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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-16167
MONSANTO COMPANY
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(Exact name of registrant as specified in its charter)
DELAWARE 43-1878297
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 NORTH LINDBERGH BLVD., ST. LOUIS, MO 63167
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(Address of principal executive offices)
(Zip Code)
(314) 694-1000
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(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). 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 May 5, 2003
----- -----------
Common Stock, $0.01 par value 261,420,808 shares
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MONSANTO COMPANY
FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION 1
Item 1. Financial Statements
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
Background 13
Financial Measures 13
Results of Operations - First Quarter 2003 Compared with First Quarter 2002 14
Financial Condition, Liquidity, and Capital Resources 17
Outlook - Update 19
Critical Accounting Policies and Estimates 21
New Accounting Standards 21
Cautionary Statements Regarding Forward-Looking Information 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURE 33
CERTIFICATIONS 34
EXHIBIT INDEX 36
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The Statement of Consolidated Operations of Monsanto Company and
subsidiaries for the three months ended March 31, 2003, and March 31, 2002,
the Condensed Statement of Consolidated Financial Position as of March 31,
2003, and Dec. 31, 2002, the Statement of Consolidated Cash Flows for the
three months ended March 31, 2003, and March 31, 2002, 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 (now a wholly-owned subsidiary of Pfizer Inc)
(Pharmacia) on Sept. 1, 2000, references to "Monsanto" or "the company"
also refer to the agricultural division of Pharmacia. Unless otherwise
indicated, "earnings (loss) per share" and "per share" mean diluted
earnings (loss) per share. In tables, all dollars are in millions, except
per share amounts.
1
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(In millions, except per share amounts)
Unaudited
Three Months Ended
March 31,
-----------------
2003 2002
---- ----
Net Sales $1,147 $ 1,221
Cost of Goods Sold 614 617
------ ------
Gross Profit 533 604
Operating Expenses:
Selling, general and administrative expenses 274 295
Bad debt expense 2 3
Research and development expenses 116 119
------ ------
Total Operating Expenses 392 417
Income From Operations 141 187
Interest Expense - net of interest income of $4 and $4, respectively 17 14
Other Expense - net 17 43
------ ------
Income Before Income Taxes and Cumulative Effect of Accounting Change 107 130
Income Tax Expense 35 44
------ ------
Income Before Cumulative Effect of Accounting Change 72 86
Cumulative effect of a change in accounting principle - net of tax benefit
of $7 and $162, respectively (12) (1,822)
------ ------
Net Income (Loss) $ 60 $(1,736)
====== =======
Basic Earnings (Loss) per Share:
Income before cumulative effect of accounting change $ 0.28 $ 0.33
Cumulative effect of a change in accounting principle (0.05) (7.04)
------ -------
Net Income (Loss) $ 0.23 $ (6.71)
====== =======
Diluted Earnings (Loss) per Share:
Income before cumulative effect of accounting change $ 0.28 $ 0.33
Cumulative effect of a change in accounting principle (0.05) (6.92)
------ -------
Net Income (Loss) $ 0.23 $ (6.59)
====== =======
Weighted Average Shares Outstanding:
Basic 261.4 258.8
Diluted 261.4 263.4
Dividends per Share $ 0.12 $0.12
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
March 31, December 31,
2003 2002
-------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 80 $ 428
Short-term investments 251 250
Trade receivables, net of allowances of $238 in 2003 and $247 in 2002 2,424 1,752
Miscellaneous receivables 314 389
Deferred tax assets 293 260
Inventories 1,336 1,272
Other current assets 71 73
------ ------
Total Current Assets 4,769 4,424
Property, Plant and Equipment - net 2,311 2,339
Goodwill - net 760 757
Other Intangible Assets - net 612 643
Other Assets 743 727
----- -----
Total Assets $9,195 $8,890
====== ======
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Short-term debt $ 847 $ 393
Accounts payable 298 275
Accrued liabilities 898 1,142
----- -----
Total Current Liabilities 2,043 1,810
Long-Term Debt 849 851
Postretirement Liabilities 809 817
Other Liabilities 257 232
Shareowners' Equity:
Common stock (Authorized: 1,500,000,000 shares, par value $0.01)
Shares issued: 261,420,808 in 2003 and 261,412,808 in 2002 3 3
Additional contributed capital 8,050 8,050
Retained deficit (1,616) (1,645)
Accumulated other comprehensive loss (1,175) (1,202)
Reserve for ESOP debt retirement (25) (26)
----- -----
Total Shareowners' Equity 5,237 5,180
----- -----
Total Liabilities and Shareowners' Equity $9,195 $8,890
====== ======
See the accompanying notes to consolidated financial statements.
3
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
Unaudited
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Operating Activities:
Net Income (Loss) $ 60 $(1,736)
Adjustments to reconcile cash provided (required) by operations:
Items that did not require (provide) cash:
Pretax cumulative effect of change in accounting principle 19 1,984
Depreciation and amortization expense 112 110
Deferred income taxes (7) (154)
Other items that did not require cash 24 30
Changes in assets and liabilities that provided (required) cash:
Trade receivables (679) (748)
Inventories (48) (28)
Accounts payable and accrued liabilities (223) (318)
Related-party transactions -- (48)
Other items 29 42
---- ----
Net Cash Required by Operations (713) (866)
---- ----
Cash Flows Provided (Required) by Investing Activities:
Property, plant and equipment purchases (36) (51)
Acquisitions and investments (11) (17)
Loans with related party -- 19
---- ----
Net Cash Required by Investing Activities (47) (49)
---- ----
Cash Flows Provided (Required) by Financing Activities:
Net change in short-term financing 479 519
Loans from related party -- 338
Long-term debt proceeds -- 19
Long-term debt reductions (31) (57)
Payments on vendor financing (5) --
Stock option exercises -- 37
Dividend payments (31) (31)
---- ----
Net Cash Provided by Financing Activities 412 825
---- ----
Net Decrease in Cash and Cash Equivalents (348) (90)
Cash and Cash Equivalents at Beginning of Year 428 307
---- ----
Cash and Cash Equivalents at End of Period $ 80 $ 217
==== ====
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 is a leading global provider of agricultural products
and integrated solutions for farmers. Monsanto makes ROUNDUP herbicide and
other herbicides. The company produces leading seed brands, including
DEKALB and ASGROW, and provides farmers and other seed companies with
biotechnology traits for insect protection and herbicide tolerance.
Monsanto's herbicides, seeds, and related biotechnology trait products can
be combined to provide growers with integrated solutions that improve
productivity and reduce the costs of farming. Monsanto also provides
lawn-and-garden herbicides for the residential market and animal
agricultural products focused on improving dairy cow productivity and swine
genetics.
Monsanto manages its business in two segments: Seeds and Genomics, and
Agricultural Productivity. The Seeds and Genomics segment consists of the
global seeds and related traits businesses, and biotechnology platforms.
The Agricultural Productivity segment consists of the crop protection
products, animal agriculture, lawn-and-garden herbicides, and environmental
technologies businesses.
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, 2002.
Financial information for the first three months of 2003 should not be
annualized. Monsanto has historically generated the majority of its sales
during the first half of the year, primarily because of the timing of the
planting and growing season in the Northern Hemisphere.
Note 2 - New Accounting Standards
Monsanto adopted Statement of Financial Accounting Standards (SFAS)
No. 143, Accounting for Asset Retirement Obligations, on Jan. 1, 2003. SFAS
143 addresses financial accounting for and reporting of costs and
obligations associated with the retirement of tangible long-lived assets.
Upon adopting this standard, in accordance with Accounting Principles Board
(APB) Opinion 20, Monsanto recorded an aftertax cumulative effect of
accounting change of approximately $12 million, or $0.05 per share. This
noncash charge was recorded as of Jan. 1, 2003. In addition, as required by
SFAS 143, as of Jan. 1, 2003, net property, plant and equipment increased
by approximately $10 million, and asset retirement obligations (a component
of noncurrent liabilities) of approximately $30 million were recorded.
Adoption of this standard did not affect the company's liquidity.
In 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities.
SFAS 146 replaces Emerging Issues Task Force 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 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date the
company commits itself to an exit or disposal plan. This statement is
effective for any exit or disposal activities initiated after Dec. 31,
2002. The adoption of SFAS 146 will have no effect on Monsanto's existing
restructuring actions, which were initiated prior to Dec. 31, 2002.
