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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 Feb. 29, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-16167
MONSANTO COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 43-1878297
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 NORTH LINDBERGH BLVD., ST. LOUIS, MO 63167
(Address of principal executive offices)
(Zip Code)
(314) 694-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--------- --------
Indicate by check mark whether the registrant is an accelerated filer(as defined
in Rule 12b-2 of the Act). YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class April 9, 2004
----- ------------------
Common Stock, $0.01 par value 265,581,270 shares
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MONSANTO COMPANY
FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Statement of Consolidated Operations 2
Condensed Statement of Consolidated Financial Position 3
Statement of Consolidated Cash Flows 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22
Background 22
Change in Fiscal Year End 22
Financial Measures 22
Results of Operations - Second Quarter Fiscal Year 2004 23
Results of Operations - First Half of Fiscal Year 2004 28
Restructuring 33
Financial Condition, Liquidity, and Capital Resources 36
Contingent Liabilities Relating to Solutia Inc. (Off-Balance Sheet Arrangement) 38
Outlook - Update 39
Critical Accounting Policies and Estimates 42
New Accounting Standards 43
Cautionary Statements: Risk Factors Regarding Forward-Looking Statements 44
Item 3. Quantitative and Qualitative Disclosures About Market Risk 48
Item 4. Controls and Procedures 48
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 49
Item 2. Securities, Use of Proceeds and Issuer Purchases of Equity Securities 56
Item 4. Submission of Matters to a Vote of Securities Holders 57
Item 5. Other Information 57
Item 6. Exhibits and Reports on Form 8-K 59
SIGNATURE 60
EXHIBIT INDEX 61
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The Statement of Consolidated Operations of Monsanto Company and
subsidiaries for the three months and six months ended Feb. 29, 2004, and
Feb. 28, 2003, the Condensed Statement of Consolidated Financial Position
as of Feb. 29, 2004, and Aug. 31, 2003, the Statement of Consolidated Cash
Flows for the six months ended Feb. 29, 2004, and Feb. 28, 2003, and
related Notes to Consolidated Financial Statements follow. Unless otherwise
indicated, "Monsanto" and "the company," and "we," "our," and "us," are
used interchangeably to refer to Monsanto Company or to Monsanto Company
and consolidated subsidiaries, as appropriate to the context. With respect
to the time period prior to Sept. 1, 2000, these terms also refer to the
agricultural business of Pharmacia Corporation (Pharmacia), which is now a
subsidiary of Pfizer Inc. Unless otherwise indicated, "earnings (loss) per
share" and "per share" mean diluted earnings (loss) per share. In tables,
all dollars are expressed in millions, except per share amounts. Trademarks
owned or licensed by Monsanto or its subsidiaries are shown in all capital
letters. Unless otherwise indicated, references to "ROUNDUP herbicides"
mean ROUNDUP branded and other branded glyphosate-based herbicides,
excluding all lawn-and-garden herbicides; references to "ROUNDUP and other
glyphosate-based herbicides" mean both branded and nonbranded
glyphosate-based herbicides, excluding all lawn-and-garden herbicide
products.
