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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
(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 August 4, 2003
----- --------------
Common Stock, $0.01 par value 261,875,541 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 15
Financial Measures 15
Results of Operations - Second Quarter 2003 Compared with Second Quarter 2002 16
Results of Operations - First Half of 2003 Compared with First Half of 2002 19
Financial Condition, Liquidity, and Capital Resources 22
Restructuring 24
Outlook - Update 26
Critical Accounting Policies and Estimates 28
New Accounting Standards 28
Cautionary Statements Regarding Forward-Looking Information 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
Item 4. Controls and Procedures 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 4. Submission of Matters to a Vote of Securities Holders 37
Item 5. Other Information 38
Item 6. Exhibits and Reports on Form 8-K 40
SIGNATURE 42
EXHIBIT INDEX 43
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The Statement of Consolidated Operations of Monsanto Company and
subsidiaries for the three months and six months ended June 30, 2003, and
June 30, 2002, the Condensed Statement of Consolidated Financial Position
as of June 30, 2003, and Dec. 31, 2002, the Statement of Consolidated Cash
Flows for the six months ended June 30, 2003, and June 30, 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 amounts are in millions, except
per share amounts.
1
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(Dollars in millions, except per share amounts)
Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net Sales $1,682 $1,553 $2,829 $ 2,774
Cost of Goods Sold 788 735 1,402 1,352
------ ------ ------ -------
Gross Profit 894 818 1,427 1,422
Operating Expenses:
Selling, general and administrative expenses 276 237 550 532
Bad debt expense 13 164 15 167
Research and development expenses 125 137 241 256
Restructuring charges - net (1) 57 (1) 57
------ ------ ------ -------
Total Operating Expenses 413 595 805 1,012
Income From Operations 481 223 622 410
Interest Expense (21) (20) (42) (38)
Interest Income 4 5 8 9
Other Income (Expense) - net (27) 7 (44) (36)
------ ------ ------ -------
Income Before Income Taxes and Cumulative Effect of
Accounting Change 437 215 544 345
Income Tax Expense (142) (68) (177) (112)
------ ------ ------ -------
Income Before Cumulative Effect of Accounting Change 295 147 367 233
Cumulative effect of a change in accounting principle -
net of tax benefit of $7 and $162, respectively -- -- (12) (1,822)
------ ------ ------ -------
Net Income (Loss) $ 295 $ 147 $ 355 $(1,589)
====== ====== ====== =======
Basic Earnings (Loss) per Share:
Income before cumulative effect of accounting change $ 1.13 $ 0.56 $ 1.40 $ 0.90
Cumulative effect of a change in accounting principle -- -- (0.05) (7.01)
------ ------ ------ -------
Net Income (Loss) $ 1.13 $ 0.56 $ 1.35 $ (6.11)
====== ====== ====== =======
Diluted Earnings (Loss) per Share:
Income before cumulative effect of accounting change $ 1.12 $ 0.56 $ 1.40 $ 0.88
Cumulative effect of a change in accounting principle -- -- (0.05) (6.90)
------ ------ ------ -------
Net Income (Loss) $ 1.12 $ 0.56 $ 1.35 $ (6.02)
====== ====== ====== =======
Weighted Average Shares Outstanding:
Basic 261.5 261.2 261.5 260.0
Diluted 262.4 264.3 261.9 263.8
Dividends per Share $ 0.12 $ 0.12 $ 0.24 $ 0.24
See the accompanying notes to consolidated financial statements.
2
MONSANTO COMPANY AND SUBSIDIARIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Dollars in millions, except share amounts)
Unaudited
June 30, December 31,
2003 2002
------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 311 $ 428
Short-term investments 230 250
Trade receivables, net of allowances of $247 in 2003 and 2002 2,709 1,752
Miscellaneous receivables 343 389
Deferred tax assets 297 260
Inventories 1,247 1,272
Other current assets 64 73
------- -------
Total Current Assets 5,201 4,424
Property, Plant and Equipment - net 2,322 2,339
Goodwill - net 780 757
Other Intangible Assets - net 593 643
Other Assets 817 727
------- -------
Total Assets $ 9,713 $ 8,890
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Short-term debt $ 340 $ 393
Accounts payable 312 275
Accrued liabilities 1,249 1,142
------- -------
Total Current Liabilities 1,901 1,810
Long-Term Debt 1,103 851
Postretirement Liabilities 806 817
Other Liabilities 263 232
Shareowners' Equity:
Common stock (Authorized: 1,500,000,000 shares, par value $0.01)
Shares issued: 261,648,327 in 2003 and 261,412,808 in 2002 3 3
Additional contributed capital 8,054 8,050
Retained deficit (1,355) (1,645)
Accumulated other comprehensive loss (1,039) (1,202)
Reserve for ESOP debt retirement (23) (26)
------- -------
Total Shareowners' Equity 5,640 5,180
------- -------
Total Liabilities and Shareowners' Equity $ 9,713 $ 8,890
======= =======
See the accompanying notes to consolidated financial statements.
3
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
Unaudited
Six Months Ended
June 30,
----------------
2003 2002
---- ----
Operating Activities:
Net Income (Loss) $ 355 $ (1,589)
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 225 229
Bad-debt expense 15 167
Noncash restructuring -- 27
Deferred income taxes (8) (226)
Gain on disposal of investments and property - net -- (52)
Equity affiliate expense - net 19 20
Other items that did not require cash 18 17
Changes in assets and liabilities that provided (required) cash:
Trade receivables (1,089) (1,072)
Inventories 87 121
Accounts payable and accrued liabilities 263 9
Related party transactions -- (37)
Tax benefit on employee stock options -- 11
Deferred revenue on supply agreements (5) 47
Net investment hedge loss (14) (6)
Other items (23) 3
------ --------
Net Cash Required by Operations (138) (347)
------ --------
Cash Flows Provided (Required) by Investing Activities:
Acquisitions and investments (259) (60)
Investment proceeds 250 --
Property, plant and equipment purchases (79) (101)
Property disposal proceeds 3 63
Loans with related party -- 14
------ --------
Net Cash Required by Investing Activities (85) (84)
------ --------
Cash Flows Provided (Required) by Financing Activities:
Net change in short-term financing (5) 488
Loans from related party -- (59)
Long-term debt proceeds 253 41
Long-term debt reductions (74) (70)
Debt issuance costs (2) --
Payments on other financing (6) --
Stock option exercises 3 63
Dividend payments (63) (62)
------ --------
Net Cash Provided by Financing Activities 106 401
------ --------
Net Decrease in Cash and Cash Equivalents (117) (30)
Cash and Cash Equivalents at Beginning of Year 428 307
------ --------
Cash and Cash Equivalents at End of Period $ 311 $ 277
====== ========
See Note 14 - 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 produces leading seed
brands, including DEKALB and ASGROW, and provides farmers and other seed
companies with biotechnology traits that assist farmers in controlling
insects and weeds. The company also makes ROUNDUP herbicide and other
herbicides. 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,
and the quarterly report on Form 10-Q for the period ended March 31, 2003.
Financial information for the first six 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. If the
Company had accounted for its asset retirement obligations in accordance
with SFAS 143 for all periods presented, the asset retirement obligation
liability would have been $28 million at June 30, 2002 and December 31,
2002. Pro forma effects for the three and six months ended June 30, 2002,
were not material to the net earnings or per share amounts, and therefore,
have not been presented.
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 had 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
5
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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. The adoption of SFAS 149 did not have a material effect on
Monsanto's 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 half of 2003.
During the first six months of 2003, customer loans sold through the
financing program totaled approximately $100 million, and approximately
$180 million was outstanding as of June 30, 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 June 30, 2003, less than $1 million of
loans sold through this financing program were delinquent. As of June 30,
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 does not have an effect on Monsanto's
accounting for the customer-financing program.
Note 4 - Inventories
Components of inventories as of June 30, 2003, and Dec. 31, 2002, were
as follows:
June 30, Dec. 31,
2003 2002
------ ------
Finished Goods $ 553 $ 637
Goods In Process 440 398
Raw Materials and Supplies 272 250
---- -------
Inventories at FIFO Cost 1,265 1,285
Excess of FIFO over LIFO Cost (18) (13)
----- -------
Total $ 1,247 $ 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
June 30, 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 -- 22 22
Additions 1 -- 1
--- ---- ----
Balance as of June 30, 2003 $75 $705 $780
=== ==== ====
Information regarding the company's other intangible assets is as
follows:
As of June 30, 2003 As of Dec. 31, 2002
------------------------------------ -------------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
-------- ------------ --- -------- ------------ ---
Germplasm $ 617 $(365) $252 $ 607 $(322) $285
Acquired biotechnology
intellectual property 390 (164) 226 382 (142) 240
Trademarks 110 (26) 84 108 (22) 86
Other 47 (16) 31 50 (18) 32
------ ------ ---- ------ ------ ----
Total $1,164 $(571) $593 $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 June 30, 2003
and June 30, 2002, was $32 million and $34 million, respectively. Total
amortization expense for the six months ended June 30, 2003 and June 30,
2002, was $64 million and $67 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 - Debt Issuance
In May 2002, Monsanto filed a $2 billion shelf registration with the
U.S. Securities and Exchange Commission. In May 2003, Monsanto issued $250
million of 4% notes due on May 15, 2008, under this registration. The net
proceeds were used to reduce commercial paper borrowings. As of June 30,
2003, $950 million remained available for future debt issuances.
