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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 Nov. 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
(Address of principal executive offices)
(Zip Code)
(314) 694-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES X NO
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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 Jan. 9, 2004
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Common Stock, $0.01 par value 265,533,193 shares
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MONSANTO COMPANY
FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Statement of Consolidated Operations 2
Condensed Statement of Consolidated Financial Position 3
Statement of Consolidated Cash Flows 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Background 17
Change in Fiscal Year End 17
Financial Measures 17
Results of Operations - First Quarter Fiscal Year 2004 18
Financial Condition, Liquidity, and Capital Resources 23
Contingent Liabilities Relating to Solutia Inc. (Off-Balance Sheet Arrangement) 25
Outlook - Update 25
Critical Accounting Policies and Estimates 29
New Accounting Standards 29
Cautionary Statements: Risk Factors Regarding Forward-Looking Statements 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 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 38
SIGNATURE
EXHIBIT INDEX
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The Statement of Consolidated Operations of Monsanto Company and
subsidiaries for the three months ended Nov. 30, 2003, and Nov. 30, 2002,
the Condensed Statement of Consolidated Financial Position as of Nov. 30,
2003, and Aug. 31, 2003, the Statement of Consolidated Cash Flows for the
three months ended Nov. 30, 2003, and Nov. 30, 2002, and related Notes to
Consolidated Financial Statements follow. Unless otherwise indicated,
"Monsanto" and "the company," and "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 Sept. 1, 2000, these terms also refer to the
agricultural business of Pharmacia Corporation (Pharmacia), which is now a
subsidiary of Pfizer Inc. Unless otherwise indicated, "earnings (loss) per
share" and "per share" mean diluted earnings (loss) per share. In tables,
all dollars are expressed in millions, except per share amounts. Trademarks
owned or licensed by Monsanto or its subsidiaries are shown in all capital
letters. Unless otherwise indicated, references to "ROUNDUP herbicides"
mean ROUNDUP branded and other branded glyphosate-based herbicides,
excluding all lawn-and-garden herbicides; references to "ROUNDUP and other
glyphosate-based herbicides" mean both branded and nonbranded
glyphosate-based herbicides, excluding all lawn-and-garden herbicide
products.
1
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(Dollars in millions, except per share amounts)
Unaudited
Three Months Ended
Nov. 30,
2003 2002
---------------------
Net Sales $1,028 $ 846
Cost of Goods Sold 560 496
------ -----
Gross Profit 468 350
Operating Expenses:
Selling, general and administrative expenses 277 217
Bad-debt expense 18 20
Research and development expenses 116 116
Adjustments of goodwill 69 --
Restructuring charges - net 29 8
------ -----
Total Operating Expenses 509 361
Loss From Operations (41) (11)
Interest Expense (21) (22)
Interest Income 4 7
Other Income (Expense) - Net (25) 1
------- -----
Loss From Continuing Operations Before Income Taxes (83) (25)
Income Tax Benefit (6) (8)
------- -----
Loss From Continuing Operations (77) (17)
Discontinued Operations (Note 14):
Loss from operations of discontinued businesses
(including estimated loss on disposal of $29 in fiscal year 2004) (28) (2)
Income tax benefit (8) (1)
------- ------
Loss on Discontinued Operations (20) (1)
------- ------
Net Loss $ (97) $ (18)
======= ======
Basic and Diluted Loss per Share:
Loss from continuing operations $(0.29) $(0.07)
Loss on discontinued operations (0.08) --
------- -------
Net Loss $(0.37) $(0.07)
======= =======
Weighted Average Shares Outstanding:
Basic and Diluted 262.1 261.4
Dividends per Share $ 0.13 $ 0.12
See the accompanying notes to consolidated financial statements.
2
MONSANTO COMPANY AND SUBSIDIARIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Dollars in millions, except share amounts)
Unaudited
As of Nov. 30, As of Aug. 31,
2003 2003
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 1,036 $ 281
Short-term investments -- 230
Trade receivables, net of allowances of $268 and
$254, respectively 1,586 2,296
Miscellaneous receivables 424 437
Deferred tax assets 315 430
Inventories 1,373 1,230
Assets of discontinued operations 32 --
Other current assets 90 58
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Total Current Assets 4,856 4,962
Property, Plant and Equipment - Net 2,228 2,280
Goodwill - Net 716 768
Other Intangible Assets - Net 516 571
Other Assets 867 880
------- -------
Total Assets $ 9,183 $ 9,461
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Short-term debt $ 288 $ 269
Accounts payable 290 290
PCB litigation settlement liability -- 400
Liabilities of discontinued operations 3 --
Accrued liabilities 1,225 985
------- -------
Total Current Liabilities 1,806 1,944
Long-Term Debt 1,222 1,258
Postretirement Liabilities 822 837
Other Liabilities 260 266
Shareowners' Equity:
Common stock (authorized: 1,500,000,000 shares, par value $0.01)
Issued 264,103,979 and 262,683,753 shares, respectively; outstanding
261,899,718 and 262,681,253 shares, respectively 3 3
Treasury stock, 2,204,261 and 2,500 shares, respectively, at cost (55) --
Additional contributed capital 8,108 8,077
Retained deficit (1,863) (1,733)
Accumulated other comprehensive loss (1,097) (1,168)
Reserve for ESOP debt retirement (23) (23)
------- -------
Total Shareowners' Equity 5,073 5,156
------- -------
Total Liabilities and Shareowners' Equity $ 9,183 $ 9,461
======= =======
See the accompanying notes to consolidated financial statements.
3
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
Unaudited
Three Months Ended
Nov. 30,
2003 2002
---- ----
Operating Activities:
Net Loss $ (97) $ (18)
Adjustments to reconcile cash provided (required) by operations:
Items that did not require (provide) cash:
Depreciation and amortization expense 114 109
Adjustments of goodwill 69 --
Impairment of assets included in discontinued operations 29 --
Bad-debt expense 18 20
Noncash restructuring 13 8
Deferred income taxes 139 (27)
Equity affiliate expense - net 11 10
Write-off of retired assets 4 8
Other items that did not provide cash (4) (21)
Changes in assets and liabilities that provided (required) cash:
Trade receivables 981 706
Inventories (123) (107)
Accounts payable and accrued liabilities (72) 29
PCB litigation settlement liability (400) --
Pension contributions (25) (10)
Related-party transactions -- 10
Other items 4 12
----- -----
Net Cash Provided by Operations 661 729
----- -----
Cash Flows Provided (Required) by Investing Activities:
Maturities of short-term investments 230 --
Technology and other investments (11) (15)
Capital expenditures (51) (54)
Property disposal proceeds 7 --
----- -----
Net Cash Provided (Required) by Investing Activities 175 (69)
----- -----
Cash Flows Provided (Required) by Financing Activities:
Net change in short-term financing (73) (426)
Long-term debt proceeds 80 13
Long-term debt reductions (26) (19)
Payments on other financing (1) (5)
Treasury stock purchases (55) --
Stock option exercises 28 --
Dividend payments (34) (31)
----- -----
Net Cash Required by Financing Activities (81) (468)
----- -----
Net Increase in Cash and Cash Equivalents 755 192
Cash and Cash Equivalents at Beginning of Period 281 137
----- ------
Cash and Cash Equivalents at End of Period $1,036 $ 329
====== ======
See Note 13 - Supplemental Cash Flow Information - for further details.
See the accompanying notes to consolidated financial statements.
4
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Note 1 - Background and Basis of Presentation
Monsanto Company, together with its subsidiaries, is a leading global
provider of agricultural products and integrated solutions for farmers.
Monsanto produces leading seed brands, including DEKALB and ASGROW, and
develops biotechnology traits that assist farmers in controlling insects
and weeds. Monsanto provides other seed companies with genetic material and
biotechnology traits for their seed brands. The company also makes ROUNDUP
herbicide and other herbicides. Monsanto's seeds, related biotechnology
trait products, and herbicides can be combined to provide growers with
integrated solutions that improve productivity and reduce the costs of
farming. Monsanto also provides lawn-and-garden herbicide products for the
residential market and animal agricultural products focused on improving
dairy cow productivity and swine genetics.
Monsanto manages its business in two segments: Seeds and Genomics, and
Agricultural Productivity. The Seeds and Genomics segment consists of the
global seeds and related traits businesses, and genetic technology
platforms. The Agricultural Productivity segment consists of the crop
protection products, animal agriculture, lawn-and-garden herbicide
products, and environmental technologies businesses. The company recently
announced plans to exit the European breeding and seed business for wheat
and barley, and discontinue the plant-made pharmaceuticals program. As a
result, these businesses have been reclassified as discontinued operations.
Accordingly, for the three months ended Nov. 30, 2003, and Nov. 30, 2002,
the Statement of Consolidated Operations has been reclassified to conform
to this presentation. Also, as of Nov. 30, 2003, the Condensed Statement of
Consolidated Financial Position has been reclassified to conform to this
presentation. These businesses were previously reported as part of the
Seeds and Genomics segment. Refer to Note 14 - Discontinued Operations -
for further discussion. Certain prior-period amounts have been reclassified
to conform with the current-year presentation.
In July 2003, Monsanto's board of directors approved a change to
Monsanto's fiscal year end from December 31 to August 31. This change
aligns the fiscal year more closely with the seasonal nature of Monsanto's
business. Accordingly, unaudited consolidated financial statements as of
and for the three months ended Nov. 30, 2003 (also referred to as the first
quarter of fiscal year 2004), and as of and for the three months ended Nov.
30, 2002, are presented in this Form 10-Q.
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 report on Form 10-K for the transition period ended Aug. 31,
2003. Financial information for the first three months of fiscal year 2004
should not be annualized because of the seasonality of the company's
business.
Note 2 - New Accounting Standards
In December 2003, the Securities Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104
updates portions of the interpretive guidance included in Topic 13 of the
codification of Staff Accounting Bulletins in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The company believes it is
following the guidance of SAB 104.
In July 2002, the Financial Accounting Standards board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. SFAS 146 requires
companies to recognize costs associated with exit or disposal activities
when they are actually incurred, rather than on the date the company
commits itself to the exit or disposal plan. This statement is effective
for any exit or disposal activities initiated after Dec. 31, 2002. Monsanto
is following the guidance of SFAS 146 for the fiscal year 2004
restructuring plan. Refer to Note 9 -- Restructuring -- for further
details. The adoption of SFAS 146 had no effect on Monsanto's 2002 and 2000
restructuring plans, which were both initiated prior to Dec. 31, 2002.
5
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Note 3 - Customer Financing Program
In April 2002, Monsanto established a new $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).
Monsanto accounts for this transaction 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, in the QSPE, or in
the loans. However, because Monsanto substantively originates the loans
through the SPE (which it consolidates) and partially guarantees and
services the loans, Monsanto accounts for the program as if it were 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 is adequate compensation for the servicing
activities. Discounts on the sale of the customer loans, and servicing
revenues collected and earned were not significant during the first quarter
of 2004 and 2003.
Customer loans sold through the financing program totaled $15 million
for the first quarter of fiscal year 2004 and $24 million for the
comparable period last year. The loan balances outstanding as of Nov. 30,
2003, and Aug. 31, 2003, were $95 million and $198 million, respectively.
The $100 million first loss guarantee will be in place throughout the
financing program. If a customer fails to pay an obligation when due,
Monsanto would incur a liability to perform under the first loss guarantee.
As of both Nov. 30, 2003, and Aug. 31, 2003, less than $1 million of loans
sold through this financing program were delinquent. As of Nov. 30, 2003,
and Aug. 31, 2003, Monsanto recorded its guarantee liability at 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. If
Monsanto is called upon to make payments under the first loss guarantee, it
would have the benefit under the financing program of any amounts
subsequently collected from the customer.
In January 2003, FASB Interpretation (FIN) No. 46, Consolidation of
Variable Interest Entities, was issued. Because QSPEs are excluded from the
scope of FIN 46, this interpretation is not expected to have an effect on
Monsanto's accounting for the customer financing program.