1
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(Dollars in millions, except per share amounts)
Unaudited
Three Months Ended Six Months Ended
-------------------- --------------------
Feb. 29, Feb.28, Feb. 29, Feb. 28,
2004 2003 2004 2003
---- ---- ---- ----
Net Sales $1,492 $1,293 $2,520 $2,139
Cost of Goods Sold 744 654 1,304 1,150
------ ------ ------ ------
Gross Profit 748 639 1,216 989
Operating Expenses:
Selling, general and administrative expenses 275 241 552 458
Bad-debt expense 22 14 40 34
Research and development expenses 126 127 242 243
Adjustments of goodwill -- -- 69 --
Restructuring charges - net 28 31 57 39
------ ------ ------ ------
Total Operating Expenses 451 413 960 774
Income From Operations 297 226 256 215
Interest Expense (23) (22) (44) (44)
Interest Income 8 3 12 10
Other Expense - Net (37) (20) (62) (19)
------ ------ ------ ------
Income From Continuing Operations Before Income Taxes and Cumulative Effect of
Accounting Change 245 187 162 162
Income Tax Expense 89 72 83 64
------ ------ ------ ------
Income From Continuing Operations Before Cumulative Effect of Accounting Change 156 115 79 98
Cumulative effect of a change in accounting principle - net of tax benefit of $7 -- (12) -- (12)
------ ------ ------ ------
Income From Continuing Operations 156 103 79 86
Discontinued Operations (Note 16):
Loss from operations of discontinued businesses (including estimated loss on
disposal of $29 for the six months ended Feb. 29, 2004) (3) (5) (31) (7)
Income tax benefit (1) (2) (9) (3)
------ ------ ------ ------
Loss on Discontinued Operations (2) (3) (22) (4)
------ ------ ------ ------
Net Income $ 154 $ 100 $ 57 $ 82
====== ====== ====== ======
Basic Earnings (Loss) per Share:
Income from continuing operations before cumulative effect of accounting change $ 0.59 $ 0.44 $ 0.30 $ 0.37
Cumulative effect of a change in accounting principle -- (0.05) -- (0.05)
------ ------ ------ ------
Income from continuing operations 0.59 0.39 0.30 0.32
Loss on discontinued operations (0.01) (0.01) (0.08) (0.01)
------ ------ ------ ------
Net Income $ 0.58 $ 0.38 $ 0.22 $ 0.31
====== ====== ====== ======
Diluted Earnings (Loss) per Share:
Income from continuing operations before cumulative effect of accounting change $ 0.58 $ 0.44 $ 0.29 $ 0.37
Cumulative effect of a change in accounting principle -- (0.05) -- (0.05)
------ ------ ------ ------
Income from continuing operations 0.58 0.39 0.29 0.32
Loss on discontinued operations (0.01) (0.01) (0.08) (0.01)
------ ------ ------ ------
Net Income $ 0.57 $ 0.38 $ 0.21 $ 0.31
====== ====== ====== ======
Weighted Average Shares Outstanding:
Basic 264.3 261.4 263.2 261.4
Diluted 268.8 261.4 267.4 261.4
Dividends per Share $ 0.13 $ 0.24 $ 0.26 $ 0.36
See the accompanying notes to consolidated financial statements.
2
MONSANTO COMPANY AND SUBSIDIARIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Dollars in millions, except share amounts)
Unaudited
As of Feb. 29, As of Aug. 31,
2004 2003
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 298 $ 281
Short-term investments 250 230
Trade receivables, net of allowances of $273 and $254, respectively 2,060 2,296
Miscellaneous receivables 444 437
Deferred tax assets 247 430
Inventories 1,316 1,207
Assets of discontinued operations 17 --
Other current assets 84 58
------- -------
Total Current Assets 4,716 4,939
Property, Plant and Equipment - Net 2,198 2,280
Goodwill - Net 723 768
Other Intangible Assets - Net 508 571
Other Assets 818 903
------- -------
Total Assets $ 8,963 $ 9,461
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Short-term debt $ 365 $ 269
Accounts payable 316 290
PCB litigation settlement liability -- 400
Liabilities of discontinued operations 3 --
Accrued liabilities 847 985
------- -------
Total Current Liabilities 1,531 1,944
Long-Term Debt 1,174 1,258
Postretirement Liabilities 708 837
Other Liabilities 250 266
Commitments and Contingencies (Note 13)
Shareowners' Equity:
Common stock (authorized: 1,500,000,000 shares, par value $0.01)
Issued 268,635,130 and 262,681,253 shares, respectively;
outstanding 264,820,969 and 262,678,753 shares, respectively 3 3
Treasury stock, 3,814,161 and 2,500 shares, respectively, at cost (106) --
Additional contributed capital 8,214 8,077
Retained deficit (1,744) (1,733)
Accumulated other comprehensive loss (1,048) (1,168)
Reserve for ESOP debt retirement (19) (23)
------- -------
Total Shareowners' Equity 5,300 5,156
------- -------
Total Liabilities and Shareowners' Equity $ 8,963 $ 9,461
======= =======
See the accompanying notes to consolidated financial statements.