In April 2003, SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, was issued. SFAS 149 amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS 133. SFAS 149 is generally effective for contracts
entered into or modified and for hedging relationships designated after
5
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED(continued)
June 30, 2003. Monsanto does not expect that SFAS 149 will have a material
effect on its financial position, profitability or liquidity.
Note 3 - Customer Financing Program
In the second quarter of 2002, Monsanto established a $500 million
revolving financing program for selected customers through a third-party
specialty lender. 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.
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 during the
first quarter of 2003.
During the first quarter of 2003, customer loans sold through the
financing program totaled approximately $20 million, and $129 million was
outstanding as of March 31, 2003. The first loss guarantee will be in place
throughout the financing program. Loans are considered delinquent when
payments are 31 days past due. If a customer fails to pay an obligation
when due, Monsanto would incur a liability to perform under the first loss
guarantee. As of March 31, 2003, less than $1 million of loans sold through
this financing program were delinquent. As of March 31, 2003, 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. In the event that Monsanto
is called upon to make payments under the first loss guarantee, it would
have the benefit under the financing program of any amounts subsequently
collected from the customer.
In January 2003, FASB Interpretation (FIN) No. 46, Consolidation of
Variable Interest Entities, was issued. Because QSPEs are excluded from the
scope of FIN 46, this interpretation is not expected to have an effect on
Monsanto's accounting for the customer-financing program.
Note 4 - Inventories
Components of inventories as of March 31, 2003, and Dec. 31, 2002,
were as follows:
March 31, Dec. 31,
2003 2002
-------- -------
Finished Goods $ 697 $ 637
Goods In Process 376 398
Raw Materials and Supplies 277 250
----- -----
Inventories at FIFO Cost 1,350 1,285
Excess of FIFO over LIFO Cost (14) (13)
----- -----
Total $1,336 $1,272
====== ======
6
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED(continued)
Note 5 - Goodwill and Other Intangible Assets
Monsanto adopted SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets, effective Jan. 1, 2002. The
first step of the transitional test, which compared the fair value of
Monsanto's reporting units with 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
of 2002, determined the $2 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. 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 142) and unanticipated delays in biotechnology
acceptance and regulatory approvals were the primary factors leading to the
impairment. As required by SFAS 142, the transitional noncash impairment
charge was recorded as an accounting change in accordance with APB Opinion
20, effective Jan. 1, 2002. The impairment charge had no effect on
Monsanto's liquidity.
Changes in the net carrying amount of goodwill for the quarter ended
March 31, 2003, by segment, are as follows:
Agricultural Seeds and
Productivity Genomics Total
------------ --------- -----
Balance as of Jan. 1, 2003 $74 $683 $757
Effect of foreign currency translation adjustments -- 2 2
Additions 1 -- 1
--- --- ---
Balance as of March 31, 2003 $75 $685 $760
=== === ===
Information regarding the company's other intangible assets is as
follows:
As of March 31, 2003 As of Dec. 31, 2002
------------------------------------ -------------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------ ------------- --- ------ ------------ ---
Germplasm $607 $(340) $267 $607 $(322) $285
Acquired biotechnology
intellectual property 384 (155) 229 382 (142) 240
Trademarks 108 (23) 85 108 (22) 86
Other 47 (16) 31 50 (18) 32
---- ---- ---- ---- ---- ----
Total $1,146 $(534) $612 $1,147 $(504) $643
====== ===== ==== ====== ===== ====
Other intangible assets include a $24 million nonamortizing intangible
asset associated with minimum pension liabilities. Total amortization
expense of other intangible assets for the three months ended March 31,
2003 and March 31, 2002, was $32 million and $33 million, respectively.
Estimated intangible asset amortization expense for each of the five
succeeding fiscal years has not changed significantly from the amounts
disclosed in Monsanto's annual report on Form 10-K for the year ended Dec.
31, 2002.
Note 6 - Comprehensive Income (Loss)
Comprehensive income (loss) includes all non-shareowner changes in
equity and consists of net income (loss), foreign currency translation
adjustments, unrealized gains and losses on available-for-sale securities,
additional minimum pension liability adjustments and accumulated derivative
gains or losses on cash flow hedges not yet realized. Comprehensive income
(loss) for the three months ended March 31, 2003, and March 31, 2002, was
$87 million and $(1,745) million, respectively. The comprehensive loss for
7
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
the three months ended March 31, 2002, includes the aftertax cumulative
effect of a change in accounting principle of $1,822 million related to the
adoption of SFAS 142.
Note 7 - Earnings (Loss) Per Share
Basic earnings (loss) per share (EPS) for the three months ended March
31, 2003, and March 31, 2002, were computed using the weighted-average
number of common shares outstanding during the period (261.4 million and
258.8 million shares, respectively). Diluted EPS for the three months ended
March 31, 2003, and March 31, 2002, were computed taking into account the
effect of dilutive potential common shares, calculated to be less than 0.1
million and 4.6 million shares, respectively. These dilutive potential
common shares consist of outstanding stock options.
Note 8 - Stock-Based Compensation Plans
In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure, which amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair-value-based method
of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. As permitted by both SFAS
148 and SFAS 123, the company has elected to follow the guidance of APB
Opinion No. 25, Accounting for Stock Issued to Employees, for measuring and
recognizing its stock-based transactions with employees. Accordingly, no
compensation expense was recognized in relation to any of the Monsanto
option plans in which Monsanto employees participate. For further details
please refer to the disclosures in Monsanto's annual report on Form 10-K
for the year ended Dec. 31, 2002.
Had stock-based compensation expense for these plans been determined
based on the fair value consistent with the method of SFAS 123, Monsanto's
net income (loss) and net income (loss) per share would have been reduced
to the pro forma amounts indicated as follows:
Three Months Ended
March 31,
2003 2002
---- ----
Net income (loss):
As reported $ 60 $(1,736)
Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of tax (1) (7)
--- -----
Pro forma $ 59 (1,743)
==== ======
Basic income (loss) per share:
As reported $0.23 $(6.71)
Pro forma $0.23 $(6.74)
Diluted income (loss) per share:
As reported $0.23 $(6.59)
Pro forma $0.23 $(6.62)
On April 24, 2003, Monsanto's shareowners approved an increase in the
number of shares reserved for issuance under the Monsanto Company Long-Term
Incentive Plan and the Monsanto Company Non-Employee Director Equity
Incentive Compensation Plan by 16.7 million shares. Subsequent to the
approved increase and through May 9, 2003, Monsanto has issued
approximately 8.2 million stock options with a weighted-average exercise
price of $16.15, which will vest in equal annual increments over the next
three years.
8
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED(continued)
Note 9 - Restructuring and Other Special Items
2002 Restructuring Plan (charges recorded in 2002)
In 2002, Monsanto's management approved a restructuring plan to
further consolidate or shut down facilities and to reduce the work force.
Under this plan, various research and development programs and sites were
shut down in the United States and Europe. This restructuring plan also
involved the closure and downsizing of certain agricultural chemical
manufacturing facilities in the Asia-Pacific region and the United States
as a result of more efficient production capacity installed at other
Monsanto manufacturing sites. Certain seed sites were consolidated within
the United States and within Brazil, and certain U.S. swine facilities were
exited. Finally, the plan included work force reductions in addition to
those related to the facility closures. These additional reductions were
primarily marketing and administrative positions in Asia-Pacific,
Europe-Africa, and the United States. In connection with this plan,
Monsanto recorded $132 million pretax ($86 million aftertax) of net charges
in 2002.
Activities related to the 2002 restructuring plan during the first
quarter of 2003 were as follows:
Work Force Facility
Reductions Closures Total
---------- -------- -----
Jan. 1, 2003, Reserve Balance $ 29 $ 17 $ 46
Costs Charged Against Reserves (20) (1) (21)
--- --- ---
March 31, 2003, Reserve Balance $ 9 $ 16 $ 25
=== === ===
During the first quarter of 2003, $14 million was paid to
approximately 160 former employees whose involuntary termination benefits
were recorded in 2002, but elected to defer payment until 2003. For the
quarter, approximately 85 former employees received cash severance payments
totaling $6 million. The work force separation payments for the remaining
115 employees associated with this plan will be completed by the end of
2003. Exit costs of $1 million associated with equipment dismantling and
disposal were also paid during the first quarter of 2003. Cash payments to
complete these restructuring actions will be funded from operations; such
payments are not expected to significantly affect the company's liquidity.