Note 4 - Inventories
Components of inventories were:
As of Nov. 30, As of Aug. 31,
2003 2003
------------- --------
Finished Goods $ 660 $ 516
Goods In Process 440 464
Raw Materials and Supplies 291 269
----- ----
Inventories at FIFO Cost 1,391 1,249
Excess of FIFO over LIFO Cost (18) (19)
----- ----
Total $1,373 $1,230
====== ======
6
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Note 5 - Goodwill and Other Intangible Assets
Changes in the net carrying amount of goodwill for the quarter ended
Nov. 30, 2003, by segment, are as follows:
Seeds and Agricultural
Genomics Productivity Total
--------- ------------ -----
Balance as of Aug. 31, 2003 $694 $74 $768
Adjustments of goodwill (69) -- (69)
Effect of foreign currency translation adjustments 16 1 17
---- --- ----
Balance as of Nov. 30, 2003 $641 $75 $716
==== === ====
The annual goodwill impairment test was performed as of July 1, 2003,
and no indications of impairment existed as of that date. The company's
decision in October 2003 to exit the European wheat and barley business
required a reevaluation for potential impairment of goodwill and other
intangible assets related to the company's global wheat business. A
potential impairment was determined in the wheat reporting unit during the
quarter ended Nov. 30, 2003. Fair value calculations using a discounted
cash flow methodology indicated a potential goodwill impairment, which
required the company to perform the second step of the goodwill impairment
test. The decision to exit the European wheat business had a negative
effect on the assumptions underlying the fair value calculation of the
remaining global wheat business because of its effect on the probability of
success of the remaining product development efforts. The second step of
the impairment assessment was completed in the first quarter of fiscal year
2004 and resulted in the $69 million impairment of goodwill in the global
wheat business. The resulting impairment charge was specific to the wheat
reporting unit. This impairment charge had no effect on Monsanto's
liquidity or cash flow.
Information regarding the company's other intangible assets is as
follows:
As of Nov. 30, 2003 As of Aug. 31, 2003
------------------------------------ ----------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
-------- ------------ --- ------- ------------ ---
Germplasm $ 585 $(373) $212 $ 617 $(376) $241
Acquired biotechnology
intellectual property 396 (183) 213 392 (172) 220
Trademarks 85 (22) 63 108 (26) 82
Other 47 (19) 28 44 (16) 28
------ ------ ---- ------ ------ ----
Total $1,113 $(597) $516 $1,161 $(590) $571
====== ====== ==== ====== ====== ====
In addition to the goodwill adjustment discussed above, germplasm and
trademarks with carrying values of $7 million and $19 million,
respectively, were also written off during the first quarter of fiscal year
2004 because of the decision to exit the European wheat and barley
business. The amounts of these charges were based on the company's estimate
of fair value and were recorded within discontinued operations. Although
these write-offs affected the Seeds and Genomics segment operating results,
they did not affect Monsanto's liquidity or cash flow. Germplasm intangible
assets also decreased by $2 million in the first quarter of fiscal year
2004 for an intangible asset impairment recognized upon the company's
decision to exit certain non-strategic projects in Asia as a result of the
fiscal year 2004 restructuring plan. This impairment expense was recorded
in restructuring expense for the Seeds and Genomics segment. The remaining
decrease in germplasm intangible assets was primarily attributable to
currency translation adjustments.
The increase in acquired biotechnology intellectual property of $4
million is related to a payment under the 2002 collaboration with Ceres,
Inc. (Ceres) that was made during the first quarter of fiscal year 2004.
This existing technology has a weighted-average useful life of 10 years.
7
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Other intangible assets include the company's only nonamortizing intangible
asset of $21 million associated with minimum pension liabilities, most of
which was recognized in calendar year 2002. Total amortization expense of
other intangible assets (exclusive of the impairment charges discussed
above and $1 million amortization expense for each of the three months
ended Nov. 30, 2003, and Nov. 30, 2002, included in discontinued
operations) for the three months ended Nov. 30, 2003, and Nov. 30, 2002,
was $31 million and $26 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 report on
Form 10-K for the transition period ended Aug. 31, 2003.
Note 6 - Comprehensive Loss
Comprehensive loss includes all nonshareowner changes in equity and
consists of net 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
loss is as follows:
Three Months Ended
Nov. 30,
------------------
2003 2002
---- ----
Comprehensive loss $(26) $(118)
The principal difference between net loss and total comprehensive loss
for the periods above relates to foreign currency translation adjustments.
Note 7 - Loss Per Share
Because Monsanto reported a loss from continuing operations for the
three months ended Nov. 30, 2003, and Nov. 30, 2002, SFAS No. 128, Earnings
per Share, requires diluted loss per share to be calculated using
weighted-average common shares outstanding, excluding dilutive potential
common shares. If diluted EPS were computed taking into account the effect
of dilutive potential common shares, the number of shares that would be
included in the calculation of dilutive EPS is noted in the table below.
Potential common shares consist of stock options using the treasury stock
method and are excluded if their effect is antidilutive. Dilutive potential
common shares noted below exclude stock options of approximately 1.8
million and 19.6 million for the three months ended Nov. 30, 2003, and Nov.
30, 2002, respectively. These potential common shares were excluded because
the options' exercise prices were greater than the average market price of
the common shares and, therefore, the effect would be antidilutive.
Three Months Ended
Nov. 30,
-----------------------
2003 2002
---- ----
Weighted-average number of common shares 262.1 261.4
Dilutive potential common shares 3.7 --
Note 8 - Stock-Based Compensation Plans
As permitted by current accounting literature, the company has elected
to follow the guidance of Accounting Principles Board (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 report on Form 10-K for the transition period
ended Aug. 31, 2003.
8
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Had stock-based compensation expense for these plans been determined
based on the fair value consistent with the method of SFAS 148, Accounting
for Stock-Based Compensation - Transition and Disclosure, which amends SFAS
123, Accounting for Stock-Based Compensation, Monsanto's net loss and net
loss per share would have been adjusted to the pro forma amounts indicated
as follows:
Three Months Ended
Nov. 30,
------------------
2003 2002
---- ----
Net Loss:
As reported $ (97) $(18)
Less: Total stock-based employee compensation expense
determined under fair-value-based method for all
awards, net of tax (2) (7)
------ ------
Pro forma $ (99) $(25)
====== ======
Basic and diluted loss per share:
As reported $(0.37) $(0.07)
Pro forma $(0.38) $(0.10)
Note 9 - Restructuring
Restructuring was recorded in the Statement of Consolidated Operations
as follows:
Three Months Ended
Nov. 30,
------------------------------
2003 2002
---- ----
Cost of goods sold $-- $ (6)
Restructuring charges-- net(1) (29) (8)
-------------- --------------
Loss from continuing operations before income taxes (29) (14)
Income tax benefit 11 5
-------------- --------------
Loss from continuing operations (18) (9)
Loss from operations of discontinued businesses(2) (33) --
Income tax benefit 9 --
-------------- --------------
Loss on discontinued operations (24) --
-------------- --------------
Net loss $(42) $ (9)
============== ==============
(1) The restructuring charges for the three months ended Nov. 30, 2003, and
Nov. 30, 2002, were both offset by $1 million in restructuring reversals
related to the 2000 restructuring plan.
(2) Fiscal year 2004 contains restructuring charges related to discontinued
businesses (refer to Note 14 - Discontinued Operations). These
restructuring charges were recorded in discontinued operations. Refer to
the following tables for more details.
Fiscal year 2004 Restructuring Plan
On Oct. 15, 2003, Monsanto announced plans to continue to reduce the
costs associated with its agricultural chemistry business as that segment
matures globally. The company will further concentrate its resources on its
core seeds and traits businesses. These plans include: (1) reducing costs
associated with the company's ROUNDUP herbicide business, (2) exiting the
European breeding and seed business for wheat and barley; and (3)
discontinuing the plant-made pharmaceuticals program. These actions will
require charges of up to $155 million aftertax (pretax $289 million) in
fiscal year 2004; $43 million of these charges have been recorded in the
first quarter of fiscal year 2004. First quarter fiscal year 2004 pretax
charges of $63 million were comprised of $56 million related to the Seeds
and Genomics segment ($23 million in continuing operations and $33 million
in discontinued operations), and $7 million related to the Agricultural
Productivity segment. The actions identified for reducing costs in the
ROUNDUP business are expected to occur in future quarters of fiscal year
2004. For fiscal year 2004, the company estimates it will incur $148
million of pretax charges relating to the Seeds and Genomics segment and
$141 million of pretax charges relating to the Agricultural Productivity
segment. The company estimates it will incur $122 million of pretax charges
9
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
relating to work force reductions, $15 million pretax in facility closures,
and $83 million pretax in asset impairments during fiscal year 2004. These
asset impairments do not include the $69 million impairment of goodwill
related to the global wheat reporting unit discussed in Note 5 - Goodwill
and Other Intangible Assets.
As discussed in Note 2 - New Accounting Policies - charges incurred in
connection with the fiscal year 2004 restructuring plan were accounted for
under SFAS 146. The company's written human resource policies are
indicative of an ongoing benefit arrangement in respect to severance
packages. Benefits paid pursuant to an ongoing benefit arrangement are
specifically excluded from the scope of SFAS 146 and should be accounted
for in accordance with the accounting pronouncement applicable to the
company's arrangement. Monsanto accounted for its severance packages under
SFAS No. 88, Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits, which addresses
the accounting for other employee benefits.
Work force reductions in continuing operations were primarily in the
areas of research and development, information technology, and marketing in
the United States; downsizing the regional structure and key country focus
in Europe; and downsizing the sales force in Canada as a result of the
realignment of the Canadian business to focus on the Seeds and Genomics
segment. Work force reduction charges included in discontinued operations
were related to employees of the plant-made pharmaceuticals program.
Facility closure charges of $1 million related to shutdown expenses
resulting from the exit of the plant-made pharmaceuticals site. Asset
impairments in continuing operations of $13 million consisted of property,
plant and equipment in the United States of $11 million associated with
closure of an office building, and an intangible asset impairment of $2
million in Asia (refer to Note 5 - Goodwill and Other Intangible Assets).
Discontinued operations asset impairments of $29 million consisted of $26
million other intangible assets (refer to Note 5) and property, plant and
equipment impairments of $2 million, both associated with the European
wheat and barley business; and property, plant and equipment impairments of
$1 million associated with the plant-made pharmaceuticals business.
Work force reduction and facility closure charges were cash charges.
Asset impairments were non-cash charges. The following table displays the
net pretax charges incurred by segment for the three months ended Nov. 30,
2003:
Work Force Facility Asset
Segment Reductions Closures Impairments Total
------- ----------------- -------------- ----------------- ----------------
Continuing Operations:
Seeds and Genomics $ 10 $-- $ 13 $ 23
Agricultural Productivity 7 -- -- 7
----------------- -------------- ----------------- ----------------
Total Continuing Operations 17 -- 13 30
Discontinued Operations:
Seeds and Genomics 3 1 29 33
Agricultural Productivity -- -- -- --
----------------- -------------- ----------------- ----------------
Total Discontinuing Operations 3 1 29 33
Total Segment
Seeds and Genomics 13 1 42 56
Agricultural Productivity 7 -- -- 7
----------------- -------------- ----------------- ----------------
Total $ 20 $ 1 $ 42 $ 63
================= ============== ================= ================
10
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
The following table displays a rollforward of the liability
established for restructuring expense from Oct. 15, 2003 (the date of board
of directors approval), to Nov. 30, 2003:
Work Force Facility Asset
Continuing Operations: Reductions Closures Impairments Total
--------------- -------------- ----------------- -----------------
Restructuring liability $17 $-- $13 $30
Cash payments (3) -- -- (3)
Asset impairment -- -- (13) (13)
Reclassification of reserves to other balance
sheet accounts:
Misc. liability (1) -- -- (1)
--------------- -------------- ----------------- -----------------
Ending liability as of Nov. 30, 2003 13 -- -- 13
Discontinued Operations:
Restructuring liability 3 1 29 33
Cash payments -- (1) -- (1)
Asset impairment -- -- (29) (29)
--------------- -------------- ----------------- -----------------
Ending liability as of Nov. 30, 2003 3 -- -- 3
Total Restructuring
Restructuring liability 20 1 42 63
Cash payments (3) (1) -- (4)
Asset impairment -- -- (42) (42)
Reclassification of reserves to other balance
sheet accounts:
Misc. liability (1) -- -- (1)
--------------- -------------- ----------------- -----------------
Ending liability as of Nov. 30, 2003 $16 $-- $-- $16
=============== ============== ================= =================
2002 Restructuring Plan (charges recorded in calendar year 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 $14 million pretax ($9 million aftertax) of net charges
during the quarter ended Nov. 30, 2002. Of these charges, $6 million was
recorded in cost of goods sold and the remainder in the restructuring line
item.
Activities related to the 2002 restructuring plan during the first
quarter of fiscal year 2004 were as follows:
Work Force Facility
Reductions Closures Total
---------- -------- -----
Beginning liability as of Aug. 31, 2003 $ 2 $ 3 $ 5
Costs Charged Against Reserves -- (2) (2)
--- --- ---
Ending liability as of Nov. 30, 2003 $ 2 $ 1 $ 3
=== === ===
During the first quarter of fiscal year 2004, approximately 50 former
employees received cash severance payments totaling less than $1 million.
