the first nine months of 2002 declined
32
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
approximately $140 million from the first nine months of 2001. Improved
management of our investment in working capital contributed significantly
to cash flow during the first nine months. Although receivables are lower
due to lower sales, earlier collections contributed to free cash flow, in
part because of our new customer financing arrangement discussed above,
under which we collected approximately $50 million in the third quarter
that would typically be collected in the fourth quarter. A reduction of our
customers' use of our internal financing program also contributed to our
free cash flow. Cash flow improvements were also achieved by strong
management of our inventories, as we controlled production costs in light
of reduced sales. We also received proceeds of $63 million on the sale of
investments and property, including the sale of herbicide assets to Nissan
in the second quarter. In addition, we received almost $50 million from the
long-term supply agreement with Nissan, which was included in cash flow
from operations.
Capital Resources and Liquidity
-------------------------------
Sept. 30, 2002 Dec. 31, 2001
-------------- -------------
Debt-to-capital 23% 19%
As a result of our cash flow improvements, total debt as of Sept. 30,
2002, decreased when compared with Dec. 31, 2001 debt levels; however, the
debt-to-capitalization ratio was negatively affected by the $2 billion
pretax ($1.8 billion aftertax) goodwill impairment charge.
In August 2002, we issued $800 million of 7-3/8% Senior Notes due Aug.
15, 2012 in two separate traunches. These notes were issued pursuant to a
May 2002 shelf registration, under which $1.2 billion remains available for
future debt issuances. (See Note 6 - Debt Issuance - of Notes to
Consolidated Financial Statements for further details.)
As of Sept. 30, 2002, we had unused committed external borrowing
facilities amounting to $1.3 billion. These facilities exist largely to
support our commercial paper borrowings. One facility is a $800 million
364-day facility which expires in July of 2003, and the other is a
$500-million facility that expires in 2005.
The Company plans to post an appeal bond on behalf of Solutia Inc.
(see Part II - Item 5 - Other Information.)
Outlook - Update
Focused Strategy
We believe that our focused approach to our business and the value we
bring to our customers will allow us to maintain an industry leadership
position in a difficult agricultural and economic environment. While growth
from our traditional products will continue to 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. In the near term, we are focused on achieving continued growth
in our seeds and traits businesses, while maintaining strong cash flows
from ROUNDUP and our other crop protection products, and managing costs.
Securing biotechnology approvals and continued development and
commercialization of our research pipeline are key factors to our future
growth, as we continue to transform our business to greater reliance on our
seed and higher-margin traits businesses. Our seed biotechnology business
is discussed in greater detail below. We will also continue to pursue
strategic alliances involving the sale or license of certain products or
product lines in certain ex-U.S. geographic areas, where appropriate.
In the fourth quarter, results will include sales of seeds and
technology traits in the United States as customers prepare for the 2003
growing season. Results for the remainder of 2002 will continue to be
negatively affected by economic conditions in Latin America. The actions we
have taken with our customers and operational decisions we have made are
designed to reduce working capital, distribution inventories and risk in
that region, by focusing on collections and maximizing cash flows.
33
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 are focusing on receivables
collections and also have instituted more restrictive credit policies
(particularly in Latin America) to improve the overall collectibility of
our receivables going forward. We will also continue to seek new external
financing alternatives for our customers to supplement the customer
financing program discussed in "Changes in Financial Condition." Our
primary working capital focus continues to be receivables management in
Latin America, particularly in Argentina and Brazil.
Latin America
In the second quarter of 2002, we announced changes in how we approach
our Latin American business, because of continued economic and market
uncertainties. These actions are intended to improve the longer-term
viability of our business there and to reduce overall risk. Because of the
economic conditions in Argentina brought on by the economic crisis earlier
in the year, we have allowed one-time crop protection product returns on a
case-by-case basis to maintain long-term customer relationships and reduce
risks for both parties. We will continue to operate primarily with cash or
grain sales terms in Argentina. Our current experience is that a larger
percentage of 2002 year-to-date sales are being made on a cash basis,
compared to the same period last year. While these sales reduce our risk,
they carry a lower net selling price than sales made on grain terms. In
addition, as part of our plan to reduce our risk in Latin America, we have
reduced distribution channel inventories in that region. While 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 and other exposures, as well as our working capital
investment in Brazil and Argentina. This plan will continue to affect sales
and EBIT for the remainder of 2002.
We have been affected by significant reforms in Argentine monetary
legislation and a decline in the value of the Argentine peso. The economic
situation in Argentina continues to evolve, and reforms continue to have an
effect on our operations in Argentina. 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. While we have prepared our 2001 and 2002 financial
statements relating to the Argentine operations on a U.S. dollar functional
basis, we could be required to change our functional currency designation
in Argentina based on future government economic reforms. The peso-to-U.S.
dollar exchange rate is 3.52-to-1.00 as of Oct. 31, 2002.