2000 Restructuring Plan (charges recorded in 2001 and 2000)
In 2000, Monsanto's management formulated a plan as part of the
company's overall strategy to focus on certain key crops and to streamline
operations. Restructuring and other special items, primarily associated
with the implementation of this plan, were recorded in 2000 and 2001. These
charges totaled $474 million pretax ($334 million aftertax): $261 million
($197 million aftertax) recorded in 2000, and $213 million ($137 million
aftertax) recorded in 2001.
Activities related to the 2000 restructuring plan during the first
quarter of 2003 were as follows:
Work Force Facility
Reductions Closures Total
---------- -------- -----
Jan. 1, 2003, Reserve Balance $ 8 $ 9 $ 17
Costs Charged Against Reserves (2) (2) (4)
-- -- ---
March 31, 2003, Reserve Balance $ 6 $ 7 $ 13
== == ===
During the first quarter, less than $1 million was paid to a former
employee whose involuntary termination benefits were recorded in 2002, but
elected to defer payment until 2003. For the quarter, former employees
received cash severance payments totaling $1 million. As of March 31, 2003,
approximately 1,485 of the 1,500 planned employee separations were
completed. Exit costs of $2 million associated with contract terminations,
9
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED(continued)
equipment dismantling and disposal were also paid during the quarter. The
remaining asset dispositions and other exit activities are expected to be
completed by mid-2003. The remaining restructuring actions will be funded
from operations; these actions are not expected to affect the company's
liquidity significantly.
Note 10 - Commitments and Contingencies
Litigation: 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 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 these lawsuits will not have a material adverse effect on Monsanto's
financial position, profitability or liquidity.
Guarantees: In November 2002, FIN No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees and
Indebtedness of Others, an interpretation of FIN No. 5, 57 and 107, and
rescission of FIN No. 34, was issued. FIN 45 elaborates on the disclosures
to be made by the guarantor in its interim and annual financial statements
about its obligations under certain guarantees that it has issued, even if
the likelihood of performance under the guarantee is remote. It also
requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued
or modified after Dec. 31, 2002. There have been no significant changes to
guarantees made by Monsanto since Dec. 31, 2002. Disclosures regarding
these guarantees made by Monsanto can be found in Note 20 - Commitments and
Contingencies - of notes to consolidated statements contained in our annual
report on Form 10-K for the year ended Dec. 31, 2002. Disclosure regarding
the guarantee Monsanto provides to a specialty finance company for certain
customer loans can be found in Note 3 - Customer Financing Program - of
this Form 10-Q.
Argentina: As a result of economic reforms in Argentina throughout
2002 and the devaluation of the Argentine peso, the company established an
allowance of $154 million pretax in the second quarter of 2002 for
estimated uncollectible receivables in Argentina. Of that amount,
approximately $100 million has been written off against receivables as of
March 31, 2003. While the company cannot determine how government actions
and economic conditions in Argentina will affect the value of net
receivables outstanding, the company continues to pursue customer
collections aggressively. Management's current assessment of the situation
is that 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 changes in commodity prices,
foreign-currency exchange rates, interest rates and, to a lesser degree,
security prices. These financial exposures are monitored and managed by the
company as an integral part of its market risk management program. This
program focuses on the unpredictability of financial markets and seeks to
reduce the potentially adverse effects that volatility in these markets
could have on operating results. Monsanto's overall objective in holding
derivatives is to minimize the risks by using the most effective methods to
eliminate or reduce the effects of these exposures. Monsanto accounts for
its derivatives in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities.
The company hedges a portion of its net investment in Brazilian
subsidiaries, and recorded an aftertax loss of $3 million in the first
quarter of 2003 and an aftertax loss of $23 million in the first quarter of
2002, both in accumulated other comprehensive loss.
10
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED(continued)
Note 12 - Segment Information
Monsanto manages its business in two segments: Seeds and Genomics, and
Agricultural Productivity. The Seeds and Genomics segment consists of the
global seeds and related traits businesses, and genetic technology
platforms. The Agricultural Productivity segment consists of the crop
protection products, animal agriculture, residential lawn-and-garden
herbicides, and environmental technologies businesses. Sales between
segments were not significant. Segment data, as well as a reconciliation of
total Monsanto Company earnings before cumulative effect of accounting
change, interest and income taxes (EBIT) to income before cumulative effect
of accounting change for the three months ended March 31, 2003, and March
31, 2002, is presented in the table that follows.
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Net Sales:
---------
Seeds and Genomics $ 550 $ 585
Agricultural Productivity 597 636
----- -----
Total Monsanto $1,147 $1,221
===== =====
EBIT:
----
Seeds and Genomics $ 95 $ 116
Agricultural Productivity 29 28
----- -----
Total Monsanto $ 124 $ 144
Less: Interest Expense - net of interest income 17 14
Less: Income Tax Expense 35 44
Income Before Cumulative Effect ----- -----
of Accounting Change $ 72 $ 86
===== =====
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 three months
ended March 31, 2003, were $39 million and $4 million, respectively. Cash
payments for interest and taxes for the three months ended March 31, 2002,
were $17 million and $7 million, respectively.
Noncash transactions with Pharmacia during the three months ended
March 31, 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.)
Note 14 - Related-Party Transactions in Prior Year
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. Under
these agreements, Monsanto provides certain administrative support services
to Pharmacia, and Pharmacia primarily provides human resources support for
Monsanto. These agreements continue to be effective after Pharmacia's Aug.
13, 2002 spinoff of Monsanto. During the three months ended March 31, 2002,
Monsanto recognized expenses of $8 million and recorded a reimbursement of
$13 million for costs incurred on behalf of 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
11
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED(continued)
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 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
Monsanto's Statement of Consolidated Shareowners' Equity, as of Jan. 1,
2002.
Monsanto and Pharmacia entered into an agreement whereby Pharmacia
paid Monsanto approximately $40 million, for certain expenses incurred by
Monsanto relating to the spinoff of Monsanto by Pharmacia effective Aug.
13, 2002. Remaining funds to be spent as of March 31, 2003, are recorded in
short-term accruals and the company expects to fully utilize these funds
for their designated purposes by June 2003.
Note 15 - Subsequent Event (Debt Issuance)
In May 2002, Monsanto filed a $2 billion shelf registration with the
U.S. Securities and Exchange Commission. As of March 31, 2003, $1.2 billion
remained available for future debt issuances. In May 2003, Monsanto issued
$250 million of 4% notes due on May 15, 2008, under this registration. The
net proceeds are being used to reduce commercial paper borrowings. Pending
such use, the company may temporarily invest the net proceeds in
interest-bearing securities.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Background
----------
Monsanto Company is a leading global provider of agricultural products
and integrated solutions for farmers. We make ROUNDUP herbicide and other
herbicides. We produce leading seed brands, including DEKALB and ASGROW,
and we provide farmers and other seed companies with biotechnology traits
for insect protection and herbicide tolerance. Our herbicides, seeds, and
related biotechnology trait products can be combined to provide growers
with integrated solutions that improve productivity and reduce the costs of
farming. 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: Seeds and Genomics, and
Agricultural Productivity. The Seeds and Genomics segment consists of the
global seeds and related traits businesses, and genetic technology
platforms. The Agricultural Productivity segment consists of the crop
protection products, animal agriculture, lawn-and-garden herbicide
products, and environmental technologies businesses.
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 and the accompanying notes. This
quarterly report on Form 10-Q should also be read in conjunction with
Monsanto's annual report on Form 10-K for the year ended Dec. 31, 2002.
Financial information for the first three months of 2003 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" and "the
company," and references to "we," "our" and "us," are used interchangeably
to refer to Monsanto Company or to Monsanto Company and consolidated
subsidiaries, as appropriate to the context. With respect to the time
period prior to the separation of Monsanto's businesses from those of
Pharmacia Corporation (now a wholly-owned subsidiary of Pfizer Inc.)
