MONSANTO COMPANY THIRD 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 May 31, 2005
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 of (I.R.S. Employer Identification No.)
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: 268,636,028 shares of Common
Stock, $0.01 par value, outstanding as of July 1, 2005.
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MONSANTO COMPANY THIRD 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 26
Overview 26
Results of Operations 29
Seeds and Genomics Segment 34
Agricultural Productivity Segment 36
Restructuring 39
Financial Condition, Liquidity, and Capital Resources 40
Outlook 45
Critical Accounting Policies and Estimates 49
New Accounting Standards 50
Cautionary Statements Regarding Forward-Looking Statements 51
Item 3. Quantitative and Qualitative Disclosures About Market Risk 55
Item 4. Controls and Procedures 55
PART II--OTHER INFORMATION
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Item 1. Legal Proceedings 56
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 59
Item 5. Other Information 59
Item 6. Exhibits 60
SIGNATURE 61
EXHIBIT INDEX 62
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MONSANTO COMPANY THIRD 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 and nine months ended May 31, 2005, and May 31, 2004, the
Condensed Statement of Consolidated Financial Position as of May 31, 2005, and
Aug. 31, 2004, the Statement of Consolidated Cash Flows for the nine months
ended May 31, 2005, and May 31, 2004, and related Notes to Consolidated
Financial Statements follow. In Part I of this Form 10-Q, references to quarters
and years are on a fiscal year basis, unless otherwise specified or apparent
from the context.
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. (Pfizer). 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 dollar amounts 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 and other glyphosate-based herbicides" exclude all
lawn-and-garden herbicide products. Unless otherwise indicated, references to
"ROUNDUP herbicides" mean ROUNDUP branded herbicides excluding all
lawn-and-garden herbicides.
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MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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Statement of Consolidated Operations
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Unaudited Three Months Ended May 31, Nine Months Ended May 31,
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(Dollars in millions, except per share amounts) 2005 2004 2005 2004
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Net Sales $ 2,042 $ 1,677 $ 5,027 $ 4,198
Cost of goods sold 1,035 848 2,509 2,165
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Gross Profit 1,007 829 2,518 2,033
Operating Expenses:
Selling, general and administrative expenses 352 285 911 829
Bad-debt expense 15 36 36 76
Research and development expenses 155 128 401 369
Acquired in-process research and development (see Note 3) 254 -- 266 --
Impairment of goodwill -- -- -- 69
Restructuring charges -- net -- 9 8 66
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Total Operating Expenses 776 458 1,622 1,409
Income from Operations 231 371 896 624
Interest expense 29 24 78 68
Interest income 5 3 19 15
Solutia-related expenses (see Note 16) 7 29 300 43
Other expense -- net 31 22 73 70
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Income from Continuing Operations Before Income Taxes 169 299 464 458
Income tax provision 128 73 178 155
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Income from Continuing Operations 41 226 286 303
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Discontinued Operations (see Note 18):
Income (loss) from operations of discontinued businesses 4 26 6 (2)
Income tax benefit (2) -- (88) (8)
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Income on Discontinued Operations 6 26 94 6
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Net Income $ 47 $ 252 $ 380 $ 309
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Basic Earnings per Share:
Income from continuing operations $ 0.16 $ 0.85 $ 1.08 $ 1.15
Income on discontinued operations 0.02 0.10 0.35 0.02
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Net Income $ 0.18 $ 0.95 $ 1.43 $ 1.17
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Diluted Earnings per Share:
Income from continuing operations $ 0.15 $ 0.83 $ 1.05 $ 1.13
Income on discontinued operations 0.02 0.10 0.35 0.02
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Net Income $ 0.17 $ 0.93 $ 1.40 $ 1.15
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Weighted Average Shares Outstanding:
Basic 268.0 265.8 266.4 264.0
Diluted 273.8 270.7 272.3 268.7
Dividends per Share $ 0.17 $ 0.28 $ 0.34 $ 0.54
The accompanying notes are an integral part of these consolidated financial
statements.
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MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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Condensed Statement of Consolidated Financial Position
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Unaudited As of May 31, As of Aug. 31,
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(Dollars in millions, except share amounts) 2005 2004
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Assets
Current Assets:
Cash and cash equivalents $ 467 $ 1,037
Short-term investments -- 300
Trade receivables -- net of allowances of $264 and $250, respectively 2,776 1,663
Miscellaneous receivables 412 316
Deferred tax assets 388 397
Inventories (see Note 6) 1,683 1,154
Assets of discontinued operations (see Note 18) 72 --
Other current assets 64 64
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Total Current Assets 5,862 4,931
Property, Plant and Equipment -- Net 2,367 2,087
Goodwill -- Net (see Note 7) 1,241 720
Other Intangible Assets -- Net (see Note 7) 1,189 454
Noncurrent Deferred Tax Assets 515 475
Other Assets 503 497
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Total Assets $ 11,677 $ 9,164
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Liabilities and Shareowners' Equity
Current Liabilities:
Short-term debt $ 1,412 $ 433
Accounts payable 392 326
Income taxes payable 343 122
Accrued compensation and benefits 201 158
Accrued marketing programs 502 419
Deferred revenues 40 16
Grower accruals 22 1
Liabilities of discontinued operations (see Note 18) 40 --
Miscellaneous short-term accruals 592 419
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Total Current Liabilities 3,544 1,894
Long-Term Debt 1,062 1,075
Postretirement Liabilities 722 687
Solutia-Related Reserve (see Note 16) 203 --
Other Liabilities 301 250
Commitments and Contingencies (see Note 16)
Shareowners' Equity:
Common stock (authorized: 1,500,000,000 shares, par value $0.01)
Issued 279,494,722 and 272,682,836 shares, respectively;
Outstanding 268,218,774 and 264,413,343 shares, respectively 3 3
Treasury stock 11,275,948 and 8,269,493 shares, respectively, at cost (415) (266)
Additional contributed capital 8,527 8,315
Retained deficit (1,356) (1,645)
Accumulated other comprehensive loss (898) (1,132)
Reserve for ESOP debt retirement (16) (17)
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Total Shareowners' Equity 5,845 5,258
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Total Liabilities and Shareowners' Equity $ 11,677 $ 9,164
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The accompanying notes are an integral part of these consolidated financial
statements.
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MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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Statement of Consolidated Cash Flows
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Unaudited Nine Months Ended May 31,
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(Dollars in millions) 2005 2004
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Operating Activities:
Net Income $ 380 $ 309
Adjustments to reconcile cash provided (required) by operations:
Items that did not require (provide) cash:
Depreciation and amortization expense 348 340
Impairment of goodwill -- 69
Impairment of assets included in discontinued operations -- 4
Bad-debt expense 36 75
Noncash restructuring 7 35
Deferred income taxes (90) 213
Gain on disposal of investments and property -- net (5) (13)
Equity affiliate expense -- net 20 26
Acquired in-process research and development 266 --
Solutia-related charge (see Note 16) 284 --
Other items that did not require cash 51 28
Changes in assets and liabilities that provided (required) cash, net of acquisitions:
Trade receivables (917) (496)
Inventories (10) 23
Accounts payable and accrued liabilities 156 8
PCB litigation settlement insurance proceeds (payments) 9 (400)
Solutia-related reserve (see Note 16) (36) --
Pension contributions (60) (150)
Tax benefit on employee stock options 67 28
Other items 27 13
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Net Cash Provided by Operations 533 112
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Cash Flows Provided (Required) by Investing Activities:
Purchases of short-term investments -- (250)
Maturities of short-term investments 300 480
Acquisitions of businesses, net of cash acquired (1,506) --
Technology and other investments (44) (46)
Capital expenditures (144) (148)
Other investments and property disposal proceeds 23 24
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Net Cash Provided (Required) by Investing Activities (1,371) 60
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Cash Flows Provided (Required) by Financing Activities:
Net change in financing with less than 90-day maturities 1,154 (58)
Short-term debt proceeds 38 18
Short-term debt reductions (18) (11)
Long-term debt proceeds 16 113
Long-term debt reductions (288) (111)
Payments on debt assumed in acquisitions (495) --
Payments on other financing (5) (4)
Treasury stock purchases (149) (133)
Stock option exercises 144 163
Dividend payments (129) (103)
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Net Cash Provided (Required) by Financing Activities 268 (126)
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Net Increase (Decrease) in Cash and Cash Equivalents (570) 46
Cash and Cash Equivalents at Beginning of Period 1,037 281
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Cash and Cash Equivalents at End of Period $ 467 $ 327
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See Note 15 -- 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 THIRD 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, ASGROW,
SEMINIS VEGETABLE SEEDS and STONEVILLE, 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 (ROUNDUP and other
glyphosate-based herbicides and selective chemistries), animal agriculture
businesses and lawn-and-garden herbicide products.
In second quarter 2005, the company committed to a plan to sell the
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 these exit plans, financial data for these businesses has been
presented as discontinued operations as outlined below. See Note 18 --
Discontinued Operations -- for further details. The financial statements have
been recast and 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 and
nine months ended May 31, 2005, and May 31, 2004, the Statement of Consolidated
Operations has been conformed to this presentation. Also, as of May 31, 2005,
the Condensed Statement of Consolidated Financial Position has been conformed to
this presentation. The European wheat and barley business and the plant-made
pharmaceuticals program were previously reported as part of the Seeds and
Genomics segment, and the environmental technologies businesses were previously
reported as part of the Agricultural Productivity 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 Report on Form 10-Q should be read in
conjunction with Monsanto's Report on Form 10-K for the fiscal year ended Aug.
31, 2004, and Monsanto's Report on Form 10-Q for the quarterly period ended Nov.
30, 2004 (portions of both have been recast in Monsanto's Current Report on Form
8-K filed on May 24, 2005), and Monsanto's Report on Form 10-Q for the quarterly
period ended Feb. 28, 2005. Financial information for the first nine months of
fiscal year 2005 should not be annualized because of the seasonality of the
company's business.
Certain prior-period amounts have been reclassified to conform with the
current-year presentation. These reclassifications include a net sales and cost
of goods sold reclassification related to outward freight costs. The company
typically pays the freight costs for transporting finished products to customers
and has historically recorded these costs as a reduction of net sales. Following
the guidance of Emerging Issues Task Force Issue 00-10, Accounting for Shipping
and Handling Fees and Costs, the company has reclassified outward freight on
sales, resulting in an increase in previously reported net sales with a
corresponding increase in cost of goods sold.
6
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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NOTE 2. NEW ACCOUNTING STANDARDS
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In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error
Corrections (SFAS 154). SFAS 154 requires retrospective application to
prior-period financial statements of changes in accounting principle, unless it
is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also redefines "restatement" as the
revising of previously issued financial statements to reflect the correction of
an error. This statement is effective for accounting changes and corrections of
errors made in fiscal years beginning after Dec. 15, 2005. The company does not
believe that the adoption of SFAS 154 will have a material impact on the
consolidated financial statements.
In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional
Asset Retirement Obligations (FIN 47) to clarify the term "conditional asset
retirement" as used in SFAS 143, Accounting for Asset Retirement Obligations.
FIN 47 requires that a liability be recognized for the fair value of a
conditional asset retirement obligation when incurred, if the fair value of the
liability can be reasonably estimated. Uncertainty about the timing or method of
settlement of a conditional asset retirement obligation would be factored into
the measurement of the liability when sufficient information exists. This
interpretation is effective no later than the end of fiscal years ending after
Dec. 15, 2005. Accordingly, Monsanto will adopt FIN 47 no later than fourth
quarter of fiscal year 2006. Monsanto is currently assessing the impact FIN 47
may have on its consolidated financial statements; however, the company does not
believe that the adoption of FIN 47 will have a material impact on the
consolidated financial statements.
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). In March 2005, the U.S.
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No.
107 (SAB 107), which expresses views of the SEC staff regarding the interaction
between SFAS 123R and certain SEC rules and regulations, and provides the
staff's views regarding the valuation of share-based payment arrangements for
public companies. 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. Monsanto will adopt the provisions
of SFAS 123R using the modified prospective method beginning Sept. 1, 2005, and
will consider the guidance of SAB 107 as it adopts SFAS 123R.
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 consolidated financial statements 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. FSP 109-2 was effective immediately
upon issuance; however, due to recent acquisition activity and until the
Treasury Department or Congress provides final clarifying language on key
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MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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elements of the repatriation provision, the amount of foreign earnings that may
be repatriated by Monsanto cannot be determined. See Note 8 -- Income Taxes --
for additional disclosures in accordance with FSP 109-2.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs -- an amendment
of ARB No. 43, Chapter 4 (SFAS 151), to clarify that abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage) should
be recognized as current period charges and to require the allocation of fixed
production overhead to the costs of conversion based on the normal capacity of
the production facilities. SFAS 151 is effective prospectively for inventory
costs incurred during fiscal years beginning after June 15, 2005. The company
does not believe that the adoption of SFAS 151 will have a material impact on
the consolidated financial statements.
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. Final regulations necessary to
implement the Act were released in January 2005. However, additional guidance is
anticipated to clarify several areas, including those that would specify the
manner in which actuarial equivalency must be determined and the evidence
required to demonstrate actuarial equivalency. 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 $19 million. The
reduction in annual benefit cost is estimated at approximately $3 million, of
which $2 million was recorded in the nine months ended May 31, 2005. Additional
guidance and interpretations of the law could require the company to revise its
estimates.
NOTE 3. BUSINESS COMBINATIONS
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In first quarter fiscal year 2005, Monsanto acquired the canola seed businesses
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), inclusive of transaction costs of $2 million. 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 operating results of this
acquisition were included in the company's consolidated financial statements.
In first quarter fiscal year 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 that were paid in second quarter 2005. In March
2005, ASI acquired NC+ Hybrids, Inc. (NC+ Hybrids), through its Channel Bio
subsidiary, for $40 million in cash (net of cash acquired). In addition to these
purchase price amounts, ASI paid transaction costs of $4 million for these
acquisitions. Channel Bio and NC+ Hybrids are U.S. seed companies that sell,
market and distribute primarily corn and soybean seeds. Channel Bio is an
independent operating company of ASI, and as a result of the NC+ Hybrids
acquisition, markets its products through four brands: CROW'S, MIDWEST SEED
GENETICS, NC+ HYBRIDS and WILSON SEEDS. The acquisitions of Channel Bio and NC+
Hybrids are expected to provide Monsanto with additional opportunity for growth
by accelerating the delivery of technology advances through these companies'
strong customer relationships, local brands and quality service. The Channel Bio
transaction was completed on Nov. 15, 2004, from which time the operating
results of this acquisition were included in the company's consolidated
financial statements. The NC+ Hybrids transaction was completed on March 1,
2005, from which time the operating results of this acquisition were included in
the company's consolidated financial statements.
In third quarter fiscal year 2005, Monsanto acquired Seminis, Inc. (Seminis) for
$1.0 billion in cash (net of cash acquired), inclusive of transaction costs of
$22 million, and paid $495 million for the repayment of outstanding debt. The
transaction was completed on March 23, 2005, from which time the operating
results of this acquisition were included in the company's consolidated
financial statements. Marinet Investments, LLC, which prior to the closing was a
holder of co-investment rights in Seminis, elected to reduce the cash payment to
which it was entitled upon completion of the transaction by $50 million in
8
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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exchange for a contingent payment of up to $125 million based on the achievement
of certain cumulative net sales targets over the 36-month period ending Sept.
30, 2007. The cash portion of the acquisition was funded with cash on hand plus
commercial paper borrowings of $600 million issued in March 2005. Prior to the
closing of the transaction, Seminis initiated a tender offer to redeem all of
its outstanding 10.25% Senior Subordinated Notes. In April 2005, payments
totaling $390 million were made to settle tender offers and were funded with
commercial paper borrowings.
Seminis is the global leader in the vegetable and fruit seed industry, and its
brands are among the most recognized in the vegetable and fruit segment of the
agricultural industry. Seminis supplies more than 3,500 seed varieties to
commercial fruit and vegetable growers, dealers, distributors and wholesalers in
more than 150 countries around the world. The acquisition of Seminis is expected
to provide Monsanto with opportunity for growth in the vegetable and fruit seed
industry. From a technology perspective, Monsanto intends to continue to focus
on developing improved products via advanced breeding techniques for the Seminis
business.
In third quarter fiscal year 2005, Monsanto acquired Emergent Genetics, Inc. and
Emergent Genetics India Ltd. (collectively, "Emergent" or "the Emergent
acquisition") for $307 million (net of cash acquired), inclusive of transaction
costs of $7 million. With its STONEVILLE and NEXGEN brands in the United States
and MAHALAXMI and PARAS brands in India, Emergent is the third largest cotton
seed business in the United States, has two strong cotton seed brands in India
and has a solid presence in several other smaller cotton-growing markets around
the world. The addition of the Emergent brands completes a strategic cotton
germplasm and traits platform modeled on the company's leading corn and soybean
strategy, and is expected to provide Monsanto with opportunities to deliver
breeding advances and biotechnology traits in the cotton seed market. The
transaction was completed on April 5, 2005, from which time the operating
results of this acquisition were included in the company's consolidated
financial statements. The cash portion of the acquisition was funded with $284
million of commercial paper borrowings issued in April 2005. Debt of $16 million
was also assumed in the transaction.
For all fiscal year 2005 acquisitions described above, the business operations
and employees of the acquired entities were added into the Seeds and Genomics
segment results upon acquisition. 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. The purchase price allocations for all fiscal year 2005
acquisitions as of May 31, 2005, are preliminary and are summarized in the
following table. The purchase price allocations for Advanta, Channel Bio and NC+
Hybrids are summarized as "All Other Acquisitions" in the table.
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All Other Aggregate
(Dollars in millions) Seminis Emergent Acquisitions Acquisitions
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Current Assets $ 710 $ 74 $ 107 $ 891
Property, Plant and Equipment 305 17 7 329
Goodwill 185 158 167 510
Other Intangible Assets 664 96 53 813
Acquired In-process Research and Development 200 48 18 266
Other Assets 101 3 5 109
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Total Assets Acquired 2,165 396 357 2,918
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Current Liabilities 751 50 108 909
Other Liabilities 339 20 32 391
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Total Liabilities Assumed 1,090 70 140 1,300
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Net Assets Acquired $ 1,075 $ 326 $ 217 $ 1,618
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Supplemental Information:
Net assets acquired $ 1,075 $ 326 $ 217 $ 1,618
Cash acquired (56) (19) (2) (77)
Accrued acquisition costs -- (35) -- (35)
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Cash paid, net of cash acquired $ 1,019 $ 272 $ 215 $ 1,506
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The primary items that generated the goodwill were the premium paid by the
company for the right to control the businesses acquired and for the
direct-to-farmer and farmer-dealer distribution networks (specific to the ASI
acquisitions), and the value of the acquired assembled workforces. None of the
goodwill is deductible for tax purposes.
9
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
As of the acquisition dates, management began to assess and formulate plans to
integrate or restructure the acquired entities. These activities are accounted
for in accordance with Emerging Issues Task Force No. 95-3, Recognition of
Liabilities in Connection with a Purchase Business Combination (EITF 95-3), and
primarily include the potential closure of facilities, the abandonment or
redeployment of equipment, and employee terminations or relocations. As of May
31, 2005, estimated integration costs of $8 million had been recorded. Such
costs are recognized as current liabilities in the purchase price allocations in
the table above. However, management has not finalized all plans, and therefore,
the amounts related to potential future actions were not recorded as of May 31,
2005, as the company continues to evaluate integration plans for the
acquisitions.
The following table presents details of the acquired identifiable intangible
assets:
----------------------------------------------------------------------------------------------------------------------------
Weighted
Average Useful Life All Other Aggregate
(Dollars in millions) Life (Years) (Years) Seminis Emergent Acquisitions Acquisitions
----------------------------------------------------------------------------------------------------------------------------
Germplasm 30 20 - 30 $ 295 $ 16 $ 10 $ 321
Acquired Biotechnology Intellectual
Property 6 4 - 10 116 60 31 207
Trademarks 29 4 - 30 91 12 5 108
Customer Relationships 13 5 - 15 162 8 6 176
Other 4 3 - 5 -- -- 1 1
----------------------------------------------------------------------------------------------------------------------------
Other Intangible Assets $ 664 $ 96 $ 53 $ 813
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Charges of $266 million were recorded in research and development (R&D) expenses
in the nine months ended May 31, 2005, for the write-off of acquired in-process
R&D (IPR&D). Management believed that the technological feasibility of the IPR&D
was not established and that the research had no alternative future uses.
Accordingly, the amounts allocated to IPR&D were required to be expensed
immediately under generally accepted accounting principles.