In March 2002, the Argentine government issued a decree establishing a
20 percent export tax on agricultural exports. It also ruled that U.S.
dollar-denominated contracts in agricultural markets entered into prior to
Jan. 6, 2002 (Predevaluation Contracts), must be honored at the same
exchange rate as the one obtained for exports of the agricultural products
that contain the agricultural inputs. This decree was amended on July 2,
2002, with the issuance of Resolution Number 143, which states that the
future settlement of the Predevaluation Contracts on farm inputs will be
subject to a 25 percent reduction (including the 20 percent export taxes
discussed above) on the U.S. dollar price. In the second quarter of 2002,
we established an allowance of $154 million pretax for estimated
uncollectible accounts receivable in Argentina, of which $44 million has
been written off against accounts receivable as of Sept. 30, 2002. 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 continue to fluctuate
as the company continues its collection efforts.
Year-to-date collections in Argentina are down approximately 23
percent, primarily due to lower sales and the effect of the 25 percent
reduction of amounts owed for farm inputs for agricultural exports. We have
been able to collect essentially all of our Predevaluation Contracts that
were secured with grain, net of the 25 percent reduction. Also, primarily
all of our year-to-date sales in Argentina have been made for either cash
or grain. While we cannot determine how government actions and economic
conditions in Argentina will affect the value of the $230 million of net
receivables outstanding as of Sept. 30, 2002, we continue to aggressively
pursue customer collections. Management's current assessment of the
situation is that the collectibility of the accounts receivable has
improved and the allowance balance is adequate.
34
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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.
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 volume 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 bulk logistics and
low-cost manufacturing capabilities. We also sell glyphosate to other
herbicide producers to capitalize on our manufacturing economies of scale.
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 U.S. glyphosate patent in 2000,
we also face these pressures in the United States, where our market share
has declined over the past two years. The current plan for the ROUNDUP
herbicide business in the United States assumes that we will continue to
see growth in the overall market for glyphosate, while facing price and
market share declines for our ROUNDUP brands. However, if price or market
share declines, or the overall market growth, deviate significantly from
our expectations, we will need to consider additional changes to our
business model.
For the year, U.S. ROUNDUP herbicide volumes will be down because of
market share loss in the burndown and over-the-top segments and adverse
weather conditions (wet spring, dry summer) which negatively affected the
overall growth of the glyphosate market. In addition, 2002 sales in
preparation for the 2003 growing season are expected to be lower than 2001
sales were in preparation for the 2002 growing season, as our operating
plan is to keep year-end distribution inventory levels flat relative to
last year's distribution inventory levels. Distribution channel inventories
have increased significantly in the United States within the past three
years. Our goal is that, in the future, sales of ROUNDUP herbicides will
approximate usage on a seasonal basis. This strategy is expected to
contribute to reduced volumes for 2002. However, many factors that are not
within our control may affect usage of ROUNDUP herbicides (for example,
weather conditions). 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 in ROUNDUP usage. In addition, if distributors elect
to reduce their inventory levels from current levels, sales volumes of
ROUNDUP herbicides would be materially adversely affected.
ROUNDUP herbicide prices are also expected to decline in the United
States for the year. We reduce prices in selected markets in order to
increase volumes, penetrate new markets and compete effectively. We expect
to continue to selectively reduce average prices through discounts, rebates
or other promotional strategies, as well as through new formulations and
product mix changes. For example, in 2001 we introduced RT MASTER
herbicide, which is formulated and priced for conservation tillage use in
the highly elastic wheat market. Our pricing strategy likely will result in
a reduction in our gross margin, consistent with the reduction in recent
years.
Seed Biotechnology
Monsanto invests more than 80 percent of its R&D in the areas of
seeds, genomics and biotechnology. These are the fastest growing segments
in the agriculture industry. As the seed and biotechnology segments of the
35
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
industry become more important to our business, we have increased our focus
in this area. Biotechnology traits offer growers several benefits: lower
costs, greater convenience and flexibility, higher yields, and the ability
to adopt environmentally responsible practices like conservation tillage.
We have introduced biotechnology traits for glyphosate tolerance and for
insect protection.
ROUNDUP and other glyphosate-based herbicides can be applied over the
top of our glyphosate-tolerant 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 2002, we estimate that approximately 112 million acres were
planted with ROUNDUP READY crops. In addition, our insect-protection seed
traits, such as YIELDGARD for corn and BOLLGARD for cotton, serve as
alternatives to certain chemical pesticides. We also "stack" ROUNDUP READY
and insect-protection traits for corn and cotton. We currently estimate
that 136 million acres were planted with our seed biotechnology traits
worldwide in 2002, compared with approximately 123 million in 2001; and
that approximately 98 million acres were planted in the United States
during the 2002 growing season, compared with approximately 86 million
acres in the previous year.