(Pharmacia) on Sept. 1, 2000, references to "Monsanto" or "the company"
also refer to the agricultural division of Pharmacia. Unless otherwise
indicated, "earnings (loss) per share" and "per share" mean diluted
earnings (loss) per share. Trademarks owned or licensed by Monsanto or its
subsidiaries are shown in all capital letters. In the tables, all dollar
amounts are expressed in millions, except per share amounts. 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 nonbranded
glyphosate-based herbicides, excluding all lawn-and-garden herbicide
products.
Financial Measures
------------------
The primary operating performance measure for our two business
segments is earnings (loss) before cumulative effect of accounting change,
interest, and income taxes (EBIT). We believe that EBIT is useful to
investors and management to demonstrate the operational profitability of
our segments by excluding interest and taxes, which are generally accounted
for across the entire company on a consolidated basis. EBIT is also one of
the measures used by management in determining resource allocations within
the company.
We also provide information regarding free cash flow, which is an
important liquidity measure for Monsanto. For the first quarter of 2003, we
define "free cash flow" as the total of net cash required by operations and
required by investing activities. We believe that free cash flow is useful
to investors and management as a measure of our ability to generate cash,
which can be returned to our shareowners through dividend payments or share
repurchases, or to debt holders in the form of principal repayments. Free
cash flow can also be reinvested into the company for future growth and is
used by management as one of the performance measures in determining
incentive compensation.
The presentation of EBIT and free cash flow is intended to supplement
investors' understanding of our operating performance and liquidity. Our
EBIT and free cash flow measures may not be comparable to other companies'
EBIT and free cash flow measures. Furthermore, these measures are not
intended to replace net income (loss), cash flows, financial position, or
13
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
comprehensive income (loss), as determined in accordance with accounting
principles generally accepted in the United States.
Results of Operations - First Quarter 2003 Compared with First Quarter 2002
---------------------------------------------------------------------------
Three Months Ended
March 31,
------------------
Total Monsanto Company and Subsidiaries: 2003 2002
--------------------------------------- ---- ----
Net sales $1,147 $1,221
===== =====
Income before cumulative effect of accounting
change $ 72 $ 86
Add: Interest expense - net of interest income 17 14
Income tax expense 35 44
----- -----
EBIT(1) $ 124 $ 144
===== =====
(1) Earnings (loss) before cumulative effect of accounting change,
interest and income taxes.
Net sales for the first quarter of 2003 declined 6 percent from the
same period last year, with both the Seeds and Genomics, and Agricultural
Productivity segments experiencing an equal percentage decline in sales. In
the Seeds and Genomics segment, first quarter soybean seed and trait sales
in the United States were lower than last year's first quarter sales. Corn
trait revenues were also down from last year's first quarter levels, though
we expect our total trait revenues for the full year to increase. Higher
worldwide corn seed sales partially offset these declines, though in the
United States, corn seed sales declined. We experienced higher U.S. corn
seed and trait revenues early in the crop season (our fourth fiscal quarter
of 2002), and the remainder of the purchases are expected to occur in the
second quarter. Lower herbicide sales, particularly glyphosate-based
herbicides, led to the 6 percent decline in net sales in the Agricultural
Productivity segment. The glyphosate-based herbicides sold in the United
States during the first quarter are primarily used in the lower-priced
preplant (also known as burn down) markets, and represent a small portion -
approximately 10 percent - of the company's full-year ROUNDUP herbicide
sales. During the first quarter of this year, our lower-tier products
comprised a higher percentage of our ROUNDUP and other glyphosate-based
herbicide sales. This led to a decline in the average net selling prices
and net sales of these products. For a more detailed discussion of the
factors affecting the net sales comparison, please see "Seeds and Genomics
Segment" and "Agricultural Productivity Segment."
Gross profit declined 12 percent to $533 million, reflective of the
lower average net selling price of ROUNDUP and other glyphosate-based
herbicides and lower soybean seed sales discussed above. In addition, lower
trait revenues have also affected the gross profit comparison. Last year's
first quarter gross profit benefited from strong trait revenues, which
carry relatively high margins. Despite the lower trait and seed revenues in
2003, the Seeds and Genomics segment contributed a greater percentage of
Monsanto's total gross profit than the Agricultural Productivity segment.
This is consistent with our full-year expectation that the Seeds and
Genomics segment will deliver a higher level of gross profit than the
Agricultural Productivity segment. As a percent of sales, Monsanto's gross
profit declined three points. The shift in ROUNDUP and other
glyphosate-based herbicide sales to lower-priced products was the major
contributor to the decline, with lower trait revenues also a factor.
Operating expenses declined 6 percent, as we continue to see the
benefits of our cost management and restructuring programs. In addition,
some of this decline can also be attributed to timing of spending.
Operating expenses were 34 percent of sales, consistent with last year's
first quarter.
Net interest expense increased to $17 million. Lower average borrowing
levels were offset by higher interest rates associated with our long-term
senior notes issued in August 2002. Other expense - net declined more than
60 percent to $17 million. Last year's first quarter other expense was
14
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
unfavorably affected by currency losses reflecting the devaluation of our
net assets that were denominated in Argentine pesos. In addition, we had
also recognized other expense related to an agreement between E.I. du Pont
de Nemours (DuPont) and DuPont's Pioneer Hi-Bred International Inc.
subsidiary. The net effect of this agreement was immaterial to our net
income in the first quarter of 2002.
Income taxes in the first quarter declined 20 percent, consistent with
the decline in pretax income in the first quarter of 2003. The effective
tax rate declined one percent to 33 percent, largely because of the
difference in the mix of earnings projected for 2003 versus those in 2002.
The factors above explain the change in income before the cumulative
effect of accounting change, which declined $14 million from last year's
first quarter. In each period, we recognized a cumulative effect of
accounting change that affected our net income (loss). In 2002, we
recognized a $1.8 billion ($6.92 per share) aftertax goodwill impairment
that resulted from our adoption of a new accounting standard related to
goodwill and other intangible assets. (See Note 5 - Goodwill and Intangible
Assets - for further details.) Our first-quarter 2002 net loss, which
includes this impairment, was $1.7 billion, or $6.59 per share. In 2003, we
adopted a new accounting standard related to asset retirement obligations,
which led to a cumulative effect charge of $12 million, or $0.05 per share,
aftertax. (See Note 2 - New Accounting Standards - for further details.)
Our net income for the first quarter of 2003, including the accounting
change, totaled $60 million, or $0.23 per share.
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
March 31,
------------------
2003 2002
---- ----
Net Sales $550 $585
==== ====
Gross Profit $303 $332
==== ====
EBIT(1) $ 95 $116
==== ====
(1) Earnings (loss) before cumulative effect of accounting
change, interest and income taxes. See Note 12 - Segment
Information - for further details.
In the Seeds and Genomics segment, net sales declined 6 percent to
$550 million for the first quarter of 2003. The quarterly decline reflects
changes in the timing of sales in the U.S. business. We experienced higher
U.S. corn seed and trait revenues early in the crop season (our fourth
fiscal quarter of 2002), and the remainder of the purchases are expected to
occur in the second quarter of 2003. The net sales decline also reflects a
competitive U.S. soybean seed market, and we believe that the U.S. soybean
business will continue to be competitive for the remainder of the season.
While corn and soybean traits were affected by the shift in the timing of
buying patterns this quarter, we expect our total trait revenues for the
full year to increase. Outside the United States, overall corn seed sales
increased because of higher sales in Latin America and Europe. More
favorable demand in Brazil contributed to higher sales, and favorable
currency effects and strong market performance in Europe contributed to the
corn seed growth.
The Seeds and Genomics segment contributed $303 million of gross
profit for the first quarter of 2003, more than half of the total company
gross profit for the quarter. Gross profit as a percent of sales declined 2
points, largely because of the lower revenues of our high-margin traits
this quarter. However, for the full year, we expect that worldwide adoption
of our biotechnology traits will continue to grow, contributing positively
to our gross profit comparison. EBIT declined from last year's first
15
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
quarter levels, stemming primarily from lower sales. While quarterly
operating expenses for the company as a whole were lower in 2003, operating
expenses in the Seeds and Genomics segment were slightly higher than the
same period last year. Lower spending because of timing and cost management
was more than offset by higher costs allocated to the segment as its
contribution to Monsanto's results grows. Lower other expense-net slightly
offset these EBIT shortfalls. Last year, we recognized more other expense
in this segment resulting primarily from unfavorable currency effects in
Argentina.