3
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
Unaudited
Six Months Ended
---------------------------
Feb. 29, Feb. 28,
2004 2003
---- ----
Operating Activities:
Net Income $ 57 $ 82
Adjustments to reconcile cash provided (required) by operations:
Items that did not require (provide) cash:
Pretax cumulative effect of change in accounting principle -- 19
Depreciation and amortization expense 228 224
Adjustments of goodwill 69 --
Impairment of assets included in discontinued operations 29 --
Bad-debt expense 40 34
Noncash restructuring 32 19
Deferred income taxes 246 (54)
Gain on disposal of investments and property - net (5) (3)
Equity affiliate expense - net 20 21
Write-off of retired assets 4 15
Other items that did not require (provide) cash 15 (19)
Changes in assets and liabilities that provided (required) cash:
Trade receivables 478 693
Inventories (79) (86)
Accounts payable and accrued liabilities (400) (107)
PCB litigation settlement liability (400) --
Pension contributions (150) (20)
Related-party transactions -- 6
Other items 33 (23)
----- -----
Net Cash Provided by Operations 217 801
----- -----
Cash Flows Provided (Required) by Investing Activities:
Purchases of short-term investments (250) (250)
Maturities of short-term investments 230 --
Capital expenditures (103) (114)
Technology and other investments (33) (31)
Property disposal proceeds 10 7
----- -----
Net Cash Required by Investing Activities (146) (388)
----- -----
Cash Flows Provided (Required) by Financing Activities:
Net change in short-term financing (54) (370)
Long-term debt proceeds 101 15
Long-term debt reductions (43) (35)
Payments on other financing (3) (10)
Treasury stock purchases (106) --
Stock option exercises 119 --
Dividend payments (68) (63)
----- -----
Net Cash Required by Financing Activities (54) (463)
----- -----
Net Increase (Decrease) in Cash and Cash Equivalents 17 (50)
Cash and Cash Equivalents at Beginning of Period 281 137
----- -----
Cash and Cash Equivalents at End of Period $ 298 $ 87
===== =====
See Note 12 - Supplemental Cash Flow Information - for further details.
See the accompanying notes to consolidated financial statements.
4
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Note 1 - Background and Basis of Presentation
Monsanto Company, together with its subsidiaries, is a leading
global provider of agricultural products and integrated solutions for
farmers. Monsanto produces leading seed brands, including DEKALB and
ASGROW, and develops biotechnology traits that assist farmers in
controlling insects and weeds. Monsanto provides other seed companies
with genetic material and biotechnology traits for their seed brands.
The company also makes ROUNDUP herbicide and other herbicides.
Monsanto's seeds, related biotechnology trait products, and herbicides
can be combined to provide growers with integrated solutions that
improve productivity and reduce the costs of farming. Monsanto also
provides lawn-and-garden herbicide products for the residential market
and animal agricultural products focused on improving dairy cow
productivity and swine genetics.
Monsanto manages its business in two segments: Seeds and
Genomics, and Agricultural Productivity. The Seeds and Genomics
segment consists of the global seeds and related traits businesses,
and genetic technology platforms. The Agricultural Productivity
segment consists of the crop protection products, animal agriculture,
lawn-and-garden herbicide products, and environmental technologies
businesses. In October 2003, the company announced plans to exit the
European breeding and seed business for wheat and barley and to
discontinue the plant-made pharmaceuticals program. In March 2004,
Monsanto signed a definitive agreement for the sale of assets
associated with the European breeding and seed business for wheat and
barley. Refer to Note 17 - Subsequent Event - for further details. As
a result of the exit plans announced in October 2003, the European
wheat and barley and plant-made pharmaceuticals businesses have been
presented as discontinued operations. Accordingly, for the three
months and six months ended Feb. 29, 2004, and Feb. 28, 2003, the
Statement of Consolidated Operations has been conformed to this
presentation. Also as of Feb. 29, 2004, the Condensed Statement of
Consolidated Financial Position has been conformed to this
presentation. These businesses were previously reported as part of the
Seeds and Genomics segment. Refer to Note 16 - Discontinued Operations
- for further discussion. Certain prior-period amounts have been
reclassified to conform with the current-year presentation.
In July 2003, Monsanto's board of directors approved a change to
Monsanto's fiscal year end from December 31 to August 31. This change
aligned the fiscal year more closely with the seasonal nature of
Monsanto's business. Accordingly, unaudited consolidated financial
statements as of and for the three months and six months ended Feb.
29, 2004 (also referred to as the second quarter and first half,
respectively, of fiscal year 2004), and as of and for the three months
and six months ended Feb. 28, 2003, are presented in this Form 10-Q.