7
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Note 7 - Comprehensive Income (Loss)
Comprehensive income (loss) includes all non-shareowner changes in
equity and consists of net income (loss), foreign currency translation
adjustments, unrealized gains and losses on available-for-sale securities,
additional minimum pension liability adjustments and accumulated derivative
gains or losses on cash flow hedges not yet realized. Information regarding
comprehensive income (loss) is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2003 2002 2003 2002
---- ---- ---- ----
Comprehensive income (loss) $431 $35 $518 $(1,710)
The principal difference between net income and total comprehensive
income for the applicable 2003 and 2002 periods relates to foreign currency
translation adjustments, driven by a strengthening Brazilian currency. The
comprehensive loss for the six months ended June 30, 2002, includes the
aftertax cumulative effect of a change in accounting principle of $1,822
million related to the adoption of SFAS 142.
Note 8 - Earnings (Loss) Per Share
Basic earnings (loss) per share (EPS) were computed using the
weighted-average number of common shares outstanding during the period
shown in the table below. Diluted EPS were computed taking into account the
effect of dilutive potential common shares, calculated as follows in the
table below. The dilutive potential common shares consist of outstanding
stock options.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2003 2002 2003 2002
---- ---- ---- ----
Weighted-average number of common shares 261.5 261.2 261.5 260.0
Diluted potential common shares 0.9 3.1 0.4 3.8
Note 9 - 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 compensation expense for these plans been determined based on the
fair value at the grant dates for awards under these plans, 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:
8
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss):
As reported $ 295 $ 147 $ 355 $(1,589)
Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of tax (3) (7) (4) (14)
----- ----- ----- -------
Pro forma $ 292 $ 140 $ 351 $(1,603)
===== ===== ===== --------
Basic income (loss) per share:
As reported $1.13 $0.56 $1.35 $ (6.11)
Pro forma $1.12 $0.54 $1.34 $ (6.17)
Diluted income (loss) per share:
As reported $1.12 $0.56 $1.35 $ (6.02)
Pro forma $1.11 $0.53 $1.34 $ (6.08)
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 June 30, 2003, Monsanto has issued
approximately 8.4 million stock options with a weighted-average exercise
price of $16.52, which will vest in equal annual increments over the next
three years.
Note 10 - Restructuring
The amounts related to restructuring were recorded in the Statement of
Consolidated Operations in the following categories:
Three Months and
Six Months Ended
June 30,
-----------------------------
2003 2002
---- ----
Cost of Goods Sold $ -- $ (9)
Restructuring charges - net 1 (57)
---- -----
Income (Loss) Before Income Taxes 1 (66)
Income tax benefit -- 23
---- -----
Net Income (Loss) $ 1 $ (43)
==== =====
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 $66 million pretax ($43 million aftertax) of net charges
in the second quarter of 2002. This net expense was comprised of charges
9
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
relating to workforce reductions ($23 million), facility closures and other
exit costs ($16 million), and $27 million relating to property, plant and
equipment asset impairments.
Activities related to the 2002 restructuring plan during the first
half of 2003 were as follows:
Work Force Facility
Reductions Closures Total
---------- -------- -----
Jan. 1, 2003, Reserve Balance $ 29 $ 17 $ 46
Costs Charged Against Reserves (24) (4) (28)
----- ---- ----
June 30, 2003, Reserve Balance $ 5 $ 13 $ 18
===== ==== ====
During the first half 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 first two
quarters, approximately 130 former employees received cash severance
payments totaling $10 million. The work force separation payments for the
remaining 70 employees associated with this plan will be completed by the
end of 2003. Exit costs of $4 million associated with equipment dismantling
and disposal were also paid during the first two quarters 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
half of 2003 were as follows:
Work Force Facility
Reductions Closures Total
---------- -------- -----
Jan. 1, 2003, Reserve Balance $ 8 $ 9 $ 17
Costs Charged Against Reserves (2) (3) (5)
Reversals -- (1) (1)
---- ---- ----
June 30, 2003, Reserve Balance $ 6 $ 5 $ 11
==== ==== ====
During the first half of 2003, less than $1 million was paid to a
former employee whose involuntary termination benefits were recorded in
2001, but elected to defer payment until 2003. For the first half, former
employees received cash severance payments totaling $1 million. As of June
30, 2003, approximately 1,485 of the 1,500 planned employee separations
were completed. Exit costs of $3 million associated with contract
terminations, equipment dismantling and disposal were also paid during the
first half of 2003. Restructuring reversals of $1 million were recorded in
2003 upon release of the company's obligation to perform under a contract.
The remaining asset dispositions and other exit activities are expected to
be completed by Dec. 31, 2003. The remaining restructuring actions will be
funded from operations; these actions are not expected to affect the
company's liquidity significantly.
Note 11 - Commitments and Contingencies
Litigation and Indemnification: 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. The litigation that Monsanto is
defending and prosecuting does not include litigation that Solutia Inc.
10
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
("Solutia") assumed from Pharmacia, and which is discussed in the next
paragraph. Although the results of litigation cannot be predicted with
certainty, it is management's belief that the final outcome of the lawsuits
that Monsanto is defending or prosecuting, and excluding the Solutia
matters discussed in the next paragraph, will not have a material adverse
effect on Monsanto's financial position, profitability or liquidity.
In addition to the litigation that Monsanto is defending or
prosecuting, pursuant to the Separation Agreement between Monsanto and
Pharmacia (as amended, the "Separation Agreement"), Monsanto is required to
indemnify Pharmacia for liabilities that Solutia 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. In general,
this indemnification obligation applies to Pharmacia liabilities that were
assumed by Solutia and which Pharmacia would otherwise be required to pay.
These liabilities may include, among others, litigation, environmental
remediation, and certain retiree liabilities relating to individuals who
were employed by Pharmacia prior to the Solutia spinoff. The litigation
that Solutia assumed from Pharmacia includes litigation currently pending
in state and federal courts in Alabama brought by several thousand
plaintiffs, alleging personal injury, emotional distress and property
damages arising from exposure to polychlorinated biphenyls ("PCB's"). These
cases seek substantial but unspecified actual and punitive damages, and
verdicts for damages are currently being returned in the first phase of one
of these cases. As of Aug. 11, 2003, these verdicts total approximately
$100.5 million, relating solely to property damage claims (including
cleanup, value diminution and mental anguish). The verdicts represent
approximately 510 of the approximately 900 property damage plaintiffs in
this case; and claims relating to alleged personal injuries and punitive
damages have not yet been tried. Solutia intends to appeal these adverse
verdicts. As of this time, efforts by Solutia to settle the PCB litigation
have been unsuccessful. On July 29, 2003, Solutia reported significantly
lower net income and cash from operations for the second quarter of 2003
than for the similar period in 2002; and anticipated that economic
conditions that contributed to those results would remain uncertain for the
foreseeable future. Solutia indicated that its business results and the PCB
litigation have adversely affected cash flow, and announced that it is
considering all available alternatives to address its future liquidity
needs. Constraints on Solutia's ability to generate cash, whether from its
business operations or from external financing sources, increase the risk
that Monsanto will be called upon to indemnify Pharmacia. Monsanto may also
determine that it is in its best interest to take action to reduce the
likelihood that it would be required to provide indemnification, or to
reduce the potential amount of any indemnification. Indemnification, or
actions to reduce the likelihood or amount of indemnification, could result
in a material adverse effect on Monsanto's financial position,
profitability and/or liquidity. At this time, Monsanto is unable to
reasonably estimate the potential cost, if any, to the company.
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 financial 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. Information regarding Monsanto's contingent
liabilities relating to Solutia Inc. can be found in the preceding
paragraph.
In various circumstances, Monsanto has agreed to indemnify or
reimburse other parties for various losses or expenses. For example, like
many other companies, Monsanto has agreed to indemnify officers and
directors for liabilities incurred by reason of such person's position with
Monsanto. Contracts for the sale of a business or line of business may
require indemnification for certain events that arose before the sale.
Certain seed licensee arrangements indemnify the licensee against liability
and damages (including legal defense costs) arising from any claims of
patent, copyright, trademark or trade secret infringement related to
Monsanto's trait technology. Credit agreements and other financial
11
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
agreements frequently require reimbursement for certain unanticipated costs
resulting from changes in legal or regulatory requirements or guidelines;
these agreements may also require reimbursement of withheld taxes, together
with additional payments adequate to allow the recipient to receive an
amount equal to the sum it would have received had no such withholding been
made ("gross-up" payments). Provisions similar to those in this paragraph
may be found in other agreements, including, for example, operating
agreements, leases, purchase or sale agreements, and other licenses. It is
not possible to predict the maximum potential amount of future payments
under these or similar provisions due to the impossibility of predicting
whether any of these contingencies will come to pass and if so, at what
amount. Historically, these types of provisions did not cause a material
effect on Monsanto's financial position, profitability or liquidity.
Monsanto believes that if it were to incur a loss in any of these matters,
such loss would not have a material effect on its financial position,
profitability or liquidity.
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 $120 million has been written off against receivables as of
June 30, 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 relating to Argentine receivables is
adequate.
Note 12 - 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, and its amendments.
The company hedges a portion of its net investment in Brazilian
subsidiaries, and recorded an aftertax loss of $16 million in the second
quarter of 2003 and an aftertax loss of $29 million in the second quarter
of 2002. These losses were recorded in accumulated other comprehensive
loss. The company recorded an aftertax loss of $19 million for the first
six months of 2003 and an aftertax gain of $6 million for the first six
months of 2002.
Note 13 - 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 is presented in the table that follows.