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 herbicides, and
environmental technologies businesses. We are a leading worldwide
developer, producer and marketer of crop protection products, including
ROUNDUP herbicides.
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Net Sales
ROUNDUP and other glyphosate-based herbicides $321 $361
All other 276 275
--- ---
Total Net Sales $597 $636
=== ===
Gross Profit
ROUNDUP and other glyphosate-based herbicides $ 95 $135
All other 135 137
--- ---
Total Gross Profit $230 $272
=== ===
EBIT(1) $ 29 $ 28
=== ===
(1) Earnings (loss) before cumulative effect of accounting
change, interest and income taxes. See Note 12 - Segment
Information - for further details.
In the Agricultural Productivity segment, net sales declined 6 percent
to $597 million for the first quarter of 2003. Lower sales of our
herbicides - ROUNDUP and other glyphosate-based herbicides, as well as
selective herbicides - were partially offset by higher sales of our
lawn-and-garden herbicides.
Worldwide net sales of ROUNDUP and other glyphosate-based herbicides
in the first quarter of 2003 declined 11 percent from sales in the first
quarter of 2002, with the most notable decline occurring in the United
States. Worldwide volumes grew primarily because of increased demand from
supply customers. In the United States, a decrease in average net selling
prices and volumes of branded ROUNDUP herbicides led to an overall decline
in net sales. The products sold in the first quarter, which represent just
a small portion (approximately 10 percent) of our expected full-year sales
of these products, are used primarily in the more price-sensitive preplant
herbicide markets. In the first quarter of 2003, the mix of products sold
in the United States included more lower-priced ROUNDUP and other
glyphosate-based products when compared with those sold in the first
quarter of 2002. These products carried a significantly lower average net
selling price. While we expect the average net selling price of ROUNDUP and
other glyphosate-based herbicides to increase from first-quarter levels, we
continue to expect that our full-year average net selling price and market
share will be lower than last year's full-year average net selling price
and market share as a result of competitive factors.
Outside of the United States, first-quarter performance of our ROUNDUP
and other glyphosate-based herbicides was mixed. Despite significantly
higher usage by farmers in Brazil, sales in that country were lower because
of the timing of sales in 2002 and the operational decisions we made last
year to reduce the risk of doing business there. These actions have
resulted in a decline in distribution inventory levels in that country. The
lower sales in Brazil were mostly offset by gains in other Latin American
countries. The Asia-Pacific region experienced higher sales volumes and net
16
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
sales, led by increased demand from supply customers and by more favorable
weather conditions in Australia. However, sales in Japan declined as
expected for the quarter as a result of the agreement mid-year 2002 to sell
certain of our herbicide assets to Nissan Chemical Industries, Ltd. for use
in Japanese markets.
First-quarter 2003 sales of our other Agricultural Productivity
products were relatively unchanged from last year's first quarter levels,
as gains in the lawn-and-garden business were offset by lower sales of our
selective herbicides. Sales of lawn-and-garden herbicides benefited from
favorable weather conditions this quarter. In addition, last year's first
quarter net sales were negatively affected by a shift in timing of sales to
later quarters in 2002. Selective herbicide sales declined, primarily
because of lower sales in the U.S. acetanilide market. We expect this trend
to continue for the remainder of the year. The animal agriculture business
generally maintained last year's first-quarter net sales levels, despite an
extremely weak milk price environment.
EBIT for this segment improved to $29 million for the first quarter of
2003. Declines in gross profit of ROUNDUP and glyphosate-based herbicides
and selective herbicides were partially offset by a gross profit gain in
our lawn-and-garden herbicide business. As a percent of sales, gross profit
for the segment declined 4 points, driven primarily by the lower average
net selling prices of ROUNDUP and other glyphosate-based herbicides.
Increases in energy and other raw materials costs were not significant in
the first quarter, and were offset by improved overall manufacturing
performance. Lower operating expenses contributed positively to EBIT,
primarily because of SG&A and R&D spending. Spending levels were lower in
the first quarter of 2003 because of timing, cost management, and lower
costs attributed to the Agricultural Productivity segment. Lower other
expense - net also helped mitigate the gross profit shortfall. Last year,
we recognized significantly more other expense in this segment resulting
primarily from unfavorable currency effects in Argentina.
Our Agreement with The Scotts Company
In 1998, Monsanto entered into an agency and marketing agreement with
The Scotts Company (Scotts) with respect to our lawn-and-garden herbicide
business. 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 the interest on the amounts owed by
Scotts and including it in interest income. The total amount owed by
Scotts, including accrued interest, was $50 million as of March 31, 2003,
and Dec. 31, 2002. Scotts has begun paying these deferred amounts ($5
million per year in monthly installments beginning Oct. 1, 2002).
Financial Condition, Liquidity, and Capital Resources
-----------------------------------------------------
Working Capital and Financial Condition
---------------------------------------
March 31, 2003 Dec. 31, 2002
-------------- -------------
Working capital $2,726 $2,614
Current ratio 2.33:1 2.44:1
Our balance sheet as of March 31, 2003, reflects working capital of
$2.7 billion, a $100 million increase from Dec. 31, 2002. Due to normal
seasonal trends in our business, the March 31, 2003 balances for the
working capital components of trade receivables and inventories increased,
and accrued liabilities decreased from year-end. First-quarter 2003
worldwide collections were slightly lower than first-quarter 2002
collections, primarily because of a highly successful customer prepayment
program at the end of 2002. Accrued liabilities declined from Dec. 31,
2002, because of payments to growers for corn and soybean production
requirements and payments for customer incentive programs. These seasonal
17
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
working capital changes were funded by an increase in short-term borrowings
and a decline in cash and cash equivalents. Cash and cash equivalents at
Dec. 31, 2002, reflected a high level of customer prepayments received near
the end of last year. From December 2002 through the first quarter of 2003,
we had $250 million invested in short-term debt securities. These
securities matured in the second quarter of 2003.
Cash Flow
---------
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Net cash required by operations $(713) $(866)
Net cash required by investing activities (47) (49)
---- ----
Free Cash Flow (760) (915)
Net cash provided by financing activities 412 825
Free cash flow, which represents the total of net cash required by
operations and required by investing activities, was a negative $760
million for the first quarter of 2003. This represents an improvement of
$155 million from negative free cash flow for the same period last year.
Net cash required by operations declined primarily because of better
working capital management quarter-to-quarter. March 31, 2003 net trade
receivables as a percent of the last 12 months' sales declined from last
year's net accounts receivables percentage. Because of reduced spending
levels, we started 2003 with a lower accounts payable balance than the
balance at the beginning of 2002. As a result, less cash was required for
payments in the first quarter 2003 than the first quarter of 2002. During
the first quarters of 2002 and 2003, we made payments relating to our
restructuring plans. In the first quarter of 2002, we paid $31 million
related to our 2000 restructuring plan. During the same period in 2003, we
paid $25 million, the majority of which related to our 2002 restructuring
plan. Most of these payments relate to work force separation payments. (See
Note 9 - Restructuring and Other Special Items - for further details.) Net
cash required by investing activities remained relatively unchanged, as
lower capital expenditures were offset by the effect of last year's loans
from Pharmacia. Net cash provided by financing activities declined more
than $400 million. Because of our strong cash position, our reliance on
short-term financing was reduced.
In connection with a financing option that is available to certain of
our customers, we collected approximately $20 million in the first quarter
of 2003 which would otherwise not have been collected until later in the
year. This $500 million revolving credit and liquidity facility allows
certain major U.S. customers to finance product purchases, and allows us to
reduce our reliance on commercial paper borrowings. The company originates
these loans on behalf of the third-party specialty lender 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
nonconsolidated qualifying special purpose entity (QSPE). We have no
ownership interest in the lender, the QSPE, or the loans. We service the
loans and provide a first loss guarantee of up to $100 million. We have not
issued, nor are we obligated to issue, any debt or equity securities in
connection with this arrangement.
