MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Nov. 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-16167
MONSANTO COMPANY
(Exact name of registrant as specified in its charter)
Delaware 43-1878297
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
800 North Lindbergh Blvd., 63167
St. Louis, MO (Zip Code)
(Address of principal executive offices)
(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 Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 266,273,747 shares of Common
Stock, $0.01 par value, outstanding as of Jan. 4, 2005.
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MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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TABLE OF CONTENTS
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PART I--FINANCIAL INFORMATION Page
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Item 1. Financial Statements 2
Statement of Consolidated Operations 3
Condensed Statement of Consolidated Financial Position 4
Statement of Consolidated Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19
Overview 19
Results of Operations -- First Quarter Fiscal Year 2005 21
Seeds and Genomics Segment 24
Agricultural Productivity Segment 25
Restructuring 27
Financial Condition, Liquidity, and Capital Resources 28
Outlook 31
Critical Accounting Policies and Estimates 35
New Accounting Standards 36
Cautionary Statements: Risk Factors Regarding Forward-Looking Statements 36
Item 3. Quantitative and Qualitative Disclosures About Market Risk 40
Item 4. Controls and Procedures 40
PART II--OTHER INFORMATION
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Item 1. Legal Proceedings 41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 43
Item 5. Other Information 43
Item 6. Exhibits 44
SIGNATURE 45
EXHIBIT INDEX 46
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MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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PART I--FINANCIAL INFORMATION
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Item 1. FINANCIAL STATEMENTS
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The Statement of Consolidated Operations of Monsanto Company and subsidiaries
for the three months ended Nov. 30, 2004, and Nov. 30, 2003, the Condensed
Statement of Consolidated Financial Position as of Nov. 30, 2004, and Aug. 31,
2004, the Statement of Consolidated Cash Flows for the three months ended Nov.
30, 2004, and Nov. 30, 2003, and related Notes to Consolidated Financial
Statements follow. Unless otherwise indicated, "Monsanto" and "the company" are
used interchangeably to refer to Monsanto Company or to Monsanto Company and its
consolidated subsidiaries, as appropriate to the context. Monsanto includes the
operations, assets and liabilities that were previously the agricultural
business of Pharmacia Corporation (Pharmacia), which is now a subsidiary of
Pfizer Inc. Unless otherwise indicated, "earnings (loss) per share" and "per
share" mean diluted earnings (loss) per share. In the notes to the consolidated
financial statements, 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 non-branded glyphosate-based
herbicides, excluding all lawn-and-garden herbicide products.
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MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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Statement of Consolidated Operations
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Unaudited Three Months Ended
Nov. 30,
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(Dollars in millions, except per share amounts) 2004 2003
------------------------------------------------------------------------------------------------- ------------- -------------
Net Sales $ 1,098 $ 1,028
Cost of goods sold 598 560
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Gross Profit 500 468
Operating Expenses:
Selling, general and administrative expenses 260 277
Bad-debt expense 10 18
Research and development expenses 132 116
Adjustment of goodwill -- 69
Restructuring charges -- net 1 29
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Total Operating Expenses 403 509
Income (Loss) from Operations 97 (41)
Interest expense 25 21
Interest income 5 4
Solutia-related charge (see Note 15) 284 --
Other expense -- net 23 25
------------------------------------------------------------------------------------------------- ------------- -------------
Loss from Continuing Operations Before Income Taxes (230) (83)
Income tax benefit (104) (6)
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Loss from Continuing Operations (126) (77)
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------------------------------------------------------------------------------------------------- ------------- -------------
Discontinued Operations (see Note 17):
Loss from operations of discontinued businesses -- (28)
Income tax benefit (86) (8)
------------------------------------------------------------------------------------------------- ------------- -------------
------------------------------------------------------------------------------------------------- ------------- -------------
Income (Loss) on Discontinued Operations 86 (20)
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------------------------------------------------------------------------------------------------- ------------- -------------
Net Loss $ (40) $ (97)
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Basic and Diluted Earnings (Loss) per Share:
Loss from continuing operations $ (0.48) $ (0.29)
Income (loss) on discontinued operations 0.33 (0.08)
------------------------------------------------------------------------------------------------- ------------- -------------
Net Loss $ (0.15) $ (0.37)
------------------------------------------------------------------------------------------------- ------------- -------------
Weighted Average Shares Outstanding:
Basic and Diluted 264.6 262.1
Dividends per Share $ -- $ 0.13
The accompanying notes are an integral part of these consolidated financial
statements.
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MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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Condensed Statement of Consolidated Financial Position
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As of Nov. 30, As of Aug. 31,
Unaudited -------------- --------------
(Dollars in millions, except share amounts) 2004 2004
----------------------------------------------------------------------------------------------------------- --------------
Assets
Current Assets:
Cash and cash equivalents $ 1,553 $ 1,037
Short-term investments 100 300
Trade receivables -- net of allowances of $251 and $250, respectively 1,397 1,684
Miscellaneous receivables 321 295
Deferred tax assets 460 397
Inventories (see Note 6) 1,452 1,154
Other current assets 90 64
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Total Current Assets 5,373 4,931
Property, Plant and Equipment -- Net 2,084 2,087
Goodwill -- Net (see Note 7) 868 720
Other Intangible Assets -- Net (see Note 7) 471 454
Other Assets 1,203 972
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Total Assets $ 9,999 $ 9,164
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Liabilities and Shareowners' Equity
Current Liabilities:
Short-term debt $ 239 $ 433
Accounts payable 373 326
Deferred revenues 549 16
Grower accruals 102 1
Miscellaneous short-term accruals 1,141 1,118
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Total Current Liabilities 2,404 1,894
Long-Term Debt 1,070 1,075
Postretirement Liabilities 651 687
Solutia-Related Reserve (see Note 15) 223 --
Other Liabilities 265 250
Commitments and Contingencies (see Note 15)
Shareowners' Equity:
Common stock (authorized: 1,500,000,000 shares, par value $0.01)
Issued 274,778,879 and 272,682,836 shares, respectively;
Outstanding 265,530,637 and 264,413,343 shares, respectively 3 3
Treasury stock, 9,248,242 and 8,269,493 shares, respectively, at cost (301) (266)
Additional contributed capital 8,373 8,315
Retained deficit (1,685) (1,645)
Accumulated other comprehensive loss (986) (1,132)
Reserve for ESOP debt retirement (18) (17)
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Total Shareowners' Equity 5,386 5,258
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Total Liabilities and Shareowners' Equity $ 9,999 $ 9,164
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The accompanying notes are an integral part of these consolidated financial
statements.
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MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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Statement of Consolidated Cash Flows
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Unaudited Three Months Ended
Nov. 30,
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(Dollars in millions) 2004 2003
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Operating Activities:
Net Loss $ (40) $ (97)
Adjustments to reconcile cash provided (required) by operations:
Items that did not require (provide) cash:
Depreciation and amortization expense 109 114
Adjustment to goodwill -- 69
Impairment of assets included in discontinued operations -- 29
Bad-debt expense 10 18
Noncash restructuring -- 13
Deferred income taxes (249) 139
Gain on disposal of investments and property -- net (4) --
Equity affiliate expense -- net 6 11
Solutia-related charge (see Note 15) 284 --
Other items that did not require (provide) cash 11 --
Changes in assets and liabilities that provided (required) cash, net of
acquisitions:
Trade receivables 893 981
Inventories (221) (123)
Accounts payable and accrued liabilities 6 (72)
PCB litigation settlement payments -- (400)
Solutia-related payments (see Note 15) (21) --
Pension contributions (60) (25)
Other items 45 4
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Net Cash Provided by Operations 769 661
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Cash Flows Provided (Required) by Investing Activities:
Maturities of short-term investments 201 230
Acquisition of businesses, net of cash acquired (158) --
Technology and other investments (9) (11)
Capital expenditures (39) (51)
Other investments and property disposal proceeds 6 7
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Net Cash Provided by Investing Activities 1 175
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Cash Flows Provided (Required) by Financing Activities:
Net change in short-term financing (22) (73)
Long-term debt proceeds 5 80
Long-term debt reductions (208) (26)
Payments on other financing (1) (1)
Treasury stock purchases (35) (55)
Stock option exercises 45 28
Dividend payments (38) (34)
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Net Cash Required by Financing Activities (254) (81)
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Net Increase in Cash and Cash Equivalents 516 755
Cash and Cash Equivalents at Beginning of Period 1,037 281
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Cash and Cash Equivalents at End of Period $ 1,553 $ 1,036
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See Note 14 -- Supplemental Cash Flow Information -- for further details.
The accompanying notes are an integral part of these consolidated financial
statements.
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MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
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NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
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Monsanto Company is a leading global provider of agricultural products 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, biotechnology trait products
and herbicides provide growers with 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 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 fiscal year 2004, the company announced plans to exit the
European breeding and seed business for wheat and barley and to discontinue the
plant-made pharmaceuticals program, and the assets associated with the company's
European wheat and barley business were sold. As a result of the exit plans,
these businesses have been presented as discontinued operations. See Note 17 --
Discontinued Operations -- for further details. The restated financial
statements have been prepared in compliance with the provisions of Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144). Accordingly, for the three months
ended Nov. 30, 2004, and Nov. 30, 2003, the Statement of Consolidated Operations
has been conformed to this presentation. These businesses were previously
reported as part of the Seeds and Genomics segment.
Monsanto includes the operations, assets and liabilities that were previously
the agricultural business of Pharmacia, which is now a subsidiary of Pfizer.
Unless otherwise indicated, "Monsanto" and "the company" are used
interchangeably to refer to Monsanto Company or to Monsanto Company and its
consolidated subsidiaries, as appropriate to the context.
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 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 fiscal year ended Aug. 31, 2004.
Financial information for the first three months of fiscal year 2005 should not
be annualized because of the seasonality of the company's business.
NOTE 2. NEW ACCOUNTING STANDARDS
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In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R replaced SFAS
No. 123, Accounting for Stock-Based Compensation (SFAS 123), and superseded
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). SFAS 123R will require compensation cost related to
share-based payment transactions to be recognized in the financial statements.
As permitted by SFAS 123, Monsanto elected to follow the guidance of APB 25,
which allowed companies to use the intrinsic value method of accounting to value
their share-based payment transactions with employees. Based on this method,
Monsanto did not recognize compensation expense in its financial statements as
the stock options granted had an exercise price equal to the fair market value
of the underlying common stock on the date of the grant. SFAS 123R requires
measurement of the cost of share-based payment transactions to employees at the
fair value of the award on the grant date and recognition of expense over the
requisite service or vesting period. SFAS 123R requires implementation using a
modified version of prospective application, under which compensation expense
for the unvested portion of previously granted awards and all new awards will be
recognized on or after the date of adoption. SFAS 123R also allows companies to
adopt SFAS 123R by restating previously issued financial statements, basing the
amounts on the expense previously calculated and reported in their pro forma
footnote disclosures required under SFAS 123. The provisions of SFAS 123R will
be adopted by Monsanto using the modified prospective method beginning Sept. 1,
2005.
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MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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In December 2004, the FASB issued FASB Staff Position No. 109-1, Application of
FASB Statement No. 109 (SFAS 109), Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004 (FSP 109-1). FSP 109-1 clarifies that the manufacturer's
deduction provided for under the American Jobs Creation Act of 2004 (AJCA)
should be accounted for as a special deduction in accordance with SFAS 109 and
not as a tax rate reduction. The adoption of FSP 109-1 will have no impact on
Monsanto's results of operations or financial position for fiscal year 2005
because the manufacturer's deduction is not available to Monsanto until fiscal
year 2006. The company is currently evaluating the effect that the
manufacturer's deduction will have in subsequent years. The FASB also issued
FASB Staff Position No. 109-2, Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004 (FSP 109-2). The AJCA introduces a special one-time dividends received
deduction on the repatriation of certain foreign earnings to a U.S. taxpayer
(repatriation provision), provided certain criteria are met. FSP 109-2 provides
accounting and disclosure guidance for the repatriation provision. Although FSP
109-2 is effective immediately, until the Treasury Department or Congress
provides additional clarifying language on key elements of the repatriation
provision, the amount of foreign earnings to be repatriated by Monsanto cannot
be determined. See Note 8 -- Income Taxes -- for additional disclosures in
accordance with FSP 109-2.
In May 2004, the FASB issued FASB Staff Position No. 106-2, Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (FSP 106-2), which superseded FSP 106-1. FSP 106-2
provides authoritative guidance on the 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, and specifies the disclosure
requirements for employers who have adopted FSP 106-2. 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. 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 was effective for Monsanto's
first quarter of fiscal year 2005. Monsanto has estimated a reduction of the
postretirement benefit obligation of approximately $14 million. The reduction in
annual benefit cost is estimated at approximately $2 million. Final
authoritative guidance could require the company to change previously reported
information.
NOTE 3. BUSINESS COMBINATIONS
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In September 2004, Monsanto acquired the canola seed assets of Advanta Seeds
(Advanta) from Advanta B.V., including the Advanta Seeds brand in Canada and the
Interstate Seed brand in the United States, for $50 million in cash (net of cash
acquired). The addition of these canola seed businesses reinforces Monsanto's
commitment to the canola industry and is intended to strengthen Monsanto's
ability to bring continued technology innovations to canola growers. The
transaction was completed on Sept. 8, 2004, from which time the results of this
acquisition were included in the company's consolidated financial statements.
Advanta's business operations and employees were integrated into the Seeds and
Genomics segment upon acquisition.
In first quarter 2005, Monsanto formed American Seeds, Inc. (ASI), a holding
company established to support regional seed businesses with capital, genetics
and technology investments. In November 2004, ASI acquired Channel Bio Corp.
(Channel Bio), for $104 million in cash (net of cash acquired) and $15 million
in assumed liabilities to be paid at a later date. Channel Bio is a U.S. seed
company that sells, markets and distributes corn and soybean seeds through three
brands: Crow's Hybrid Corn Company, Midwest Seed Genetics, Inc. and Wilson
Seeds. The acquisition of Channel Bio is expected to provide Monsanto with
additional opportunity for growth by accelerating the delivery of technology
advances through Channel Bio's strong customer relationships, local brands and
quality service. The transaction was completed on Nov. 15, 2004, from which time
the results of this acquisition were included in the company's consolidated
financial statements. As part of ASI, Channel Bio's business operations were
added to the Seeds and Genomics segment results upon acquisition.
The purchase price allocations for Advanta and Channel Bio as of Nov. 30, 2004,
were preliminary and are summarized in the aggregate in the following table. Pro
forma information related to these acquisitions is not included because the
impact of these acquisitions, either individually or in the aggregate, on the
company's consolidated results of operations was not considered to be
significant.
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MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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Aggregate
(Dollars in millions) Acquisitions
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Current assets $ 84
Property, plant and equipment 5
Goodwill 134
Other intangible assets 42
In-process research and development 12
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Total assets acquired 277
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Current liabilities 77
Other liabilities 25
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Total liabilities assumed 102
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Net assets acquired $ 175
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These acquisitions were accounted for as purchase transactions, and accordingly,
the assets and liabilities of the acquired entities were recorded at their
estimated fair values at the dates of the acquisitions. In addition to the
purchase amounts stated above, the company paid transaction costs of $4 million
and recorded estimated integration costs of $2 million. The primary items that
generated the goodwill are the direct-to-farmer distribution network of Channel
Bio, the value of the acquired assembled workforces, and the premium paid by the
company for the right to control the businesses acquired. None of the goodwill
is deductible for tax purposes.