The following unaudited pro forma financial information presents the combined
results of operations of the company and the company's significant acquisitions,
which include Seminis and Emergent, as if these acquisitions had occurred at the
beginning of the periods presented. The pro forma results are not necessarily
indicative of what actually would have occurred had the acquisitions been in
effect for the periods presented and should not be taken as representative of
Monsanto's future consolidated results of operations. Pro forma results were as
follows for the three months and nine months ended May 31, 2005, and May 31,
2004:
------------------------------------------------------------------------------------------------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
----------------------------------- -----------------------------
(Dollars in millions, except per share) 2005 2004 2005 2004
-------------------------------------------------------------------------------------- -----------------------------
Net Sales $ 2,123 $ 1,852 $ 5,401 $ 4,658
Net Income 303 254 623 266
-------------------------------------------------------------------------------------- -----------------------------
-------------------------------------------------------------------------------------- -----------------------------
Net Income per Basic Share $ 1.13 $ 0.96 $ 2.34 $ 1.01
Net Income per Diluted Share 1.11 0.94 2.29 0.99
-------------------------------------------------------------------------------------- -----------------------------
The pro forma information contains the actual combined operating results of
Monsanto, Seminis and Emergent, with the results prior to the acquisition date
adjusted to include the amortization of the acquired intangible assets presented
above. The pro forma results exclude the write-off of acquired IPR&D and the
increase in cost of goods sold due to the revaluation of inventory related to
the Seminis and Emergent acquisitions.
The historical financial information for Seminis includes charges of
approximately $1 million and $32 million in the three months and nine months
ended May 31, 2004, respectively, related to one-time legal and professional
fees and other costs directly attributable to a prior acquisition transaction.
The historical financial information for Seminis also includes nonrecurring
costs under the previous ownership structure of $3 million and $2 million for
the three months ended May 31, 2005 and 2004, respectively, and $8 million and
$9 million for the nine months ended May 31, 2005 and 2004, respectively. In
addition, interest costs related to Seminis debt have not been removed from the
historical Seminis results; however, as discussed above, Seminis debt of $495
million, with a weighted average interest rate of approximately 10%, was repaid
subsequent to the acquisition date, while interest expense on commercial paper
issued to fund repayments of the debt is at an interest rate of approximately
3%.
10
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
NOTE 4. RESTRUCTURING
-----------------------------------------------------------------------------------------------------------------------------------
Restructuring charges were recorded in the Statement of Consolidated Operations
as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
May 31, May 31,
--------------------------- ---------------------------
(Dollars in millions) 2005 2004 2005 2004
-------------------------------------------------------------------------------- ------------- ---------------------------
Cost of Goods Sold $ -- $ (2) $ -- $ (19)
Impairment of Goodwill -- -- -- (69)
Restructuring Charges -- Net(1, 2) -- (9) (8) (66)
---------------------------------------------------------------------------------------------- ---------------------------
Loss from Continuing Operations Before Income Taxes -- (11) (8) (154)
Income Tax Benefit(3) -- 4 21 28
---------------------------------------------------------------------------------------------- ---------------------------
Income (Loss) from Continuing Operations -- (7) 13 (126)
Income (Loss) from Operations of Discontinued Businesses(4) -- 25 -- (9)
Income Tax Benefit -- -- -- 10
---------------------------------------------------------------------------------------------- ---------------------------
Income on Discontinued Operations -- 25 -- 1
---------------------------------------------------------------------------------------------- ---------------------------
Net Income (Loss) $ -- $ 18 $ 13 $ (125)
---------------------------------------------------------------------------------------------- ---------------------------
---------------------------------------------------------------------------------------------- ---------------------------
(1) The $8 million of restructuring charges for the nine months ended May 31,
2005, was split by segment as follows: $7 million in the Seeds and Genomics
segment and $1 million in the Agricultural Productivity segment.
(2) The restructuring charges for the three months and nine months ended May
31, 2004, were offset by $4 million and $6 million, respectively, in
restructuring reversals related to the 2000 restructuring plan.
(3) The $21 million of income tax benefit for the nine months ended May 31,
2005, includes $20 million related to tax losses incurred on the sale of
the European wheat and barley business. See below for further discussion.
(4) The three months and nine months ended May 31, 2004, contain restructuring
charges related to discontinued businesses (see Note 18 -- 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. 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 the nine
months ended May 31, 2005, the company completed the restructuring actions under
this plan, and no further actions are planned in 2005.
Pre-tax restructuring charges of $8 million ($7 million aftertax) for the nine
months ended May 31, 2005, were comprised of $7 million related to the Seeds and
Genomics segment and $1 million related to the Agricultural Productivity
segment. The restructuring charges of $7 million recorded during second quarter
2005 included impairments incurred as a result of office closures and
anticipated asset sales in South Africa and the United States. The office
closure actions began in fiscal year 2004, and additional write-downs were
required in fiscal year 2005 based on revised estimates of losses on
dispositions of certain facilities in these countries.
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 included in the
table above. See Note 8 -- Income Taxes -- and Note 18 -- Discontinued
Operations -- for further discussion of the $86 million tax benefit recorded in
discontinued operations.
Third quarter fiscal year 2004 pre-tax restructuring activity was comprised of
income of $23 million related to the Seeds and Genomics segment (charges of $2
million in continuing operations and income of $25 million in discontinued
operations) and charges of $13 million related to the Agricultural Productivity
segment. This activity included charges of $13 million pretax related to work
force reductions and income of $23 million pretax related to an increase in the
11
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
value of the European wheat and barley business upon sale of the business and
the resulting increase in its assets that were previously written down in the
first quarter of 2004. In the first nine months of fiscal year 2004, pre-tax
charges of $100 million were comprised of $44 million related to the Seeds and
Genomics segment ($35 million in continuing operations and $9 million in
discontinued operations) and $56 million related to the Agricultural
Productivity segment. These charges included $59 million pretax related to work
force reductions, $39 million pretax in asset impairments (excluding the $69
million impairment of goodwill), and $2 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 May 31, 2005:
----------------------------------------------------------------------------------------------------------------------------
Work Force Facility Asset
(Dollars in millions) Reductions Closures Impairments Total
----------------------------------------------------------------------------------------------------------------------------
Continuing Operations:
Beginning liability as of Aug. 31, 2004 $ 44 $ 1 $ -- $ 45
Restructuring liability 1 -- 7 8
Cash payments (34) (1) -- (35)
Asset impairments -- -- (7) (7)
Reclassification of reserves to other balance
sheet accounts:
Long-term liability (5) -- -- (5)
----------------------------------------------------------------------------------------------------------------------------
Ending Liability as of May 31, 2005 $ 6 $ -- $ -- $ 6
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
NOTE 5. CUSTOMER FINANCING PROGRAMS
--------------------------------------------------------------------------------
In April 2002, Monsanto established a revolving financing program to provide
financing of up to $500 million for selected customers in the United States
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
(SFAS 140).
Monsanto has no ownership interest in the lender, in the QSPE, or in the loans.
However, because Monsanto substantively originates the loans through the SPE
(which it consolidates) and partially guarantees and services the loans,
Monsanto accounts for the program as if it were the originator of the loans and
the transferor selling the loans to the QSPE.
Monsanto records its guarantee liability at a value that approximates fair value
(except that it does not discount credit losses because of the short term of the
loans), primarily related to expected future credit losses. Monsanto does not
recognize any servicing asset or liability because the servicing fee is adequate
compensation for the servicing activities. Discounts on the sale of the customer
loans and servicing revenues collected and earned were not significant during
the nine months ended May 31, 2005, and May 31, 2004.
Proceeds from customer loans sold through the financing program totaled $169
million for the nine months ended May 31, 2005, and $124 million for the nine
months ended May 31, 2004. These proceeds are included in the net cash provided
by operations in the Statement of Consolidated Cash Flows. The loan balance
outstanding as of May 31, 2005, and Aug. 31, 2004, was $109 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
12
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
incur a liability to perform under the first-loss guarantee. As of May 31, 2005,
and Aug. 31, 2004, less than $1 million of loans sold through this financing
program were delinquent. As of May 31, 2005, 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.
In November 2004, Monsanto entered into an agreement with a lender to establish
a program to provide financing of up to $40 million for selected customers in
Brazil. The agreement was amended May 25, 2005, at which time the conditions
necessary to qualify for sales treatment under SFAS 140 were met. Accordingly,
the customer receivables and the related liabilities that had been recorded
since the program was established in November 2004 were removed from the
company's consolidated balance sheet in May 2005 as a noncash transaction.
Proceeds from the transfer of the receivables subsequent to the May 2005
amendment are included in net cash provided by operations in the Statement of
Consolidated Cash Flows. The total amount of customer receivables transferred
through the program and the amount of loans outstanding were $14 million as of
May 31, 2005. Monsanto provides a full guarantee of the loans in the event of
customer default. The liability for the guarantee is recorded at an amount that
approximates fair value and is based on the company's historical collection
experience with customers that participate in the program. The guarantee
liability recorded by Monsanto was less than $1 million as of May 31, 2005. If
performance is required under the guarantee, Monsanto may retain amounts that
are subsequently collected from customers.
NOTE 6. INVENTORIES
-----------------------------------------------------------------------------------------------------------------------------
Components of inventories were:
-----------------------------------------------------------------------------------------------------------------------------
As of May 31, As of Aug.31,
------------- --------------
(Dollars in millions) 2005 2004
----------------------------------------------------------------------------------------------------------- --------------
Finished Goods $ 964 $ 477
Goods In Process 505 436
Raw Materials and Supplies 236 266
----------------------------------------------------------------------------------------------------------- --------------
Inventories at FIFO Cost 1,705 1,179
Excess of FIFO over LIFO Cost (22) (25)
----------------------------------------------------------------------------------------------------------- -------------
Total $ 1,683 $ 1,154
----------------------------------------------------------------------------------------------------------- -------------
----------------------------------------------------------------------------------------------------------- -------------
The increase in finished goods inventory as of May 31, 2005, primarily resulted
from the acquisitions described in Note 3 -- Business Combinations.
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 2005 annual goodwill impairment test was performed as of March 1,
2005, and no indications of goodwill impairment existed as of that date.
13
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
Changes in the net carrying amount of goodwill for the nine months ended May 31,
2005, by segment, are as follows:
-----------------------------------------------------------------------------------------------------------------------------
Seeds and Agricultural
(Dollars in millions) Genomics Productivity Total
----------------------------------------------------------------------------------------------------------------------------
Balance as of Aug. 31, 2004 $ 659 $ 61 $ 720
Acquisition Activity (see Note 3) 510 -- 510
Effect of Foreign Currency Translation Adjustments 11 -- 11
----------------------------------------------------------------------------------------------------------------------------
Balance as of May 31, 2005 $ 1,180 $ 61 $ 1,241
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Information regarding the company's other intangible assets is as follows:
----------------------------------------------------------------------------------------------------------------------------
As of May 31, 2005 As of Aug. 31, 2004
----------------------------------------------- -----------------------------------------------
Carrying Accumulated Carrying Accumulated
(Dollars in millions) Amount Amortization Net Amount Amortization Net
------------------------------------------------------------------------- -----------------------------------------------
Germplasm $ 925 $ (468) $ 457 $ 590 $ (423) $ 167
Acquired Biotechnology
Intellectual Property 639 (264) 375 423 (218) 205
Trademarks 194 (32) 162 85 (26) 59
Customer Relationships 176 (2) 174 -- -- --
Other 37 (16) 21 42 (19) 23
------------------------------------------------------------------------- -----------------------------------------------
Total $ 1,971 $ (782) $ 1,189 $ 1,140 $ (686) $ 454
------------------------------------------------------------------------- -----------------------------------------------
------------------------------------------------------------------------- -----------------------------------------------
The increases in other intangible assets as of May 31, 2005, primarily resulted
from the acquisitions described in Note 3 -- Business Combinations.
Total amortization expense of other intangible assets was $38 million in third
quarter 2005 and $29 million in third quarter 2004 (exclusive of $1 million
amortization expense included in discontinued operations in third quarter 2004).
Total amortization expense of other intangible assets for the nine months ended
May 31, 2005, and May 31, 2004, was $93 million and $91 million, respectively
(exclusive of $3 million amortization expense for the nine months ended May 31,
2004, included in discontinued operations).
The estimated intangible asset amortization expense for each of the five
succeeding fiscal years is as follows:
----------------------------------------------------------
Year ending Aug. 31,
(Dollars in millions) Amount
----------------------------------------------------------
2006 $ 135
2007 125
2008 110
2009 90
2010 80
----------------------------------------------------------
NOTE 8. INCOME TAXES
--------------------------------------------------------------------------------
The sale of the European wheat and barley business in fiscal year 2004 generated
a tax loss that was 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 impairment loss 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, was written off during first quarter 2005.
14
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
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 fiscal year 2006. As of May 31, 2005, 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, as well as the company's recent acquisition activity, 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 the Treasury Department has issued all of its guidance, including
the expected passage of a Technical Corrections Bill by Congress. The range of
possible amounts that the company is currently considering eligible for
repatriation is between zero and $500 million. Since the Treasury Department has
not issued of all of its guidance on the AJCA, the company can only make a
good-faith estimate of the tax liability that would have to be recorded if these
extraordinary dividends are paid. Accordingly, the company expects, based on the
information presently available, that it may record a tax liability based on the
5.25% statutory rate in the AJCA. However, the actual cost to the company is
dependent on a number of factors that are currently being analyzed. Therefore,
as of May 31, 2005, the related potential range of income tax effects of such
repatriation cannot be reasonably estimated.
In June 2005, new tax legislation was enacted in Argentina and Belgium that
could affect the recoverability of deferred tax asset balances recorded as of
May 31, 2005. The company is currently evaluating the potential impact, if any,
of the new legislation. See Note 19 -- Subsequent Events -- for further
discussion.
NOTE 9. DEBT AND OTHER CREDIT ARRANGEMENTS
--------------------------------------------------------------------------------
Effective March 11, 2005, Monsanto finalized a 364-day $1.0 billion revolving
credit facility. This facility will be used for general corporate purposes,
which may include working capital, acquisitions, capital expenditures,
refinancing and commercial paper backstop (e.g., the revolving credit facility
could serve as a back-up to repay commercial paper borrowings upon maturity).
The company's existing five-year $1.0 billion revolving credit facility remains
in place. (Discussion of this facility can be found in Note 12 -- Debt and Other
Credit Arrangements -- of the notes to consolidated financial statements
contained in Monsanto's Report on Form 10-K for the fiscal year ended Aug. 31,
2004.) The terms and conditions of the new $1.0 billion revolving credit
facility are substantially similar to the existing $1.0 billion revolving credit
facility.
As discussed in Note 3 -- Business Combinations, commercial paper borrowings
were issued in March 2005 to fund a portion of the Seminis acquisition, and in
April 2005 to fund the tender offer for Seminis debt and the Emergent
acquisition. The commercial paper borrowings have maturities of less than 90
days and are therefore classified as short-term debt. As of May 31, 2005,
commercial paper borrowings of approximately $1.3 billion remained outstanding.
In May 2002, the company filed a shelf registration with the SEC for the
issuance of up to $2.0 billion of registered debt. In May 2005, the existing
2002 shelf registration was amended by filing a new shelf registration with the
SEC that allows the company to issue up to $2.0 billion of debt, equity and
hybrid offerings in the future (including debt securities of $950 million
remaining available under the May 2002 shelf registration statement). As of the
date of this Report on Form 10-Q, no securities had been issued under this 2005
shelf registration.
NOTE 10. 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
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.
15
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
The company hedges a portion of its net investment in Brazilian subsidiaries and
reported an after-tax loss of $13 million in the third quarter of fiscal year
2005 and an after-tax gain of $1 million in the third quarter of fiscal year
2004. The company recorded after-tax losses of $21 million and $5 million in the
nine months ended May 31, 2005, and May 31, 2004, respectively. These losses are
included in accumulated other comprehensive loss.
As discussed in Note 9, the company filed a shelf registration with the SEC that
allows the company to issue debt, equity and hybrid offerings of up to $2.0
billion in the future. Also in May 2005, the company entered into treasury rate
lock agreements with several banks to hedge against changes in long-term
interest rates in anticipation of a long-term debt issue. Monsanto has
designated these rate lock agreements as a cash-flow hedges. Since the hedges
are deemed effective, the changes in fair value are recognized in other
comprehensive income (loss) until the hedged interest costs are recognized in
earnings. As of May 31, 2005, the market value of these agreements was an $11
million loss to Monsanto.
NOTE 11. 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 May 31, Nine Months Ended May 31,
--------------------------- ---------------------------
(Dollars in millions) 2005 2004 2005 2004
---------------------------------------------------------------------------------------------- ---------------------------
Service Cost for Benefits Earned During the Period $ 8 $ 9 $ 25 $ 26
Interest Cost on Benefit Obligation 24 28 70 81
Assumed Return on Plan Assets (27) (32) (80) (92)
Amortization of Unrecognized Net Loss 9 8 27 23
---------------------------------------------------------------------------------------------- ---------------------------
Total Net Periodic Benefit Cost $ 14 $ 13 $ 42 $ 38
---------------------------------------------------------------------------------------------- ---------------------------
---------------------------------------------------------------------------------------------- ---------------------------
-----------------------------------------------------------------------------------------------------------------------------
Health Care and Other Postretirement Benefits Three Months Ended May 31, Nine Months Ended May 31,
--------------------------- ---------------------------
(Dollars in millions) 2005 2004 2005 2004
---------------------------------------------------------------------------------------------- ---------------------------
Service Cost for Benefits Earned During the Period $ 3 $ 2 $ 9 $ 5
Interest Cost on Benefit Obligation 5 7 15 19
Amortization of Unrecognized Net Loss 1 1 3 3
---------------------------------------------------------------------------------------------- ---------------------------
Total Net Periodic Benefit Cost $ 9 $ 10 $ 27 $ 27
---------------------------------------------------------------------------------------------- ---------------------------
---------------------------------------------------------------------------------------------- ---------------------------
Monsanto contributed $60 million to its pension plan in the nine months ended
May 31, 2005. Monsanto did not make any contribution to its pension plan in the
third quarter of fiscal year 2005, and as of May 31, 2005, 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.
Monsanto did not make any contributions to its pension plan in the three months
ended May 31, 2004, but made $150 million in contributions for the nine months
ended May 31, 2004. Seminis employees are currently covered under a separate
pension plan. The table above includes the costs related to the Seminis plan for
the three months and nine months ended May 31, 2005, since the date of
acquisition. Seminis contributed less than $1 million to its plan in third
quarter 2005 and plans to contribute approximately $1 million to its plan in
fourth quarter fiscal year 2005.
16
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
NOTE 12. 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 see 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
Stock-Based Compensation -- Transition and Disclosure, which amends SFAS 123,
Accounting for Stock-Based Compensation, Monsanto's net income and net income
per share would have been adjusted to the pro forma amounts indicated as
follows:
-----------------------------------------------------------------------------------------------------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
--------------------------- ---------------------------
(Dollars in millions, except per share amounts) 2005 2004 2005 2004
---------------------------------------------------------------------------------------------- ---------------------------
Net Income:
As reported $ 47 $ 252 $ 380 $ 309
Less: Total stock-based employee compensation expense
determined under fair-value-based method for all awards,
net of tax (5) (3) (16) (9)
---------------------------------------------------------------------------------------------- ---------------------------
Pro forma $ 42 $ 249 $ 364 $ 300
---------------------------------------------------------------------------------------------- ---------------------------
---------------------------------------------------------------------------------------------- ---------------------------
Basic Income per Share:
As reported $ 0.18 $ 0.95 $ 1.43 $ 1.17
Pro forma $ 0.16 $ 0.94 $ 1.37 $ 1.14
Diluted Income per Share:
As reported $ 0.17 $ 0.93 $ 1.40 $ 1.15
Pro forma $ 0.15 $ 0.92 $ 1.34 $ 1.12
---------------------------------------------------------------------------------------------- ---------------------------
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. For stock option awards granted to retirement eligible
employees and to employees that become eligible for retirement subsequent to the
grant date, Monsanto follows the guidance of APB 25 and SFAS 123, which allows
compensation costs to be recognized over the vesting period of the award. SFAS
123R requires compensation costs to be recognized over the requisite service
period. For plans where the employee becomes vested upon eligibility to retire,
the requisite service period may be shorter than the vesting period for the
award. As a result, compensation costs are recognized over the period from the
date of the grant through when the employee becomes eligible to retire instead
of over the vesting period of the award. Monsanto will follow this guidance for
awards granted subsequent to the adoption of SFAS 123R. For awards granted prior
to the date of adoption, Monsanto will recognize compensation costs over the
vesting period with accelerated recognition of the unvested portion upon actual
retirement as allowed under SFAS 123R.
