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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 May 31, 2004
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
------ ------
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 July 8, 2004
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Common Stock, $0.01 par value 267,026,979 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 25
Background 25
Change in Fiscal Year End 25
Financial Measures 25
Results of Operations - Third Quarter Fiscal Year 2004 26
Results of Operations - First Nine Months of Fiscal Year 2004 31
Restructuring 37
Financial Condition, Liquidity, and Capital Resources 39
Contingent Liabilities Relating to Solutia Inc. (Off-Balance Sheet Arrangement) 42
Outlook - Update 43
Critical Accounting Policies and Estimates 47
New Accounting Standards 47
Cautionary Statements: Risk Factors Regarding Forward-Looking Statements 49
Item 3. Quantitative and Qualitative Disclosures About Market Risk 52
Item 4. Controls and Procedures 52
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 53
Item 2. Securities, Use of Proceeds and Issuer Purchases of Equity Securities 58
Item 5. Other Information 58
Item 6. Exhibits and Reports on Form 8-K 60
SIGNATURE 61
EXHIBIT INDEX 62
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The Statement of Consolidated Operations of Monsanto Company and
subsidiaries for the three months and nine months ended May 31, 2004, and May
31, 2003, the Condensed Statement of Consolidated Financial Position as of May
31, 2004, and Aug. 31, 2003, the Statement of Consolidated Cash Flows for the
nine months ended May 31, 2004, and May 31, 2003, 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. Monsanto comprises the operations, assets and
liabilities that were previously the agricultural business of Pharmacia
Corporation (Pharmacia), which is now a subsidiary of Pfizer Inc. Monsanto was
incorporated as a subsidiary of Pharmacia in February 2000. On Sept. 1, 2000,
the assets and liabilities of the agricultural business were transferred from
Pharmacia to Monsanto, pursuant to the terms of a separation agreement dated as
of that date. With respect to the time period prior to Sept. 1, 2000, these
terms also refer to the agricultural business of Pharmacia. 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 Nine Months
Ended Ended
May 31, May 31,
-------------------- ---------------------
2004 2003 2004 2003
---- ---- ---- ----
Net Sales $1,679 $1,468 $4,199 $3,607
Cost of Goods Sold 840 742 2,144 1,892
------ ------ ------ ------
Gross Profit 839 726 2,055 1,715
Operating Expenses:
Selling, general and administrative expenses 291 299 843 757
Bad-debt expense 35 5 75 39
Research and development expenses 128 117 370 360
Adjustments of goodwill -- -- 69 --
Restructuring charges - net 9 -- 66 39
------ ------ ------ ------
Total Operating Expenses 463 421 1,423 1,195
Income From Operations 376 305 632 520
Interest Expense (24) (21) (68) (65)
Interest Income 3 3 15 13
Other Expense - Net (52) (21) (114) (40)
------ ------ ------ ------
Income From Continuing Operations Before Income Taxes 303 266 465 428
Income Tax Expense 74 87 157 151
------ ------ ------ ------
Income From Continuing Operations 229 179 308 277
Discontinued Operations (Note 17):
Income (loss) from operations of discontinued businesses (including
adjustment to reflect sales proceeds for the three and nine months ended
May 31, 2004) 22 (8) (9) (15)
Income tax benefit (1) (3) (10) (6)
------ ------ ------ ------
Income (Loss) on Discontinued Operations 23 (5) 1 (9)
------ ------ ------ ------
Income Before Cumulative Effect of Accounting Change 252 174 309 268
Cumulative Effect of a Change in Accounting Principle - Net of Tax Benefit of $7 -- -- -- (12)
------ ------ ------ ------
Net Income $ 252 $ 174 $ 309 $ 256
====== ====== ====== ======
Basic Earnings per Share:
Income from continuing operations $ 0.86 $ 0.69 $ 1.17 $ 1.06
Income (loss) on discontinued operations 0.09 (0.02) -- (0.03)
Cumulative effect of a change in accounting principle -- -- -- (0.05)
------ ------ ------ ------
Net Income $ 0.95 $ 0.67 $ 1.17 $ 0.98
====== ====== ====== ======
Diluted Earnings per Share:
Income from continuing operations $ 0.85 $ 0.68 $ 1.15 $ 1.06
Income (loss) on discontinued operations 0.08 (0.02) -- (0.03)
Cumulative effect of a change in accounting principle -- -- -- (0.05)
------ ------ ------ ------
Net Income $ 0.93 $ 0.66 $ 1.15 $ 0.98
====== ====== ====== ======
Weighted Average Shares Outstanding:
Basic 265.8 261.4 264.0 261.4
Diluted 270.7 261.7 268.7 261.5
Dividends per Share $ 0.28 $ 0.13 $ 0.54 $ 0.49
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 May 31, As of Aug. 31,
2004 2003
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 327 $ 281
Short-term investments -- 230
Trade receivables, net of allowances of $266 and $254, respectively 2,737 2,296
Miscellaneous receivables 391 437
Deferred tax assets 239 430
Inventories 1,196 1,207
Assets of discontinued operations 42 --
Other current assets 68 58
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Total Current Assets 5,000 4,939
Property, Plant and Equipment - Net 2,130 2,280
Goodwill - Net 718 768
Other Intangible Assets - Net 480 571
Other Assets 969 978
------- -------
Total Assets $ 9,297 $ 9,536
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Short-term debt $ 401 $ 269
Accounts payable 333 290
PCB litigation settlement liability -- 400
Liabilities of discontinued operations 5 --
Accrued marketing programs 473 396
Other accrued liabilities 609 664
------- -------
Total Current Liabilities 1,821 2,019
Long-Term Debt 1,072 1,258
Postretirement Liabilities 718 837
Other Liabilities 260 266
Commitments and Contingencies (Note 14)
Shareowners' Equity:
Common stock (authorized: 1,500,000,000 shares, par value $0.01)
Issued 270,784,061 and 262,681,253 shares, respectively;
outstanding 266,179,713 and 262,678,753 shares, respectively 3 3
Treasury stock, 4,604,348 and 2,500 shares, respectively, at cost (133) --
Additional contributed capital 8,267 8,077
Retained deficit (1,565) (1,733)
Accumulated other comprehensive loss (1,127) (1,168)
Reserve for ESOP debt retirement (19) (23)
------- -------
Total Shareowners' Equity 5,426 5,156
------- -------
Total Liabilities and Shareowners' Equity $ 9,297 $ 9,536
======= =======
See the accompanying notes to consolidated financial statements.
3
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
Unaudited
Nine Months Ended
May 31,
------------------------
2004 2003
---- ----
Operating Activities:
Net Income $309 $256
Adjustments to reconcile cash provided (required) by operations:
Items that did not require (provide) cash:
Pretax cumulative effect of change in accounting principle -- 19
Depreciation and amortization expense 340 337
Adjustments of goodwill 69 --
Impairment of assets included in discontinued operations 4 --
Bad-debt expense 75 39
Noncash restructuring 35 19
Deferred income taxes 213 (48)
Gain on disposal of investments and property - net (13) (3)
Equity affiliate expense - net 26 32
Write-off of retired assets 5 16
Other items that did not require (provide) cash 23 (23)
Changes in assets and liabilities that provided (required) cash:
Trade receivables (496) (183)
Inventories 23 (25)
Accounts payable and accrued liabilities 8 116
PCB litigation settlement liability (400) --
Pension contributions (150) (35)
Related-party transactions -- 11
Other items 41 26
---- ----
Net Cash Provided by Operations 112 554
---- ----
Cash Flows Provided (Required) by Investing Activities:
Purchases of short-term investments (250) (250)
Maturities of short-term investments 480 250
Capital expenditures (148) (151)
Technology and other investments (46) (52)
Other investments and property disposal proceeds 24 8
---- ----
Net Cash Provided (Required) by Investing Activities 60 (195)
---- ----
Cash Flows Provided (Required) by Financing Activities:
Net change in short-term financing (51) (459)
Long-term debt proceeds 113 266
Long-term debt reductions (111) (68)
Debt issuance costs -- (2)
Payments on other financing (4) (11)
Treasury stock purchases (133) --
Stock option exercises 163 --
Dividend payments (103) (94)
---- ----
Net Cash Required by Financing Activities (126) (368)
---- ----
Net Increase (Decrease) in Cash and Cash Equivalents 46 (9)
Cash and Cash Equivalents at Beginning of Period 281 137
---- ----
Cash and Cash Equivalents at End of Period $327 $128
==== ====
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. In October 2003, the
company announced plans to exit the European breeding and seed business for
wheat and barley and to discontinue the plant-made pharmaceuticals program.
In third quarter 2004, Monsanto signed a definitive agreement for the sale
of assets associated with the European wheat and barley business, and in
fourth quarter 2004, this sale was finalized. Refer to Note 17 -
Discontinued Operations - and Note 18 - Subsequent Events - for further
details. As a result of the exit plans announced in October 2003, the
European wheat and barley business and plant-made pharmaceuticals program
have been presented as discontinued operations. Accordingly, for the three
months and nine months ended May 31, 2004, and May 31, 2003, the Statement
of Consolidated Operations has been conformed to this presentation. Also as
of May 31, 2004, the Condensed Statement of Consolidated Financial Position
has been conformed to this presentation. These businesses were previously
reported as part of the Seeds and Genomics segment.
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
aligned 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 and nine months ended May 31, 2004 (also referred
to as the third quarter and first nine months, respectively, of fiscal year
2004), and as of and for the three months and nine months ended May 31,
2003, 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, and Monsanto's quarterly reports on Form 10-Q for the periods ended
Nov. 30, 2003, and Feb. 29, 2004. Financial information for the first nine
months of fiscal year 2004 should not be annualized because of the
seasonality of the company's business.
Note 2 - New Accounting Standards
In January 2003, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46), and amended it by issuing FIN 46R in December 2003. FIN
46R addresses the consolidation of business enterprises to which the usual
condition of consolidation (ownership of a majority voting interest) does
not apply. This interpretation focuses on controlling financial interests
that may be achieved through arrangements that do not involve voting
interests. It concludes that, in the absence of clear control through
voting interests, a company's exposure (variable interest) to the economic
risks and potential rewards from the variable interest entity's assets and
activities are the best evidence of control. If an enterprise holds a
majority of the variable interests of an entity, it would be considered the
5
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
primary beneficiary. The primary beneficiary is required to include the
assets, liabilities and results of operations of the variable interest
entity in its financial statements.
Monsanto adopted the provisions of FIN 46R for the quarter ended Feb.
29, 2004, for interests in variable interest entities that are considered
to be special-purpose entities. Monsanto has an arrangement with a
special-purpose entity to provide a financing program for selected Monsanto
customers. See Note 4 - Customer Financing Program - for a description of
this arrangement. This special-purpose entity is consolidated.
As of May 31, 2004, the company adopted the provisions of FIN 46R for
all other types of variable interest entities. The company has evaluated
its relationships with two entities and has determined that, although the
entities are variable interest entities and Monsanto holds variable
interests in the entities, these investments are not required to be
consolidated in the company's financial statements pursuant to FIN 46R as
Monsanto is not the primary beneficiary. One entity is a biotechnology
company focused on plant gene research, development and commercialization,
in which the company had a nine percent equity investment as of May 31,
2004. Monsanto currently has an agreement in place under which Monsanto
makes payments for research services and receives rights to intellectual
property developed within funded research. The entity reported total assets
of $31 million and total liabilities of $13 million as of Dec. 31, 2003,
and revenues of $20 million for the year ended Dec. 31, 2003. The second
entity is a joint venture in which the company has a 49 percent equity
investment. This joint venture packages and sells seeds, with a focus in
corn and sunflower seeds, and also sells and distributes agricultural
chemical products. The joint venture reported total assets of $24 million
and total liabilities of $17 million as of Dec. 31, 2003, and revenues of
$18 million for the year ended Dec. 31, 2003. As of May 31, 2004,
Monsanto's total estimate of maximum exposure to loss as a result of its
relationships with these entities is approximately $23 million, which
represents Monsanto's equity investments in these entities.
In January 2004, the FASB issued FASB Staff Position No. 106-1 (FSP
106-1), Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003. FSP 106-1
permits a sponsor of a postretirement health care plan that provides a
prescription drug benefit to make a one-time election to defer accounting
for the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act), which was signed into law on Dec. 8,
2003. The Act introduced a prescription drug benefit under Medicare, as
well as a federal subsidy to sponsors of retiree health care benefit plans
that provide a benefit that is at least actuarially equivalent to Medicare.
These provisions of the new law will affect accounting measurements of the
company's postretirement benefit obligation and expense. As permitted by
FSP 106-1, Monsanto made a one-time election to defer accounting for the
effect of the Act, and as a result, the amounts included in the
consolidated financial statements related to the company's postretirement
benefit plans do not reflect the effects of the Act. In May 2004, the FASB
issued FSP No. 106-2 (FSP 106-2), which superseded FSP 106-1. FSP 106-2
provides authoritative guidance on the accounting for the federal subsidy
and specifies the disclosure requirements for employers who have adopted
FSP 106-2. Detailed regulations necessary to implement the Act have not
been issued, including those that would specify the manner in which
actuarial equivalency must be determined, the evidence required to
demonstrate actuarial equivalency, and the documentation requirements
necessary to be entitled to the subsidy. FSP 106-2 is effective for
Monsanto's first quarter of fiscal 2005. Monsanto is currently evaluating
the effect that the adoption of FSP 106-2 will have on its results of
operations and financial condition. Final authoritative guidance could
require the company to change previously reported information.
In December 2003, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 132 (Revised 2003), Employers' Disclosures about
Pensions and Other Postretirement Benefits, which enhanced the required
disclosures about pension plans and other postretirement benefit plans, but
did not change the measurement or recognition principles for those plans.
The statement requires additional interim and annual disclosures about the
assets, obligations, cash flows, and net periodic benefit cost of defined
benefit pension plans and other defined benefit postretirement plans. The
required interim disclosures were effective for Monsanto in the third
quarter of fiscal year 2004, and the required annual disclosures are
effective for Monsanto's 10-K for the fiscal year ended Aug. 31, 2004.
Refer to Note 9 - Postretirement Benefits - Pensions - for the required
quarterly disclosures.
In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104). SAB 104
updates portions of the interpretive guidance included in Topic 13 of the
6
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS 143). SFAS 143, which was effective for
Monsanto on Jan. 1, 2003, addresses financial accounting for and reporting
of costs and obligations associated with the retirement of tangible
long-lived assets. Upon adopting this standard, in accordance with APB
Opinion 20, Monsanto recorded an aftertax cumulative effect of accounting
change of $12 million, or $0.05 per share. This noncash charge was recorded
as of Jan. 1, 2003. In addition, as required by SFAS 143, as of Jan. 1,
2003, net property, plant and equipment increased by $10 million, and asset
retirement obligations (a component of noncurrent liabilities) of $30
million were recorded. Adoption of this standard did not affect the
company's liquidity. If SFAS 143 would have been effective for all periods
presented, net earnings would have been reduced by $1 million for the nine
months ended May 31, 2003, with no change to reported diluted earnings per
share.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 replaced
Emerging Issues Task Force Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS 146 requires
companies to recognize costs associated with exit or disposal activities
when they are 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 3 - 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.
Note 3 - Restructuring
Restructuring charges were recorded in the Statement of Consolidated
Operations as follows:
Three Months Ended Nine Months Ended
May 31, May 31,
------------------------ -----------------------
2004 2003 2004 2003(1)
---- ---- ---- ----
Cost of goods sold $ (2) $ -- $(19) $(10)
Restructuring charges - net (2) (9) -- (66) (39)
---- ---- ---- ----
Loss from continuing operations before income
taxes (11) -- (85) (49)
Income tax benefit 4 -- 28 18
---- ---- ---- ----
Loss from continuing operations (7) -- (57) (31)
Income (loss) from operations of discontinued
businesses (3) 25 -- (9) --
Income tax benefit -- -- 10 --
---- ---- ---- ----
Income on discontinued operations 25 -- 1 --
---- ---- ---- ----
Net income (loss) $ 18 $ -- $(56) $(31)
==== ==== ==== ====
(1) The $10 million of restructuring charges recorded in cost of goods
sold was split by segment as follows: $1 million Seeds and Genomics
and $9 million Agricultural Productivity. The $39 million of
restructuring charges - net was split by segment as follows: $19
million Seeds and Genomics and $20 million Agricultural Productivity.
(2) The restructuring charges for the three months ended May 31, 2004,
were offset by $4 million in restructuring reversals related to prior
plans, all of which was recorded in the Agricultural Productivity
segment. Restructuring charges for the nine months ended May 31, 2004,
and May 31, 2003, were offset by prior plan reversals of $6 million
($5 million in Agricultural Productivity and $1 million in Seeds and
Genomics) and $12 million ($9 million in Agricultural Productivity and
$3 million in Seeds and Genomics), respectively.
(3) Fiscal year 2004 contains restructuring charges related to
discontinued businesses (refer to Note 17 - Discontinued Operations).
These restructuring charges were recorded in discontinued operations.
Refer to the tables that follow for more details.
7
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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. Total restructuring charges approved under the fiscal
year 2004 restructuring plan were $289 million pretax. The company will
further concentrate its resources on its core seeds and traits businesses.
These plans included: (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 are expected to require total
restructuring charges of up to $191 million pretax ($136 million aftertax)
in fiscal year 2004. Additionally, the approved plan included the $69
million impairment of goodwill in the global wheat business (refer to Note
6 - Goodwill and Other Intangible Assets).
Third quarter fiscal year 2004 pretax restructuring activity was
comprised of income of $23 million related to the Seeds and Genomics
segment (charges of $2 million in continuing operations and income of $25
million in discontinued operations), and charges of $13 million related to
the Agricultural Productivity segment. Pretax restructuring charges of $100
million for the first nine months of fiscal year 2004 were comprised of $44
million related to the Seeds and Genomics segment ($35 million in
continuing operations and $9 million in discontinued operations) and $56
million related to the Agricultural Productivity segment. Additional
actions identified for reducing costs in the ROUNDUP herbicide business are
expected to occur in the fourth quarter of fiscal year 2004. For fiscal
year 2004, the company estimates that it will incur $145 million of pretax
charges relating to the Agricultural Productivity segment and $115 million
of pretax charges relating to the Seeds and Genomics segment. These
estimates include $130 million of pretax charges relating to work force
reductions, $51 million pretax in asset impairments (excluding the $69
million impairment of goodwill related to the global wheat reporting unit
discussed in Note 6), and $10 million pretax in costs associated with
facility closures during fiscal year 2004. Charges relating to asset
impairments within the Seeds and Genomics segment are approximately $30
million lower than previously estimated due to the favorable results from
the sale of the European wheat and barley business.