The acquired identifiable intangible assets of $42 million have a
weighted-average useful life of approximately 10 years. The intangible assets
that make up that amount include acquired biotechnology intellectual property of
$23 million to be amortized on a straight-line basis over lives ranging from
four to seven years, germplasm of $10 million to be amortized on a straight-line
basis over 20 years, and trademarks and other intangibles of $9 million to be
amortized on a straight-line basis over lives ranging from four to 12 years.
Charges of $12 million were recorded in research and development (R&D) expenses
in first quarter 2005 for the write-off of acquired in-process R&D (IPR&D).
Management believes the technological feasibility of the IPR&D has not been
established and that the research has no alternative future uses. Accordingly,
the amounts allocated to IPR&D are required to be expensed immediately under
generally accepted accounting principles.
NOTE 4. RESTRUCTURING
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Restructuring charges were recorded in the Statement of Consolidated Operations as follows:
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Three Months Ended Nov. 30,
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(Dollars in millions) 2004 2003
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Cost of goods sold $ -- $ --
Adjustment of goodwill -- (69)
Restructuring charges -- net(1, 2) (1) (29)
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Loss from Continuing Operations Before Income Taxes (1) (98)
Income tax benefit 20 11
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Income (Loss) from Continuing Operations 19 (87)
Loss from operations of discontinued businesses(3) -- (33)
Income tax benefit -- 9
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Loss on Discontinued Operations -- (24)
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Net Income (Loss) $ 19 $ (111)
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(1) The restructuring charges for the three months ended Nov. 30, 2003, include
reversals of $1 million related to the 2000 restructuring plan.
(2) The $1 million of restructuring charges for the three months ended Nov. 30,
2004, was recorded in the Agricultural Productivity segment.
(3) First quarter of fiscal year 2004 contains restructuring charges related to
discontinued businesses (see Note 17 - Discontinued Operations). These
restructuring charges were recorded in discontinued operations.
Fiscal Year 2004 Restructuring Plan
On Oct. 15, 2003, Monsanto announced plans to continue to reduce costs primarily
associated with its agricultural chemistry business as that sector matures
globally. The company has further concentrated its resources on its core seeds
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MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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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. In fiscal year 2004, total restructuring charges
related to these actions were $165 million pretax ($105 million aftertax).
Additionally, the approved plan included the impairment of goodwill in the
global wheat business of $69 million (see Note 7 -- Goodwill and Other
Intangible Assets). In fiscal year 2005, the company incurred charges of $1
million pretax to complete the restructuring actions under this plan. No further
actions are planned in 2005.
In first quarter 2005, Monsanto recorded a deferred tax benefit of $106 million,
of which $20 million was recorded in continuing operations and the remaining $86
million was recorded in discontinued operations. The $20 million tax benefit
recorded in continuing operations was related to the impairment of goodwill in
the global wheat business as part of the fiscal year 2004 restructuring plan. As
such, the benefit amount recorded in continuing operations is reflected in the
table above. See Note 8 -- Income Taxes -- and Note 17 -- Discontinued
Operations -- for further discussion of the $86 million tax benefit recorded in
discontinued operations.
First quarter fiscal year 2004 pretax charges of $63 million were comprised of
$56 million related to the Seeds and Genomics segment ($23 million in continuing
operations and $33 million in discontinued operations) and $7 million related to
the Agricultural Productivity segment. These charges include $20 million pretax
related to work force reductions, $42 million pretax in asset impairments
(excluding the $69 million impairment of goodwill related to the global wheat
reporting unit), and $1 million pretax in costs associated with facility
closures.
Charges incurred in connection with the fiscal year 2004 restructuring plan were
accounted for under SFAS 144 and SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146). The company's written human
resource policies are indicative of an ongoing benefit arrangement in respect to
severance packages. Benefits paid pursuant to an ongoing benefit arrangement are
specifically excluded from the scope of SFAS 146 and should be accounted for in
accordance with the accounting pronouncement applicable to the company's
arrangement. Monsanto accounted for its severance packages under SFAS No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, which addresses the accounting for
other employee benefits.
The following table displays a roll forward of the liability established for
restructuring expense from Sept. 1, 2004, to Nov. 30, 2004:
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Work Force Facility
(Dollars in millions) Reductions Closures Total
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Continuing Operations:
Beginning liability as of Aug. 31, 2004 $ 44 $ 1 $ 45
Restructuring liability 1 -- 1
Cash payments (12) (1) (13)
Reclassification of reserves to other balance sheet accounts:
Long-term liability (5) -- (5)
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Ending liability as of Nov. 30, 2004 $ 28 $ -- $ 28
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NOTE 5. CUSTOMER FINANCING PROGRAM
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In April 2002, Monsanto established a new $500 million revolving financing
program for selected customers through a third-party specialty lender. Under the
financing program, Monsanto originates customer loans on behalf of the lender,
which is a special purpose entity (SPE) that Monsanto consolidates, pursuant to
Monsanto's credit and other underwriting guidelines approved by the lender.
Monsanto services the loans and provides a first-loss guarantee of up to $100
million. Following origination, the lender transfers the loans to multi-seller
commercial paper conduits through a nonconsolidated 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.
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MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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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 three months ended Nov. 30, 2004, and Nov. 30, 2003.
Customer loans sold through the financing program totaled $60 million for the
first quarter of fiscal year 2005 and $15 million for the first quarter of
fiscal year 2004. The loan balance outstanding as of Nov. 30, 2004, and Aug. 31,
2004, was $150 million and $222 million, respectively. The first-loss guarantee
will be in place throughout the financing program. Loans are considered
delinquent when payments are 31 days past due. If a customer fails to pay an
obligation when due, Monsanto would incur a liability to perform under the
first-loss guarantee. As of Nov. 30, 2004, and Aug. 31, 2004, less than $1
million of loans sold through this financing program were delinquent. As of Nov.
30, 2004, and Aug. 31, 2004, Monsanto recorded its guarantee liability at less
than $1 million, based on the company's historical collection experience with
these customers and the company's current assessment of credit exposure. Adverse
changes in the actual loss rate would increase the liability. If Monsanto is
called upon to make payments under the first-loss guarantee, it would have the
benefit under the financing program of any amounts subsequently collected from
the customer.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), and amended it by issuing 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 6. INVENTORIES
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Components of inventories were:
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As of Nov. 30, As of Aug. 31,
-------------- --------------
(Dollars in millions) 2004 2004
----------------------------------------------------------------------------------------------------------- -------------
Finished Goods $ 679 $ 477
Goods In Process 528 436
Raw Materials and Supplies 270 266
----------------------------------------------------------------------------------------------------------- -------------
Inventories at FIFO Cost 1,477 1,179
Excess of FIFO over LIFO Cost (25) (25)
----------------------------------------------------------------------------------------------------------- -------------
Total $ 1,452 $ 1,154
----------------------------------------------------------------------------------------------------------- -------------
----------------------------------------------------------------------------------------------------------- -------------
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
--------------------------------------------------------------------------------
In first quarter 2004, the company's decision to exit the European wheat and
barley business required an evaluation for potential impairment of goodwill and
other intangible assets related to the company's global wheat business. 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 second step of the impairment
assessment was completed during the quarter ended Nov. 30, 2003, and resulted in
the $69 million impairment of goodwill specific to the wheat reporting unit. 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.
Changes in the net carrying amount of goodwill for the first quarter of fiscal year 2005, by segment, are as follows:
----------------------------------------------------------------------------------------------------------------------------
Seeds and Agricultural
(Dollars in millions) Genomics Productivity Total
----------------------------------------------------------------------------------------------------------------------------
Balance as of Aug. 31, 2004 $ 645 $ 75 $ 720
Acquisition Activity (see Note 3) 134 -- 134
Effect of Foreign Currency Translation Adjustments 14 -- 14
----------------------------------------------------------------------------------------------------------------------------
Balance as of Nov. 30, 2004 $ 793 $ 75 $ 868
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
10
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
Information regarding the company's other intangible assets is as follows:
----------------------------------------------------------------------------------------------------------------------------
As of Nov. 30, 2004 As of Aug. 31, 2004
----------------------------------------------- -----------------------------------------------
Carrying Accumulated Carrying Accumulated
(Dollars in millions) Amount Amortization Net Amount Amortization Net
------------------------------------------------------------------------- -----------------------------------------------
Germplasm $ 606 $ (441) $ 165 $ 590 $ (423) $ 167
Acquired Biotechnology
Intellectual Property 447 (231) 216 423 (218) 205
Trademarks 89 (28) 61 85 (26) 59
Other 48 (19) 29 42 (19) 23
------------------------------------------------------------------------- -----------------------------------------------
Total $ 1,190 $ (719) $ 471 $ 1,140 $ (686) $ 454
------------------------------------------------------------------------- -----------------------------------------------
------------------------------------------------------------------------- -----------------------------------------------
The increases in other intangible assets during the first quarter of 2005
primarily resulted from the acquisitions of Advanta and Channel Bio. See Note 3
-- Business Combinations -- for further discussion of these acquisitions.
Total amortization expense of other intangible assets was $28 million in first
quarter of fiscal year 2005 and $31 million in first quarter of fiscal year 2004
(exclusive of $1 million amortization expense recorded in discontinued
operations in first quarter 2004). 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 fiscal year ended Aug. 31, 2004.
NOTE 8. INCOME TAXES
--------------------------------------------------------------------------------
The sale of the European wheat and barley business in fiscal year 2004 generated
a tax loss deductible in either the United Kingdom or the United States. As of
Aug. 31, 2004, a deferred tax asset had not been recorded for the tax loss
incurred in the United States because of the existence of a number of
uncertainties. These uncertainties diminished with the enactment of the American
Jobs Creation Act of 2004 (AJCA) on Oct. 22, 2004. As a result, Monsanto
recorded a deferred tax benefit of $106 million in first quarter 2005. Of this
tax benefit, $20 million was recorded in continuing operations related to the
impairment of goodwill in the global wheat business recorded in first quarter
2004. The remaining $86 million recorded in discontinued operations was
primarily related to the goodwill write-off at the date of adoption of SFAS No.
142, Goodwill and Other Intangible Assets (SFAS 142), on Jan. 1, 2002, which was
recorded as a cumulative effect of a change in accounting principle. The
recognition of this tax benefit in the United States effectively precludes
Monsanto from claiming any U.K. benefit for the U.K. tax loss. Accordingly, the
U.K. deferred tax asset of $71 million, which had a full valuation allowance
against it, has been written off during the quarter ended Nov. 30, 2004.
The AJCA created a temporary incentive for U.S. multinationals to repatriate
accumulated earnings outside the United States by providing an 85 percent
dividends received deduction for certain dividends from controlled foreign
corporations. Monsanto may elect to apply this provision to qualifying earnings
repatriations in either the remainder of fiscal year 2005 or in fiscal year
2006. As of Nov. 30, 2004, Monsanto has not recorded deferred taxes on foreign
earnings because any taxes on dividends would be substantially offset by foreign
tax credits or because Monsanto intends to reinvest those earnings indefinitely.
Due to the complexity of the repatriation provision, the company is still
evaluating the effects of this provision on its plan for repatriation of foreign
earnings and does not expect to be able to complete this evaluation until after
Congress or the Treasury Department provides additional guidance clarifying key
elements of the provision. The range of possible amounts that the company is
currently considering eligible for repatriation is between zero and $500
million. As of Nov. 30, 2004, the related potential range of income tax cannot
be reasonably estimated.
NOTE 9. 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 for seed inventories
purchased from growers, 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
11
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
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 after-tax losses of $8 million and $3 million in the first quarter of
fiscal year 2005 and fiscal year 2004, respectively. These losses are included
in accumulated other comprehensive loss.
NOTE 10. POSTRETIREMENT BENEFITS -- PENSIONS, HEALTH CARE AND OTHER
--------------------------------------------------------------------------------
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.
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 company's net periodic benefit cost for pension benefits, and health care
and other postretirement benefits include the following components:
----------------------------------------------------------------------------------------------------------------------------
Pension Benefits Three Months Ended Nov. 30,
---------------------------
(Dollars in millions) 2004 2003
----------------------------------------------------------------------------------------------------------------------------
Service Cost for Benefits Earned During the Period $ 9 $ 7
Interest Cost on Benefit Obligation 23 22
Assumed Return on Plan Assets (27) (24)
Amortization of Unrecognized Net Loss 9 6
----------------------------------------------------------------------------------------------------------------------------
Total Net Periodic Benefit Cost $ 14 $ 11
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Health Care and Other Postretirement Benefits Three Months Ended Nov. 30,
---------------------------
(Dollars in millions) 2004 2003
----------------------------------------------------------------------------------------------------------------------------
Service Cost for Benefits Earned During the Period $ 3 $ 2
Interest Cost on Benefit Obligation 5 5
Amortization of Unrecognized Net Loss 1 1
-----------------------------------------------------------------------------------------------------------------------------
Total Net Periodic Benefit Cost $ 9 $ 8
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Monsanto contributed $60 million to its pension plan in the three months ended
Nov. 30, 2004. As of Nov. 30, 2004, management does not plan to make additional
contributions to the company's pension plan in fiscal year 2005. However,
pending management's assessment of 2005 results of operations, the company may
reassess planned contributions to its pension plan. In the three months ended
Nov. 30, 2003, pension plan contributions were $25 million.
NOTE 11. STOCK-BASED COMPENSATION PLANS
--------------------------------------------------------------------------------
As permitted by current accounting literature, the company has elected to follow
the guidance of APB 25 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 fiscal year ended Aug. 31, 2004.
Had stock-based compensation expense for these plans been determined based on
the fair value consistent with the method of SFAS 148, Accounting for
12
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
Stock-Based Compensation -- Transition and Disclosure, which amends SFAS 123,
Accounting for Stock-Based Compensation, Monsanto's net loss and net loss per
share would have been adjusted to the pro forma amounts indicated as follows:
-----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
---------------------------
(Dollars in millions, except per share amounts) 2004 2003
-----------------------------------------------------------------------------------------------------------------------------
Net Loss:
As reported $ (40) $ (97)
Less: Total stock-based employee compensation expense
determined under fair-value-based method for all awards, net of tax (6) (2)
-----------------------------------------------------------------------------------------------------------------------------
Pro forma $ (46) $ (99)
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Basic and Diluted Loss per Share:
As reported $ (0.15) $ (0.37)
Pro forma (0.17) (0.38)
-----------------------------------------------------------------------------------------------------------------------------
As discussed in Note 2 -- New Accounting Standards, SFAS 123R was issued in
December 2004, which replaced SFAS 123. SFAS 123R is effective for Monsanto
beginning Sept. 1, 2005.
NOTE 12. 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
(loss) is as follows:
----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
-----------------------------
(Dollars in millions) 2004 2003
----------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 106 $ (26)
----------------------------------------------------------------------------------------------------------------------------
The components of accumulated other comprehensive loss are as follows:
----------------------------------------------------------------------------------------------------------------------------
As of Nov. 30, As of Aug. 31,
-------------- --------------
(Dollars in millions) 2004 2004
------------------------------------------------------------------------------------------------------------ --------------
Accumulated foreign currency translations $ (649) $ (824)
Net unrealized gains on investments, net of taxes 8 9
Net accumulated derivative loss, net of taxes (46) (18)
Minimum pension liability, net of taxes (299) (299)
------------------------------------------------------------------------------------------------------------ ------------
Accumulated Other Comprehensive Loss $ (986) $ (1,132)
------------------------------------------------------------------------------------------------------------ ------------
NOTE 13. LOSS PER SHARE
--------------------------------------------------------------------------------
Because Monsanto reported a loss from continuing operations for the three months
ended Nov. 30, 2004, and Nov. 30, 2003, SFAS No. 128, Earnings per Share,
requires diluted loss per share to be calculated using weighted-average common
shares outstanding, excluding dilutive potential common shares. If diluted EPS
were computed taking into account the effect of dilutive potential common
shares, the number of shares that would be included in the calculation of
dilutive EPS is noted in the table below. Potential common shares consist of
stock options using the treasury stock method and are excluded if their effect
is antidilutive. Dilutive potential common shares noted below exclude stock
options of approximately 1.9 million and 1.8 million for the three months ended
Nov. 30, 2004, and Nov. 30, 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.