NOTE 13. COMPREHENSIVE INCOME (LOSS)
--------------------------------------------------------------------------------
Comprehensive income (loss) includes all nonshareowner changes in equity and
consists of net income (loss), foreign currency translation adjustments,
unrealized gains and losses on available-for-sale securities, additional minimum
pension liability adjustments, and accumulated derivative gains or losses on
cash flow hedges not yet realized. Information regarding comprehensive income is
as follows:
-----------------------------------------------------------------------------------------------------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
-------------------------- ---------------------------
(Dollars in millions) 2005 2004 2005 2004
---------------------------------------------------------------------------------------------- ---------------------------
Comprehensive Income $ 51 $ 173 $ 614 $ 350
---------------------------------------------------------------------------------------------- ---------------------------
17
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
The components of accumulated other comprehensive loss are as follows:
----------------------------------------------------------------------------------------------------------------------------
As of May 31, As of Aug. 31,
------------ ------------
(Dollars in millions) 2005 2004
----------------------------------------------------------------------------------------------------------- ------------
Accumulated Foreign Currency Translations $ (589) $ (824)
Net Unrealized Gains on Investments, Net of Taxes 10 9
Net Accumulated Derivative Loss, Net of Taxes (20) (18)
Minimum Pension Liability, Net of Taxes (299) (299)
----------------------------------------------------------------------------------------------------------- ------------
Accumulated Other Comprehensive Loss $ (898) $ (1,132)
----------------------------------------------------------------------------------------------------------- ------------
----------------------------------------------------------------------------------------------------------- ------------
NOTE 14. EARNINGS (LOSS) PER SHARE
--------------------------------------------------------------------------------
Basic earnings (loss) per share (EPS) was computed using the weighted-average
number of common shares outstanding during the period shown in the table below.
Diluted EPS was computed taking into account the effect of dilutive potential
common shares, as shown in the table below. Potential common shares consist of
stock options using the treasury stock method and are excluded if their effect
is antidilutive. Dilutive potential common shares noted below exclude stock
options of less than 0.1 million and 0.4 million for the three months ended May
31, 2005, and May 31, 2004, respectively, and less than 0.1 million and 2.6
million for the nine months ended May 31, 2005, and May 31, 2004, respectively.
These potential common shares were excluded because the options' exercise prices
were greater than the average market price of the common shares and, therefore,
the effect would be antidilutive.
-----------------------------------------------------------------------------------------------------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
--------------------------- ---------------------------
(Shares in millions) 2005 2004 2005 2004
---------------------------------------------------------------------------------------------- ---------------------------
Weighted-Average Number of Common Shares 268.0 265.8 266.4 264.0
Dilutive Potential Common Shares 5.8 4.9 5.9 4.7
---------------------------------------------------------------------------------------------- ---------------------------
NOTE 15. 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:
----------------------------------------------------------------------------------------------------------------------------
Nine Months Ended May 31,
--------------------------
(Dollars in millions) 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Interest $ 63 $ 65
Taxes 50 56
----------------------------------------------------------------------------------------------------------------------------
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 May 31, 2005, the company had purchased 11 million
shares for $415 million, including transaction costs of less than $1 million.
In third quarter 2005, the company recognized noncash transactions related to
acquisitions and a customer financing program. See Note 3 -- Business
Combinations -- for details of liabilities assumed in acquisitions and Note 5 --
Customer Financing Programs -- for further discussion of the new program in
Brazil and the related noncash transaction.
NOTE 16. 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, and Report on Form 10-Q for the quarterly
period ended Nov. 30, 2004 (portions of both have been recast in our Current
18
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
Report on Form 8-K filed on May 24, 2005), and in our Report on Form 10-Q for
the quarterly period ended Feb. 28, 2005.
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 related to Solutia's bankruptcy:
o The stay of all litigation agreed to by Solutia, the Official Committee of
Unsecured Creditors, the Official Committee of Retirees, Monsanto and
Pharmacia 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 The proof of claim filed by Monsanto on Nov. 29, 2004, remains effective.
Solutia, the Creditors' Committee, Monsanto and Pharmacia have agreed that
Monsanto and Pharmacia may amend their initial proofs of claim and file
additional claims through Aug. 1, 2005.
o On May 24, 2005, Monsanto and Pharmacia filed a motion to dismiss the
Complaint and Objection to Claim filed on March 7, 2005, against Monsanto
and Pharmacia by the Official Committee of Equity Security Holders. This
Committee objected to the claims filed by Monsanto and Pharmacia against
Solutia. The motion to dismiss is set for hearing on July 19, 2005.
o In March 2005, the U.S. Court of Appeals for the Eleventh Circuit denied
Solutia's request for a provisional appeal of the District Court's order
and denial of Solutia's request for reconsideration of the District Court's
earlier order that the automatic stay provisions of the Bankruptcy Code do
not apply to Solutia's obligations under the Partial Consent Decree related
to certain environmental activities in Anniston, Alabama. Since Feb. 27,
2004, Solutia has sought a declaration that the bankruptcy automatic stay
precluded the U.S. Environmental Protection Agency (EPA) from taking
efforts to enforce the Partial Consent Decree against Solutia.
o On June 7, 2005, Monsanto announced that it had reached an agreement in
principle with Solutia and the Official Committee of Unsecured Creditors
for a proposal for Solutia's reorganization. In order for such proposal to
become effective and binding on Monsanto, Solutia must submit a plan of
reorganization to the Bankruptcy Court, which must be approved by various
parties, including Monsanto's Board of Directors, and ultimately confirmed
by the Bankruptcy Court. No adjustments to the Solutia-related charge
discussed below are required at this time as a result of this agreement in
principle. Key elements of the agreement in principle include Monsanto's:
(i) commitment to provide backstop funding for a $250 million equity
infusion to support medical, disability and life insurance benefit
liabilities for retirees who worked for Pharmacia and were assigned to
Solutia at the time of its spinoff and certain environmental and other
liabilities; (ii) receipt of approximately 50 percent of the common stock
of newly reorganized Solutia in exchange for (a) certain funds spent or
committed by Monsanto, and (b) any contribution Monsanto makes with respect
to the equity infusion described above, provided that the actual percent of
stock received could be less depending on the determination of the
Bankruptcy Court and the amount of common stock issued to any other parties
in exchange for their participation in the $250 million equity infusion;
and (iii) retention of oversight with respect to resolution of tort
litigation claims and continued management of designated environmental
remediation programs that Monsanto is currently managing. See below for
further detail about the tort litigation and environmental remediation
matters Monsanto is currently managing.
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 and on an interim
basis, Monsanto has assumed the management and defense of certain third-party
tort litigation and funded some of Solutia's environmental obligations. In the
19
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
process of managing such litigation and environmental liabilities, and through
Monsanto's involvement in the bankruptcy process, Monsanto determined that it
was probable that Monsanto would incur some expenses related to third-party tort
litigation and environmental liabilities and that the amount of certain of these
expenses could be reasonably estimated. In December 2004, Monsanto determined
that it was 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 (the
"Solutia-related charge" or the "charge") was recorded in Monsanto's first
quarter fiscal 2005 results. As of May 31, 2005, $251 million was recorded in
the Condensed Statement of Consolidated Financial Position ($48 million in
current liabilities and $203 million in other liabilities).
A portion of the $284 million charge was discounted, using a risk-free discount
rate of 3.5 percent. The remaining portion of the charge was not subject to
discounting because of uncertainties in the timing of cash outlay or was paid
during first quarter fiscal year 2005. In third quarter 2005, interest expense
of $2 million was recognized for the accretion of the discounted amount. The
following table provides a detailed summary of the discounted and undiscounted
amounts included in the charge.
----------------------------------------------------------------------------
(Dollars in millions)
----------------------------------------------------------------------------
Undiscounted Portion:
---------------------
Amount accrued in first quarter fiscal year 2005 $ 86
Amount accrued and paid during first quarter fiscal year
2005 21
----------------------------------------------------------------------------
Aggregate Undiscounted Amount 107
----------------------------------------------------------------------------
Discounted Portion:
-------------------
Expected payment (undiscounted) for:
2005 29
2006 26
2007 18
2008 7
2009 5
Undiscounted aggregate expected payments after 2009 137
----------------------------------------------------------------------------
Aggregate Amount to be Discounted as of Nov. 30, 2004 222
Discount, as of Nov. 30, 2004 (45)
----------------------------------------------------------------------------
Aggregate Discounted Amount Accrued in First Quarter Fiscal
Year 2005 177
----------------------------------------------------------------------------
Total Charge Recognized in First Quarter Fiscal Year 2005 $ 284
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Monsanto believes that the Solutia-related charge represents the discounted cost
that Monsanto would expect to incur in connection with these litigation and
environmental matters. Monsanto expects to pay for these potential liabilities
over time as the various legal proceedings are resolved and remediation is
performed at the various environmental sites. Actual costs to Monsanto may
differ materially from this estimate. Further, additional litigation or
environmental matters that are not reflected in the charge may arise in the
future, and Monsanto may also manage, 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.
The charge may not reflect all potential liabilities that Monsanto may incur in
connection with Solutia's bankruptcy and does not reflect any insurance
reimbursements or any recoveries Monsanto might receive through the bankruptcy
process. In addition to the Solutia-related charge, Monsanto has incurred legal
and other costs related to the Chapter 11 proceeding and its Solutia-related
indemnification obligations to Pharmacia. These costs are expensed as incurred,
because the potential future costs to Monsanto to protect its interests cannot
be reasonably estimated. The legal and other costs, together with the
Solutia-related charge recorded in first quarter 2005, are reflected in the
Statement of Consolidated Operations as Solutia-related expenses.
The degree to which Monsanto may ultimately be responsible for the particular
matters reflected in the charge or other of Solutia's Assumed Liabilities or
Solutia-related expenses is uncertain, although as described above, Monsanto
announced on June 7, 2005, that it had reached an agreement in principle with
Solutia and the Official Committee of Unsecured Creditors for a proposal for
Solutia's reorganization. Solutia has not filed a plan of reorganization, and
thus any projection of the outcome of Monsanto's claims remains uncertain, but
it is possible that Monsanto could receive equity in any reorganized Solutia in
satisfaction or partial satisfaction of Monsanto's claims. However, discussions
between and among the various parties involved in the Solutia bankruptcy are
continuing, and any formal reorganization plan must ultimately be affirmed by
several constituencies and the Bankruptcy Court.
20
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
Miscellaneous receivables of $74 million were recorded as of May 31, 2005 ($27
million was recorded in miscellaneous receivables and $47 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 Litigation Obligations: Included in the Solutia-related charge are
amounts related to certain of Solutia's third-party tort litigation, including
lawsuits involving PCBs and other chemical and premises liability litigation.
The following discussion provides new and updated information regarding the
significant third-party tort proceedings reflected in the Solutia-related
charge. Other information with respect to such proceedings appears in Monsanto's
Report on Form 10-K for the fiscal year ended Aug. 31, 2004, and Reports on Form
10-Q for the quarterly periods ended Nov. 30, 2004, and Feb. 28, 2005.
Sixteen cases were filed by approximately 1,654 plaintiffs who 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, 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 or Copiah County in Mississippi and thereafter were transferred to the
U.S. District Court for the Southern District of Mississippi. On May 3, 2005, an
agreement resolving the claims of 1,388 plaintiffs was reached with their
counsel, subject to obtaining releases from the plaintiffs. On May 12, 2005,
cases covering 240 plaintiffs were resolved and their claims were dismissed with
prejudice. On June 10, 2005, an agreement resolving the claims of all but three
of the remaining plaintiffs was reached, subject to obtaining releases from the
plaintiffs.
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. The total amount of the judgment plus
post-judgment interest as of June 30, 2005, is approximately $75 million. In
2002, in connection with this case, Monsanto posted a $71 million appeal bond on
Solutia's behalf pursuant to its indemnification obligation to Pharmacia under
the Separation Agreement and an agreement with Pharmacia and Solutia. Solutia
provided a $20 million bank letter of credit to secure a portion of Monsanto's
obligations in connection with the appeal bond.
Solutia Environmental Obligations: Included in the Solutia-related charge are
amounts related to certain of Solutia's environmental liabilities, particularly
expenses for environmental remediation of sites Solutia never owned or operated
and sites beyond the property lines of Solutia's current or former operations.
The following discussion provides new and updated information regarding the
significant environmental matters reflected in the Solutia-related charge. Other
information with respect to such proceedings appears in Monsanto's Report on
Form 10-K for the fiscal year ended Aug. 31, 2004, and Reports on Form 10-Q for
the quarterly periods ended Nov. 30, 2004, and Feb. 28, 2005.
On Aug. 4, 2003, the U.S. District Court for the Northern District of Alabama
approved a Revised Partial Consent Decree (RPCD), pursuant to which Pharmacia
and Solutia are obligated to perform PCB residential cleanup work and a remedial
investigation/feasibility study of PCB contamination in Anniston, among other
things. Based on Solutia's failure to perform, 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 Anniston, Alabama,
and Sauget, Illinois, sites under the RPCD and other orders where both Solutia
and Pharmacia are named parties. As a part of this arrangement, Monsanto has
agreed with the EPA to perform certain remediation in Anniston and Sauget until
Monsanto invokes a 60-day notice of termination provision, which Monsanto has
not invoked. As discussed below in Part II -- Item 1 -- Legal Proceedings,
Solutia and Pharmacia are seeking contribution for the Anniston cleanup costs
from other manufacturers in the area. However, the EPA is pursuing an agreement
with certain of those manufacturers and offering them protection from the
contribution litigation. On June 30, 2005, the District Court ruled that the EPA
had renounced the RPCD by pursuing the separate agreement and ordered that, upon
motion by Pharmacia and Solutia, it would suspend Pharmacia's and Solutia's
21
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
obligations under the RPCD. As of the date of this Report on Form 10-Q, the
impact of the District Court's ruling on the RPCD work that Monsanto is
performing on Pharmacia's behalf is unclear.
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. Information with
respect to such litigation appears in Part II -- Item 1 -- Legal Proceedings of
this Report on Form 10-Q and in Monsanto's Report on Form 10-K for the fiscal
year ended Aug. 31, 2004, and Reports on Form 10-Q for the quarterly periods
ended Nov. 30, 2004, and Feb. 28, 2005.
Guarantees: As disclosed in Monsanto's Report on Form 10-K for the fiscal year
ended Aug. 31, 2004, Monsanto provides guarantees to certain banks that provide
loans to Monsanto customers in Brazil. Due to the seasonal nature of Monsanto's
business, the level of customer loans with these banks and the related Monsanto
guarantees has increased since Aug. 31, 2004. As a result, the maximum potential
amount of future payments under these guarantees is approximately $55 million as
of May 31, 2005. Based on the company's current assessment of credit exposure,
Monsanto has recorded a liability of less than $1 million related to these
guarantees. Monsanto's recourse under these guarantees is limited to the
customer, and it is not currently estimable.
Also disclosed in Monsanto's Report on Form 10-K for the fiscal year ended Aug.
31, 2004, Monsanto may provide and has provided guarantees on behalf of its
consolidated subsidiaries for obligations incurred in the normal course of
business. In third quarter 2005, a wholly-owned finance subsidiary was
established in Canada. The new subsidiary may issue debt securities, which would
be fully and unconditionally guaranteed by Monsanto. Because the guarantee is
for obligations of a consolidated subsidiary, Monsanto's consolidated financial
position is not affected by the issuance of this guarantee. As of May 31, 2005,
no debt of the Canadian subsidiary was outstanding.
Except as described above, 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 Programs -- 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.
22
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
NOTE 17. 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 crop protection products (ROUNDUP
and other glyphosate-based herbicides and selective chemistries), animal
agriculture businesses and lawn-and-garden herbicide products. Sales between
segments were not significant. Segment data is presented in the table that
follows.
-----------------------------------------------------------------------------------------------------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
--------------------------- ---------------------------
(Dollars in millions) 2005 2004 2005 2004
---------------------------------------------------------------------------------------------- ---------------------------
Net Sales(1)
Corn seed and traits $ 431 $ 298 $ 1,305 $ 975
Soybean seed and traits 204 166 827 655
Vegetable and fruit seed 87 -- 87 --
All other crops seeds and traits 336 233 489 334
---------------------------------------------------------------------------------------------- ---------------------------
Total Seeds and Genomics $ 1,058 $ 697 $ 2,708 $ 1,964
---------------------------------------------------------------------------------------------- ---------------------------
ROUNDUP and other glyphosate-based herbicides $ 628 $ 600 $ 1,547 $ 1,407
All other agricultural productivity products 356 380 772 827
---------------------------------------------------------------------------------------------- ---------------------------
Total Agricultural Productivity $ 984 $ 980 $ 2,319 $ 2,234
---------------------------------------------------------------------------------------------- ---------------------------
Total $ 2,042 $ 1,677 $ 5,027 $ 4,198
---------------------------------------------------------------------------------------------- ---------------------------
---------------------------------------------------------------------------------------------- ---------------------------
EBIT(2)
Seeds and Genomics $ 4 $ 183 $ 511 $ 332
Agricultural Productivity 193 163 18 177
---------------------------------------------------------------------------------------------- ---------------------------
Total $ 197 $ 346 $ 529 $ 509
---------------------------------------------------------------------------------------------- ---------------------------
---------------------------------------------------------------------------------------------- ---------------------------
Depreciation and Amortization Expense
Seeds and Genomics(3) $ 81 $ 64 $ 209 $ 198
Agricultural Productivity 46 48 139 142
---------------------------------------------------------------------------------------------- ---------------------------
Total $ 127 $ 112 $ 348 $ 340
---------------------------------------------------------------------------------------------- ---------------------------
---------------------------------------------------------------------------------------------- ---------------------------
(1) Represents net sales from continuing operations.
(2) EBIT is defined as earnings before interest and taxes; see the following
table for reconciliation. Earnings is intended to mean net income as
presented in the Statement of Consolidated Operations under generally
accepted accounting principles.
(3) Does not include the $69 million impairment of goodwill in the nine months
ended May 31, 2004.
A reconciliation of EBIT to net income for each period follows:
-----------------------------------------------------------------------------------------------------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
--------------------------- ---------------------------
(Dollars in millions) 2005 2004 2005 2004
---------------------------------------------------------------------------------------------- ---------------------------
EBIT $ 197 $ 346 $ 529 $ 509
Interest Expense -- Net 24 21 59 53
Income Tax Provision(1) 126 73 90 147
---------------------------------------------------------------------------------------------- ---------------------------
Net Income $ 47 $ 252 $ 380 $ 309
---------------------------------------------------------------------------------------------- ---------------------------
---------------------------------------------------------------------------------------------- ---------------------------
(1) Includes the income tax provision from continuing operations and the income
tax benefit from discontinued operations.
NOTE 18. DISCONTINUED OPERATIONS
--------------------------------------------------------------------------------
In second quarter 2005, the company committed to a plan to sell its
environmental technologies businesses that met the "held for sale" criteria
under SFAS 144. The environmental technologies businesses provide engineering,
procurement and construction management services, and sell proprietary equipment
and process technologies. The company determined that these businesses were no
longer consistent with its strategic business goals. In April 2005, the company
announced that it signed a non-binding letter of intent to sell the
environmental technologies businesses to the management of the businesses in a
management buyout. The parties are negotiating a definitive agreement for the
transaction, which is targeted to close by the end of fiscal year 2005.
23
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
As discussed in Note 4 -- Restructuring, in first quarter 2004, 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 of these plans and the plan to sell the environmental technologies
businesses, certain financial data for these businesses has been presented as
discontinued operations in accordance with SFAS 144. Accordingly, for the three
months and nine months ended May 31, 2005, and May 31, 2004, the Statement of
Consolidated Operations has been conformed to this presentation. Also, as of May
31, 2005, the Condensed Statement of Consolidated Financial Position has been
conformed to this presentation. The European wheat and barley business and the
plant-made pharmaceuticals program were previously reported as part of the Seeds
and Genomics segment, and the environmental technologies businesses were
previously reported as part of the Agricultural Productivity segment.
The company evaluated the carrying amount of the environmental technologies
businesses net assets as of May 31, 2005, in accordance with SFAS 144, and
determined that the net assets were not impaired primarily based on discussions
with third parties concerning strategic alternatives for the businesses. This
assessment is subject to change based on future developments related to selling
the businesses. The assets and liabilities of the environmental technologies
businesses are shown in the table below. As of May 31, 2005, there were no
remaining assets and liabilities of the European wheat and barley and plant-made
pharmaceuticals businesses.