During the third quarter of fiscal year 2004, pretax restructuring
charges of $13 million were recorded in continuing operations related to
work force reductions. Work force reductions were primarily related to
downsizing of certain manufacturing and commercial operations and related
support functions in the United States, as well as reductions in Europe
resulting from changes in the business model. Asset impairments in
continuing operations of $2 million were recorded in cost of goods sold,
including property, plant and equipment impairments of $1 million in the
United States related to production equipment, and inventory impairments of
$1 million in Canada related to disposal of inventory at a production site
being shutdown. Restructuring income of $25 million recorded in
discontinued operations was related to the recently completed sale of the
European wheat and barley business and reflects an increase in the value of
that business and its related assets that were previously written down in
the first quarter of 2004. Due to higher than anticipated sales proceeds
and lower than expected employee-related costs, the company was able to
obtain a higher value for the sale of the European wheat and barley
business, and the fair value of the intangible assets was increased
accordingly, but not above their pre-write down book values. See Note 17 -
Discontinued Operations - for further discussion.
In the first nine months of fiscal year 2004, pretax restructuring
charges of $59 million were recorded related to work force reductions. Work
force reductions in continuing operations of $56 million were primarily in
the areas of research and development, manufacturing, information
technology and marketing in the United States; downsizing the regional
structure 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 of $3 million were related to employees of the plant-made
pharmaceuticals program. Facility closure charges in discontinued
operations of $2 million were related to shutdown expenses resulting from
the exit of the plant-made pharmaceuticals site. Asset impairments in
continuing operations of $35 million included $19 million recorded in cost
of goods sold and the remainder in restructuring charges - net. Property,
plant and equipment impairments of $10 million were recorded in the United
States and, to a lesser extent, in Asia for the shutdown of production
lines and disposal of equipment. Inventory impairments of $9 million were
also recorded related to discontinued seed hybrids in Argentina,
discontinued agricultural chemical products and seed hybrids in Brazil,
8
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
discontinued agricultural chemical products in Asia, and disposal of
inventory at a production site being shutdown in Canada. Asset impairments
in restructuring charges - net consisted of $11 million for the closure of
an office building in the United States, $2 million for the closure of a
technology facility in Canada, an intangible asset impairment of $2 million
in Asia (refer to Note 6), and approximately $1 million for the disposal of
a computer system in Asia. Discontinued operations asset impairments of $4
million consisted of $1 million related to other intangible assets and $2
million related to property, plant and equipment, both associated with the
European wheat and barley business; and property, plant and equipment
impairments of $1 million associated with the plant-made pharmaceuticals
program.
Work force reduction and facility closure charges were cash charges.
Asset impairments were non-cash charges. The following table displays the
pretax charges incurred by segment under the fiscal year 2004 restructuring
plan for the three months ended May 31, 2004 (before restructuring
reversals related to prior year plans of $4 million):
Work Force Facility Asset
Segment Reductions Closures Impairments Total
------- ----------------- -------------- ----------------- ----------------
Continuing Operations:
Seeds and Genomics $ 2 $-- $ -- $ 2
Agricultural Productivity 11 -- 2 13
----------------- -------------- ----------------- ----------------
Total Continuing Operations 13 -- 2 15
Discontinued Operations:
Seeds and Genomics -- -- (25) (25)
Agricultural Productivity -- -- -- --
----------------- -------------- ----------------- ----------------
Total Discontinuing Operations -- -- (25) (25)
Total Segment
Seeds and Genomics 2 -- (25) (23)
Agricultural Productivity 11 -- 2 13
----------------- -------------- ----------------- ----------------
Total $ 13 $-- $(23) $(10)
================= ============== ================= ================
The following table displays the pretax charges incurred by segment
under the fiscal year 2004 restructuring plan for the nine months ended May
31, 2004 (before restructuring reversals related to prior year plans of $6
million):
Work Force Facility Asset
Segment Reductions Closures Impairments Total
------- ----------------- -------------- ----------------- ----------------
Continuing Operations:
Seeds and Genomics $14 $-- $21 $ 35
Agricultural Productivity 42 -- 14 56
----------------- -------------- ----------------- ----------------
Total Continuing Operations 56 -- 35 91
Discontinued Operations:
Seeds and Genomics 3 2 4 9
Agricultural Productivity -- -- -- --
----------------- -------------- ----------------- ----------------
Total Discontinuing Operations 3 2 4 9
Total Segment
Seeds and Genomics 17 2 25 44
Agricultural Productivity 42 -- 14 56
----------------- -------------- ----------------- ----------------
Total $59 $ 2 $39 $ 100
================= ============== ================= ================
Charges incurred in connection with the fiscal year 2004 restructuring
plan were accounted for under SFAS 146 (as discussed in Note 2 - New
Accounting Standards) and SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. 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
9
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
of Defined Benefit Pension Plans and for Termination Benefits, which
addresses the accounting for other employee benefits.
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 May 31, 2004:
Work Force Facility Asset
Reductions Closures Impairments Total
--------------- -------------- ----------------- -----------------
Continuing Operations:
Restructuring liability $56 $ -- $ 35 $ 91
Cash payments (38) -- -- (38)
Asset impairment -- -- (35) (35)
Reclassification of reserves to other balance sheet accounts:
Misc. liability (1) -- -- (1)
--------------- -------------- ----------------- -----------------
Ending liability as of May 31, 2004 17 -- -- 17
Discontinued Operations:
Restructuring liability 3 2 4 9
Cash payments (3) (2) -- (5)
Asset impairment -- -- (4) (4)
--------------- -------------- ----------------- -----------------
Ending liability as of May 31, 2004 -- -- -- --
Total Restructuring
Restructuring liability 59 2 39 100
Cash payments (41) (2) -- (43)
Asset impairment -- -- (39) (39)
Reclassification of reserves to other balance
sheet accounts:
Misc. liability (1) -- -- (1)
--------------- -------------- ----------------- -----------------
Ending liability as of May 31, 2004 $17 $ -- $ -- $ 17
=============== ============== ================= =================
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, no
charges were recorded in the three months ended May 31, 2003. In the first
nine months of 2003, Monsanto recorded $61 million pretax of restructuring
charges, of which $10 million was recorded in cost of goods sold and the
remainder in the restructuring line item. The company also recorded
reversals of $12 million for the 2000 and 2002 restructuring plans,
resulting in net pretax restructuring expenses of $49 million for the nine
months ended May 31, 2003.
10
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Activities related to the 2002 restructuring plan during the first
nine months 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 (1) (2) (3)
Reclassification of reserves to other balance sheet accounts:
Misc. liability -- (1) (1)
Reversals of excess reserves (1) -- (1)
---- -- ----
Ending liability as of May 31, 2004 $ -- $-- $ --
==== === ====
During the first nine months of fiscal year 2004, the reserve balance
was reduced by $1 million for cash severance payments to former employees
and $2 million for facility closure actions that were completed. No
additional work force separation payments are expected, and accordingly,
the related remaining reserves were reversed in third quarter 2004. As of
May 31, 2004, the liability balance for the 2002 restructuring plan was
less than $1 million. The remaining facility closure actions associated
with this plan are expected to be completed during fiscal year 2004 and
will be funded from operations; these actions 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
nine months of fiscal year 2004 were as follows:
Work Force Facility
Reductions Closures Total
---------- -------- -----
Beginning liability as of Aug. 31, 2003 $ 5 $ 3 $ 8
Costs charged against reserves (1) (2) (3)
Reclassification of reserves to other balance sheet accounts:
Misc. liability (1) (1) (2)
Reversals of excess reserves (3) -- (3)
---- ---- ----
Ending liability as of May 31, 2004 $ -- $ -- $ --
==== ==== ====
The 2000 plan restructuring reserves decreased $3 million in the first
nine months of 2004 due to the sale of a U.S. manufacturing plant during
second quarter 2004. In addition, reversals of $3 million were recorded in
the first nine months of fiscal year 2004 ($2 million in third quarter
2004) related to work force reductions. Reversals were recorded primarily
because costs were lower than originally estimated. As of May 31, 2004, the
liability balance for the 2000 restructuring plan was less than $1 million.
The remaining restructuring actions associated with this plan are expected
to be completed during fiscal year 2004 and will be funded from operations;
these actions are not expected to significantly affect the company's
liquidity.
Note 4 - 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
11
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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 nine
months of 2004 and 2003.
Customer loans sold through the financing program totaled $124 million
for the first nine months of fiscal year 2004 and $153 million for the
comparable period last year. The loan balances outstanding as of May 31,
2004, and Aug. 31, 2003, were $97 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 May 31, 2004, and Aug. 31, 2003, less than $1 million of loans
sold through this financing program were delinquent. As of May 31, 2004,
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.
As discussed in Note 2 - New Accounting Standards, in January 2003,
FIN 46 was issued and then amended by FIN 46R in December 2003. The SPE is
included in Monsanto's consolidated financial statements. Because QSPEs are
excluded from the scope of FIN 46R and Monsanto does not have the
unilateral right to liquidate the QSPE, this interpretation does not have
an effect on Monsanto's accounting for the customer financing program.
Note 5 - Inventories
Components of inventories were:
As of May 31, As of Aug. 31,
2004 2003
----------------- ----------------
Finished Goods $ 521 $ 516
Goods In Process 438 464
Raw Materials and Supplies 256 246
------- -------
Inventories at FIFO Cost 1,215 1,226
Excess of FIFO over LIFO Cost (19) (19)
------- -------
Total $ 1,196 $ 1,207
======= =======
12
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Note 6 - Goodwill and Other Intangible Assets
Changes in the net carrying amount of goodwill for the nine months
ended May 31, 2004, 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 19 -- 19
---- --- ----
Balance as of May 31, 2004 $644 $74 $718
==== === ====
The 2003 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 during the quarter ended Nov. 30,
2003, 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.
Under SFAS 142, Goodwill and Other Intangible Assets, the company
initially selected July 1 for performing the required annual impairment
testing of goodwill since July 1 was the approximate time that the company
completed its annual reassessment of its strategy and revised its long-term
financial projections. Performing the SFAS 142 goodwill impairment testing
at this time was appropriate as the revised long-term financial projections
that were the basis for such measurements had been updated to reflect
management's current strategic direction and considered the company's
current and expected future business environment. Accordingly, when the
decision was made to change the company's fiscal year-end from December 31
to August 31, the company also changed its annual strategic reassessment
completion timing from approximately July 1 to approximately March 1. As a
result, the company has changed its annual goodwill impairment testing date
to March 1. The change is not intended to delay, accelerate, or avoid an
impairment charge. Therefore, the company believes that the accounting
change described above was to an alternative principle that is preferable
under the circumstances. The fiscal year 2004 annual goodwill impairment
test was performed as of March 1, 2004, and no indications of goodwill
impairment existed as of that date.
Information regarding the company's other intangible assets related to
continuing operations is as follows:
As of May 31, 2004 As of Aug. 31, 2003
------------------------------------ -------------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------- ------------ --- -------- ------------ ---
Germplasm $ 587 $(406) $181 $ 617 $(376) $241
Acquired biotechnology
intellectual property 418 (206) 212 392 (172) 220
Trademarks 85 (25) 60 108 (26) 82
Other 47 (20) 27 44 (16) 28
------- ------ ---- ------- ------ ----
Total $ 1,137 $(657) $480 $ 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
13
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
of fair value and were recorded within discontinued operations. In third
quarter 2004, a definitive agreement for the divestiture of the European
breeding and seed business for wheat and barley was reached and was
finalized in the fourth quarter of fiscal year 2004. Based on the sales
proceeds, Monsanto was able to obtain a higher value than originally
estimated in the first quarter for the wheat and barley intangible assets
that were previously written down. SFAS 144 requires a company to adjust
the fair value of assets held for sale to reflect the anticipated sales
proceeds in the valuation of the assets, but not in excess of the assets'
pre-write down book value. Accordingly, in the third quarter of fiscal
2004, the value of the European wheat and barley intangible assets was
increased by $25 million because of higher than anticipated sales proceeds
and lower than expected employee termination costs. These assets are
recorded in assets of discontinued operations. 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 charges - net for the Seeds and Genomics segment. The
decreases in germplasm intangible assets were partially offset by the
purchase of an additional interest in a Canadian seed company that occurred
in the second quarter of fiscal 2004; approximately $4 million of the
purchase price was allocated to germplasm and is being amortized over seven
years.
The increase in the carrying amount of acquired biotechnology
intellectual property was primarily related to the acquisition of a
software license for approximately $17 million in the second quarter of
fiscal 2004. This license will provide enabling technology to Monsanto to
improve the speed and efficiency of moving product concepts through its
pipeline and has a useful life of seven years. Additionally, during the
first nine months of fiscal 2004, deliverables totaling $9 million were
received under the 2002 collaboration with Ceres, Inc. This existing
technology has a weighted-average useful life of 10 years. 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 was $30 million
for each of the three month periods ended May 31, 2004, and May 31, 2003
(exclusive of $1 million amortization expense included in discontinued
operations in each period). Total amortization expense of other intangible
assets for the nine months ended May 31, 2004, and May 31, 2003, was $92
million and $88 million, respectively (exclusive of the impairment charges
discussed above and $2 million and $4 million amortization expense for the
nine months ended May 31, 2004, and May 31, 2003, respectively, included in
discontinued operations). 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 7 - Income Taxes
Management regularly assesses the likelihood that deferred tax assets
will be recovered from future taxable income. To the extent management
believes that it is more likely than not that a deferred tax asset will not
be realized, a valuation allowance is established. During the second
quarter of fiscal 2004, the company assessed the realizability of its
deferred tax assets in Argentina and Brazil following completion of the
crop season in these countries and the preparation of updated long-range
financial projections for these countries. The company concluded that it
was more likely than not that the deferred tax assets of $102 million
related to net operating loss carryforwards (NOLs) in Argentina will not be
realizable prior to their expiration from 2006 to 2009 and established a
valuation allowance for the entire amount. This conclusion was based on the
recent history of losses, the continued uncertain economic conditions and
also the limited tax carryforward period of five years. Management is
taking actions to attempt to realize such deferred tax assets; however,
such actions are dependent, in part, on conditions that are not entirely in
management's control. The company also concluded that it is more likely
than not that it will realize its deferred tax assets in Argentina that are
not related to the NOLs noted above through future projected taxable
income.
At the beginning of fiscal 2004, Monsanto Brazil had a valuation
allowance of $90 million for deferred tax assets related to NOLs because
management believed it was more likely than not that such deferred tax
assets would not be realized. However, based on improvements in Monsanto
Brazil's operations related to business changes that the company had begun
implementing two crop seasons previously, and improvements over that period
in Brazil's overall economy, and in particular the agricultural sector,
management now believes it is more likely than not that such deferred tax
14
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
assets will be realized. Accordingly, the previously recorded $90 million
valuation allowance, related to NOLs which have an indefinite life, was
reversed in the second quarter of fiscal 2004. The company also concluded
that it is more likely than not that it will realize its deferred tax
assets in Brazil that are not related to the NOLs noted above through
future projected taxable income.
For the three months ended May 31, 2004, and May 31, 2003, the
effective tax rate was 24 percent and 33 percent, respectively. The
reduction in the tax rate was driven primarily by a favorable adjustment to
the income tax reserve and, to a lesser extent, the geographic mix of
earnings projected for fiscal year 2004 versus those in fiscal 2003. A
settlement was reached with the Internal Revenue Service (IRS) on a number
of issues. As a result, Monsanto has recorded a favorable adjustment in its
third quarter 2004 results. For the nine months ended May 31, 2004, and May
31, 2003, the effective tax rate was 34 percent and 35 percent,
respectively.
As a result of the sale of the European wheat and barley business in
the fourth quarter of fiscal year 2004, a deferred tax asset of $58 million
was recorded at such time with a full valuation allowance. See Note 18 -
Subsequent Events - for further details.
Note 8 - 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 gain of $1 million in the third
quarter of fiscal year 2004 and an aftertax loss of $18 million in the
comparable period last year. The company recorded aftertax losses of $5
million and $2 million, respectively, for the nine months ended May 31,
2004, and May 31, 2003. These gains and losses are included in accumulated
other comprehensive loss.
Note 9 - Postretirement Benefits - Pensions
The majority of Monsanto's employees are covered by noncontributory
pension plans sponsored by the company. The company also provides certain
postretirement health care and life insurance benefits for retired
employees through insurance contracts.
As stated in Note 2 - New Accounting Standards - the FASB revised SFAS
132 effective for all interim periods beginning after Dec. 15, 2003. SFAS
132 revises employers' disclosures about pension plans and other
postretirement benefit plans including disclosures made in interim periods.
While it does not change the measurement or recognition of those plans, it
requires additional interim disclosures as detailed below.
The company's net periodic benefit cost for pension and other
postretirement benefit plans include the following components:
15
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Pension Benefits
Three Months Ended Nine Months Ended
May 31, May 31,
----------------------- ------------------------
2004 2003 2004 2003
---- ---- ---- ----
Service Cost for Benefits Earned During the Period $ 9 $ 8 $26 $24
Interest Cost on Benefit Obligation 28 25 81 76
Assumed Return on Plan Assets (32) (26) (92) (83)
Amortization of Unrecognized Net Loss 8 4 23 7
SFAS 88 Settlement Charge -- 2 -- 5
--- --- --- ---
Total Net Periodic Benefit Cost $ 13 $13 $38 $29
==== === === ===
Other Postretirement Benefits
Three Months Ended Nine Months Ended
May 31, May 31,
----------------------- ------------------------
2004 2003 2004 2003
---- ---- ---- ----
Service Cost for Benefits Earned During the Period $ 2 $ 2 $ 5 $ 7
Interest Cost on Benefit Obligation 7 5 19 13
Amortization of Unrecognized Net Loss 1 1 3 3
--- --- --- ---
Total Net Periodic Benefit Cost $10 $ 8 $27 $23
=== === === ===
Monsanto did not make any contributions to its pension plan in the
three months ended May 31, 2004, but made $150 million in contributions for
the nine months ended May 31, 2004. Pending management's assessment of
fourth quarter 2004 results of operations, the company may make an
additional contribution to its pension plan in the fourth quarter of fiscal
year 2004. In the three months and nine months ended May 31, 2003, pension
plan contributions were $15 million and $35 million, respectively.
Note 10 - 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.