We are working to secure additional biotechnology approvals for our
existing products globally, and toward the development and
commercialization of biotechnology traits and products in our research
pipeline. We are continuing our efforts to obtain approval in Brazil for
planting of ROUNDUP READY soybeans, and in Europe for importing corn that
contains the ROUNDUP READY trait. We have two new biotechnology traits
ready to enter the U.S. market in 2003, pending successful completion of
regulatory reviews -- YIELDGARD Rootworm corn and BOLLGARD II cotton, both
of which have received clearance from the U.S. Food and Drug Administration
and the U.S. Department of Agriculture, and are awaiting registration by
the U.S. Environmental Protection Agency. In addition, YIELDGARD Rootworm
corn has received all necessary import clearance by Japanese regulatory
agencies, and BOLLGARD II cotton is awaiting environmental clearance in
Japan.
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 adventitious or
unintended trace presence of biotechnology materials in seed, grain 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, grain, feed and food industry associations, by
developing information to improve both understanding and management of
biotechnology and seed production quality, and by continuing globally to
seek regulations that recognize and accept the adventitious presence of
commercial biotechnology traits and provide for approval and acceptance of
trace amounts of pre-commercial traits.
Other Information
We regularly evaluate our pension-related assumptions. Because of the
decline in the equity markets, the fair value of the Monsanto pension fund
assets has decreased. During the third quarter of 2002, the company
recorded an additional minimum pension liability adjustment. This noncash
adjustment decreased shareowners' equity by $155 million aftertax, but did
not affect our results of operations. Also in the third quarter of 2002, we
made a voluntary cash contribution of $10 million to our pension plan, and
anticipate voluntarily funding a similar amount in the fourth quarter of
2002 and in each quarter of 2003. We also anticipate that our pension
expenses will continue to increase in 2003. Holding all assumptions
constant, we estimate that a one-half percent increase or decrease in the
discount rate would increase or decrease Monsanto's pretax income by
approximately $1 million. Likewise, we estimate that a one-half percent
increase or decrease in the expected return on plan assets would increase
or decrease Monsanto's pretax income by approximately $6 million.
36
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
As discussed in Note 10 - 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," later in this section.
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
deferred portions of the $20 million annual fixed fee 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 $51 million as of Sept. 30, 2002,
and $48 million as of Dec. 31, 2001. Scotts has begun paying these deferred
amounts ($5 million per year in monthly installments beginning Oct. 1,
2002).
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
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
below and 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.
Income Taxes: Significant management judgment is required in
determining Monsanto's provision for income taxes, including any valuation
allowances that might be required against deferred tax assets. As part of
the process of preparing the company's consolidated financial statements,
management is required to estimate income taxes in each of the
jurisdictions in which the company operates. This process involves
estimating actual current tax expense together with assessing temporary
differences resulting from differing treatment of items for tax and book
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within the company's statement of
consolidated financial position. Management assesses the likelihood that
deferred tax assets will be recovered from future taxable income and to the
extent management believes that recovery is not likely, a valuation
allowance is established. To the extent that a valuation allowance is
established or increased, an expense within the tax provision is included
37
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
in the statement of consolidated operations. The provision for income taxes
could be affected by changes to tax laws, changes in statutory tax rates
and estimates of the company's future taxable income levels.
Goodwill: Our annual goodwill impairment assessment involves
estimating the fair value of a reporting unit and comparing it with its
carrying amount. If the carrying value of the reporting unit exceeds its
fair value, additional steps are required to calculate a potential
impairment loss. Calculating the fair value of the reporting units requires
significant estimates and long-term assumptions. Any changes in key
assumptions about the business and its prospects, or changes in market
conditions, interest rates or other externalities, could result in an
impairment charge. We estimate the fair value of our reporting units by
applying discounted cash flows methodologies.
New Accounting Standards
SFAS No. 141, Business Combinations, requires that the purchase method
of accounting be used for all business combinations initiated after Sept.
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
Sept. 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
third quarter, first nine months, and full year would have increased by
$0.06 per share, $0.33 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.
38
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 Plan (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 results of operations.
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. In addition, you should not place undue reliance on
our forward-looking statements, which are current only as of the date of
this filing. 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," "will," 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 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
39
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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.
Development 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.
Government Regulation: The field testing, production, marketing and
use of our products, particularly our seed biotechnology products, are
subject to extensive regulation and numerous government approvals.
Government regulations, regulatory systems, and the politics which
influence them vary widely among jurisdictions. Obtaining necessary
regulatory approval is time consuming and costly, and there can be no
guarantee of the timing or success in obtaining approvals. If crops grown
from seeds 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 there are markets
that have not approved some products, some companies in the grain and food
industries 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 and can result in grower
opposition to the introduction of new biotechnology products or approved
traits in a new crop (such as ROUNDUP READY wheat, one of our pipeline
products), even in countries where planting and consumption may be fully
approved.
In addition to delaying or preventing the sale or import of our
products, regulatory authorities can order recalls, and prohibit, or place
limits or conditions on, the planting of seeds containing our technology.
Although weed resistance to various herbicides has occurred and is managed
through proper use, stewardship and alternative weed control methods,
government agencies could choose to restrict the use of herbicides and
herbicide tolerant crops, such as glyphosate and glyphosate tolerant crops,
in response to claims that increased use of the herbicide increases the
potential for the development of weed resistance. Legislation or regulation
may also require the tracking of biotechnology products and the labeling of
food or feed products with ingredients grown from seeds containing
biotechnology traits. In addition, international agreements, such as the
Biosafety Protocol which is nearing ratification, also affect the treatment
of biotechnology products.