--------------------------------------------------------------------------------
As of May 31,
(Dollars in millions) 2005
--------------------------------------------------------------------------------
Assets of Discontinued Businesses Held for Sale:
Accounts receivable $ 19
Miscellaneous receivables 27
Inventories 13
Property, plant and equipment - net 2
Other 11
--------------------------------------------------------------------------------
Total Assets of Discontinued Businesses Held for Sale $ 72
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Liabilities of Discontinued Businesses Held for Sale:
Current liabilities $ 39
Long-term liabilities 1
--------------------------------------------------------------------------------
Total Liabilities of Discontinued Businesses Held for Sale $ 40
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The following amounts related to the environmental technologies businesses,
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 May 31, Nine Months Ended May 31,
--------------------------- ---------------------------
(Dollars in millions) 2005 2004 2005 2004
-------------------------------------------------------------------------------- ------------- ------------- -------------
Net Sales $ 44 $ 36 $ 121 $ 99
Income (Loss) from Operations of Discontinued Businesses 4 26 6 (2)
Income Tax Benefit (2) -- (88) (8)
---------------------------------------------------------------------------------------------- ---------------------------
Income on Discontinued Operations $ 6 $ 26 $ 94 $ 6
---------------------------------------------------------------------------------------------- ---------------------------
---------------------------------------------------------------------------------------------- ---------------------------
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 that was recognized as a tax benefit in
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 impairment loss 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 for discussion
of the $20 million tax benefit recorded in continuing operations and Note 8 --
Income Taxes -- for further discussion of the tax benefit.
24
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
--------------------------------------------------------------------------------
NOTE 19. SUBSEQUENT EVENTS
--------------------------------------------------------------------------------
In June 2005, new legislation was enacted in Argentina and Belgium that could
affect the recoverability of deferred tax asset balances recorded on Monsanto's
consolidated financial statements as of May 31, 2005. On June 1, 2005, the
Argentine regulation for a minimum capitalization requirement, which was in
effect as of Dec. 10, 2004, was extended by decree for an additional year. The
company had assumed a capitalization would be required in 2005 but is now
re-evaluating its capitalization strategy. On June 30, 2005, legislation was
enacted in Belgium allowing a notional interest deduction for Belgian
tax-resident companies. This tax legislation will provide the company's Belgian
subsidiary with an interest deduction beginning with the fiscal 2007 tax year
and could impact the recoverability of $48 million of deferred tax asset
balances as of May 31, 2005, related to the Belgian subsidiary. The company is
currently evaluating the potential related financial impact, if any, of the new
legislation.
On June 7, 2005, Monsanto announced that it had reached an agreement in
principle with Solutia and the Official Committee of Unsecured Creditors
appointed in Solutia's bankruptcy case for a proposal for Solutia's
reorganization. See Note 16 -- Commitments and Contingencies -- for further
discussion of this agreement.
25
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
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, ASGROW, SEMINIS
VEGETABLE SEEDS and STONEVILLE, 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.
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 our crop protection products (ROUNDUP and other
glyphosate-based herbicides and selective chemistries), animal agriculture
businesses and lawn-and-garden herbicide products.
In second quarter 2005, we committed to a plan to sell the 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 these exit plans, financial
data for these businesses has been presented as discontinued operations as
outlined below. See Note 18 -- Discontinued Operations -- for further details.
The financial statements have been recast and prepared in compliance with the
provisions of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Accordingly, for the three months and nine months ended May 31, 2005,
and May 31, 2004, the Statement of Consolidated Operations has been conformed to
this presentation. Also, as of May 31, 2005, the Condensed Statement of
Consolidated Financial Position has been conformed to this presentation. The
European wheat and barley business and the plant-made pharmaceuticals program
were previously reported as part of the Seeds and Genomics segment, and the
environmental technologies businesses were previously reported as part of the
Agricultural Productivity segment.
Certain prior-period amounts have been reclassified to conform with the
current-year presentation. These reclassifications include a net sales and cost
of goods sold reclassification related to outward freight costs. We typically
pay the freight costs for transporting finished products to customers and have
historically recorded these costs as a reduction of net sales. Following the
guidance of Emerging Issues Task Force Issue 00-10, Accounting for Shipping and
Handling Fees and Costs, we have reclassified outward freight on sales,
resulting in an increase in previously reported net sales with a corresponding
increase in cost of goods sold.
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 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, and Monsanto's Report on Form 10-Q for the quarterly
period ended Nov. 30, 2004 (portions of both have been recast in our Current
Report on Form 8-K filed on May 24, 2005), and Monsanto's Report on Form 10-Q
for the quarterly period ended Feb. 28, 2005. Financial information for the
first nine months of fiscal year 2005 should not be annualized because of the
seasonality of our business.
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. 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 MD&A, all dollar amounts are expressed in
millions, except per share amounts. Unless otherwise noted, all amounts and
analyses are based on continuing operations. Unless otherwise indicated,
references to "ROUNDUP and other glyphosate-based herbicides" exclude all
lawn-and-garden herbicides. Unless otherwise indicated, references to "ROUNDUP
herbicides" mean ROUNDUP branded herbicides excluding all lawn-and-garden
herbicides. The notes to the consolidated financial statements that are
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MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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referenced throughout MD&A are included in Part I -- Item 1 -- Financial
Statements -- of this Report on Form 10-Q.
Non-GAAP Financial Measures
The information presented in MD&A includes financial information prepared in
accordance with U.S. generally accepted accounting principles (GAAP), as well as
two other financial measures, EBIT and free cash flow, that are considered
"non-GAAP financial measures." Generally, a non-GAAP financial measure is a
numerical measure of a company's performance, financial position or cash flows
that either excludes or includes amounts that are not normally excluded or
included in the most directly comparable measure calculated and presented in
accordance with GAAP. 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 U.S. GAAP.
EBIT is defined as earnings before interest and taxes. Earnings is intended to
mean net income as presented in the Statement of Consolidated Operations under
GAAP. EBIT is the primary operating performance measure for our two business
segments. We believe that EBIT is useful to investors and management to
demonstrate the operational profitability of our segments by excluding interest
and taxes, which are generally accounted for across the entire company on a
consolidated basis. EBIT is also one of the measures used by Monsanto management
in determining resource allocations within the company. See Note 17 -- Segment
Information -- for a reconciliation of EBIT to net income for the three months
and nine months ended May 31, 2005, and May 31, 2004.
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. See the "Financial Condition, Liquidity, and
Capital Resources -- Cash Flow" section of MD&A for a reconciliation of free
cash flow to net cash provided by operations and net cash provided (required) by
investing activities on the Statement of Consolidated Cash Flows.
Executive Summary
Consolidated Operating Results -- Significant financial items related to third
quarter 2005 and the nine months ended May 31, 2005, versus the comparable
prior-year periods include:
o The primary driver of the net sales increase of $365 million in the
three-month comparison was the fiscal year 2005 acquisitions of
Advanta, Channel Bio, NC+ Hybrids, Seminis and Emergent. Net sales
increased $829 million in the nine-month comparison as a result of
higher trait revenues in the United States, the fiscal year 2005
acquisitions, corn seed sales in the United States and the
Europe-Africa region, and cotton trait revenues in Australia and
India.
o We wrote off acquired in-process research and development (IPR&D)
related to the acquisitions of $254 million and $266 million in the
three months and nine months ended May 31, 2005, respectively. The
majority of the write-off was related to the Seminis acquisition.
o In the first nine months of 2004, we recorded a $69 million, or $0.26
per share, goodwill impairment related to our global wheat business.
o After-tax restructuring charges in continuing operations for the nine
months ended May 31, 2005, were $7 million, or $0.03 per share,
compared with $57 million, or $0.21 per share, in the same period a
year ago. There were no restructuring charges recorded in third
quarter 2005 compared with after-tax charges in continuing operations
of $7 million, or $0.03 per share, in the prior-year quarter.
o We recorded a pretax charge of $284 million ($181 million aftertax),
or $0.66 per share, associated with certain liabilities in connection
with the Solutia bankruptcy in first quarter 2005 (see Note 16 --
Commitments and Contingencies).
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o In first quarter 2005, we recorded a deferred tax benefit of $106
million, or $0.39 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.
o Net income in third quarter 2005 was $0.17 per share compared with
$0.93 per share in the prior-year third quarter. Net income in the
nine months ended May 31, 2005, was $1.40 per share compared with
$1.15 per share in the prior-year comparable period.
Financial Condition, Liquidity, and Capital Resources -- For the first nine
months of 2005, net cash provided by operations was $533 million compared with
$112 million in the comparable prior-year period. Net cash required by investing
activities was $1.4 billion in 2005, and net cash provided by investing
activities was $60 million in 2004. As a result, our free cash flow as defined
in the "Overview -- Non-GAAP Financial Measures" section of MD&A was a negative
$838 million in the first nine months of 2005 compared with a positive $172
million in the same period a year ago. 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 businesses of Advanta Seeds (Advanta)
from Advanta B.V. These acquisitions required a cash outlay of $173 million. In
third quarter 2005, we completed three acquisitions: Seminis Inc. (Seminis), the
Emergent Genetics cotton business (Emergent) and NC+ Hybrids Inc. (NC+ Hybrids,
acquired by ASI). These acquisitions required a cash outlay of $1.3 billion.
Seminis, the largest of the three, is the global leader in the vegetable and
fruit seed industry. In the first nine months of 2004, we contributed $400
million toward the PCB litigation settlement.
Total debt outstanding increased $966 million between Aug. 31, 2004, and May 31,
2005, primarily because of the commercial paper we borrowed to fund the Seminis
and Emergent acquisitions, which was somewhat offset by certain medium-term
notes that matured and were repaid in the first nine months of 2005. Further, in
March 2005, we finalized a 364-day $1.0 billion revolving credit facility to be
used for general corporate purposes. In May 2005, we filed a shelf registration
with the Securities and Exchange Commission (SEC) that allows us to issue up to
$2.0 billion of debt, equity and hybrid offerings in the future (including debt
securities of $950 million remaining available under the May 2002 shelf
registration statement). See the "Financial Condition, Liquidity, and Capital
Resources" section of MD&A for a more detailed discussion of the items in this
section.
Outlook -- We have evolved into 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 in order to maintain market leadership and to
support near-term performance. We are focused on innovation, especially in
biotechnology, which we expect to deliver through solving problems in new ways
for farmers. Our current research-and-development strategy and commercial
priorities are focused on bringing our farmer customers second-generation
traits, on delivering multiple solutions in one seed ("stacking"), and on
developing pipeline products. We aspire to bring new solutions to our customers'
unmet needs, for example, crops with improved oil and protein composition and
with drought tolerance. Our capabilities in biotechnology research are
generating a rich product pipeline that is expected to drive long-term growth.
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 was launched in southern
Brazil last year given the continuing uncertainty in the regulatory and legal
environment. In March 2005, Brazil's President signed a biosafety bill into law
which established the regulatory process for the approval of biotech crops and
validated the prior approval of ROUNDUP READY soybeans, allowing it to be sold
in certified seed for the first time. The implementation of our
point-of-delivery payment system in the previous year laid the groundwork for
capturing value on biotech crops grown in Brazil. The legalization of
biotechnology in Brazil should make our system more effective and allow Brazil
to be a greater contributor to revenue in seeds and traits in the coming years.
As discussed in the previous section, we completed five acquisitions in the
first nine months of 2005. Seminis is well positioned to capitalize on the
fast-growing vegetable and fruit segment of the agriculture industry, and the
acquisition expands our ability to grow. We aim to improve and to grow the
Seminis business by applying our molecular breeding and marker capabilities to
their library of vegetable and fruit germplasm. Further, the addition of
Emergent completes a strategic cotton germplasm and traits platform modeled on
our branded and licensing strategies for corn and soybeans. Over the next year,
we plan to focus on three areas: accelerating the potential growth of these new
businesses, executing our business plan, and strengthening our balance sheet.
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ROUNDUP agricultural herbicides remain the market leader. We are focused on
managing the costs associated with our agricultural chemistry business as that
sector matures globally. 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
(defined in Note 16), 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 16 for further details. Accordingly, in first quarter
2005, we recorded a charge of $284 million for estimated litigation and
environmental liabilities we expect to incur in connection with Solutia's
bankruptcy. The charge may not reflect all potential liabilities 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.
See the "Outlook" section of MD&A for a more detailed discussion of certain of
the opportunities, challenges and risks we have identified for our business.
RESULTS OF OPERATIONS
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Three Months Ended May 31, Nine Months Ended May 31,
------------------------------------- -------------------------------------
(Dollars in millions, except per share
amounts) 2005 2004 % Change 2005 2004 % Change
----------------------------------------------------------------------------------- -------------------------------------
Net Sales $ 2,042 $ 1,677 22% $ 5,027 $ 4,198 20%
Gross Profit 1,007 829 21% 2,518 2,033 24%
Operating Expenses:
Selling, general and administrative
expenses 352 285 24% 911 829 10%
Bad-debt expense 15 36 (58)% 36 76 (53)%
Research and development expenses 155 128 21% 401 369 9%
Acquired in-process research and
development (see Note 3) 254 -- NM 266 -- NM
Impairment of goodwill -- -- -- -- 69 (100)%
Restructuring charges -- net -- 9 (100)% 8 66 (88)%
----------------------------------------------------------------------------------- -------------------------------------
Total Operating Expenses 776 458 69% 1,622 1,409 15%
----------------------------------------------------------------------------------- -------------------------------------
Income from Operations 231 371 (38)% 896 624 44%
Interest expense 29 24 21% 78 68 15%
Interest income 5 3 67% 19 15 27%
Solutia-related expenses (see Note 16) 7 29 (76)% 300 43 NM
Other expense -- net 31 22 41% 73 70 4%
----------------------------------------------------------------------------------- -------------------------------------
Income from Continuing Operations Before
Income Taxes 169 299 (43)% 464 458 1%
Income tax provision 128 73 75% 178 155 15%
----------------------------------------------------------------------------------- -------------------------------------
Income from Continuing Operations 41 226 (82)% 286 303 (6)%
Discontinued Operations (see Note 18):
Income (loss) from operations of
discontinued businesses 4 26 (85)% 6 (2) NM
Income tax benefit (2) -- NM (88) (8) NM
----------------------------------------------------------------------------------- -------------------------------------
Income on Discontinued Operations 6 26 (77)% 94 6 NM
----------------------------------------------------------------------------------- -------------------------------------
Net Income $ 47 $ 252 (81)% $ 380 $ 309 23%
----------------------------------------------------------------------------------- -------------------------------------
----------------------------------------------------------------------------------- -------------------------------------
Diluted Earnings per Share:
Income from continuing operations $ 0.15 $ 0.83 (82)% $ 1.05 $ 1.13 (7)%
Income on discontinued operations 0.02 0.10 (80)% 0.35 0.02 NM
----------------------------------------------------------------------------------- -------------------------------------
Net Income $ 0.17 $ 0.93 (82)% $ 1.40 $ 1.15 22%
----------------------------------------------------------------------------------- -------------------------------------
----------------------------------------------------------------------------------- -------------------------------------
NM = Not Meaningful
Effective Tax Rate 76% 24% 38% 34%
Comparison as a Percent of Net Sales:
Gross profit 49% 49% 50% 48%
Selling, general and administrative
expenses 17% 17% 18% 20%
Research and development expenses 8% 8% 8% 9%
Total operating expenses 38% 27% 32% 34%
Income from continuing operations
before income taxes 8% 18% 9% 11%
Net income 2% 15% 8% 7%
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Third Quarter Fiscal Year 2005
--------------------------------------------------------------------------------
The following explanations discuss the significant components of our results of
operations that affected the quarter-to-quarter comparison of our third quarter
income from continuing operations:
Net sales improved 22 percent, or $365 million, in the third-quarter comparison,
with 12 percent of that growth coming from our acquisitions and 10 percent from
organic growth in our core business. Our 2005 acquisitions of Advanta, Channel
Bio, NC+ Hybrids, Seminis and Emergent all are included in the Seeds and
Genomics segment. We also experienced sales improvements in our U.S. traits,
U.S. corn seed and India cotton traits in the three-month comparison. Sales in
our Agricultural Productivity segment were flat in the third-quarter comparison.
Sales increases in our U.S. ROUNDUP herbicides and POSILAC bovine somatotropin
product offset a decline in U.S. acetanilide-based herbicide sales. For a more
detailed discussion of the factors affecting the net sales comparison, see the
"Seeds and Genomics Segment" and the "Agricultural Productivity Segment"
sections of MD&A.
Gross profit increased 21 percent in third quarter 2005. Total company gross
profit as a percent of sales was 49 percent in both three-month periods. Gross
profit as a percent of sales for the Seeds and Genomics segment was 58 percent
in third quarter 2005 and 59 percent in third quarter 2004. Gross profit as a
percent of sales for the Agricultural Productivity segment was 40 percent in
third quarter 2005 and 42 percent in third quarter 2004. See the drivers of
these fluctuations in the "Seeds and Genomics Segment" and "Agricultural
Productivity Segment" sections of MD&A.
Operating expenses increased 69 percent, or $318 million, in the
quarter-over-quarter comparison. We wrote-off IPR&D of $254 million related to
the Seminis, Emergent and NC+ Hybrids acquisitions in third quarter 2005. Higher
selling, general and administrative (SG&A) expenses and research and development
(R&D) expenses, primarily because of the 2005 acquisitions, also drove operating
expenses higher. Operating expenses as a percent of net sales increased 11
percentage points to 38 percent in the three-month comparison.
SG&A expenses increased 24 percent, or $67 million, for the three-month
comparison resulting from a variety of factors. The largest contributor was SG&A
expenses related to the businesses we acquired in 2005. SG&A expense also
increased because of higher accrued incentive compensation, which is
commensurate with our improved operational results this year. As a percent of
net sales, SG&A expenses were 17 percent in both quarterly periods.
Bad-debt expense decreased 58 percent, or $21 million, in the third-quarter
comparison. In fiscal year 2004, we continued to restructure our Argentine
business model and to monitor unfavorable economic and business conditions,
which led to increased credit exposure. As a result, in third quarter 2004, we
recorded higher bad-debt expense for exposures related to estimated
uncollectible Argentine accounts receivable after performing a thorough review
of our past-due trade receivables. In third quarter 2005, bad-debt expense
continued to be concentrated in our Latin American business.
R&D expenses increased 21 percent, or $27 million, in third quarter 2005
compared with the same quarter a year ago. R&D expenses increased because of
spending incurred by the acquired businesses and higher amortization expense
related to the acquired businesses. Also, we incurred higher employee-related
costs in 2005.
In third quarter 2005, we recorded charges of $254 million for the write-off of
acquired IPR&D related to the acquisitions of NC+ Hybrids, Seminis and Emergent.
Management believed the technological feasibility of the IPR&D was not
established and that the research had no alternative future uses. Accordingly,
the amounts allocated to IPR&D were required to be expensed immediately under
generally accepted accounting principles.
Restructuring charges -- net were recorded in third quarter 2004. Actions under
our fiscal year 2004 restructuring were completed in second quarter 2005. In the
prior-year quarter, we recorded charges related to this plan of $15 million
within continuing operations, of which $13 million was recorded in operating
expenses and $2 million in cost of goods sold. Our third quarter 2004
restructuring charges were reduced by $4 million in restructuring reversals
related to our past restructuring plans. For a further discussion, see the
"Restructuring" section of MD&A.
Interest expense increased $5 million in the three-month comparison primarily
because of the interest paid on commercial paper to support the acquisitions in
third quarter 2005 and the interest expense from the incremental Seminis debt
that remained outstanding after the Seminis acquisition date (see the "Financial
Condition, Liquidity, and Capital Resources" section of MD&A). We had lower
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interest expense on Brazilian debt that matured and was paid in December 2004,
which somewhat offset the increased interest expense in third quarter 2005.
Interest income increased $2 million in third quarter 2005 primarily because of
interest earned on larger overnight cash deposits and short-term investments and
higher interest rates on overnight deposits.
Solutia-related expenses decreased $22 million in the three-month comparison. In
third quarter 2005, we recorded $7 million of legal and other expenses related
to the Solutia bankruptcy. In third quarter 2004, we recorded $29 million for
the advancement of funds to pay for Solutia's Assumed Liabilities in light of
Solutia's refusal to pay for those liabilities and for legal and other expenses
related to the Solutia bankruptcy. See Note 16 for further details.
Other expense -- net increased $9 million in the quarter-over-quarter
comparison. Minority interest expense increased $5 million in the three-month
comparison because certain of our investments in India had sales increases in
cotton traits. Net foreign-currency transaction losses (as defined in SFAS 52,
Foreign Currency Translation) increased $3 million to a loss of $12 million in
third quarter 2005. In third quarter 2004, we realized $4 million of other
income related to a gain upon the sale of equity securities.
Income tax provision for third quarter 2005 increased 75 percent, or $55
million, compared with a decrease in income from continuing operations before
income taxes of 43 percent, or $130 million. The third quarter 2005 effective
tax rate was 76 percent, an increase of 52 percentage points compared with the
prior-year quarter. Third quarter 2005 included nondeductible IPR&D write-offs
related to our acquisitions of Seminis, Emergent and NC+ Hybrids of $254
million, increasing our effective tax rate by 46 percentage points. Third
quarter 2004 included a favorable adjustment resulting from a settlement with
the Internal Revenue Service (IRS). Without these adjustments, our effective tax
rate would have been slightly higher in the current-year quarter. This increase
was primarily related to the geographic mix of earnings projected for fiscal
2005 compared with those in fiscal year 2004.