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 income and net
income per share would have been adjusted to the pro forma amounts
indicated as follows:
16
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Three Months Ended Nine Months Ended
May 31, May 31,
------------------------ -----------------------
2004 2003 2004 2003
---- ---- ---- ----
Net Income:
As reported $ 252 $ 174 $ 309 $ 256
Less: Total stock-based employee compensation
expense determined under fair-value-based
method for all awards, net of tax (3) (1) (9) (11)
----- ----- ---- -----
Pro forma $ 249 $ 173 $ 300 $ 245
===== ===== ==== =====
Basic income per share:
As reported $0.95 $0.67 $1.17 $0.98
Pro forma $0.94 $0.66 $1.14 $0.94
Diluted income per share:
As reported $0.93 $0.66 $1.15 $0.98
Pro forma $0.92 $0.66 $1.12 $0.94
Note 11 - Comprehensive Income (Loss)
Comprehensive income (loss) includes all nonshareowner changes in
equity and consists of net income (loss), foreign currency translation
adjustments, unrealized gains and losses on available-for-sale securities,
additional minimum pension liability adjustments, and accumulated
derivative gains or losses on cash flow hedges not yet realized.
Information regarding comprehensive income is as follows:
Three Months Ended Nine Months Ended
May 31, May 31,
------------------------ -----------------------
2004 2003 2004 2003
---- ---- ---- ----
Comprehensive income $173 $337 $350 $315
The principal difference between net income and total comprehensive
income for the periods above relates to foreign currency translation
adjustments.
Note 12 - Earnings (Loss) Per Share
Basic earnings (loss) per share (EPS) were computed using the
weighted-average number of common shares outstanding during the period
shown in the table below. Diluted EPS were computed taking into account the
effect of dilutive potential common shares, as shown 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 0.4
million and 19.4 million for the three months ended May 31, 2004, and May
31, 2003, respectively, and 2.6 million and 19.4 million for the nine
months ended May 31, 2004, and May 31, 2003, 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 Nine Months Ended
May 31, May 31,
------------------------ -----------------------
2004 2003 2004 2003
---- ---- ---- ----
Weighted-average number of common shares 265.8 261.4 264.0 261.4
Dilutive potential common shares 4.9 0.3 4.7 0.1
17
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Note 13 - Supplemental Cash Flow Information
The effect of exchange rate changes on cash and cash equivalents was
not material. Cash payments for interest and taxes for the nine months
ended May 31, 2004, were $38 million and $46 million, respectively. Cash
payments for interest and taxes for the nine months ended May 31, 2003,
were $39 million and $63 million, respectively.
On July 31, 2003, the Executive Committee of the board of directors
authorized the purchase of up to $500 million of the company's common stock
over a three-year period. As of May 31, 2004, the company purchased 4.6
million shares for $133 million.
Note 14 - Commitments and Contingencies
Solutia Inc.: Pursuant to the Sept. 1, 2000, Separation Agreement
between Monsanto and Pharmacia, as amended (Separation Agreement), 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. Those liabilities remain the present
responsibility of Pharmacia. In general, this indemnification obligation
applies to Pharmacia liabilities that were assumed by Solutia, pursuant to
the Sept. 1, 1997 Distribution Agreement between Solutia and Pharmacia, as
amended (Distribution Agreement), and which Pharmacia would otherwise be
required to pay. The liabilities that Solutia assumed from Pharmacia are
referred to as "Solutia's Assumed Liabilities." Solutia's 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.
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 some or all of Solutia's Assumed
Liabilities. Solutia may retain responsibility for all or a portion of
Solutia's Assumed Liabilities. However, if Solutia is discharged from all
or a portion of Solutia's Assumed Liabilities, Monsanto may be required to
indemnify Pharmacia for all or a portion of them. Monsanto is participating
in the Chapter 11 proceeding as a creditor of Solutia and will act as
appropriate to protect Monsanto's interests and the interests of its
shareowners. Pharmacia or Monsanto may have defenses to payment obligations
for some or all of Solutia's Assumed Liabilities, and Monsanto has legal
claims against Solutia. However, it is unclear what effect the Chapter 11
proceeding will have on Monsanto's ability to recover on those claims.
During the third quarter of fiscal 2004, two additional adversary
proceedings were filed in the Bankruptcy Court. First, on April 20, 2004,
Solutia filed a complaint for declaratory judgment against Pharmacia and
Monsanto that, among other things: (a) any and all rights that Pharmacia
and Monsanto have against Solutia for indemnification pursuant to the
Distribution Agreement are "claims" that arose before Solutia filed its
bankruptcy petition and may be discharged in the Chapter 11 proceeding; and
(b) the Distribution Agreement has been fully performed. Second, on May 7,
2004, the Official Committee of Retirees filed a complaint for declaratory
judgment against Solutia, Pharmacia and Monsanto that Pharmacia and
Monsanto share responsibility for providing certain benefits to certain
retirees and must pay certain benefits to certain retirees if Solutia
reduces or terminates retiree benefits. The Official Committee of Retirees
also seeks to have the Bankruptcy Court declare all claims held by
Pharmacia and Monsanto subordinate to the retiree claims. Monsanto believes
it has meritorious defenses to assert in each of these matters; however, it
has not filed any response or asserted counterclaims because all parties
have agreed to a limited stay of all litigation. Given the uncertain nature
of litigation, Monsanto cannot reasonably predict the outcome of either
proceeding.
Both immediately prior to and since its Chapter 11 filing, Solutia has
failed to perform its obligations relating to some of Solutia's Assumed
Liabilities. These obligations relate primarily to third-party tort
litigation and environmental matters and are described below. For the nine
months of fiscal year 2004, Monsanto recorded approximately $43 million in
OTHER EXPENSE - NET in the Statement of Consolidated Operations for the
advancement of funds to pay for Solutia's Assumed Liabilities, in light of
Solutia's refusal to pay for those liabilities during and prior to its
bankruptcy, and for legal and other costs related to the Chapter 11
proceeding. Monsanto expects to pursue recovery of its costs for Solutia's
Assumed Liabilities from Solutia in the bankruptcy proceedings. However,
18
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
neither the extent of Monsanto's ability to recover such costs, nor the
potential future costs to Monsanto for advancement of funds and legal and
other costs to protect its interests, can be reasonably estimated at this
time.
Litigation Obligations: On Feb. 17, 2004, Solutia notified Pharmacia
and Monsanto that it was disclaiming its obligation to defend and indemnify
Pharmacia and Monsanto for litigation matters that it had been managing
under the Distribution Agreement, and that it would not accept defense of
new cases relating to Solutia's Assumed Liabilities. Monsanto believes
Solutia is required to meet its obligations unless and until those
obligations are discharged by the Bankruptcy Court. However, in order to
protect Pharmacia's and its interests until that issue is resolved,
pursuant to its obligation to indemnify Pharmacia under the Separation
Agreement, Monsanto has on an interim basis assumed the management and
defense of such litigation. If additional such cases arise in the future,
Monsanto may also assume their management in order to mitigate damages and
protect Pharmacia and Monsanto. In addition, Monsanto may settle litigation
related to Solutia's Assumed Liabilities and pay judgments entered with
respect to Solutia's Assumed Liabilities if Solutia refuses to do so.
Solutia's Assumed Liabilities include certain liabilities related to
polychlorinated biphenyls (PCBs). In September 2003, the state and federal
courts approved a global settlement of certain PCB litigation: 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). Monsanto, Solutia and Pharmacia are each responsible
for paying the full amount of the settlement; however, they agreed among
themselves that Solutia would pay $50 million of the settlement amount over
the next eleven years or more. 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 be partially
reimbursed by commercial insurance. Monsanto recorded miscellaneous
receivables of $155 million in fiscal year 2003 for the anticipated
insurance reimbursement; however, this amount has been reduced by $6
million to reflect the discounted effect of the anticipated delay in
receipt of the reimbursement. Monsanto and the insurer responsible for
approximately $140 million of this reimbursement are negotiating the terms
of the reimbursement, but Monsanto does not expect full receipt of the
reimbursement in fiscal year 2004. Accordingly, a significant portion of
the reimbursement receivable has also been reclassified from short-term to
long-term assets.
In connection with the global settlement of the Abernathy and Tolbert
cases, Solutia also 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. Solutia did not execute a final warrant agreement or
issue or deliver the warrants prior to the Chapter 11 filing, and Monsanto
expects that Solutia's obligation to issue the warrants will be discharged
in the Chapter 11 proceeding. Monsanto has not recorded the warrants in its
financial statements because they were not received. Monsanto will make a
claim for its unreimbursed settlement contribution in the course of the
Chapter 11 proceeding.
In 2002, in connection with litigation that Solutia was defending in
Pennsylvania state court, Monsanto posted a $71 million appeal bond on
Solutia's behalf pursuant to its indemnification obligation to Pharmacia
under the Separation Agreement and an agreement with Pharmacia and Solutia.
Solutia 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 of such
fees against Solutia in the course of the Chapter 11 proceeding.
Environmental Obligations: On Feb. 27, 2004, Solutia filed a
declaratory judgment action requesting that the Bankruptcy Court declare
that the automatic stay under bankruptcy law prevented Solutia from
continuing to perform its environmental obligations under the Distribution
Agreement with respect to any sites where it does not have current
operations or beyond its property line at sites where it has current
operations. Prior to the filing of its declaratory judgment action, Solutia
stopped performing its environmental obligations under the Distribution
Agreement and applicable environmental laws, except within the boundaries
of its current operations.
19
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Solutia also filed on Feb. 27, 2004, a motion for summary judgment
seeking a declaration from the Bankruptcy Court that the bankruptcy
automatic stay precluded the U.S. Environmental Protection Agency (EPA)
from taking efforts to enforce a Partial Consent Decree issued by the
United States District Court for the Northern District of Alabama (Alabama
District Court). In light of Solutia's failure to perform under the Partial
Consent Decree, the EPA had previously filed actions and pleadings in the
Alabama District Court asserting that Solutia's bankruptcy filing does not
eliminate Solutia's obligation to perform certain environmental activities.
The Bankruptcy Court denied Solutia's summary judgment motion and directed
that the Alabama District Court determine Solutia's performance obligations
under the Partial Consent Decree. The Alabama District Court then entered
an order that the automatic stay provisions of the Bankruptcy Code do not
apply to Solutia's obligations under the Partial Consent Decree. Solutia
has filed a motion to reconsider, modify, or clarify this order and has
continued to selectively perform its environmental obligations.
Based on Solutia's failure to perform these environmental obligations,
on March 25, 2004, Monsanto entered into an arrangement with the EPA and
Solutia to perform certain environmental obligations at the Sauget,
Illinois, and Anniston, Alabama sites under existing orders where both
Solutia and Pharmacia are named parties. As a part of this arrangement,
Monsanto has agreed with the EPA to perform certain remedial work for a
minimum period of six months, but this agreement is automatically extended
if Monsanto does not invoke a sixty day notice of termination provision.
Monsanto will assert claims and seek payment from Solutia for all the costs
incurred in performing under this agreement. During the third quarter of
fiscal 2004, Monsanto recorded a reserve of approximately $11 million for
estimated remediation costs through Sept. 25, 2004, in accordance with this
agreement.
Monsanto believes that Solutia remains obligated to continue to meet
its environmental obligations unless and until those obligations are
discharged by the Bankruptcy Court. However, in order to protect
Pharmacia's and its interests until that issue is resolved, pursuant to its
contractual obligation to indemnify Pharmacia under the Separation
Agreement, Monsanto has on an interim basis stepped in as Pharmacia's
representative and funded some of Solutia's environmental obligations at
sites in addition to Sauget, Illinois, and Anniston, Alabama. Monsanto may
continue to fund Solutia's environmental obligations at these other sites
in order to mitigate damages and to protect Pharmacia and Monsanto.
Effect on Monsanto: It is reasonably possible that Monsanto's
obligation under the Separation Agreement to indemnify Pharmacia for
Solutia's Assumed Liabilities will result in a material adverse effect on
Monsanto's financial position, profitability and/or liquidity. However,
because of the many uncertainties relating to any resolution of Solutia's
Chapter 11 proceeding, including the potential allocation of responsibility
for and the ultimate resolution of Solutia's Assumed Liabilities, at this
time Monsanto is unable to reasonably estimate the amount or range of any
potential future liability or expense to the company.
Other Solutia-related matters: 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 pursuant to the Separation Agreement. In September 2003, Monsanto
and Solutia amended this contract upon mutually beneficial terms. Pursuant
to this amendment, Monsanto made a $25 million prepayment to Solutia for
formalin. Under the terms of the amended agreement, the prepayment must
either be exhausted or the remainder returned to Monsanto in cash or credit
against other product sales by Sept. 30, 2004. In consideration for making
this prepayment, the duration of Monsanto's obligation under the formalin
supply contract was reduced. Through June 30, 2004, Solutia had delivered
$16 million of product relating to this prepaid amount. At this time,
Solutia has indicated that it will continue to perform its obligations
under the formalin supply contract.
Other 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 under the Separation Agreement. 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 (excluding litigation relating to Solutia's Assumed
20
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Liabilities), will not have a material adverse effect on Monsanto's
financial position, profitability, and/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 May 31, 2004, the maximum potential
amount of future payments under this guarantee is approximately $1 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.
As disclosed in Monsanto's report on Form 10-K for the transition
period ended Aug. 31, 2003, Monsanto provides guarantees to certain banks
that provide loans to Monsanto customers in Brazil. Due to the seasonal
nature of Monsanto's business, the level of customer loans with these banks
and the related Monsanto guarantees has increased since Aug. 31, 2003. As a
result, the maximum potential amount of future payments under these
guarantees is approximately $31 million as of May 31, 2004. Based on the
company's current assessment of credit exposure, Monsanto has recorded a
liability of less than $1 million related to these guarantees. Monsanto's
recourse under these guarantees is limited to the customer, and it is not
currently estimable.
Except as described above, there have been no significant changes to
guarantees made by Monsanto 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 4 -
Customer Financing Program - of this Form 10-Q. Information regarding
Monsanto's indemnification obligations to Pharmacia under the Separation
Agreement relating to Solutia's Assumed Liabilities can be found above.
Note 15 - 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 herbicide products, and
environmental technologies businesses. Sales between segments were not
significant. Certain selling, general and administrative expenses are
allocated between segments based primarily on the ratio of sales of the
segment to total Monsanto sales, consistent with the company's historical
practice. Based on the Seeds and Genomics segment's increasing contribution
to total Monsanto operations, the allocation percentages were changed at
the beginning of fiscal 2004.
Segment data, as well as a reconciliation of total Monsanto Company
earnings from continuing operations before cumulative effect of accounting
change, interest and income taxes (EBIT) to net income for the three months
and nine months ended May 31, 2004, and May 31, 2003, is presented in the
table that follows.
21
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Three Months Ended Nine Months Ended
May 31, May 31,
------------------------ -----------------------
2004 2003 2004 2003
---- ---- ---- ----
Net Sales:
Seeds and Genomics $ 681 $ 612 $1,923 $1,624
Agricultural Productivity 998 856 2,276 1,983
------- ------ ------ -----
Total Monsanto $ 1,679 $1,468 $4,199 $3,607
======= ====== ====== ======
EBIT:
Seeds and Genomics $ 161 $147 $ 341 $ 343
Agricultural Productivity 163 137 177 137
------- ------ ------ ------
Total Monsanto 324 284 518 480
Less: Interest Expense - Net (21) (18) (53) (52)
Less: Income Tax Expense (74) (87) (157) (151)
------- ------ ------ ------
Income From Continuing Operations 229 179 308 277
Discontinued Operations (Note 17):
Income (loss) from operations of discontinued
businesses (including adjustment to reflect
sales proceeds for the three and nine
months ended May 31, 2004) 22 (8) (9) (15)
Income tax benefit (1) (3) (10) (6)
------- ------ ------ ------
Income (Loss) on Discontinued Operations 23 (5) 1 (9)
------- ------ ------ ------
Income Before Cumulative Effect of Accounting Change 252 174 309 268
Cumulative Effect of a Change in Accounting Principle
- Net of Tax Benefit of $7 -- -- -- (12)
------- ------ ------ ------
Net Income $ 252 $ 174 $ 309 $ 256
======= ====== ====== ======
Depreciation and Amortization Expense:
Seeds and Genomics $ 64 $ 55 $ 198 $ 161
Agricultural Productivity 48 58 142 176
------- ------ ------ ------
Total Monsanto $ 112 $ 113 $ 340 $ 337
======= ====== ====== ======
22
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Note 16 - Other Expense - Net
For the three months and nine months ended May 31, 2004, and May 31,
2003, the significant components of other expense - net were:
Three Months Ended Nine Months Ended
May 31, May 31,
--------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Solutia's Assumed Liabilities and
Bankruptcy-Related Legal and Other
Expenses $29 $-- $ 43 $--
Equity Affiliate Expense - Net 6 10 26 32
Foreign-Currency Transaction Losses - Net 9 1 23 9
Hedging (Gains) Losses -- (1) 7 (5)
Banking and Other Related Fees 3 6 11 8
Gains Realized Upon Sale of Equity Securities (4) -- (9) --
Other Miscellaneous Expense (Income) 9 5 13 (4)
--- --- ---- ---
Other Expense - Net $52 $21 $114 $40
=== === ==== ===
Other miscellaneous expense (income) for the periods presented
comprises numerous items that are individually immaterial. See Note 14 -
Commitments and Contingencies - for a description of Solutia's Assumed
Liabilities and bankruptcy-related legal and other expenses.
Note 17 - Discontinued Operations
As discussed earlier in Note 3 - 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 presented
as discontinued operations. Accordingly, for the three months and nine
months ended May 31, 2004, and May 31, 2003, the Statement of Consolidated
Operations has been conformed to this presentation. Also, as of May 31,
2004, the Condensed Statement of Consolidated Financial Position has been
conformed to this presentation. These businesses were previously reported
as part of the Seeds and Genomics segment. The assets and liabilities of
these businesses follow:
As of May 31,
2004
--------------
Assets of discontinued businesses held for sale:
Accounts receivable $ 1
Miscellaneous receivables 3
Inventories 3
Property, plant and equipment - net 9
Other intangible assets - net 26
---
Total assets of discontinued businesses held for sale $42
===
Liabilities of discontinued businesses held for sale:
Current liabilities $ 3
Postretirement liabilities 2
---
Total liabilities of discontinued businesses held for sale $ 5
===
23
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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 Nine Months Ended
May 31, May 31,
----------------------- ------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net sales $ 1 $ 3 $20 $22
Income (loss) from operations of discontinued
businesses (including adjustment to reflect sales
proceeds for the three and nine months ended May
31, 2004) 22 (8) (9) (15)
Income tax benefit (1) (3) (10) (6)
Income (loss) on discontinued operations 23 (5) 1 (9)
In third quarter 2004, a definitive agreement for the divestiture of
the European breeding and seed business for wheat and barley was reached
and was finalized in the fourth quarter of fiscal year 2004. Based on the
sales proceeds, Monsanto was able to obtain a higher value than originally
estimated for the wheat and barley business and related assets that were
previously written down in the first quarter of 2004. SFAS 144 requires a
company to adjust the fair value of assets held for sale to reflect the
anticipated sales proceeds in the valuation of the assets, but not to
exceed the assets' pre-write down book value. Accordingly, in the third
quarter of fiscal 2004, the value of the European wheat and barley
intangible assets was increased by $25 million because of higher than
anticipated sales proceeds and lower than expected employee termination
costs. The write down of the intangible assets in the first quarter of 2004
was tax effected. Since the assets originally had no tax basis, the
previously recorded deferred tax liability was reversed with the first
quarter 2004 write down. The third quarter 2004 increase in intangible
assets was not tax effected because, based on recently obtained valuation
information, these assets have been reassessed and the revised tax basis
approximately equals the adjusted book basis.