The work force separation payments for the remaining 10 employees
associated with this plan will be completed during fiscal year 2004. The
remaining asset dispositions and other exit activities are expected to be
completed during fiscal year 2004. Cash payments to complete these
11
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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 calendar years 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 during calendar years
2001 and 2000. These charges totaled $474 million pretax ($334 million
aftertax): $213 million ($137 million aftertax) recorded in calendar year
2001, and $261 million ($197 million aftertax) recorded in calendar year
2000.
Activities related to the 2000 restructuring plan during the first
quarter of fiscal year 2004 did not decrease the Aug. 31, 2003, $8 million
liability balance, consisting of $5 million work force reductions and $3
million facility closures. Approximately $1 million in 2000 restructuring
plan reversals were recorded in first quarter fiscal year 2004 and
consisted of less than a $1 million in facility closures and less than $1
million in asset impairment reversals that were originally recorded as
restructuring charges. Reversals were recorded primarily because costs were
lower than originally estimated. Both items are individually less than $1
million and therefore do not change the liability balance, however, both
items total $1 million in current quarter reversals.
As of Nov. 30, 2003, approximately 1,485 of the 1,500 planned employee
separations were completed. The remaining work force reductions, asset
dispositions, and other exit activities are expected to be completed during
fiscal year 2004. The remaining restructuring actions will be funded from
operations; these actions are not expected to significantly affect the
company's liquidity.
Note 10 - Commitments and Contingencies
Solutia Inc.: Pursuant to the Separation Agreement between Monsanto
and Pharmacia, as amended, Monsanto was required 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 liabilities. In general,
this indemnification obligation applies to Pharmacia liabilities that were
assumed by Solutia and which Pharmacia would otherwise be required to pay.
The liabilities that Solutia assumed from Pharmacia are referred to as
"Solutia Assumed Liabilities." The Solutia Assumed 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, to the extent that Solutia fails to pay, perform or
discharge those liabilities. On Dec. 17, 2003, Solutia and 14 of its U.S.
subsidiaries filed voluntary petitions for reorganization under Chapter 11
of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern
District of New York. In the Chapter 11 proceeding, Solutia is seeking
relief from paying certain liabilities, including the Solutia Assumed
Liabilities. If Solutia is discharged from all or a portion of the Solutia
Assumed Liabilities, Monsanto may be required to indemnify Pharmacia for
all or a portion of them. However, Solutia may retain responsibility for
all or a portion of the Solutia Assumed Liabilities; and Pharmacia or
Monsanto may have defenses to payment obligations for some or all of any
Solutia Assumed Liabilities from which Solutia is discharged. In addition,
Monsanto has legal claims for reimbursement from Solutia, and will
participate in the Chapter 11 proceeding as a creditor of Solutia and as
appropriate to protect its interests and the interests of its shareowners.
Although Monsanto has the right to indemnification from Solutia, it is
unclear what effect the Chapter 11 proceeding will have on Monsanto's
ability to recover this indemnification. It is reasonably possible that
Monsanto's obligation to indemnify Pharmacia will result in a material
adverse effect on Monsanto's financial position, profitability and/or
liquidity. However, because of the many uncertainties, including those
indicated above, at this time Monsanto is unable to reasonably estimate the
amount or range of any potential future cost to the company.
Both prior to and since its Chapter 11 filing, Solutia has failed to
perform obligations relating to some of the Solutia Assumed Liabilities.
Monsanto has advanced funds to pay for some of these obligations in order
to mitigate damages and to protect the potential rights and positions of
Pharmacia and Monsanto, and Monsanto will continue to do so as it deems
appropriate. To date, the amount of these advances has not been
12
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
significant. However, the potential future cost to the company for interim
advancement of funds to protect the interests of the company cannot be
reasonably estimated at this time. Monsanto may be able to recover from
Solutia or other parties for all or some of the amounts advanced, although
the extent of the company's ability to do so cannot be determined at this
time.
The liabilities that Solutia assumed from Pharmacia include certain
liabilities related to polychlorinated biphenyls (PCBs). Solutia had been
defending significant PCB litigation, including Sabrina Abernathy et al. v.
Monsanto Company et al. (a group of consolidated cases in the Circuit Court
of Etowah County, Alabama) and Antonia Tolbert et al. v. Monsanto Company
et al. (in the U.S. District Court for the Northern District of Alabama).
In September 2003, the state and federal courts approved a global
settlement of the Abernathy and Tolbert cases. The courts continue to
administer this settlement despite the bankruptcy filing by Solutia, and
settlement funds are currently being disbursed to plaintiffs and their
counsel. Under the global settlement, Monsanto, Solutia and Pharmacia have
obligations that are joint and several; however, the three companies agreed
among themselves that Solutia would pay $50 million of the settlement
amount, over not less than eleven years. If Solutia is discharged from this
obligation in the Chapter 11 proceeding, Monsanto may be required to pay,
or to indemnify Pharmacia for, this amount. Monsanto provided $150 million
to the settlement fund during August 2003, and $400 million during
September 2003, and expects to receive approximately $155 million in
reimbursement from commercial insurance. Monsanto and the insurer
responsible for approximately $140 million of the reimbursement have agreed
to mediation of a dispute regarding the amount due. Miscellaneous
receivables of $155 million were recorded in fiscal year 2003 for the
anticipated insurance reimbursement, approximately $140 million of which
the company expects to receive during fiscal year 2004, notwithstanding the
mediation.
In connection with the global settlement of the Abernathy and Tolbert
cases, Solutia agreed to issue warrants to Monsanto for the purchase of up
to 10 million shares of Solutia common stock, at an exercise price of
$1.104 per share (the average closing price for the common stock on the New
York Stock Exchange for the five trading days immediately prior to the
announcement of the settlement). The warrants would be exercisable upon the
execution of a Solutia change in control agreement, or when Solutia's
average closing stock price during a 30-day period exceeded $10 per share;
and would expire upon the earlier of 10 years after issuance, or seven days
after a change in control of Solutia. The warrants were to be issued upon
the execution of a final warrant agreement between Solutia and Monsanto.
Solutia did not execute a final warrant agreement or deliver the warrants
prior to the Chapter 11 filing. Because the warrants were not received,
they have not been recorded in Monsanto's financial statements. In the
Chapter 11 proceeding, Monsanto may assert claims against Solutia relating
to these warrants.
On Oct. 27, 2003, a motion was filed in U.S. District Court for the
Northern District of Alabama, contending that the global PCB settlement
also requires the payment of approximately $100 million in additional funds
to plaintiffs in Owens v. Monsanto, another Anniston-related PCB case
previously settled by Solutia on behalf of itself and Pharmacia. On Jan. 8,
2004, the court substantially denied plaintiffs' claim, and awarded an
additional amount of approximately $800 per plaintiff, for a total
additional award of $1.3 million.
In connection with Monsanto's indemnification obligation, and pursuant
to an agreement with Pharmacia and Solutia, in 2002 Monsanto posted a $71.4
million appeal bond on Solutia's behalf, in connection with litigation that
Solutia is currently defending in Pennsylvania state court. Solutia has
provided a $20 million bank letter of credit to secure a portion of
Monsanto's obligations in connection with the appeal bond. Although this
letter of credit remains available to Monsanto, Solutia has discontinued
the payment of bank fees associated with maintaining the letter of credit.
Monsanto is paying these fees and will make a claim for recovery against
Solutia in the course of the bankruptcy proceeding.
At the time of Solutia's 1997 spinoff from Pharmacia, Solutia and
Pharmacia entered into raw material supply contracts, including a 10-year
requirements contract for the supply of formalin by Solutia. Because
formalin is a raw material used in the production of glyphosate, this
formalin supply contract was assigned to Monsanto when it separated from
Pharmacia in 2000. In September 2003, the parties amended this contract
upon mutually beneficial terms. Pursuant to this amendment, Monsanto made a
13
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
$25 million prepayment to Solutia for formalin. The prepayment must either
be exhausted or the remainder returned to Monsanto in cash or credit
against other product sales by Sept. 30, 2004. Through Jan.8, 2004, Solutia
had delivered $4 million of product relating to this prepaid amount. In
consideration for making the prepayment, the duration of Monsanto's
obligation under the formalin supply contract was reduced. At this time,
Solutia has indicated that it will continue to perform its obligations
under the formalin supply contract.
Solutia is defending and prosecuting litigation relating to the
Solutia Assumed Liabilities, pursuant to powers of attorney granted by
Pharmacia and by us. At this time, Solutia continues to manage this
litigation. However, Solutia's active management of litigation relating to
Solutia Assumed Liabilities may change as a result of the Chapter 11
filing. The management of certain environmental and litigation matters may
be selectively assumed by Monsanto for purposes of defense and resolution;
and Monsanto may advance funds for the defense, performance or disposition
of certain matters and pursue recovery of its expenses from Solutia in the
Chapter 11 proceeding.
Litigation: Monsanto is defending and prosecuting litigation in its
own name. Monsanto is also 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. Some of the lawsuits
seek damages in very large amounts, or seek to restrict the company's
business activities. Although the results of litigation cannot be predicted
with certainty, it is management's belief that the final outcome of the
lawsuits that Monsanto is defending or prosecuting (which at this time do
not include the Solutia Assumed Liabilities), will not have a material
adverse effect on Monsanto's financial position, profitability, or
liquidity.
Guarantees: Monsanto provides a guarantee to a bank that provides
loans to selected Monsanto customers in Poland. Terms of the guarantee are
equivalent to terms of the bank loans, which are generally six months. When
a customer fails to pay an obligation that is due, Monsanto incurs a
liability to make these payments. As of Nov. 30, 2003, the maximum
potential amount of future payments under this guarantee is approximately
$9 million. Based on the company's current assessment of credit exposure,
Monsanto has recorded a liability of less than $1 million related to this
guarantee. Monsanto's recourse under this guarantee is limited to the
customer, and it is not currently estimable.
There have been no significant changes to guarantees made by Monsanto,
except for the aforementioned guarantee, since Aug. 31, 2003. Disclosures
regarding these guarantees made by Monsanto can be found in Note 22 -
Commitments and Contingencies - of the notes to consolidated financial
statements contained in Monsanto's report on Form 10-K for the transition
period ended Aug. 31, 2003. 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 indemnifications relating to Solutia can
be found above.
Note 11 - Accounting for Derivative Instruments and Hedging Activities
Monsanto's business and activities expose it to a variety of market
risks, including risks related to changes in commodity prices,
foreign-currency exchange rates, interest rates and, to a lesser degree,
security prices and natural gas prices. These financial exposures are
monitored and managed by the company as an integral part of its market risk
management program. This program recognizes the unpredictability of
financial markets and seeks to reduce the potentially adverse effects that
market volatility 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 SFAS No.
149, Amendment of Statement 133 Derivative Instruments and Hedging
Activities.
The company hedges a portion of its net investment in Brazilian
subsidiaries, and reported an aftertax loss of $3 million in the first
quarter of fiscal year 2004 and an aftertax gain of $24 million in the
comparable period last year, both of which are included in accumulated
other comprehensive loss.
14
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Note 12 - Segment Information
Monsanto manages its business in two segments: Seeds and Genomics, and
Agricultural Productivity. The Seeds and Genomics segment consists of the
global seeds and related traits businesses and biotechnology platforms. The
Agricultural Productivity segment consists of the crop protection products,
animal agriculture, residential lawn-and-garden products, and environmental
technologies businesses. Sales between segments were not significant.
Segment data, as well as a reconciliation of total Monsanto Company
earnings (loss) from continuing operations before interest and income taxes
(EBIT) to income (loss) from continuing operations for the three months
ended Nov. 30, 2003, and Nov. 30, 2002, is presented in the table that
follows.
Three Months Ended
Nov. 30,
2003 2002
---- ----
Net Sales:
---------
Seeds and Genomics $ 385 $ 365
Agricultural Productivity 643 481
------- ----
Total Monsanto $1,028 $ 846
====== =====
EBIT:
----
Seeds and Genomics $ (96) $ 45
Agricultural Productivity 30 (55)
------- -----
Total Monsanto $ (66) $ (10)
Less: Interest Expense - net of interest income (17) (15)
Plus: Income Tax Benefit 6 8
------- -----
Loss from Continuing Operations $ (77) $ (17)
======= =====
Note 13 - Supplemental Cash Flow Information
The effect of exchange rate changes on cash and cash equivalents was
not material. Cash payments for interest and taxes for the three months
ended Nov. 30, 2003, were $7 million and $54 million, respectively. Cash
payments for interest and taxes for the three months ended Nov. 30, 2002,
were $9 million and $33 million, respectively.