The factors above explain the $185 million decline in income from continuing
operations. In third quarter 2005, we recorded income on discontinued operations
of $2 million related to the environmental technologies businesses. We also
reversed a valuation allowance associated in part with the deferred tax benefit
related to the European wheat and barley business that was recorded in first
quarter 2005. The reversal of $4 million in third quarter 2005 resulted from a
realignment of our domestic operations.
In third quarter 2004, we recorded income on discontinued operations of $3
million related to the environmental technologies businesses and recorded an
aftertax gain of $23 million related to the European wheat and barley business.
In first quarter 2004, we recorded a loss on disposal of $26 million pretax for
the intangible assets related to the European wheat and barley business based
upon our initial estimate of the sales proceeds from the sale of the business
and employee termination costs. In third quarter 2004, a definitive agreement
for the divestiture of the European wheat and barley business was reached, and
in fourth quarter 2004 the sale was finalized. We were able to obtain a higher
value for the wheat and barley business and related assets that were previously
written down in the first quarter of 2004. SFAS 144 requires a company to adjust
the fair value of assets held for sale to reflect the anticipated sales proceeds
in the valuation of its assets, but not in excess of the assets' pre-write down
book value. Accordingly in third quarter 2004, we adjusted the value of the
European wheat and barley assets by $25 million pretax because of higher than
anticipated sales proceeds and lower than expected employee termination costs.
The tax treatment of these adjustments was different for the first and third
quarters of 2004. The write down of the European wheat and barley intangible
assets in the first quarter of 2004 was tax effected. Since the assets
originally had no tax basis, the previously recorded deferred tax liability was
reversed with the first quarter 2004 write down. The third quarter 2004 increase
in intangible assets was not tax effected because, based on then current
valuation information, these assets have been reassessed and the revised tax
basis approximately equals the adjusted book basis. Restructuring expenses
recorded in discontinued operations were less than $1 million for third quarter
2004. See Note 18 -- Discontinued Operations -- for further details.
Nine Months Ended May 31, 2005
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The following explanations discuss the significant components of our results of
operations that affected the comparison of the nine months ended May 31, 2005,
with the nine months ended May 31, 2004:
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Net sales increased 20 percent, or $829 million, in the nine-month comparison,
with 6 percent of that growth coming from our acquisitions and 14 percent from
organic growth in our core business. Net sales of our Seeds and Genomics segment
improved 38 percent, or $744 million, and net sales of our Agricultural
Productivity segment improved 4 percent, or $85 million. For a more detailed
discussion of the factors affecting the net sales comparison, see the "Overview
-- Executive Summary," the "Seeds and Genomics Segment" and the "Agricultural
Productivity Segment" sections of MD&A.
Gross profit increased 24 percent in the nine-month comparison. Total company
gross profit as a percent of sales improved 2 percentage points to 50 percent,
which was attributable to the Seeds and Genomics segment. In the first nine
months of 2005, the Seeds and Genomics segment represented 54 percent of total
company net sales and 66 percent of total company gross profit. See the "Seeds
and Genomics Segment" section of MD&A for the details. Gross profit as a percent
of sales for the Agricultural Productivity segment declined 1 percentage point
to 37 percent in the nine-month comparison.
Operating expenses increased 15 percent, or $213 million, in the first nine
months of 2005 from the prior-year comparable period primarily because of the
$266 million IPR&D write-off in 2005 and higher SG&A expenses associated with
the acquired businesses. Offsetting these increases were the global wheat
goodwill impairment, higher restructuring charges and higher bad-debt expense in
2004.
SG&A expenses increased 10 percent, or $82 million, in the nine-month
comparison. The largest driver was the SG&A expenses for the acquired
businesses. Also, higher commission expense for our lawn-and-garden herbicide
products as a result of increased net sales for the nine-month comparison and
higher accrued incentive compensation contributed to the SG&A expense increase.
As a percent of net sales, SG&A expenses decreased 2 percentage points to 18
percent in the first nine months of 2005 primarily because of 2005 cost savings
in the United States and Europe as a result of restructuring charges in fiscal
year 2004. The European cost savings related to prior-year restructuring actions
were nearly offset by the effect of exchange rates on European SG&A expenses in
the first nine months of 2005.
Bad-debt expense decreased $40 million, or 53 percent, in the nine-month
comparison. See the explanation for this line item discussed in the "Results of
Operations -- Third Quarter Fiscal Year 2005" section of MD&A. This explanation
for the third quarter comparison is also applicable to the nine-month
comparison.
R&D expenses increased 9 percent, or $32 million, in the first nine months of
2005 from the same period a year ago. This increase is consistent with the
third-quarter comparison (see "Results of Operations -- Third Quarter Fiscal
Year 2005" in MD&A). As a percent of net sales, R&D expenses decreased 1
percentage point to 8 percent in the first nine months of 2005.
In first quarter 2005, we recorded charges of $12 million for the write-off of
acquired IPR&D from the Advanta and Channel Bio acquisitions. We wrote off
acquired IPR&D of $254 million in third quarter 2005 for the Seminis, Emergent
and NC+ Hybrids acquisitions.
In first quarter 2004, we recognized a $69 million noncash goodwill impairment
related to our global wheat business. Our decision to exit the European wheat
and barley 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 nine-month periods. We
recorded $8 million of restructuring charges in the first nine months of 2005 to
complete the restructuring actions under our fiscal year 2004 restructuring
plan. In the prior-year nine months, we began recording charges related to our
fiscal year 2004 restructuring plan, with $91 million recorded within continuing
operations ($19 million was recorded in cost of goods sold). The restructuring
charges recorded in the first nine months of 2004 were reduced by $6 million in
restructuring reversals related to our past restructuring plans. For a further
discussion, see the "Restructuring" section of MD&A.
Interest expense increased 15 percent, or $10 million, in the nine-month
comparison. We borrowed over $1.3 billion in commercial paper in third quarter
2005, which resulted in higher interest expense. In third quarter 2005, we also
recorded higher interest expense from the incremental Seminis debt that remained
outstanding after the Seminis acquisition date. In the first nine months of
2005, interest expense of $3 million was recognized for the accretion of the
discount on the Solutia-related reserve established in first quarter 2005.
Interest incurred on liabilities unrelated to debt was offset by lower interest
expense on Brazilian debt, which matured in December 2004.
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Interest income increased $4 million in the 2005 nine month period primarily
because of interest earned on larger overnight cash deposits and short-term
investments and higher interest rates on overnight deposits.
We recorded Solutia-related expenses of $300 million in the first nine months of
2005 and $43 million in the comparable prior-year period. 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 was 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 estimated discounted cost that we would expect to incur in
connection with these litigation and environmental matters. However, actual
costs to the company may be materially different from this estimate. Also, in
the first nine months of 2005, we recorded $16 million of legal and other
expenses related to the Solutia bankruptcy. In the first nine months of 2004, we
recorded $43 million for the advancement of funds to pay for Solutia's Assumed
Liabilities in light of Solutia's refusal to pay for those liabilities and for
legal and other expenses related to the Solutia bankruptcy. See Note 16 --
Commitments and Contingencies -- for further details and for information
regarding an agreement in principle reached with Monsanto, Solutia and the
Official Committee of Unsecured Creditors for a proposal for Solutia's
reogranization.
Other expense -- net increased $3 million in the first nine months of 2005. In
first quarter 2005, we established a $15 million reserve for litigation, which
was paid out in second quarter 2005. Net foreign-currency transaction losses (as
defined in SFAS 52, Foreign Currency Translation) decreased $7 million to $16
million. Our equity affiliate expense, primarily related to Renessen, decreased
$6 million to $20 million in the first nine months of 2005 because of lower
payroll costs as a result of a prior-year reorganization, and improved cost
management.
Income tax provision for the first nine months of 2005 increased 15 percent to
$178 million, compared with a 1 percent increase in pretax earnings. The
effective tax rate for the current period was 38 percent, an increase of 4
percentage points versus the prior-year period. This difference was the result
of the following items:
o Nondeductible IPR&D charges for the current-year acquisitions were
recorded in the first nine months of 2005.
o A tax benefit of $20 million was recorded in continuing operations in
2005 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).
o The goodwill impairment of $69 million in fiscal year 2004 was not
deductible for tax purposes.
o The first nine months of 2004 included two adjustments for valuation
allowances against our deferred tax assets, establishing a valuation
allowance of $102 million in Argentina and reversing the previously
existing valuation allowance of $90 million in Brazil.
o The prior year period included a favorable adjustment resulting from a
settlement with the IRS.
o The effective tax rate for 2005 was affected by the $284 million
Solutia-related charge ($181 million aftertax).
Without these items, our effective tax rate would have been comparable to the
prior-year period.
The factors above explain the change in income from continuing operations. In
the first nine months of 2005, we recorded income on discontinued operations of
$94 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 $0.39
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 impairment related to our
global wheat business recorded in continuing operations in fiscal year 2004.
Since the goodwill impairment 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 impairment loss 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, was written off during first quarter 2005.
33
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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In second quarter 2005, we committed to a plan to sell the environmental
technologies businesses. We generated after-tax income of $4 million and $5
million in the nine months ended May 31, 2005, and May 31, 2004, respectively,
related to the environmental technologies businesses.
In the first nine months of 2004, we incurred an after-tax gain of $1 million
related to the European wheat and barley business and the plant-made
pharmaceuticals program. We recorded pre-tax restructuring charges of $9 million
in discontinued operations in the first nine months of 2004 related to these
businesses (see Note 4). Despite a pre-tax loss from discontinued operations of
$9 million, we recorded an income tax benefit of $10 million in the first nine
months of 2004. See "Results of Operations -- Third Quarter Fiscal Year 2005"
for a discussion of the tax treatment associated with the European wheat and
barley business.
SEEDS AND GENOMICS SEGMENT
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
------------------------------------ ---------------------------------------
(Dollars in millions) 2005 2004 % Change 2005 2004 % Change
---------------------------------------------------------------------------------- ---------------------------------------
Net Sales
Corn seed and traits $ 431 $ 298 45% $ 1,305 $ 975 34%
Soybean seed and traits 204 166 23% 827 655 26%
Vegetable and fruit seed 87 -- NM 87 -- NM
All other crops seeds and traits 336 233 44% 489 334 46%
---------------------------------------------------------------------------------- ---------------------------------------
Total Net Sales $ 1,058 $ 697 52% $ 2,708 $ 1,964 38%
---------------------------------------------------------------------------------- ---------------------------------------
---------------------------------------------------------------------------------- ---------------------------------------
Gross Profit
Corn seed and traits $ 215 $ 166 30% $ 751 $ 578 30%
Soybean seed and traits 115 77 49% 564 400 41%
Vegetable and fruit seed 42 -- NM 42 -- NM
All other crops seeds and traits 240 171 40% 313 211 48%
---------------------------------------------------------------------------------- ---------------------------------------
Total Gross Profit(1) $ 612 $ 414 48% $ 1,670 $ 1,189 40%
---------------------------------------------------------------------------------- ---------------------------------------
---------------------------------------------------------------------------------- ---------------------------------------
EBIT(2) $ 4 $ 183 (98)% $ 511 $ 332 54%
---------------------------------------------------------------------------------- ---------------------------------------
NM = Not Meaningful
(1) Includes any net restructuring charges for the segment that were recorded
within cost of goods sold. See Note 4 -- Restructuring and "Restructuring"
in MD&A for further details.
(2) EBIT is defined as earnings before interest and taxes. Interest and taxes
are recorded on a total company basis and not at the segment level. See
Note 17 -- Segment Information and the "Overview -- Non-GAAP Financial
Measures" section of MD&A for further details.
Seeds and Genomics Financial Performance -- Third Quarter Fiscal Year 2005
--------------------------------------------------------------------------------
Net sales in the third-quarter comparison increased 52 percent, with 29 percent
of that growth coming from our acquisitions and 23 percent from organic growth
in our core business. In fiscal year 2005, we formed ASI, which acquired Channel
Bio and NC+ Hybrids, and we acquired Advanta, Seminis and Emergent, all of which
were added to the results of the Seeds and Genomics segment. See the "Capital
Resources and Liquidity" section of MD&A for more details on our acquisitions,
including the acquisition completion dates and products acquired.
Net sales of corn seed and traits increased 45 percent, or $133 million, in the
quarter-over-quarter comparison. Organic growth resulted from improved sales of
corn seed and traits in the United States. Sales volume and, to a lesser extent,
average net selling prices increased for our branded corn seed. Based on order
and shipping patterns, we expect our market share to increase in our branded
U.S. corn business in fiscal year 2005 compared with fiscal year 2004. The
average net selling price for our U.S. branded corn seed increased because a
higher percentage of sales had seed treatments that commanded higher selling
prices, and because of an improved product mix. Both branded and licensed corn
traits in the United States increased because of a fiscal year 2005 increase in
ROUNDUP READY corn trait pricing and a favorable product mix as a result of new
trait combinations and growth in stacked traits. Sales volumes of our corn
traits were driven by increased penetration and the market share gain in our
branded corn seed business. Sales from the ASI acquisitions of Channel Bio and
NC+ Hybrids represented slightly under half of the growth in corn seed and
traits sales.
Overall gross profit as a percent of sales for corn seed and traits decreased 6
percentage points to 50 percent in the quarter-over-quarter comparison primarily
because of timing differences in adjustments to standard cost per unit in third
quarter 2005 compared with the same period in 2004 for our branded corn seed in
the United States. In the prior-year quarter, we recorded a year-to-date
adjustment to lower our standard cost because of a higher production yield. Our
34
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
U.S. corn seed unit cost in the nine-month comparison was slightly higher;
however, the impact on gross profit as a percent of sales was much less
significant than the three-month comparison. To a lesser extent, the
amortization of inventory step-up for the NC+ Hybrids acquisition and higher
corn seed obsolescence charges in Brazil contributed to the decline in third
quarter 2005 gross profit as a percent of sales for corn seed and traits. An
inventory step-up is a purchase accounting treatment that requires us to
write-up seed inventory to its market value at the time the acquisition is
completed. Until the acquired inventory is sold, we earn less gross profit on
our corn seed sales for the acquired business. As of May 31, 2005, all NC+
Hybrids inventory on hand at the date of the acquisition has been sold;
therefore, we do not expect an inventory step-up impact on gross profit for NC+
Hybrids in future quarters.
Soybean seed and trait net sales increased 23 percent, or $38 million, in third
quarter 2005. This sales increase was driven by the fiscal year 2005 price
increase for ROUNDUP READY soybean traits in the United States, which resulted
in both higher branded trait revenues and trait royalties from licensees, and
the Channel Bio acquisition. The price increase was also the primary contributor
to the 10 percentage point increase in soybean seed and trait gross profit as a
percent of sales in the third-quarter comparison.
Vegetable and fruit seed contributed sales of $87 million to our third-quarter
2005 results. Sales for the Seminis acquisition were recorded from the date of
acquisition, March 23, 2005, in this line item.
All other crops seed and trait net sales increased 44 percent, or $103 million,
in the current-year quarter primarily because of higher cotton seed and trait
sales in the United States and, to a lesser extent, in India, and the
acquisitions of Emergent and Advanta. Sales of cotton traits in the United
States increased because of a 2005 price increase for ROUNDUP READY cotton
traits and improved mix with a higher percentage of sales consisting of stacked
traits. Lower U.S. cotton trait volume somewhat offset these increases. Sales of
BOLLGARD traits began in third quarter in India, and orders were strong
resulting in increased cotton trait penetration. Also, new cotton hybrids in
India contributed to the sales increase. Our 2005 acquisitions were a
substantial contributor to the 44 percent net sales increase in all other crops
seed and trait net sales.
EBIT for the Seeds and Genomics segment decreased $179 million in the
quarter-over-quarter comparison. The IPR&D write off that resulted from the
Seminis, Emergent and NC+ Hybrid acquisitions negatively impacted EBIT by $254
million in third quarter 2005. SG&A expenses increased in the third-quarter
comparison for this segment primarily as a result of the acquisitions. R&D
expenses also increased because of higher employee-related costs and spending
related to the acquired businesses. The sales increases and associated gross
profit impact discussed throughout this section resulted in $198 million higher
gross profit in third quarter 2005, which somewhat offset the increase in
operating expenses. Gross profit as a percent of sales declined 1 percentage
point to 58 percent in third quarter 2005 primarily because of the higher unit
cost of U.S. corn seed, amortization of inventory step-up for the NC+ Hybrids
acquisition and higher corn seed obsolescence charges in Brazil, which were
somewhat offset by the price increase of U.S. ROUNDUP READY soybean traits. To a
lesser extent, the amortization of the inventory step-up for the Seminis and
Emergent acquisitions also lowered gross profit as a percent of sales for this
segment. The amortization of the Seminis and Emergent inventory step-up will
continue to be recorded in fourth quarter 2005, and Seminis will continue in
fiscal year 2006.
Seeds and Genomics Financial Performance -- Nine Months Ended May 31, 2005
--------------------------------------------------------------------------------
Net sales in the nine-month comparison increased 38 percent, with 12 percent of
that growth coming from our acquisitions and 26 percent from organic growth in
our core business. In the nine-month comparison, approximately 4 percent of the
sales growth from acquisitions was contributed by our acquisition of the Seminis
vegetable and fruit seed business. The remaining sales growth from acquisitions
is discussed below.
Net sales of corn seed and traits increased 34 percent, or $330 million, in the
nine months ended May 31, 2005. This sales growth was fueled by corn seed and
traits in the United States and corn seed in the Europe-Africa region. See the
"Seeds and Genomics Financial Performance -- Third Quarter Fiscal Year 2005"
section of MD&A for the drivers of the U.S. corn seed and traits increase. The
ASI acquisitions of Channel Bio and NC+ Hybrids represented slightly under
one-fourth of the U.S. corn seed and trait sales increase. Corn seed sales in
the Europe-Africa region increased in the nine-month comparison because of
stronger market performance, including expected market share gains in several
countries, and favorable exchange rates. Also, corn seed sales in South Africa
increased because of 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.
35
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
Soybean seed and trait net sales increased 26 percent, or $172 million, in the
nine-month comparison. The primary driver of the sales increase was the U.S.
2005 price increase for ROUNDUP READY soybean traits and, to a lesser extent,
the acquisition of Channel Bio. Gross profit as a percent of sales for soybean
seed and traits improved 7 percentage points to 68 percent in the nine-month
comparison primarily because of the U.S. ROUNDUP READY soybean traits price
increase.
All other crops seed and trait net sales increased 46 percent, or $155 million,
in the nine months ended May 31, 2005, compared with the same period a year ago
primarily because of higher cotton seed and trait sales in the United States,
Australia and India, and, to a lesser extent, the Advanta and Emergent
acquisitions. Sales of U.S. cotton traits increased because of a 2005 price
increase for ROUNDUP READY cotton traits and improved mix consisting of more
stacked traits. Lower U.S. cotton trait volume somewhat offset these increases.
In the nine-month Australian comparison, trait penetration, planted cotton
hectares and trait pricing all increased. The market penetration of our cotton
traits doubled in the nine-month comparison. In addition, in the first nine
months of 2005, BOLLGARD II cotton traits, our first second-generation
biotechnology product, 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 cotton 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, increased
farmer experience and acceptance of our BOLLGARD II cotton traits, an increased
number of hectares planted and a higher availability of product supply in 2005
resulted in the increased cotton trait penetration. In the first nine months of
2005, cotton hectares planted increased substantially compared with the same
period in 2004 when drought weather conditions and the related lack of available
water for irrigation lowered hectares planted. We also increased the price of
our BOLLGARD II cotton traits in 2005. Sales in India improved in the first nine
months of 2005 because of increased cotton trait penetration and new cotton
hybrids.
EBIT for the Seeds and Genomics segment increased 54 percent, or $179 million,
in the nine-month comparison. The sales increases and associated gross profit
improvements discussed in this section resulted in $481 million higher gross
profit in the first nine months of 2005, which contributed significantly toward
the EBIT improvement. Gross profit as a percent of sales improved 1 percentage
point to 62 percent in the nine-month comparison. This improvement was primarily
driven by the 2005 price increases for our ROUNDUP READY traits in the United
States, and increased trait penetration and growth of stacked traits,
particularly in U.S. corn. Total operating expenses increased $310 million
primarily because of the $266 million IPR&D write-off and, to a lesser extent,
higher SG&A expenses related to the acquired businesses, and R&D expenses
related to higher employee-related expenses and spending related to the
acquisitions. Operating expenses were lower in 2005 because of the $69 million
goodwill impairment and higher restructuring expenses that were recorded in
2004.