Note 18 - Subsequent Events
On June 15, 2004, Monsanto completed the sale of assets associated
with the company's European wheat and barley business to Rodez,
France-based RAGT Genetique, S.A. (RAGT). Monsanto originally stated its
intention to exit the European wheat and barley breeding business as a part
of the fiscal year 2004 restructuring plan. Pursuant to SFAS No. 109,
Accounting for Income Taxes, a deferred tax asset of $58 million has been
recorded in the fourth quarter of fiscal year 2004 based on the U.K.
capital loss generated on the sale of the European wheat and barley
business. Also, in accordance with this accounting guidance, a full
valuation allowance has been recorded against the deferred tax asset since
it is currently deemed more likely than not that this capital loss will not
be utilized in the carryforward period. Monsanto is also evaluating
alternative tax planning strategies in an effort to realize a benefit from
the loss incurred on this investment, whether in the United Kingdom or
another jurisdiction.
Effective June 4, 2004, Monsanto finalized a new five-year, $1 billion
revolving credit facility. This facility replaces the existing $500 million
five-year and $500 million 364-day facilities. Covenants under the $1
billion revolving credit facility are consistent with the facilities
replaced.
24
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 to discontinue the plant-made pharmaceuticals program. In
third quarter 2004, we signed a definitive agreement for the sale of assets
associated with our European wheat and barley business, and in fourth
quarter 2004, this sale was finalized. Refer to Note 17 - Discontinued
Operations - and Note 18 - Subsequent Events - for further details. As a
result of the exit plans announced in October 2003, the European wheat and
barley business and plant-made pharmaceuticals program have been presented
as discontinued operations. Accordingly, for the three months and nine
months ended May 31, 2004, and May 31, 2003, the Statement of Consolidated
Operations has been conformed to this presentation. Also as of May 31,
2004, the Condensed Statement of Consolidated Financial Position has been
conformed to this presentation. These businesses were previously reported
as part of the Seeds and Genomics segment.
Certain prior-period amounts have been reclassified to conform with
current-year presentation.
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, and Monsanto's quarterly reports on Form 10-Q for the periods ended
Nov. 30, 2003, and Feb. 29, 2004. Financial information for the first nine
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
aligned 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 and nine months ended
May 31, 2004 (also referred to as the third quarter and first nine months,
respectively, of fiscal year 2004), with the unaudited consolidated
financial statements as of and for the three months and nine months ended
May 31, 2003.
Financial Measures
The primary operating performance measure for our two business
segments is earnings (loss) from continuing operations before cumulative
effect of accounting change, interest and income taxes (EBIT). We believe
that EBIT is useful to investors and management to demonstrate the
operational profitability of our segments by excluding interest and taxes,
which are generally accounted for across the entire company on a
consolidated basis. EBIT is also one of the measures used by Monsanto
management in determining resource allocation within the company.
25
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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. We believe that free cash flow is useful to investors
and management as a measure of the ability of our business to generate
cash. This cash can be used for business needs and obligations, to reinvest
into the company for future growth, or returned to our shareowners through
dividend payments or share repurchases. Free cash flow is also one of the
performance measures management uses to determine incentive compensation.
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.
Results of Operations - Third Quarter Fiscal Year 2004
--------------------------------------------------------------------------------
Three Months Ended
May 31,
--------------------
Total Monsanto Company and Subsidiaries: 2004 2003
---------------------------------------- ---- ----
Net sales $1,679 $1,468
====== ======
Gross profit $ 839 $ 726
====== ======
Income from continuing operations $ 229 $ 179
====== ======
Net income $ 252 $ 174
====== ======
--------------------------------------------------------------------------------
The following factors affected the quarter-to-quarter comparison
of Monsanto's third quarter continuing operations:
Net sales improved 14 percent, or $211 million, in third quarter 2004
from the prior year comparable period. Both segments had substantial net
sales increases: Seeds and Genomics 11 percent, or $69 million; and
Agricultural Productivity 17 percent, or $142 million. In third quarter
2004, we had increases in corn, soybean and all other crops seed and trait
net sales from the same period a year ago. Higher corn seed and trait net
sales of $24 million were driven by European corn seed and U.S. corn
traits, which were slightly offset by lower sales of U.S. corn seed. Sales
of all other crops seeds and traits improved $29 million from the same
period in the prior year primarily because of cotton traits in India and
the United States, and canola traits in Canada. ROUNDUP and other
glyphosate-based herbicide sales improved in nearly all markets, with the
most significant improvements in Canada, Argentina and the United States.
For a more detailed discussion of the factors affecting the net sales
comparison, please see "Seeds and Genomics Segment" and "Agricultural
Productivity Segment."
Gross profit increased 16 percent, or $113 million, in the current
year quarter. As a percent of net sales, gross profit improved one
percentage point to 50 percent in third quarter 2004. Higher Canadian trait
revenues for canola, soybeans and corn primarily drove the gross profit
improvement in the current year quarter.
Operating expenses increased to $463 million for the current quarter,
from $421 million in the same period last year.
o Selling, general and administrative (SG&A) expenses decreased $8
million in the current year quarter primarily because of
non-restructuring severance expenses recorded in the same period a
year ago, and timing of U.S. marketing and advertising expenses in the
current year. Employee-related costs for accrued incentive
26
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
compensation were flat for the quarter-over-quarter comparison as
incentives were accrued in both periods.
o Restructuring charges - net of $9 million were recorded in third
quarter 2004. We recorded $13 million of restructuring charges in
third quarter 2004 for the fiscal year 2004 restructuring plan, which
were reduced by $4 million in restructuring reversals related to our
prior restructuring plans. There were no restructuring charges
recorded in the prior year comparable period. Restructuring activity
was recorded within cost of goods sold, restructuring charges - net
and discontinued operations. Operating expenses include restructuring
charges - net. For further details on our restructuring plans, please
see the "Restructuring" section of MD&A and Note 3 - Restructuring.
o The increase in bad-debt expense of $30 million was primarily for
exposures related to potential uncollectible Argentine trade
receivables. In fiscal year 2004, we continued to restructure our
Argentine business model. This redesign focused on streamlining
distribution, improving working capital management and rationalizing
our product portfolio. In addition, these changes, coupled with the
continued economic and business challenges, led to increased credit
exposure. We have performed a thorough review of our past due trade
receivables in Argentina and, as a result, have increased the
allowance for estimated uncollectible receivables. Although we cannot
determine with certainty how government actions and economic
conditions in Argentina will affect the value of net receivables
outstanding, we continue to pursue customer collections aggressively
to minimize exposure. The increase in bad-debt expense also included a
reserve for trade receivables related to two minor crops that were
exited during fiscal 2004, which has resulted in a lower probability
of collection. Third quarter 2004 also had higher bad-debt expense
incurred in the normal course of business.
o Research and development (R&D) expenses increased nine percent, or $11
million, in third quarter 2004 from the same period a year ago
primarily because of higher salary expenses and outside service
expenses. As a percent of sales, R&D expenses were eight percent in
both three-month periods.
Other expense - net increased $31 million to $52 million in third
quarter 2004 from $21 million in the same period a year ago. During the
current quarter, other expense - net contained $29 million for the
advancement of funds to pay for Solutia's Assumed Liabilities in light of
Solutia's refusal to pay for those liabilities and for legal and other
expenses related to the Solutia bankruptcy. Refer to Note 14 - Commitments
and Contingencies - for further details. Refer to Note 16 - Other Expense -
Net - for further details of the increase in this line item.
Income tax expense for the quarter decreased 15 percent to $74
million, compared to an increase in pretax earnings of 14 percent. The
effective tax rate improved to 24 percent, a reduction of nine percent
versus the prior year period. This improvement was primarily driven by a
favorable adjustment to our income tax reserve and, to a lesser extent, the
geographic mix of earnings projected for fiscal 2004 versus those in fiscal
2003. A settlement was reached with the Internal Revenue Service (IRS) on a
number of issues. As a result, we have recorded a favorable adjustment in
our third quarter 2004 results.
Discontinued operations generated an aftertax gain of $23 million in
third quarter 2004 and an aftertax loss of $5 million in the same period a
year ago. In first quarter fiscal 2004, we recorded a loss on disposal of
$26 million pretax for the intangible assets related to the European wheat
and barley business based upon our initial estimate of the net sales
proceeds from the sale of the business and employee termination costs. In
third quarter 2004, a definitive agreement for the divestiture of the
European wheat and barley business was reached, and in fourth quarter 2004,
this sale was finalized (refer to Note 18 - Subsequent Events). We were
able to obtain a higher value for the wheat and barley business and related
assets that were previously written down in the first quarter of 2004. SFAS
144, Accounting for the Impairment or Disposal of Long-Lived Assets,
requires a company to adjust the fair value of assets held for sale to
reflect the anticipated sales proceeds in the valuation of its assets, but
not in excess of the assets' pre-write down book value. Accordingly, in the
third quarter of fiscal 2004, we adjusted the value of the European wheat
and barley assets by $25 million pretax because of higher than anticipated
sales proceeds and lower than expected employee termination costs. The tax
treatment of these adjustments was different for the first and third
quarters of 2004. The write down of the European wheat and barley
intangible assets in the first quarter of 2004 was tax effected. Since the
assets originally had no tax basis, the previously recorded deferred tax
liability was reversed with the first quarter 2004 write down. The third
quarter 2004 increase in intangible assets was not tax effected because,
based on recently obtained valuation information, these assets have been
27
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
reassessed and the revised tax basis approximately equals the adjusted book
basis. Restructuring expenses recorded in discontinued operations were less
than $1 million for the third quarter of fiscal 2004. For further details
of our discontinued operations, please refer to Note 17 - 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
May 31,
------------------------
2004 2003
---- ----
Net sales
Corn seed and traits $291 $267
Soybean seed and traits 159 143
All other crops seeds and traits 231 202
---- ----
Total net sales $681 $612
==== ====
Gross profit
Corn seed and traits $166 $143
Soybean seed and traits 77 73
All other crops seeds and traits (1) 172 147
---- ----
Total gross profit $415 $363
==== ====
EBIT(2) $161 $147
==== ====
(1) Includes any net restructuring charges for the segment that were
recorded within cost of goods sold. See Note 3 - Restructuring,
and "Restructuring" in MD&A for further details.
(2) Earnings (loss) from continuing operations before cumulative
effect of accounting change, interest and income taxes. See Note
15 - Segment Information - for further details.
Net sales for the Seeds and Genomics segment increased 11 percent to
$681 million in third quarter fiscal 2004 from $612 million in the
comparable prior year period. Gross profit for this segment increased 14
percent to $415 million from the same period in the prior year of $363
million. As a percent of net sales, gross profit improved two percentage
points to 61 percent.
Corn seed and trait net sales increased nine percent, or $24 million,
in third quarter 2004 compared to the same period a year ago. Third quarter
2004 European corn seed sales benefited from stronger market performance in
several European countries and favorable exchange rates. Higher sales of
corn seed in Europe almost entirely offset the decline in U.S. corn seed
sales. Third quarter fiscal 2004 corn seed sales in the United States
declined from the same period in the prior year because of higher accruals
for marketing programs. U.S. corn trait sales increased because of higher
corn trait penetration and growth in stacked corn traits. Timing of
revenues for licensed traits also benefited the current year quarter. The
third quarter 2004 U.S. corn trait revenues reflect an increase in the
average prices of our branded seed, which includes our ROUNDUP READY
traits, to reflect the value those products provide to growers.
Net sales of soybean seed and traits increased 11 percent, or $16
million, in third quarter fiscal 2004 over sales in the prior year
comparable period primarily because of higher sales of Canadian soybean
seed and traits. Sales of Canadian soybean traits were higher in the third
quarter of fiscal 2004 from the prior year comparable period because of
timing of royalties from seed licensees. The timing was a shift from fourth
quarter to third quarter in fiscal year 2004 versus the same period in the
28
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
prior year. Soybean seed and trait sales in Canada also benefited from a
favorable exchange rate. Gross profit as percent of sales declined three
percent for soybean seed and traits primarily because of hedging losses.
All other crops seed and trait net sales increased 14 percent, or $29
million, in third quarter 2004 from the comparable prior year period. Third
quarter 2004 revenues of cotton traits in India improved from the same
period a year ago primarily because of increased acreage planted with
BOLLGARD cotton traits. In the prior year, farmers saw the crop protection
benefits of our cotton traits. As a result, more farmers began using or
increased their acreage planted with BOLLGARD traits in the current year.
Revenues of cotton traits also increased in the United States because of
higher average net selling prices and the introduction of ROUNDUP READY
BOLLGARD II traits. Canadian canola trait revenues also increased in third
quarter 2004 from the prior year comparable period because of timing of
branded canola trait revenues and royalties from seed licensees and, to a
lesser extent, favorable exchange rates. The timing was a shift from fourth
quarter to third quarter in fiscal year 2004 versus the same periods a year
ago.
Gross profit as a percent of net sales improved two percentage points
in third quarter 2004 primarily because of the timing of Canadian canola,
soybean and corn trait revenues, which were recorded in third quarter 2004
compared to the three months ended Aug. 31, 2003. Also, branded corn seed
in the United States had lower cost of goods sold (COGS) per unit in third
quarter 2004 from the same period in the prior year because of higher than
expected yield and higher plantings due to expected market share growth.
EBIT increased by 10 percent, or $14 million, for the Seeds and Genomics
segment. In third quarter 2004, this segment experienced higher SG&A and
bad-debt expenses from the prior year comparable period of approximately
$32 million. SG&A expenses increased because a higher percentage of certain
expenses was allocated to this segment in third quarter 2004 versus the
same period a year ago based on the Seeds and Genomics segment's increasing
contribution to total Monsanto operations. The allocation percentages were
changed at the beginning of fiscal 2004. Our allocation methodology is
primarily based on the ratio of sales of the Seeds and Genomics segment to
total Monsanto sales, and is consistent with our historical practice.
Bad-debt expense increased because of the uncollectible Argentine trade
receivables discussed in the "Results of Operations - Third Quarter Fiscal
Year 2004" section of MD&A.
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
May 31,
-----------------------
2004 2003
---- ----
Net sales
ROUNDUP and other glyphosate-based herbicides $588 $463
All other agricultural productivity products 410 393
---- ----
Total net sales $998 $856
==== ====
Gross profit
ROUNDUP and other glyphosate-based herbicides $235 $170
All other agricultural productivity products (1) 189 193
---- ----
Total gross profit $424 $363
==== ====
EBIT(2) $163 $137
==== ====
(1) Includes any net restructuring charges for the segment that were
recorded within cost of goods sold. See Note 3 - Restructuring,
and "Restructuring" in MD&A for further details.
(2) Earnings (loss) from continuing operations before cumulative
effect of accounting change, interest and income taxes. See Note
15 - Segment Information - for further details.
29
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Net sales for the Agricultural Productivity segment increased 17
percent to $998 million in third quarter fiscal 2004 from $856 million in
the comparable prior year period. Gross profit for this segment also
increased 17 percent to $424 million from last year's same period level of
$363 million. As a percent of net sales, gross profit was 42 percent in
both three-month periods.
ROUNDUP and other glyphosate-based herbicides net sales increased 27
percent, or $125 million, in third quarter 2004 from the same period a year
ago. Net sales increased in nearly all markets with the largest increases
occurring in Canada, Argentina and the United States. Canadian ROUNDUP net
sales increased because of the introduction of ROUNDUP WEATHERMAX in third
quarter 2004, favorable weather conditions and favorable exchange rates.
Compared to the same period in the prior year, some Canadian ROUNDUP 2004
sales occurred earlier in the season as they shifted from the fourth
quarter into the third quarter. Favorable wet weather conditions in late
spring contributed to dealers taking a stronger inventory position.
Additionally, a reorganized Canadian sales force focused on ROUNDUP played
a role in the earlier season sales and higher demand. Third quarter 2004
sales of ROUNDUP increased in Argentina because of advance customer
purchases related to market supply constraints, strong on-farm cash flow
and market concerns related to the significant price increases taken across
the industry in previous months in Argentina. Sales of ROUNDUP and other
glyphosate-based herbicides increased in the United States primarily
because of timing. The timing was a shift in U.S. volume from fourth
quarter to third quarter in fiscal 2004 compared to the same periods in the
prior year. During third quarter 2004, we continued to experience
competitive pressures and a shift in sales volume to our lower-priced
branded and nonbranded glyphosate products. The shift in product mix was
reflected in our average net selling price for ROUNDUP herbicides in the
United States, which declined during the third quarter of 2004 from the
same period in the prior year.
Third quarter 2004 sales of our other Agricultural Productivity
products increased four percent, or $17 million, to $410 million from $393
million in the prior year comparable period. Third quarter 2004 sales
increases in lawn-and-garden herbicides, the environmental technologies
business and other selective herbicides more than offset the sales decline
in animal agriculture products. Lawn-and-garden herbicide net sales
increased because of strong market performance in the United States and
favorable exchange rates in Europe. U.S. sales benefited from the
introduction of a private label product at a large national retailer in
fiscal 2004 and a favorable product mix. Sales for the environmental
technologies business increased because of several new significant projects
compared to no significant projects in the same period a year ago. Other
selective herbicides net sales increased because of timing from earlier
season corn plantings in the United States.
Sales of animal agriculture products decreased primarily because of
the POSILAC product allocation resulting from corrections and improvements
being made by Sandoz GmbH at their manufacturing facility in Austria. These
changes are being made in response to issues raised by the U.S. Food and
Drug Administration (FDA) during and following a November 2003 inspection
of Sandoz's facility and further identified in a March 29, 2004, FDA
warning letter to Sandoz. Sandoz manufactures the finished dose formulation
of POSILAC, and is our sole supplier of the finished dose formulation until
we receive FDA approval at our Augusta, Georgia facility. For a further
discussion of POSILAC refer to the "Outlook - Update - Agricultural
Productivity" section of MD&A.