Note 14 - Discontinued Operations
As discussed earlier in Note 9 - Restructuring, on Oct. 15, 2003,
Monsanto announced plans to (1) exit the European breeding and seed
business for wheat and barley, and (2) discontinue the plant-made
pharmaceuticals program. As a result, these businesses have been
reclassified as discontinued operations. Accordingly, for the three months
ended Nov. 30, 2003, and Nov. 30, 2002, the Statement of Consolidated
Operations has been reclassified to conform to this presentation. Also, as
of Nov. 30, 2003, the Condensed Statement of Consolidated Financial
Position has been reclassified to conform to this presentation. These
businesses were previously reported as part of the Seeds and Genomics
segment. The assets and liabilities of these businesses follow:
15
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
As of
Nov. 30,
2003
------------
Assets of discontinued businesses held for sale:
Accounts receivable $6
Miscellaneous receivables 10
Inventories 5
Property, plant and equipment - net 10
Other 1
------------
Total assets of discontinued businesses held for sale $32
============
Liabilities of discontinued businesses held for sale:
Current liabilities $ 1
Postretirement liabilities 2
------------
Total liabilities of discontinued businesses held for sale $ 3
============
The following amounts related to the European breeding and seed
business for wheat and barley and the plant-made pharmaceuticals program
have been segregated from continuing operations and reflected as
discontinued operations:
Three Months Ended
Nov. 30,
-------------------------
2003 2002
---- ----
Net sales $ 15 $ 12
Loss from operations of discontinued businesses
(including estimated loss on disposal of $29, in
fiscal year 2004) (28) (2)
Income tax benefit (8) (1)
Loss on discontinued businesses (20) (1)
As discussed in Note 5 - Goodwill and Other Intangible Assets - the
loss on disposal was comprised of $26 million impairments of germplasm and
trademarks related to the European wheat and barley business, and the
remaining $3 million loss on disposal related to fixed asset impairments
related to both businesses. The divestiture of the European breeding and
seed business for wheat and barley is expected to close in fiscal year
2004. The remaining work force reductions and facility closures for the
plant-made pharmaceuticals program are also expected to be completed in
fiscal year 2004.
16
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 develop biotechnology traits that
assist farmers in controlling insects and weeds. We provide other seed
companies with genetic material and biotechnology traits for their seed
brands. We also make ROUNDUP herbicide and other herbicides. Our seeds,
related biotechnology trait products, and herbicides can be combined to
provide growers with integrated solutions that improve productivity and
reduce the costs of farming. We also provide lawn-and-garden herbicide
products for the residential market and animal agricultural products
focused on improving dairy cow productivity and swine genetics.
We manage our business in two segments: Seeds and Genomics, and
Agricultural Productivity. The Seeds and Genomics segment consists of the
global seeds and related traits businesses, and genetic technology
platforms. The Agricultural Productivity segment consists of the crop
protection products, animal agriculture, lawn-and-garden herbicide
products, and environmental technologies businesses. In October 2003, we
announced plans to exit the European breeding and seed business for wheat
and barley, and discontinue the plant-made pharmaceuticals program. As a
result, these businesses have been reclassified as discontinued operations,
and the Statement of Consolidated Operations and Condensed Statement of
Consolidated Financial Position have been reclassified to conform to this
presentation. These businesses were previously reported as part of the
Seeds and Genomics segment.
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 report on Form 10-K for the transition period ended Aug. 31,
2003. Financial information for the first three months of fiscal year 2004
should not be annualized because of the seasonality of our business.
Change in Fiscal Year End
In July 2003, Monsanto's board of directors approved a change to
Monsanto's fiscal year end from December 31 to August 31. This change
aligns our fiscal year more closely with the seasonal nature of our
business. In view of this change, MD&A compares the unaudited consolidated
financial statements as of and for the three months ended Nov. 30, 2003
(also referred to as the first quarter of fiscal year 2004) with the
unaudited consolidated financial statements as of and for the three months
ended Nov. 30, 2002.
Financial Measures
The primary operating performance measure for our two business
segments is earnings (loss) from continuing operations before interest and
income taxes (EBIT). We also provide information regarding free cash flow,
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. The presentation of EBIT and free cash
flow information 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.
17
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Results of Operations - First Quarter Fiscal Year 2004
----------------------------------------------------------------------------------------------
Three Months Ended
Nov. 30,
Total Monsanto Company and Subsidiaries: 2003 2002
---------------------------------------- ---- ----
Net sales $1,028 $ 846
====== =====
Gross profit $ 468 $ 350
====== =====
Loss from continuing operations $ (77) $ (17)
====== =======
Net loss $ (97) $ (18)
======= =======
-----------------------------------------------------------------------------------------------
The following factors affected the quarter-to-quarter comparison of
Monsanto's first quarter continuing operations:
Net sales improved 22 percent, largely because of both higher ROUNDUP
sales volumes and higher worldwide average net selling prices. Nearly all
world areas experienced ROUNDUP sales gains, with the most notable
increases in the United States and Brazil. We also experienced slightly
higher seeds and traits sales. 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 was driven higher in the first quarter of fiscal 2004 by
the increase in net sales. As a percent of sales, gross profit increased
four points to 45 percent, led by improved operations in Brazil and the
United States.
Operating expenses increased to $509 million for the quarter, from
$361 million for the same period last year.
o Selling, general and administrative (SG&A) expenses increased $60
million. Increased employee-related costs, primarily related to
accrued incentive compensation, drove SG&A expenses higher. These
accrued incentive levels are commensurate with our improved
operational results this year. An increase in marketing-related
activities in the quarter also led to higher SG&A expenses.
o We recognized $69 million of noncash goodwill adjustments during the
quarter, related to our global wheat business. Our decision to exit
the European wheat business required us to reevaluate the goodwill
related to the wheat reporting unit for impairment.
o We recognized restructuring expenses in both first quarter periods. In
the current quarter, we began recording charges relating to our fiscal
year 2004 restructuring plan, with $30 million recorded within
continuing operations and $34 million within discontinued operations.
Our first quarter fiscal year 2004 restructuring charges were reduced
by $1 million in restructuring reversals related to our past
restructuring plans. During the quarter ended Nov. 30, 2002, we
recognized $14 million of charges related to our 2002 restructuring
plan, $8 million of which were recorded as restructuring expense. For
further details on our restructuring plans, please see the
"Restructuring" section of MD&A and Note 9 - Restructuring.
o First quarter bad debt expense and research and development (R&D)
expenses were relatively unchanged from last year's first-quarter
levels. As a percent of net sales, R&D expenses declined for the
quarter.
18
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Net interest expense for the quarter totaled $17 million, which was
relatively consistent with last year's first quarter net interest expense.
Our borrowing levels throughout both first-quarter periods remained
relatively unchanged at $1.5 billion.
We recorded net other expense of $25 million in the first quarter of
fiscal year 2004, versus net other income of $1 million during the
comparable period last year. The largest single component of this caption
in both periods was equity affiliate expense related to our Renessen LLC
joint venture, which totaled approximately $10 million in each period. We
also experienced less favorable currency fluctuations in the current
quarter, resulting in higher foreign-currency transaction losses. The
remainder of the quarterly fluctuation was caused by several individually
immaterial items, which resulted in net other expense for the first quarter
of fiscal 2004 and net other income for the same period last year.
Because of our loss from continuing operations in both quarters, we
recognized an income tax benefit for both first quarter periods. Despite
the larger loss from continuing operations in fiscal 2004, income taxes
were relatively flat for the quarter-to-quarter comparison. The $69 million
of goodwill adjustments in fiscal 2004, which were not deductible for tax
purposes, and to a lesser extent, charges related to our restructuring
plans, significantly affected the quarterly effective tax rate comparison.
Without these items, our effective tax rate would have been 32 percent in
both periods.
The factors above explain the change in loss from continuing
operations. Discontinued operations generated an aftertax loss of $20
million in the current period, reflecting a portion of our fiscal year 2004
restructuring plan charges. Operating activities slightly offset these
charges. For further details of our discontinued operations, please refer
to Note 14 - Discontinued Operations.
Seeds and Genomics Segment
The Seeds and Genomics segment consists of our global seeds and
related trait businesses, and our genetic technology platforms. We produce
leading seed brands, including DEKALB and ASGROW, and we develop
biotechnology traits that assist farmers in controlling insects and weeds.
We also provide genetic material and biotechnology traits to other seed
companies for their seed brands.
Three Months Ended
Nov. 30,
------------------------------
2003 2002
---- ----
Net sales
Corn seed and traits $ 186 $ 188
Soybean seed and traits 169 158
All other crops seed and traits 30 19
----- -----
Total net sales $ 385 $ 365
===== =====
Gross profit
Corn seed and traits $ 120 $ 117
Soybean seed and traits 99 95
All other crops seeds and traits (1) 16 3
----- -----
Total gross profit $ 235 $ 215
===== =====
EBIT(2) $ (96) $ 45
===== =====
(1) Includes any net restructuring charges for the segment that were recorded
within cost of goods sold. See Note 9 - Restructuring - for further
details.
(2) Earnings (loss) from continuing operations before interest and income
taxes. See Note 12 - Segment Information - for further details.
19
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
First quarter fiscal 2004 Seeds and Genomics segment net sales and
gross profit each improved $20 million from last year's first quarter
levels. Consistent with the purchasing and growing patterns in Latin
America, that region's operations will be the primary focus of the first
quarter analysis that follows.
Worldwide corn seed and trait revenues were slightly lower in the
quarter, as gains in Brazil and Mexico were more than offset by lower sales
in Argentina and the United States. First quarter 2004 sales of corn seed
in Brazil rebounded from last year's first quarter levels because of
improved market conditions and market performance. First quarter 2004 net
sales of corn seed also benefited from better weather in Mexico. However,
severe drought conditions in Argentina reduced sales of corn seed and
traits in that country, and many farmers chose to plant other crops this
season. The pre-fiscal year 2004 timing of corn seed sales in Argentina
also negatively affected the quarter-to-quarter sales comparison, as did
the timing of corn trait revenues from global licensees. In the United
States, sales in preparation for the 2004 growing season are indicating
that a higher percentage of corn seed sales this season will contain one or
more of Monsanto's biotechnology traits. The first quarter 2004 U.S. corn
trait revenues also reflect continued growth in stacked traits, as well as
an increase in the average prices of ROUNDUP READY traits to reflect the
value those products provide to growers.
Sales of soybean seeds and traits increased during the quarter, with
the net gain shared among several markets. In the United States, favorable
market conditions led to slightly higher soybean trait revenues. Higher
cotton trait revenues in Australia led the increase in sales for the other
crops.
Segment EBIT declined to a loss of $96 million for the first quarter
of 2004. While segment EBIT benefited from improved operating results -
particularly in Brazil - these improvements were more than offset by the
$69 million write-off of global wheat goodwill and $23 million of
restructuring charges related to the fiscal year 2004 restructuring plan.
Operating expenses also increased for the quarter, reflecting higher
accrued incentive compensation. Segment SG&A also reflects the Seeds and
Genomics segment's increasing contribution to Monsanto's operations.
Agricultural Productivity Segment
Our Agricultural Productivity segment consists of our crop protection
products (ROUNDUP and other glyphosate-based herbicides and selective
chemistries) and our animal agriculture, lawn-and-garden herbicides, and
environmental technologies businesses. We are a leading worldwide
developer, producer and marketer of crop protection products, including
ROUNDUP herbicides.
Three Months Ended
Nov. 30,
------------------------------
2003 2002
---- ----
Net sales
ROUNDUP and other glyphosate-based herbicides $ 429 $ 260
All other agricultural productivity products 214 221
----- -----
Total net sales $ 643 $ 481
===== =====
Gross profit
ROUNDUP and other glyphosate-based herbicides $ 156 $ 58
All other agricultural productivity products (1) 77 77
---- -----
Total gross profit $ 233 $ 135
===== =====
EBIT (2) $ 30 $ (55)
===== =====
(1) Includes any net restructuring charges for the segment that were recorded
within cost of goods sold. See Note 9 - Restructuring - for further
details.
(2) Earnings (loss) from continuing operations before interest and income
taxes. See Note 12 - Segment Information - for further details.
20
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
In the Agricultural Productivity segment, first quarter 2004 net sales
increased $162 million from the same period a year ago. This gain is
attributable to stronger sales of ROUNDUP in the United States and Brazil.
Quarterly sales volumes of ROUNDUP increased in the United States, as did
average net selling prices. A better product mix benefited sales during
this period. A higher percentage of our glyphosate sales consisted of
branded product, as this quarter's results reflect the successful launch of
ROUNDUP ORIGINAL MAX for the 2004 growing season. It should, however, be
noted that the first fiscal quarter is not the primary glyphosate selling
season in the United States, and much of this quarter's increase is timing
related. For the full year, we continue to expect a decline in the market
share and average net selling price of ROUNDUP in the United States.