The accompanying consolidated financial statements have not been
audited, but have been prepared in conformity with accounting
principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. In the opinion of management, these
unaudited consolidated financial statements contain all adjustments
necessary to present fairly the financial position, results of
operations and cash flows for the interim periods reported. This
quarterly report on Form 10-Q should be read in conjunction with the
audited consolidated financial statements as presented in Monsanto's
report on Form 10-K for the transition period ended Aug. 31, 2003, and
Monsanto's quarterly report on Form 10-Q for the period ended Nov. 30,
2003. Financial information for the first six months of fiscal year
2004 should not be annualized because of the seasonality of the
company's business.
Note 2 - New Accounting Standards
In January 2003, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46), and amended it by issuing FIN 46R in December 2003.
Application of this interpretation is required in the company's
financial statements for the quarter ended Feb. 29, 2004, for
interests in variable interest entities that are considered to be
special-purpose entities. Application of FIN 46R for all other types
of variable interest entities is required for Monsanto effective May
31, 2004.
FIN 46R addresses the consolidation of business enterprises to
which the usual condition of consolidation (ownership of a majority
voting interest) does not apply. This interpretation focuses on
controlling financial interests that may be achieved through
arrangements that do not involve voting interests. It concludes that,
5
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
in the absence of clear control through voting interests, a company's
exposure (variable interest) to the economic risks and potential
rewards from the variable interest entity's assets and activities are
the best evidence of control. If an enterprise holds a majority of the
variable interests of an entity, it would be considered the primary
beneficiary. The primary beneficiary is required to include the
assets, liabilities and results of operations of the variable interest
entity in its financial statements.
Monsanto has an arrangement with a special-purpose entity to
provide a financing program for selected Monsanto customers. See Note
4 - Customer Financing Program - for a description of this
arrangement. This special-purpose entity is consolidated. Other
variable interest entities with which the company is involved must be
evaluated prior to May 31, 2004, to determine the primary beneficiary.
In January 2004, the FASB issued FASB Staff Position No. 106-1
(FSP 106-1), Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003.
FSP 106-1 permits a sponsor of a postretirement health care plan that
provides a prescription drug benefit to make a one-time election to
defer accounting for the effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act), which was signed
into law on Dec. 8, 2003. The Act introduced a prescription drug
benefit under Medicare, as well as a federal subsidy to sponsors of
retiree health care benefit plans that provide a benefit that is at
least actuarially equivalent to Medicare. These provisions of the new
law will affect accounting measurements of the company's
postretirement benefit obligation and expense. As permitted by FSP
106-1, Monsanto made a one-time election to defer accounting for the
effect of the Act until specific authoritative guidance is issued.
Therefore, the amounts included in the consolidated financial
statements related to the company's postretirement benefit plans do
not reflect the effects of the Act. Final authoritative guidance could
require the company to change previously reported information.
In December 2003, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 132 (Revised 2003), Employers'
Disclosures about Pensions and Other Postretirement Benefits, which
enhanced the required disclosures about pension plans and other
postretirement benefit plans, but did not change the measurement or
recognition principles for those plans. The statement requires
additional interim and annual disclosures about the assets,
obligations, cash flows, and net periodic benefit cost of defined
benefit pension plans and other defined benefit postretirement plans.
The required interim disclosures are effective for Monsanto in the
third quarter of fiscal year 2004, and the required annual disclosures
are effective for Monsanto's 10-K for the fiscal year ended Aug. 31,
2004.
In December 2003, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 104, Revenue Recognition (SAB
104). SAB 104 updates portions of the interpretive guidance included
in Topic 13 of the codification of Staff Accounting Bulletins in order
to make this interpretive guidance consistent with current
authoritative accounting and auditing guidance and SEC rules and
regulations. The company believes it is following the guidance of SAB
104.
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS 143). SFAS 143, which was effective for
Monsanto on Jan. 1, 2003, addresses financial accounting for and
reporting of costs and obligations associated with the retirement of
tangible long-lived assets. Upon adopting this standard, in accordance
with APB Opinion 20, Monsanto recorded an aftertax cumulative effect
of accounting change of $12 million, or $0.05 per share. This noncash
charge was recorded as of Jan. 1, 2003. In addition, as required by
SFAS 143, as of Jan. 1, 2003, net property, plant and equipment
increased by $10 million, and asset retirement obligations (a
component of noncurrent liabilities) of $30 million were recorded.