12
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
---- ---- ---- ----
Net Sales:
Seeds and Genomics $ 488 $ 214 $ 1,038 $ 799
Agricultural Productivity 1,194 1,339 1,791 1,975
------- ------- ------- ------
Total Monsanto $ 1,682 $ 1,553 $ 2,829 $2,774
======= ======= ======= ======
EBIT:
Seeds and Genomics $ 59 $ (196) $ 154 $ (80)
Agricultural Productivity 395 426 424 454
------- ------- ------- ------
Total Monsanto $ 454 $ 230 $ 578 $ 374
Less: Interest expense - net of interest income 17 15 34 29
Less: Income tax provision 142 68 177 112
------- ------- ------- ------
Income Before Cumulative Effect of
Accounting Change $ 295 $ 147 $ 367 $ 233
======= ======= ======= ======
Note 14 - Supplemental Cash Flow Information
The effect of exchange rate changes on cash and cash equivalents
was not material. Cash payments for interest and taxes were as follows:
Six Months Ended
June 30,
-----------------------------
2003 2002
---- ----
Interest $41 $38
Taxes 29 27
Noncash transactions with Pharmacia during the three months and six
months ended June 30, 2002, included approximately $75 million primarily
associated with the assumed net pension liabilities and related deferred
tax assets. (See Note 15 - Related-Party Transactions in Prior Year - for
further details.)
Note 15 - 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 June 30, 2002,
Monsanto recognized expenses of $10 million and recorded a reimbursement of
$9 million for costs incurred on behalf of Pharmacia. During the six months
ended June 30, 2002, Monsanto recognized expenses of $18 million and
recorded a reimbursement of $22 million.
Monsanto and Pharmacia have separated their noncontributory pension
plans into Monsanto-only and Pharmacia-only sponsored plans. Effective Jan.
1, 2002, the sponsorship of a plan, in which Monsanto and Pharmacia
employees participated, was transferred from Pharmacia to Monsanto. The
assets attributable to Pharmacia employees and former Pharmacia employees
were transferred to a new Pharmacia-sponsored plan. The approximate fair
value of assets, projected benefit obligation, accumulated benefit
obligation, net pension liabilities, and related deferred tax assets
assumed by Monsanto as of Jan. 1, 2002, were approximately $1 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.
13
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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 June 30, 2003, are recorded in
short-term accruals and the company expects to utilize the majority of
these funds for their designated purposes by Dec. 31, 2003.
Note 16 - Subsequent Events
As of June 30, 2003, Monsanto had unused committed external borrowing
facilities amounting to $1.3 billion. One facility is a $500 million
facility that expires in 2005; the other $800 million, 364-day facility was
renewed in July 2003 for $500 million. The amount of the 364-day facility
was reduced because Monsanto expects to have reduced reliance on commercial
paper compared with 2002.
On July 22, 2003, Monsanto's board of directors authorized a change to
the company's fiscal year end from December 31 to August 31. This change
aligns the company's business cycle more closely with those of its
customers. With this change, Monsanto's 2004 fiscal year will begin Sept.
1, 2003, and end Aug. 31, 2004. The company will file a transition report
on Form 10-K for the eight-month period ended Aug. 31, 2003, with the
Securities and Exchange Commission in accordance with the filing
requirements for such report.
On July 31, 2003, Monsanto announced a share repurchase program
authorizing the purchase of up to $500 million of the company's shares of
common stock over a three-year period.
14
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Background
----------
Monsanto Company is a leading global provider of agricultural products
and integrated solutions for farmers. We produce leading seed brands,
including DEKALB and ASGROW, and we provide farmers and other seed
companies with biotechnology traits that assist farmers in controlling
insects and weeds. We also make ROUNDUP herbicide and other herbicides. 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 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. 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.
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, and
quarterly report on Form 10-Q for the period ended March 31, 2003.
Financial information for the first six 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. We define "free cash flow" as the
total of net cash provided or required by operations and provided or
required by investing activities. We believe that free cash flow is useful
to investors and management as a measure of the ability of our business to
generate cash. This cash can be used to meet business needs and
obligations, reinvested into the company for future growth, or returned to
our shareowners through dividend payments or share
15
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
repurchases. Free cash flow is also 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
comprehensive income (loss), as determined in accordance with accounting
principles generally accepted in the United States.
Results of Operations - Second Quarter 2003 Compared with Second Quarter 2002
-----------------------------------------------------------------------------
Three Months Ended
June 30,
------------------
Total Monsanto Company and Subsidiaries: 2003 2002
---------------------------------------- ---- ----
Net Sales $1,682 $1,553
====== ======
Gross Profit $ 894 $ 818
====== ======
Income Before Cumulative Effect of
Accounting Change $ 295 $ 147
====== ======
Net sales for the second quarter improved 8 percent from last year's
second quarter net sales. Sales improvements in our Seeds and Genomics
segment were partially offset by a sales decline in our Agricultural
Productivity segment. The increase in Seeds and Genomics sales was fueled
by improved corn seed performance in Latin America and the United States,
and stronger sales of our traits in the United States. Net sales this
quarter benefited from a lower level of seed returns in Latin America,
stemming primarily from the operational changes we put in place last year.
The Agricultural Productivity net sales decline was primarily attributable
to lower net sales of ROUNDUP in the United States. 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 for the second quarter of 2003 increased 9 percent, in
line with the 8 percent quarterly net sales increase. Improved corn seed
and ROUNDUP results from our Latin American operations benefited this
quarter's gross profit comparison, as did higher U.S. sales of our seeds
and traits. Last year's second quarter gross profit for both segments was
negatively affected by the difficult economic conditions in Latin America
and operational changes to address the market and economic uncertainties in
that region. These improvements over prior year were partially offset by
lower gross profit for ROUNDUP herbicides in the United States, reflecting
lower volumes and a shift in ROUNDUP and other glyphosate-based herbicides
to our lower-priced products. As a percent of net sales, gross profit
remained unchanged. The lower ROUNDUP gross profit was mitigated by higher
sales of our traits, which are high margin contributors.
Operating expenses for the second quarter declined $182 million from
last year's second quarter operating expenses.
o In the second quarter of last year, we established a $154 million
pretax bad-debt reserve related to Argentine receivables. This
allowance was established because of the economic turmoil and market
conditions in that country. Excluding this allowance, bad debt expense
for the second quarters of 2003 and 2002 was consistent.
o We recorded restructuring charges in the second quarter of last year,
$57 million of which were recorded in operating expenses.
o Research and development (R&D) expenses improved 9 percent over last
year's second quarter R&D expenses, and continue to reflect the
benefits of our restructuring and cost management programs.
o Selling, general and administrative (SG&A) expenses increased 16
percent, with a variety of factors affecting the quarter-to-quarter
comparison. Higher employee-related costs, primarily incentive-related
because of our improved operational results, drove this quarter's SG&A
expenses higher.
16
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
However, continued cost management efforts helped lessen the effect of
the higher incentive accruals this quarter. SG&A expenses in 2002
reflected an approximate $25 million reduction of costs stemming from
our agreement to sell certain Monsanto herbicide assets to Nissan
Chemical Industries, Ltd. (Nissan) last year. SG&A expenses in 2003
also reflected a reduction, but to a lesser extent, in SG&A costs
related to agreements that are a part of our ongoing business.
Net interest expense increased slightly from last year's second
quarter levels. Although our debt levels during the quarter were
significantly lower than debt levels during the same period last year, the
change in debt mix from short-term borrowings to long-term fixed-rate notes
led to overall higher interest expense.
We recognized $27 million of net other expense in the second quarter
of 2003, compared with $7 million of net other income in the same period
last year. Two key items affected this comparison. In 2002, we recorded
approximately $20 million of other income related to sales of certain
herbicide assets for use in ex-U.S. markets, including the Nissan
transaction in Japan and a smaller transaction in the Australia and New
Zealand markets. We also recognized $10 million of other income last year
related to gains that were realized upon the sale of equity securities.
These gains were slightly offset by currency losses reflecting the further
devaluation of our net assets denominated in Argentine pesos. Net other
expense in 2003 consisted primarily of equity affiliate expense and
foreign-currency transaction losses.
Income tax expense more than doubled, consistent with the growth in
our pretax income. The effective tax rate remained steady at 32 percent.
The factors above explain the change in income before the cumulative
effect of accounting change, which increased from $147 million for the
second quarter of 2002 to $295 million for the second quarter of 2003.
Seeds and Genomics Segment
--------------------------
Three Months Ended
June 30,
------------------
2003 2002
---- ----
Net Sales $ 488 $ 214
===== =====
Gross Profit $ 291 $ 79
===== =====
EBIT(1) $ 59 $(196)
===== =====
(1) Earnings (loss) before cumulative effect of accounting change, interest and
income taxes. See Note 13 - Segment Information - for further details.
Second quarter 2003 Seeds and Genomics net sales more than doubled, topping
last year's second quarter net sales by nearly $275 million. This growth
reflects improved results in Latin America and the United States. Seeds and
Genomics segment results in 2002 were significantly affected by events in Latin
America, including the poor economic conditions discussed earlier. In the second
quarter of last year, we instituted operational changes to our business model to
address the economic uncertainty and unfavorable market conditions there. Last
year, we recorded additional return accruals in Argentina and experienced higher
seed obsolescence in Brazil. While these changes reduced EBIT in 2002, they have
reduced our investments in working capital and risk in that region. Although the
predominant Latin American planting season begins in the latter part of the
calendar year, so far seed sales and gross profit have rebounded considerably in
both Argentina and Brazil this year. This is primarily because of the lower
return experience and lower obsolescence charges in 2003.
The timing of this crop year's buying patterns in the U.S. favorably
affected this quarter's net sales. Because of a delayed season, some sales that
typically would have taken place in the first quarter took place this quarter.