Improved market and pricing conditions, along with favorable weather
conditions, led to sales gains in Brazil. The operational changes we made
there last year also favorably affected the first quarter net sales
comparison, as did the effect of the Brazilian real exchange rate. In
Argentina, sales for the three months ended Nov. 30, 2002, included the
effect of actions taken in conjunction with our customers during a time of
economic and market turmoil. A one-time exception to our policy regarding
crop protection product returns reduced that period's sales by
approximately $60 million, but also reduced risks for both parties. During
the first quarter of fiscal year 2004, ROUNDUP net sales in Argentina were
negatively affected by the dry weather and competitive conditions.
Sales of our other Agricultural Productivity products declined for the
quarter, primarily because of lower sales of our other herbicides. However,
the absence of restructuring charges in cost of goods sold and more
efficient operations during the first quarter of fiscal year 2004 offset
the sales declines to result in steady gross profit results for the other
Agricultural Productivity products in both quarters.
This quarter's improved Agricultural Productivity sales performance
significantly benefited the segment EBIT comparison. Higher
employee-related expenses and $7 million in charges related to the fiscal
year 2004 restructuring plan partially offset the sales and gross profit
improvements.
Our Agreement with The Scotts Company
In 1998, Monsanto entered into an agency and marketing agreement with
The Scotts Company (Scotts) with respect to our lawn-and-garden herbicide
business. Under the agreement, beginning in the fourth quarter of 1998,
Scotts was obligated to pay us a $20 million fixed fee each year to defray
costs associated with the lawn-and-garden business. Scotts' payment of a
portion of this fee owed in each of the first three years of the agreement
was deferred and is required to be paid at later dates, with interest.
Monsanto is accruing the deferred portions of the $20 million annual fixed
fee owed by Scotts ratably over the periods during which it is being earned
as a reduction of SG&A expenses. We are also accruing the interest on the
amounts owed by Scotts and including it in interest income. The total
amount owed by Scotts, including accrued interest, was approximately $50
million as of Nov. 30, 2003, and Aug. 31, 2003. Scotts began paying these
deferred amounts ($5 million per year in monthly installments) beginning in
October 2002.
Restructuring
During the first quarter periods presented, we recorded charges
relating to our restructuring plans. These net charges were recorded in the
Statement of Consolidated Operations as outlined below. Please see Note 9 -
Restructuring - for further details.
21
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Three Months Ended
Nov. 30,
-----------------------------
2003 2002
---- ----
Cost of goods sold $-- $ (6)
Restructuring charges-- net(1) (29) (8)
-------------- --------------
Loss from continuing operations before income taxes (29) (14)
Income tax benefit 11 5
-------------- --------------
Loss from continuing operations (18) (9)
Loss from operations of discontinued businesses(2) (33) --
Income tax benefit 9 --
-------------- --------------
Loss on discontinued operations (24) --
-------------- --------------
Net loss $(42) $ (9)
============== ==============
(1) The restructuring charges for the three months ended Nov. 30, 2003, and
Nov. 30, 2002, were both offset by $1 million in restructuring reversals
related to the 2000 restructuring plan.
(2) Fiscal year 2004 contains restructuring charges related to discontinued
businesses (refer to Note 14 - Discontinued Operations).
Fiscal Year 2004 Restructuring Plan
In October 2003, we announced plans to continue to reduce the costs
associated with our agricultural chemistry business as that segment matures
globally. We will further concentrate our resources on our core seeds and
traits businesses. These plans include: (1) reducing costs associated with
our ROUNDUP herbicide business, (2) exiting the European breeding and seed
business for wheat and barley; and (3) discontinuing the plant-made
pharmaceuticals program. These actions will require charges of up to $155
million aftertax ($289 million pretax) in fiscal year 2004; $43 million
($63 million pretax) of these charges were recorded in the first quarter of
fiscal year 2004. Of these pretax charges, $23 million was recorded within
the Seeds and Genomics segment, $7 million within the Agricultural
Productivity segment, and the remainder within discontinued operations. We
are following the new accounting guidance of SFAS 146 to account for these
actions.
In the first quarter of fiscal year 2004, we recorded charges of $20
million related to work force reductions. Work force reductions in
continuing operations ($17 million) were primarily R&D, information
technology, and marketing in the United States; downsizing the regional
structure and key country focus in Europe; and downsizing the sales force
in Canada as a result of the realignment of the Canadian business to focus
on the Seeds and Genomics segment. Discontinued operations work force
reductions were related to employees of the plant-made pharmaceuticals
program. Facility closure charges of $1 million related to shutdown
expenses resulting from the exit of the plant-made pharmaceuticals site.
Asset impairments in continuing operations of $13 million were associated
with the closure of an office building ($11 million), and an intangible
asset impairment of $2 million in Asia. Discontinued operations asset
impairments of $29 million consisted of $26 million other intangible assets
and property, plant and equipment impairments of $2 million, both
associated with the European wheat and barley business; and property, plant
and equipment impairments of $1 million associated with the plant-made
pharmaceuticals business.
For the full fiscal year, we expect approximately $148 million of
pretax charges to relate to the Seeds and Genomics segment and $141 million
to relate to the Agricultural Productivity segment. We estimate that this
restructuring will require approximately $137 million of cash, relating to
work force reductions and to a lesser extent, facility closures. We also
estimate we will incur $83 million of noncash pretax asset impairments
during fiscal year 2004, not including the $69 million impairment of
goodwill related to the global wheat reporting unit. The actions relating
to this restructuring plan are expected to produce aftertax savings of
approximately $80 million to $95 million in fiscal year 2005, and
approximately $90 million to $105 million in fiscal year 2006, with
continuing savings going forward. We expect that these actions will lower
our SG&A costs as a percent of sales.
22
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
2002 Restructuring Plan (charges recorded in calendar year 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, and certain agricultural chemical manufacturing facilities in
the Asia-Pacific region and the United States were closed or downsized.
Certain seed sites were consolidated, and certain U.S. swine facilities
were exited. In connection with this plan, Monsanto recorded $14 million
pretax ($9 million aftertax) of net charges during the quarter ended Nov.
30, 2002. Of these charges, $6 million was recorded in cost of goods sold
and the remainder in the restructuring line item.
During the first quarter fiscal year 2004, approximately 50 former
employees received cash severance payments totaling less than $1 million.
As of Nov. 30, 2003, the reserve balance related to this plan was $3
million. Cash payments to complete these restructuring actions are expected
to be made during fiscal year 2004, and will be funded from operations.
These payments are not expected to significantly affect the company's
liquidity. We anticipate that the actions related to this plan will yield
annual cash savings of more than $50 million.
2000 Restructuring Plan (charges recorded in calendar years 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 during calendar years
2001 and 2000. These charges totaled $474 million pretax ($334 million
aftertax): $213 million ($137 million aftertax) recorded in calendar year
2001, and $261 million ($197 million aftertax) recorded in calendar year
2000.
Activities related to the 2000 restructuring plan during the first
quarter of fiscal year 2004 did not decrease the Aug. 31, 2003, $8 million
liability balance, which was comprised of $5 million work force reductions
and $3 million facility closures. Approximately $1 million in 2000
restructuring plan reversals were recorded in first quarter fiscal year
2004, and consisted of less than a $1 million in facility closures and less
than $1 million in asset impairment reversals that were originally recorded
as restructuring charges. Reversals were recorded primarily because costs
were lower than originally estimated. Both items are individually less than
$1 million and therefore do not change the liability balance, however,
total $1 million in current quarter reversals.
The remaining work force reductions, asset dispositions, and other
exit activities associated with this plan are expected to be completed
during fiscal year 2004. The remaining restructuring actions will be funded
from operations; these actions are not expected to significantly affect the
company's liquidity. These actions under the 2000 restructuring plan have
yielded annual cash savings of more than $100 million.
Financial Condition, Liquidity, and Capital Resources
Working Capital and Capital Resources
As of As of As of
Nov. 30, 2003 Aug. 31, 2003 Nov. 30, 2002*
------------- ------------- --------------
Working capital $3,050 $3,018 $2,546
Current ratio 2.69:1 2.55:1 2.62:1
*All data as of Nov. 30, 2002, are derived from our
unaudited consolidated statement of financial position,
which is not presented herein.
Our working capital balance as of Nov. 30, 2003, reflects the strength
of our balance sheet. The net working capital of $3 billion as of Nov. 30,
2003, is consistent with the August 2003 working capital level, as a
portion of the receivables that were outstanding has been realized into
cash through collections. The $1 billion of cash on hand at the end of the
first quarter is evidence of the strong cash collections throughout the
first quarter of fiscal year 2004, as customer prepayments for the upcoming
23
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
U.S. growing season's products increased significantly during the quarter.
Customers are paying for their products earlier this season, a signal of
the strengthening agricultural economy. Quarterly collections improved in
nearly every world area and business line, and total trade receivables as a
percent of the trailing 12-month sales have improved significantly thus far
in fiscal year 2004.
Current liabilities as of the end of November this year were down more
than $100 million from levels at the end of August 2003. The effect of the
$400 million Solutia PCB settlement payment during the quarter was
partially offset by seasonal increases in certain liabilities. For example,
balances relating to deferred revenue and grower liabilities as of Nov. 30,
2003, were higher than balances as of Aug. 31, 2003. Deferred revenue
balances were also driven higher by the increase in customer prepayments
received during the quarter.
Our working capital increased on a November-to-November comparison,
reflecting the higher prepayments and stronger cash position this year.
Improved operational performance drove accrued liabilities as of Nov. 30,
2003, higher than year-ago levels because of accruals for customer
incentive programs and potential incentive payments to employees. A decline
in short-term debt from November 2002 to November 2003 was offset by an
additional senior note issuance that is not reflected in the working
capital figures because the notes are classified as long-term debt.
Monsanto's debt-to-capital ratio as of Nov. 30, 2003, remained relatively
consistent with prior periods at 23 percent.
Cash Flow
Three Months Ended
Nov. 30,
------------------------------
2003 2002
---- ----
Net cash provided by operations $ 661 $ 729
Net cash provided (required) by investing activities 175 (69)
----- -----
Free Cash Flow 836 660
Net cash required by financing activities (81) (468)
----- -----
Net Increase in Cash and Cash Equivalents $ 755 $ 192
Free cash flow for first quarter 2004 improved more than $170 million
from the same period last year to $836 million. Continued strong
receivables management benefited the comparison, as trade receivables and
customer prepayments provided more cash from operations this quarter than
the same quarter last year. The maturity of $230 million of short-term
investments also benefited this quarter's free cash flow. We used a mix of
cash and short-term borrowings to fund the $400 million Solutia PCB
litigation settlement payments made in September 2003. We are also
continuing to voluntarily contribute to our U.S. qualified pension plan,
with $25 million contributed in the first quarter of 2004. We voluntarily
contributed $125 million to the plan in December of 2003, which will be
reflected in our second quarter cash flow results.
The net change in short-term financing during the three months ended
Nov. 30, 2003, drove the change in cash required by financing activities.
Treasury share purchases totaling $55 million during the first quarter of
fiscal year 2004 slightly offset the change in short-term debt. These share
repurchases are part of our three-year, $500 million share repurchase
program.
Customer Financing Program: In connection with a financing option that
is available to certain of our customers, we collected approximately $15
million in the first quarter of 2004 and $24 million during the same period
last year. 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.
24
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
As of Nov. 30, 2003, customer loans outstanding through this financing
program totaled approximately $95 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 Nov. 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.
Contingent Liabilities Relating to Solutia Inc. (Off-Balance Sheet
Arrangement)
As further discussed in Note 10 - Commitments and Contingencies, under
our Separation Agreement with Pharmacia, we were 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. Solutia has filed a
voluntary petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code, and is seeking relief from paying certain liabilities,
including the liabilities that it assumed from Pharmacia. If Solutia is
discharged from all or a portion of these liabilities, Monsanto may be
required to indemnify Pharmacia for all of a portion of them. Note 10
includes further information regarding Solutia, and the reasonable
possibility of a material adverse effect on our financial position,
profitability and/or liquidity. Also see Item 5 - Other Information -
Relationships Among Monsanto Company, Pharmacia Corporation And Solutia
Inc. Under the rules of the SEC, these contingent liabilities are
considered to be an off-balance sheet arrangement.
Outlook - Update
Focused Strategy
Monsanto has established leadership in agricultural markets by
applying advanced technology to develop high-value products ahead of
competitors, and by reinforcing strong brands and customer relationships.
We continually improve our products to maintain market leadership and
support near-term performance. Our capabilities in biotechnology research
are generating a rich product pipeline that is expected to drive long-term
growth. We believe that our focused approach to our business and the value
we bring to our customers will allow us to maintain an industry leadership
position in a highly competitive and difficult agricultural and economic
environment.
Our strategic actions will allow us to focus on 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 income.