EBIT for the Agricultural Productivity segment increased 19 percent,
or $26 million, in third quarter 2004 from the same period a year ago.
Gross profit as a percent of sales remained constant for both three-month
periods at 42 percent. Third quarter 2004 operating expenses were higher
than the same period a year ago primarily because of increases in other
expense - net and bad-debt expense. The increase in other expense - net was
primarily because of the advancement of funds to pay for Solutia's Assumed
Liabilities in light of Solutia's refusal to pay for those liabilities and
for legal and other expenses of $29 million related to the Solutia
bankruptcy. Bad-debt expense increased because of the uncollectible
Argentine trade receivables discussed in the "Results of Operations - Third
Quarter Fiscal Year 2004" section of MD&A. SG&A expenses for the
Agricultural Productivity segment declined in the third quarter 2004 from
the same period a year ago because of the lower allocation of certain SG&A
expenses to the Agricultural Productivity segment in third quarter 2004.
Refer to the previous section "Seeds and Genomics Segment" for a further
explanation of the change in allocation percentages between segments of
SG&A expenses.
30
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Results of Operations - First Nine Months of Fiscal Year 2004
--------------------------------------------------------------------------------
Nine Months Ended
May 31,
----------------------
Total Monsanto Company and Subsidiaries: 2004 2003
---------------------------------------- ---- ----
Net sales $4,199 $3,607
====== ======
Gross profit $2,055 $1,715
====== ======
Income from continuing operations $ 308 $ 277
====== ======
Net income $ 309 $ 256
====== ======
--------------------------------------------------------------------------------
Net sales improved 16 percent, or $592 million, in the first nine
months of fiscal 2004 from last year's first nine months net sales. Sales
increased 18 percent, or $299 million, for the Seeds and Genomics segment
and 15 percent, or $293 million, for the Agricultural Productivity segment.
Corn and soybean seed and trait net sales in the United States drove the
improvement in the Seeds and Genomics segment. Net sales of ROUNDUP and
other glyphosate-based herbicides increased in all world areas for the
first nine months of fiscal 2004 compared to the same period a year ago.
Brazil, Argentina and Australia were the largest contributors to the net
sales increase in ROUNDUP and other glyphosate-based herbicides. 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 increased 20 percent, or $340 million, in the first nine
months of fiscal year 2004 compared to the same period in the prior year.
Gross profit as a percent of net sales increased over one percentage point
to 49 percent. The Seeds and Genomics segment gross profit as a percent of
net sales increased two percentage points to 62 percent primarily because
of the gross profit improvement that comes from stacking more than one
biotech trait in corn, increased trait penetration, and higher average net
selling prices for branded corn seed and higher royalties from seed
licensees. Gross profit also benefited from higher branded soybean trait
prices and royalties from licensees. The Agricultural Productivity segment
gross profit percentage was 38 percent for both nine-month periods.
Operating expenses increased 19 percent, or $228 million, to $1,423
million for the first nine months of 2004 from $1,195 million for the same
period last year.
o SG&A expenses increased 11 percent, or $86 million. Increased
employee-related costs, primarily related to accrued incentive
compensation and, to a lesser extent, employee-benefit related
expenses, were the primary drivers of the increase in SG&A expenses.
SG&A expenses also increased because of higher expenses associated
with the institution of a royalty system for ROUNDUP READY soybean
traits in Brazil.
o We recognized $69 million of noncash goodwill adjustments in the first
quarter of 2004, 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 Restructuring charges - net were recorded in both nine-month periods.
Restructuring charges recorded in the first nine months of 2004 for
the fiscal year 2004 restructuring plan were $72 million. Our first
nine months of 2004 restructuring charges were reduced by $6 million
of restructuring reversals related to our prior restructuring plans.
During the prior year comparable period, we recognized $51 million of
restructuring charges in operating expenses related to our 2002
restructuring plan. These restructuring charges were offset by $12
million of restructuring reversals related to the 2000 and 2002
restructuring plans. Thus, restructuring charges - net were $66
million for the first nine months of 2004 and $39 million in the prior
year comparable period.
o Bad-debt expense increased $36 million in the first nine months of
2004. We recorded $64 million in higher bad-debt expense from the same
31
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
period a year ago for exposures related to potential uncollectible
Argentine accounts receivable. Lower bad-debt expenses in Europe and
the United States somewhat offset the increase in Argentina. In fiscal
year 2004, we continued to restructure our Argentine business model.
This redesign focused on streamlining distribution, improving working
capital management and rationalizing our product portfolio. In
addition, these changes, coupled with the continued economic and
business challenges, led to increased credit exposure. We have
performed a thorough review of our past due trade receivables in
Argentina and, as a result, have increased the allowance for estimated
uncollectible receivables. Although we cannot determine with certainty
how government actions and economic conditions in Argentina will
affect the value of net receivables outstanding, we continue to pursue
customer collections aggressively to minimize exposure. The increase
in bad-debt expense also included a reserve for trade receivables
related to two minor crops that were exited during fiscal 2004, which
has resulted in a lower probability of collection. The first nine
months of 2004 also had higher bad-debt expense incurred in the normal
course of business.
o R&D expenses increased three percent, or $10 million, from last year's
first nine months. As a percent of sales, R&D expenses for the first
nine months of 2004 declined one percent from the comparable prior
year period.
Net interest expense for the first nine months of 2004 totaled $53
million, which was consistent with net interest expense of $52 million in
the same period a year ago. Our average borrowing level in the first nine
months of the current fiscal year of $1.5 billion was consistent with our
average borrowing levels in the prior year comparable period.
We recorded other expense - net of $114 million in the first nine
months of 2004 and $40 million in the comparable period last year. During
the first nine months of 2004, we recorded $43 million for the advancement
of funds to pay for Solutia's Assumed Liabilities in light of Solutia's
refusal to pay for those liabilities and for legal and other expenses
related to the Solutia bankruptcy. Refer to Note 14 - Commitments and
Contingencies - for further details. Foreign-currency translation losses,
hedging losses and several individually immaterial items in other
miscellaneous expense caused the remainder of the year-over-year increase.
Please see Note 16 - Other Expense - Net - for further details.
Income tax expense for the first nine months of fiscal 2004 increased
four percent to $157 million, compared to an increase in pretax earnings of
nine percent. The effective tax rate improved to 34 percent, a reduction of
one percent versus the prior year period. Absent the goodwill adjustments
in the first quarter of fiscal year 2004, the effective tax rate would have
been 29 percent, a reduction of six percent versus the prior year period.
This improvement was driven primarily by a favorable adjustment to our
income tax reserve and, to a lesser extent, the geographic mix of earnings
projected for fiscal 2004 versus those in fiscal 2003. A settlement was
reached with the IRS on a number of issues. As a result, we have recorded a
favorable adjustment in our third quarter 2004 results. In addition, income
tax expense for the first nine months of 2004 includes two adjustments for
valuation allowances against our deferred tax assets in Argentina and
Brazil. For further details of these deferred tax adjustments, please refer
to Note 7 - Income Taxes.
Discontinued operations generated an aftertax gain of $1 million in
the first nine months of 2004, reflecting $1 million in aftertax
restructuring income. We were able to obtain a higher value for the wheat
and barley business and related assets that were previously written down in
the first quarter of 2004. SFAS 144 requires a company to adjust the fair
value of assets held for sale to reflect the anticipated sales proceeds but
not in excess of their pre-write down book value. Accordingly, in third
quarter of fiscal 2004, we adjusted the value of the European wheat and
barley assets by $25 million pretax because of higher than anticipated
sales proceeds and lower than expected employee termination costs. Despite
the pretax charges of $9 million, we recorded an income tax benefit of $10
million. The European wheat and barley intangible assets that were written
down in the first quarter of 2004 were tax effected. Since the assets
originally had no tax basis, the previously recorded deferred tax liability
was reversed with the first quarter 2004 write down. The third quarter 2004
increase in intangible assets was not tax effected because, based on
recently obtained valuation information, these assets have been reassessed
and the revised tax basis approximately equals the adjusted book basis.
Discontinued operations in the prior year period generated an aftertax loss
of $9 million. For further details of our discontinued operations, please
refer to Note 17 - Discontinued Operations.
32
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The factors above explain the change in income before cumulative
effect of accounting change. In the first nine months of the prior year, a
new accounting standard relating to asset retirement obligations was
adopted on Jan. 1, 2003, which negatively affected our net income by $12
million, or $0.05 per share, aftertax.
Seeds and Genomics Segment
Nine Months Ended
May 31,
------------------------
2004 2003
---- ----
Net sales
Corn seed and traits $ 956 $ 782
Soybean seed and traits 636 561
All other crops seeds and traits 331 281
------- ------
Total net sales $ 1,923 $1,624
======= ======
Gross profit
Corn seed and traits $ 578 $ 445
Soybean seed and traits 400 344
All other crops seeds and traits (1) 211 181
------- ------
Total gross profit $ 1,189 $ 970
======= ======
EBIT(2) $ 341 $ 343
======= ======
(1) Includes any net restructuring charges for the segment that were
recorded within cost of goods sold. See Note 3 - Restructuring,
and "Restructuring" in MD&A for further details.
(2) Earnings (loss) from continuing operations before cumulative
effect of accounting change, interest and income taxes. See Note
15 - Segment Information - for further details.
Net sales for the Seeds and Genomics segment increased 18 percent, or
$299 million, to $1,923 million in the first nine months of 2004. Sales
increased for all seed and trait crops in the first nine months of 2004
from the same period a year ago. Corn seed and traits was the largest
contributor, representing 58 percent of the total segment improvement. Net
sales for corn seed and traits in the first nine months of 2004 increased
22 percent, or $174 million, from the prior year comparable period. Corn
seed and trait sales were driven higher primarily by increases in the
United States. Corn seed net sales also increased in Brazil and Europe, and
to a lesser extent, in Mexico. Argentina corn seed and trait sales declined
slightly, which partially offset the gains in the above regions. Gross
profit for this segment increased 23 percent, or $219 million, from the
comparable prior year period. As a percent of net sales, gross profit
increased two percentage points to 62 percent in the first nine months of
2004.
The increase in U.S. corn seed was because of stronger market
performance and increased average net selling prices. Our branded corn
business expects to capture 14 share points this year, which is a one-point
increase over the prior year. Sales of U.S. corn traits increased primarily
because of growth in stacked traits and higher corn trait penetration. The
number of U.S. acres in 2004 that growers chose to plant with stacked corn
traits has increased substantially. To a lesser extent, the timing of
licensed trait royalties also favorably impacted the year-over-year
comparison. Corn seed net sales in Brazil increased from the same period a
year ago because of improved market conditions, which included a fiscal
2004 price increase, a mix shift to higher value products, and the
favorable Brazilian real exchange rate. Europe corn seed sales increased
because of favorable exchange rates, market share gains in France and
Turkey, and a favorable product mix. Argentina experienced drought
conditions in an extremely competitive marketplace in the first nine months
of 2004, which led to a decrease in net sales of corn seed and traits from
the prior year comparable period. The unfavorable weather conditions caused
many farmers to reduce plantings in the first nine months of 2004, and to
shift to other crops such as soybeans.
Soybean seed and traits net sales increased 13 percent, or $75
million, in the first nine months of 2004 and were driven by higher soybean
trait sales in the United States compared to the same period a year ago.
33
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
U.S. soybean trait revenues benefited from higher prices for branded
soybeans and royalties from seed licensees.
All other crops seed and trait sales in the first nine months of 2004
increased 18 percent, or $50 million, from the first nine months of 2003.
Canadian canola trait revenues increased because of timing of branded
canola trait revenues and royalties from seed licensees and, to a lesser
extent, favorable exchange rates. The timing was a shift from fourth
quarter to third quarter in fiscal year 2004 versus the same period a year
ago. Cotton trait revenues in India for the first nine months of 2004
improved from the same period a year ago primarily because of increased
acreage planted with BOLLGARD cotton traits. In the prior year, farmers saw
the crop protection benefits of our cotton traits. As a result, more
farmers began using or increased their acreage planted with BOLLGARD traits
in the current year. Revenues of cotton traits also increased in the United
States because of higher average net selling prices and the introduction of
ROUNDUP READY BOLLGARD II traits.
EBIT for the Seeds and Genomics segment decreased less than one
percent in the first nine months of 2004 from the prior year comparable
period. Gross profit as a percent of sales for the Seeds and Genomics
segment increased two percentage points to 62 percent because of the gross
profit improvement that comes from stacking more than one biotech trait in
corn, higher volumes and average net selling prices for branded corn, and
higher corn seed royalties from licensees. Gross profit also benefited from
higher branded soybean trait prices and royalties from licensees. The
timing of Canadian canola, soybean and corn trait royalties favorably
impacted this ratio. Additionally, branded corn seed COGS per unit was
lower in the United States because of higher yield and higher planting due
to expected market share growth. Operating expenses increased primarily
because of higher SG&A expenses and the $69 million global wheat goodwill
impairment. SG&A expenses increased because a higher percentage of certain
expenses was allocated to this segment in the first nine months of 2004
versus the same period a year ago based on the Seeds and Genomics segment's
increasing contribution to total Monsanto operations. The allocation
percentages were changed at the beginning of fiscal 2004. Our allocation
methodology is primarily based on the ratio of sales of the Seeds and
Genomics segment to total Monsanto sales, and is consistent with our
historical practice. SG&A expenses also increased in the first nine months
of 2004 because of higher accrued incentive compensation. To a lesser
extent, this segment also had higher bad-debt expense, R&D expense and
restructuring expense in the first nine months of 2004.
Agricultural Productivity Segment
Nine Months Ended
May 31,
-----------------------
2004 2003
---- ----
Net sales
ROUNDUP and other glyphosate-based herbicides $1,380 $1,096
All other agricultural productivity products 896 887
------ ------
Total net sales $2,276 $1,983
====== ======
Gross profit
ROUNDUP and other glyphosate-based herbicides $ 489 $ 362
All other agricultural productivity products (1) 377 383
------ ------
Total gross profit $ 866 $ 745
====== ======
EBIT(2) $ 177 $ 137
====== ======
(1) Includes any net restructuring charges for the segment that were
recorded within cost of goods sold. See Note 3 - Restructuring,
and "Restructuring" in MD&A for further details.
(2) Earnings (loss) from continuing operations before cumulative
effect of accounting change, interest and income taxes. See Note
15 - Segment Information - for further details.
34
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Net sales for the Agricultural Productivity segment increased 15
percent, or $293 million, to $2,276 million in the first nine months of
2004 from $1,983 million in the comparable prior year period. An increase
in sales of ROUNDUP herbicides and, to a lesser extent, other
glyphosate-based herbicides contributed to the net sales increase in the
first nine months of 2004 for the Agricultural Productivity segment. Gross
profit for this segment increased 16 percent to $866 million from last
year's same period level of $745 million. As a percent of net sales, gross
profit was 38 percent in both nine-month periods. Gross profit as a percent
of sales for this segment would have increased slightly if restructuring
expenses were excluded from cost of goods sold. In the first nine months of
2004, we recorded $13 million of restructuring charges related to the
fiscal year 2004 restructuring plan in cost of goods sold. During the prior
year comparable first nine months, we recorded $9 million in cost of goods
sold for the 2002 restructuring plan. For further details on our
restructuring plans, please see the "Restructuring" section of MD&A and
Note 3 - Restructuring.
Net sales of ROUNDUP and other glyphosate-based herbicides increased
in all world areas for the first nine months of fiscal 2004 compared to the
same period a year ago. The largest increases in year-over-year net sales
were achieved in Brazil, Argentina and Australia. To a lesser extent,
Canada and the United States had increases in ROUNDUP net sales in the
first nine months of fiscal 2004 from the same period a year ago. Brazil's
net sales of ROUNDUP and other glyphosate-based herbicides in the first
nine months of 2004 benefited from improved market and pricing conditions,
our operational changes that took place in the prior year, and the
favorable effect of the Brazilian real exchange rate. Net sales of ROUNDUP
herbicides in Argentina increased in the first nine months of 2004 compared
to the same period in the prior year. Argentine sales in the first quarter
of fiscal year 2003 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
the first nine months of 2003's sales by approximately $60 million, but
also reduced risks for both parties. Excluding the prior year actions, net
sales slightly decreased in the first nine months of 2004 because sales
were negatively affected by competitive conditions and dry weather. Sales
of glyphosate products in Australia increased for the first nine months of
2004 from the same period a year ago because of improved market conditions
and favorable exchange rates.
Canadian ROUNDUP net sales increased because of the introduction of
ROUNDUP WEATHERMAX, favorable weather conditions and favorable exchange
rates. Compared to the prior year, some Canadian ROUNDUP 2004 sales
occurred earlier in the season as they shifted from the fourth quarter into
the first nine months of 2004. Favorable wet weather conditions in late
spring contributed to dealers taking a stronger inventory position.
Additionally, a reorganized Canadian sales force focused on ROUNDUP played
a role in the earlier season sales and higher demand. Net sales of ROUNDUP
and, to a lesser extent, other glyphosate-based herbicides, in the United
States increased in the first nine months of 2004 from the same period a
year ago. Volumes for both branded and nonbranded glyphosate products
increased, which were both partially offset by lower average net selling
prices. Early positioning and applications of ROUNDUP drove business
performance for the first nine months of 2004, and created a timing shift
between third quarter and fourth quarter versus the prior year comparable
period. During the first nine months of 2004, we continued to experience
competitive pressures and a shift of sales volume to our lower-priced
branded and nonbranded products. For the full year, we continue to expect a
lower-value mix of branded and nonbranded products, and a decline in the
market share of ROUNDUP herbicides in the United States compared to fiscal
year 2003.
Net sales of all other agricultural productivity products increased $9
million in the first nine months of 2004 from the same period a year ago.
Sales increases in the first nine months of 2004 for lawn-and-garden
herbicides and the environmental technologies business were partially
offset by a sales decline in the animal agricultural business.
Lawn-and-garden herbicide net sales increased because of strong market
performance in the United States and favorable exchange rates in Europe.
U.S. sales benefited from the introduction of a private label product at a
large national retailer in fiscal 2004 and a favorable product mix. The
environmental technologies business net sales increased in the first nine
months of fiscal 2004 because of several major projects that were in
progress; there were no major projects in the prior year comparable period.
Sales of animal agriculture products decreased because of the POSILAC
product allocation resulting from corrections and improvements being made
by Sandoz GmbH at their manufacturing facility in Austria. For further
explanation of the POSILAC product allocation, please refer to the
"Agricultural Productivity" segment discussion for third quarter fiscal
2004 in MD&A.