As of March 31, 2003, customer loans outstanding through this
financing program totaled $129 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 (generally 12 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 March 31, 2003,
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.
Capital Resources and Liquidity
-------------------------------
March 31, 2003 Dec. 31, 2002
-------------- -------------
Debt-to-total capital ratio 24% 19%
18
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
Our debt-to-total capital ratio increased because of the seasonality
of our business. In addition to the senior notes we issued in August 2002,
we also use short-term commercial paper borrowings to fund certain of our
operating cash requirements. In May 2003, we issued $250 million of 5-year
4% notes. The net proceeds are being used to reduce commercial paper
borrowings. Pending such use, we may temporarily invest the net proceeds in
interest-bearing securities. We have $950 million available under our $2
billion shelf registration for future debt issuances. We are continuing to
make voluntary cash contributions to our U.S. qualified pension plan, and
continue to expect an increase in pension expense in 2003 when compared
with the prior year. For a detailed discussion regarding our
pension-related assumptions, see the "Critical Accounting Policies and
Estimates" discussion and Note 13 to the consolidated financial statements
in our annual report to shareowners, incorporated by reference into our
report on Form 10-K for the year ended Dec. 31, 2002.
Outlook - Update
----------------
Focused Strategy
We believe that the 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. Growth from
our traditional products will continue to be challenged in these
conditions, but 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 ensuring that ROUNDUP and our
other herbicides continue to make strong contributions to cash flow and
gross profit. 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 from a chemistry-based
portfolio. Increased revenues from seeds and traits are expected to help
offset the anticipated decline in ROUNDUP's gross profit contribution. 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 where appropriate. This will allow us
to focus our efforts on areas where we can offer an integrated portfolio of
seeds, traits and chemicals.
We remain committed to managing our operating costs and improving our
cash position through working capital and capital expenditure management.
We aim to maintain the progress we made in managing our investment in
working capital, particularly receivables and inventories. We will also
continue to seek additional external financing opportunities for our
customers to supplement the customer financing program discussed in "Cash
Flow."
As a result of economic reforms in Argentina throughout 2002 and the
devaluation of the Argentine peso, we increased the allowance for doubtful
trade receivables by $154 million pretax in the second quarter of 2002 for
estimated uncollectible accounts receivable in Argentina. Of this amount,
approximately $100 million has been written off against accounts receivable
as of March 31, 2003. Although we cannot determine how government actions
and economic conditions in Argentina will affect the value of the
outstanding receivables, we continue to pursue customer collections
aggressively. Management's current assessment of the situation is that the
current allowance balance is adequate.
The Brazilian real has also fluctuated considerably. We have a hedging
program in place to hedge anticipated Brazilian cash flows through the
first half of 2003. 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 and net income.
Seeds and Traits
Monsanto invests more than 80 percent of its R&D in the areas of
seeds, genomics and biotechnology. These are the fastest-growing segments
of the agriculture industry. As these segments become more important to our
business, we have increased our focus in this area. Monsanto has built a
19
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
leading global position in seeds, and successful integration of our seed
businesses has allowed us to optimize our seed portfolio. We continue to
make improvements in our base seed business, as advanced breeding
techniques combined with production practices and plant capital investments
have significantly improved germplasm quality and yields. Our biotechnology
seed traits, such as herbicide tolerance and insect protection, are
expressed in products such as ROUNDUP READY soybeans and YIELDGARD corn
products. Biotechnology traits offer growers several benefits: lower costs,
greater convenience and flexibility, higher yields, and the ability to
adopt environmentally responsible practices such as conservation tillage.
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 in soybeans, corn, canola
and cotton. 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 offer "stacked" ROUNDUP READY and
insect-protection traits for corn and cotton. Stacked traits represent more
than one trait in a single crop plant. These stacked traits offer
significant growth potential. We are working to secure additional
biotechnology approvals for our existing products globally, and toward the
development and commercialization of additional products in our pipeline.
We continue to address concerns raised by consumers in some regions
and by public interest groups and questions from 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 precommercial traits.
ROUNDUP Herbicide
Although ROUNDUP herbicide faces significant competitive pressures, it
remains a key part of our business strategy. We believe that glyphosate
volumes, including volumes of ROUNDUP, will continue to grow through
increased conservation tillage, which helps farmers reduce soil erosion by
replacing plowing with the judicious use of herbicides to control weeds,
and through applications of ROUNDUP over the top of increased acreage of
ROUNDUP READY crops. We intend to remain a market leader by providing new
and unique formulations of ROUNDUP herbicide, such as ROUNDUP WEATHERMAX
herbicide, which provides consistent weed control even in a variety of
challenging weather conditions. We also remain committed to providing
valuable services to growers, and to offering integrated seed,
biotechnology and chemistry solutions. We also expect to continue to
benefit from our bulk logistics and low-cost manufacturing capabilities for
herbicides. Our investments in our facilities and manufacturing advances
have helped us maintain our low-cost position. In addition, we sell
glyphosate to other herbicide producers to capitalize on our manufacturing
economies of scale.
Even as we face increased competition for our ROUNDUP business, we
plan to build on our advantages to capture and sustain value. Without
patent protection worldwide, ROUNDUP herbicide faces competition from
producers and marketers of glyphosate, whose pricing policies in most
instances cause downward pressure on our prices. Our U.S. market share has
declined in recent years, and we expect continuing declines over the next
few 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, gross margin, and market share
declines for our ROUNDUP brands. However, if decreases in price or market
share, or growth of the overall market, deviates significantly from our
expectations, we will need to consider additional changes to our business
model.
20
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
In recent years, distribution channel inventories increased
significantly in the United States. However, ROUNDUP distribution inventory
levels at the end of the first quarter 2003 in the United States were
roughly flat with levels at 2002 year-end, and our intention is that these
inventories remain flat to down over the next few years. However, many
factors that are not within our control may affect usage of ROUNDUP
herbicides and may also affect distribution inventories -- for example,
adverse weather conditions such as those we experienced in the United
States in 2002. Higher product levels at our distributors could have a
material adverse effect on our future results of operations. Further, an
unanticipated rate of reduction in prices of competitive glyphosate
products or in ROUNDUP usage could materially adversely affect ROUNDUP
pricing and our financial results. In addition, if distributors elect to
reduce their inventory levels from current levels, sales volumes of ROUNDUP
herbicides would be materially adversely affected.
Other Information
As discussed in Note 10 - Commitments and Contingencies - for further
details, 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.
For additional information on the outlook for Monsanto, see
"Cautionary Statements Regarding Forward-Looking Information."
Critical Accounting Policies and Estimates
------------------------------------------
In preparing our financial statements, we must select and apply
various accounting policies. Our most significant policies are described in
Note 2 - Significant Accounting Policies - to the consolidated financial
statements contained in our annual report to shareowners, incorporated by
reference into our report on Form 10-K for the year ended Dec. 31, 2002. In
order to apply our accounting policies, we often need to make estimates
based on judgments about future events. In making such estimates, we rely
on historical experience, market and other conditions, and on assumptions
that we believe to be reasonable. However, the estimation process is by its
nature uncertain given that estimates depend on events over which we may
not have control. If market and other conditions change from those that we
anticipate, our financial condition, results of operations, or liquidity
may be affected materially. In addition, if our assumptions change, we may
need to revise our estimates, or to take other corrective actions, either
of which may also have a material effect on our financial condition,
profitability, or liquidity.
The estimates that have a higher degree of inherent uncertainty and
require our most significant judgments are outlined in Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in our annual report to shareowners, incorporated by reference
into our report on Form 10-K for the year ended Dec. 31, 2002. In addition,
had we used estimates different from any of these, our financial condition,
profitability, or liquidity for the current period could have been
materially different from those presented.
New Accounting Standards
------------------------
Monsanto adopted Statement of Financial Accounting Standards (SFAS)
No. 143, Accounting for Asset Retirement Obligations, on Jan. 1, 2003. SFAS
143 addresses financial accounting for and reporting of costs and
obligations associated with legal obligations related to the retirement of
tangible long-lived assets. Upon adoption of this standard, in accordance
with Accounting Principles Board (APB) Opinion No. 20, Accounting Changes,
we recorded an aftertax cumulative effect of accounting change of $12
million, or $0.05 per share. This noncash charge was recorded as of Jan. 1,
2003. In addition, as required by SFAS 143, as of Jan. 1, 2003, net
property, plant and equipment was increased by approximately $10 million,
and asset retirement obligations (a component of noncurrent liabilities) of
approximately $30 million was recorded. Adoption of this standard did not
affect Monsanto's liquidity.