AGRICULTURAL PRODUCTIVITY SEGMENT
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
------------------------------------- -------------------------------------
(Dollars in millions) 2005 2004 % Change 2005 2004 % Change
----------------------------------------------------------------------------------- -------------------------------------
Net Sales
ROUNDUP and other glyphosate-based
herbicides $ 628 $ 600 5% $ 1,547 $ 1,407 10%
All other agricultural productivity products 356 380 (6)% 772 827 (7)%
----------------------------------------------------------------------------------- -------------------------------------
Total Net Sales $ 984 $ 980 --% $ 2,319 $ 2,234 4%
----------------------------------------------------------------------------------- -------------------------------------
----------------------------------------------------------------------------------- -------------------------------------
Gross Profit
ROUNDUP and other glyphosate-based
herbicides $ 244 $ 235 4% $ 535 $ 489 9%
All other agricultural productivity products 151 180 (16)% 313 355 (12)%
----------------------------------------------------------------------------------- -------------------------------------
Total Gross Profit(1) $ 395 $ 415 (5)% $ 848 $ 844 --%
----------------------------------------------------------------------------------- -------------------------------------
----------------------------------------------------------------------------------- -------------------------------------
EBIT(2) $ 193 $ 163 18% $ 18 $ 177 (90)%
----------------------------------------------------------------------------------- -------------------------------------
(1) Includes any net restructuring charges for the segment that were recorded
within cost of goods sold. See Note 4 -- Restructuring and "Restructuring"
in MD&A for further details.
(2) EBIT is defined as earnings before interest and taxes. Interest and taxes
are recorded on a total company basis and not at the segment level. See
Note 17 -- Segment Information and the "Overview -- Non-GAAP Financial
Measures" section of MD&A for further details.
Agricultural Productivity Financial Performance--Third Quarter Fiscal Year 2005
--------------------------------------------------------------------------------
In the quarter-over-quarter comparison, net sales of ROUNDUP and other
glyphosate-based herbicides increased 5 percent, or $28 million, primarily
because the timing of sales in the United States. Sales of our U.S. ROUNDUP
herbicides occurred earlier in the second half of fiscal 2005 compared with the
same period a year ago. U.S. sales volume also shifted to our mid-tier ROUNDUP
36
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
ORIGINAL MAX product from our lower-priced branded and non-branded products and
our high-tier ROUNDUP WEATHERMAX product. In the third-quarter comparison, our
worldwide sales volumes of ROUNDUP and other glyphosate-based herbicides
decreased less than 1 percent.
Lower quarter-over-quarter sales of acetanilide-based herbicides were the
primary contributor to the 6 percent, or $24 million, sales decline in all other
agricultural productivity products. Both the price and volume of our
acetanilide-based herbicides in the United States decreased significantly
because of a decline in the total market size, market share loss and a change in
market approach. The declining market for our acetanilide-based herbicides is
correlated to the increase in ROUNDUP READY corn acres, which typically require
lower selective herbicide usage.
Sales of POSILAC and lawn-and-garden herbicides improved and somewhat offset the
decline in acetanilide-based herbicide sales. In second quarter 2004, we
notified our customers that supplies of POSILAC would be temporarily limited
because of a combination of factors, including our supplier's need to make
corrections and improvements at its manufacturing facility in Austria. See the
"Outlook -- Agricultural Productivity" section in MD&A for background on the
POSILAC product allocation. In second quarter 2005, and again in third quarter
2005, we were able to increase the number of doses allocated among our
customers, which resulted in improved sales in the third-quarter comparison. In
the third-quarter comparison, sales of our U.S. lawn-and-garden herbicides
improved because of the introduction of ROUNDUP Extended Control, a new product
that offers weed and grass control, and prevention for up to three months.
EBIT for the Agricultural Productivity segment increased $30 million in third
quarter 2005. Operating expenses for the Agricultural Productivity segment
declined approximately $28 million primarily because of lower Argentine bad-debt
expense and restructuring expenses. Also, we recorded lower Solutia-related
expenses of $22 million in third quarter 2005 compared with the prior-year
quarter. The Agricultural Productivity segment gross profit decreased $20
million in the third-quarter comparison. Gross profit as a percentage of sales
declined 2 percentage points to 40 percent primarily because of the significant
decline in average net selling price for our U.S. acetanilide-based herbicides
and, to a lesser extent, higher POSILAC cost of goods sold (COGS). POSILAC COGS
increased because of higher volumes and an increase in the standard unit cost
due to mix, unfavorable volume variances due to bulk powder inventory
management, and a one-time bulk powder inventory valuation reserve recorded in
third quarter 2005.
Agricultural Productivity Financial Performance -- Nine Months Ended May 31,
2005
--------------------------------------------------------------------------------
Net sales of ROUNDUP and other glyphosate-based herbicides increased 10 percent,
or $140 million, in the nine-month comparison. Our sales volume of ROUNDUP and
other glyphosate-based herbicides increased 9 percent. The average net selling
price was favorable for the majority of world areas excluding the United States.
In fiscal year 2005, the supply of generic glyphosate from China continued to
grow somewhat, but because of major energy and raw material shortages, it was
generally supplied at higher prices. The tight supply and higher Chinese prices
provided greater pricing flexibility outside of the United States to everyone in
the industry. Recently, the Chinese price has softened from the strength we
observed earlier in 2005 and has begun to somewhat decline; however, it remains
above the average price in fiscal year 2004.
Sales of ROUNDUP and other glyphosate-based herbicides experienced the largest
increases in Europe, Brazil and to global supply customers, but were somewhat
offset by a sales decline in the United States. Sales of ROUNDUP and other
glyphosate-based herbicides increased in Europe primarily because of favorable
foreign exchange rates and favorable weather conditions, most notably in France,
in 2005 compared with 2004. Sales volumes of ROUNDUP herbicides in Brazil
increased in 2005 because of lower distribution channel inventory levels and
overall market growth. We began fiscal year 2005 with lower levels of ROUNDUP
herbicides in the distribution channel in Brazil versus the comparable prior
year. In the nine-month comparison, there was overall growth in the Brazilian
glyphosate market driven by increased soybean acreage and increased soybean
pre-harvest application. Further, the favorable effect of the Brazilian real
exchange rate contributed to the ROUNDUP herbicide sales increase. Sales from
our global supply customers also increased in the nine-month comparison because
of higher volume and average net selling prices attributable to several supply
customers.
Sales of ROUNDUP herbicides in the United States decreased in the nine-month
comparison primarily because of a shift of sales volume to our lower-priced
branded and non-branded products. The market for ROUNDUP herbicides in the
United States continues to move from our high-tier ROUNDUP WEATHERMAX product to
our mid-tier ROUNDUP ORIGINAL MAX product. The average net selling price of
ROUNDUP herbicides also decreased as a result of the shift in product mix and,
to a lesser extent, a price decrease that was taken in August 2004 for certain
mid-tier branded products. We expect the fiscal year 2005 mix to continue to be
37
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
unfavorable compared with the mix of our products in fiscal year 2004 and the
average net selling price of ROUNDUP herbicides to be slightly lower in 2005. In
fourth quarter 2005, we see an opportunity for some additional working capital
reductions related to our ROUNDUP agricultural business in the United States to
optimize our working capital and adjust to current market conditions, which
could result in lower year-over-year fourth quarter sales.
Sales of all other agricultural productivity products decreased 7 percent, or
$55 million, which was primarily attributable to lower sales of
acetanilide-based herbicides and other selective herbicides. Sales of our U.S.
acetanilide-based herbicides decreased because of a decline in the total market
size, market share loss and a change in our market approach. Other selective
herbicide sales declined primarily because of portfolio rationalization in
Argentina.
These declines were somewhat mitigated by growth in our lawn-and-garden
herbicide products. Sales of our lawn-and-garden herbicides in the United States
improved in the nine-month comparison primarily because of the introduction of
ROUNDUP Extended Control and strong early season sales to retailers in 2005.
Lawn-and-garden herbicide sales also improved in Europe because of the favorable
effect of foreign exchange rates.
EBIT for this segment decreased $159 million in the nine-month comparison. The
largest driver was the $284 million Solutia-related charge recorded in first
quarter 2005. Gross profit as a percent of sales declined 1 percentage point to
37 percent in the nine months ended May 31, 2005, primarily because of the
average net selling price decline of our U.S. acetanilide-based herbicides.
Operating expenses declined $97 million primarily because of lower Argentine
bad-debt expense and restructuring expenses in the first nine months of 2005.
Our Agreement with Scotts
In 1998, Pharmacia (f/k/a Monsanto Company) entered into an agency and marketing
agreement with The Scotts Miracle-Gro Company (f/k/a The Scotts Company)
(Scotts) with respect to the lawn-and-garden herbicide business, which was
transferred to us in connection with our separation from Pharmacia. Scotts acts
as our principal agent to market and distribute our lawn-and-garden herbicide
products. The agreement has an indefinite term except for certain countries in
the European Union, where the agreement related to those countries terminates on
Sept. 30, 2008, and may be extended for up to 10 years by the mutual agreement
of both parties. Under the agreement, beginning in the fourth quarter of 1998,
Scotts is obligated to pay us a $20 million fixed fee each year for the length
of the contract to defray costs associated with the lawn-and-garden herbicide
business (the annual payment). We record the annual payment from Scotts as a
reduction of SG&A expenses ratably over the year to which the payment relates.
Of the total fixed fee that was owed for the first three years of the agreement,
Scotts deferred $40 million and is contractually required to repay this amount
in full, with interest. We are accruing interest on the deferred amounts owed by
Scotts monthly and including it in interest income. Beginning in program year
2003 (program year is defined as October 1 to September 30), Scotts began paying
these deferred amounts ($5 million per year for both the deferred portion of the
fixed fee and interest in monthly installments). In addition, if certain
earnings thresholds are achieved, starting with program year 2001, recovery of
the deferred amount is accelerated through additional payments. The total amount
owed by Scotts, including accrued interest, was $46 million as of May 31, 2005,
and $49 million as of Aug. 31, 2004.
We are obligated to pay Scotts an annual commission based on the earnings of the
lawn-and-garden herbicide business (before interest and income taxes). The
amount of the commission due to Scotts varies depending on whether or not the
earnings of the lawn-and-garden herbicide business exceed certain thresholds
that vary by program year. The commission due to Scotts is accrued monthly and
included in SG&A expenses. The commission expense included in SG&A expenses was
$27 million and $51 million for the three months and nine months ended May 31,
2005, respectively, and $25 million and $41 million for the three months and
nine months ended May 31, 2004, respectively (amounts are not net of any
payments received from Scotts).
38
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
--------------------------------------------------------------------------------
RESTRUCTURING
--------------------------------------------------------------------------------
Our results include restructuring activities that significantly affected net
income. Restructuring charges were recorded in the Statement of Consolidated
Operations as follows:
-----------------------------------------------------------------------------------------------------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
--------------------------- ---------------------------
(Dollars in millions) 2005 2004 2005 2004
---------------------------------------------------------------------------------------------- ---------------------------
Cost of Goods Sold $ -- $ (2) $ -- $ (19)
Impairment of Goodwill -- -- -- (69)
Restructuring Charges -- Net(1, 2) -- (9) (8) (66)
---------------------------------------------------------------------------------------------- ---------------------------
Loss from Continuing Operations Before Income Taxes -- (11) (8) (154)
Income Tax Benefit(3) -- 4 21 28
---------------------------------------------------------------------------------------------- ---------------------------
Income (Loss) from Continuing Operations -- (7) 13 (126)
Income (Loss) from Operations of Discontinued Businesses(4) -- 25 -- (9)
Income Tax Benefit -- -- -- 10
---------------------------------------------------------------------------------------------- ---------------------------
Income on Discontinued Operations -- 25 -- 1
---------------------------------------------------------------------------------------------- ---------------------------
Net Income (Loss) $ -- $ 18 $ 13 $ (125)
---------------------------------------------------------------------------------------------- ---------------------------
---------------------------------------------------------------------------------------------- ---------------------------
(1) The $8 million of restructuring charges for the nine months ended May 31,
2005, was split by segment as follows: $7 million in the Seeds and Genomics
segment and $1 million in the Agricultural Productivity segment.
(2) The restructuring charges for the three months and nine months ended May
31, 2004, were offset by $4 million and $6 million, respectively, in
restructuring reversals related to the 2000 restructuring plan.
(3) The $21 million of income tax benefit for the nine months ended May 31,
2005, includes $20 million related to tax losses incurred on the sale of
the European wheat and barley business. See below for further discussion.
(4) The three months and nine months ended May 31, 2004, contain restructuring
charges related to discontinued businesses (see Note 18 -- 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. In fiscal year 2004, total restructuring
charges related to these actions were $165 million pretax ($105 million
aftertax). Additionally, the approved plan included the $69 million impairment
of goodwill in the global wheat business (see Note 7 -- Goodwill and Other
Intangible Assets). In the nine months ended May 31, 2005, we incurred charges
of $8 million pretax ($7 million aftertax) to complete the restructuring actions
under this plan. No further actions are planned in 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 4 to the
consolidated financial statements). See Note 4 -- Restructuring -- for the roll
forward of the liability related to this plan from Sept. 1, 2004, to May 31,
2005.
In the nine months ended May 31, 2005, pre-tax restructuring charges of $7
million were related to the Seeds and Genomics segment and included impairments
incurred as a result of office closures and asset sales in South Africa and the
United States. The office closure actions began in fiscal year 2004, and
additional write-downs were required in fiscal year 2005 based on revised
estimates of losses on dispositions of certain facilities in these countries. We
also incurred pre-tax restructuring charges of $1 million related to the
Agricultural Productivity segment in the nine months ended May 31, 2005.
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 included in the
table above. See Note 18 and the "Results of Operations" section of MD&A for a
further discussion of the $86 million tax benefit recorded in discontinued
operations.
Third quarter fiscal year 2004 pre-tax restructuring activity was comprised of
income of $23 million related to the Seeds and Genomics segment (charges of $2
million in continuing operations and income of $25 million in discontinued
operations) and charges of $13 million related to the Agricultural Productivity
segment. The activity included charges of $13 million pretax related to work
force reductions and income of $23 million pretax related to an increase in the
value of European wheat and barley business upon sale of the business and the
39
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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resulting increase in its assets that were previously written down in the first
quarter of 2004. In the first nine months of 2004, pre-tax charges of $100
million were comprised of $44 million related to the Seeds and Genomics segment
($35 million in continuing operations and $9 million in discontinued operations)
and $56 million related to the Agricultural Productivity segment. These charges
included $59 million pretax related to work force reductions, $39 million pretax
in asset impairments (excluding the $69 million impairment of goodwill), and $2
million pretax in costs associated with facility closures.
The actions relating to this restructuring plan resulted in after-tax savings of
approximately $40 million in fiscal year 2004, and they are expected to produce
after-tax savings of approximately $80 million to $90 million in fiscal year
2005, and approximately $85 million to $95 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.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
--------------------------------------------------------------------------------
Working Capital and Financial Condition
----------------------------------------------------------------------------------------------------------------------------
As of As of As of
May 31, May 31, Aug. 31,
--------------------------- ------------
(Dollars in millions, except current ratio) 2005 2004 2004
----------------------------------------------------------------------------------------------------------- ------------
Cash and Cash Equivalents $ 467 $ 327 $ 1,037
Short-Term Investments -- -- 300
Trade Receivables -- Net 2,776 2,715 1,663
Inventories 1,683 1,196 1,154
Other Current Assets(1) 936 762 777
----------------------------------------------------------------------------------------------------------- ------------
Total Current Assets $ 5,862 $ 5,000 $ 4,931
----------------------------------------------------------------------------------------------------------- ------------
Short-Term Debt $ 1,412 $ 401 $ 433
Accounts Payable 392 333 326
Accrued Liabilities(2) 1,740 1,087 1,135
----------------------------------------------------------------------------------------------------------- ------------
Total Current Liabilities $ 3,544 $ 1,821 $ 1,894
----------------------------------------------------------------------------------------------------------- ------------
Working Capital(3) $ 2,318 $ 3,179 $ 3,037
Current Ratio(3) 1.65:1 2.75:1 2.60:1
----------------------------------------------------------------------------------------------------------- ------------
----------------------------------------------------------------------------------------------------------- ------------
(1) Includes miscellaneous receivables, current deferred tax assets, assets of
discontinued operations (only as of May 31, 2005) and other current assets.
(2) Includes income taxes payable, accrued compensation and benefits, accrued
marketing programs, deferred revenues, grower accruals, liabilities of
discontinued operations (only as of May 31, 2005) 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.
May 31, 2005, compared with Aug. 31, 2004: Working capital decreased $719
million because of the following factors:
o Short-term debt increased $979 million because of the commercial paper
borrowings to fund the Seminis and Emergent acquisitions.
o Cash and cash equivalents declined $570 million because we used cash
on hand to fund the Seminis and Emergent acquisitions and for the
tender offer to purchase the Seminis Senior Subordinated Notes (see
"Capital Resources and Liquidity") in third quarter 2005.
o We had no short-term investments as of May 31, 2005, compared with
short-term securities of $300 million as of Aug. 31, 2004.
o Accrued liabilities increased $605 million primarily because of higher
current liabilities of approximately $194 million associated with our
acquisitions as of May 31, 2005, and an increase in income taxes
payable.
The decreases to working capital as of May 31, 2005, compared with Aug. 31,
2004, were offset by these factors:
o Net trade receivables increased $1.1 billion primarily because of the
seasonality of our business and, to a lesser extent, trade receivables
from our acquisitions of approximately $253 million. A large amount of
40
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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the trade receivables balance as of May 31, 2005, represented sales of
our Agricultural Productivity products in the United States, which
will become due in fourth quarter 2005.
o Inventory increased $529 million primarily because of $433 million of
higher inventory as a result of the 2005 acquisitions.
May 31, 2005, compared with May 31, 2004: Working capital decreased $879 million
because of the following factors:
o Short-term debt increased $1.0 billion because of the commercial paper
borrowings to fund the Seminis and Emergent acquisitions.
o Accrued liabilities increased $653 million. The current tax liability
increased significantly between May 31, 2004, and May 31, 2005,
primarily because the tax benefit related to the PCB litigation
settlement was carried as a reduction in the tax liability balance
until Aug. 31, 2004. The PCB litigation settlement became deductible
in September 2003 when we funded the PCB litigation settlement. We
also had higher current liabilities associated with our acquisitions.
The decreases to working capital as of May 31, 2005, compared with May 31, 2004,
were offset by an increase in inventory of $487 million primarily because of
higher inventory from the 2005 acquisitions.
Customer Financing Programs: Monsanto refers certain of its interested U.S.
customers to a third-party specialty lender that makes loans directly to
Monsanto's customers. This revolving financing program of up to $500 million
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 $169 million during the nine months ended May 31,
2005, and $124 million during the nine months ended May 31, 2004, from the
proceeds of loans made to our customers through this financing program. These
proceeds are included in the net cash provided by operations in the Statement of
Consolidated Cash Flows. 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 May 31, 2005, Aug. 31, 2004, and May 31, 2004, the customer loans held by
the QSPE and the QSPE's liability to the conduits were $109 million, $222
million, and $97 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 May 31, 2005, 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.
In November 2004, Monsanto entered into an agreement with a lender to establish
a program to provide financing of up to $40 million for selected customers in
Brazil. The agreement was amended May 25, 2005, at which time the conditions
necessary to qualify for sales treatment under SFAS 140 were met. Accordingly,
the customer receivables and the related liabilities that had been recorded
since the program was established in November 2004 were removed from the
company's consolidated balance sheet in May 2005 as a noncash transaction.
Proceeds from the transfer of the receivables subsequent to the May 2005
amendment are included in net cash provided by operations in the Statement of
Consolidated Cash Flows. The total amount of customer receivables transferred
through the program and the amount of loans outstanding was $14 million as of
May 31, 2005. Monsanto provides a full guarantee of the loans in the event of
customer default. The liability for the guarantee is recorded at an amount that
approximates fair value and is based on the company's historical collection
experience with customers that participate in the program. The guarantee
liability recorded by Monsanto was less than $1 million as of May 31, 2005. If
performance is required under the guarantee, Monsanto may retain amounts that
are subsequently collected from customers.
41
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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Cash Flow
------------------------------------------------------------------------------------------------- --------------------------
Nine Months Ended May 31,
--------------------------
(Dollars in millions) 2005 2004
----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operations $ 533 $ 112
Net Cash Provided (Required) by Investing Activities (1,371) 60
----------------------------------------------------------------------------------------------------------------------------
Free Cash Flow(1) (838) 172
Net Cash Provided (Required) by Financing Activities 268 (126)
----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (570) 46
Cash and Cash Equivalents at Beginning of Period 1,037 281
----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 467 $ 327
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
(1) Free cash flow represents the total of net cash provided or required by
operations and provided or required by investing activities (see the
"Overview -- Non-GAAP Financial Measures" section of MD&A for further
discussion).