35
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
EBIT for the Agricultural Productivity segment increased $40 million
for the first nine months of 2004. Gross profit year-over-year increased
$121 million, however, as a percent of net sales was flat at 38 percent.
Higher other expenses, bad-debt expense and restructuring expenses reduced
EBIT. Other expenses were $67 million higher in the first nine months of
2004 from the same period a year ago. The increase in other expense was
primarily because of the advancement of funds to pay for Solutia's Assumed
Liabilities in light of Solutia's refusal to pay for those liabilities and
for legal and other expenses related to the Solutia bankruptcy of $43
million. The increase in bad-debt expense was because of the uncollectible
Argentine accounts receivable discussed in the "Results of Operations -
First Nine Months of Fiscal Year 2004" section of MD&A. Net restructuring
charges recorded in the first nine months of 2004 were $51 million compared
to $29 million recorded in the same period a year ago. Offsetting these
higher expenses was the impact of a lower allocation of certain SG&A
expenses to the Agricultural Productivity segment in the first nine months
of 2004. Please see the previous section "Seeds and Genomics Segment" for a
further explanation of the change in allocation percentages between
segments of SG&A expenses.
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 $49
million and $50 million as of May 31, 2004, and Aug. 31, 2003,
respectively. Scotts began paying these deferred amounts ($5 million per
year in monthly installments) beginning in October 2002.
36
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Restructuring
During the three months and nine months ended May 31, 2004, and May
31, 2003, 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 3 - Restructuring - for further details.
Three Months Ended Nine Months Ended
May 31, May 31,
------------------------ -----------------------
2004 2003 2004 2003(1)
---- ---- ---- ----
Cost of goods sold $(2) $-- $(19) $(10)
Restructuring charges - net(2) (9) -- (66) (39)
--- -- ---- ----
Loss from continuing operations before income
taxes 11 -- (85) (49)
Income tax benefit 4 -- 28 18
--- --- ---- ----
Loss from continuing operations (7) -- (57) (31)
Income (loss) from operations of discontinued
businesses(3) 25 -- (9) --
Income tax benefit -- -- 10 --
--- --- ---- ----
Income on discontinued operations 25 -- 1 --
--- -- ---- ----
Net income (loss) $18 $-- $(56) $(31)
=== === ==== ====
(1) The $10 million of restructuring charges recorded in cost of
goods sold was split by segment as follows: $1 million Seeds and
Genomics and $9 million Agricultural Productivity. The $39
million of restructuring charges - net was split by segment as
follows: $19 million Seeds and Genomics and $20 million
Agricultural Productivity.
(2) The restructuring charges for the three months ended May 31,
2004, were offset by $4 million in restructuring reversals
related to prior plans, all of which was recorded in the
Agricultural Productivity segment. Restructuring charges for the
nine months ended May 31, 2004, and May 31, 2003, were offset by
prior plan reversals of $6 million ($1 million in Seeds and
Genomics and $5 million in Agricultural Productivity) and $12
million ($3 million in Seeds and Genomics and $9 million in
Agricultural Productivity), respectively.
(3) Fiscal year 2004 contains restructuring charges related to
discontinued businesses (refer to Note 17 - Discontinued
Operations). These restructuring charges were recorded in
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. Total restructuring charges approved under the fiscal year 2004
restructuring plan were $289 million pretax. We will further concentrate
our resources on our core seeds and traits businesses. These plans
included: (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 were originally expected to require restructuring charges of up to
$220 million pretax ($155 million aftertax) in fiscal year 2004.
Additionally, the approved plan included the $69 million impairment of
goodwill in the global wheat business (refer to Note 6 - Goodwill and Other
Intangible Assets). The goodwill impairment was not deductible for tax
purposes. The following table outlines the pretax restructuring charges
related to our fiscal year 2004 restructuring plan recorded by segment in
continuing operations and discontinued operations for the three months and
nine months ended May 31, 2004. We are following SFAS 144 and SFAS 146 to
account for these actions.
37
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Three Months Nine Months
Ended Ended
May 31, 2004 May 31, 2004
---------------- ---------------
Continuing Operations:
Seeds and Genomics $ 2 $ 35
Agricultural Productivity 13 56
---- -----
Total Continuing Operations 15 91
Discontinued Operations:
Seeds and Genomics (25) 9
Agricultural Productivity -- --
---- -----
Total Discontinuing Operations (25) 9
Total Segment:
Seeds and Genomics (23) 44
Agricultural Productivity 13 56
---- -----
Total $(10) $ 100
==== =====
In the first nine months of fiscal year 2004, we recorded pretax
restructuring charges of $59 million related to work force reductions. Work
force reductions in continuing operations of $56 million were primarily in
the areas of R&D, manufacturing, information technology and marketing in
the United States; downsizing the regional structure 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 of $3 million were related to employees of
the plant-made pharmaceuticals program. Facility closure charges in
discontinued operations of $2 million related to shutdown expenses
resulting from the exit of the plant-made pharmaceuticals site. Asset
impairments in continuing operations were $35 million, of which $19 million
was recorded in cost of goods sold and the remainder in restructuring
charges - net. Property, plant and equipment impairments of $10 million
were recorded in the United States and, to a lesser extent, in Asia for the
shutdown of production lines and disposal of equipment. We also recorded $9
million in inventory impairments related to discontinued seed hybrids in
Argentina, discontinued agricultural chemical products and seed hybrids in
Brazil, discontinued agricultural chemical products in Asia, and disposal
of inventory at a production site being shutdown in Canada. Asset
impairments in restructuring charges - net consisted of $11 million for the
closure of an office building in the United States, $2 million for the
closure of a research facility in Canada, an intangible asset impairment of
$2 million in Asia, and approximately $1 million for the disposal of a
computer system in Asia. Discontinued operations asset impairments of $4
million consisted of $2 million of property, plant and equipment
impairments and $1 million of other intangible assets, both associated with
the European wheat and barley business; and property, plant and equipment
impairments of $1 million associated with the plant-made pharmaceuticals
program. For details of restructuring charges recorded in third quarter
2004 for the fiscal year 2004 restructuring plan, refer to Note 3.
We expect to incur total restructuring charges of $191 million pretax
($136 million aftertax) in fiscal year 2004 (not including the $69 million
impairment of goodwill). For fiscal year 2004, we expect approximately $115
million of pretax charges to relate to the Seeds and Genomics segment and
$145 million to relate to the Agricultural Productivity segment. We
estimate that this restructuring will require approximately $140 million of
cash, relating to work force reductions and to a lesser extent, facility
closures. We also estimate we will incur $51 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. Charges
relating to asset impairments within the Seeds and Genomics segment are
approximately $30 million lower than previously estimated due to the
favorable results from the sale of the European wheat and barley business.
The actions relating to this restructuring plan are expected to produce
aftertax savings of approximately $20 million to $26 million in fiscal year
2004, 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 costs, primarily SG&A, as a percent of sales.
38
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, we recorded $61 million pretax
of restructuring charges during the first nine months of 2003. During the
first nine months of 2003, $10 million was recorded in cost of goods sold
and the remainder in the restructuring line item. The company also recorded
reversals of $12 million in the nine months ended May 31, 2003, for the
2000 and 2002 restructuring plans. Net pretax restructuring expenses of $49
million were recorded in the nine months ended May 31, 2003.
As of May 31, 2004, the liability balance for the 2002 restructuring
plan was less than $1 million. The reserve balance decreased approximately
$5 million during the nine months ended May 31, 2004. The reserve balance
was reduced $1 million for cash severance payments to former employees and
$2 million for facility closure actions that were completed. No additional
work force separation payments are expected, and accordingly, the remaining
reserves for work force reductions of $1 million were reversed in third
quarter 2004. The remaining facility closure actions associated with this
plan are expected to be completed in fourth quarter 2004. The remaining
actions will be funded from operations, and 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.
As of May 31, 2004, the liability balance for the 2000 restructuring
plan was less than $1 million. The reserve balance decreased approximately
$8 million during the nine months ended May 31, 2004. The 2000 plan
restructuring reserves decreased $3 million due to the sale of a U.S.
manufacturing plant during the second quarter of 2004. In addition,
reversals of $3 million were recorded in the first nine months of fiscal
year 2004 ($2 million in third quarter 2004) related to work force
reductions. Reversals were recorded primarily because costs were lower than
originally estimated. The remaining facility closure actions associated
with this plan are expected to be completed in fourth quarter 2004, and 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 Financial Condition
As of As of As of
May 31, 2004 Aug. 31, 2003 May 31, 2003*
------------ ------------- -------------
Working capital $3,179 $2,920 $3,055
Current ratio 2.75:1 2.45:1 2.53:1
*All data as of May 31, 2003, are derived from our unaudited consolidated
statement of financial position, which is not presented herein.
Working capital increased $259 million from Aug. 31, 2003, to May 31,
2004. Current assets increased $61 million, and current liabilities
decreased $198 million. An increase in trade accounts receivable was
somewhat offset by decreases in short-term investments and deferred tax
assets. Trade accounts receivable as of May 31, 2004, increased $441
million from the level as of Aug. 31, 2003. The increase was primarily
39
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
because of the seasonality of our business. A large amount of the trade
receivables balance as of May 31, 2004, represented sales of our
Agricultural Productivity products in the United States. These U.S.
receivables will become due in the fourth quarter of 2004. There were no
short-term investments as of May 31, 2004, and $230 million in short-term
investments as of Aug. 31, 2003. We invested excess cash in short-term
securities as of Aug. 31, 2003. There was no impact to working capital
between May 31, 2004, and Aug. 31, 2003, for the taxes related to the PCB
litigation settlement. When the PCB litigation settlement was funded in
September 2003, the deferred tax asset balance was reduced and the current
tax liability decreased. Current liabilities decreased from Aug. 31, 2003,
to May 31, 2004, primarily because of the $400 million payment for the PCB
litigation settlement. Short-term debt was $132 million higher as of May
31, 2004, compared to Aug. 31, 2003. The increase in short-term debt
lowered our working capital. Total debt outstanding as of May 31, 2004, and
Aug. 31, 2003, was unchanged at approximately $1.5 billion for both
periods; the mix shifted from long-term to short-term based upon current
maturities.
Working capital as of May 31, 2004, increased $124 million from May
31, 2003, reflecting lower current assets of $51 million and lower current
liabilities of $175 million. Current assets decreased because of $142
million in lower inventory and $131 million in lower trade accounts
receivables, which were partially offset by higher cash and cash
equivalents of $198 million. Argentine finished goods seed inventory
declined primarily because of higher inventory obsolescence charges in 2004
and product line discontinuances. ROUNDUP finished goods inventory declined
in Argentina because of higher third quarter 2004 sales compared to the
same period in the prior year (refer to the "Results of Operations - Third
Quarter Fiscal Year 2004" section of MD&A), which lowered our inventory
levels as of May 31, 2004. For both segments in Argentina, we have been
focused on improved inventory management in 2004. Finished goods inventory
also declined in the United States because of product rationalization of
ROUNDUP and other selective herbicides. Further, the United States produces
glyphosate intermediate product to meet global demand; as sales outside the
United States increased, there has been less glyphosate intermediate
product available for U.S. production, causing finished goods inventory
levels to decline. Trade accounts receivable were lower as of May 31, 2004,
compared to May 31, 2003, primarily because of lower accounts receivable in
Argentina and the United States. We increased our Argentine allowance for
doubtful accounts in fiscal 2004, which lowered our accounts receivable
balance. We saw a significant decline in the Argentine, and, to a lesser
extent, the U.S. days sales outstanding between the respective periods.
U.S. collections improved because of prepayments in both segments, which
were somewhat offset by higher sales. Current liabilities decreased because
of a lower current tax liability and lower short-term debt levels. The
current tax liability was approximately $164 million lower than the balance
as of May 31, 2003. The current tax liability decreased between May 31,
2003, and May 31, 2004, because of the taxes related to the PCB litigation
settlement, which became deductible in September 2003 when we funded the
PCB litigation settlement, and the payment of income taxes owed to
Pharmacia in the first nine months of 2004. Short-term debt was
approximately $150 million lower as of May 31, 2004. We had no commercial
paper outstanding as of May 31, 2004, and approximately $135 million of
commercial paper outstanding as of May 31, 2003. Total debt outstanding was
approximately $1.5 billion as of May 31, 2004, and $1.7 billion as of May
31, 2003.
Customer Financing Program: In connection with a financing option that
is available to certain of our customers, we collected approximately $124
million in the first nine months of 2004 and $153 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 non-consolidated 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.
The customer loan balance outstanding as of May 31, 2004, and May 31,
2003, was $97 million and $129 million, respectively. 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 May 31,
2004, Monsanto's guarantee liability was less than $1 million, based on our
40
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
historical collection experience with these customers and our current
assessment of credit exposure. Adverse changes in the actual loss rate
would increase the liability.
Cash Flow
Nine Months Ended
May 31,
-----------------------
2004 2003
---- ----
Net cash provided by operations $112 $554
Net cash provided (required) by investing activities 60 (195)
---- ----
Free Cash Flow 172 359
Net cash required by financing activities (126) (368)
---- ----
Net Increase (Decrease) in Cash and Cash
Equivalents $ 46 $ (9)
==== ====
Free cash flow (refer to the "Financial Measures" section of MD&A)
decreased $187 million for the first nine months of 2004 to $172 million
from $359 million in the prior year comparable period. The primary drivers
of the decrease were the PCB litigation settlement and pension funding. In
September 2003, we paid $400 million related to the Solutia PCB litigation
settlement. We are also continuing to voluntarily contribute to our U.S.
qualified pension plan, with $150 million contributed in the first nine
months of 2004 compared to $35 million in the first nine months of 2003.
The change in accounts receivable required cash of $496 million in the
first nine months of 2004 and $183 million in the first nine months of
2003. Sales increased in the current nine-month period at a rate higher
than our rate of collections during this time period. Although our
year-to-date collections have increased substantially as compared to the
nine months ended May 31, 2003, our increase in year-to-date sales more
than offset this improvement in collections in the cash flow statement.
Deferred income taxes were a source of cash of $213 million in the
first nine months of 2004 and a use of cash of $48 million in the
comparable prior year period. Similar to the current tax liability
discussion in "Working Capital and Financial Condition", the PCB litigation
settlement expense was the primary driver of this line. The tax impact of
the PCB litigation settlement was recorded in the current deferred tax
asset account as of Aug. 31, 2003. In September 2003 after the PCB
litigation settlement was funded, this amount was recorded to current tax
liability. Essentially the higher source of cash from deferred income taxes
was offset by the higher use of cash for accounts payable and accrued
liabilities in the first nine months of 2004 from the same period in the
prior year. Thus, overall net cash from operations was unaffected by taxes
related to the PCB litigation settlement in the first nine months of 2004.
Net cash provided by investing activities was $60 million for the
first nine months of 2004 compared to net cash required by investing
activities of $195 million in the prior year comparable period. The
fluctuation between the nine-month periods was primarily because of
purchases and maturities of short-term investments. For the first nine
months of 2003, we invested $250 million in short-term securities in
December 2002, which matured in April and May of 2003. Thus, there was no
cash flow impact of short-term securities during the nine months of 2003.
During the first nine months of 2004, short-term investments of $230
million matured in October 2003, and we reinvested $250 million in
short-term securities in December 2003. The December 2003 securities
matured in March and April 2004. The net impact was a source of cash in the
amount of $230 million. Investment and property disposal proceeds exceeded
prior year by $16 million primarily because of the sale of an equity
security during the first nine months of 2004. Capital spending was down
two percent from the prior year level of $151 million.
Net cash required by financing activities was $126 million in the
first nine months of 2004 compared to $368 million for the first nine
months of 2003. The net change in cash required for short-term financing
was $51 million in the first nine months of 2004 and $459 million in the
first nine months of 2003. During the first nine months of 2004, we had
41
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
strong cash flows, which has reduced our need for seasonal borrowings. In
the first nine months of 2003, we used our free cash flow to pay down our
short-term borrowings. Commercial paper outstanding decreased approximately
$480 million between Aug. 31, 2002, and May 31, 2003. No commercial paper
was outstanding as of Aug. 31, 2003, and May 31, 2004. Long-term debt
proceeds in the first nine months of 2004 were from our Brazil medium term
borrowings. During the first nine months of 2003, we issued $250 million of
4% Senior Notes under our May 2002 shelf registration. Stock option
exercises totaled $163 million during the first nine months of 2004
compared to no exercises in the prior year comparable period. During the
first nine months of 2004, treasury share purchases totaled $133 million.
The share repurchases are part of our three-year, $500 million share
repurchase program, which was authorized by the Executive Committee of the
board of directors on July 31, 2003. Dividend payments increased 10
percent, or $9 million, for the first nine months of 2004. In April 2003,
the board of directors approved an increase in the quarterly dividend from
12 cents per share to 13 cents per share. In May 2004, the board of
directors approved an increase in the quarterly dividend from 13 cents per
share to 14.5 cents per share.
Capital Resources and Liquidity
Effective June 4, 2004, we finalized a new five-year, $1 billion
revolving credit facility. This facility replaces the existing $500 million
five-year and $500 million 364-day facilities. Covenants under the $1
billion revolving credit facility are consistent with the facilities
replaced.
Contingent Liabilities Relating to Solutia Inc. (Off-Balance Sheet
Arrangement)
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 (Solutia's Assumed
Liabilities), to the extent that Solutia fails to pay, perform or discharge
those liabilities. Those liabilities remain the present responsibility of
Pharmacia. In general, this indemnification obligation applies to Solutia's
Assumed Liabilities for which Pharmacia would otherwise be required to pay.
Solutia's 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.
Solutia and 14 of its U.S. subsidiaries filed a voluntary petition 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 Solutia's Assumed Liabilities. Solutia has notified Pharmacia and
Monsanto that it is repudiating its obligation to defend litigation which
Solutia had been managing or to accept new cases relating to Solutia's
Assumed Liabilities pursuant to the terms of agreements between Pharmacia,
Solutia and Monsanto. Solutia has also taken the position that the
bankruptcy proceeding prevents it from continuing to perform its
environmental obligations except within the boundaries of its current
operations. If Solutia is discharged from all or a portion of Solutia's
Assumed Liabilities, Monsanto may be required to indemnify Pharmacia for
all or a portion of them. Under the rules of the SEC, these contingent
liabilities are considered to be an off-balance sheet arrangement. Part I.
Item 1 - Note 14 - Commitments and Contingencies - includes further
information regarding Solutia's Assumed Liabilities and the reasonable
possibility of a material adverse effect on our financial position,
profitability and/or liquidity. Also see Part II. Item 1 - Legal
Proceedings - and Item 5 - Other Information - Relationships Among Monsanto
Company, Pharmacia Corporation and Solutia Inc. - for further information.