We are accelerating Monsanto's evolution to a company led by its strengths
in seeds and biotechnology traits as means of delivering solutions to our
customers. As we concentrate our resources on this growth sector of the
agricultural industry, we are taking steps to reduce SG&A costs --
particularly those associated with our agricultural chemistry business as
that sector matures globally. Monsanto remains the leading manufacturer of
the best-selling herbicide, ROUNDUP, and maintains a very strong
manufacturing cost position.
As part of this seed and technology-based strategic initiative, we are
focusing on projects that we believe have the best commercial potential.
Our research and marketing will focus on three crops grown on significant
acreage: corn, cotton and soybeans. We have announced plans to exit the
European breeding and seed business for wheat and barley, but we will
continue our work on ROUNDUP READY wheat, which is in the regulatory
approval phase.
We will also focus geographically on our top agricultural markets,
where we can bring together a broad complement of our products and
technologies, while pursuing ways to best participate in other markets. We
have accordingly adopted different business models for different markets.
These actions allow us to reduce our exposure to risk from changes in the
marketplace.
25
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Our financial strategy will continue to emphasize both earnings and
cash, and we believe that Monsanto is positioned to sustain earnings growth
and strong cash flow. We remain committed to returning cash to shareowners.
We have begun to implement our new share repurchase program, and our board
of directors also authorized an increase to our dividend rate in 2003. We
also applied our strong cash position to participate in a settlement of
Solutia's PCB litigation and continue to make voluntary contributions to
our pension plan.
We have taken decisive steps to address key risks in our business
position. These include the measures noted above, to reduce costs in our
agricultural chemistry business and to accelerate the evolution to an
emphasis on seeds and traits. We also took steps in 2002 to reduce risk and
stabilize our business position in Latin America. We remain focused on cost
and cash management both to maintain the progress we have made in managing
our investment in working capital -- in particular, receivables and
inventories -- and to realize the full earnings potential of our
businesses. We will also continue to seek additional external financing
opportunities for our customers.
Seeds and Genomics
We invest more than 80 percent of our R&D in the areas of seeds,
genomics and biotechnology. These are the fastest-growing segments of the
agriculture industry. By shifting our focus to create value for farmers in
seeds and traits, we have set Monsanto on a path of sustainable growth, as
we expect increasing gross profit from seeds and traits to more than offset
a declining contribution from agricultural chemicals.
ROUNDUP and other glyphosate-based herbicides can be applied over the
top of glyphosate-tolerant ROUNDUP READY crops, controlling weeds without
injury to the crop. This integration of agricultural chemicals and enhanced
seeds offers growers a cost-effective solution for weed control. To date,
we have introduced ROUNDUP READY traits in soybeans, corn, canola and
cotton. In addition, our insect-protection seed traits, such as YIELDGARD
for corn and BOLLGARD and BOLLGARD II for cotton, serve as alternatives to
certain chemical pesticides.
Key near-term growth opportunities in seeds and traits include
o Continued growth in Monsanto's branded and licensed seed market
shares, through successful breeding of high-performance germplasm and
continuous improvement in the quality of our seeds;
o Continued growth in licensing of seed germplasm and biotechnology
traits to other seed companies through our Holden's/Corn States business
and the newly established Cotton States business; and,
o Expansion of existing traits, especially in corn, and stacking of
additional traits in current biotechnology products.
At the same time, we expect to continue to reduce seed production
costs through higher yields on seed production acres and careful management
of our seed product portfolio.
Monsanto has built a leading global position in seeds, and the
successful integration of seed businesses acquired in the 1990s 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, yields and cost. The performance of Monsanto
germplasm is reflected in market share gains for both our branded and
licensed seed businesses. We also use our genetic material to develop new
varieties for other seed companies' brands.
Outstanding seed quality and leading germplasm provide a vehicle for
introducing biotechnology seed traits, such as herbicide tolerance and
insect protection. 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 and reduced pesticide use.
26
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Our past successes provide a significant competitive advantage in
delivering stacked-trait products and improved, second-generation traits.
We can achieve continued growth through stacking and increased penetration
of traits in approved markets. Trait stacking is a key growth driver in our
seeds and traits business, because it allows Monsanto to earn a greater
share of the farmer's expenditures on each acre. Stacked-trait cotton
overtook single-trait cotton products in Monsanto's product mix in 2003. We
are seeing the same trend in our corn seed business, where higher-value,
stacked-trait products represent a growing share of total seed sales.
We are currently developing the first triple-stack product, YIELDGARD
Plus corn with ROUNDUP READY. Another source of growth in the near term is
the commercialization of second-generation traits, such as BOLLGARD II
cotton. In addition to delivering new stacked-trait products and
second-generation traits in the near term, we are working toward developing
products to generate long-term growth. Our strategic head start in first-
and second-generation input traits gives us a leadership position in
developing output traits that provide consumer benefits and create value
for the food industry.
We are working to achieve greater acceptance and to secure additional
approvals for our existing biotechnology products globally, and toward the
development and timely commercialization of additional products in our
pipeline. We are prioritizing our efforts to gain approvals for
biotechnology crops, and while we continue to gain new approvals in global
markets, we are pursuing strategies that enable growth even with delays in
some global regulatory approvals. The Brazilian government recently passed
a measure which legalizes the planting of Roundup Ready soybeans in Brazil
for the 2003-2004 crop year. Monsanto is working with the Brazilian grain
industry to collect royalties for the use of our technology. We are
continuing our efforts to obtain long-term approval for the planting of
ROUNDUP READY soybeans in Brazil, and plan to continue to develop a royalty
system, which matches the decisions made by the government of Brazil.
However, there is no certainty that royalties will be profitably collected.
Additionally, Monsanto is pursuing approvals to enable the importation of
corn and processed corn products that contain the ROUNDUP READY and
YIELDGARD rootworm traits into Europe. Crop import restrictions in some key
markets, most notably the European Union (EU), reduce potential expansion
of current and future biotechnology crops in the United States and other
markets where they are approved. The development of effective systems to
enable farmers growing crops in the United States to sell into elevator
systems that do not export to the EU, however, is mitigating the effect of
these restrictions.
We are committed to addressing concerns raised by consumers and by
public interest groups and questions from government regulators regarding
agricultural and food products developed through biotechnology. We also
continue to address concerns about the adventitious or certain unintended
trace presence of biotechnology materials in seed, grain or feed and food
products. We are responding to the issue of adventitious presence in
several ways. These include seeking sound, science-based rules and
regulations that clarify and allow for trace amounts, and providing
industry leadership to establish the highest standards of purity reasonably
achievable and to establish global standards for quality. We are also
working with the seed industry to develop strategies on production
interventions that may reduce the likelihood of adventitious presence.
Agricultural Productivity
In recent years, we have seen reduced revenues and earnings from
ROUNDUP herbicide, which reflect both the overall decline in the
agricultural chemicals market and the expiration of U.S. patent protection
for the active ingredient in ROUNDUP in 2000. By aligning our
infrastructure and costs with our expectations for the glyphosate herbicide
market, however, we believe the ROUNDUP franchise can continue to be a
significant and sustainable source of cash and income generation for
Monsanto, even in the face of increased competition.
As expected, the market share and price of ROUNDUP in the United
States have declined since the patent expired in 2000. We expect these
trends to continue until we reach steady-state postpatent levels. In
postpatent markets around the world, ROUNDUP has maintained a leading
market position and a price premium compared with generics. We will
continue to support the market leadership of ROUNDUP with product
27
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
innovations, superior customer service and logistics, low-cost
manufacturing, and further expansion of ROUNDUP READY crops and
conservation tillage.
We have several patents on our glyphosate formulations and
manufacturing processes in the United States and in other countries. We
continue to differentiate ROUNDUP with innovations using proprietary
technology. We also provide more concentrated formulations that provide
greater convenience for farmers while reducing production and logistics
costs. We offer a variety of products to meet farmers' needs. The U.S.
launch of premium ROUNDUP WEATHERMAX was followed by successful
introduction of ROUNDUP ORIGINAL MAX, which offers key brand advantages
versus imitator products at a very competitive price, for the 2004 growing
season.
Monsanto will support ROUNDUP through expansion of ROUNDUP READY crops
and promotion of conservation tillage. Conservation tillage helps farmers
reduce soil erosion by replacing plowing with the judicious use of
herbicides to control weeds. Further penetration of ROUNDUP READY crops
also enhances the market position of ROUNDUP as a brand-name product that
farmers trust to avoid the risk of crop injury in over-the-top use on these
crops.
Monsanto maintains strong distribution relationships and a unique bulk
tank system to support retailers. Monsanto remains the primary global
producer of glyphosate, the active ingredient in ROUNDUP, with agreements
to supply glyphosate to many of our competitors. Our high volume combined
with patented process technology allows us to maintain low unit costs. We
continue to reduce production costs, and we are also achieving reductions
in working capital through careful management of inventories. In recent
years, distribution channel inventories had increased significantly in the
United States. However, ROUNDUP distribution inventory levels at the end of
calendar year 2002 were roughly flat with levels at 2001 calendar year-end,
and declined during the key 2003 selling season. Preliminary reports
indicate levels at the end of the calendar year to be lower than the
year-ago levels.
Like most chemical herbicides, Monsanto's selective herbicides face
declining markets and increasing competitive pressures, but they continue
to complement our ability to offer fully integrated solutions, particularly
in ROUNDUP READY corn. While rapid penetration of ROUNDUP READY corn in the
United States has also had a negative effect on sales of Monsanto selective
corn herbicides, increased gross profit from the ROUNDUP READY trait and
the ROUNDUP used on these acres are significantly higher than the lost
selective herbicide sales.
Our lawn-and-garden herbicide business remains a strong cash generator
and supports Monsanto's brand equity in the marketplace. Another key
product in our Agricultural Productivity segment is POSILAC bovine
somatotropin, which improves dairy cow productivity. POSILAC provides a
steady contribution to gross profit. The active ingredient for POSILAC is
manufactured both at our new plant in Augusta, Georgia, and by Sandoz GmbH
in Austria. Sandoz also manufactures the finished dose formulation of
POSILAC, and will remain the sole supplier of the finished dose formulation
until we obtain approval from the U.S. Food and Drug Administration (FDA)
to manufacture the finished dose formulation at Augusta. On Dec. 19, 2003,
we notified our customers that supplies of POSILAC will be temporarily
limited while Sandoz completes necessary corrections and improvements at
its facility in cooperation with the FDA. Due to circumstances beyond our
control, this limitation has temporarily reduced volumes of POSILAC
available for sale and required us to allocate available supplies.
Other Information
As discussed in Note 10 -- 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.
28
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
For additional information on the outlook for Monsanto, see
"Cautionary Statements: Risk Factors 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 report on Form 10-K for the transition period
ended Aug. 31, 2003. 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, results of operations, 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 report on Form 10-K for the transition period ended Aug.
31, 2003. 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
In December 2003, the SEC issued SAB No. 104, Revenue Recognition. SAB
104 updates portions of the interpretive guidance included in Topic 13 of
the codification of Staff Accounting Bulletins in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The company believes it is
following the guidance of SAB 104.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 replaced EITF Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS 146 requires companies to recognize costs associated
with exit or disposal activities when they are actually incurred, rather
than on the date the company commits itself to the exit or disposal plan.
This statement is effective for any exit or disposal activities initiated
after Dec. 31, 2002. We are following the guidance of SFAS 146 for the
fiscal year 2004 restructuring plan. Refer to Note 9 -- Restructuring --
for further details. The adoption of SFAS 146 had no effect on our 2002 and
2000 restructuring plans, which were both initiated prior to Dec. 31, 2002.
Cautionary Statements Regarding Forward-Looking Information
In this report, and from time to time throughout the year, we share
our expectations for our company's future performance. These
forward-looking statements represent our best estimates and expectations at
the time that we make those statements. However, by their nature, these
types of statements are uncertain and are not guarantees of our future
performance. Many events beyond our control will determine whether our
expectations will be realized. In the interests of our investors, and in
accordance with the "safe harbor" provisions of the U.S Private Securities
Litigation Reform Act of 1995, this section of our report explains some of
the important reasons that actual results may be materially different from
those that we anticipate.
Our forward-looking statements include statements about: our business
plans; the potential development, regulatory approval, and public
acceptance of our products; our expected financial performance and the
anticipated effect of our strategic actions; domestic or international
economic, political and market conditions; and other factors that could
affect our future operations or financial position. Any statements we make
that are not matters of current reportage or historical fact should be
29
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
considered forward looking. Such statements often include words such as
"believes," "expects," "anticipates," "intends," "plans," "estimates,"
"will," and similar expressions.