Adoption of this standard did not affect the company's liquidity. If
SFAS 143 would have been effective for all periods presented, net
earnings would have been reduced by less than $1 million and $1
million for the three months and six months ended Feb. 28, 2003,
respectively, with no change to reported diluted earnings per share in
either period.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). SFAS 146
replaced Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS 146 requires companies to recognize costs
associated with exit or disposal activities when they are actually
incurred, rather than on the date the company commits itself to the
6
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
exit or disposal plan. This statement is effective for any exit or
disposal activities initiated after Dec. 31, 2002. Monsanto is
following the guidance of SFAS 146 for the fiscal year 2004
restructuring plan. Refer to Note 3 - Restructuring - for further
details. The adoption of SFAS 146 had no effect on Monsanto's 2002 and
2000 restructuring plans, which were both initiated prior to Dec. 31,
2002.
Note 3 - Restructuring
Restructuring charges were recorded in the Statement of
Consolidated Operations as follows:
Three Months Ended Six Months Ended
------------------------ -----------------------
Feb. 29, Feb. 28, Feb. 29, Feb. 28,
2004 2003 2004 2003
---- ---- ---- ----
Cost of goods sold $(17) $ (4) $(17) $(10)
Restructuring charges - net (1) (28) (31) (57) (39)
---- ----- ----- -----
Loss from continuing operations before income
taxes (45) (35) (74) (49)
Income tax benefit 13 13 24 18
---- ----- ----- -----
Loss from continuing operations (32) (22) (50) (31)
Loss from operations of discontinued businesses (2) (1) -- (34) --
Income tax benefit 1 -- 10 --
---- ----- ----- -----
Loss on discontinued operations -- -- (24) --
---- ----- ----- -----
Net loss $(32) $ (22) $(74) $(31)
==== ===== ==== ====
(1) The restructuring charges for the three months ended Feb. 29, 2004, and
Feb. 28, 2003, were offset by $1 million and $8 million, respectively, in
restructuring reversals related to prior plans. Restructuring charges for
the six months ended Feb. 29, 2004, and Feb. 28, 2003, were offset by $2
million and $12 million, respectively.
(2) Fiscal year 2004 contains restructuring charges related to discontinued
businesses (refer to Note 16 - Discontinued Operations). These
restructuring charges were recorded in discontinued operations. Refer to
the tables that follow for more details.
Fiscal Year 2004 Restructuring Plan
On Oct. 15, 2003, Monsanto announced plans to continue to reduce
the costs associated with its agricultural chemistry business as that
segment matures globally. Total restructuring charges approved under
the fiscal year 2004 restructuring plan were $289 million pretax. The
company will further concentrate its resources on its core seeds and
traits businesses. These plans include: (1) reducing costs associated
with the company's ROUNDUP herbicide business, (2) exiting the
European breeding and seed business for wheat and barley, and (3)
discontinuing the plant-made pharmaceuticals program. These actions
will require total restructuring charges of up to $220 million pretax
($155 million aftertax) in fiscal year 2004. Additionally, the
approved plan included the $69 million impairment of goodwill in the
global wheat business (refer to Note 6 - Goodwill and Other Intangible
Assets). The goodwill impairment was not deductible for tax purposes.
Second quarter fiscal year 2004 pretax restructuring charges of
$47 million were comprised of $11 million related to the Seeds and
Genomics segment ($10 million in continuing operations and $1 million
in discontinued operations), and $36 million related to the
Agricultural Productivity segment. Pretax restructuring charges of
$110 million for the first six months of fiscal year 2004 were
comprised of $67 million related to the Seeds and Genomics segment
($33 million in continuing operations and $34 million in discontinued
operations) and $43 million related to the Agricultural Productivity
segment. Additional actions identified for reducing costs in the
ROUNDUP herbicide business are expected to occur in future quarters of
fiscal year 2004. For fiscal year 2004, the company estimates it will
incur $144 million of pretax charges relating to the Seeds and
Genomics segment and $145 million of pretax charges relating to the
Agricultural Productivity segment. The company estimates it will incur
$126 million of pretax charges relating to work force reductions, $10
million pretax in facility closures, and $84 million pretax in asset
impairments (excluding the $69 million impairment of goodwill related
to the global wheat reporting unit discussed in Note 6 - Goodwill and
Other Intangible Assets) during fiscal year 2004.