13
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
---------------------------
2004 2003
----------------------------------------------------------------------------------------------------------------------------
Weighted-average number of common shares 264.6 262.1
Dilutive potential common shares 5.0 3.7
----------------------------------------------------------------------------------------------------------------------------
NOTE 14. SUPPLEMENTAL CASH FLOW INFORMATION
--------------------------------------------------------------------------------
The effect of exchange rate changes on cash and cash equivalents was not
material. Cash payments for interest and taxes were as follows:
----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
---------------------------
(Dollars in millions) 2004 2003
----------------------------------------------------------------------------------------------------------------------------
Interest $ 9 $ 10
Taxes 15 62
----------------------------------------------------------------------------------------------------------------------------
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. Through Nov. 30, 2004, the company purchased 9.2 million
shares for $301 million.
NOTE 15. COMMITMENTS AND CONTINGENCIES
--------------------------------------------------------------------------------
Solutia Inc.: The following discussion provides new and updated information
regarding proceedings related to Solutia Inc. (Solutia). Other information with
respect to Solutia matters appears in Monsanto's Report on Form 10-K for the
fiscal year ended Aug. 31, 2004.
As described in Monsanto's Report on Form 10-K for the fiscal year ended Aug.
31, 2004, 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 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 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.
The following updates some of the proceedings in Solutia's bankruptcy:
o The stay of all litigation agreed to by all parties in the bankruptcy
proceedings remains in force and effect, subject to any party's right to
issue a termination notice. As of the filing date of this report, no
termination notice has been issued by any party.
o Monsanto timely filed its proof of claim on Nov. 29, 2004. Monsanto alleged
claims against Solutia for (i) breach of the Distribution Agreement; (ii)
failure to defend, indemnify and hold Monsanto harmless for all tort
liabilities and obligations associated with the chemicals business formerly
operated by Pharmacia; (iii) failure to defend, indemnify and hold Monsanto
harmless for all environmental liabilities and obligations associated with
the chemicals business formerly operated by Pharmacia; (iv) failure to
perform all of its obligations under a global settlement agreement entered
into in connection with the Abernathy and Tolbert cases, and related
agreements in certain lawsuits which were pending in federal and state
courts in Alabama; (v) Solutia's potential failure to fulfill all
obligations related to retiree benefits associated with the chemicals
business formerly operated by Pharmacia; and (vi) other claims arising
based upon Solutia's failure to pay, perform or discharge obligations to
Monsanto, including payment for goods, services, and commitments under
appeal bonds. The claim was filed in an amount of not less than $90
14
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
million, together with additional damages in amounts yet to be determined.
Due to the complexity of Monsanto's claims, the Bankruptcy Court's order
establishing a claims bar date expressly permits Monsanto the right to
amend its claim under certain conditions.
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.
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 Monsanto's interests until that issue is resolved,
pursuant to Monsanto's obligation to indemnify Pharmacia, Monsanto has on an
interim basis assumed the management and defense of certain third-party tort
litigation and funded some of Solutia's environmental obligations. In the
process of managing such litigation and environmental liabilities, and through
Monsanto's involvement in the bankruptcy process, Monsanto has determined that
it is probable that Monsanto will incur some expenses related to third-party
tort litigation and environmental liabilities and that the amount of certain of
these expenses can now be reasonably estimated. In December, Monsanto determined
that it is appropriate to establish a reserve for such expenses based on the
best estimates by Monsanto's management with input from its legal and other
outside advisors. Accordingly, a charge in the amount of $284 million was
recorded in Monsanto's first quarter fiscal 2005 results, of which $263 million
was accrued ($40 million in current liabilities and $223 million in other
liabilities) and $21 million was paid in cash. Monsanto believes that the
charge, based on what is known at the time of filing this report, represents the
discounted cost that Monsanto would expect to incur in connection with these
litigation and environmental matters. However, the degree to which Monsanto may
ultimately be responsible for the particular matters reflected in the charge is
uncertain. Discussions between and among the various parties involved in the
Solutia bankruptcy will continue for some time and a formal reorganization plan
must ultimately be affirmed by several constituencies and the Bankruptcy Court.
Monsanto's actual costs may be materially different from this estimate.
The potential liabilities reflected in the charge relate to third-party tort
litigation and environmental remediation for sites Solutia never owned or
operated and for sites beyond the property lines of its current operations. See
below for a description of some of the significant litigation and environmental
matters reflected in the charge. Monsanto expects to pay for such liabilities
over time as the various legal proceedings are resolved and remediation is
performed at the various environmental sites.
The charge does not reflect any insurance reimbursements or any recoveries
Monsanto might receive through the bankruptcy process and may not reflect all
potential liabilities and expenses that Monsanto may incur in connection with
Solutia's bankruptcy. In particular, additional litigation or environmental
matters that are not reflected in the charge may arise in the future, and
Monsanto may also assume the management of, settle, or pay judgments or damages
with respect to litigation or environmental matters in order to mitigate
contingent potential liability and protect Pharmacia and Monsanto, if Solutia
refuses to do so.
Solutia Litigation Obligations: Included in the Solutia-related charge are
amounts related to certain of Solutia's third-party tort litigation, and below
is disclosure of the significant third-party tort proceedings reflected in such
charge. The following proceedings were previously described in Item 3 -- Legal
Proceedings of Monsanto's Report on Form 10-K for the fiscal year ended Aug. 31,
2004.
Twelve cases pending in federal or state court in Alabama, which involve a total
of 41 plaintiffs, claim personal injury or property damage allegedly arising
from exposure to polychlorinated biphenyls (PCBs) discharged from an Anniston,
Alabama, plant site that was formerly owned by Pharmacia and was transferred to
Solutia. One such case, Cole v. Monsanto, was filed by 12 plaintiffs in U.S.
District Court for the Northern District of Alabama as a purported class action
involving a class of individuals allegedly not included within the global
settlement for the Tolbert and Abernathy cases.
Pharmacia is a defendant to a case filed by the Commonwealth of Pennsylvania,
which is pending in the Commonwealth Court of Pennsylvania and related to the
Transportation and Safety Building (T & S Building) in Harrisburg, Pennsylvania.
In June 1994, a fire broke out in the T & S Building. The Commonwealth claims
that PCBs in the building's fireproofing contaminated the building and
necessitated its demolition and temporary relocation of Commonwealth employees.
The Commonwealth seeks the cost of constructing a new building on the site of
the T & S Building. Solutia defended the litigation pursuant to its obligations
under the Distribution Agreement. The jury returned a verdict of $90 million
against Pharmacia, which was reduced to $45 million by the trial court. Solutia
appealed the verdict to the Supreme Court of Pennsylvania, for which oral
argument was heard on May 11, 2004.
15
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
Seventeen PCB cases are now pending in Mississippi seeking damages for personal
injury and/or property damage caused by exposure to PCBs, including compensatory
and punitive damages, in unspecified amounts. All of these cases were filed in
state court in Hinds County and Copiah County. The 1,654 plaintiffs in 16 of
these cases are either present or former employees of an electrical transformer
manufacturing facility located in Crystal Springs, Mississippi, or present or
former residents of the Crystal Springs community. All cases have been removed
to the U.S. District Court for the Southern District of Mississippi. Motions to
remand have been filed in each removed case. On Sept. 29, 2004, in the first
case removed to federal court, the District Court denied the plaintiffs' motion
to remand. In addition, on Dec. 30, 2003, a wrongful death case was filed
against Monsanto in the Circuit Court of Hinds County on behalf of three
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. The case was removed to federal court, and a motion to
remand was recently denied by the federal court. No trial dates have been
scheduled.
Miscellaneous receivables of $80 million remain recorded as of Nov. 30, 2004
($19 million was recorded in miscellaneous receivables and $61 million was
recorded in other assets), for the anticipated insurance reimbursement for a
portion of the settlement amount paid by Monsanto in connection with the global
settlement of the Abernathy and Tolbert cases, which is described in our Report
on Form 10-K for the fiscal year ended Aug. 31, 2004.
Solutia Environmental Obligations: Included in the Solutia-related charge are
amounts related to certain of Solutia's environmental liabilities, and below is
disclosure of the significant environmental matters reflected in the charge. The
following environmental matters were previously described in Item 3 -- Legal
Proceedings of Monsanto's Report on Form 10-K for the fiscal year ended Aug. 31,
2004.
In May 2002, the U.S. Environmental Protection Agency (EPA) sent Monsanto and
Solutia a "notice of potential liability and offer to negotiate for removal
action" regarding dioxin in the Kanawha River in Putnam and Kanawha counties,
West Virginia, which was premised on Pharmacia's former operations at its Nitro,
West Virginia, manufacturing facility. The EPA, Monsanto and Pharmacia have
negotiated a consent order under which Monsanto is preparing an Engineering
Evaluation/Cost Analysis Report, which will contain the results of Monsanto's
investigation of dioxin contamination in the Kanawha River, the sources of such
contamination, an evaluation of removal options, and a recommended approach to
removing or otherwise addressing the contaminated sediments. The degree to which
Monsanto, Solutia and Pharmacia, as opposed to third parties, could ultimately
be responsible for costs associated with this matter is unclear.
Based on Solutia's failure to perform its environmental obligations, on March
25, 2004, Monsanto, acting on behalf of Pharmacia, 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 until Monsanto invokes
a 60-day notice of termination provision, which Monsanto has not invoked.
Monsanto anticipates that work will continue under the administrative orders
related to Sauget through calendar year 2005, after which Monsanto expects the
EPA to issue a Record of Decision identifying further remedial activities.
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. While the ultimate liabilities resulting from such lawsuits
and claims may be significant to profitability in the period recognized,
management does not anticipate they will have a material adverse effect on
Monsanto's consolidated financial position or liquidity.
The determination to disclose the following proceeding in this note to the
consolidated financial statements was made after consideration of recent
developments in the case and consideration of Monsanto's criteria for evaluating
the likelihood of incurring a liability.
On June 3, 1999, AgrEvo Environmental Health, n/k/a Aventis Environmental
Science (AgrEvo) filed a suit in the U.S. District Court for the Southern
District of New York against The Scotts Company (Scotts) and Pharmacia seeking
damages and injunctive relief for alleged antitrust violations by Scotts and
Pharmacia and alleged tortious interference of contract by Pharmacia that
16
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
included a supply agreement for the active ingredient for the Finale(R) consumer
herbicide. AgrEvo claims that Scotts' subsequent agreement to become the
exclusive sales and marketing agent for Pharmacia's ROUNDUP lawn-and-garden
business violated its agreement with AgrEvo and that Pharmacia and Scotts agreed
that Scotts would divest Finale(R) to a weaker competitor in connection with the
ROUNDUP deal. Pursuant to its obligation under the Separation Agreement,
Monsanto is defending Pharmacia in this matter. On Oct. 25, 2004, the court
granted Monsanto summary judgment on the state law claims but denied the
defendants' motions for summary judgment on the antitrust claims. A trial is
scheduled for Feb. 22, 2005.
Guarantees: There have been no significant changes to guarantees made by
Monsanto since Aug. 31, 2004. 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 fiscal year ended Aug. 31, 2004. Disclosure regarding the
guarantee Monsanto provides to a specialty finance company for certain customer
loans can be found in Note 5 -- 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 16. SEGMENT INFORMATION
--------------------------------------------------------------------------------
Monsanto manages its business in two segments: Seeds and Genomics, and
Agricultural Productivity. The Seeds and Genomics segment consists of the global
seeds and related traits businesses and biotechnology platforms. The
Agricultural Productivity segment consists of the crop protection products,
animal agriculture, residential lawn-and-garden products, and environmental
technologies businesses. Sales between segments were not significant. Segment
data is presented in the table that follows.
----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
---------------------------
(Dollars in millions) 2004 2003
----------------------------------------------------------------------------------------------------------------------------
Net Sales(1)
Corn seed and traits $ 224 $ 186
Soybean seed and traits 177 169
All other crops seeds and traits 60 30
----------------------------------------------------------------------------------------------------------------------------
Total Seeds and Genomics $ 461 $ 385
----------------------------------------------------------------------------------------------------------------------------
ROUNDUP and other glyphosate-based herbicides $ 429 $ 429
All other agricultural productivity products 208 214
----------------------------------------------------------------------------------------------------------------------------
Total Agricultural Productivity $ 637 $ 643
----------------------------------------------------------------------------------------------------------------------------
Total $ 1,098 $ 1,028
----------------------------------------------------------------------------------------------------------------------------
EBIT(2)
Seeds and Genomics $ 15 $ (96)
Agricultural Productivity (225) 30
----------------------------------------------------------------------------------------------------------------------------
Total $ (210) $ (66)
----------------------------------------------------------------------------------------------------------------------------
Depreciation and Amortization Expense
Seeds and Genomics(3) $ 63 $ 65
Agricultural Productivity 46 49
----------------------------------------------------------------------------------------------------------------------------
Total $ 109 $ 114
----------------------------------------------------------------------------------------------------------------------------
(1) Represents net sales from continuing operations.
(2) Earnings (loss) from continuing operations before cumulative effect of
accounting change, interest and income taxes; see the following table for
reconciliation.
(3) Does not include the $69 million adjustment of goodwill in fiscal year
2004.
17
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
A reconciliation of EBIT to net income (loss) for each quarter follows:
----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
---------------------------
(Dollars in millions) 2004 2003
----------------------------------------------------------------------------------------------------------------------------
EBIT $ (210) $ (66)
Interest Expense -- Net (20) (17)
Income Tax Benefit (104) (6)
----------------------------------------------------------------------------------------------------------------------------
Loss from Continuing Operations (126) (77)
Discontinued Operations:
Loss from operations of discontinued businesses -- (28)
Income tax benefit (86) (8)
----------------------------------------------------------------------------------------------------------------------------
Income (Loss) on Discontinued Businesses 86 (20)
----------------------------------------------------------------------------------------------------------------------------
Net Loss $ (40) $ (97)
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
NOTE 17. DISCONTINUED OPERATIONS
--------------------------------------------------------------------------------
As discussed earlier in Note 4 -- 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, under SFAS 144, these businesses have been presented as discontinued
operations. Accordingly, for the three months ended Nov. 30, 2004, and Nov. 30,
2003, the Statement of Consolidated Operations has been conformed to this
presentation. As of Nov. 30, 2004, there were no remaining assets and
liabilities of these businesses, and thus there was no impact on the Condensed
Statement of Consolidated Financial Position. These businesses were previously
reported as part of the Seeds and Genomics segment.