Public Acceptance: The commercial success of agricultural and food
products developed through biotechnology will depend in part on public
acceptance of their development, cultivation, distribution and consumption.
Biotechnology has enjoyed and continues to enjoy substantial support from
the scientific community, regulatory agencies, governmental officials and
grower communities around the world. However, public attitudes can be
influenced by claims that genetically modified plant products are unsafe
40
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
for consumption or pose unknown risks to the environment or to traditional
social or economic practices, even if such claims have no scientific basis.
These public attitudes can influence regulatory and legislative decisions
about seed biotechnology, and may also result in refusal to purchase
products derived from biotechnology even where approved. The development,
introduction and sale of our products have been, and may in the future be,
delayed or impaired because of adverse public perception regarding the
safety of our products and the potential effects of these products on other
plants, animals, human health and the environment. We continue to work with
consumers and customers to encourage understanding of modern biotechnology,
crop protection and agricultural biotechnology products.
Adventitious Presence of Biotechnology Traits: Because the global
acceptance and regulation of biotechnology-derived agricultural products is
not consistent or harmonized, the detection of unintended trace amounts
(adventitious presence) of biotechnology traits in precommercial seed, seed
varieties, or the grain 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.
Some growers of organic and conventional non-biotechnology crops have
claimed that the adventitious presence of biotechnology traits in their
crops will cause them commercial harm. Concerns about adventitious presence
of biotechnology traits could lead to additional requirements such as seed
labeling, traceability, liability or insurance requirements, and
restrictions on testing, planting or use of biotechnology traits. 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.
The detection in 2000 of the Starlink trait (a trait developed by another
company, and approved for feed but not for food) in the food supply, grain
and growing crops has continued to cause members of the grain and food
industries and some grower organizations to demand more stringent
regulation and financial protection. The development of plant-made
pharmaceutical proteins and food-crop plant production of such proteins
(e.g., Monsanto's Protein Technologies Business) and industrial enzymes in
food and feed crops is a target of many who are demanding tighter controls.
Together with other seed companies, biotechnology providers 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, grain and food,
together with rigorous regulation that will prevent the presence of traits
intended not to be in food or feed. This may involve the establishment of
approval processes or threshold levels for the adventitious presence of
biotechnology traits intended to be in food and feed, and standardized
sampling and testing methods for all traits. Although we believe that
thresholds for traits intended to be in food and feed crops 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. In the
United States, the USDA and FDA are already coordinating to strengthen the
regulation and confinement of traits intended not to be present in food or
feed.
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
41
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
of change, some of our products may unknowingly rely on key technologies
that are 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 and marketing resources
than we do.
Weather and Natural Disasters: 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. The
occurrence of adverse weather conditions or natural disasters in major
markets can have a material adverse effect on our sales and profitability.
Planting Decisions: In order to successfully market our products, we
must anticipate the planting decisions that growers will make for future
crop seasons. Market and economic conditions affect growers' decisions
about the types and amounts of crops to plant and may negatively affect
sales of our herbicide, seed and biotechnology products. Failure to
accurately predict the grower demand for specific products may also result
in unanticipated returns, which could have a material adverse effect on our
profitability.
Need for Short-Term Financing: Like many other agricultural companies,
we regularly extend credit to our customers in certain areas of the world
to enable them to acquire agricultural chemicals and seeds at the beginning
of their growing seasons. Our credit practices, combined with the
seasonality of our sales, make us dependent on our ability to obtain
short-term financing to fund our cash flow requirements, our ability to
collect customer receivables when due, 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. 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.
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
42
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
these distributor inventories are worked down, particularly in the event of
unanticipated price reductions or of unanticipated reductions in the volume
of our products purchased by growers. Distributors may also elect to reduce
their inventory levels from current levels, which could have a material
adverse effect on our sales volumes.
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 and Mexico. 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.
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 $2 billion shelf registration with
the Securities and Exchange Commission (SEC). On Aug. 14, 2002, Monsanto
issued $600 million of 7-3/8% Senior Notes under this shelf registration.
On Aug. 23, 2002, the aggregate principal amount of the outstanding notes
was increased to $800 million. The fair value of this debt is approximately
$845 million as of Sept. 30, 2002. A one-percentage point change in the
interest rates would change the fair value by approximately $60 million.
43
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Item 4. CONTROLS AND PROCEDURES
We maintain a comprehensive set of disclosure controls and procedures
(as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934 (Exchange Act)) and internal controls designed to ensure that
information required to be disclosed in our filings under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. As of Nov. 8, 2002 (the Evaluation
Date), an evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
design and operation of these disclosure controls and procedures were
effective as of the Evaluation Date.