17
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Sales in the United States also benefited from continued strong performance of
our branded corn seed and increased adoption of our biotechnology traits for
corn. We also continue to experience strong growth in sales of our "stacked"
traits - more than one biotechnology trait in a single crop plant -- for our
corn and cotton traits. Despite a competitive U.S. soybean market, acres planted
with our ROUNDUP READY soybean trait were up modestly.
These operational improvements led to a significant increase in segment
EBIT and a dramatic increase in gross profit as a percent of net sales for the
quarter. Lower operating expenses also contributed to the EBIT improvement. Last
year's Seeds and Genomics segment EBIT included a portion of the Argentine bad
debt expense, as well as charges related to our 2002 restructuring plan. We
continue to tightly control R&D and SG&A expenses, although SG&A expenses
related to estimated incentives for employees have increased commensurate with
our improved financial results. A higher level of other expense slightly offset
these sales and net operating expense improvements. During last year's second
quarter, we recognized other income relating to the sale of equity securities.
Agricultural Productivity Segment
---------------------------------
Three Months Ended
June 30,
------------------------------
2003 2002
---- ----
Net Sales
ROUNDUP and other glyphosate-based herbicides $ 739 $ 844
All other 455 495
------ -------
Total Net Sales $1,194 $ 1,339
====== =======
Gross Profit
ROUNDUP and other glyphosate-based herbicides $ 383 $ 504
All other 220 235
------ ------
Total Gross Profit $ 603 $ 739
====== =======
EBIT(1) $ 395 $ 426
====== =======
(1) Earnings (loss) before cumulative effect of accounting change, interest and
income taxes. See Note 13 - Segment Information - for further details.
In the Agricultural Productivity segment, second quarter sales
declined 11 percent from the same period last year. Sales of ROUNDUP and
other glyphosate-based herbicides represented the bulk of the sales
decline, stemming primarily from lower net sales in the United States.
Selective herbicide sales also declined, primarily because of lower sales
in the U.S. acetanilide market. Wet weather conditions affected this market
in the second quarter of 2003, as did a continued competitive environment
and increased adoption of our ROUNDUP READY corn products.
Worldwide net sales of ROUNDUP and other glyphosate-based herbicides
declined 12 percent. Similar to last quarter, worldwide volumes grew
primarily because of higher sales volumes in Latin America and increased
demand from supply customers. As expected, sales of ROUNDUP and other
glyphosate-based herbicides decreased in the United States, reflecting a
shift of volumes to our lower-priced products. As a result of this shift,
the average net selling price of ROUNDUP branded herbicides has declined
from last year's second quarter levels. Volumes were also affected by wet
weather conditions, which delayed some of this year's applications
over-the-top of ROUNDUP READY crops until after the second quarter. In
addition, sales to distributors were less than end-user usage this quarter,
which also reduced net sales. Last year, adverse weather conditions reduced
the amount of glyphosate used during the over-the-top season.
Improved performance of glyphosate-based herbicides outside the United
States helped partially offset the U.S. decline. Improved market and
economic conditions in Latin America versus prior year, particularly
Brazil, led to modest volume growth. In Australia, increased demand from
supply customers and continued favorable weather conditions drove sales
higher in that country. However, as expected, the absence of sales in Japan
18
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
negatively affected net sales because of our sale last year of certain
herbicide assets to Nissan for use in Japanese markets.
Quarterly EBIT for the segment declined $31 million, primarily because
of the lower sales of ROUNDUP and other glyphosate-based herbicides.
Segment gross profit and gross profit as a percent of net sales both
declined, reflective of the lower average net selling price of ROUNDUP
herbicides. While our cost management efforts continue, employee-related
costs related to incentive accruals have increased this quarter's SG&A
expenses, consistent with Monsanto's improved overall operating performance
so far this year. Last year's transaction with Nissan also affected the
quarter-to-quarter comparison. We recorded other income and a reduction to
SG&A expenses related to the sale of certain Japanese assets in the second
quarter of 2002. However, lower bad debt and restructuring expenses this
year helped partially mitigate this EBIT shortfall. In the second quarter
of last year, a portion of the Argentine bad debt allowance was recorded in
this segment's results.
Results of Operations - First Half 2003 Compared with First Half 2002
---------------------------------------------------------------------
We recognized net income of $355 million, or $1.35 per share, for the
first six months of 2003. For the first six months of 2002, we recognized a
net loss of $1.6 billion, or $6.02 per share. The following factors
affected the year-to-date comparison:
o $1.8 billion aftertax goodwill impairment in 2002 upon adoption of a
new accounting standard relating to goodwill
o Aftertax charge of $12 million upon adoption of a new accounting
standard relating to asset retirement obligations in 2003
o Lower volumes and average net selling prices of ROUNDUP herbicides in
the United States in 2003
o Establishment of a $100 million aftertax bad debt reserve in 2002
related to Argentine receivables
o Actions in 2002 to reduce risk in Latin America, due to economic and
market uncertainties last year, that negatively affected last year's
results
o Charges last year relating to our 2002 restructuring plan
o Gain from sales in 2002 of certain herbicide assets for use in certain
ex-U.S. markets
Six Months Ended
June 30,
----------------
Total Monsanto Company and Subsidiaries: 2003 2002
---------------------------------------- ---- ----
Net Sales $2,829 $2,774
====== ======
Gross Profit $1,427 $1,422
====== ======
Income Before Cumulative Effect of
Accounting Change $ 367 $ 233
====== ======
Net sales for the first half of 2003 increased nearly 2 percent from
last year's first half net sales. Both segments benefited from improved
performance in Latin America. Last year's net sales were negatively
affected by the economic conditions in that region, as well as the
operational changes we made to our business to address the uncertainties
there. In the Seeds and Genomics segment, U.S. corn seed sales continued to
experience strong growth. Higher cotton and canola traits more than offset
slight decreases in corn and soybean traits for the first half of the year.
Sales in the Agricultural Productivity segment were affected by lower U.S.
ROUNDUP volumes and the continued shift toward lower priced ROUNDUP and
other glyphosate-based herbicides in the U.S. post-patent glyphosate
market. Sales of our selective herbicides also declined. For a more
detailed discussion of the factors affecting the net sales comparison,
please see "Seeds and Genomics Segment" and "Agricultural Productivity
Segment."
19
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Gross profit of $1.4 billion for the six-month period ended June 30,
2003, was relatively unchanged from gross profit for the same period last
year. Increases in Seeds and Genomics gross profit were offset by declines
in Agricultural Productivity gross profit. As a percent of net sales, gross
profit declined one point to 50 percent. Improved operations in Latin
America, coupled with continued growth in our stacked traits, have
benefited our margins. These improvements have helped mitigate the effect
of the shift in ROUNDUP and other glyphosate-based herbicide sales to lower
priced products.
Operating expenses for the first half of 2003 declined more than 20
percent from last year's first-half operating expenses. Three major events
last year affect the first-half comparison. Last year, we increased our
allowance for uncollectible trade receivables by $154 million because of
the economic turmoil and market conditions in Argentina. We also recorded
$57 million of operating expenses related to management's 2002
restructuring plan in the second quarter of 2002. These and other operating
expenses for the first half of last year were partially offset by a $25
million reduction in SG&A costs stemming from the sale of certain Monsanto
herbicide assets to Nissan.
SG&A expenses for the first half of 2003 increased 3 percent from the
same period last year. In addition to last year's reduction in costs last
year related to Nissan discussed above, higher employee-related costs have
affected the comparison from prior year. Continued cost management has
helped offset some of this increase, and has also led to a 6 percent
decrease in R&D expenses. We are also continuing to see the benefits from
our restructuring programs through lower R&D expenses.
Net interest expense increased slightly to $34 million for the first
two quarters of 2003. Consistent with the first quarter, lower average
borrowing levels for the six-month period were offset by higher interest
rates associated with our long-term senior notes that were issued after
last year's second quarter.
Income taxes for the first half of 2003 increased 58 percent to $177
million, consistent with the increase in pretax earnings. The effective tax
rate increased just slightly to 33 percent 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 increased from $233 million for the
first half of last year to $367 million for the first half of this year. In
each period, we recognized a cumulative effect of accounting change that
affected net income (loss). Last year, we recorded a $1.8 billion ($6.90
per share) aftertax goodwill impairment charge that resulted from our
adoption of a new accounting standard related to goodwill and other
intangible assets. A new accounting standard relating to asset retirement
obligations adopted in 2003 negatively affected our 2003 net income by $12
million, or $0.05 per share, aftertax. Including the effects of these
accounting changes, we recognized a net loss for the first half of 2002 in
the amount of $1.6 billion, and net income totaling $355 million for the
first half of this year.
Seeds and Genomics Segment
--------------------------
Six Months Ended
June 30,
--------------------
2003 2002
---- ----
Net Sales $1,038 $ 799
====== ======
Gross Profit $ 594 $ 411
====== ======
EBIT(1) $ 154 $ (80)
====== ======
(1) Earnings (loss) before cumulative effect of accounting change, interest and
income taxes. See Note 13 - Segment Information - for further details.
20
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Sales in the Seeds and Genomics segment improved nearly $240 million,
led by corn seed net sales increases in Latin America and the United
States. Seed sales in Latin America were depressed last year, when we
recorded additional return accruals in Argentina in response to the
contracting market that was affected by the economic conditions. More
normal return experience this year, coupled with improved market conditions
and the benefits of the operational changes we instituted, have led to an
increase in sales in that region. However, the primary sales activity in
this region will not occur until later in 2003, when the predominant
planting season starts.