Operating Activities: Cash provided by operations improved $421 million in the
nine-month comparison. In first quarter 2004, we used cash of $400 million to
fund Solutia's PCB litigation settlement as discussed in our 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. Cash provided by accounts payable and accrued
liabilities increased $148 million in the nine-month comparison because of the
current tax liability impact in the first nine months of 2004. The current tax
liability fluctuation between Aug. 31, 2003, and May 31, 2004, was driven by the
tax effects of funding the PCB litigation settlement. In the nine months ended
May 31, 2005, and May 31, 2004, we made voluntary pension contributions of $60
million and $150 million, respectively. At the time of filing this report, we
are not planning to make additional pension contributions in fiscal year 2005.
Cash provided from the change in trade receivables decreased $421 million in the
first nine months of 2005. Both our sales and collections improved in the first
nine months of 2005 compared with the same period a year ago. However, the sales
increase from our core business was more significant than the collections
improvement resulting in a higher use of cash for first nine months of 2005.
Investing Activities: Cash required by investing activities increased $1.4
billion in the first nine months of 2005 primarily because of our 2005
acquisitions. We used cash of $173 million for the Channel Bio and Advanta
acquisitions in the first quarter 2005 and in third quarter 2005 we used cash of
approximately $1.3 billion to fund the Seminis, Emergent and NC+ Hybrids
acquisitions (see the "Capital Resources and Liquidity" section below). The
timing of our purchases and maturities of short-term investments resulted in a
source of cash of $300 million in the first nine months of 2005 compared with a
$230 million source of cash in the same period a year ago. Our capital
expenditures were 3 percent, or $4 million, lower in the nine-month comparison.
We expect fiscal year 2005 capital expenditures to be in the range of $250
million to $300 million compared with fiscal year 2004 capital spending of $210
million.
Financing Activities: In the first nine months of 2005, cash provided by
financing activities was $268 million compared with cash required of $126
million in the comparable prior-year period. Commercial paper borrowings to fund
the Seminis and Emergent acquisitions and the tender offer to purchase the
Seminis Senior Subordinated Notes were the primary driver of the increase. We
used cash of $495 million to fund the tender offer of the Seminis Senior
Subordinated Notes and to retire other Seminis debt after the acquisition
closed. Cash required for long-term debt reductions increased $177 million in
the nine-month comparison (see "Capital Resources and Liquidity" below). We
purchased shares under our three-year $500 million share purchase program in
both nine-month periods: $149 million in 2005 and $133 million in 2004. As of
May 31, 2005, $85 million was available for share purchase under the $500
million authorized amount. 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 subject to market conditions and
other factors. Stock option exercises resulted in lower cash of $19 million in
the nine-month comparison. Dividend payments increased 25 percent, or $26
million, in the first nine months of 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 May 31, As of May 31, As of Aug. 31,
-------------------------------- ---------------
(Dollars in millions, except debt-to-capital ratio) 2005 2004 2004
------------------------------------------------------------------------------------------------------- ---------------
Short-Term Debt $ 1,412 $ 401 $ 433
Long-Term debt 1,062 1,072 1,075
Debt-to-Capital Ratio 30% 21% 22%
------------------------------------------------------------------------------------------------------- ---------------
Total debt outstanding increased $966 million between May 31, 2005, and Aug. 31,
2004, primarily because of short-term commercial paper borrowings in third
quarter 2005. We borrowed commercial paper of $600 million in March 2005 to fund
42
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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a portion of the Seminis acquisition, and $680 million in April 2005 to fund the
tender offer for the Seminis Senior Subordinated Notes and the Emergent
acquisition (both acquisitions are described in detail below). The commercial
paper borrowings have maturities of less than 90 days and are therefore
classified as short-term debt. As of May 31, 2005, commercial paper borrowings
of approximately $1.3 billion remained outstanding. Offsetting the debt increase
between Aug. 31, 2004, and May 31, 2005, certain medium-term notes matured in
the first nine months of 2005. These medium-term notes were classified as
short-term debt as of Aug. 31, 2004. Further, the Statement of Consolidated Cash
Flows for the nine months ended May 31, 2005, presents the maturities as
long-term debt reductions because the medium-term notes had maturities of
greater than one year at inception.
Effective March 11, 2005, we finalized a 364-day $1.0 billion revolving credit
facility. This facility will be used for general corporate purposes, which may
include working capital, acquisitions, capital expenditures, refinancing and
commercial paper backstop (e.g., the revolving credit facility could serve as a
back-up to repay commercial paper borrowings upon maturity). Our existing
five-year $1.0 billion revolving credit facility will remain in place.
(Discussion of this facility can be found in Note 12 -- Debt and Other Credit
Arrangements -- of the notes to consolidated financial statements in our Report
on Form 10-K for the fiscal year ended Aug. 31, 2004.) The terms and conditions
of the new $1.0 billion revolving credit facility are substantially similar to
the existing $1.0 billion revolving credit facility.
In May 2002, we filed a shelf registration with the SEC for the issuance of up
to $2.0 billion of registered debt. In May 2005, we amended the existing 2002
shelf registration by filing a new shelf registration with the SEC that allows
us to issue up to $2.0 billion of debt, equity and hybrid offerings in the
future (including debt securities of $950 million remaining available under the
May 2002 shelf registration statement). As of the date of this Report on Form
10-Q, no securities had been issued under this 2005 shelf registration.
Acquisitions: In first quarter 2005, we acquired the canola seed businesses of
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), inclusive of transaction costs of $2 million. 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 operating results of this acquisition were included in our consolidated
financial statements.
In first quarter 2005, we formed 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 that were paid in second
quarter 2005. In third quarter 2005, ASI acquired NC+ Hybrids, through its
Channel Bio subsidiary, for $40 million in cash (net of cash acquired). In
addition to these purchase price amounts, ASI paid transaction costs of $4
million for these acquisitions. Channel Bio and NC+ Hybrids are U.S. seed
companies that sell, market and distribute primarily corn and soybean seeds.
Channel Bio is an independent operating company of ASI, and as a result of the
NC+ Hybrids acquisition, markets its products through four brands: CROW'S,
MIDWEST SEED GENETICS, NC+ HYBRIDS and WILSON SEEDS. The acquisitions of Channel
Bio and NC+ Hybrids are expected to provide us with additional opportunity for
growth by accelerating the delivery of technology advances through these
companies' strong customer relationships, local brands and quality service. The
Channel Bio transaction was completed on Nov. 15, 2004, from which time the
operating results of this acquisition were included in our consolidated
financial statements. The NC+ Hybrids transaction was completed on March 1,
2005, from which time the operating results of this acquisition were included in
our consolidated financial statements.
In third quarter 2005, we acquired Seminis for $1.0 billion in cash (net of cash
acquired), inclusive of transaction costs of $22 million, and paid $495 million
for the repayment of outstanding debt. The transaction was completed on March
23, 2005, from which time the operating results of this acquisition were
included in our consolidated financial statements. Marinet Investments, LLC,
which prior to the closing was a holder of co-investment rights in Seminis,
elected to reduce the cash payment to which it was entitled upon completion of
the transaction by $50 million in exchange for a contingent payment of up to
$125 million based on the achievement of certain cumulative net sales targets
over the 36-month period ending Sept. 30, 2007. The cash portion of the
acquisition was funded with cash on hand plus commercial paper borrowings of
$600 million issued in March 2005. Prior to the closing of the transaction,
Seminis initiated a tender offer to redeem all of its outstanding 10.25% Senior
Subordinated Notes. Commercial paper borrowings were also issued in April 2005
to fund the payments pursuant to the tender offer, which totaled approximately
$390 million.
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MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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Seminis is the global leader in the vegetable and fruit seed industry, and its
brands are among the most recognized in the vegetable and fruit segment of
agriculture. Seminis supplies more than 3,500 seed varieties to commercial fruit
and vegetable growers, dealers, distributors and wholesalers in more than 150
countries around the world. The acquisition of Seminis is expected to provide us
with opportunity for growth in the vegetable and fruit seed industry. From a
technology perspective, we intend to continue to focus on developing improved
products via advanced breeding techniques for the Seminis business.
In third quarter 2005, we acquired Emergent Genetics, Inc. and Emergent Genetics
India Ltd. (collectively, "Emergent" or "the Emergent acquisition") for $307
million (net of cash acquired), inclusive of transaction costs of $7 million.
With its STONEVILLE and NEXGEN brands in the United States and MAHALAXMI and
PARAS brands in India, Emergent is the third largest cotton seed business in the
United States, has two strong cotton seed brands in India and has a solid
presence in several other smaller cotton-growing markets around the world. The
addition of the Emergent brands completes a strategic cotton germplasm and
traits platform modeled on the company's leading corn and soybean strategy, and
is expected to provide us with opportunities to deliver breeding advances and
biotechnology traits in the cotton seed market. The transaction was completed on
April 5, 2005, from which time the operating results of this acquisition were
included in our consolidated financial statements. The cash portion of the
acquisition was funded with $284 million of commercial paper borrowings issued
in April 2005. We also assumed debt of $16 million.
For all fiscal year 2005 acquisitions described above, the business operations
and employees of the acquired entities were added into the Seeds and Genomics
segment results upon acquisition. The purchase price allocations as of May 31,
2005, were preliminary and are summarized in Note 3 -- Business Combinations. As
of the acquisition dates, management began to assess and formulate plans to
integrate or restructure the acquired entities. These activities are accounted
for in accordance with EITF 95-3, Recognition of Liabilities in Connection with
a Purchase Business Combination (EITF 95-3), and primarily include the potential
closure of facilities, the abandonment or redeployment of equipment, and
employee terminations or relocations. As of May 31, 2005, estimated integration
costs of $8 million had been recorded. However, management has not finalized all
plans, and therefore, the amounts related to potential future actions were not
recorded as of May 31, 2005, as we continue to evaluate integration plans for
the acquisitions.
See Note 3 for unaudited pro forma financial information of the combined results
of our operations and our significant acquisitions, which include Seminis and
Emergent, as if these acquisitions had occurred at the beginning of the periods
presented. Also, 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 were 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 filed a
voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy
Code and have sought relief from paying certain liabilities, including Solutia's
Assumed Liabilities. Solutia 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 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
determined that it was probable that we would incur some expenses related to
such litigation and environmental liabilities and that the amount of such
expenses could be reasonably estimated. Accordingly, we 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 represents the discounted cost that we would expect
to incur in connection with these litigation and environmental matters. However,
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. Accordingly, our actual costs may be materially different from this
estimate. 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 16 -- Commitments and Contingencies under the
subheading "Solutia Inc." for further information regarding Solutia's Assumed
Liabilities, the charge discussed above, and an agreement in principle which we
have reached with certain other parties in Solutia's bankruptcy proceeding. 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.
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MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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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 aim to continually
improve our products in order 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.
Our strategic actions will allow us to focus on continued growth in our seeds
and traits businesses, while ROUNDUP herbicides and our other herbicides
continue to make strong contributions to cash flow and income. We have evolved
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 brand, 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. The acquisition of
Seminis will broaden our research and marketing focus to small-acre fruit and
vegetable 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 value to shareowners through
vehicles such as investments that grow and expand the business, an increased
dividend rate and share repurchases. We have recently used our cash position for
strategic acquisitions and technology investments, and have used a combination
of cash and debt to fund the Seminis, Emergent and NC+ Hybrids acquisitions that
closed in third quarter 2005. We will continue to evaluate technology
arrangements that have the potential to increase the efficiency and
effectiveness of our research and development efforts, and acquisition
opportunities that meet our strategic needs, although we have no current plans
to pursue any major acquisitions.
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 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. We have also taken steps to reduce
risk and stabilize our business position in Latin America. We continue to
monitor the business environment and the related impact on our working capital
in Latin American countries, particularly Brazil and Argentina.
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. 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,
45
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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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.
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 continue investing 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. ASI completed the acquisition of Channel Bio in first quarter 2005 and the
acquisition of NC+ Hybrids in third quarter 2005.
Key near-term growth opportunities in our seeds and traits include:
o Continued growth in Monsanto's branded and licensed seed market
shares, through 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 Commercialization of second-generation traits, such as BOLLGARD II
cotton and ROUNDUP READY Flex cotton.
In third quarter 2005, we completed the acquisition of Seminis, the global
leader in the vegetable and fruit seed industry. Seminis will operate as a
wholly-owned subsidiary of Monsanto. Of the other seeds outside of corn,
oilseeds and cotton, vegetable seeds have the best prospect for consistent
growth at high margins. Similar to Monsanto, Seminis has captured a leading
position in its respective global markets, and has done so by focusing on
molecular breeding and the value it creates for the farmer. From a technology
perspective, we intend to continue on the path taken by Seminis for its
business, which is to focus on developing products via advanced molecular
breeding techniques, and to leverage our research on the seed breeding side for
Seminis. We believe Seminis is an attractive investment for us because of its
market leadership, innovation and financial growth.
In third quarter 2005, we completed the acquisition of Emergent, a cotton seed
business, that we plan to add to our cotton traits business. Like corn and
soybeans, we will have a branded presence in cotton through the Emergent brands,
and it will join a foundation cotton seed company that we have created in the
last three years, called Cotton States. We will also use the same model that we
have adopted in corn and soybeans, and will be broadly licensing both our
biotech traits and our germplasm to other companies. The decision to purchase
Emergent is key to the future of our cotton business, core to accelerating the
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value of our new second-generation cotton traits, and complementary to the
introduction of our new Cotton States foundation seed business. We expect growth
to come from the combination of improved breeding and continued growth of
biotech traits, particularly stacked and second-generation traits.
We can achieve continued growth through stacking and increased penetration of
traits in approved markets. Trait stacking is a key growth driver in our seeds
and traits business because it allows Monsanto to earn a greater share of the
farmer's expenditures on each acre. 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, which is consistent with
our expectations for 2005. 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 were 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 for growth even
with delays in some global regulatory approvals.
The Brazilian government passed measures legalizing the planting and harvest of
ROUNDUP READY soybeans in Brazil for our 2004 and 2005 fiscal years. A
grain-based payment system was successfully launched in fiscal year 2004, and it
had a slightly negative effect on our earnings because of start-up expenses and
lower yields caused by drought. In March 2005, Brazil's President signed a
biosafety bill into law that establishes the regulatory process for the approval
of biotech crops. The implementation of our point-of-delivery payment system in
the past year laid the groundwork for ensuring that we capture value on biotech
crops grown in Brazil. The legalization of biotechnology in Brazil should make
our system more effective and allow Brazil to be a greater contributor to
revenue in seeds and traits in the nearterm. Recently, we expanded this
grain-based payment system by offering and executing a two-year contract to most
local grain elevators in the southern states of Brazil. The largest grain
exporters have accepted this contract and are implementing the agreement. We
expect the system to have a neutral to slightly negative effect on earnings in
2005 because of lower pricing compared with 2004, and drought conditions which
decreased grain production in 2005 by nearly 70 percent. As ROUNDUP READY
soybeans have now been fully approved in Brazil, a limited amount of certified
seed containing the ROUNDUP READY gene is expected to be sold in 2005, in
addition to continuing with the grain-based payment system on saved and
replanted seed. A similar grain-based system has also been established for
Paraguay. Due to the limited size of that market, start-up incentives and
expenses, this is expected to break-even in fiscal year 2005, and be a modest
contributor to earnings in fiscal year 2006. Efforts continue to develop systems
in Argentina and Uruguay. It is likely that court cases in Europe will be
required to determine the applicability of patent rights for ROUNDY READY
soybeans grown in Argentina and exported to Europe. The first of these legal
cases has been filed. Monsanto does not hold patent rights in Argentina, as they
were denied in a broad ruling along with hundreds of other patents during a
change in the patent system in 1995. It is not certain that payments on ROUNDUP
READY soybeans will be profitable in Brazil or in other parts of Latin America.
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.
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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 by 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 products 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 herbicides in the United States in fiscal 2005 to be slightly lower than
the net average selling price for fiscal 2004. Further, we expect the net
average selling price of U.S. ROUNDUP herbicides in 2005 will 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
herbicides have maintained a leading market position and a price premium
compared with generics.
We will continue to support the market leadership of ROUNDUP herbicides with
product innovations, superior customer service and logistics, low-cost
manufacturing, further 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 herbicides as a brand-name product that farmers trust to
avoid the risk of crop injury in over-the-top use on these crops.
We have several patents on our glyphosate formulations and manufacturing
processes in the United States and in other countries. We continue to
differentiate ROUNDUP herbicides 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.
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 herbicides, 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
manage production costs, and we are also achieving reductions in working capital
through careful management of inventories. Several years ago, ROUNDUP herbicides
distribution channel inventories had increased in the United States. U.S.
ROUNDUP herbicides distribution channel inventory levels have been declining,
for example levels as of Aug. 31, 2004, declined compared with Aug. 31, 2003.
Like most other selective herbicides, Monsanto's selective herbicides face
declining markets and increasing competitive pressures, but they continue to
support our ability to offer fully integrated crop-protection 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 herbicides used on these acres are significantly higher than the
gross profit on the lost selective herbicide sales.
Our lawn-and-garden herbicide products remain a strong cash generator and
support 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 receive U.S. FDA approval to
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MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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manufacture the finished dose formulation at our Augusta facility. In second
quarter of fiscal year 2005, we applied for U.S. FDA approval for finished dose
formulation at our Augusta 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 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. In second quarter 2005, and again in third quarter
2005, we were able to increase the number of doses allocated among our
customers, but expect the supply of POSILAC to continue to be limited through
most of calendar year 2005. 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 16 -- 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 -- Outlook" 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 16.
In second quarter 2005, we received notification from the Brazilian tax
authorities stating that certain value-added tax credits were not recoverable.
We evaluated the validity and the related financial impact of such notification,
and adjusted the value-added tax asset balance to the amount we believe is the
current fair value of the recoverable credits. We will continue to evaluate the
recoverability of the value-added tax asset balance.
In June 2005, new legislation was enacted in Argentina and Belgium that could
affect the recoverability of deferred tax asset balances recorded on our
consolidated financial statements as of May 31, 2005. We are currently
evaluating the potential related financial impact, if any, of the new
legislation. See Note 19 -- Subsequent Events -- for further details.
For additional information on the outlook for Monsanto, see "Cautionary
Statements 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
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.
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NEW ACCOUNTING STANDARDS
--------------------------------------------------------------------------------
In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error
Corrections (SFAS 154). SFAS 154 requires retrospective application to
prior-period financial statements of changes in accounting principle, unless it
is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also redefines "restatement" as the
revising of previously issued financial statements to reflect the correction of
an error. This statement is effective for accounting changes and corrections of
errors made in fiscal years beginning after Dec. 15, 2005. We do not believe
that the adoption of SFAS 154 will have a material impact on the consolidated
financial statements.
In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional
Asset Retirement Obligations (FIN 47) to clarify the term "conditional asset
retirement" as used in SFAS 143, Accounting for Asset Retirement Obligations.
FIN 47 requires that a liability be recognized for the fair value of a
conditional asset retirement obligation when incurred, if the fair value of the
liability can be reasonably estimated. Uncertainty about the timing or method of
settlement of a conditional asset retirement obligation would be factored into
the measurement of the liability when sufficient information exists. This
interpretation is effective no later than the end of fiscal years ending after
Dec. 15, 2005. Accordingly, we will adopt FIN 47 no later than fourth quarter of
fiscal year 2006. We are currently assessing the impact FIN 47 may have on our
consolidated financial statements; however, we do not believe that the adoption
of FIN 47 will have a material impact on the consolidated financial statements.
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). In March 2005, the U.S.
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No.
107 (SAB 107), which expresses views of the SEC staff regarding the interaction
between SFAS 123R and certain SEC rules and regulations, and provides the
staff's views regarding the valuation of share-based payment arrangements for
public companies. 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. We will adopt the provisions of
SFAS 123R using the modified prospective method beginning Sept. 1, 2005, and
will consider the guidance of SAB 107 as we adopt SFAS 123R.
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 consolidated financial statements 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. FSP 109-2 was effective immediately upon issuance;
however, due to recent acquisition activity and until the Treasury Department or
Congress provides final clarifying language on key elements of the repatriation
provision, the amount of foreign earnings that may be repatriated by us cannot
be determined. See Note 8 -- Income Taxes -- for additional disclosures in
accordance with FSP 109-2.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs -- an amendment
of ARB No. 43, Chapter 4 (SFAS 151), to clarify that abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage) should
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be recognized as current period charges and to require the allocation of fixed
production overhead to the costs of conversion based on the normal capacity of
the production facilities. SFAS 151 is effective prospectively for inventory
costs incurred during fiscal years beginning after June 15, 2005. We do not
believe that the adoption of SFAS 151 will have a material impact on our
consolidated financial statements.
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. Final regulations necessary to
implement the Act were released in January 2005. However, additional guidance is
anticipated to clarify several areas, including those that would specify the
manner in which actuarial equivalency must be determined and the evidence
required to demonstrate actuarial equivalency. 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 $19 million. The reduction in
annual benefit cost is estimated at approximately $3 million, of which $2
million was recorded in the nine months ended May 31, 2005. Additional guidance
and interpretations of the law could require the company to revise our
estimates.