The following amounts related to the European wheat and barley business and the
plant-made pharmaceuticals program have been segregated from continuing
operations and reflected as discontinued operations:
----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
----------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 2004 2003
----------------------------------------------------------------------------------------------------------------------------
Net sales $ -- $ 15
Loss from operations of discontinued businesses -- (28)
Income tax benefit (86) (8)
----------------------------------------------------------------------------------------------------------------------------
Income (loss) on discontinued operations $ 86 $ (20)
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
In fiscal year 2004, the sale of assets associated with the European wheat and
barley business to Rodez, France-based RAGT Genetique, S.A. (RAGT) was
finalized. This divestiture resulted in a net loss of approximately $3 million
before taxes recorded in loss from operations of discontinued businesses, after
accounting for currency translation adjustments and transactional costs. The
divestiture also generated a tax loss deductible in either the United Kingdom or
the United States. In first quarter 2005, Monsanto recorded a deferred tax
benefit of $106 million, of which $20 million was recorded in continuing
operations, and the remaining $86 million was recorded in discontinued
operations. The tax benefit of $86 million recorded in discontinued operations
was primarily related to the wheat reporting unit goodwill write-off at the date
of adoption of SFAS 142 on Jan. 1, 2002, which was recorded as a cumulative
effect of a change in accounting principle. See Note 4 -- Restructuring -- for
discussion of the $20 million tax benefit recorded in continuing operations and
Note 8 -- Income Taxes -- for further discussion of the tax benefit.
18
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
OVERVIEW
--------------------------------------------------------------------------------
Background
Monsanto Company is a leading global provider of agricultural products 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, biotechnology trait products and herbicides provide
growers with 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. Unless otherwise indicated, "Monsanto," "the
company," "we," "our," and "us" are used interchangeably to refer to Monsanto
Company and its consolidated subsidiaries, as appropriate to the context.
We manage our business in two segments: Seeds and Genomics, and Agricultural
Productivity. The Seeds and Genomics segment consists of the global seeds and
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 fiscal year 2004, we announced plans to exit the European
breeding and seed business for wheat and barley and to discontinue the
plant-made pharmaceuticals program, and the assets associated with our European
wheat and barley business were sold. As a result of the exit plans, these
businesses have been presented as discontinued operations. See Note 17 --
Discontinued Operations -- for further details. The restated financial
statements have been prepared in compliance with the provisions of SFAS 144.
Accordingly, for the three months ended Nov. 30, 2004, and Nov. 30, 2003, the
Statement of Consolidated Operations has been conformed to this presentation.
These businesses were previously reported as part of the Seeds and Genomics
segment.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) should be read in conjunction with Monsanto's consolidated
financial statements and the accompanying notes. This Quarterly Report on Form
10-Q should also be read in conjunction with Monsanto's Report on Form 10-K for
the fiscal year ended Aug. 31, 2004. Financial information for the first three
months of fiscal year 2005 should not be annualized because of the seasonality
of our business. Unless otherwise noted, all amounts and analyses are based on
continuing operations. The notes to the consolidated financial statements that
are referenced throughout MD&A are included in Part I -- Item 1 -- Financial
Statements -- of this Quarterly Report on Form 10-Q.
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 income 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
allocations within the company.
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 to meet
business needs and obligations, to reinvest in the company for future growth, or
to return to our shareowners through dividend payments or share repurchases.
Free cash flow is also used by management as one of the performance measures in
determining incentive compensation.
The presentation of EBIT and free cash flow 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.
19
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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Executive Summary
Consolidated Operating Results -- Net sales increased to $1.1 billion in first
quarter 2005 from $1 billion in the comparable prior-year quarter. Sales
increased $76 million in the Seeds and Genomics segment and decreased $6 million
in the Agricultural Productivity segment. We experienced sales improvements in
corn seed in Europe and Brazil, corn and soybean traits in the United States,
and cotton traits in Australia. Sales of ROUNDUP and other glyphosate-based
herbicides were flat in the quarter-over-quarter comparison. Higher sales of
ROUNDUP and other glyphosate-based herbicides in Brazil and Europe were offset
by lower sales of ROUNDUP in the United States. Sales of all other agricultural
productivity products slightly declined primarily because of lower POSILAC
bovine somatotropin sales, which were nearly offset by higher sales in our
environmental technologies businesses. Total company gross profit as a percent
of sales was flat for the quarter-over-quarter comparison despite a decline in
gross profit as a percent of sales for the Agricultural Productivity segment.
First quarter 2005 operating expenses decreased 21 percent, or $106 million,
primarily because of the global wheat goodwill impairment of $69 million and
higher restructuring charges of $28 million in first quarter 2004. We recorded a
charge of $284 million, or $0.68 per share, associated with certain liabilities
in connection with the Solutia bankruptcy in first quarter 2005 (see Note 15 --
Commitments and Contingencies). Also, in first quarter 2005, we recorded a
deferred tax benefit of $106 million, or $0.40 per share, as a result of the
loss incurred on the European wheat and barley business (see Note 8 -- Income
Taxes). Of this tax benefit, $20 million was recorded in continuing operations,
and $86 million was recorded in discontinued operations. The first quarter 2005
net loss of $40 million, or $0.15 per share, improved from a net loss of $97
million, or $0.37 per share, in the comparable prior-year quarter. For further
details, see the "Results of Operations," "Seeds and Genomics Segment," and
"Agricultural Productivity Segment" sections of MD&A.
Financial Condition, Liquidity, and Capital Resources -- As of Nov. 30, 2004,
the balance of cash and cash equivalents was more than $1.5 billion, which
increased when compared with the balance outstanding as of Aug. 31, 2004, of
approximately $1 billion. In first quarter 2005, we formed American Seeds, Inc.
(ASI), which acquired Channel Bio Corp. (Channel Bio), and we acquired the North
American canola seed assets of Advanta Seeds (Advanta) from Advanta B.V. These
acquisitions required a cash outlay of $158 million. We also made $60 million in
voluntary pension contributions and purchased $35 million of our shares in first
quarter 2005. In first quarter 2004, we contributed $400 million toward the PCB
litigation settlement, purchased $55 million of our shares and made $25 million
in voluntary pension contributions. For first quarter 2005, net cash provided by
operations was $769 million compared with $661 million in the comparable
prior-year quarter. Net cash provided by investing activities was $1 million in
2005 and $175 million in the comparable 2004 quarter. As a result, our free cash
flow as defined in the "Financial Measures" section was $770 million in first
quarter 2005 compared with $836 million in the comparable 2004 quarter. Total
debt outstanding decreased approximately $200 million between Nov. 30, 2004, and
Aug. 31, 2004, primarily because certain medium-term notes matured in first
quarter 2005. See the "Financial Condition, Liquidity, and Capital Resources"
section of MD&A for a more detailed discussion.
Outlook -- We are continuing to evolve to a company led by its strengths in
seeds and biotechnology traits as a means of delivering value to our customers.
We aim to continually improve our products to maintain market leadership and to
support near-term performance. We are focused on solving problems in new ways
for farmers and bringing second-generation traits to the market, such as
BOLLGARD II, and pipeline products in advanced stages, such as ROUNDUP READY
Flex cotton. We are also focused on providing farmers with multiple solutions in
one seed, or "stacking" more than one trait in a seed. Our capabilities in
biotechnology research are generating a rich product pipeline that is expected
to drive long-term growth. We aspire to bring new solutions to our customers'
unmet needs, for example crops with improved oil and protein composition and
with drought tolerance. The viability of our product pipeline depends in part on
the speed of regulatory approvals globally. As a key determinant of our ability
to launch new products, we have focused on aspects of the process we can
control. This has resulted in programs such as the Brazil value capture system,
which makes it possible to collect a royalty on our ROUNDUP READY soybeans even
though the longer-term regulatory system there is still evolving. Concurrent to
this activity in the Seeds and Genomics segment, we are focused on reducing the
costs associated with our agricultural chemistry business as that sector matures
globally. ROUNDUP remains the market leader; however, the mix of our glyphosate
products sold reflects the increased competitive dynamics of the marketplace.
We are required to indemnify Pharmacia for Solutia's Assumed Liabilities, to the
extent that Solutia fails to pay, perform or discharge those liabilities. Prior
to and following its filing for bankruptcy protection, Solutia has disclaimed
responsibility for some of Solutia's Assumed Liabilities. See Note 15 --
Commitments and Contingencies and Part II -- Item 1 -- Legal Proceedings for
further details. Accordingly, we recorded a charge of $284 million for
litigation and environmental liabilities we expect to incur in connection with
Solutia's bankruptcy of which $21 million was paid in cash in first quarter
20
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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2005. The charge may not reflect all potential liabilities and expenses that we
may incur in connection with Solutia's bankruptcy and does not reflect any
insurance reimbursement or any recoveries we might receive through the
bankruptcy process.
Refer to the "Outlook" section of MD&A for a more detailed discussion of the
opportunities, challenges and risks we have identified for our business.
In October 2004, we announced that return on capital (ROC) would be a new
financial measure starting in fiscal year 2005. We intend to improve ROC through
continued optimization of the ROUNDUP business, while accelerating the seeds and
traits businesses. Additionally, we expect our compounded annual earnings per
share growth rate to somewhat increase in fiscal year 2005 from the fiscal year
2004 earnings per share base, excluding restructuring charges for both years,
the Solutia-related charge and the tax benefit on the loss from the European
wheat and barley business in 2005, and the goodwill impairment and discontinued
operations in 2004. We expect the earnings per share growth to be driven by
greater acreage penetration of biotech traits, the use of more than one trait
per acre, and pricing flexibility in our seeds and traits businesses. The
factors described in the "Cautionary Statements: Risk Factors Regarding
Forward-Looking Statements" section of MD&A represent continuing risks to this
expectation.
RESULTS OF OPERATIONS -- FIRST QUARTER FISCAL YEAR 2005
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Three Months Ended
Nov. 30,
------------------
2004 2003
----------------------------------------------------------------------------------------------------------------------------
Net Sales $ 1,098 $ 1,028
Gross Profit 500 468
Operating Expenses:
Selling, general and administrative expenses 260 277
Bad-debt expense 10 18
Research and development expenses 132 116
Adjustment of goodwill -- 69
Restructuring charges -- net 1 29
----------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 403 509
----------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Operations 97 (41)
Interest expense -- net 20 17
Solutia-related charge (see Note 15) 284 --
Other expense -- net 23 25
----------------------------------------------------------------------------------------------------------------------------
Loss from Continuing Operations Before Income Taxes (230) (83)
Income tax benefit (104) (6)
----------------------------------------------------------------------------------------------------------------------------
Loss from Continuing Operations (126) (77)
Discontinued Operations:
Loss from operations of discontinued businesses -- (28)
Income tax benefit (86) (8)
----------------------------------------------------------------------------------------------------------------------------
Income (Loss) on Discontinued Operations 86 (20)
----------------------------------------------------------------------------------------------------------------------------
Net Loss $ (40) $ (97)
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Diluted Earnings (Loss) per Share:
Loss from continuing operations $ (0.48) $ (0.29)
Income (loss) on discontinued operations 0.33 (0.08)
----------------------------------------------------------------------------------------------------------------------------
Net Loss $ (0.15) $ (0.37)
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
The following factors affected the quarter-to-quarter comparison of Monsanto's
first quarter continuing operations:
Net sales increased 7 percent in first quarter 2005 from the same quarter a year
ago. Our Seeds and Genomics segment net sales improved 20 percent, and were
slightly offset by a 1 percent sales decline in our Agricultural Productivity
segment. For a more detailed discussion of the factors affecting the net sales
comparison, see the "Executive Summary," "Seeds and Genomics Segment" and the
"Agricultural Productivity Segment" sections.
Gross profit also increased 7 percent in first quarter 2005. In first quarter
2005, the Seeds and Genomics segment represented 42 percent of total company net
sales and 57 percent of total company gross profit. Total company gross profit
as a percent of sales was 46 percent for both three-month periods. Gross profit
as a percent of sales for the Seeds and Genomics segment was 61 percent for both
three-month periods. Higher cotton trait revenues in Australia and increased
ROUNDUP READY soybean trait pricing in the United States in first quarter 2005,
21
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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and the favorable quarter-over-quarter effect of the decision to exit the
Argentine soybean seed business in first quarter 2004, offset higher inventory
handling expenses for corn seed in the United States and Europe. Gross profit as
a percent of sales for the Agricultural Productivity segment decreased 2
percentage points to 34 percent in first quarter 2005 primarily because of the
POSILAC product allocation (see the "Agricultural Productivity Segment" and
"Outlook" sections of MD&A for a more detailed explanation) and an unfavorable
product mix in first quarter 2005 for the environmental technologies businesses.
Operating expenses decreased 21 percent, or $106 million, in first quarter of
2005 from the prior-year comparable quarter primarily because of the global
wheat goodwill impairment and higher restructuring charges in 2004.
Selling, general and administrative (SG&A) expenses decreased 6 percent, or $17
million, for the three-month comparison primarily because of 2005 savings in the
United States and Europe as a result of restructuring charges in fiscal 2004,
lower selling expenses in the United States, and lower overall spending in
Argentina. The European savings related to prior-year restructuring actions were
nearly offset by the effect of exchange rates on European SG&A expenses in first
quarter 2005. As a percent of net sales, SG&A expenses decreased 3 percentage
points to 24 percent in first quarter 2005.
Bad-debt expense decreased $8 million, or 44 percent, to $10 million in first
quarter 2005 compared with the same quarter a year ago. Bad-debt expense in
first quarter 2005 was recorded in the normal course of business across various
world areas. We recorded higher bad-debt expense in first quarter 2004 for
exposures related to estimated uncollectible Argentine accounts receivable after
performing a thorough review of our past-due trade receivables. In fiscal year
2004, we continued to restructure our Argentine business model and to monitor
unfavorable economic and business conditions.
Research and development (R&D) expenses increased 14 percent, or $16 million, in
first quarter 2005 from the comparable prior-year quarter. In first quarter
2005, we formed ASI, which acquired Channel Bio, and acquired Advanta (see Note
3 -- Business Combinations -- for additional details of these acquisitions). We
recorded charges of $12 million related to these acquisitions for the write-off
of acquired in-process R&D (IPR&D). Management believes the technological
feasibility of the acquired IPR&D has not been established and that the research
has no alternative future uses. Accordingly, the amounts allocated to IPR&D are
required to be expensed immediately under generally accepted accounting
principles. As a percent of net sales, R&D expenses increased 1 percentage point
to 12 percent in first quarter 2005.
In first quarter of fiscal year 2004, we recognized a $69 million noncash
goodwill adjustment related to our global wheat business. Our decision to exit
the European wheat business required us to re-evaluate the goodwill related to
the wheat reporting unit for impairment. See Note 7 -- Goodwill and Other
Intangible Assets -- for additional information.
Restructuring charges -- net were recorded in both three-month periods. We
recorded $1 million of restructuring charges in first quarter 2005 to complete
the restructuring actions under our fiscal year 2004 restructuring plan. We do
not expect additional charges related to our fiscal year 2004 restructuring plan
in 2005. In the prior-year quarter, we began recording charges related to our
fiscal year 2004 restructuring plan, with $30 million recorded within continuing
operations and $33 million recorded within discontinued operations. Our first
quarter 2004 restructuring charges were reduced by $1 million in restructuring
reversals related to our past restructuring plans. For a further discussion, see
the "Restructuring" section of MD&A.
In first quarter 2005, we recorded a Solutia-related charge of $284 million
pretax in anticipation of certain litigation and environmental liabilities
reverting to Pharmacia, and by extension, to Monsanto. This charge is based on
the best estimates by our management with input from our legal and other outside
advisors. Discussions between and among the various parties involved in the
Solutia bankruptcy will continue for some time, and a formal reorganization plan
must ultimately be affirmed by several constituencies and the bankruptcy court.