21
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
In 2002, the Financial Accounting Standards Board issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146
replaces Emerging Issues Task Force 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 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date the company
commits itself to an exit or disposal plan. This statement is effective for
any exit or disposal activities initiated after Dec. 31, 2002. The adoption
of SFAS 146 will have no effect on our existing restructuring actions,
which were initiated prior to Dec. 31, 2002.
In April 2003, SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, was issued. SFAS 149 amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS 133. SFAS 149 is generally effective for contracts
entered into or modified and for hedging relationships designated after
June 30, 2003. We do not expect that SFAS 149 will have a material effect
on our financial position, profitability or liquidity.
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 our 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 Herbicide: 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 continue to 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 Strategy: We intend to respond to
increasing competition by encouraging new uses (especially
conservation tillage), by providing unique formulations and
services, and by offering integrated seed and biotechnology
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 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, to penetrate new markets, and to compete
effectively. In addition to reduced list prices, price reductions
may include discounts, rebates or other promotional strategies,
22
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
as well as the development and sale of lower-priced 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 technological
innovations and increased volumes 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.
Our ability to achieve our anticipated cost reductions will also
depend upon input costs, such as raw materials and energy,
remaining within our anticipated ranges.
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 and maintain acceptance
through the chain of commerce (for example, from farmers, 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, import,
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. For example, China's regulatory system is developing and
unpredictable, resulting in continuing uncertainty about import of
major U.S. crops such as soybeans containing biotechnology traits. 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 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
biotechnology traits. 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 Cartagena Biosafety Protocol which is in the process of
ratification, may 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 for consumption or that
23
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
they pose unknown risks to the environment or to traditional social or
economic practices, even if such claims are not based on scientific
studies. These public attitudes can influence regulatory and
legislative decisions about seed biotechnology, and they may also
result in refusal to purchase products derived from biotechnology even
where they are 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 nonbiotechnology crops have claimed that the
adventitious presence of biotechnology traits in their crops will
cause them commercial harm. Concerns about the adventitious presence
of biotechnology traits could lead to more stringent regulation, which
may include: requirements for labeling and traceability; financial
protection such as surety bonds, liability or insurance; and/or
restrictions or moratoria on testing, planting or use of biotechnology
traits. Concern about unintended biotechnology traits in grain or food
has led to consumer concerns about the integrity of the food supply
chain from the farm to the finished product. In addition, concerns
have been expressed about the potential for adventitious presence of
proteins in food, resulting from the development and production of
pharmaceutical proteins in food-crop plants. Monsanto's Protein
Technologies business is one of several businesses engaged in this
research.
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 U.S. Department of Agriculture and U.S. Food and Drug
Administration 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 confidential, or if published like those outside
the United States, published 18 months after filing. Accordingly,
competitors may be issued patents from time to time without any prior
warning to us. That could decrease or eliminate the value of similar
technologies that we are developing. Because of this rapid pace of
24
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
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. In addition, natural disasters affecting our
manufacturing facilities, our major suppliers or our major customers
could have a material adverse effect on our financial results.
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 products at
the beginning of their growing seasons. Because of these credit
practices and the seasonality of our sales, we may need to issue
short-term debt at certain times of the year in order to fund our cash
flow requirements. The amount of short-term debt required will be
greater to the extent that we are unable to collect customer
receivables when due, to repatriate funds from ex-U.S. operations, or
to manage our costs and expenses. 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 and subsequently amended, we assumed, and agreed to
indemnify Pharmacia for, any liabilities primarily related to
Pharmacia's former agricultural or chemical businesses. Under the
Separation Agreement, as amended, 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
25
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
do not have enough inventory of our products at the right time, our
current sales will suffer. On the other hand, high product inventory
levels at our distributors may cause revenues to suffer materially in
future periods as these distributor inventories are worked down.
Distributors may also elect to reduce their inventory levels from
current levels, which could have a material adverse effect on our
sales volumes. High product inventories at our distributors also
increases the risk of obsolescence and product returns with respect to
our seed products. In addition, distributor liquidity could affect
distributors' abilities to purchase or pay for our products.
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, such as increased costs of raw materials or
energy, which we are not able to manage or 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: collectibility of receivables; levels of
returns; future obsolescence of inventories; realization of deferred
tax assets; asset impairment; valuation of pension and other
postretirement assets and liabilities; and the probability and amount
of other 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 U.S. companies doing business abroad. Acts of terror or war
may impair our ability to operate in particular countries or regions,
and may impede the flow of goods and services between countries.
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
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, 2002.
26
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 accurately and within the time periods specified in the SEC's
rules and forms. As of May 12, 2003 (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, as of the Evaluation Date, the design and operation of
these disclosure controls and procedures were effective to provide
reasonable assurance of the achievement of the objectives described
above.
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.
27
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 (now a wholly-owned
subsidiary of Pfizer Inc) 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. 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. In
the following discussion, we may use the phrase "the former Monsanto
Company" to refer to Pharmacia prior to the date of the Separation
Agreement. 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 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
damages 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. The PCB litigation includes but is not
limited to the Abernathy litigation described in "Business -
Relationships Among Monsanto Company, Pharmacia Corporation and
Solutia Inc.," below. Solutia is also responsible for the Commonwealth
of Pennsylvania litigation, which is described in that same section.
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. Other information with respect to legal
proceedings appears in our annual report on Form 10-K for the year
ended Dec. 31, 2002.
As described in our Form 10-K report for the year ended Dec. 31,
2002, on Nov. 20, 1997, Aventis CropScience S.A. (formerly Rhone
Poulenc Agrochimie S.A., now Bayer CropScience AG) ("Bayer") filed
suit in United States District Court in North Carolina against the
former Monsanto Company and DEKALB Genetics Corporation (subsequently
acquired by us) ("DEKALB Genetics"), alleging that because DEKALB
Genetics had failed to disclose a research report involving the
testing of plants to determine glyphosate tolerance, Bayer had been
induced by fraud to enter into a 1994 license agreement relating to
technology incorporated into a specific type of herbicide-tolerant
corn. Jury trial of the fraud claims ended April 22, 1999, with a
verdict against DEKALB Genetics for $15 million in actual damages and
$50 million in punitive damages. The district court had dismissed the
former Monsanto Company from trial prior to verdict, on the legal
basis that it was a bona fide licensee of the corn technology. DEKALB
28
Genetics appealed the jury verdict regarding the damage award, and
Bayer 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 judgments against DEKALB Genetics
with respect to damages, and against Bayer with respect to the bona
fide licensee issue. On March 26, 2002, the Court of Appeals for the
Federal Circuit declined rehearing on the damage award, and reversed
its decision on the bona fide licensee issue. 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. In December 2002, the Court referred Monsanto's
petition to the Office of the Solicitor General for the United States
for comment. On April 8, 2003, the Court granted certiorari to DEKALB
Genetics on its petition and remanded the case to the Federal Circuit
in light of the Supreme Court's decision in State Farm Mutual
Automobile Insurance Co. v. Campbell.
As described in our Form 10-K report for the year ended Dec. 31,
2002, on Jan. 10, 2003, Bayer BioScience N.V. ("Bayer BioScience")
filed a new lawsuit in the U.S. District Court for the District of
Delaware contending that a patent assigned to it by PGS and Bayer was
infringed by Monsanto's development and potential future sale of corn
protected from corn rootworm. Monsanto filed suit the same day in the
U.S. District Court for the Eastern District of Missouri to declare
the patent invalid, non-infringed and unenforceable due to inequitable
conduct before the Patent Office during the procurement of the patent.
On March 25, 2003, the Delaware lawsuit filed by Bayer BioScience was
transferred to the U.S. District Court for the Eastern District of
Missouri.