Corn seed sales also increased in the United States. The quality of
Monsanto's corn seed portfolio was evidenced by a market share gain, on top
of last year's share gains. As expected, U.S. soybean seed sales declined,
reflecting the competitive U.S. soybean market. Cotton and canola trait
revenues increased for the six-month comparison. We experienced higher corn
and soy trait sales early in the U.S. crop season (the fourth quarter of
calendar-year 2002), and sales of these products increased on a crop year
basis. An increasingly higher percentage of our seed sales contain a
biotechnology trait, demonstrating continued growing demand for our
biotechnology products. We continue to see growth in our stacked corn and
cotton trait products, which deliver both herbicide tolerance and insect
protection. For the 2003 crop year, we currently estimate that our
insect-protected and ROUNDUP READY traits were planted on approximately 105
million acres in the United States. This represents an 8 percent increase
compared with approximately 97 million U.S. acres planted with Monsanto's
traits the previous crop year.
The Seeds and Genomics segment delivered $154 million of EBIT for the
first half of 2003, up from the EBIT loss of $80 million last year. Gross
profit as a percent of sales increased 6 percentage points. Strong corn
seed performance in the United States and Latin America and improved Latin
American operations drove the EBIT and gross profit improvements. While
segment EBIT for the first half of 2002 included charges for restructuring
and additional bad debt expense relating to Argentine receivables, this
year's first-half EBIT reflected higher SG&A expenses. The effects of
higher employee-related costs and a higher level of expenses allocated to
this segment were partially offset by continued management of other SG&A
and R&D costs.
Agricultural Productivity Segment
---------------------------------
Six Months Ended
June 30,
-----------------------
2003 2002
---- ----
Net Sales
ROUNDUP and other glyphosate-based herbicides $1,060 $ 1,205
All other 731 770
------ -------
Total Net Sales $1,791 $ 1,975
====== =======
Gross Profit
ROUNDUP and other glyphosate-based herbicides $ 478 $ 639
All other 355 372
------ -------
Total Gross Profit $ 833 $ 1,011
====== =======
EBIT(1) $ 424 $ 454
====== =======
(1) Earnings (loss) before cumulative effect of accounting change, interest and
income taxes. See Note 13 - Segment Information - for further details.
Agricultural Productivity net sales for the first half of 2003
declined $184 million from net sales for the same period last year. This
decline is largely attributable to lower sales of ROUNDUP herbicides in the
United States. Lower volumes and lower average net selling prices affected
U.S. sales of these products. Volumes declined 18 percent from last year's
first-half levels. Wet weather conditions in 2003 delayed some of this
year's applications over-the-top of ROUNDUP READY crops until after the
second quarter. In addition, sales to distributors through the first half
of the year were less than end-user usage, which also reduced net sales.
21
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Last year, adverse weather conditions reduced the amount of glyphosate used
in the over-the-top market. The average net selling price of ROUNDUP
branded products in the United States declined approximately 19 percent
from last year's first-half price levels, primarily reflecting a continued
shift to lower-priced glyphosate products. Since our higher-priced products
tend to be used predominantly for the over-the-top market, which occurs
after the first quarter of the year, the average net selling price of
ROUNDUP and other glyphosate-based herbicides for the first half of 2003
increased from levels earlier in the year. 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.
Worldwide, volumes of ROUNDUP and other glyphosate-based herbicides
grew primarily because of ROUNDUP gains in Latin America and increased
demand from supply customers. Economic conditions and the operational
changes we made drove last year's sales lower in Latin America. The
Asia-Pacific region experienced higher sales volumes during the first half
of 2003, led by increased demand from supply customers and by more
favorable weather conditions in Australia. However, sales in the region
declined for the period because of the absence of sales in Japan. We signed
an agreement in mid-year 2002 to sell certain of our herbicide assets to
Nissan for use in Japanese markets.
First-half 2003 net sales of our other Agricultural Productivity
products were down approximately $40 million. 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, reflective
of the competitive nature of this market and continued adoption of ROUNDUP
READY corn products. Sales in 2003 were also negatively affected by wet
weather, which led to some of this season's acetanilide applications being
lost. The animal agriculture business experienced moderately lower sales in
an extremely weak milk price environment. Higher sales of lawn-and-garden
herbicides partially offset these sales declines, as the business benefited
from favorable weather conditions this year. We are party to an agency and
marketing agreement with The Scotts Company with respect to our
lawn-and-garden herbicide business. For additional details, please refer to
the Management's Discussion and Analysis of Financial Condition and Results
of Operations contained in our annual report to shareowners for the year
ended Dec. 31, 2002.
EBIT for the segment declined $30 million to $424 million for the
first half of 2003. The effect of lower ROUNDUP sales in the United States
was partially offset by significantly lower bad debt expense and improved
operations in Latin America. Continued cost management also helped lessen
the effect of the lower ROUNDUP sales, though SG&A expenses were slightly
higher because of higher employee-related costs. As mentioned in the
quarter-to-quarter discussion, second quarter 2002 results for the segment
also included gains from the Nissan transaction.
Financial Condition, Liquidity, and Capital Resources
-----------------------------------------------------
Working Capital and Financial Condition
---------------------------------------
June 30, 2003 Dec. 31, 2002
------------- -------------
Working capital $ 3,300 $ 2,614
Current ratio 2.74:1 2.44:1
Our balance sheet at June 30, 2003, reflected working capital of $3.3
billion, an increase of nearly $700 million from Dec. 31, 2002. Trade
receivables were the major driver of the working capital increase,
consistent with the seasonal trends of our business. However, as a percent
of sales, our year-to-date receivables position has improved by 9
percentage points. Trade receivables as of June 30, 2003 declined over $200
million from year-ago levels, driven by lower receivable balances in the
United States and Brazil. In the United States, lower ROUNDUP sales and
increased usage of our third-party financing option led to a lower net
receivable balance. Although our seed and trait sales increased
significantly this year, a highly successful seed prepayment program at the
end of last year kept the June 30, 2003 receivable balances lower in the
United States. In Latin America, we are seeing the results of our tightened
credit policies instituted last year. Stronger collections led to an
overall year-over-year decline in the net trade receivable balances in
Brazil and in Argentina. In Brazil, a strengthening currency partially
masked the effect of the stronger collections. Our working capital balances
22
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
as of June 30, 2003 and Dec. 31, 2002, reflect the strength of our cash
flow. At the end of both periods, we had over $200 million invested in
short-term debt securities and over $300 million of cash on hand.
Cash Flow
---------
Six Months Ended June 30,
------------------------------
2003 2002
---- ----
Net cash required by operations $(138) $(347)
Net cash required by investing activities (85) (84)
----- -----
Free Cash Flow (223) (431)
Net cash provided by financing activities 106 401
Free cash flow, which represents the total of net cash provided or
required by operations and provided or required by investing activities,
was a negative $223 million for the first half of 2003. Our free cash flow
for the first half of the year is historically negative, as we use cash to
fund the seasonal fluctuations in our business. Our 2003 first-half free
cash flow represents a considerable improvement -- more than $200 million
-- from the negative free cash flow for the same period last year. A
decrease in the net cash required by operations fueled the free cash flow
improvement. A key driver of the lower cash requirement this year is our
improved financial performance, reflecting our strong Seeds and Genomics
net sales and an improved Latin American business. This improved financial
performance also drove accrued liabilities at the end of June 2003 higher
than the same time last year, primarily because of accruals for income
taxes, employee incentives, and customer incentive programs. We continue to
carefully manage our investments in trade receivables and inventories, and
have benefited from strong collections. Net cash required by investing
activities was relatively unchanged, as the proceeds associated with the
sale of herbicide assets to Nissan in 2002 were offset by lower capital
expenditures and investments in short-term debt securities in 2003.
Investments of $250 million matured throughout April and May of 2003, and
following strong second quarter collections, we invested $230 million in
short term debt securities as of June 30, 2003. The strength of our cash
flow enabled us to reduce our reliance on borrowings, thereby reducing net
cash provided by financing activities for the quarter.
Because of the strong cash-generating capabilities demonstrated by
Monsanto this year, the company's board of directors authorized an increase
in the quarterly dividend in April 2003, and the executive committee of the
board approved a share repurchase program in July 2003. This repurchase
program allows for the purchase of up to $500 million of Monsanto's common
stock over a three-year period.
Customer Financing Program: In connection with a financing option that
is available to certain of our customers, we collected approximately $100
million in the first half of 2003, which would otherwise have been
collected later in the year. For the first half of 2003, our customers
increased their use of this financing option by more than $40 million. This
$500 million revolving credit and liquidity facility allows certain 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 June 30, 2003, customer loans outstanding through this financing
program totaled approximately $180 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 June 30, 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.
23
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Capital Resources and Liquidity
-------------------------------
June 30, 2003 Dec. 31, 2002
------------- -------------
Debt-to-total capital ratio 20% 19%
Our debt-to-capital ratio increased slightly from Dec. 31, 2002, but
declined significantly from the 27 percent debt-to-capital ratio at the
same time last year. As mentioned previously, because of our strong cash
position, our reliance on short-term financing has been reduced from
historical levels. In May 2003, we issued $250 million of 5-year 4 percent
notes. These notes were subsequently swapped to six-month London Interbank
Offered Rate (LIBOR), plus a spread of 39 basis points. As of June 30,
2003, we had $950 million available for future debt issuances under our
shelf-registration filed in May 2002.