We believe that this charge, based on what is known at the time of filing this
report, represents the discounted cost that we would expect to incur in
connection with these litigation and environmental matters. However, given the
current status of Solutia's bankruptcy proceedings, actual costs to the company
may be materially different from this estimate. See Note 15 -- Commitments and
Contingencies -- for further details.
Other expense -- net decreased $2 million for the quarter to $23 million. The
quarter-over-quarter fluctuations for equity affiliate expense and
foreign-currency transaction losses were each favorable by $5 million. Our
equity affiliate expense, primarily related to our Renessen LLC (Renessen) joint
venture, decreased $5 million to $6 million in first quarter 2005 because of
lower payroll costs as a result of a prior-year reorganization, and improved
cost management. This joint venture is owned and funded 50-50 with Cargill,
Incorporated. It was formed to develop and market products for the grain
22
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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processing and animal feed industries. Net foreign-currency transaction losses
decreased $5 million to $3 million. Further, we recognized $4 million of other
income during first quarter 2005 related to gains that were realized upon the
sale of equity securities. In first quarter 2005, we established a $15 million
reserve for legal proceedings (unrelated to Solutia's Assumed Liabilities) that
we believed were probable and reasonably estimable as of Nov. 30, 2004.
Income tax benefit increased $98 million quarter over quarter, whereas the
effective tax rate increased to 45 percent from 7 percent in the prior-year
quarter. The current-year quarter includes a tax benefit of $20 million in
continuing operations as a result of the loss incurred on the European wheat and
barley business (see the discontinued operations discussion in this section and
Note 8 -- Income Taxes). The first quarter 2005 effective tax rate was also
affected by the $284 million Solutia-related charge and the $12 million
nondeductible IPR&D write-off. In first quarter 2004, the $69 million goodwill
adjustment and, to a lesser extent, charges related to our fiscal year 2004
restructuring plan significantly affected the quarterly effective tax rate
comparison. Without these items, our effective tax rate would have been 30
percent in first quarter 2005, which would have been an improvement of 2
percentage points over first quarter 2004. This improvement was primarily the
result of a realignment of the company's European business operations.
The factors above explain the change in loss from continuing operations. In
first quarter 2005, we recorded income on discontinued operations of $86
million. As discussed in Note 8, the sale of the European wheat and barley
business in fiscal year 2004 generated a tax loss deductible in either the
United Kingdom or the United States. As of Aug. 31, 2004, a deferred tax asset
had not been recorded for the tax loss incurred in the United States because of
the existence of a number of uncertainties. These uncertainties diminished with
the enactment of the American Jobs Creation Act of 2004 (AJCA) on Oct. 22, 2004.
As a result, Monsanto recorded a deferred tax benefit of $106 million, or $0.40
per share, in first quarter 2005. Of this tax benefit, $20 million was recorded
in continuing operations, and the remaining $86 million was recorded in
discontinued operations. The tax benefit of $20 million recorded in continuing
operations was related to the $69 million goodwill adjustment related to our
global wheat business recorded in continuing operations in fiscal year 2004.
Since the goodwill adjustment was recorded in continuing operations, the related
tax benefit was also recorded in continuing operations. The tax benefit of $86
million recorded in discontinued operations was primarily related to the wheat
reporting unit goodwill write-off at the date of adoption of SFAS 142 on Jan. 1,
2002, which was recorded as a cumulative effect of a change in accounting
principle. The recognition of this tax benefit in the United States effectively
precludes Monsanto from claiming any U.K. benefit for the U.K. tax loss.
Accordingly, the U.K. deferred tax asset of $71 million, which had a full
valuation allowance against it, has been written off during the quarter ended
Nov. 30, 2004.
The loss on discontinued operations was $20 million in first quarter of 2004,
reflecting a portion of our fiscal year 2004 restructuring plan charges.
Operating activities slightly offset these charges. For further details of our
discontinued operations, see Note 17 -- Discontinued Operations.
23
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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SEEDS AND GENOMICS SEGMENT
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Three Months Ended
Nov. 30,
------------------------
2004 2003
----------------------------------------------------------------------------------------------------------------------------
Net Sales
Corn seed and traits $ 224 $ 186
Soybean seed and traits 177 169
All other crops seeds and traits 60 30
----------------------------------------------------------------------------------------------------------------------------
Total Net Sales $ 461 $ 385
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Gross Profit
Corn seed and traits $ 129 $ 120
Soybean seed and traits 115 99
All other crops seeds and traits 39 16
----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit $ 283 $ 235
----------------------------------------------------------------------------------------------------------------------------
EBIT(1) $ 15 $ (96)
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
(1) Earnings (loss) from continuing operations before cumulative effect of
accounting change, interest and income taxes. See Note 16 -- Segment
Information -- and the "Financial Measures" section of MD&A for further
details.
Seeds and Genomics Financial Performance -- First Quarter Fiscal Year 2005
Net sales of corn seed and traits increased 20 percent, or $38 million, in first
quarter 2005. Higher corn seed sales in Europe and Brazil, and corn trait sales
in the United States drove the sales increase. Corn seed sales in the
Europe-Africa region, primarily South Africa, increased because of stronger
market performance and timing. The sales timing was a shift in sales volume from
fourth quarter 2004 to first quarter 2005 versus sales recorded in the
comparable prior-year periods. The average net selling price increased in South
Africa because of the favorable effect of the South African rand exchange rate
and improved product mix. Net sales of corn seed in Brazil increased in the
quarter-over-quarter comparison because of an increase in branded volume related
to timing. As a result of farmers delaying their planting decisions, sales
shifted from fourth quarter 2004 to first quarter 2005 versus sales recorded in
the comparable prior-year periods. An improved product mix consisting of
higher-value products also contributed to the Brazilian corn seed sales increase
in first quarter 2005. Sales of corn traits in the United States improved
because of a fiscal year 2005 increase in ROUNDUP READY corn trait pricing and,
to a lesser extent, higher licensed trait volume as a result of growth in
stacked traits and increased trait penetration. Gross profit as a percent of
sales for corn seed and traits decreased 7 percentage points to 58 percent in
the quarter-over-quarter comparison primarily because of higher inventory
handling expenses recorded in the United States and Europe.
Soybean seed and trait net sales increased 5 percent, or $8 million, in the
current-year quarter. This increase was primarily driven by a fiscal year 2005
price increase for ROUNDUP READY soybean traits in the United States, which
resulted in both higher trait royalties from licensees and branded trait
revenues. The sales increase in the United States was somewhat offset by the
quarter-over-quarter impact of deciding to exit the soybean seed business in
Argentina in December 2003, which was completed in fiscal year 2004. However,
the decision to exit the Argentine soybean seed business had a positive impact
on the gross profit comparison from a quarter-over-quarter perspective, in
addition to the trait price increase in the United States. Gross profit for
soybean seed and traits increased 16 percentage points, or $16 million, in first
quarter 2005, and gross profit as a percent of sales increased 6 percentage
points to 65 percent in the quarter-over-quarter comparison.
All other crops seed and trait net sales of $60 million in first quarter 2005
doubled compared with $30 million in the prior-year quarter primarily because of
higher cotton trait sales in Australia. The number of hectares planted with
cotton in Australia in first quarter 2005 increased substantially from first
quarter 2004 primarily because of drought weather conditions and the related
lack of available water for irrigation in 2004. The majority of Australia's
cotton is grown with the use of irrigated water. The market penetration of our
cotton traits doubled in the quarter-over-quarter comparison. In addition, in
first quarter 2005, BOLLGARD II comprised all of our insect-protected trait
acreage in Australia, whereas in 2004, in its introductory year, it was half of
the insect-protected trait acreage. Prior to BOLLGARD II approval, the
Australian government had restricted cotton plantings with a single Bt gene
trait to a maximum 30 percent of the country's total cotton plantings. The
combination of removing this cap on biotechnology cotton plantings with
increased farmer experience and acceptance of our BOLLGARD II cotton traits and
a higher availability of product supply in first quarter 2005 resulted in the
increased cotton trait penetration. We also increased the price of our BOLLGARD
II cotton traits in fiscal year 2005.
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EBIT for the Seeds and Genomics segment increased $111 million to $15 million in
first quarter 2005 compared with a loss of $96 million in the 2004 quarter. The
sales increases discussed throughout this section resulted in $48 million higher
gross profit in first quarter 2005, which contributed significantly toward the
EBIT improvement. Gross profit as a percent of sales for this segment was flat
in the quarter-over-quarter comparison at 61 percent. Total operating expenses
for the Seeds and Genomics segment decreased $56 million. In first quarter 2004,
we recorded a goodwill adjustment related to our global wheat business of $69
million and $23 million in restructuring charges related to the fiscal year 2004
restructuring plan. Somewhat offsetting the quarter-over-quarter operating
expense improvement, SG&A and R&D expenses increased in first quarter 2005
because of higher sales and marketing expenses and the IPR&D write-off related
to the Channel Bio and Advanta acquisitions.
AGRICULTURAL PRODUCTIVITY SEGMENT
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Three Months Ended
Nov. 30,
------------------------
2004 2003
----------------------------------------------------------------------------------------------------------------------------
Net Sales
ROUNDUP and other glyphosate-based herbicides $ 429 $ 429
All other agricultural productivity products 208 214
----------------------------------------------------------------------------------------------------------------------------
Total Net Sales $ 637 $ 643
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Gross Profit
ROUNDUP and other glyphosate-based herbicides $ 154 $ 156
All other agricultural productivity products 63 77
----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit $ 217 $ 233
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
EBIT(1) $ (225) $ 30
----------------------------------------------------------------------------------------------------------------------------
(1) Earnings (loss) from continuing operations before cumulative effect of
accounting change, interest and income taxes. See Note 16 -- Segment
Information -- and the "Financial Measures" section of MD&A for further
details.
Agricultural Productivity Financial Performance--First Quarter Fiscal Year 2005
Net sales of ROUNDUP and other glyphosate-based herbicides were flat for the
quarter-to-quarter comparison. Sales volumes of ROUNDUP and other
glyphosate-based herbicides increased approximately 10 percent while the average
net selling price declined approximately 9 percent in first quarter 2005. Brazil
and Europe were the largest contributors to the sales volume improvement of
ROUNDUP and other glyphosate-based herbicides. The decline in average net
selling price was primarily related to an unfavorable mix shift and, to a lesser
extent, a price reduction of certain mid-tier products in the United States.
Excluding the United States, the average net selling price of ROUNDUP and
other-glyphosate-based herbicides improved primarily because of the worldwide
supply of and demand for generic glyphosate in addition to various other factors
discussed below. The supply of generic glyphosate from China continued to grow
somewhat, but was constrained because of major energy and raw material shortages
and accompanying price increases.
Sales volumes of ROUNDUP herbicides in Brazil increased substantially in first
quarter 2005 compared with the same quarter in 2004 because of timing and
improved market conditions. As a result of farmers delaying their planting
decisions, sales shifted from fourth quarter 2004 to first quarter 2005 versus
sales recorded in the comparable prior-year periods. Also, the average net
selling price of ROUNDUP increased in Brazil because of price increases for our
branded products and a shift in our product mix to higher-priced branded
products. ROUNDUP and other glyphosate-based herbicide sales increased in Europe
primarily because of favorable foreign exchange rates, favorable
quarter-over-quarter weather conditions and timing. The weather conditions most
notably improved in France where we experienced drought conditions in the
prior-year quarter compared with more normal conditions in the 2005 quarter. We
experienced a delay in the German season in fiscal year 2004 as farmers awaited
the launch of a new formulation, which shifted sales from first quarter to
second quarter 2004.
Quarter-over-quarter sales of ROUNDUP herbicides in the United States decreased
substantially primarily because of a shift of sales volume to our lower-priced
branded products and non-branded products. Additionally, the average net selling
price of ROUNDUP herbicides declined significantly in first quarter 2005 as a
result of the mix shift and, to a lesser extent, a price decrease that was taken
in August 2004 for certain mid-tier branded products. In the prior-year quarter,
we sold higher volumes of our high-tier ROUNDUP WEATHERMAX product in the United
States. Whereas in the current-year quarter, sales volumes of our ROUNDUP
ORIGINAL MAX product in the United States increased over the comparative
prior-year quarter. ROUNDUP ORIGINAL MAX was introduced in the United States in
first quarter 2004. The first fiscal quarter is not the primary glyphosate
selling season in the United States. However, in the United States, we expect
25
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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the fiscal year 2005 mix to continue to be unfavorable compared with the mix of
fiscal year 2004 and the average net selling price of ROUNDUP to be slightly
lower in fiscal year 2005.
Sales of animal agriculture products decreased because of the POSILAC product
allocation due to a combination of factors, including our supplier's need to
make corrections and improvements at its manufacturing facility in Austria.
Sandoz GmbH manufactures the finished dose formulation of POSILAC and is our
sole supplier of the finished dose formulation until we receive U.S. Food and
Drug Administration (FDA) approval at our Augusta, Georgia facility. Sandoz is
making corrections and improvements at its facility in response to issues raised
by the FDA during and following a November 2003 inspection of Sandoz's facility
and further identified in a March 2004 FDA warning letter to Sandoz. The
reduction in doses of POSILAC available for sale has required us to allocate
available supplies. In second quarter fiscal year 2004, we notified our
customers that supplies of POSILAC would be temporarily limited. We expect the
supply of POSILAC to be limited well into 2005 with incremental increases in
supply occurring over time. This allocation is expected to have a material
adverse effect on POSILAC revenues as long as it continues. The sales decline of
the POSILAC business was nearly offset by sales increases for the environmental
technologies businesses. The environmental technologies businesses net sales
increased in first quarter 2005 because of several major projects that were in
progress in the United States and China; there were no major projects in the
comparable prior-year quarter.
EBIT for the Agricultural Productivity segment decreased $255 million to a loss
of $225 million in first quarter 2005. The largest driver of the EBIT downside
was the $284 million Solutia-related charge recorded in first quarter 2005.
Gross profit as a percent of sales for the Agricultural Productivity segment
declined 2 percentage points to 34 percent in first quarter 2005 primarily
because of the POSILAC product allocation and an unfavorable product mix in
first quarter 2005 for the environmental technologies businesses. Offsetting the
gross profit decline were lower operating expenses of $50 million. Operating
expenses for the Agricultural Productivity segment declined primarily because of
lower SG&A expenses in the United States and Argentina and, to a lesser extent,
lower first quarter 2005 bad-debt expense in Argentina.
Our Agreement with Scotts
In 1998, Pharmacia (f/k/a Monsanto Company), which was transferred to us in
connection with our separation from Pharmacia, entered into an agency and
marketing agreement with The Scotts Company (Scotts) with respect to the
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
deferred a specified amount of this fee, owed in each of the first three years
of the agreement, and it is required to be paid in full, with interest, at later
dates. We are accruing interest on the amounts owed by Scotts and including it
in interest income. The total amount owed by Scotts, including accrued interest,
was approximately $47 million as of Nov. 30, 2004, and $49 million as of Aug.
31, 2004. Scotts began paying these deferred amounts ($5 million per year in
monthly installments) in October 2002. Additionally, if certain earnings targets
are exceeded, Scotts' required payment may be increased above $25 million
annually.