Subsequent to the Evaluation Date, there were no significant changes
in internal controls or other factors that could significantly affect
internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
44
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
This portion of the Report on Form 10-Q describes material legal
proceedings that we are defending or prosecuting. These include proceedings
to which we are party in our own name, as well as proceedings to which
Pharmacia Corporation is a named party, but for which we have assumed
responsibility pursuant to the Separation Agreement between ourselves and
Pharmacia, effective Sept. 1, 2000 (as amended, the "Separation
Agreement"). Under that 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
named defendant, we will indemnify Pharmacia for costs, expenses and any
judgments or settlements; and in the proceedings where Pharmacia is the
named plaintiff, we will pay the fees and costs of, and receive any
benefits from, the litigation. We are also involved in other legal
proceedings, not described in this section, which arise in the ordinary
course of our 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.
The discussion of our legal proceedings in this section does not
include proceedings relating to liabilities that Solutia Inc. ("Solutia")
assumed from Pharmacia pursuant to a Distribution Agreement (as amended,
the "Distribution Agreement"), in connection with Pharmacia's spinoff of
its chemical businesses to Solutia on Sept. 1, 1997 (the "Solutia
Spinoff"). Under the Distribution Agreement, Solutia assumed and agreed to
indemnify Pharmacia for certain liabilities related to those chemicals
businesses, and Solutia is responsible for litigation relating to the
liabilities that it assumed. For example, Solutia is responsible for
litigation currently pending in state and federal courts in Alabama brought
by several thousand plaintiffs, alleging property damage, anxiety,
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 and the
Commonwealth of Pennsylvania litigation described in Item 5 - Other
Information - Relationships Among Monsanto Company, Pharmacia Corporation
and Solutia Inc. Solutia is managing these lawsuits and must indemnify
Pharmacia for any liabilities that Pharmacia incurs. Under the Separation
Agreement, we must 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. Under the Distribution Agreement, Solutia is required
to indemnify us for any liabilities that we incur in connection with this
litigation. See Item 5 - Other Information - Relationships Among Monsanto
Company, Pharmacia Corporation and Solutia Inc. for additional information
relating to Solutia.
The following discussion provides updated information regarding
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 for the year ended Dec. 31, 2001
and our quarterly reports on Form 10-Q for the quarters ended March 31,
2002 and June 30, 2002.
Proceedings Related to Biotechnology Rights
As described in our Form 10-K report for the year ended Dec. 31, 2001,
on Oct. 22, 1996, Mycogen Corporation ("Mycogen") filed suit against the
former Monsanto Company, DEKALB Genetics Corporation (subsequently acquired
by us) ("DEKALB Genetics") and Delta and Pine Land Company ("Delta and Pine
Land") in the United States District Court in Delaware alleging
infringement of two Bt-related patents (the "Delaware Bt Action"). The jury
trial concluded on Feb. 3, 1998, with a verdict in favor of all defendants.
Mycogen's patents were invalidated on the basis that we were a prior
inventor. On Sept. 8, 1999, the district court issued a revised order that
45
upheld the jury verdict and ruled that Mycogen's patents were invalid due
to their prior invention and lack of enablement. On March 12, 2001, the
Court of Appeals for the Federal Circuit affirmed the verdict that had
invalidated Mycogen's patents on the basis of prior invention. Mycogen's
application to the United States Supreme Court for writ of certiorari has
been denied.
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 Nov. 20, 1997, Aventis CropScience S.A. (formerly Rhone Poulenc
Agrochimie S.A., now Bayer CropScience AG) ("Aventis") filed suit in the
United States District Court in North Carolina against the former Monsanto
Company and DEKALB Genetics Corporation ("DEKALB Genetics") alleging that
because DEKALB Genetics failed to disclose a research report involving the
testing of plants to determine glyphosate tolerance, Aventis was induced by
fraud to enter into a 1994 license agreement relating to technology
incorporated into a specific type of herbicide-tolerant corn. Aventis also
alleged that DEKALB Genetics did not have a right to license, make or sell
products using Aventis technology for glyphosate resistance under the terms
of the 1994 agreement. On April 5, 1999, the trial court rejected Aventis's
claim that the contract language did not convey a license. Jury trial of
the fraud claims ended April 22, 1999, with a verdict for Aventis and
against DEKALB Genetics. The jury awarded Aventis $15 million in actual
damages and $50 million in punitive damages. The trial was bifurcated to
allow claims for patent infringement and misappropriation of trade secrets
to be tried before a different jury. Jury trial on these claims ended June
3, 1999, with a verdict for Aventis and against DEKALB Genetics. The
district court had dismissed the former Monsanto Company from both phases
of the trial prior to verdict on the legal basis that it was a bona fide
licensee of the corn technology. On or about Feb. 8, 2000, the district
court affirmed both jury verdicts against DEKALB Genetics, and enjoined
DEKALB Genetics from future sales of the specific type of
herbicide-tolerant corn involved in the agreement (other than materials
held in DEKALB Genetics' inventory on June 2, 1999). Judgment was entered
March 10, 2000. DEKALB Genetics appealed the jury verdict and damage award,
and Aventis appealed the finding that the former Monsanto Company was a
bona fide licensee. On Nov. 22, 2001 the United States Court of Appeals for
the Federal Circuit upheld the prior judgments. On March 26, 2002, the
Court of Appeals for the Federal Circuit reversed its decision regarding
the bona fide licensee issue and declined rehearing on the petition of
DEKALB Genetics regarding the monetary awards. Subsequent to those
appellate rulings, DEKALB Genetics has paid the monetary judgments.