Postretirement Benefits - Pensions
----------------------------------
Because of the decline in the equity markets, the fair value of assets
in the Monsanto U.S. qualified pension plan decreased in 2002. As a result,
along with the impact of declining interest rates, we recorded an
additional minimum pension liability adjustment during the third and fourth
quarters of calendar-year 2002. Since interest rates have continued to
decline, we anticipate that an increase to the additional minimum pension
liability will be required to be recorded in our financial statements for
the eight-month period ended Aug. 31, 2003. (See note 16 regarding the
change in Monsanto's fiscal year end.) This adjustment is necessary so that
the recorded pension liability is at least equal to the unfunded
accumulated benefit obligation for the plan. Similar to the additional
minimum pension liability adjustment in 2002, this noncash adjustment will
decrease shareowners' equity, but will not affect our results of
operations.
We are continuing to make voluntary cash contributions to our U.S.
qualified pension plan. The company's funding policy is to contribute at a
minimum the amount required by regulation with the ability to make
discretionary amounts if merited. In light of a significant decline in
interest rates and the adverse performance of the financial markets in
recent years as mentioned previously, required contributions were expected
to begin in 2004. Accordingly, although contributions are not required for
2003, the company expects to contribute approximately $135 million to the
U.S. qualified plan during calendar year 2003 (including $30 million
contributed through the second quarter). We have chosen to use a portion of
our cash flow from 2003 to accelerate our contributions and increase the
amount contributed in 2003 to $135 million from the prior $60 million
estimate to maintain future contribution flexibility allowed by
regulations. While the level of future contributions that would be required
is volatile and depends heavily on plan asset experience and interest
rates, we expect to continue to contribute to the plan on a regular basis
in the near-term.
Restructuring
-------------
The amounts related to restructuring plans were recorded in the
Statement of Consolidated Operations in the following categories:
Three and Six
Months Ended
June 30, 2002
-------------
2002
----
Cost of Goods Sold $ (9)
Restructuring charges - net (57)
----
Income (Loss) Before Income Taxes (66)
Income tax benefit 23
----
Net Income (Loss) $(43)
====
24
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
2002 Restructuring Plan:
In 2002, Monsanto's management approved a restructuring plan to
further rationalize (i.e., consolidate or shut down) facilities and reduce
the work force. In connection with this plan, Monsanto recorded $66 million
pretax ($43 million aftertax) of net charges in the second quarter of 2002.
The pretax components of the restructuring for the three months and six
months ended June 30, 2002 were as follows:
Three and Six
Months Ended
June 30, 2002
-------------
Work Force Reductions $23
Facility Closures / Exit Costs 16
Asset Impairments:
Property, plant and equipment - net 27
---
Total Pretax Charge $66
===
These restructuring costs primarily relate to the closure of certain
research sites and certain manufacturing sites, as well as work force
reductions. The work force reductions include involuntary employee
separation costs for approximately 450 employees worldwide, including
positions in marketing, research and development, manufacturing and
administration. Facility closures and other exit costs included expenses
associated with contract terminations ($8 million), equipment dismantling
and disposal ($4 million) and other shutdown costs ($4 million) resulting
from the exit of certain research sites and certain manufacturing sites.
The asset impairments related to property, plant and equipment.
During the first half 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 first two
quarters, approximately 130 former employees received cash severance
payments totaling $10 million. The work force separation payments for the
remaining 70 employees associated with this plan will be completed by the
end of 2003. Exit costs of $4 million associated with equipment dismantling
and disposal were also paid during the first two quarters of 2003. Cash
payments to complete the actions related to this plan will be funded from
operations and are not expected to significantly affect our liquidity. We
anticipate that the actions related to this plan will yield annual cash
savings of more than $50 million.
2000 Restructuring Plan:
In 2000, Monsanto's management formulated a plan as part of the
company's overall strategy to focus on certain key crops and streamline
operations. In connection with this plan, Monsanto incurred $474 million of
net charges during 2000 and 2001.
During the first half of 2003, less than $1 million was paid to a
former employee whose involuntary termination benefits were recorded in
2001, but elected to defer payment until 2003. For the first half, former
employees received cash severance payments totaling $1 million. As of June
30, 2003, approximately 1,485 of the 1,500 planned employee separations
were completed. Exit costs of $3 million associated with contract
terminations, equipment dismantling and disposal were also paid during the
first half of 2003. Restructuring reversals of $1 million were recorded in
2003 upon release of the company's obligation to perform under a contract.
The remaining asset dispositions and other exit activities are expected to
be completed by Dec. 31, 2003. Cash payments to complete this restructuring
plan will be funded from operations and are not expected to significantly
affect the company's liquidity. We anticipate that these actions will yield
annual cash savings of more than $100 million.
See Note 10 - Restructuring - of Notes to Consolidated Financial
Statements for further details regarding our restructuring plans.
25
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 highly-competitive and 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 $120 million has been written off against accounts receivable
as of June 30, 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 relating to Argentine receivables is adequate.
The Brazilian real has also fluctuated considerably in the past year,
although recent improvements in economic and political situation have
reduced volatility. We have a hedging program in place to hedge anticipated
Brazilian cash flows through the end of August. 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
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, YIELDGARD Rootworm
corn, and YIELDGARD Corn Borer 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
26
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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.
In recent years, distribution channel inventories had increased
significantly in the United States. However, ROUNDUP distribution inventory
levels at the end of the first half of 2003 in the United States were lower
than levels at June and December last year.
Other Information
As discussed in Note 11 -- Commitments and Contingencies, 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.
As further discussed in Note 11, Monsanto has agreed to indemnify
Pharmacia for liabilities that Solutia Inc. (Solutia) 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
27
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
liabilities. Note 11 includes further information regarding Solutia, and
related risks to Monsanto's financial position, profitability and/or
liquidity.
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.
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 had 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. The adoption of SFAS 149 did not have a material effect on
our financial position, profitability or liquidity.
28
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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, 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
29
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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. 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 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 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
30
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 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 patents and licenses are currently the subject of
litigation, and additional future litigation is possible. 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
31
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 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, we are
required to indemnify Pharmacia for 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. In general, this indemnification obligation
applies to Pharmacia liabilities that were assumed by Solutia and which
Pharmacia would otherwise be required to pay. These liabilities may
include, among others, litigation, environmental remediation, and certain
retiree liabilities relating to individuals who were employed by Pharmacia
prior to the Solutia spinoff. The litigation that Solutia assumed from
Pharmacia includes litigation currently pending in state and federal courts
in Alabama brought by several thousand plaintiffs, alleging personal
injury, emotional distress and property damages arising from exposure to
polychlorinated biphenyls ("PCB's"). These cases seek substantial but
unspecified actual and punitive damages, and verdicts for damages are
currently being returned in the first phase of one of these cases. As of
this time, efforts by Solutia to settle the PCB litigation have been
unsuccessful. On July 29, 2003, Solutia reported significantly lower net
income and cash from operations for the second quarter of 2003 than for the
similar period in 2002; and anticipated that economic conditions that
contributed to those results would remain uncertain for the foreseeable
future. Solutia indicated that its business results and the PCB litigation
have adversely affected cash flow, and announced that it is considering all
available alternatives to address its future liquidity needs. Constraints
on Solutia's ability to generate cash, whether from its business operations
or from external financing sources, increase the risk that we will be
called upon to indemnify Pharmacia, and the possibility that we will
determine that it is in our best interest to take action to reduce the
likelihood that we would be required to provide indemnification, or to
reduce the potential amount of any indemnification.
Distribution of Products: In order to successfully market our
products, we must estimate growers' needs, and successfully match the level
of product at our distributors to those needs. If distributors do not have
enough inventory of our products at the right time, our current sales will
suffer. On the other hand, high product inventory levels at our
distributors may cause revenues to suffer materially in future periods as
these distributor inventories are worked down. 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
32
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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.
Item 4. CONTROLS AND PROCEDURES
We maintain a comprehensive set of disclosure controls and procedures
(as defined in Rules 13a--15(e) and 15d--15(e) under the Securities
Exchange Act of 1934 (Exchange Act)) 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 June 30, 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.
During the fiscal quarter that ended on the Evaluation Date, there was
no change in internal controls over financial reporting (as defined in
Rules 13a--15(f) and 15d--15(f) under the Exchange Act) that materially
affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
33
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, the "Separation Agreement"). Under that agreement, we
assumed responsibility for legal proceedings primarily related to the
agricultural business that Pharmacia transferred to us on that date. As a
result, although Pharmacia may remain the named defendant or plaintiff in
some of these cases, we manage and are responsible for the litigation. As
required by the Separation Agreement, in the proceedings where Pharmacia is
the named defendant, we will indemnify Pharmacia for costs, expenses and
any judgments or settlements; and in the proceedings where Pharmacia is the
named plaintiff, we will pay the fees and costs of, and receive any
benefits from, the litigation. We are also defending or prosecuting other
legal proceedings, not described in this section, which arise in the
ordinary course of our business. The litigation that we are defending or
prosecuting does not include litigation that Solutia Inc. ("Solutia")
assumed from Pharmacia, and which is discussed in the next paragraph. 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, and excluding the
Solutia matters discussed in the next paragraph, 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 the proceedings that we are defending or
prosecuting.
In addition to the litigation that we are defending or prosecuting, we
may have potential liabilities 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 certain liabilities
related to those chemicals businesses; and under the Separation Agreement,
we are required to indemnify Pharmacia to the extent that Solutia fails to
pay, perform or discharge those liabilities. Solutia has agreed to
indemnify both Pharmacia and us for any liabilities that either of us
incurs in connection with the liabilities that Solutia assumed. Solutia is
defending all litigation relating to these assumed liabilities, pursuant to
powers of attorney granted by Pharmacia and by us. The litigation that
Solutia is defending includes, for example, litigation currently pending in
state and federal courts in Alabama brought by several thousand plaintiffs,
alleging personal injury, emotional distress and property 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 Sabrina Abernathy, et al. v.