42
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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, with the goal of ensuring that ROUNDUP and
our other herbicides continue to make strong contributions to cash flow and
income. Monsanto is continuing to evolve into a company led by its
strengths in seeds and biotechnology traits as a 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 focuses on three crops grown on significant
acreage: corn, soybeans and cotton. Following our announced exit from our
European breeding and seed business for wheat and barley, we entered into a
definitive agreement in third quarter of fiscal year 2004 for the sale of
assets associated with that business, and finalized the sale in June 2004.
Recently, we made the decision to realign our research and development
investments to accelerate the development of new and improved traits in
corn, cotton and oilseeds. As part of this realignment, we are deferring
all further efforts to introduce ROUNDUP READY wheat, until such time that
other wheat biotechnology traits are introduced. This decision was reached
after a comprehensive review of our research investment portfolio and
extensive consultation with customers in the wheat industry.
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 diversify our exposure to risk from changes in
the marketplace.
Our financial strategy will continue to emphasize both earnings and
cash flow, and we believe that Monsanto is positioned to sustain earnings
growth and strong cash flow. We remain committed to returning cash to
shareowners. Our board of directors increased our dividend rate in April
2003, and again in May 2004. We began our share repurchase program in the
first quarter of 2004. We expect to continue the share repurchase program
until the earlier of July 2006 or such time as we have reached the $500
million amount authorized by the board of directors. 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 will also evaluate using our cash position for acquisition
opportunities that meet the strategic needs of our seed and traits
businesses or for technology arrangements that have the potential to
increase the efficiency and effectiveness of our research and development
efforts.
We have taken decisive steps to address key risks in our business
position. These include the measures noted above, reducing costs in our
agricultural chemistry business and pursuing the evolution of our business
to an emphasis on seeds and traits. We have also taken steps to reduce risk
and stabilize our business position in Latin America. We remain focused on
cost and cash management both to support 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 continue to seek additional external financing opportunities for
our customers.
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RESULTS OF OPERATIONS (continued)
We implemented changes in how we approach our Argentina business that
negatively impacted our sales and earnings in fiscal year 2003 and the
first nine months of 2004 but are intended to stabilize our business
position in this important agricultural market. The actions we have taken
with our customers were designed to reduce risk and to balance earnings and
cash during a particularly difficult economic period. We continue to follow
through on business decisions made in recent years aimed at maintaining
market leadership and restoring profitability in Argentina. Although
economic and market uncertainties remain, we believe we are making
progress. In addition, we continue to focus on reducing inventories and
receivables in Argentina.
Seeds and Genomics
Monsanto has built a leading global position in seeds, and the
successful integration of seed businesses acquired in the 1990s has allowed
us to improve 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.
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. 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.
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.
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. Our past
successes provide a significant competitive advantage in delivering
stacked-trait products and improved, second-generation traits.
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.
The EPA has granted Monsanto registration and we have obtained
Japanese import approval for YIELDGARD Plus, YIELDGARD Corn Borer and
YIELDGARD Rootworm stacked traits in corn, with ROUNDUP READY. We will be
44
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
launching this product in the United States in fiscal year 2005. 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. We believe our strategic head start in first- and second-generation
input traits will give 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 passed a
measure, which legalized the planting of ROUNDUP READY soybeans in Brazil
for the 2003-2004 crop year. Although we expect this legislation to extend
to the 2004-2005 crop year, the extension is not yet completed. Monsanto is
working with the Brazilian grain industry to collect royalties for the use
of our technology, as ROUNDUP READY grain is sold to grain handlers. 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. More
than 95 percent of the grain handlers in two southern Brazil states have
signed contracts to collect this royalty upon the delivery and sale of the
grain produced with ROUNDUP READY soybean technology. We have collected
checks from grain handlers in these two southern states, however, after
deducting expenses we expect the system to have a roughly neutral to
negative effect on our earnings in fiscal year 2004. This same approach may
also be applicable to other parts of Latin America. However, there is no
certainty that royalties on ROUNDUP READY soybeans will be profitably
collected in Brazil or other parts of Latin America. 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 herbicides, 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 net average selling price of ROUNDUP
herbicides in the United States have declined since the patent expired in
2000. Although prices may continue to decline in the future, we do not
currently expect the decline in the future net average selling price to be
as significant as it has been in recent years. We expect the net average
selling price of ROUNDUP in the United States in fiscal 2005 to be
generally consistent with the net average selling price for fiscal 2004. We
also believe we will be able to maintain our leadership position and
continue to generate cash from this business. 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 innovations, superior customer service
45
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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. Several years
ago distribution channel inventories had increased significantly in the
United States. However, ROUNDUP distribution inventory levels at the end of
fiscal year 2003 were slightly down from levels at the end of fiscal year
2002. Distribution inventory levels as of May 31, 2004, continued to be
flat compared to the same date in the prior year.
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. 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 FDA to manufacture the
finished dose formulation at Augusta. In second quarter of fiscal year
2004, we notified our customers that supplies of POSILAC would be
temporarily limited while Sandoz completes necessary corrections and
improvements at its facility in response to issues identified by the FDA.
This limitation has temporarily reduced volumes of POSILAC available for
sale and required us to allocate available supplies. The allocation is
expected to have a material adverse effect on POSILAC revenues as long as
it continues.
Other Information
As discussed in Part I. Item 1 - Note 14 - 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.
For additional information on the outlook for Monsanto, see
"Cautionary Statements: Risk Factors Regarding Forward-Looking Statements."
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MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 take other corrective actions, either of which may 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. During the second quarter of 2004, management evaluated those
estimates and determined our critical accounting policies and estimates
should be expanded to include litigation and other contingencies as
discussed below. Had we used estimates different from any of those
contained in such report on Form 10-K, our financial condition,
profitability, or liquidity for the current period could have been
materially different from those presented.
Litigation and Other Contingencies: We are involved in various patent,
product liability, consumer, commercial, environmental and other
litigation, claims and legal proceedings, for example proceedings relating
to Solutia's bankruptcy filing; environmental remediation; and government
investigations. We routinely assess the likelihood of adverse judgments or
outcomes to those matters, as well as ranges of probable losses, to the
extent losses are reasonably estimable. We record accruals for such
contingencies to the extent that we conclude their occurrence is probable
and the financial impact, should an adverse outcome occur, is reasonably
estimable. Disclosure for specific legal contingencies is provided if the
likelihood of occurrence is at least reasonably possible and the exposure
is considered material to the consolidated financial statements. In making
determinations of likely outcomes of litigation matters, management
considers many factors. These factors include, but are not limited to, past
history, scientific and other evidence, and the specifics and status of
each matter. If our assessment of the various factors changes, we may
change our estimates. That may result in the recording of an accrual or a
change in a previously recorded accrual. Predicting the outcome of claims
and litigation, and estimating related costs and exposure involves
substantial uncertainties that could cause actual costs to vary materially
from estimates and accruals.
New Accounting Standards
In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46), and amended it by
issuing FIN 46R in December 2003. FIN 46R addresses the consolidation of
business enterprises to which the usual condition of consolidation
(ownership of a majority voting interest) does not apply. This
interpretation focuses on controlling financial interests that may be
achieved through arrangements that do not involve voting interests. It
concludes that, in the absence of clear control through voting interests, a
company's exposure (variable interest) to the economic risks and potential
rewards from the variable interest entity's assets and activities are the
best evidence of control. If an enterprise holds a majority of the variable
interests of an entity, it would be considered the primary beneficiary. The
primary beneficiary is required to include the assets, liabilities and
results of operations of the variable interest entity in its financial
statements.
Monsanto adopted the provisions of FIN 46R for the quarter ended Feb.
29, 2004, for interests in variable interest entities that are considered
to be special-purpose entities. Monsanto has an arrangement with a
special-purpose entity to provide a financing program for selected Monsanto
customers. See Note 4 - Customer Financing Program - for a description of
this arrangement. This special-purpose entity is consolidated.
47
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
As of May 31, 2004, the company adopted the provisions of FIN 46R for
all other types of variable interest entities. The company has evaluated
its relationships with two entities and has determined that, although the
entities are variable interest entities and Monsanto holds variable
interests in the entities, these investments are not required to be
consolidated in the company's financial statements pursuant to FIN 46R as
Monsanto is not the primary beneficiary. One entity is a biotechnology
company focused on plant gene research, development and commercialization,
in which the company had a nine percent equity investment as of May 31,
2004. Monsanto currently has an agreement in place under which Monsanto
makes payments for research services and receives rights to intellectual
property developed within funded research. The entity reported total assets
of $31 million and total liabilities of $13 million as of Dec. 31, 2003,
and revenues of $20 million for the year ended Dec. 31, 2003. The second
entity is a joint venture in which the company has a 49 percent equity
investment. This joint venture packages and sells seeds, with a focus in
corn and sunflower seeds, and also sells and distributes agricultural
chemical products. The joint venture reported total assets of $24 million
and total liabilities of $17 million as of Dec. 31, 2003, and revenues of
$18 million for the year ended Dec. 31, 2003. As of May 31, 2004,
Monsanto's total estimate of maximum exposure to loss as a result of its
relationships with these entities is approximately $23 million, which
represents Monsanto's equity investments in these entities.
In January 2004, the FASB issued FASB Staff Position No. 106-1 (FSP
106-1), Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003. FSP 106-1
permits a sponsor of a postretirement health care plan that provides a
prescription drug benefit to make a one-time election to defer accounting
for the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act), which was signed into law on Dec. 8,
2003. The Act introduced a prescription drug benefit under Medicare, as
well as a federal subsidy to sponsors of retiree health care benefit plans
that provide a benefit that is at least actuarially equivalent to Medicare.
These provisions of the new law will affect accounting measurements of our
postretirement benefit obligation and expense. As permitted by FSP 106-1,
we made a one-time election to defer accounting for the effect of the Act
and, as a result, the amounts included in the consolidated financial
statements related to our postretirement benefit plans do not reflect the
effects of the Act. In May 2004, the FASB issued FSP No. 106-2 (FSP 106-2),
which superseded FSP 106-1. FSP 106-2 provides authoritative guidance on
the accounting for the federal subsidy and specifies the disclosure
requirements for employers who have adopted FSP 106-2. Detailed regulations
necessary to implement the Act have not been issued, including those that
would specify the manner in which actuarial equivalency must be determined,
the evidence required to demonstrate actuarial equivalency, and the
documentation requirements necessary to be entitled to the subsidy. FSP
106-2 is effective for Monsanto's first quarter of fiscal year 2005.
Monsanto is currently evaluating the effect that the adoption of FSP 106-2
will have on its results of operations and financial condition. Final
authoritative guidance could require the company to change previously
reported information.
In December 2003, the FASB issued SFAS No. 132 (Revised 2003),
Employers' Disclosures about Pensions and Other Postretirement Benefits,
which enhanced the required disclosures about pension plans and other
postretirement benefit plans, but did not change the measurement or
recognition principles for those plans. The statement requires additional
interim and annual disclosures about the assets, obligations, cash flows,
and net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans. The required interim disclosures were
effective for Monsanto in the third quarter of fiscal year 2004, and the
required annual disclosures are effective for Monsanto's Form 10-K for the
fiscal year ended Aug. 31, 2004. Refer to Note 9 - Postretirement Benefits
- Pensions - for the required quarterly disclosures.
In December 2003, the SEC issued SAB No. 104, Revenue Recognition (SAB
104). 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 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS 143). SFAS 143, which was effective for
Monsanto on Jan. 1, 2003, addresses financial accounting for and reporting
of costs and obligations associated with the retirement of tangible
long-lived assets. Upon adopting this standard, in accordance with APB
Opinion 20, we recorded an aftertax cumulative effect of accounting change
of $12 million, or $0.05 per share. This noncash charge was recorded as of
Jan. 1, 2003. In addition, as required by SFAS 143, as of Jan. 1, 2003, net
48
MONSANTO COMPANY AND SUBSIDIARIES
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RESULTS OF OPERATIONS (continued)
property, plant and equipment increased by $10 million, and asset
retirement obligations (a component of noncurrent liabilities) of $30
million were recorded. Adoption of this standard did not affect the
company's liquidity. If SFAS 143 would have been effective for all periods
presented, net earnings would have been reduced by $1 million for the nine
months ended May 31, 2003, with no change to reported diluted earnings per
share.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). 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 3 -
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: Risk Factors Regarding Forward-Looking Statements
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
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 (particularly those influenced by the European Union) can affect
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
49
MONSANTO COMPANY AND SUBSIDIARIES
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RESULTS OF OPERATIONS (continued)
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, and
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 if present in their
crops could 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 possibly lead to
increased regulation, which may include: requirements for labeling and
traceability; liability transfer mechanisms such as financial protection
such as insurance; and possible 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.
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
50
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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,
in connection with the separation of our businesses from those of Pharmacia
on Sept. 1, 2000, we were required to indemnify Pharmacia for Solutia's
Assumed Liabilities, 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 Solutia's Assumed
Liabilities. Both prior to and since its Chapter 11 filing, Solutia has
failed to perform obligations relating to some of Solutia's Assumed
Liabilities including repudiating its obligation to defend certain
litigation proceedings and refusing to perform certain of its environmental
obligations. In order to protect its and Pharmacia's interest, Monsanto has
advanced, and expects to advance in the future, funds to pay for some of
Solutia's Assumed Liabilities, in light of Solutia's refusal to pay for
those liabilities, and for legal and other expenses related to Solutia's
bankruptcy. If Solutia is discharged from all or a portion of these
liabilities and obligations in its Chapter 11 proceeding, Monsanto may be
required to indemnify Pharmacia for all or a portion of them. It is
reasonably possible that such advancement of funds and/or obligation to
indemnify Pharmacia will result in a material adverse effect on Monsanto's
financial position, profitability and/or liquidity. Additional information
about our relationship with Solutia and risks related to Solutia may be
found in Part I. Item 1 - Note 14 - Commitments and Contingencies and 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: In October 2003, we 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.
51
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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.
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 May 31, 2004 (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 control 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.
52
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 Monsanto and Pharmacia,
effective Sept. 1, 2000, as amended (Separation Agreement). Under that
agreement, we assumed responsibility for, among other things described
below, legal proceedings primarily related to the agricultural business
that Pharmacia transferred to us on that date. As a result, although
Pharmacia may remain the 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 primarily related to the
agricultural business that Pharmacia transferred to us where Pharmacia is
the defendant, we will indemnify Pharmacia for costs, expenses and any
judgments or settlements; and in such proceedings where Pharmacia is the
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, we were also required to
indemnify Pharmacia for liabilities that Solutia assumed from Pharmacia
under a Distribution Agreement entered into between those companies in
connection with the spinoff of Solutia on Sept. 1, 1997, as amended
(Distribution Agreement), to the extent that Solutia fails to pay, perform
or discharge those liabilities. Those liabilities remain the present
responsibility of Pharmacia. In general, this indemnification obligation
applies to Pharmacia liabilities that were assumed by Solutia, pursuant to
the Distribution Agreement, and which Pharmacia would otherwise be required
to pay. The liabilities that Solutia assumed from Pharmacia are referred to
as "Solutia's Assumed Liabilities." Solutia's 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.
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 (Bankruptcy Court). In the Chapter 11 proceeding, Solutia is
seeking relief from paying certain liabilities, including some or all of
Solutia's Assumed Liabilities. On Feb. 17, 2004, Solutia notified Pharmacia
and Monsanto that it was disclaiming its obligation to defend litigation
that Solutia had been managing, pursuant to powers of attorney granted by
Pharmacia and by Monsanto under the Distribution Agreement, and to accept
new cases relating to Solutia's Assumed Liabilities. We believe Solutia
remains obligated to continue to defend such litigation unless and until
discharged from such obligations by the Bankruptcy Court. However, in order
to protect our interests and those of Pharmacia while that issue is
resolved, we have assumed, on an interim basis, the management of that
litigation for which Solutia has disclaimed responsibility. To the extent
additional such matters arise in the future, we may also assume management
of those matters for purposes of defense and resolution. We are advancing
and expect to continue to advance funds for the defense, performance or
disposition of these matters and will pursue recovery of our expenses from
Solutia in the Chapter 11 proceeding. For additional information, see Part
I. Item 1 - Note 14 - Commitments and Contingencies and Part II. Item 5 -
Other Information - 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, excluding litigation relating to Solutia's Assumed
Liabilities, either individually or taken as a whole, will have a material
adverse effect on our financial position, profitability and/or liquidity.
As discussed in Part I. Item 1 - Note 14, it is reasonably possible that
the resolution of Solutia's bankruptcy proceeding, including the allocation
of responsibility for the litigation relating to Solutia's Assumed
Liabilities, could have a material effect on our financial position,
profitability and/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, including those related
to Solutia's Assumed Liabilities.
The following discussion provides new and updated information
regarding certain proceedings to which Pharmacia or Monsanto is a party and
53
for which we are responsible and proceedings that we are managing related
to Solutia's Assumed Liabilities. Other information with respect to legal
proceedings appears in our report on Form 10-K for the transition period
ended Aug. 31, 2003, and in our reports on Form 10-Q for the quarterly
periods ended Nov. 30, 2003, and Feb. 29, 2004.
Patent and Commercial Proceedings
The following updates the proceedings involving Mycogen Plant Science
Inc. (Mycogen Plant Science), now part of Dow AgroSciences LLC, a
subsidiary of The Dow Chemical Company:
o As described in our report on Form 10-K for the transition period
ended Aug. 31, 2003, as updated in our report on Form 10-Q for
the quarterly period ended Feb. 29, 2004, on May 19, 1995,
Mycogen Plant Science filed suit against the former Monsanto
Company in the U.S. District Court in California alleging
infringement of its patent involving synthetic Bt genes, and
seeking unspecified damages and injunctive relief, which we refer
to as the "Synthetic Bt case." Monsanto prevailed on summary
judgment in dismissing all claims. On May 10, 2004, Mycogen Plant
Science dismissed with prejudice its lawsuit against the former
Monsanto Company. As part of that dismissal, Mycogen Plant
Science was required to agree not to sue Monsanto, its
affiliates, or its sublicensees under the patent at issue for all
of Monsanto's current commercial and pipeline products.
o As described in our report on Form 10-K for the transition period
ended Aug. 31, 2003, as updated in our report on Form 10-Q for
the quarterly period ended Feb. 29, 2004, Monsanto was also
involved in interference proceedings against Mycogen Plant
Science in the U.S. Patent and Trademark Office to determine the
first party to invent certain technology related to the synthetic
Bt technology at issue in the California case. Under U.S. law,
patents are issued to the first to invent, not the first to file
for a patent on, a subject invention. If two or more parties seek
patent protection on the same invention, as is the case with our
synthetic Bt technology, the U.S. Patent and Trademark Office may
hold interference proceedings to identify the party who first
invented the particular invention in dispute. In prior litigation
between the parties Monsanto has been determined to be the prior
inventor of patent claims associated with synthetic Bt
technology. On Jan. 29, 2004, the Board of Patent Appeals
determined that Monsanto scientists were the first to invent
synthetic Bt genes for expression in plants. As a result of this
decision, we expect that Monsanto's scientists will receive a
patent covering this technology. On March 29, 2004, Mycogen Plant
Science filed with the U.S. District Court for the Southern
District of Indiana an appeal from the decision of the Board of
Patent Appeals in which it seeks to have the decision of the
Board of Patent Appeals reversed. On June 15, 2004, the District
Court denied Monsanto's motion to transfer Mycogen Plant
Science's appeal to the U.S. District Court in California in
which the Synthetic Bt case was pending prior to its dismissal by
Mycogen Plant Science.