As described in our Form 10-K report for the year ended Dec. 31,
2002, on March 7, 2000, the United States Department of Justice filed
suit on behalf of the Environmental Protection Agency ("EPA") in
United States District Court for the District of Wyoming against the
former Monsanto Company, Solutia and 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
Jan. 30, 1997) for the air violations, and immediate compliance with
the air permit. The parties have filed a Stipulation and Order of
Judgment which settles the case, without admitting liability, upon the
payment of a civil penalty of $800,000. The Order was entered on April
23, 2003. Pursuant to an agreement between Monsanto and Solutia, the
two companies will share the liability based upon their respective
purchases from P4 Production. Accordingly, Monsanto will be
responsible for approximately $373,000 of the penalty and Solutia will
be responsible for the remainder.
As described in our Form 10-K report for the year ended Dec. 31,
2002, since the late 1990's, the EPA has focused attention on the
presence of dioxin in the Kanawha River in West Virginia. As part of
its efforts in this regard, the EPA is conducting preliminary
assessments at more than 20 sites identified as potential sources of
dioxin in the Kanawha River. Among these sites are three landfills -
the Heizer Creek landfill, the Poca Strip Mine landfill, and the
Manila Creek landfill - that the former Monsanto Company used in the
late 1950s to dispose of plant waste from its former Nitro, West
Virginia, manufacturing location. Through the preliminary assessment
work, the EPA identified an elevated dioxin level in one soil sample
taken at the Heizer Creek landfill, and notified the former Monsanto
Company of its potential liability at that landfill. Pursuant to a
September 1999 consent order with the EPA, the former Monsanto Company
and (after Sept. 1, 2000) Monsanto prepared and submitted to the EPA
an Engineering Evaluation/Cost Analysis (EE/CA) Report, which
contained an investigation of the dioxin contamination at the Heizer
Creek landfill, a risk assessment, an evaluation of remedial action
options, and our recommended remedy. The cost to implement the
recommended remedy was estimated at $1.5 million, and funds were
reserved for this amount. The EPA has approved the EE/CA Report. As of
this time, the EPA has not identified elevated dioxin levels at the
Poca Strip Mine or Manila Creek landfills. Also with regard to the
EPA's focus on dioxin in the Kanawha River, in May 2002, the EPA sent
Monsanto a "notice of potential liability and offer to negotiate for
removal action" regarding the Kanawha River Sediment Site in Putnam
County, West Virginia. The EPA has asked Monsanto to conduct
investigations associated with the elevated dioxin levels that the EPA
found in sediments located in certain areas of the Kanawha River. We
anticipate negotiating a consent order with the EPA to address the
requested work. At this point, the degree, if any, to which Monsanto
will ultimately be responsible for any costs associated with this
matter is unclear.
29
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 ("Pharmacia"). Pharmacia is now a wholly-owned subsidiary
of Pfizer Inc, which together with its subsidiaries operates 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 these three corporations.
--------------------- ------------------------------------------------------
Date of Event Description of Event
===================== ======================================================
Sept. 1, 1997 o Pharmacia (then known as Monsanto
Company) entered into a Distribution Agreement
with Solutia related to the transfer of the
operations, assets and liabilities of the
Chemical Business from Pharmacia (then known as
Monsanto Company) to Solutia.
o Pursuant to the Distribution Agreement, Solutia
assumed and agreed to indemnify Pharmacia (then
known as Monsanto Company) for certain
liabilities related to the Chemicals Business.
--------------------- ------------------------------------------------------
Dec. 19, 1999 o Pharmacia (then known as Monsanto
Company) 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 Pharmacia (then known
as Monsanto Company) 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 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 in which
we sold approximately 15 percent of the shares of
our common stock to the public. Pharmacia
continued to own 220 million shares of our common
stock.
30
--------------------- ------------------------------------------------------
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 the
Abernathy Agreement regarding the Abernathy
litigation described below.
--------------------- ------------------------------------------------------
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 (the
"Monsanto Spinoff").
o As a result of the Monsanto Spinoff, Pharmacia no
longer owns any equity interest in Monsanto.
--------------------- ------------------------------------------------------
Nov. 15, 2002 o We, Pharmacia and Solutia entered into
the Pennsylvania Agreement regarding the
Pennsylvania litigation described below.
--------------------- ------------------------------------------------------
Apr. 16, 2003 o Pursuant to a merger transaction, Pharmacia
became a wholly-owned subsidiary of Pfizer Inc.
--------------------- ------------------------------------------------------
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 in state
court in Pennsylvania, referred to in Item 1 - Legal Proceedings and
discussed below. 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 its 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 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 (the
"Abernathy 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 Abernathy
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 the Abernathy 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. The trial court
entered judgment on Oct. 17, 2002, in the amount of $59.5 million and
Solutia has filed an appeal with the Pennsylvania Supreme Court. Under
Pennsylvania law, a bond in the amount of 120 percent 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 requested Monsanto's assistance to facilitate the posting
31
of an appeal bond in this action. Pursuant to an agreement entered
into with Pharmacia and Solutia on Nov. 15, 2002, and subsequently
amended, we posted the required appeal bond, collateralized with a $25
million letter of credit. Solutia has delivered letters of credit to
us in the aggregate amount of $59.9 million, in order to secure a
portion of our obligations in connection with the bond, and has paid
all of our out-of-pocket expenses in connection with obtaining the
bond. In addition, Solutia is required to either secure a replacement
appeal bond or settle the litigation, no later than Nov. 30, 2003. We
do not believe that the appeal bond that we posted in November 2002
will have a material adverse effect on our financial position,
profitability or liquidity.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits: See Exhibit Index
(B) Reports on Form 8-K:
The Company furnished a report on Form 8-K (Item 9) on Feb. 5, 2003,
pursuant to Regulation FD, providing (i) a press release announcing
Monsanto Company's fourth quarter and full-year 2002 financial and
operating results, (ii) fourth quarter and full-year 2002 unaudited
supplemental data, (iii) 1996-2002 Monsanto Biotechnology Trait Acreage,
and (iv) a slide presentation to accompany the Company's webcast financial
results conference call.
The Company furnished a report on Form 8-K (Item 9) on Feb. 13, 2003,
pursuant to Regulation FD, relating to a press release and slide
presentation prepared for use in a speech given by the Company's Chief
Operating Officer at the Morgan Stanley Global Chemical Conference on Feb.
13, 2003.
The Company furnished a report on Form 8-K (Item 9) on Feb. 27, 2003,
pursuant to Regulation FD, relating to a press release and slide
presentation prepared for use in a speech given by the Company's Chief
Operating Officer at the Goldman Sachs Agricultural Forum on Feb. 27, 2003.
The Company furnished a report on Form 8-K (Item 9) on March 13, 2003,
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 Annual Report on Form
10-K for the year ended Dec. 31, 2002.
The Company furnished a report on Form 8-K (Item 9) on March 19, 2003,
pursuant to Regulation FD, relating to a press release and slide
presentation prepared for use in a speech given by the Company's Vice
President of North American Operations at the Merrill Lynch Chemicals
Investor Conference on March 19, 2003.
32
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: May 14, 2003
33
CERTIFICATIONS
I, Frank V. AtLee III, Chairman of the Board, Chief Executive Officer and
President 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 officer 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 officer 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 officer 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: May 14, 2003
/s/ Frank V. AtLee III
----------------------------
Frank V. AtLee III
Chairman of the Board, Chief Executive Officer and President
Monsanto Company
34
CERTIFICATIONS (continued)
I, Terrell K. Crews, Executive Vice President 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 officer 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 officer 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 officer 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: May 14, 2003
/s/ Terrell K. Crews
------------------------
Terrell K. Crews
Executive Vice President and Chief Financial Officer
Monsanto Company
35
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
2 Omitted - Inapplicable
3 Omitted - Inapplicable
4 Omitted - Inapplicable
10 Omitted - Inapplicable
10.16 Monsanto Company Long-Term Incentive Plan effective April 24,
2003 (formerly the Monsanto 2000 Management Incentive Plan)
(incorporated herein by reference to Appendix C to the
Company's Proxy Statement dated March 13, 2003.)
11 Omitted - Inapplicable; see Note 7 of Notes to Consolidated
Financial Statements
15 Omitted - Inapplicable
18 Omitted - Inapplicable
19 Omitted - Inapplicable
22 Omitted - Inapplicable
23 Omitted - Inapplicable
24 Omitted - Inapplicable
99 Computation of Ratio of Earnings to Fixed Charges
36