26
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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RESTRUCTURING
--------------------------------------------------------------------------------
Our results include restructuring activities that significantly affected net
income (loss). Restructuring charges were recorded in the Statement of
Consolidated Operations as follows:
-----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
---------------------------
(Dollars in millions) 2004 2003
-----------------------------------------------------------------------------------------------------------------------------
Cost of goods sold $ -- $ --
Adjustment of goodwill -- (69)
Restructuring charges -- net(1, 2) (1) (29)
-----------------------------------------------------------------------------------------------------------------------------
Loss from Continuing Operations Before Income Taxes (1) (98)
Income tax benefit 20 11
-----------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 19 (87)
Loss from operations of discontinued businesses(3) -- (33)
Income tax benefit -- 9
-----------------------------------------------------------------------------------------------------------------------------
Loss on Discontinued Operations -- (24)
-----------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 19 $ (111)
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
(1) The restructuring charges for the three months ended Nov. 30, 2003, include
reversals of $1 million related to the 2000 restructuring plan.
(2) The $1 million of restructuring charges for the three months ended Nov. 30,
2004, was recorded in the Agricultural Productivity segment.
(3) First quarter of fiscal year 2004 contains restructuring charges related to
discontinued businesses (see 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 costs primarily associated with our agricultural chemistry
business as that sector matures globally. 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. Additionally, the approved plan included the
$69 million impairment of goodwill in the global wheat business (see Note 7 -
Goodwill and Other Intangible Assets). Total restructuring charges related to
these actions were $165 million pretax ($105 million aftertax) in fiscal year
2004. We incurred charges of $1 million pretax in the three months ended Nov.
30, 2004, to complete the restructuring actions under this plan. No further
actions are planned in fiscal year 2005 related to this plan. We followed the
accounting guidance in SFAS 88, SFAS 144 and SFAS 146 to record these actions
(these accounting standards are defined in Notes 1 and 3 to the consolidated
financial statements).
In first quarter 2005, we recorded a deferred tax benefit of $106 million, of
which $20 million was recorded in continuing operations, and the remaining $86
million was recorded in discontinued operations. The $20 million tax benefit
recorded in continuing operations was related to the impairment of goodwill in
the global wheat business as part of the fiscal year 2004 restructuring plan. As
such, the benefit amount recorded in continuing operations is reflected in the
table above. See Note 17 -- Discontinued Operations and the "Results of
Operations" section of MD&A for a further discussion of the $86 million tax
benefit recorded in discontinued operations. See Note 4 -- Restructuring -- for
the roll forward of the restructuring liability related to this plan from Sept.
1, 2004, to Nov. 30, 2004.
First quarter 2004 pretax charges of $63 million were comprised of $56 million
related to the Seeds and Genomics segment ($23 million in continuing operations
and $33 million in discontinued operations) and $7 million related to the
Agricultural Productivity segment. These charges included $20 million pretax
related to work force reductions, $42 million pretax in asset impairments
(excluding the $69 million goodwill impairment), and $1 million pretax in costs
associated with facility closures.
The actions relating to this restructuring plan resulted in aftertax savings of
approximately $40 million in fiscal year 2004, and they are expected to produce
aftertax savings of approximately $80 million to $95 million in fiscal year
2005, and approximately $90 million to $105 million in fiscal year 2006, with
continuing savings thereafter. We expect that these actions will lower our
costs, primarily SG&A, as a percent of sales.
27
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
----------------------------------------------------------------------------------------------------------------------------
Working Capital and Financial Condition
----------------------------------------------------------------------------------------------------------------------------
As of
As of Nov. 30, Aug. 31,
--------------------------- ------------
(Dollars in millions, except current ratio) 2004 2003 2004
----------------------------------------------------------------------------------------------------------- ------------
Cash and cash equivalents $ 1,553 $ 1,036 $ 1,037
Short-term investments 100 -- 300
Trade receivables -- net 1,397 1,586 1,684
Inventories 1,452 1,350 1,154
Other current assets(1) 871 861 756
----------------------------------------------------------------------------------------------------------- ------------
Total Current Assets $ 5,373 $ 4,833 $ 4,931
----------------------------------------------------------------------------------------------------------- ------------
Short-term debt $ 239 $ 288 $ 433
Accounts payable 373 290 326
Accrued liabilities(2) 1,792 1,304 1,135
----------------------------------------------------------------------------------------------------------- ------------
Total Current Liabilities $ 2,404 $ 1,882 $ 1,894
----------------------------------------------------------------------------------------------------------- ------------
Working Capital(3) $ 2,969 $ 2,951 $ 3,037
Current Ratio(3) 2.24:1 2.57:1 2.60:1
----------------------------------------------------------------------------------------------------------- ------------
----------------------------------------------------------------------------------------------------------- ------------
(1) Includes miscellaneous receivables, current deferred tax assets and other
current assets.
(2) Includes accrued compensation and benefits, accrued marketing programs,
deferred revenues, and miscellaneous short-term accruals.
(3) Working capital is total current assets less total current liabilities;
current ratio represents total current assets divided by total current
liabilities.
Nov. 30, 2004, compared with Aug. 31, 2004: Working capital decreased $68
million between Aug. 31, 2004, and Nov. 30, 2004, because of the following
factors:
o Accrued liabilities increased over $650 million of which $533 million
was because of deferred revenues, which was driven by U.S. customer
prepayments in first quarter 2005.
o Trade receivables decreased $287 million. Collections in first quarter
2005 exceeded our sales. A portion of the collections was related to
customer prepayments in the United States.
o We had lower investments of $200 million in short-term securities.
The decreases to working capital as of Nov. 30, 2004, compared with Aug. 31,
2004, were offset by these factors:
o Cash and cash equivalents increased $516 million. We had strong cash
collections throughout first quarter 2005. Customer prepayments in the
U.S. seed and traits business for the upcoming growing season's
products increased significantly. Customers paid for their products
earlier in the season because of a stronger agricultural economy.
o Inventory increased approximately $300 million between the respective
periods primarily because the seasonality of our U.S. seed business in
which the fall harvest of seed products occurs in first quarter of the
fiscal year resulting in a higher inventory balance as of Nov. 30,
2004, and, to a lesser extent, because of the Channel Bio and Advanta
acquisitions.
o Short-term debt declined $194 million, which is discussed below in the
"Capital Resources and Liquidity" section of MD&A.
Nov. 30, 2004, compared with Nov. 30, 2003: Working capital increased $18
million in the comparison between Nov. 30, 2004, and Nov. 30, 2003. The
following factors increased working capital as of Nov. 30, 2004, compared with
Nov. 30, 2003:
o Cash and cash equivalents of approximately $1.6 billion as of Nov. 30,
2004, was evidence of the strong cash collections throughout first
quarter 2005. In addition, as noted above, customer prepayments for
the upcoming growing season's products in the United States increased
significantly. There was also an increase in quarter-over-quarter
customer prepayments because of growth in our seeds and traits
businesses.
28
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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o Inventory increased approximately $100 million between the respective
periods primarily because of higher U.S. seed inventory as a result of
higher yields for corn and soybeans and in order to meet the
requirements of the growing business. To a lesser extent, inventory
increased because of the Channel Bio and Advanta acquisitions. POSILAC
inventories increased in order to establish adequate inventory levels
to support incremental increases in product supply and were offset by
lower chemical inventories as a result of improved inventory
management and SKU reductions.
The working capital increases were offset by these factors:
o Accrued liabilities increased $488 million because of an increase in
quarter-over-quarter customer prepayments. Additionally, the reduction
in the Nov. 30, 2003, current tax liability related to the PCB
litigation settlement was moved to the deferred tax asset account.
o November-over-November trade receivables were lower by $189 million,
which was partially attributable to a lower beginning balance despite
higher net sales. Quarter-over-quarter collections decreased 3 percent
in the current-year quarter. A decrease in collections for the U.S.
chemicals business was somewhat offset by higher customer prepayments
in the U.S. seeds and traits businesses. As discussed in the Report on
Form 10-K for the fiscal year ended Aug. 31, 2004, fiscal year 2004
collections improved in the United States because more customers chose
not to take advantage of extended terms in fiscal 2004. A higher
amount of U.S. fourth quarter 2003 sales was collected in 2004
compared with fourth quarter 2004 sales that were collected in the
same fiscal year as the sale.
Customer Financing Program: Monsanto refers certain of its interested U.S.
customers to a third-party specialty lender that makes loans directly to
Monsanto's customers. This $500 million revolving financing program allows
certain U.S. customers to finance their product purchases, royalties and
licensing fee obligations, and allows us to reduce our reliance on commercial
paper borrowings. We received $60 million during first quarter 2005 and $15
million during first quarter 2004 from the proceeds of loans made to our
customers through this financing program. Monsanto originates these customer
loans on behalf of the third-party specialty lender, a special purpose entity
(SPE) that Monsanto consolidates, using Monsanto's credit guidelines approved by
the lender. The loans are sold to multiseller commercial paper conduits through
a nonconsolidated qualifying special purpose entity (QSPE). We have no ownership
interest in the lender, the QSPE, or the loans. We service the loans and provide
a first-loss guarantee of up to $100 million.
As of Nov. 30, 2004, Aug. 31, 2004, and Nov. 30, 2003, the customer loans held
by the QSPE and the QSPE's liability to the conduits was $150 million, $222
million, and $95 million, respectively. The lender or the conduits may restrict
or discontinue the facility at any time. If the facility were to terminate,
existing 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 these customers with direct credit purchase terms. Our servicing fee
revenues from the program were not significant. As of Nov. 30, 2004, Monsanto's
recorded guarantee liability was less than $1 million, based on our historical
collection experience with these customers and our current assessment of credit
exposure. Adverse changes in the actual loss rate would increase the liability.
In January 2003, the FASB issued FIN 46 and amended it by issuing FIN 46R in
December 2003. The SPE is included in our consolidated financial statements.
Because QSPE's are excluded from the scope of FIN 46R and we do not have the
unilateral right to liquidate the QSPE, this interpretation does not have an
effect on our accounting for the customer financing program.
29
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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Cash Flow
----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
---------------------------
(Dollars in millions) 2004 2003
----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operations $ 769 $ 661
Net Cash Provided by Investing Activities 1 175
----------------------------------------------------------------------------------------------------------------------------
Free Cash Flow(1) 770 836
Net Cash Required by Financing Activities (254) (81)
----------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 516 755
Cash and Cash Equivalents at Beginning of Period 1,037 281
----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 1,553 $ 1,036
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
(1) Free cash flow represents the total of net cash provided or required by
operations and provided or required by investing activities (see the
"Financial Measures" section in MD&A for a further discussion).
Cash provided by operations improved $108 million in the quarter-over-quarter
comparison. In first quarter 2004, we used cash of $400 million to fund
Solutia's PCB litigation settlement as discussed in the Report on Form 10-K for
the fiscal year ended Aug. 31, 2004. This amount was accrued in August 2003 and
paid in September 2003. For the three months ended Nov. 30, 2004, and Nov. 30,
2003, we made voluntary pension contributions of $60 million and $25 million,
respectively. At the time of filing this report, we are not planning to make
additional pension contributions in fiscal year 2005. Cash required from the
change in inventory increased $98 million in fiscal year 2005 because of higher
yields and increased requirements as a result of growing the U.S. corn seed
business and, to a lesser extent, the impact of the acquisitions. Cash provided
from the change in trade receivables decreased $88 million in fiscal year 2005
primarily because of more normalized collections in fiscal year 2005. Further,
the timing of our employee incentives negatively impacted cash provided by
operations in the current-year quarter. Employee incentives were paid in first
quarter 2005, and no incentives were paid in the prior-year quarter because of
the fiscal year change and a related change to the timing of paying our employee
incentive liabilities.
Cash provided by investing activities decreased $174 million in first quarter
2005. We used cash of $158 million for the Channel Bio and Advanta acquisitions
in first quarter 2005. These acquisitions are explained in more detail in the
"Capital Resources and Liquidity" section below. The timing of the maturities of
our short-term investments provided $29 million less cash in first quarter 2005
compared with the prior-year quarter. Cash provided by maturities of investments
was $201 million in 2005 and $230 million in 2004. Lastly, our capital
expenditures were 24 percent, or $12 million, lower in first quarter 2005
compared with the prior-year quarter because of timing. We expect fiscal 2005
capital expenditures to be in the range of $250 million to $300 million compared
with fiscal year 2004 capital spending of $210 million.
The amount of cash required by financing activities increased $173 million to
$254 million in first quarter 2005. Cash required for long-term debt reductions
was $208 million in first quarter 2005 compared with $26 million in first
quarter 2004 (see the following section for a further explanation). We purchased
shares under our three-year $500 million share purchase program in both
quarters: $35 million in first quarter 2005 and $55 million in first quarter
2004. As of Nov. 30, 2004, $199 million was available for share purchase under
the $500 million authorized amount. Stock option exercises provided $17 million
of additional cash in the quarter-over-quarter comparison. Dividend payments
increased 12 percent, or $4 million, in first quarter 2005. 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, and in December 2004, approved an increase in
the quarterly dividend to 17 cents per share.
Capital Resources and Liquidity
---------------------------------------------------------------------------------------------------------------------------
As of Nov. 30, As of Aug. 31,
-------------------------------------------------
(Dollars in millions, except debt-to-capital ratio) 2004 2003 2004
---------------------------------------------------------------------------------------------------------------------------
Short-term debt $ 239 $ 288 $ 433
Long-term debt 1,070 1,222 1,075
Debt-to-capital ratio 20% 23% 22%
---------------------------------------------------------------------------------------------------------------------------
Total debt outstanding decreased approximately $200 million between Nov. 30,
2004, and Aug. 31, 2004, primarily because certain medium-term notes matured in
first quarter 2005. These medium-term notes were classified as short-term debt
as of Aug. 31, 2004. Further, in first quarter 2005, the Statement of
Consolidated Cash Flows presents the maturities as long-term debt reductions
because the medium-term notes had maturities of greater than one year at
inception.
Acquisitions: In September 2004, we acquired the canola seed assets of Advanta
from Advanta B.V., including the Advanta Seeds brand in Canada and the
30
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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Interstate Seed brand in the United States, for $50 million in cash (net of cash
acquired). The addition of these canola seed businesses reinforces our
commitment to the canola industry and is intended to strengthen our ability to
bring continued technology innovations to canola growers. The transaction was
completed on Sept. 8, 2004, from which time the results of this acquisition were
included in our consolidated financial statements. Advanta's business operations
and employees were integrated into the Seeds and Genomics segment upon
acquisition.
In first quarter 2005, we formed American Seeds, Inc. (ASI), a holding company
established to support regional seed businesses with capital, genetics and
technology investments. In November 2004, ASI acquired Channel Bio, for $104
million in cash (net of cash acquired) and $15 million in assumed liabilities to
be paid at a later date. Channel Bio is a U.S. seed company that sells, markets
and distributes corn and soybean seeds through three brands: Crow's Hybrid Corn
Company, Midwest Seed Genetics, Inc. and Wilson Seeds. The acquisition of
Channel Bio is expected to provide us with additional opportunity for growth by
accelerating the delivery of technology advances through Channel Bio's strong
customer relationships, local brands and quality service. The transaction was
completed on Nov. 15, 2004, from which time the results of this acquisition were
included in our consolidated financial statements. As part of ASI, Channel Bio's
business operations were added to the Seeds and Genomics segment results upon
acquisition.
In addition to cash paid related to the first-quarter 2005 acquisitions, we
incurred $4 million for transaction costs. The purchase price allocation as of
Nov. 30, 2004, was preliminary and is summarized in Note 3 -- Business
Combinations. Pro forma information related to these acquisitions is not
included because the impact of these acquisitions, either individually or in the
aggregate, on our consolidated results of operations was not considered to be
significant. See Note 3 for a further discussion of the purchase accounting
surrounding these acquisitions.