Monsanto Company, et al., an ongoing trial currently pending in state court
in Alabama; and Antonia Tolbert, et al. v. Monsanto Company, et al.,
currently scheduled to begin trial on Oct. 14, 2003, in the United States
District Court for the Northern District of Alabama, on claims of 4 of
approximately 17,000 plaintiffs. In the Abernathy case, as of Aug. 11,
2003, damage verdicts of approximately, $100.5 million have been returned,
relating solely to property damage claims (including cleanup, value
diminution and mental anguish). The verdicts represent approximately 510 of
the approximately 900 property damage plaintiffs in this case; and claims
relating to alleged personal injuries and punitive damages have not yet
been tried. The PCB cases seek substantial but unspecified actual and
punitive damages. Solutia has stated its intention to appeal the
aforementioned and any other adverse verdicts in the PCB litigation. As of
this time, Solutia's efforts to settle the PCB litigation have been
unsuccessful. Solutia is also defending Commonwealth of Pennsylvania,
Department of General Services, et al. v. United States Mineral Products,
et al., a property damage suit currently pending in state court in
Pennsylvania. The trial court has entered judgment in the amount of $59.5
million and Solutia has filed an appeal with the Pennsylvania Supreme
Court. Solutia, Pharmacia and we have entered into agreements relating to
appeal bonds, to allow Solutia to file appeals in the Abernathy and
Commonwealth of Pennsylvania cases - see Item 5 - Other Information -
Relationships Among Monsanto Company, Pharmacia Corporation and Solutia
Inc., for additional information relating to these agreements, and to the
relationships among these companies. The litigation that Solutia is
defending pursuant to the Distribution Agreement is described by Solutia in
its Reports on Forms 10-K and 10-Q, filed with the U.S. Securities and
Exchange Commission; since Solutia is defending this litigation, we do not
participate in the preparation of those filings. Our obligation to
34
indemnify Pharmacia, or actions that we might take to reduce the likelihood
that we would be required to provide indemnification, or to reduce the
potential amount of any indemnification, could result in a material adverse
effect on Monsanto's financial position, profitability and/or liquidity.
The following discussion provides updated information regarding
certain proceedings to which Pharmacia or we are a party and for which we
are responsible. 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. Other information with respect to legal proceedings
appears in our annual report on Form 10-K for the year ended Dec. 31, 2002,
and in our quarterly report on Form 10-Q for the quarter ended March 31,
2003.
As described in our Form 10-K report for the year ended Dec. 31, 2002,
and in our quarterly report on Form 10-Q for the quarter ended March 31,
2003, 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
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 June 27, 2003, the U.S. Supreme Court
denied Monsanto's petition for certiorari. Because of this denial, the
prior decision of the U. S. Court of Appeals for the Federal Circuit,
denying Monsanto's status as a bona fide licensee, will remain in effect.
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. On June 27, 2003, at the Federal Circuit's request, DEKALB
Genetics filed a brief to overturn the punitive damage judgment in view of
the State Farm opinion.
As described in our Form 10-K report for the year ended Dec. 31, 2002,
on July 25, 2002, Syngenta Biotechnology, Inc. ("SBI") filed a suit against
Monsanto and Delta and Pine Land Company ("Delta and Pine Land") in the
United States District Court for Delaware alleging infringement of a patent
issued in April 2000, under which SBI is a licensee, and which allegedly
relates to certain agro-transformed cotton technology products. SBI seeks
injunctive relief and monetary damages. Monsanto moved on Jan. 15, 2002, to
dismiss the suit on the basis that the patent owner, Washington University,
was not a party; and on May 22, 2003, the court denied Monsanto's motion.
Trial is scheduled for November 2004. Monsanto has substantial defenses to
the claims, including inequitable conduct in securing the patent,
non-infringement and invalidity of the patent.
As described in our Form 10-K report for the year ended Dec. 31, 2002,
on Jan. 18, 2000, Delta and Pine Land reinstituted a suit against the
former Monsanto Company in the Circuit Court of the First Judicial District
of Bolivar County, Mississippi, seeking unspecified compensatory damages
for lost stock market value of not less than $1 billion, as well as
punitive damages, resulting from alleged failure to exercise reasonable
efforts to complete a merger between the two companies. On Feb. 14, 2001,
Delta and Pine Land amended its complaint, to add an allegation that the
former Monsanto Company tortiously interfered with Delta and Pine Land's
prospective business relations by feigning interest in the merger so as to
keep Delta and Pine Land from pursuing transactions with other entities. On
June 27, 2003, Monsanto requested permission to file a counterclaim,
seeking substantial damages including recoupment of the $83 million breakup
fee previously paid to Delta and Pine Land. In addition, Delta and Pine
Land has requested that this trial, originally scheduled for January 2004,
be postponed until July 2004. There has been no ruling on either request by
the court. We have substantial defenses to this litigation and the claimed
35
damages, including: our payment of the approximately $83 million to Delta
and Pine Land as a break-up fee; Delta and Pine Land's contemporaneous
disclosures that it was unaffected by the failed merger; and
representations by the U.S. Department of Justice that the merger would
have been opposed by the agency.
As described in our Form 10-K report for the year ended Dec. 31, 2002,
various manufacturers of herbicides used by the U.S. armed services during
the Vietnam war, including the former Monsanto Company, have been parties
to lawsuits filed on behalf of veterans and others alleging injury from
exposure to the herbicides. In the United States this litigation has been
assigned to Judge Weinstein of the United States District Court for the
Eastern District of New York, as part of In re "Agent Orange" Product
Liability Litigation, MDL 381, a multidistrict litigation proceeding
established in 1977 to coordinate Agent Orange-related litigation in the
United States (the "MDL"). In 1984, a settlement in the MDL proceeding
concluded all class action litigation filed on behalf of U.S. and certain
other groups of plaintiffs. However, various other claims by veterans or
civilians alleging personal injury from exposure to herbicides used in
Vietnam have been filed since that settlement. Two suits filed by
individual U.S. veterans contesting the denial of their claims subsequent
to the class action settlement have been consolidated in the MDL and were
dismissed by the District Court. In an opinion dated Nov. 30, 2001, the
United States Court of Appeals for the Second Circuit vacated the District
Court's dismissal and remanded the cases for further proceedings. On Nov.
4, 2002, the manufacturers' petition for writ of certiorari was granted by
the U.S. Supreme Court. On June 9, 2003, the U.S. Supreme Court failed to
overturn the judgment of the U.S. Court of Appeals with respect to one
plaintiff, thereby allowing this plaintiff's claim to proceed in the U.S.
District Court notwithstanding a 1984 class action settlement. Defendants
have stated they will file a motion to dismiss the remanded suit on the
basis of the government contract defense, which has led to the dismissal of
other Agent Orange-related suits. A handful of cases have been filed on
behalf of individual veterans in recent months, and have all been
transferred to Judge Weinstein for handling in the MDL proceeding.
As described in our Form 10-K report for the year ended Dec. 31, 2002,
in October 1999, approximately 13,800 Korean veterans of the Vietnam war
filed suit against Dow Chemical Company and the former Monsanto Company in
Seoul, South Korea, alleging that they were exposed to herbicides and
suffered injuries as a result. The suit involves three separate complaints
which were filed and are being handled collectively in Seoul District
Court. The complaints fail to assert any specific causes of action but seek
damages of 300 million won (approximately $250,000) per plaintiff. Other
ancillary actions are also pending in Korea, including a request for
provisional relief pending resolution of the main action. On May 23, 2002,
the Seoul District Court ruled in favor of the manufacturers and dismissed
all claims of the petitioners on the basis of lack of causation and
statutes of limitations. Petitioners have filed an appeal de novo and have
requested the waiver of certain legal conditions ordinarily associated with
the pursuit of any appeal. On May 23, 2003, the Supreme Court of South
Korea reversed a decision of the Seoul High Court which had refused to
grant this waiver, and remanded the case to the Seoul High Court for
further consideration of the appeal de novo.
36
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the company's Annual Meeting of Shareowners on April 24, 2003, five matters
were submitted to a vote of shareowners.
1. The following individuals were nominated and elected to serve as directors:
Frank V. AtLee III, Gwendolyn S. King and Sharon R. Long, Ph.D. were
elected to serve until the 2004 Annual Meeting or until a successor is
elected and has qualified or until his or her earlier death, resignation or
removal; William U. Parfet and George Poste, D.V.M., Ph.D. were elected to
serve until the 2005 Annual Meeting or until a successor is elected and has
qualified or until his or her earlier death, resignation or removal; C.
Steven McMillan and Robert J. Stevens were elected to serve until the 2006
Annual Meeting or until a successor is elected and has qualified or until
his or her earlier death, resignation or removal. Votes were cast as
follows:
Votes Votes to
Name "For" "Withhold Authority"
---- ----- --------------------
Elected for Terms Expiring at the 2004 Annual Meeting:
-----------------------------------------------------
Frank V. AtLee III 219,178,478 6,629,539
Gwendolyn S. King 221,733,062 4,047,955
Sharon R. Long, Ph.D. 222,777,839 3,030,178
Elected for Terms Expiring at the 2005 Annual Meeting:
-----------------------------------------------------
William U. Parfet 220,442,442 5,365,575
George H. Poste, D.V.M., Ph. D 222,765,819 3,042,198
Elected for Terms Expiring at the 2006 Annual Meeting:
-----------------------------------------------------
C. Steven McMillan 220,498,929 5,309,088
Robert J. Stevens 220,567,755 5,240,262
A provision in our amended and restated certificate of incorporation, which
was triggered as the result of the spinoff of us by Pharmacia last year,
required that our directors be divided into three classes during the last
annual meeting. As a result, our board of directors is divided into three
classes of ten directors. The classes of directors whose terms expire in
2004 and 2005 consist of three directors each. The class of directors whose
term expires in 2006 consists of four directors. Immediately after the
above elections, one vacancy existed in the class of directors whose term
expires in 2005 and two vacancies existed in the class of directors whose
terms expires in 2006. Subsequently, on May 29, 2003, we announced that
Hugh Grant was elected President, Chief Executive Officer and director. Mr.