Our forward-looking statements are current only as of the date of this
report. Circumstances change constantly, often unpredictably, and investors
should not place undue reliance on these statements. We disclaim any
current intention to revise or update any forward-looking statements, or
the factors that may affect their realization, whether in light of new
information, future events or otherwise, and investors should not rely on
us to do so.
Competition for ROUNDUP Herbicides: We expect to face continued
competition for our branded ROUNDUP herbicide product line. The extent to
which we can realize cash and gross profit from these products will depend
on our ability to predict and respond effectively to competitor pricing, to
provide marketing programs meeting the needs of our customers and of the
farmers who are our end-users, to maintain an efficient distribution
system, to control manufacturing and marketing costs without adversely
affecting sales, and to develop new formulations with features attractive
to our end-users.
Regulation and Public Acceptance of Seed Biotechnology: Regulatory and
legislative requirements affect the testing and planting of seeds
containing our biotechnology traits, and the import of crops grown from
those seeds. Obtaining testing, planting and import approvals can be
lengthy and costly, with no guarantee of success. Planting approvals may
also include significant regulatory requirements that can limit our sales.
Lack of approval to import crops containing biotechnology traits into key
markets affects sales of our traits, even in jurisdictions where planting
has been approved. 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. Such
traceability and labeling requirements may cause food processors and food
companies to avoid biotechnology and select non-biotechnology crop sources,
which can affect grower seed purchase decisions and the sale of our
products. Some opponents of the technology publicly express concern about
potential effects of our biotechnology traits on other plants and on the
environment, and about potential effects of crops containing these traits
on animals and human health. Such concerns can affect government approvals
and may adversely affect sales of our traits, even after approvals are
granted. In addition, violent opponents of agricultural biotechnology have
attacked facilities used by agricultural biotechnology companies, and may
launch future violent attacks against our field testing sites, research,
production, or other facilities.
Adventitious Presence of Biotechnology Traits: The detection of
unintended but unavoidable trace amounts (sometimes called "adventitious
presence") of commercial biotechnology traits in conventional
(non-biotechnology) seed, or in the grain or products produced from seeds
containing these traits, may negatively affect our business or results of
operations. The detection of adventitious presence of traits not approved
in the country where detected may result in the withdrawal of seed lots
from sale, or in compliance actions such as crop destruction or product
recalls. Some growers of organic and conventional crops have claimed that
the adventitious presence of any biotechnology traits in their crops will
cause them commercial harm. The potential for adventitious presence of
biotechnology traits is a factor in general public acceptance of these
traits. Concern about adventitious presence may also 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.
Regulation and Legislation Affecting Agricultural Products: In
addition to regulation and legislation specifically affecting our seed
biotechnology products, agricultural products and their manufacturers are
subject to other government regulation, which affects our sales and
profitability. These regulations affect the development, manufacture and
distribution of our products, and non-compliance could affect our sales and
profitability. Farm legislation encouraging or discouraging the planting of
specific crops can affect our sales. In addition, claims that increased use
of glyphosate herbicides increases the potential for the development of
glyphosate- resistant weeds could result in restrictions on the use of
glyphosate and of seeds containing our ROUNDUP READY traits, and thereby
reduce our sales.
30
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Intellectual Property: Intellectual property rights are crucial to our
business, and we endeavor to obtain and protect these rights in
jurisdictions in which our products are produced or used, and in
jurisdictions into which our products are imported. Intellectual property
rights are particularly important with respect to our seeds and genomics
segment. However, we may be unable to obtain protection for our
intellectual property in key jurisdictions. Even if protection is obtained,
competitors, growers, or others in the chain of commerce may illegally
infringe on our rights, and such infringement may be difficult to prevent
or detect. For example, the practice of saving seeds from non-hybrid crops
(including, for example, soybeans, canola and cotton) containing our
biotechnology may prevent us from realizing the full value of our
intellectual property, particularly outside the United States. We must also
protect our intellectual property against legal challenges by competitors.
Efforts to protect our intellectual property rights against infringement
and legal challenges can increase our costs, and will not always succeed.
In addition, because of the rapid pace of technological change, and the
confidentiality of patent applications in some jurisdictions, competitors
may be issued patents from applications that were unknown to us prior to
issuance. These patents could reduce the value of our commercial or
pipeline products. Because of the rapid pace of change and the complexity
of the legal and factual issues involved, we could unknowingly rely on key
technologies that are or become patent-protected by others, which would
require that we seek to obtain licenses or cease using the technology, no
matter how valuable to our business.
Research and Development: The continued development and
commercialization of pipeline products is key to our growth. The ability to
develop and bring new products to market, especially agricultural
biotechnology products, requires adequately funded, efficient and
successful research and development programs. Inadequate availability of
funds, failure to focus R&D efforts efficiently, or lack of productivity in
R&D, would hurt our future growth.
Competition in Plant Biotechnology: Many companies engage in plant
biotechnology research. Their success could render our existing products
less competitive. In addition, a company's speed in getting its new product
to market can be a significant competitive advantage. We expect to see more
competition, from agricultural biotechnology firms and from major
agrichemical, seed and food companies, some of which have substantially
greater financial and marketing resources than we do.
Weather, Natural Disasters and Accidents: Our sales and profitability
are subject to significant risk from weather conditions and natural
disasters that affect commodity prices, seed yields, and grower decisions
about purchases of our products. Weather conditions also affect the
quality, cost and volumes of the seed that we are able to produce and sell.
Natural disasters or industrial accidents could also affect our own
manufacturing facilities, our major suppliers, or our major customers.
Manufacturing: Because we use hazardous and other regulated materials
in our product development programs and chemical manufacturing processes,
we are subject to risks of accidental environmental contamination, and
therefore to potential personal injury claims and fines. We are also
subject to regulation of air emissions, waste water discharges and solid
waste. Compliance may be costly, and failure to comply may result in
penalties and remediation obligations. In addition, lapses in quality or
other manufacturing controls could affect our sales and result in claims
for defective products.
Short-Term Financing: We regularly extend credit to our customers in
certain areas of the world so that they can buy 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 to fund our cash flow requirements. The amount of
short-term debt will be greater to the extent that we are unable to collect
customer receivables when due, to repatriate funds from ex-U.S. operations,
and to manage our costs and expenses. Any downgrade in our credit rating,
or other limitation on our access to short-term financing or refinancing,
would increase our interest cost and adversely affect our profitability.
Litigation and Contingencies: We are involved in major lawsuits
concerning contracts, intellectual property, biotechnology, antitrust
allegations, and other matters. Adverse outcomes could subject us to
substantial damages or limit our ability to sell our products. In addition,
31
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
in connection with the separation of our businesses from those of Pharmacia
on Sept. 1, 2000, we were required to indemnify Pharmacia for liabilities
that 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. Solutia has filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code, and is seeking
relief from paying certain liabilities, including the liabilities that it
assumed from Pharmacia. If Solutia is discharged from all or a portion of
these liabilities, Monsanto may be required to indemnify Pharmacia for all
or a portion of them. Additional information about our relationship with
Solutia and risks related to Solutia may be found in other sections of this
report.
Product Distribution: To market our products successfully, we must
estimate growers' future needs, and match our production and the level of
product at our distributors to those needs. However, growers' decisions are
affected by market and economic conditions that are not known in advance.
Failure to provide distributors with enough inventory of our products will
reduce our current sales. However, high product inventory levels at our
distributors may reduce sales in future periods, as those distributor
inventories are worked down. Large distributor inventories also diminish
our ability to react to changes in the market, and increase the risk of
obsolescence and seed returns. In addition, inadequate distributor
liquidity could affect distributors' ability to pay for our products.
Cost Management: We have recently announced strategic initiatives that
include cost reductions in our ROUNDUP business. Inability to implement
these cost reductions while maintaining sales, or unanticipated increases
in our costs, could reduce our profitability.
Commodity Prices: Fluctuations in commodity prices can affect our
costs and our sales. We purchase our seed inventories from production
growers at market prices, and retain the seed in inventory until it is
sold. We use hedging strategies to mitigate the risk of changes in these
prices. In addition, the prices of our seeds and traits could be affected
by commodity prices. Farmers' income, and therefore their ability to
purchase our herbicides, seeds and traits, is also affected by commodity
prices.
Accounting Policies and Estimates: Changes to our accounting policies
could affect future results. In addition, changes to generally accepted
accounting principles could require adjustments to financial statements for
prior periods and changes to our policies for future periods. In addition,
if actual experience differs from the estimates, judgments and assumptions
that we used in order to prepare our financial statements, adjustments will
need to be made in 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
represent more than 40 percent of our revenues. 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 to external customers 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 subject to special risks and limitations, including:
fluctuations in currency values and foreign-currency exchange rates;
exchange control regulations; changes in local political or economic
conditions; import and trade restrictions; import or export licensing
requirements and trade policy; 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. Customers in weakened economies may be unable to purchase our
products, or we may be unable to collect receivables; and 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.
32
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes related to market risk from the
disclosures in Monsanto's report on Form 10-K for the transition period
ended Aug. 31, 2003.
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 Nov. 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 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 is
a named party, but for which we have assumed responsibility pursuant to the
Separation Agreement between ourselves and Pharmacia, effective Sept. 1, 2000.
Under that agreement, we assumed responsibility for legal proceedings primarily
related to the agricultural business that Pharmacia transferred to us on that
date. As a result, although Pharmacia may remain the named defendant or
plaintiff in some of these cases, we manage and are responsible for the
litigation. In the following discussion, we may use the phrase "the former
Monsanto Company" to refer to Pharmacia prior to the date of the Separation
Agreement. 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.
Pursuant to the Separation Agreement between Monsanto and Pharmacia, as
amended, we were 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. At this time, the litigation that we are defending or
prosecuting does not include litigation relating to the liabilities that Solutia
assumed from Pharmacia, and this litigation is not included in the descriptions
below. Solutia has been managing this litigation pursuant to powers of attorney
granted by Pharmacia and by us, and has described this litigation in its reports
on Forms 10-K and 10-Q, filed with the SEC. Since Solutia has been managing this
litigation, we have not participated in the preparation of those filings. As
described in Note 10 - Commitments and Contingencies, on Dec. 17, 2003, Solutia
and 14 of its U.S. subsidiaries filed voluntary petitions for reorganization
under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for
the Southern District of New York. Solutia's active management of litigation
relating to the liabilities that it assumed from Pharmacia may change as a
result of the Chapter 11 filing. Certain environmental and litigation matters
may be selectively assumed by us for purposes of defense and resolution; and we
may advance funds for the defense, performance or disposition of certain matters
and pursue recovery of our expenses from Solutia in the Chapter 11 proceeding.
For additional information, see Note 10 - Commitments and Contingencies, and
Item 5 - Relationships Among Monsanto Company, Pharmacia Corporation and Solutia
Inc.
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 (which at this time do not include litigation relating to the
liabilities that Solutia assumed from Pharmacia), either individually or taken
as a whole, will have a material adverse effect on our financial position,
profitability or liquidity. We have meritorious legal arguments and will
continue to represent our interests vigorously in all of the proceedings that we
are defending or prosecuting.
The following discussion provides updated information regarding certain
proceedings to which Pharmacia or we are a party and for which we are
responsible. Other information with respect to legal proceedings appears in our
report on Form 10-K for the transition period ended Aug. 31, 2003.
The following updates certain proceedings involving Bayer CropScience AG
(formerly Aventis CropScience S.A., previously Rhone Poulenc Agrochimie S.A.)
(Bayer CropScience), a subsidiary of Bayer AG, and its affiliates:
o As described in our report on Form 10-K for the transition period
ended Aug. 31, 2003, on Nov. 20, 1997, Bayer CropScience filed suit in
U.S. 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 CropScience 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
34
DEKALB Genetics for $15 million in actual damages and $50 million in
punitive damages. The damage awards have been paid in full. DEKALB
Genetics appealed the jury verdict and the U.S. Court of Appeals for
the Federal Circuit upheld the judgment. The U.S. Supreme Court
vacated the punitive damage award and remanded the case to the Court
of Appeals for the Federal Circuit to reconsider the issue in light of
the Supreme Court's punitive damages decision in State Farm Mutual
Automobile Insurance Co. v. Campbell. On Sept. 29, 2003, the Federal
Circuit once again affirmed the judgment of the District Court,
stating that the central holding of State Farm had no bearing on the
case. Monsanto has again requested that the U.S. Supreme Court
overturn the decision of the Federal Circuit.
o As described in our report on Form 10-K for the transition period
ended Aug. 31, 2003, on Dec. 4, 2000, in view of threats of patent
infringement made by Bayer CropScience against Monsanto's licensees
for its YIELDGARD corn, Monsanto filed suit in the U.S. District Court
for the Eastern District of Missouri, for a declaratory judgment
against Bayer CropScience to invalidate four patents that had been
assigned to Bayer CropScience by Plant Genetics Systems, N.V. (PGS).