Contingent Liabilities Relating to Solutia Inc. (Off-Balance Sheet Arrangement)
Under the Separation Agreement, we are required to indemnify Pharmacia for
Solutia's Assumed Liabilities, to the extent that Solutia fails to pay, perform
or discharge those liabilities. Solutia and 14 of its U.S. subsidiaries have
filed a voluntary petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code and are seeking relief from paying certain liabilities,
including Solutia's Assumed Liabilities. Solutia has disclaimed its obligations
to defend pending or future litigation relating to Solutia's Assumed Liabilities
and has taken the position that the bankruptcy proceeding prevents it from
continuing to perform its environmental obligations, except within the
boundaries of its current operations. On an interim basis, we have assumed the
management and defense of certain of Solutia's third-party tort litigation and
environmental matters. In the process of managing such litigation and
environmental liabilities, we have determined that it is probable that we will
incur some expenses related to such litigation and environmental liabilities and
that the amount of such expenses can be reasonably estimated. Accordingly, we
have recorded a charge in the amount of $284 million based on the best estimates
by our management with input from our legal and other outside advisors. We
believe that the charge, based on what is known at the time of filing this
report, represents the discounted cost that we would expect to incur in
connection with these litigation and environmental matters. However, our actual
costs may be materially different from this estimate. Further, the charge may
not reflect all potential liabilities and expenses that we may incur in
connection with Solutia's bankruptcy and does not reflect any insurance
reimbursements or any recoveries we might receive through the bankruptcy
process. Under the rules of the Securities and Exchange Commission (SEC), these
contingent liabilities are considered to be an off-balance sheet arrangement.
See Part I -- Item 1 -- Note 15 -- Commitments and Contingencies under the
subheading "Solutia Inc." for further information regarding Solutia's Assumed
Liabilities and the charge discussed above. Also see Part II -- Item 1 -- Legal
Proceedings and Item 5 -- Relationships Among Monsanto Company, Pharmacia
Corporation, Pfizer Inc. and Solutia Inc. for further information.
OUTLOOK
--------------------------------------------------------------------------------
Focused Strategy
Monsanto has established leadership in agricultural markets by applying advanced
technology to develop high-value products ahead of its competitors, and by
reinforcing strong brands and customer relationships. We continually improve our
products to maintain market leadership and to 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 environment.
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MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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Our strategic actions will allow us to focus on continued growth in our seeds
and traits businesses, while 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. To date, our
research and marketing focus on crops grown on significant acreage: corn, cotton
and oilseeds, which includes soybeans and canola. In fiscal year 2004, we made
the decision to realign our research and development investments to accelerate
the development of new and improved traits in these crops.
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 through vehicles
such as investments that grow and expand the business, increasing our dividend
rate and share repurchases. We have recently used our cash position for
strategic acquisitions and technology investments, and will continue to evaluate
acquisition opportunities that meet our strategic needs and technology
arrangements that have the potential to increase the efficiency and
effectiveness of our research and development efforts. Our board of directors
increased our dividend rate three times (in April 2003, May 2004 and December
2004) by a cumulative total of 42 percent since Monsanto was spun off as an
independent company in August 2002. We began our share repurchase program in
fiscal year 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. Lastly, we also applied our strong cash
position to continue to make voluntary contributions to our pension plan.
We have taken decisive steps to address key risks in our business position.
These include the measures noted above, 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.
Seeds and Genomics
Monsanto has built a leading global position in seeds, and the successful
integration of seed businesses acquired in the 1990s by our former parent 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.
In first quarter 2005, we formed ASI, a holding company established to support
regional seed businesses with capital, genetics and technology investments. ASI
intends to invest in independent seed businesses and operate them autonomously
as subsidiaries. These investments will allow the operating companies of ASI to
more rapidly connect their customers to significant innovations in
genetics-based breeding and other new technologies while continuing to operate
autonomously and locally, providing service to their customers and building
value of their brands. Within our U.S. business, we now have three approaches to
the market, each serving unique customers in unique ways: we are selling our
branded DEKALB and Asgrow seeds through the distribution channel; we are
licensing to more than 250 regional seed companies through our Holden's/Corn
States business; and with the addition of ASI, we are now selling direct to
farmers in localized markets. We more rapidly provide farmers choices for the
newest technology in the distribution channels they rely on. Channel Bio, which
was completed in first quarter 2005, was the first acquisition by ASI.
32
MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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Outstanding seed quality and leading germplasm provide a vehicle for delivering
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 85 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 our seeds and traits include:
o Continued growth in Monsanto's branded and licensed seed market
shares, through potential acquisitions, 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 Cotton States business;
o Expansion of existing traits, especially in corn, and stacking of
additional traits in current biotechnology products;
o Ability to have flexibility to price our traits in line with the
value growers have experienced and expect to continue to
experience from our traits; and
o The commercialization of second-generation traits, such as
BOLLGARD II cotton and ROUNDUP READY Flex cotton.
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 2004 and 2003. We are seeing the same
trend in our corn seed business, where higher-value, stacked-trait products
represent a growing share of total seed sales.
We have completed the regulatory approval processes in the United States, Japan
and Canada for YIELDGARD Plus with ROUNDUP READY Corn 2, Monsanto's three-way
stacked product that includes the YIELDGARD Corn Borer, YIELDGARD Rootworm and
ROUNDUP READY Corn 2 biotech traits. YIELDGARD Plus with ROUNDUP READY Corn 2
hybrids will be available for sale and planting in limited quantities in fiscal
year 2005 with broader product availability in fiscal year 2006 in the United
States. Monsanto corn products designed to be tolerant to the active ingredient
in ROUNDUP agricultural herbicides are currently marketed as ROUNDUP READY Corn
2 in the United States.
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 legalizing the planting and harvest of ROUNDUP READY
soybeans in Brazil for the 2003-2004 crop year. In October 2004, this
legislation was extended to the 2004-2005 crop year, pending approval by the
president of Brazil. If he does not sign the provisional measure, or if a
recently added provision on the collection of payments is not removed, it may
require us to modify the collection process for the unlicensed use of our
technology. We are prepared to make such modifications, if necessary. Monsanto
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continues to work with the grain industry to collect payments for the use of our
technology in Brazil. Soybean grain containing the ROUNDUP READY trait is sold
to or by grain handlers into export markets. More than 95 percent of the grain
handlers in two southern Brazilian states have a contract to collect a payment
upon the delivery and sale of the soy grain containing the ROUNDUP READY trait.
We have collected cash from grain handlers in these two states. The system had a
slightly negative effect on our earnings in fiscal year 2004 because of start-up
expenses and lower yields caused by drought. In fiscal year 2005, we expect the
system to be a modest contributor to earnings. A similar grain-based system also
may be applicable to other parts of Latin America. However, it is not certain
that payments on ROUNDUP READY soybeans will be collected and be profitable in
Brazil or other parts of Latin America. We continue to work to obtain long-term
approval for the planing of ROUNDUP READY soybeans in Brazil.
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. However, 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 is mitigating
the effect of these restrictions. 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 the EU, including those traits
as a part of various stacked-trait combinations, and has recently received
approval from the EU for human consumption, and the import, processing and use
in animal feed, of ROUNDUP READY Corn 2.
We are committed to addressing the concerns raised by consumers and by public
interest groups and the 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 business
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 slightly lower than the net
average selling price for fiscal 2004. Further, we expect the U.S. ROUNDUP net
average selling price in 2005 will start to settle in the range of historical
pricing seen outside the United States. We also believe that 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 and logistics, low-cost manufacturing, further
expansion of ROUNDUP READY crops and the ROUNDUP Rewards program.
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 the successful launch of ROUNDUP ORIGINAL MAX, which offers key
brand advantages versus imitator products at a very competitive price.
Monsanto will support ROUNDUP through expansion of ROUNDUP READY crops and the
ROUNDUP Rewards program. ROUNDUP Rewards offers added protection and reduced
risk program elements for farmers who use certain Monsanto technologies and
agricultural herbicides. 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.
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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, ROUNDUP
distribution channel inventories had increased in the United States. However,
U.S. ROUNDUP distribution channel inventory levels have been declining, for
example levels as of Aug. 31, 2004, declined compared with Aug. 31, 2003.
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's selective corn herbicides,
gross profit from the ROUNDUP READY trait and from the ROUNDUP used on these
acres are significantly higher than the gross profit on 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 is our 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 because of a combination of factors, including the time
needed for Sandoz to complete corrections and improvements at its facility in
cooperation with the FDA. This limitation has temporarily reduced volumes of
POSILAC available for sale and required us to allocate available supplies. We
expect the supply of POSILAC to be limited well into 2005 with incremental
increases in supply occurring over time. The allocation is expected to have a
material adverse effect on POSILAC revenues as long as it continues.
Other Information
As discussed in Item 1 -- Note 15 -- Commitments and Contingencies and Part II
-- Item 1 -- Legal Proceedings, Monsanto is involved in a number of lawsuits and
claims relating to a variety of issues. Many of these lawsuits relate to
intellectual property disputes. We expect that such disputes will continue to
occur as the agricultural biotechnology industry evolves.
As mentioned in the "Overview -- Executive Summary" section of MD&A, we are
required to indemnify Pharmacia for Solutia's Assumed Liabilities. Our
obligation to indemnify Pharmacia for Solutia's Assumed Liabilities is discussed
in Note 15 and Part II -- Item 1 -- Legal Proceedings.
In late December 2004, the company received notification from Brazilian tax
authorities stating that certain value-added tax credits are not recoverable.
Tax credits that potentially are not recoverable because of this notification
were approximately $18 million as of Nov. 30, 2004. We are currently evaluating
the validity and the related financial impact, if any, of such notification.
For additional information on the outlook for Monsanto, see "Cautionary
Statements: Risk Factors Regarding Forward-Looking Statements."
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 Part II --
Item 8 -- Note 2 -- Significant Accounting Policies -- to the consolidated
financial statements contained in our Report on Form 10-K for the fiscal year
ended Aug. 31, 2004. 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
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10-K for fiscal year ended Aug. 31, 2004. 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.
NEW ACCOUNTING STANDARDS
--------------------------------------------------------------------------------
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123R). SFAS 123R replaced SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123), and superseded Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25). SFAS 123R will require
compensation cost related to share-based payment transactions to be recognized
in the financial statements. As permitted by SFAS 123, we elected to follow the
guidance of APB 25, which allowed companies to use the intrinsic value method of
accounting to value their share-based payment transactions with employees. Based
on this method, we did not recognize compensation expense in our financial
statements as the stock options granted had an exercise price equal to the fair
market value of the underlying common stock on the date of the grant. SFAS 123R
requires measurement of the cost of share-based payment transactions to
employees at the fair value of the award on the grant date and recognition of
expense over the requisite service or vesting period. SFAS 123R requires
implementation using a modified version of prospective application, under which
compensation expense for the unvested portion of previously granted awards and
all new awards will be recognized on or after the date of adoption. SFAS 123R
also allows companies to adopt SFAS 123R by restating previously issued
financial statements, basing the amounts on the expense previously calculated
and reported in their pro forma footnote disclosures required under SFAS 123.
The provisions of SFAS 123R will be adopted by us using the modified prospective
method beginning Sept. 1, 2005.
In December 2004, the FASB issued FASB Staff Position No. 109-1, Application of
FASB Statement No. 109 (SFAS 109), Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004 (FSP 109-1). FSP 109-1 clarifies that the manufacturer's
deduction provided for under the American Jobs Creation Act of 2004 (AJCA)
should be accounted for as a special deduction in accordance with SFAS 109 and
not as a tax rate reduction. The adoption of FSP 109-1 will have no impact on
our results of operations or financial position for fiscal year 2005 because the
manufacturer's deduction is not available to us until fiscal year 2006. We are
currently evaluating the effect that the manufacturer's deduction will have in
subsequent years. The FASB also issued FASB Staff Position No. 109-2, Accounting
and Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004 (FSP 109-2). The AJCA introduces a
special one-time dividends received deduction on the repatriation of certain
foreign earnings to a U.S. taxpayer (repatriation provision), provided certain
criteria are met. FSP 109-2 provides accounting and disclosure guidance for the
repatriation provision. Although FSP 109-2 is effective immediately, until the
Treasury Department or Congress provides additional clarifying language on key
elements of the repatriation provision, the amount of foreign earnings to be
repatriated by us cannot be determined. See Note 8 -- Income Taxes -- for
additional disclosures in accordance with FSP 109-2.
In May 2004, the FASB issued FASB Staff Position No. 106-2, Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (FSP 106-2), which superseded FSP 106-1. FSP 106-2
provides authoritative guidance on the 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, and specifies the disclosure
requirements for employers who have adopted FSP 106-2. 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. 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 was effective for our first
quarter of fiscal year 2005. We have estimated a reduction of the postretirement
benefit obligation of approximately $14 million. The reduction in annual benefit
cost is estimated at approximately $2 million. Final authoritative guidance
could require us to change previously reported information.
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
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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 "believe," "expect," "anticipate,"
"intend," "plan," "estimate," "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 or
obligation 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.
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.
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 conventional or organic crops, 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 that can affect
general public acceptance of these traits. Concern about adventitious presence
could lead to increased regulation, which may include: requirements for labeling
and traceability; liability transfer mechanisms which may include financial
protection insurance; and possible restrictions or moratoria on testing,
planting or use of biotechnology traits.
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. Farmers' income, and therefore
their ability to purchase our herbicides, seeds and traits, is also affected by
commodity prices.
Competition in Plant Biotechnology: Many companies engage in plant biotechnology
research. Their success could render our existing products less competitive. In
addition, a company's speed in getting its new product to market can be a
significant competitive advantage. We expect to see more competition in fiscal
year 2005 and future years, 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.
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 control
manufacturing and marketing costs without adversely affecting sales, 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, and to develop new formulations with
features attractive to our end users.
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
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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.
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 that may
be significant to profitability in the period recognized or limit our ability to
engage in our business activities. In addition, pursuant to the Separation
Agreement, we are required to indemnify Pharmacia for Solutia's Assumed
Liabilities, to the extent that Solutia fails to pay, perform or discharge those
liabilities. A charge in the amount of $284 million was recorded in our first
quarter fiscal 2005 results for certain expenses related to third-party tort
litigation and environmental matters that we are managing following Solutia's
refusal to manage such matters. We believe that the charge, based on what is
known at the time of filing this report, represents the discounted cost that we
would expect to incur in connection with these litigation and environmental
matters. However, the degree to which we may ultimately be responsible for the
particular matters reflected in the charge is uncertain. Our actual costs may be
materially different from this estimate. Further, the charge may not reflect all
potential liabilities and expenses that we may incur in connection with
Solutia's bankruptcy. In particular, additional litigation or environmental
matters that are not reflected in the charge may arise in the future, and we may
also assume the management of, settle, or pay judgments or damages with respect
to litigation or environmental matters in order to mitigate contingent potential
liability and protect Pharmacia and us, if Solutia refuses to do so. Additional
information about Solutia and other litigation matters and the related risks to
our business may be found in Part I -- Item 1 -- Note 15 -- Commitments and
Contingencies and in other sections of this report.
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.
Operations Outside the United States: In fiscal year 2004, sales outside the
United States represent more than 45 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 sales outside the United States 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 shareowners' equity.
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. In
addition, inadequate distributor liquidity could affect distributors' ability to
pay for our products.