CAUTIONARY STATEMENTS 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 include statements about: our business plans; the potential
development, regulatory approval, and public acceptance of our products; our
expected financial performance, including sales performance, and the anticipated
effect of our strategic actions; the anticipated benefits of recent
acquisitions; the outcome of contingencies, such as litigation; domestic or
international economic, political and market conditions; and other factors that
could affect our future results of operations or financial position, including,
without limitation, statements under the captions "Overview-Executive
Summary-Outlook," "Seeds and Genomics Segment," "Agricultural Productivity
Segment," "Financial Condition, Liquidity, and Capital Resources," and
"Outlook," and "Legal Proceedings." 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. By their nature,
these types of statements are uncertain and are not guarantees of our future
performance.
Our forward-looking statements represent our estimates and expectations at the
time that we make those statements. However, circumstances change constantly,
often unpredictably, and investors should not place undue reliance on these
statements. Many events beyond our control will determine whether our
expectations will be realized. 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. In the interests of our
investors, and in accordance with the "safe harbor" provisions of the 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.
RISK FACTORS
Competition in seeds and traits and agricultural chemicals has significantly
affected and will continue to affect our sales.
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 increasing competition from agricultural
biotechnology firms and from major agrichemical, seed and food companies,
some of which have substantially greater financial and marketing resources
than we do. In addition, we expect to face continued competition for our
ROUNDUP agricultural 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
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system, and to develop new formulations with features attractive to our end
users. If we are not able to successfully compete in any of these areas,
our results of operations will be harmed.
Intellectual property rights are crucial to our business; however, efforts to
protect our intellectual property rights against infringement and legal
challenges and to defend against claims against us can increase our costs and
will not always succeed.
We endeavor to obtain and protect our intellectual property rights in
jurisdictions in which our products are produced or used and in
jurisdictions into which our products are imported. 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 raise legal challenges to our rights or
illegally infringe on our rights, including through means that may be
difficult to prevent or detect. Intellectual property rights are
particularly important to our Seeds and Genomics segment. For example, the
practice of saving seeds from non-hybrid crops (including, for example,
soybeans, canola and cotton) containing our biotechnology has prevented and
may continue to prevent us from realizing the full value of our
intellectual property, particularly outside the United States. 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. We cannot assure you we would be able to obtain such a
license on acceptable terms. The extent to which we succeed or fail in our
efforts to protect our intellectual property will affect our results of
operations.
We are subject to extensive regulation affecting our seed biotechnology and
agricultural products and our manufacturing processes, which affects our sales
and profitability.
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. Concern about 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, among other
things, could lead to increased regulation or legislation, which may
include: liability transfer mechanisms that may include financial
protection insurance; possible restrictions or moratoria on testing,
planting or use of biotechnology traits; and requirements for labeling and
traceability, which requirements may cause food processors and food
companies to avoid biotechnology and select non-biotechnology crop sources
and can affect grower seed purchase decisions and the sale of our products.
Further, 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.
These regulations affect the development, manufacture and distribution of
our products, and non-compliance can harm our sales and profitability.
Legislation encouraging or discouraging the planting of specific crops can
also harm 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 herbicides as well as seeds containing our ROUNDUP READY traits
and thereby reduce our sales.
The degree of public acceptance or perceived public acceptance of our
biotechnology products can impact our sales and results of operations by
affecting planting approvals, regulatory requirements and grower planting
decisions.
Some opponents of the technology actively raise public concern 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. Further, the
potential for adventitious presence of commercial biotechnology traits in
conventional (non-biotechnology) seed, or in the grain or products produced
from conventional or organic crops, is a factor that can affect general
public acceptance of these traits.
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The successful development and commercialization of our pipeline products will
be necessary for our growth.
Commercializing our new biotechnology products entails considerable time
(as much as ten years) and investment (as much as $100 million). Moreover,
a considerable percentage of our new product concepts are abandoned and
never commercialized. There are a number of reasons why a new product
concept may be abandoned including greater than anticipated development
costs, regulatory obstacles, competition, inability to prove the original
concept, lack of demand, and the need to divert focus, from time to time,
to other initiatives with perceived opportunities for better returns. Many
of our competitors are also making considerable investments in similar new
biotechnology products. Commercial success frequently depends on being the
first company to the market. Consequently, we believe our ability to grow
our business depends significantly on our ability to fund extensive
research and development activities and deliver new products to the markets
we serve.
Adverse outcomes in legal proceedings could subject us to substantial damages
and adversely impact our results of operations and profitability.
We are involved in major lawsuits concerning intellectual property,
biotechnology, contracts, antitrust allegations, employee benefits, and
other matters, the outcomes of which may be significant to results of
operations 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. We recorded a charge in the amount of $284 million in our
first quarter fiscal 2005 results for certain estimated 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 represents the estimated discounted cost that we would incur in
connection with these litigation and environmental matters. However, our
actual costs may be materially different from this estimate. The degree to
which we may ultimately be responsible for the particular matters reflected
in the charge is uncertain. Further, 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 16 -- Commitments and Contingencies and in other sections of
this report.
Our operations outside the United States are subject to special risks and
restrictions, which could negatively affect our results of operations and
profitability.
We engage in manufacturing, seed production, research and development or
sales in many parts of the world. Sales outside the United States
represented more than 45 percent of our revenues in fiscal year 2004.
Although we have operations in virtually every region, our sales outside
the United States in fiscal year 2004 were 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. Special risks
and restrictions to which our operations outside the United States are
subject include: 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 net income,
the book value of our assets outside the United States, and our
shareowners' equity.
Any diversion of management's attention to matters related to acquisitions or
any delays or difficulties encountered in connection with integrating acquired
operations may have an adverse effect on our business, results of operations,
and/or financial condition.
We have recently completed several 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,
53
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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systems integration and the reconciliation of corporate cultures. Those
operations could divert management's attention from our business or cause a
temporary interruption of or loss of momentum in our business and the loss
of key personnel from the acquired companies.
Fluctuations in commodity prices can increase our costs and decrease our sales.
We purchase our seed inventories from production growers at market prices
and retain the seed in inventory until it is sold. These purchases
constitute a significant portion of the manufacturing costs for our seeds.
We use hedging strategies to mitigate the risk of short-term changes in
these prices but are unable to avoid the risk of medium- and long-term
changes. Accordingly, increases in commodity prices may negatively impact
our cost of goods sold or cause us to increase seed prices, which could
adversely affect our sales. Farmers' incomes are also affected by commodity
prices and that may have some effect on their ability to purchase our
products.
Compliance with quality controls and regulations affecting our manufacturing may
be costly, and failure to comply may result in decreased sales, penalties and
remediation obligations.
Because we use hazardous and other regulated materials in our chemical
manufacturing processes and engage in mining operations, we are subject to
risks of accidental environmental contamination, and therefore to potential
personal injury claims, remediation expenses and penalties. We have entered
into agreements with various regulatory agencies for the management of many
of our sites, and if we fail to comply with such agreements we could be
subject to penalties and facility shutdowns. Should a catastrophic event
occur at any of our facilities, we could face significant reconstruction or
remediation costs, penalties, and loss of production capacity, which could
affect our sales. In addition, lapses in quality or other manufacturing
controls could affect our sales and result in claims for defective
products.
We must estimate growers' future needs, and match our production and the level
of product at our distributors to those needs, to market our products
successfully.
Growers' decisions are affected by market, economic and weather 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.
Our ability to issue short-term debt to fund our cash flow requirements and the
cost of such debt may affect our financial condition.
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.
Weather, natural disasters and accidents may significantly affect our results of
operations and financial condition.
Our sales and profitability are subject to some risk from weather
conditions and natural disasters that affect the timing of planting and the
acreage planted, as well as yields and commodity prices. Weather conditions
also can 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. One of our major U.S. glyphosate manufacturing facilities is
located in Luling, Louisiana, which is an area subject to hurricanes.
54
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------------------
Except as noted below, 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.
In May 2002, we filed a shelf registration with the SEC for the issuance of up
to $2.0 billion of registered debt. In May 2005, we amended the existing 2002
shelf registration by filing a new shelf registration with the SEC that allows
us to issue up to $2.0 billion of debt, equity and hybrid offerings in the
future (including debt securities of $950 million remaining available under the
May 2002 shelf registration statement). As of the date of this Report on Form
10-Q, no securities had been issued under this 2005 shelf registration.
In May 2005, the company entered into treasury rate lock agreements with several
banks to hedge against changes in long-term interest rates in anticipation of a
long-term debt issue. As of May 31, 2005, the market value of these agreements
was an $11 million loss to Monsanto. The market value of the treasury rate lock
agreements rises or falls with the yield on 30-year U.S. Treasury bonds. A 1
percentage point change in the 30-year yield would change the fair value of the
treasury rate lock by approximately $67 million.
ITEM 4. CONTROLS AND PROCEDURES
--------------------------------------------------------------------------------
We maintain a comprehensive set of disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934 (Exchange Act)) designed to ensure that information required to be
disclosed in our filings under the Exchange Act is recorded, processed,
summarized and reported accurately and within the time periods specified in the
SEC's rules and forms. As of May 31, 2005 (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 were changes in
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting. We consider the inclusion of the acquisitions of Seminis and Emergent
significant to our results of operations, financial position and cash flows from
the dates of acquisition through May 31, 2005, and consider the integration of
Seminis and Emergent to have materially affected our internal control over
financial reporting.
55
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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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 material legal proceedings 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 16 --
Commitments and Contingencies under the subheading "Other Litigation" and is
incorporated by reference herein. As discussed in Part I -- Item 1 -- Note 16
under the subheading "Solutia Inc.," we 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 fiscal year ended Aug. 31, 2004, and our Reports on
Form 10-Q for the quarterly periods ended Nov. 30, 2004, and Feb. 28, 2005.
Patent and Commercial Proceedings
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2004,
on Dec. 4, 2000, Monsanto filed suit in the U.S. District Court for the Eastern
District of Missouri for a declaratory judgment against Bayer CropScience AG, a
subsidiary of Bayer AG (Bayer CropScience), and its affiliates that four
patents, which had been assigned to Bayer CropScience by Plant Genetics Systems,
N.V. and which involve claims to truncated Bt technology, were invalid and not
infringed by MON810 in YIELDGARD corn. Bayer CropScience counterclaimed to
request royalties for prior sales of YIELDGARD corn and injunctive relief. On
June 22, 2004, Bayer CropScience dismissed with prejudice its claims on three of
the four patents in dispute and agreed not to sue Monsanto, its affiliates or
its sublicensees under those patents for any of Monsanto's current commercial
products. Monsanto intends to seek recovery from Bayer CropScience of its
attorneys' fees involved in defending against the dismissed claims and to assert
defenses, including non-infringement and invalidity of the fourth and remaining
patent in the litigation. Commencement of a trial on the one remaining patent
has been set for Oct. 31, 2005.
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2004,
and our Report on Form 10-Q for the quarterly period ended Feb. 28, 2005, on
July 27, 2004, DEKALB filed suit against Syngenta Seeds, Inc. and Syngenta
Biotechnology, Inc. in the U. S. District Court for the Northern District of
Illinois alleging infringement of two of DEKALB's patents pertaining to fertile
transgenic corn. DEKALB is seeking an injunction against the sale of GA21 corn
by Syngenta Seeds and Syngenta Biotechnology and damages for willful
infringement of its patents. On May 19, 2005, the U.S. District Court for the
Northern District of Illinois transferred DEKALB's lawsuit to the U.S. District
Court for the District of Delaware.
Grower Lawsuits
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2004,
and our Report on Form 10-Q for the quarterly period ended Feb. 28, 2005, two
purported class action lawsuits by farmers concerning our biotechnology trait
products have been consolidated in the U.S. District Court for the Eastern
District of Missouri in a case styled McIntosh v. Monsanto et al. The suits were
initially filed against the former Monsanto Company by two groups of farmers:
one on Dec. 14, 1999, in the U.S. District Court for the District of Columbia,
which complaint was amended in March 2001 to add Pioneer Hi-Bred International,
Inc., Syngenta Seeds, Syngenta Crop Protection, and Bayer CropScience as
defendants; and the other on Feb. 14, 2002, in the U.S. District Court for the
Southern District of Illinois. The complaints included both tort allegations in
connection with the sale of genetically modified seed and allegations of
violations of antitrust laws, including allegations of a conspiracy among
56
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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defendants to fix seed prices in the United States. Plaintiffs sought
declaratory and injunctive relief in addition to antitrust, treble, compensatory
and punitive damages, and attorneys' fees. On Sept. 22, 2003, the District Court
for the Eastern District of Missouri granted Monsanto's motion for summary
judgment on all tort claims and denied the plaintiffs' motion to allow the tort
claims to proceed as a class action. On Sept. 30, 2003, the District Court
denied the plaintiffs' motion to allow their antitrust claims to proceed as a
class action, which decision was affirmed by the U.S. Court of Appeals for the
Eighth Circuit on March 7, 2005. On June 30, 2005, the plaintiffs filed a motion
with the District Court seeking to amend their complaint to seek certification
of a class of growers from only four states (Iowa, Illinois, Minnesota, and
Indiana) and restricted to only one crop (glyphosate tolerant soybeans). We
intend to oppose the plaintiffs' request.
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2004,
starting the week of March 7, 2004, individual plaintiffs filed essentially
identical purported class actions on behalf of direct and indirect purchasers in
16 different state courts essentially alleging violations of unspecified
international laws through patent license agreements, alleged breaches of an
implied warranty of merchantability, and alleged violations of unspecified
consumer fraud and deceptive business practices laws, all in connection with the
sale of genetically modified seed. The antitrust claims included allegations of
violations of various antitrust laws, including allegations of a conspiracy
among defendants to fix seed prices in the United States in violation of federal
antitrust laws. On June 8, 2004, Monsanto filed suit in the U.S. District Court
for the Eastern District of Missouri against each of the individual named
plaintiffs in the state class actions for breach of contract, which we refer to
as the "Monsanto Action." We alleged that the agreements we entered into with
the plaintiffs required that the plaintiffs' suits be filed in federal or state
court in Missouri. Subsequently, the plaintiffs agreed to stay their state
actions pending determination of our request for summary judgment in our favor
in the Monsanto Action. On March 29, 2005, the court in the Monsanto Action
denied our motion for summary judgment and dismissed that action for lack of
jurisdiction.
Proceedings Related to Delta and Pine Land Company
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2004,
on May 20, 2004, we filed a request with the American Arbitration Association
for arbitration and a determination that we have the right to terminate the 1996
U.S. licensing agreements that provided Delta and Pine Land with access to
BOLLGARD insect-protected cotton and ROUNDUP READY herbicide-tolerant
technologies for cotton. We believe Delta and Pine Land has violated its duties
to, and its contracts with, us in a variety of ways including: (i) failing to
calculate, collect and ensure that we were paid all royalty amounts due under
the agreements; (ii) breaching its fiduciary duty to us as the managing agent of
D&M Partners by neglecting to properly collect and allocate the income of D&M
Partners; and (iii) misusing our intellectual property by inappropriately
providing our technology to an unlicensed party. A final hearing on the
arbitration has been set to commence the second week of August 2006.
Agent Orange
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2004,
and our Reports on Form 10-Q for the quarterly periods ended Nov. 30, 2004, and
Feb. 28, 2005, 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. After the United States Supreme Court allowed
new claims to proceed notwithstanding a prior class action settlement, this
litigation was sent back 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. After a hearing
during the week of Feb. 28, 2005, the District Court granted the motions for
summary judgment filed by Monsanto and other defendants in all pending cases
arising out of claims from U.S. veterans on the basis of the government
contractor defense. Plaintiffs have appealed the District Court's judgment to
the U.S. Court of Appeals for the Second Circuit.
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2004,
and our Reports on Form 10-Q for the quarterly periods ended Nov. 30, 2004, and
Feb. 28, 2005, on Feb. 5, 2004, a purported class action suit, styled VAVAO, et
al. v. The Dow Chemical Company, et al., was filed in the U.S. District Court
for the Eastern District of New York by the Vietnam Association of Victims of
Agent Orange (VAVAO) 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 was also
assigned to Judge Weinstein. On March 10, 2005, the District Court granted the
57
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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motions to dismiss and for summary judgment filed by Monsanto and other
defendants in this case. Plaintiffs have appealed the District Court's judgment
to the U.S. Court of Appeals for the Second Circuit.
Illinois Attorney General Subpoena
On April 18, 2005, Monsanto received from the Illinois Attorney General, and
subsequently disclosed, a subpoena for the production of documents relating to
the prices and terms upon which we license technology for genetically modified
seeds, and upon which we sell or license genetically modified seeds to growers.
Monsanto is cooperating with the production of the requested materials.
Proceedings Related to Solutia's Assumed Liabilities
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2004,
on June 5, 2003, Solutia and Pharmacia filed suit in the U.S. District Court for
the Northern District of Alabama against 19 parties to force them to pay a share
of past and future investigation and cleanup costs in Anniston under the
Comprehensive Environmental Response Compensation and Liability Act (CERCLA).
The action is styled Solutia Inc. and Pharmacia Corporation v. McWane, Inc. et
al. The 19 defendants are owners and operators of manufacturing facilities that
Solutia/Pharmacia believed were responsible for a major share of the PCB
contamination found throughout Anniston. Solutia was managing this suit until it
filed for bankruptcy protection, but Monsanto and Solutia have arranged for the
continued management and prosecution of this suit. In order to secure
cooperation in the cleanup of lead contamination in Anniston, the EPA is
pursuing an agreement with certain of the defendants to this suit by purporting
to give them contribution protection under CERCLA for both lead and PCB related
cleanup costs. This suit will be dismissed if the strategy of the EPA and these
settling parties prevails. On Pharmacia's behalf, Monsanto is vigorously
opposing the contribution-protection provision of the agreement. On June 30,
2005, the District Court ruled that the EPA had renounced the Anniston Revised
Partial Consent Decree (RPCD) by pursuing the separate agreement and ordered
that, upon motion by Pharmacia and Solutia, it would suspend Pharmacia's and
Solutia's obligations under the RPCD. At this time, the impact the District
Court's ruling on the RPCD work that Monsanto is performing on Pharmacia's
behalf is unclear.
Information regarding material legal proceedings related to Solutia's Assumed
Liabilities, which is disclosed in Part I -- Item 1 -- Note 16 under the
subheadings "Solutia Litigation Obligations" and "Solutia Environmental
Obligations" is incorporated by reference herein.
See "MD&A -- Cautionary Statements 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.
58
MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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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 third 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(2) or Programs the Plans or Programs
-----------------------------------------------------------------------------------------------------------------------------
March 2005:
March 1, 2005, through March 31, 2005 -- $ -- -- $160,487,560
April 2005:
April 1, 2005, through April 30, 2005 185,849(1) $ 59.12 185,200 $149,539,668
May 2005:
May 1, 2005, through May 31, 2005 1,103,300 $ 58.01 1,103,300 $ 85,540,331
-----------------------------------------------------------------------------------------------------------------------------
Total 1,289,149 $ 58.17 1,288,500 $ 85,540,331
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
(1) Includes 649 total number of restricted shares withheld to cover the
withholding taxes upon the vesting of restricted stock.
(2) The average price paid per share is calculated on a settlement basis and
excludes commission.
On July 31, 2003, the Executive Committee of the board of directors authorized
the purchase of up to $500 million of the company's common stock over a
three-year period. The plan expires on July 30, 2006. There were no other
publicly announced plans outstanding as of May 31, 2005.
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
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."
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MONSANTO COMPANY THIRD QUARTER 2005 FORM 10-Q
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------------------------------------- ---------------------------------------------------------------------------------------------
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 16
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.
60
SIGNATURE
--------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONSANTO COMPANY
(Registrant)
By: /s/ RICHARD B. CLARK
-------------------------------------
Richard B. Clark
Vice President and Controller
(On behalf of the Registrant and as
Principal Accounting Officer)
Date: July 11, 2005
61
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
10.15 Monsanto Non-Employee Director Equity Incentive Compensation Plan,
as amended and effective May 1, 2005 (incorporated by reference to
Exhibit 10.15 of the Form 8-K, filed April 25, 2005,
Commission File No. 1-16167).
11 Omitted -- see Note 14 of Notes to Consolidated Financial Statements
-- Earnings (Loss) Per Share.
12 Computation of Ratio of Earnings to Fixed Charges.
15 Omitted
18 Omitted
19 Omitted
22 Omitted
23 Omitted
24 Omitted
31.1 Rule 13a-14(a) Certification, executed by the Chief Executive
Officer of Monsanto Company.
31.2 Rule 13a-14(a) Certification, executed by the Chief Financial
Officer of Monsanto Company.
32 Exchange Act Rule 13(a)-14(b) and 18 U.S.C. Section 1350
Certifications, executed by the Chief Executive Officer and the
Chief Financial Officer of Monsanto Company.
63