Monsanto and DEKALB Genetics have filed certiorari petitions with the
United States Supreme Court to overturn the appellate rulings. We, our
licensees and DEKALB Genetics (to the extent permitted under the district
court's order and an agreement with Aventis) continue to sell the specific
type of herbicide-tolerant corn pursuant to a royalty-bearing agreement
with Aventis. In addition, we and DEKALB Genetics are replacing this
specific type of herbicide-tolerant corn with new technology not associated
with Aventis's claims in this litigation. The district court held an
advisory jury trial which ended with a verdict in favor of Aventis on Sept.
1, 2000, regarding claims that certain employees of Aventis should be named
as "co-inventor" on two patents issued to DEKALB Genetics. No monetary
relief was sought. DEKALB Genetics continues to deny that Aventis employees
should be named as "co-inventor" on the two patents since those individuals
made no inventive contribution. The parties have submitted proposed
findings of fact and conclusions of law on the verdict. DEKALB Genetics
will appeal any adverse final decision or judgment.
On Dec. 4, 2000, Monsanto Company filed suit in the U.S. District
Court for the Eastern District of Missouri, for a declaratory judgment
against Aventis CropScience S.A. (now Bayer CropScience AG) ("Aventis"), to
invalidate four patents assigned to Aventis by Plant Genetics Systems, N.V.
("PGS"). Monsanto licensees of the MON810 event used in YIELDGARD corn had
been sued by Aventis in another jurisdiction for purported infringement of
the patents. Monsanto successfully obtained jurisdiction to challenge the
patents in advance of any case involving its licensees. Monsanto maintains
that the patents, which involve claims to truncated Bt technology, are
invalid and not infringed by MON810 in YIELDGARD corn. Numerous grounds
support Monsanto's position, including prior invention by Monsanto and the
result in a related suit won by a Monsanto subsidiary against PGS. The
prior case determined that a related patent, allegedly applicable to corn,
was not valid or infringed by Monsanto's subsidiary. Monsanto has sought
recovery of its legal fees in this case on the basis that the patents were
obtained by PGS via inequitable conduct before the U.S. Patent and
Trademark Office during the patent application process.
46
Aventis has counterclaimed to request royalties for prior sales of
YIELDGARD corn and injunctive relief. Trial of this matter is scheduled for
Jan. 6, 2003.
Enforcement of DEKALB Genetics' Patents
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,
DEKALB Genetics, which the former Monsanto Company acquired in Dec. 1998,
has filed legal actions to enforce its patents. On April 30, 1996, DEKALB
Genetics filed patent infringement actions in the United States District
Court for the Northern District of Illinois against Mycogen and two of
Mycogen's subsidiaries, and on Aug. 27, 1996, against several Hoechst
Schering AgrEvo GmbH entities. The suits related to DEKALB Genetics'
patents involving herbicide-resistant and/or insect-resistant fertile,
transgenic corn. These suits have been dismissed, pursuant to a settlement
agreement announced on Oct. 2, 2002.
Proceedings Related to Delta and Pine Land Company
As described in our Form 10-K report for the year ended Dec. 31, 2001,
on Jan. 18, 2000, Delta and Pine Land reinstituted a suit against the
former Monsanto Company in the Circuit Court of the First Judicial District
of Bolivar County, Mississippi, seeking unspecified compensatory damages
for lost stock market value of not less than $1 billion, as well as
punitive damages, resulting from alleged failure to exercise reasonable
efforts to complete a merger between the two companies. On Feb. 14, 2001,
Delta and Pine Land amended its complaint, to add an allegation that the
former Monsanto Company tortiously interfered with Delta and Pine Land's
prospective business relations by feigning interest in the merger so as to
keep Delta and Pine Land from pursuing transactions with other entities.
Trial has been set for January 2004.
Environmental Proceedings
As described in our Form 10-K report for the year ended Dec. 31, 2001
and in our Form 10-Q reports for the quarterly periods ended March 31, 2002
and June 30, 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 Inc.
("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 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 January 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 Aug. 9, 2002, the United States
filed a Motion for Partial Summary Judgment on Liability. A hearing on that
motion is scheduled Nov. 14, 2002. Any liability would be shared by
Monsanto and Solutia, based upon the purchases from P4 Production.
Agent Orange
As described in our Form 10-K report for the year ended Dec. 31, 2001
and in our Form 10-Q reports for the quarterly periods ended March 31, 2002
and June 30, 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 does 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
47
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 November 4,
2002, Monsanto's petition for writ of certiorari was granted by the U.S.