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Regulation and Legislation Affecting Agricultural Products: In addition to
regulation and legislation specifically affecting our seed biotechnology
products, agricultural products and the manufacturers of agricultural products
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 can affect our sales and
profitability. 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.
Regulation and Public Acceptance of Agricultural 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 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 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 actively raise
public concern with speculation about the potential for adverse effects of our
biotechnology traits on other plants and on the environment, and about the
potential for adverse 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,
opponents of agricultural biotechnology have attacked facilities used by
agricultural biotechnology companies, and may launch future attacks against our
field testing sites, and research, production, or other facilities.
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.
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 operations outside the United States, 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.
Successful Operation of Recent Acquisitions: We have made acquisitions involving
seed companies. These transactions are designed to contribute to our long-term
growth. We must fit such acquisitions into our growth strategies to generate
sufficient value to justify their cost. Acquisitions also present other
challenges, including geographical coordination, personnel integration, and the
reconciliation of corporate cultures. Those operations could cause a temporary
interruption of or loss of momentum in our business and the loss of key
personnel from the acquired companies. There can be no assurance that the
diversion of management's attention to such matters or the delays or
difficulties encountered in connection with integrating these operations will
not have an adverse effect on our business, results of operations, or financial
condition.
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.
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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 fiscal year ended Aug. 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
--------------------------------------------------------------------------------
We maintain a comprehensive set of disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934 (Exchange Act)) designed to ensure that information required to be
disclosed in our filings under the Exchange Act is recorded, processed,
summarized and reported accurately and within the time periods specified in the
SEC's rules and forms. As of Nov. 30, 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 has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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PART II--OTHER INFORMATION
--------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
--------------------------------------------------------------------------------
This section of the Report on Form 10-Q provides information regarding material
legal proceedings that we are defending or prosecuting. These include
proceedings to which we are party in our own name and proceedings to which
Pharmacia is a party but that we manage and for which we are responsible, and
proceedings that we are managing related to Solutia's Assumed Liabilities. We
are also defending or prosecuting other legal proceedings, not described in this
section, which arise in the ordinary course of our business.
Information regarding another material legal proceeding and the possible effects
on our business of litigation we are defending, excluding litigation related to
Solutia's Assumed Liabilities, is disclosed in Part I -- Item 1 -- Note 15 --
Commitments and Contingencies under the subheading "Other Litigation" and is
incorporated by reference herein. As discussed in Part I -- Item 1 -- Note 15
under the subheading "Solutia Inc.," we have recorded a charge related to
certain of Solutia's litigation and environmental obligations. We believe 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 for which we are
responsible. Other information with respect to legal proceedings appears in our
Report on Form 10-K for the period ended Aug. 31, 2004.
Patent and Commercial Proceedings
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2004,
Monsanto and Mycogen Plant Science, Inc. (Mycogen Plant Science), an affiliate
of Dow AgroSciences LLC, have been involved in interference proceedings in the
U.S. Patent and Trademark Office to determine the first party to invent certain
technology related to synthetic Bt technology. Under U.S. law, patents are
issued to the first to invent, not the first to file for a patent on, a subject
invention. On Jan. 29, 2004, the Board of Patent Appeals determined that our
scientists were the first to invent synthetic Bt genes for expression in plants.
As a result of this decision, we expect that our 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 in
which it seeks to have the decision of the Board of Patent Appeals reversed. A
trial on this matter is scheduled to begin on May 9, 2005.
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2004,
on July 25, 2002, Syngenta Seeds, Inc. (Syngenta Seeds) filed a suit against
Monsanto, our wholly owned subsidiary DEKALB Genetics Corporation (DEKALB),
Pioneer Hi-Bred International, Inc., Dow Agrosciences, LLC, and Mycogen Plant
Science, Inc. and Agrigenetics, Inc., collectively Mycogen Seeds, in the U.S.
District Court for the District of Delaware alleging infringement of three
patents issued between June 2000 and June 2002. The patents allegedly pertain to
insect-protected transgenic corn, including our insect-protected corn traits.
Syngenta Seeds seeks injunctive relief and monetary damages. On Nov. 29, 2004,
Pioneer Hi-Bred International, Inc. announced that it had entered into a
settlement with Syngenta Seeds with respect to this lawsuit. A trial on claims
against the remaining parties was held beginning on Nov. 29, 2004. During the
course of the trial, the Court ruled in favor of Monsanto and DEKALB on two of
the patents. On Dec. 14, 2004, the jury returned a verdict in our favor,
determining that the third patent was invalid.
Agent Orange
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2004,
various manufacturers of herbicides used by the U.S. armed services during the
Vietnam War, including the former Monsanto Company, have been parties to
lawsuits filed on behalf of veterans and others alleging injury from exposure to
the herbicides. In the United States, this litigation has been assigned to Judge
Weinstein of the U.S. District Court for the Eastern District of New York, as
part of In re Agent Orange Product Liability Litigation, MDL 381 (MDL)., a
multidistrict litigation proceeding established in 1977 to coordinate Agent
Orange-related litigation in the United States. In 1984, a settlement in the MDL
proceeding concluded all class action litigation filed on behalf of U.S. and
certain other groups of plaintiffs. Approximately 30 suits filed by individual
U.S. veterans contesting the denial of their claims subsequent to the class
action settlement have been consolidated in the MDL and are currently pending in
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MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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the District Court. On June 9, 2003, the U.S. Supreme Court allowed two claims
(Isaacson and Stephenson) to proceed notwithstanding the 1984 class action
settlement. On Nov. 17, 2004, the District Court made final the conditional
summary judgment it previously granted to all defendants judgment on all claims
made in the Isaacson and Stephenson cases, including Monsanto, on the basis of
the government contractor defense. The District Court has set a hearing on Feb.
28, 2005, defendants' motions for summary judgment in the remaining cases
arising out of claims from U.S. veterans.
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2004,
on Feb. 5, 2004, a putative class action suit was filed in the U.S. District
Court for the Eastern District of New York by certain citizens of Vietnam
alleging that the manufacturers of Agent Orange conspired with the United States
government to commit war crimes and crimes against humanity in connection with
the spraying of Agent Orange. This case has also been assigned to Judge
Weinstein. The District Court has set for hearing on Feb. 28, 2005, defendants'
motions to dismiss and for summary judgment in this case.
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2004,
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 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 and a formal hearing to address
issues on the appeal. Other ancillary actions are also pending in Korea,
including a request for provisional relief pending resolution of the main
action.
Activities Related to Indonesian Affiliates' Business
As previously disclosed, during an internal audit and follow-up review conducted
by management and outside counsel, we discovered and reported to the SEC Staff
and the Department of Justice (DOJ) improper payments and related financial
irregularities in connection with our Indonesian affiliates. We have reached
resolution with the SEC and DOJ on the resulting related investigations, and
accept full responsibility for these improper activities. The total combined
amount of penalties assessed by both agencies is $1.5 million. Our settlement
with the SEC requires us to cease and desist from any further violations of the
Foreign Corrupt Practices Act (FCPA) and to pay a penalty of $500,000. We have
entered into a Deferred Prosecution Agreement (DPA) with DOJ, which is subject
to court approval. Under the DPA, we agree to pay a penalty of $1 million and
continue our compliance program. Both the DPA and SEC Order require us to retain
for a period of three years an independent consultant to review and evaluate our
policies and procedures to ensure compliance with the FCPA. If we comply with
the terms of the DPA for three years, the charges deferred under the DPA will be
permanently dismissed. Our agreement with DOJ centers on an illegal $50,000
payment in 2002 to an Indonesian government official made by a former outside
consultant of our Indonesian affiliates at the direction of a former U.S. based
senior Monsanto manager. The SEC Order includes charges for the aforementioned
$50,000 payment and related books and records and internal controls violations.
The Order also includes additional charges for books and records and internal
controls violations involving a series of illegal or questionable payments
totaling at least $700,000 made to various Indonesian government officials
between 1997 and 2002.
Tort Litigation
Virdie Allen, et al. v. Monsanto, et al.: On Dec. 17, 2004, 15 plaintiffs filed
a purported class action lawsuit in the Putman County, West Virginia state court
against Monsanto, Pharmacia and seven other defendants. We are named as the
successor in interest to the liabilities of Pharmacia. The alleged class
consists of all current and former residents, workers, and students who, between
1949 and the present, were allegedly exposed to dioxins/furans contamination in
counties surrounding Nitro, West Virginia. The complaint alleges that the source
of the contamination is a chemical plant in Nitro, formerly owned and operated
by Pharmacia and later by Flexsys, a joint venture between Solutia and Akzo
Nobel Chemicals, Inc. (Akzo Nobel). Akzo Nobel and Flexsys are named defendants
in the case but Solutia is not, due to its pending bankruptcy proceeding. The
suit seeks damages for property clean up costs, loss of real estate value, funds
to test property for contamination levels, funds to test for human contamination
and future medical monitoring costs. The complaint also seeks an injunction
against further contamination and punitive damages.
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Proceedings Related to Solutia's Assumed Liabilities
Information regarding material legal proceedings related to Solutia's Assumed
Liabilities, which is disclosed in Part I -- Item 1 -- Note 15 -- Commitments
and Contingencies -- Solutia Inc. under the subheadings "Solutia Litigation
Obligations" and "Solutia Environmental Obligations" is incorporated by
reference herein.
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2004,
the following proceeding alleges damages arising from exposure to
polychlorinated biphenyls (PCBs) discharged from an Anniston, Alabama, plant
site that was formerly owned by Pharmacia and was transferred to Solutia as part
of the spinoff of Solutia from Pharmacia:
o Payton v. Monsanto: This case was brought in the Circuit Court in Shelby
County, Alabama, on July 15, 1997, against Pharmacia, on behalf of a
purported class of owners, lessees and licensees of properties located on
Lay Lake, which is downstream from Lake Logan Martin on the Coosa River in
Alabama. Plaintiffs claim that PCBs in Lay Lake entitle them to
compensatory and punitive damages in an unspecified amount for an alleged
increased risk of physical injury and illness, emotional distress caused by
fear of future injury or illness, medical monitoring and diminishment in
the value of their properties and their water rights. On Aug. 4, 2004, the
class representatives and Monsanto (on behalf of Pharmacia) agreed to
settle this class action. On Nov. 3, 2004, a fairness hearing was held,
after which the Court entered an order approving the settlement.
See "MD&A -- Cautionary Statements: Risk Factors Regarding Forward-Looking
Statements," in Part I -- Item 2 of this Form 10-Q, which is incorporated herein
by reference, for information regarding the risk factors that may affect any
forward-looking statements regarding our legal proceedings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
--------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
The following table is a summary of any purchases of equity securities during
the first quarter of fiscal year 2005 by Monsanto and any affiliated purchasers,
pursuant to SEC rules.
-------------------------------------------------------------------------------------------------------------------------------
(c) Total Number
of Shares (d) Approximate
Purchased as Part Dollar Value of
(b) Average of Publicly Shares that May Yet
(a) Total Number of Price Paid Announced Plans Be Purchased Under
Period Shares Purchased per Share or Programs the Plans or Programs
-------------------------------------------------------------------------------------------------------------------------------
September 2004: 972,549(1) $ 36.25 971,900 $ 199,191,335
Sept. 1, 2004, through Sept. 30, 2004
October 2004:
Oct. 1, 2004, through Oct. 31, 2004 6,200 $ 38.53 6,200 $ 198,952,449
November 2004:
Nov. 1, 2004, through Nov. 30, 2004 -- $ -- -- $ 198,952,449
------------------------------------------------------------------------------------------------------------------------------
Total 978,749 $ 36.26 978,100 $ 198,952,449
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
(1) Includes 649 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 Nov. 30, 2004.
ITEM 5. OTHER INFORMATION
--------------------------------------------------------------------------------
RELATIONSHIPS AMONG MONSANTO COMPANY, PHARMACIA CORPORATION, PFIZER INC. 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
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MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
known as Pharmacia. Pharmacia is now a wholly owned subsidiary of Pfizer Inc.
(Pfizer), which together with its subsidiaries operates the Pharmaceuticals
Business. Our business includes the operations, assets and liabilities that were
previously the Ag Business. 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 corporations.
Date of Event Description of Event
------------------------------------- -----------------------------------------------------------------------------------------
Sept. 1, 1997 o Pharmacia (then known as Monsanto Company) entered into a Distribution
Agreement (Distribution Agreement) with Solutia related to the transfer of the
operations, assets and liabilities of the Chemical Business from Pharmacia (then
known as Monsanto Company) to Solutia.
o Pursuant to the Distribution Agreement, Solutia assumed and agreed
to indemnify Pharmacia (then known as Monsanto Company) for certain
liabilities related to the Chemicals Business.
------------------------------------- -----------------------------------------------------------------------------------------
Dec. 19, 1999 o Pharmacia (then known as Monsanto Company) entered into an agreement with
Pharmacia & Upjohn, Inc. (PNU) relating to a merger (the Merger).
------------------------------------- -----------------------------------------------------------------------------------------
Feb. 9, 2000 o We were incorporated in Delaware as a wholly owned subsidiary of Pharmacia
(then known as Monsanto Company) under the name "Monsanto Ag Company."
------------------------------------- -----------------------------------------------------------------------------------------
March 31, 2000 o Effective date of the Merger.
o In connection with the Merger, (1) PNU became a wholly owned subsidiary of
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 (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 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 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 Separation Agreement to clarify our respective rights
and obligations relating to our indemnification obligations.
------------------------------------- -----------------------------------------------------------------------------------------
Aug. 13, 2002 o Pharmacia distributed the 220 million shares of our common stock that it
owned to its shareowners via a tax-free stock dividend (the Monsanto Spinoff).
o As a result of the Monsanto Spinoff, Pharmacia no longer owns any equity
interest in Monsanto.
------------------------------------- -----------------------------------------------------------------------------------------
April 16, 2003 o Pursuant to a merger transaction, Pharmacia became a wholly owned subsidiary of Pfizer.
------------------------------------- -----------------------------------------------------------------------------------------
Dec. 17, 2003 o Solutia and 14 of its U.S. subsidiaries filed a voluntary petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code.
------------------------------------- -----------------------------------------------------------------------------------------
Part II -- Item 1 -- Legal Proceedings includes information concerning
litigation matters that Monsanto is managing pursuant to its obligation under
the Separation Agreement to indemnify Pharmacia. Part I -- Item 1 -- Note 15
includes further information regarding litigation and environmental matters that
Monsanto is managing pursuant to its obligation under the Separation Agreement
to indemnify Pharmacia and regarding Solutia's bankruptcy, the related charge to
Monsanto associated with certain of Solutia's litigation and environmental
obligations, and other arrangements between Monsanto and Solutia.
ITEM 6. EXHIBITS
--------------------------------------------------------------------------------
Exhibits: The list of exhibits in the Exhibit Index to this Report is
incorporated herein by reference.
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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)
By: /s/ RICHARD B. CLARK
--------------------------------------
Richard B. Clark
Vice President and Controller
(On behalf of the Registrant and as
Principal Accounting Officer)
Date: Jan. 10, 2005
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MONSANTO COMPANY FIRST QUARTER 2005 FORM 10-Q
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EXHIBIT INDEX
--------------------------------------------------------------------------------
These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K.
----------------- ----------- --------------------------------------------------
Exhibit
No. Description
------------------- ----------- ------------------------------------------------
2 Omitted
3 Omitted
4 Omitted
10 Omitted
11 Omitted -- see Note 13 of Notes to Consolidated Financial
Statements -- Earnings (Loss) Per Share
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 18 U.S.C. 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
46