Monsanto successfully maintained that the patents, which involve
claims to truncated Bt technology, were invalid and not infringed by
MON810 in YIELDGARD corn. Bayer CropScience counterclaimed to request
royalties for prior sales of YIELDGARD corn and injunctive relief. On
Dec. 27, 2002, Monsanto's motion for summary judgment was granted.
Bayer CropScience has appealed the District court's judgment to the
U.S. Court of Appeals for the Federal Circuit. On Dec. 4, 2003, the
Federal Circuit heard oral argument on Bayer CropScience's appeal.
Also, on Nov. 14, 2003, in light of its finding of inequitable conduct
against Bayer CropScience, the District Court ordered Bayer
CropScience to pay Monsanto $4.78 million in attorneys' fees and
costs. Bayer CropScience has asked the District Court to hold
enforcement of that judgment until the Federal Circuit rules on its
appeal.
As described in our report on Form 10-K for the transition period ended
Aug. 31, 2003, Monsanto is defending several lawsuits which allege that,
beginning in 1988, Monsanto and the former Monsanto Company conspired with
competitors, through a series of negotiations and legal settlements, to fix the
price of glyphosate-based herbicides and paraquat-based herbicides at prices
higher than the market would otherwise bear. These lawsuits all seek monetary
damages. The following two cases have been consolidated and are currently
pending in U.S. District Court for the Eastern District of Missouri, and were
filed alleging claims on behalf of all direct purchasers of glyphosate-based
herbicides or paraquat-based herbicides in the United States from March 1, 1988,
to the present: (i) a suit filed by S&M Farm Supply, Inc. on Nov. 21, 2001, in
U.S. District Court for the Northern District of California; and (ii) a suit
filed by Orange Cove Ag-Chem and Sidehill Citrus Grove, Inc., on March 11, 2002,
in U.S. District Court for the Eastern District of California. On Oct. 16, 2003,
the District Court denied plaintiffs' motion to certify these actions as class
actions. On Dec. 16, 2003, the U.S. Court of Appeals for the Eighth Circuit
denied plaintiffs' request for immediate appellate review of the District
Court's decision. In addition, three other purported class action lawsuits
alleging the same facts have been filed by individuals, and are pending in state
courts in California and Tennessee.
As described in our report on Form 10-K for the transition period ended
Aug. 31, 2003, two purported class action lawsuits by farmers, concerning our
biotechnology trait products, have been consolidated in U.S. District Court for
the Eastern District of Missouri. The suits were initially filed against the
former Monsanto Company by two groups of farmers: one on Dec. 14, 1999, in the
U.S. District Court for the District of Columbia; and the other on Feb. 14,
2002, in the U.S. District Court for the Southern District of Illinois. In March
2001, plaintiffs amended their complaint to add Pioneer, Syngenta Seeds,
Syngenta Crop Protection, and Bayer CropScience as defendants. The complaints
included both tort and antitrust allegations. The tort claims included alleged
violations of unspecified international laws through patent license agreements,
alleged breaches of an implied warranty of merchantability, and alleged
violations of unspecified consumer fraud and deceptive business practices laws,
all in connection with the sale of genetically modified seed. The antitrust
claims included allegations of violations of various antitrust laws, including
allegations of a conspiracy among defendants to fix seed prices in the United
States in violation of federal antitrust laws. Plaintiffs sought declaratory and
injunctive relief in addition to antitrust, treble, compensatory and punitive
damages and attorneys' fees. On Sept. 22, 2003, the District Court granted
Monsanto's motion for summary judgment on all tort claims, and denied
plaintiffs' motion to allow the tort claims to proceed as a class action. On
Sept. 30, 2003, the District Court denied plaintiffs' motion to allow their
antitrust claims to proceed as a class action. On Dec. 16, 2003, the U.S. Court
of Appeals for the Eighth Circuit granted plaintiffs' request for immediate
appellate review of the District Court's decision denying class certification of
their antitrust claims.
35
As described in our report on Form 10-K for the transition period ended
Aug. 31, 2003, 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 U.S. 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 (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. Approximately 22 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
are currently pending in the District Court. On Feb. 14, 2000, the District
Court dismissed claims by two of these plaintiffs, on the ground that they were
barred by the 1984 settlement. On Nov. 30, 2001, the U.S. Court of Appeals for
the Second Circuit vacated the District Court's dismissal, and on June 9, 2003,
the U.S. Supreme Court failed to overturn the judgment of the Court of Appeals,
thereby allowing these two claims to proceed notwithstanding the 1984 class
action settlement. The District Court has scheduled a hearing on Jan. 26, 2004,
on the issue of whether it retains jurisdiction over the two cases. Defendants
have stated that they will file a motion to dismiss on the basis of the
government contract defense, which has led to the dismissal of other Agent
Orange-related suits.
As described in our report on Form 10-K for the transition period ended
Aug. 31, 2003, since the late 1990s, the U.S. Environmental Protection Agency
(EPA) has focused attention on the presence of dioxin in the Kanawha River in
West Virginia. As part of its efforts in this regard, the EPA is conducting
preliminary assessments at more than 20 sites identified as potential sources of
dioxin in the Kanawha River. Among these sites are three landfills -- the Heizer
Creek landfill, the Poca Strip Mine landfill, and the Manila Creek landfill --
that Pharmacia used in the late 1950s to dispose of plant waste from its former
Nitro, West Virginia, manufacturing location. Through the preliminary assessment
work, the EPA identified an elevated dioxin level in one soil sample taken at
the Heizer Creek landfill, and notified Pharmacia of its potential liability at
that landfill. Pursuant to a September 1999 consent order with the EPA,
Pharmacia and (after Sept. 1, 2000) Monsanto prepared and submitted to the EPA
an Engineering Evaluation/Cost Analysis (EE/CA) Report, which contained, among
other things, our recommended remedy. The cost to implement the recommended
remedy was estimated at $1.5 million, and funds were reserved for this amount.
The EPA has approved the EE/CA Report. As of this time, the EPA has not
identified elevated dioxin levels at the Poca Strip Mine or Manila Creek
landfills. Also with regard to the EPA's focus on dioxin in the Kanawha River,
in May 2002, the EPA sent Monsanto, as well as Solutia, a "notice of potential
liability and offer to negotiate for removal action" regarding the Kanawha River
Site in Putnam and Kanawha counties, West Virginia. The EPA's communication to
Monsanto and Solutia was premised on Pharmacia's former operations at the Nitro
plant. Pharmacia, Solutia, and Monsanto have all been in communication with the
EPA regarding the notice and offer. Monsanto believes that the Kanawha River
Site is the responsibility of Solutia under the terms of the Distribution
Agreement between Pharmacia and Solutia, and has tendered responsibility for it
to Solutia. Prior to Solutia's Chapter 11 filing, Solutia refused to accept the
matter. In order to mitigate damages and protect the rights and positions of
Monsanto and Pharmacia, Monsanto has been managing this matter on behalf of
Pharmacia. We will make a claim for recovery against Solutia in the course of
its bankruptcy proceeding. The EPA and Monsanto are negotiating a consent order
under which, if executed, Monsanto would prepare an EE/CA Report, which would
contain the results of our investigation of dioxin contamination in the Kanawha
River, the sources of such contamination, an evaluation of removal options, and
a recommended approach to removing or otherwise addressing the contaminated
sediments. At this point, the degree to which Monsanto/ Solutia/ Pharmacia, as
opposed to third parties, could ultimately be responsible for costs associated
with this matter is unclear.
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 is now a wholly
owned subsidiary of Pfizer, 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. comprises the
operations, assets and liabilities that were previously the Chemicals Business.
36
The following table sets forth a chronology of events that resulted in the
formation of Monsanto, Pharmacia and Solutia as three separate and distinct
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."
-------------------- --------------------------------------------------------------------------------
March 31, 2000 o Effective date of the Merger.
o In connection with the Merger, (1) PNU became a wholly owned subsidiary of
Former Monsanto (now Pharmacia); (2)Former Monsanto changed its name from
"Monsanto Company" to "Pharmacia Corporation"; and (3) we changed our
name from "Monsanto Ag Company" to "Monsanto Company."
-------------------- --------------------------------------------------------------------------------
Sept. 1, 2000 o We entered into a Separation Agreement with Pharmacia related to the
transfer of the operations, assets and liabilities of the Ag Business from
Pharmacia to us.
o Pursuant to the Separation Agreement, we were 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.
-------------------- --------------------------------------------------------------------------------
July 1, 2002 o We, Pharmacia and Solutia amended the Sept. 1, 1997 Distribution
Agreement, to provide that Solutia will indemnify us for the same
liabilities for which it had agreed to indemnify Pharmacia, and to clarify
the parties' rights and obligations.
o We and Pharmacia amended the Sept. 1, 2000 Separation Agreement, to clarify
our respective rights and obligations relating to our indemnification
obligations.
-------------------- --------------------------------------------------------------------------------
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.
-------------------- --------------------------------------------------------------------------------
April 16, 2003 o Pursuant to a merger transaction, Pharmacia became a wholly owned
subsidiary of Pfizer.
-------------------- --------------------------------------------------------------------------------
Dec. 17, 2003 o Solutia filed a voluntary petition for reorganization under Chapter
11 of the U.S. Bankruptcy Code.
-------------------- --------------------------------------------------------------------------------
37
The liabilities for which we were 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.
Solutia has agreed to indemnify both Pharmacia and us for any liabilities that
we incur in connection with the liabilities that Solutia assumed.
On Dec. 17, 2003, Solutia and 14 of its U.S. subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the
U.S. Bankruptcy Court for the Southern District of New York. In the Chapter 11
proceeding, Solutia is seeking relief from paying certain liabilities, including
the liabilities that it assumed from Pharmacia. Note 10 - Commitments and
Contingencies, includes further information regarding Solutia, and the
reasonable possibility of a material adverse effect on our financial position,
profitability and/or liquidity.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits: See Exhibit Index (B) Reports on Form 8-K:
Date Filed or
Furnished Item No. Description
--------- ------- -----------
Sept. 9, 2003 Item 12 The company furnished a report on Form 8-K (Item 12), providing modified
historical pro forma financial information based upon crop fiscal year. This
information was posted to the company's website.
Sept. 16, 2003 Items 9 The company furnished a report on Form 8-K (Item 9), providing a slide
presentation prepared for use by the company's Chief Executive Officer at the
Banc of America Securities' 33rd Annual Investment Conference in San
Francisco on Sept. 16, 2003.
Sept. 18, 2003 Item 9 The company furnished a report on Form 8-K (Item 9), providing a slide
presentation prepared for use by the company's Chief Executive Officer at the
Credit Suisse First Boston 16th Annual Chemical Conference in New York on
Sept. 18, 2003.
Sept. 24, 2003 Item 5 The company filed a report on Form 8-K (Item 5), announcing a quarterly
dividend and setting the date of the 2004 annual meeting of shareowners to be
held on Jan. 29, 2004.
Oct. 15, 2003 Items 9 and 12 The company furnished a report on Form 8-K (Item 9 and Item 12), providing:
(i) a press release announcing Monsanto Company's fourth quarter and fiscal
year 2003 financial and operating results; (ii) fourth quarter and fiscal
year 2003 supplemental data; (iii) 1996-2003 Monsanto Biotechnology U.S.
Trait Acreage; (iv) a slide presentation to accompany the company's webcast
financial results conference call held on Oct. 15, 2003; and (v) updated
historical pro forma financial information based on crop fiscal year.
Oct. 16, 2003 Items 9 and 12 The company furnished an amended report on Form 8-K/A (Item 9 and Item 12),
providing corrections to the slide presentation that accompanied the
company's webcast financial results conference call on Oct. 15, 2003.
38
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: Jan. 14, 2004
39
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
2 Omitted - Inapplicable
3 Omitted - Inapplicable
4 Omitted - Inapplicable
9 Omitted - Inapplicable
10.15 Monsanto Non-Employee Director Equity Incentive
Compensation Plan, amended and effective Dec. 3,
2003
11 Omitted - Inapplicable; see Note 7 of Notes to
Consolidated Financial Statements
15 Omitted - Inapplicable
18 Omitted - Inapplicable
19 Omitted - Inapplicable
22 Omitted - Inapplicable
23 Omitted - Inapplicable
24 Omitted - Inapplicable
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)
99.1 Computation of Ratio of Earnings to Fixed Charges
99.2 First Amendment to the Monsanto Company Long Term
Incentive Plan, subject to shareowner approval at the
Annual Meeting of Shareowners to be held Jan. 29,
2004 (incorporated by reference to Appendix C to
Notice of Annual Meeting and Proxy Statement dated
Dec. 12, 2003, File No. 1-16167)
40