Supreme Court. All proceedings in the litigation have been stayed pending
the final decision by the U.S. Supreme Court.
Activities of Foreign Affiliates
During an internal audit and follow-up review conducted by management
and outside counsel, management learned of certain books and records and
compliance irregularities involving the Company's Indonesian affiliate
companies and certain of their foreign national employees. The employment
of the foreign nationals has been terminated. The Company has notified the
United States Securities and Exchange Commission of this matter and will
cooperate with the Commission's staff with respect to any review of this
matter. For the nine month periods ending September 30, 2001, and September
30, 2002, the net combined revenues of the Company's Indonesian operations
were less than 0.8 percent of total Company revenues, and their net income
(loss) for those two periods was ($2 million) and $1 million, respectively.
Neither the commercial impact nor any action resulting from these matters
is expected to have a material adverse effect on our financial position,
profitability or liquidity.
48
Item 5. OTHER INFORMATION
Relationships Among Monsanto Company, Pharmacia Corporation and
Solutia Inc.
Prior to Sept. 1, 1997, a corporation that was then known as Monsanto
Company ("Former Monsanto") operated an agricultural products business (the
"Ag Business"), a pharmaceuticals and nutrition business (the
"Pharmaceuticals Business") and a chemical products business (the
"Chemicals Business"). Former Monsanto is today known as Pharmacia
Corporation and operates only the Pharmaceuticals Business. Our business
consists of the operations, assets and liabilities that were previously the
Ag Business. Solutia Inc. ("Solutia") comprises the operations, assets and
liabilities that were previously the Chemicals Business. The following
table sets forth a chronology of events that resulted in the formation of
Monsanto, Pharmacia and Solutia as three separate, distinct and
unaffiliated corporations and provides a brief background on the
relationships among the these three corporations.
--------------------- ----------------------------------------------------------------------------------------------
Description of Event
Date of Event
===================== ==============================================================================================
===================== ==============================================================================================
Sept. 1, 1997 o Former Monsanto (now Pharmacia) entered into a Distribution Agreement with
Solutia related to the transfer of the operations, assets and liabilities of the
Chemical Business from Former Monsanto (now Pharmacia) to Solutia.
o Pursuant to the Distribution Agreement, Solutia assumed and agreed to indemnify
Former Monsanto (now Pharmacia) for certain liabilities related to the Chemicals Business.
--------------------------------------------------------------------------------------------------------------------
Dec. 19, 1999 o Former Monsanto (now Pharmacia) entered into an agreement with Pharmacia & Upjohn, Inc.
("PNU") relating to a merger (the "Merger").
--------------------------------------------------------------------------------------------------------------------
Feb. 9, 2000 o We were incorporated in Delaware as a wholly-owned subsidiary of Former Monsanto
(now Pharmacia) under the name "Monsanto Ag Company."
--------------------------------------------------------------------------------------------------------------------
Mar. 31, 2000 o Effective date of the Merger.
o In connection with the Merger, (1) PNU became a wholly-owned subsidiary of Former
Monsanto (now Pharmacia); (2) Former Monsanto (now Pharmacia) changed its name from
"Monsanto Company" to "Pharmacia Corporation"; and (3) we changed our name from "Monsanto
Ag Company" to "Monsanto Company."
--------------------------------------------------------------------------------------------------------------------
Sept. 1, 2000 o We entered into a Separation Agreement with Pharmacia related to the transfer of the
operations, assets and liabilities of the Ag Business from Pharmacia to us.
o Pursuant to the Separation Agreement, we agreed to indemnify Pharmacia for any liabilities
primarily related to the Ag Business or the Chemicals Business, including any
liabilities assumed by Solutia pursuant to the Sept. 1, 1997 Distribution Agreement, to
the extent that Solutia fails to pay, perform or discharge those liabilities.
--------------------------------------------------------------------------------------------------------------------
Oct. 23, 2000 o We completed an initial public offering (the "IPO") in which we sold approximately
15% of the shares of our common stock to the public. Pharmacia continued to own
220 million shares of our common stock.
--------------------------------------------------------------------------------------------------------------------
Jul. 1, 2002 o We, Pharmacia and Solutia entered into an agreement to provide that Solutia will
indemnify us for the same liabilities for which it had agreed to indemnify
Pharmacia under the Sept. 1, 1997 Distribution Agreement, and to clarify the parties'
rights and obligations.
o We and Pharmacia entered into an agreement to clarify our respective rights and obligations
relating to our indemnification obligations under the Sept. 1, 2000 Separation Agreement.
o We, Pharmacia and Solutia entered into an agreement regarding the Abernathy litigation
described below.
49
--------------------------------------------------------------------------------------------------------------------
Aug. 13, 2002 o Pharmacia distributed the 220 million shares of our common stock that it owned to its
shareowners via a tax-free stock dividend.
o As a result of this distribution, Pharmacia no longer owns any equity interest in Monsanto.