Grant is part of the class of directors whose term expires in 2006.
2. The appointment by the Board of Directors of Deloitte & Touche LLP as
principal independent auditors for the year 2003 was ratified by a vote of
the shareowners. A total of 217,570,354 votes were cast in favor of
ratification, 6,840,278 votes were cast against it, and 1,397,385 votes
were counted as abstentions.
3. The amendments to the Monsanto Company Long-Term Incentive Plan (formerly
known as the 2000 Management Incentive Plan), including an amendment to
increase the number of shares with respect to which awards may be granted
under the plan, were approved by a vote of the shareowners. The Board
recommended a vote for the proposal. A total of 164,265,830 votes were cast
in favor, a total of 28,426,966 votes were cast against it, 1,786,177 votes
were counted as abstentions, and 31,329,044 were counted as broker
non-votes.
4. The shareowner proposal requesting that the Board review the Company's
policies for genetically engineered seed and report to shareowners was not
approved by a vote of the shareowners. The Board recommended a vote against
the proposal. A total of 9,693,737 votes were cast in favor, 153,835,536
votes were cast against it, 30,949,573 votes were counted as abstentions,
and 31,329,171 were counted as broker non-votes.
37
5. The shareowner proposal requesting that the Board provide a report to
shareowners regarding pesticides was not approved by a vote of the
shareowners. The Board recommended a vote against the proposal. A total of
21,792,512 votes were cast in favor of the proposal, 141,794,729 votes were
cast against it, 30,891,605 votes were counted as abstentions, and
31,329,171 were counted as broker non-votes.
Under New York Stock Exchange rules, brokerage firms that hold shares as
nominee may vote shares for which the beneficial owners do not provide
voting instructions on certain "routine" matters. When a proposal is not a
routine matter and the nominee does not receive voting instructions from
the beneficial owner of the shares with respect to the proposal, the
nominee cannot vote the shares on that proposal. This is called a "broker
non-vote." With respect to the matters submitted to a vote of the Company's
shareowners at its Annual Meeting of Shareowners on April 24, 2003, the
election of directors and the ratification of auditors were considered
routine matters under applicable rules for which nominees were permitted to
vote uninstructed shares. However, the following were not considered
routine under applicable rules, which resulted in the broker non-votes
indicated above: (i) the approval of amendments to the Monsanto Company
Long-Term Incentive Plan (formerly known as the 2000 Management Incentive
Plan); (ii) the approval of a shareowner proposal requesting that the Board
review the Company's policies for genetically engineered seed and report to
shareowners; and (iii) the approval of a shareowner proposal requesting
that the Board provide a report to shareowners regarding pesticides.
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."
38
--------------------- ------------------------------------------------------
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 are
required to indemnify Pharmacia for any
liabilities primarily related to the Ag Business
or the Chemicals Business, and for 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.
--------------------- ------------------------------------------------------
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 (subsequently amended)
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 are required to indemnify Pharmacia,
pursuant to the Sept. 1, 2000, Separation Agreement, include the
liabilities that Solutia 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. In general, this
indemnification obligation applies to Pharmacia liabilities that were
assumed by Solutia and which Pharmacia would otherwise be required to pay.
These liabilities may include, among others, litigation, environmental
remediation, and certain retiree liabilities relating to individuals who
were employed by Pharmacia prior to the Solutia spinoff. These include
liabilities that were Pharmacia liabilities prior to the 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. The cases
pending in Alabama, regarding polychlorinated biphenyls ("PCB's"), seek
substantial but unspecified actual and punitive damages, and verdicts for
damages are currently being returned in the first phase of one of these
cases. As of this time, Solutia's efforts to settle the PCB litigation have
been unsuccessful. On July 29, 2003, Solutia reported significantly lower
net income and cash from operations for the second quarter of 2003 than for
the similar period in 2002; and anticipated that economic conditions that
contributed to those results would remain uncertain for the foreseeable
future. Solutia indicated that its business results and the PCB litigation
have adversely affected cash flow, and announced that it is considering all
available alternatives to address its future liquidity needs. Constraints
on Solutia's ability to generate cash, whether from its business operations
or from external financing sources, increase the risk that we will be
called upon to indemnify Pharmacia, and the possibility that we will
determine that it is in our best interest to take action to reduce the
likelihood that we would be required to provide indemnification, or to
reduce the potential amount of any indemnification.
39
Solutia, Pharmacia and we have entered into agreements relating to
appeal bonds, to allow Solutia to file appeals in some of its litigation.
As noted in Item 1 - Legal Proceedings, 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. Because no appeal has been filed at this time,
there has not yet been a need for an appeal bond. 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.
In addition, 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 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 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. Pursuant to an agreement dated August 4, 2003, Monsanto agreed to
release one of these letters of credit associated with the appeal bond, in
the amount of $39.9 million, in exchange for Monsanto's receipt of the
right to settle this litigation, including Monsanto's right to access any
applicable insurance policies related to a resolution of the underlying
matter. Solutia continues to provide a $20 million letter of credit to
secure a portion of Monsanto's obligations in connection with the appeal
bond.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits: See Exhibit Index
(B) Reports on Form 8-K
The Company furnished a report on Form 8-K (Item 9) on April 2, 2003,
pursuant to Regulation FD, relating to press releases and slide
presentation prepared for use in a speech given by the Company's chief
operating officer of North American Operations to investors at the Deutsche
Bank Basic Industries Conference in New York on April 2, 2003.
The Company furnished a report on Form 8-K (Item 9 and Item 12) on April
30, 2003, pursuant to Regulation FD and in connection with the release of
information regarding results of operations and financial condition,
providing (i) a press release announcing Monsanto Company's first quarter
2003 financial and operating results, (ii) first quarter 2003 unaudited
supplemental data, and (iii) a slide presentation to accompany the
Company's webcast financial results conference call held on April 30, 2003.
The Company furnished a report on Form 8-K (Item 9) on May 8, 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
Technology Officer to investors at the Salomon Smith Barney R&D Forum in
Boston on May 8, 2003.
The Company furnished a report on Form 8-K (Item 9) on May 14, 2003,
pursuant to Regulation FD, relating to certifications signed by the Chief
Executive Officer and Chief Financial Officer of Monsanto Company, pursuant
40
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 period ended March 31, 2003.
The Company filed a report on Form 8-K (Item 5) on May 29, 2003, pursuant
to Regulation FD, providing a press release announcing that the Company
elected Hugh Grant as President and Chief Executive Officer, and director
of the Company's Board, effective immediately. The Company also reconfirmed
full year 2003 earnings per share and free cash flow guidance and the
Company's second-quarter 2003 earnings per share guidance.
The Company furnished a report on Form 8-K (Item 9) on June 13, 2003,
pursuant to Regulation FD, relating to seven slide presentations prepared
for use at the Company's Field of Dreams Tour 2003 for investors at it's
farm facility in Monmouth, Illinois. In addition to the various technical
presentations, the Company's Chief Technology Officer and the Marketing
Director for U.S. Herbicides addressed investors.
The Company filed a report on Form 8-K (Item 5) on June 18, 2003, pursuant
to Regulation FD, providing a press release announcing that on June 17,
2003, the Company's Board of Directors elected new officers in connection
with changes in the Company's organizational structure and related
management team implemented by the Company's President and Chief Executive
Officer.
41
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONSANTO COMPANY
(Registrant)
/s/ Richard B. Clark
----------------------
RICHARD B. CLARK
Vice President and Controller
(On behalf of the Registrant and
as Principal Accounting Officer)
Date: August 13, 2003
42
EXHIBIT INDEX
2 Omitted - Inapplicable
3.2 Amended and Restated By-Laws of the Company effective
July 22, 2003 (incorporated herein by reference to
Exhibit 99.2 of the Company's Report on Form 8-K,
filed July 23, 2003, File No. 1-16167)
4 Omitted - Inapplicable
10.8.2 Second Amendment to Protocol Agreement, dated August 4,
2003, further amending an agreement relating to an appeal
bond in Pennsylvania
10.13 364-Day Credit Agreement dated July 2, 2003
10.22.2 Amendment to Letter Agreement with Frank V. AtLee III,
effective May 29, 2003
11 Omitted - Inapplicable; see Note 8 of Notes to Consolidated
Financial Statements
15 Omitted - Inapplicable
18 Omitted - Inapplicable
19 Omitted - Inapplicable
22 Omitted - Inapplicable
23 Omitted - Inapplicable
24 Omitted - Inapplicable
31.1 Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, executed by the
Chief Executive Officer of Monsanto Company)
31.2 Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, executed by the
Chief Financial Officer of Monsanto Company)
32 Section 1350 Certifications (pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, executed by the Chief Executive
Officer and the Chief Financial Officer of Monsanto
Company)
99 Computation of Ratio of Earnings to Fixed Charges
43