The following updates a proceeding 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, as updated in our reports on Form 10-Q for
the quarterly periods ended Nov. 30, 2003, and Feb. 29, 2004, 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.
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 appealed the
District Court's judgment to the U.S. Court of Appeals for the
Federal Circuit. 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. On March 30, 2004, the Federal Circuit
determined that possible contested issues of fact exist that made
summary judgment inappropriate and reversed the District Court's
decision. On June 22, 2004, Bayer CropScience dismissed with
prejudice its claims on three of the four patents in dispute. As
part of that dismissal, Bayer CropScience agreed not to sue
54
Monsanto, its affiliates or its sublicensees under those patents
for any of Monsanto's current commercial products. Monsanto
intends to seek recovery from Bayer CropScience of its attorneys'
fees involved in defending against the claims Bayer CropScience
is dismissing and to assert defenses, including non-infringement
and invalidity of the remaining patent in the litigation.
The following proceedings involve affiliates of Syngenta AG
(Syngenta):
o On May 10, 2004, Monsanto filed suit against Syngenta Seeds, Inc.
(Syngenta Seeds) in the Circuit Court of St. Louis County,
Missouri, for declaratory judgment seeking a determination that,
under its license from Monsanto for ROUNDUP READY soy, Syngenta
Seeds is limited to commercializing its ROUNDUP READY soy under
one product brand. On May 19, 2004, in response to Monsanto's
lawsuit, Syngenta Seeds filed a lawsuit in the District Court for
Hennepin County, Minnesota seeking an injunction against Monsanto
and a determination that it could commercialize ROUNDUP READY soy
under a second brand. On June 2, 2004, the District Court denied
Syngenta Seeds' request for a temporary injunction and granted
Monsanto's motion to stay the Minnesota case in deference to the
St. Louis litigation, which will determine the respective rights
of the parties.
o Syngenta has also announced that it acquired certain rights to a
glyphosate tolerant corn product, known as GA21 corn and that it
intended to commercialize GA21 corn in the United States in 2005.
Monsanto, however, has various patent rights that cover GA21
corn, to which Syngenta holds no license. To protect Monsanto's
intellectual property rights, on May 12, 2004, Monsanto filed
suit against Syngenta Seeds, Inc. and Syngenta Biotechnology,
Inc. in the U. S. District Court for the District of Delaware
alleging infringement of one of Monsanto's patents involving
glyphosate tolerant crops. Monsanto is seeking an injunction
against Syngenta's sale of GA21 corn and damages for willful
infringement of our patent.
As described in our report on Form 10-Q for the period ended Feb. 29,
2004, on July 10, 2003, PT Panen Buah Emas (Emas) commenced proceedings in
the South Jakarta District Court against Monsanto and two of its Indonesian
affiliates regarding an alleged wrongful termination of a Cotton Processing
Agreement (CPA) between one of the affiliates and Emas. The CPA contains an
arbitration clause prescribing exclusive dispute resolution by arbitration
in Singapore. Monsanto and its affiliates believe such clause should be
dispositive but were not successful in their challenge to the jurisdiction
of the South Jakarta District Court. On June 6, 2004, the South Jakarta
District Court awarded Emas $8.4 million in damages. Monsanto and its
affiliates have appealed the decision, including the damage award.
Grower Lawsuits
As described in our report on Form 10-K for the transition period
ended Aug. 31, 2003, as updated in our reports on Form 10-Q for the
quarterly periods ended Nov. 30, 2003, and Feb. 29, 2004, two purported
class action lawsuits by farmers, concerning our biotechnology trait
products have been consolidated in the 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 Hi-Bred
International, Inc., Syngenta Seeds, Syngenta Crop Protection Inc., 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 for the
Eastern District of Missouri 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
55
certification of their antitrust claims. In addition to this action,
starting the week of March 7, 2004, individual plaintiffs filed essentially
identical purported class actions, on behalf of direct and indirect
purchasers in 16 different state courts essentially realleging claims set
forth in the Federal Cases.
Proceedings Related to Delta and Pine Land Company
As described in our report on Form 10-K for the transition period
ended Aug. 31, 2003, on Jan. 18, 2000, Delta and Pine Land Company (Delta
and Pine Land) reinstituted a suit against the former Monsanto Company in
the Circuit Court of the First Judicial District of Bolivar County,
Mississippi, seeking unspecified compensatory damages for lost stock market
value of not less than $1 billion, as well as punitive damages, resulting
from alleged failure to exercise reasonable efforts to complete a merger
between the two companies. The amended complaint alleges that the former
Monsanto Company tortiously interfered with Delta and Pine Land's
prospective business relations by feigning interest in the merger so as to
keep Delta and Pine Land from pursuing transactions with other entities. On
Sept. 9, 2003, the Court granted Monsanto's motion to file a counterclaim
seeking to set aside the merger agreement on the basis of Delta and Pine
Land's fraudulent nondisclosure of material information, and substantial
damages including recoupment of the $83 million breakup fee previously paid
to Delta and Pine Land. While it considers certain motions of the parties,
including a motion for partial summary judgment filed by Monsanto, the
Court has suspended all deadlines in the case and indicated that it will
hold a new scheduling conference in the future. No trial date has been set.
On May 20, 2004, Monsanto filed a request with the American
Arbitration Association for arbitration and a determination that Monsanto
has the right to terminate the 1996 U.S. licensing agreements that provided
Delta and Pine Land with access to Monsanto's BOLLGARD insect-protected
cotton and ROUNDUP READY herbicide-tolerant technologies for cotton.
Monsanto believes Delta and Pine Land has violated its duties to, and its
contracts with, Monsanto in a variety of ways including: (i) failing to
calculate, collect and ensure that Monsanto was paid all royalty amounts
due under the agreements; (ii) breaching its fiduciary duty to Monsanto as
the managing agent of D&M Partners by neglecting to properly collect and
allocate the income of D&M Partners; and (iii) misusing Monsanto's
intellectual property by inappropriately providing Monsanto technology to
an unlicensed party.
Agent Orange
As described in our report on Form 10-K for the transition period
ended Aug. 31, 2003, certain Korean veterans of the Vietnam War have filed
suit in Seoul, South Korea, against The Dow Chemical Company and the former
Monsanto Company. Plaintiffs allege that they were exposed to herbicides,
and that they suffered injuries or their children suffered birth defects as
a result. Three separate complaints filed in October 1999 are being handled
collectively and currently involve approximately 16,700 plaintiffs. The
complaints fail to assert any specific causes of action but seek damages of
300 million won (approximately US$260,000) per plaintiff. On May 23, 2002,
the Seoul District Court ruled in favor of the manufacturers and dismissed
all claims of the plaintiffs on the basis of lack of causation and statutes
of limitations. Plaintiffs have filed an appeal de novo with the Seoul High
Court and the parties have engaged in the briefing process required by that
Court. The Seoul High Court has held three preparatory hearings to address
issues on the appeal and has indicated that it will hold a formal hearing
on the appeal on Oct. 4, 2004. Other ancillary actions are also pending in
Korea, including a request for provisional relief pending resolution of the
main action.
Pension Plan
On June 23, 2004, two former employees of Monsanto and Pharmacia filed
a purported class action lawsuit in the U.S. District Court for the
Southern District of Illinois against Monsanto and the Monsanto Company
Pension Plan, which we refer to as the "Plan." The suit claims that the
Plan underpaid certain benefits and violated federal law against age
discrimination from Jan. 1, 1997 (when the Plan was sponsored by Pharmacia,
then known as Monsanto Company) and continuing to the present. On July 13,
2004, Monsanto tendered defense of this suit to Pharmacia pursuant to the
terms of the Separation Agreement and demanded that (a) Pharmacia defend
Monsanto or pay Monsanto's costs of defense, and (b) indemnify Monsanto for
any liabilities arising from the lawsuit.
56
Litigation Relating to Solutia's Assumed Liabilities
As described above, Solutia managed and directed the defense of
litigation with respect to Solutia's Assumed Liabilities until
approximately Feb. 17, 2004, when Solutia notified Pharmacia and Monsanto
of its intention to cease or suspend performance. In order to protect the
interests of Pharmacia and Monsanto, we have assumed management of these
matters on an interim basis or until resolution of Solutia's Chapter 11
proceeding. As we are now managing litigation relating to Solutia's Assumed
Liabilities, a description of material proceedings relating to those
liabilities is included in this portion of this report on Form 10-Q.
The following updates the proceedings that have alleged damages
arising from exposure to polychlorinated biphenyls (PCBs), which were
discharged from an Anniston, Alabama, plant site that was formerly owned by
Pharmacia and that was transferred to Solutia as part of the spinoff of
Solutia from Pharmacia:
o Other Anniston Cases: As described in our report on Form 10-Q for
the quarterly period ended Feb. 29, 2004, after the global
settlement of the multiplaintiff cases known as Abernathy and
Tolbert, 12 cases remained pending in various Circuit Courts in
the state of Alabama. Three additional cases brought by three pro
se plaintiffs have been filed with various courts, but have not
been served on any defendants. On March 15, 2004, Monsanto, on
behalf of Pharmacia removed all but one of those to the United
States District Court for the Northern District of Alabama.
Monsanto has moved to consolidate all the removed cases before
the same court in which the Tolbert matter remains pending for
administrative purposes. Two of the removed cases have been
remanded to state court. Decisions on the remaining cases that
Monsanto removed remain pending.
As described in our report on Form 10-Q for the quarterly period ended
Feb. 29, 2004, there are currently pending in Mississippi 14 PCB cases,
which were originally filed in state courts in Copiah County and Hinds
County, Mississippi on behalf of a total of 785 plaintiffs. The plaintiffs
are either present or former employees of a transformer manufacturing
facility owned by Kuhlman Electric Corporation located in Crystal Springs,
Mississippi or present or former residents of the Crystal Springs
community. The cases assert various negligence and product liability claims
and seek damages for personal injury and/or property damage caused by
exposure to PCBs. The plaintiffs seek to recover both compensatory and
punitive damages in unspecified amounts. The plaintiffs in these cases name
as defendants in various combinations Solutia, Inc., Monsanto Company
and/or Pharmacia. On Feb. 20, 2003, Feb. 24, 2003, and June 4, 2004,
Monsanto and/or Monsanto on behalf of Pharmacia, removed these cases to the
United States District Court for the Southern District of Mississippi.
Motions to remand have been filed in 13 of the 14 cases. In addition, on
Dec. 30, 2002, a wrongful death case was filed against Monsanto Company in
the Circuit Court of Hinds County on behalf of three wrongful death
beneficiaries for damages allegedly arising from their decedent's exposure
to PCBs in the course of his work as an electrician in the Ingall's
shipyard in Pascagoula, Mississippi. Pharmacia is not named as defendant in
this suit. The case was removed to federal court and a motion to remand was
recently denied by the federal court.
57
Item 2. SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
The following table includes all issuer repurchases, including those
made pursuant to publicly announced plans or programs and those not made
pursuant to publicly announced plans or programs.
-----------------------------------------------------------------------------------------------------------
(c) Total Number
of Shares (d) Approximate Dollar
(a) Total (b) Purchased as Part Value of Shares that
number of Average of Publicly May Yet Be Purchased
Shares Price Paid Announced Plans Under the Plans
Period Purchased per Share or Programs or Programs
-----------------------------------------------------------------------------------------------------------
March 2004: 791,700 $33.21 791,700 $367,365,481
(March 1, 2004 through March 31,
2004)
-----------------------------------------------------------------------------------------------------------
April 2004:
(April 1, 2004 through April 30,
2004) -- -- -- $367,365,481
-----------------------------------------------------------------------------------------------------------
May 2004:
(May 1, 2004 through May 31, 2004) 487(1) 34.07 -- $367,365,481
-----------------------------------------------------------------------------------------------------------
Total 792,187 $33.23 791,700 $367,365,481
-----------------------------------------------------------------------------------------------------------
(1) Represents total number of restricted shares withheld to cover the
withholding taxes upon the vesting of restricted stock.
On July 31, 2003, the Executive Committee of the board of directors
authorized the purchase of up to $500 million of the company's common stock
over a three-year period. The plan expires on July 30, 2006. There were no
other publicly announced plans outstanding as of May 31, 2004.
Item 5. OTHER INFORMATION
(a) Relationships Among Monsanto Company, Pharmacia Corporation and Solutia
Inc.
Prior to Sept. 1, 1997, a corporation that was then known as Monsanto
Company (Former Monsanto) operated an agricultural products business (the
Ag Business), a pharmaceuticals and nutrition business (the Pharmaceuticals
Business) and a chemical products business (the Chemicals Business). Former
Monsanto is today known as Pharmacia Corporation (Pharmacia). Pharmacia is
now a wholly owned subsidiary of Pfizer Inc. (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. (Solutia) comprises the operations, assets and
liabilities that were previously the Chemicals Business. The following
table sets forth a chronology of events that resulted in the formation of
Monsanto, Pharmacia and Solutia as three separate and distinct
corporations, and provides a brief background on the relationships among
these three corporations.
58
-------------------- --------------------------------------------------------------------------------
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 Chemicals Business from
Pharmacia (then known as Monsanto Company) to Solutia.
o Pursuant to the Distribution Agreement, Solutia assumed and agreed to
indemnify Pharmacia (then known as Monsanto Company) for certain liabilities
related to the Chemicals Business.
-------------------- --------------------------------------------------------------------------------
Dec. 19, 1999 o Pharmacia (then known as Monsanto Company) entered into an agreement
with Pharmacia & Upjohn, Inc. (PNU) relating to a merger (the Merger).
-------------------- --------------------------------------------------------------------------------
Feb. 9, 2000 o We were incorporated in Delaware as a wholly owned subsidiary of
Pharmacia (then known as Monsanto Company) under the name "Monsanto Ag
Company."
-------------------- --------------------------------------------------------------------------------
Mar. 31, 2000 o Effective date of the Merger.
o In connection with the Merger, (1) PNU became a wholly owned
subsidiary of Pharmacia (then known as Monsanto Company); (2) Pharmacia
(then known as Monsanto Company) 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 Pharmacia, Solutia and we 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 Pharmacia and we 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.
-------------------- --------------------------------------------------------------------------------
Apr. 16, 2003 o Pursuant to a merger transaction, Pharmacia became a wholly owned
subsidiary of Pfizer
-------------------- --------------------------------------------------------------------------------
Dec. 17, 2003 o Solutia and 14 of its U.S. subsidiaries filed a voluntary petition
for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
-------------------- --------------------------------------------------------------------------------
Part I. Item 1 - Note 14 - Commitments and Contingencies, includes
further information regarding Solutia's bankruptcy, the related reasonable
possibility of a material adverse effect on our financial position,
profitability and/or liquidity, and other arrangements between Monsanto and
Solutia. Part II. Item 1 - Legal Proceedings includes information
concerning litigation matters that Monsanto is managing pursuant to its
obligation under the Sept. 1, 2000 Separation Agreement to indemnify
Pharmacia.
(b) Procedures by which Shareowners may Recommend Director Nominees to the
Board
During the third quarter of fiscal 2004, the Nominating and Corporate
Governance Committee of the Board of Directors (the "Committee") adopted
the Board of Directors Candidate Nomination Policy. In accordance with this
Policy, the Committee, which is responsible for identifying any need to add
an additional member to the Board, will consider candidates recommended by
shareowners. Shareowners may recommend a director candidate by writing to
the Company Secretary or the Chairman. In order to be considered by the
Committee, the recommendation must include the following information:
o The director candidate's name and business address,
59
o A resume or curriculum vitae describing the director candidate's
qualifications, which clearly addresses the desirable
characteristics reflected on Attachment B to the Board of
Directors' Charter and Corporate Governance Guidelines,
o Whether, during the past ten years, the director candidate has
been convicted in a criminal proceeding (excluding traffic
violations) and, if so, the dates, the nature of the conviction,
the name or other disposition of the case, and whether the
individual has been involved in any other legal proceeding during
the past five years,
o A statement from the director candidate that he or she consents
to serve on the Board if elected, and
o A statement from the person submitting the director candidate
that he or she is the registered holder of shares of Monsanto, or
if the shareowner is not the registered holder, a written
statement from the "record" holder of the shares (usually a
broker or bank) verifying that at the time the shareowner
submitted the director candidate that he or she was a shareowner.
All director candidates nominated by a shareowner pursuant to the
foregoing requirements will be submitted to the Committee for its review
and may be accompanied by an analysis of such director candidate from the
Company's management.
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
------------- ------- -----------
April 5, 2004 Item 12 The company furnished a report on Form 8-K (Item
12), providing: (i) a press release announcing
Monsanto Company's financial and operating
results for the period ended Feb. 29, 2004; (ii)
second quarter fiscal year 2004 unaudited
supplemental data; and (iii) a slide
presentation which accompanied the company's
webcast financial results conference call held on
March 31, 2004.
60
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: July 14, 2004
61
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
2 Omitted
3.2 Amended and Restated By-Laws of the Company amended May 4, 2004
4 Omitted
10.14 $1,000,000,000 Five Year Credit Agreement dated June 4, 2004
10.16.2 Form of Non-Employee Director Restricted Share Grant Terms
and Conditions Under the Monsanto Company Long-Term Incentive
Plan, approved by the Board of Directors
11 Omitted - see Note 12 of Notes to Consolidated Financial
Statements
15 Omitted
18 Omitted
19 Omitted
22 Omitted
23 Omitted
24 Omitted
31.1 Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, executed by the Chief
Executive Officer of Monsanto Company)
31.2 Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, executed by the Chief
Financial Officer of Monsanto Company)
32 Section 1350 Certifications (pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, executed by the Chief Executive
Officer and the Chief Financial Officer of Monsanto Company)
99 Computation of Ratio of Earnings to Fixed Charges
62