--------------------------------------------------------------------------------------------------------------------
The liabilities for which we have agreed to indemnify Pharmacia,
pursuant to the Sept. 1, 2000 Separation Agreement, include litigation,
environmental, retiree and all other Pharmacia liabilities that were
assumed by Solutia pursuant to the Sept. 1, 1997 Distribution Agreement.
These include liabilities that were Pharmacia liabilities prior to the
Sept. 1, 1997 spinoff of Solutia, 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 referred to 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.
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. 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. On July 1, 2002, we, Pharmacia and
Solutia entered into an agreement providing 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 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.
Solutia is defending itself and Pharmacia in a property damage suit in
connection with Commonwealth of Pennsylvania, Department of General
Services, et al. v. United States Mineral Products, et al., currently
pending in state court in Pennsylvania. Judgment was entered by the trial
court on October 17, 2002, in the amount of $59.5 million and Solutia plans
to appeal as a matter of right to the Pennsylvania Supreme Court. Under
Pennsylvania law, a bond in the amount of 120% of the judgment, or $71.4
million in this case, must be posted in order to stay execution of the
judgment pending appeal of the judgment. Pharmacia and Solutia have
requested Monsanto's assistance to facilitate the posting of an appeal bond
in the Pennsylvania action. Monsanto plans to post the appeal bond and to
contribute any collateral required in order to secure the appeal bond.
Solutia has agreed in principle to provide collateral to Monsanto having a
present cash value of $20 million to secure a portion of Monsanto's
obligations in connection with the appeal bond, and to reimburse or pay
directly to Monsanto all of Monsanto's out-of-pocket expenses incurred in
connection with obtaining the appeal bond. Although the arrangements have
not been finalized, because Monsanto will provide the collateral required
to secure the appeal bond, we anticipate that the final agreement will
provide that any decisions regarding settlement of this matter will be
controlled by Monsanto. Any collateral required to be posted by Monsanto
would be disclosed as a commitment in future financial reports. Although
the arrangements have not been finalized, we believe that our participation
in posting this appeal bond will not have a material adverse effect on our
financial position, profitability or liquidity.
50
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits: See Exhibit Index
(B) Reports on Form 8-K:
The Company filed a report on Form 8-K (Item 5) on July 30, 2002, providing
specific details regarding the effect of Monsanto Company's adoption of
SFAS No. 142, Goodwill and Intangible Assets, and, pursuant to Regulation
FD, furnished a report (Item 9) relating to slide presentation given by
executives of Monsanto to prospective investors in debt securities.
The Company furnished a report on Form 8-K (Item 9) on Aug. 1, 2002,
pursuant to Regulation FD, relating to slide presentations prepared for use
by the Chief Executive Officer and other senior executives of Monsanto
Company in connection with various presentations to investors, securities
analysts and other members of the financial and investment community given
at various times from Aug. 1, 2002 through Aug. 13, 2002.
The Company furnished a report on Form 8-K (Item 9) on Aug. 13, 2002,
pursuant to Regulation FD, relating to certifications signed by the Chief
Executive Officer and Chief Financial Officer of Monsanto Company, pursuant
to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, which were submitted to the Securities and Exchange Commission
in connection with the filing of Monsanto Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2002.
The Company furnished a report on Form 8-K (Item 9) on Sept. 6, 2002,
pursuant to Regulation FD, relating to a conference call script prepared
for use by the Vice President of U.S. Branded Business of Monsanto Company
during a conference call hosted by Deutsche Bank Securities Inc. for
certain of its customers.
The Company furnished a report on Form 8-K (Item 9) on Sept. 26, 2002,
pursuant to Regulation FD, relating to a slide presentation given by the
Chief Technology Officer of Monsanto Company at the Credit Suisse First
Boston 15th Annual Chemicals Conference in New York.
51
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: November 14, 2002
52
CERTIFICATIONS
I, Hendrik A. Verfaillie, President and Chief Executive Officer of Monsanto
Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Monsanto Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Hendrik A. Verfaillie
-------------------------
Hendrik A. Verfaillie
President and Chief Executive Officer
Monsanto Company
53
CERTIFICATIONS (continued)
I, Terrell K. Crews, Executive and Chief Financial Officer of Monsanto Company,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Monsanto Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Terrell K. Crews
-----------------------
Terrell K. Crews
Executive Vice President and Chief Financial Officer
Monsanto Company
54
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
2 Omitted - Inapplicable
3.2 By-Laws of the Company, as amended Sept. 19, 2002
4 Omitted - Inapplicable
10.8 Amended and Restated Monsanto 2000 Management
Incentive Plan (Amended and Restated as of
Aug.13, 2002)
10.11.1 Excerpt of a resolution adopted by the People and
Compensation Committee of the Monsanto Company Board
of Directors on Sept. 18, 2002, terminating
Split-Dollar Life Insurance arrangements for
certain key executives
10.13 Non-Employee Director Equity Incentive Compensation
Plan, as amended effective Sept. 19, 2002
10.15 Form of Change-of-Control Employment Security
Agreement for certain executives who are members of
the Executive Team and/or the Monsanto Leadership
Team
11 Omitted - Inapplicable; see Note 8 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
55