7
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
During the second quarter of fiscal year 2004, pretax
restructuring charges of $26 million were recorded in continuing
operations related to work force reductions. Work force reductions
were primarily related to downsizing the regional structure and key
country focus in Europe. Facility closure charges of $1 million
related to shutdown expenses resulting from the exit of the plant-made
pharmaceuticals site. Asset impairments in continuing operations of
$20 million include $17 million recorded in cost of goods sold and the
remainder in restructuring charges - net. Property, plant and
equipment impairments of $9 million were recorded in the United States
and, to a lesser extent, in Asia for the shutdown of production lines
and equipment. Inventory impairments of $8 million were also recorded
related to discontinued seed hybrids in Argentina, discontinued
agricultural chemical products and seed hybrids in Brazil, and
discontinued agricultural chemical products in Asia. Asset impairments
in restructuring charges - net consisted of $2 million for the closure
of a technology facility in Canada and approximately $1 million for
the disposal of a computer system in Asia.
In the first half of fiscal year 2004, pretax restructuring
charges of $46 million were recorded related to work force reductions.
Work force reductions in continuing operations of $43 million were
primarily in the areas of research and development, information
technology, and marketing in the United States; downsizing the
regional structure and key country focus in Europe; and downsizing the
sales force in Canada as a result of the realignment of the Canadian
business to focus on the Seeds and Genomics segment. Work force
reduction charges included in discontinued operations of $3 million
were related to employees of the plant-made pharmaceuticals program.
Facility closure charges of $2 million related to shutdown expenses
resulting from the exit of the plant-made pharmaceuticals site. Asset
impairments in continuing operations of $33 million include $17
million recorded in cost of goods sold and the remainder in
restructuring charges - net. All asset impairments in cost of goods
sold were charged during the second quarter of fiscal year 2004. Asset
impairments in restructuring charges - net consisted of $11 million
for the closure of an office building in the United States, $2 million
for the closure of a technology facility in Canada, an intangible
asset impairment of $2 million in Asia (refer to Note 6 - Goodwill and
Other Intangible Assets), and approximately $1 million for the
disposal of a computer system in Asia. Discontinued operations asset
impairments of $29 million consisted of $26 million of other
intangible assets impairments (refer to Note 6) and $2 million of
property, plant and equipment impairments, both associated with the
European wheat and barley business; and property, plant and equipment
impairments of $1 million associated with the plant-made
pharmaceuticals business.
Work force reduction and facility closure charges were cash
charges. Asset impairments were non-cash charges. The following table
displays the net pretax charges incurred by segment for the three
months ended Feb. 29, 2004:
Work Force Facility Asset
Segment Reductions Closures Impairments Total
- ------- ----------------- -------------- ----------------- ----------------
Continuing Operations:
Seeds and Genomics $ 2 $-- $ 8 $10
Agricultural Productivity 24 -- 12 36
----------------- -------------- ----------------- ----------------
Total Continuing Operations 26 -- 20 46
Discontinued Operations:
Seeds and Genomics -- 1 -- 1
Agricultural Productivity -- -- -- --
----------------- -------------- ----------------- ----------------
Total Discontinuing Operations -- 1 -- 1
Total Segment
Seeds and Genomics 2 1 8 11
Agricultural Productivity 24 -- 12 36
----------------- -------------- ----------------- ----------------
Total $ 26 $ 1 $ 20 $47
================= ============== ================= ================
8
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
The following table displays the net pretax charges incurred by
segment for the six months ended Feb. 29, 2004:
Work Force Facility Asset
Segment Reductions Closures Impairments Total
- ------- ----------------- -------------- ----------------- ---------------
Continuing Operations:
Seeds and Genomics $12 $-- $21 $ 33
Agricultural Productivity 31 -- 12 43
----------------- -------------- ----------------- ---------------
Total Continuing Operations 43 -- 33 76
Discontinued Operations:
Seeds and Genomics 3 2 29 34
Agricultural Productivity -- -- -- --
----------------- -------------- ----------------- ---------------
Total Discontinuing Operations 3 2 29 34
Total Segment
Seeds and Genomics 15 2 50 67
Agricultural Productivity 31 -- 12 43
----------------- -------------- ----------------- ---------------
Total $46 $ 2 $62 $110
================= ============== ================= ===============
Charges incurred in connection with the fiscal year 2004
restructuring plan were accounted for under SFAS 146 (as discussed in
Note 2 - New Accounting Standards) and SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. The company's written
human resource policies are indicative of an ongoing benefit
arrangement in respect to severance packages. Benefits paid pursuant
to an ongoing benefit arrangement are specifically excluded from the
scope of SFAS 146 and should be accounted for in accordance with the
accounting pronouncement applicable to the company's arrangement.
Monsanto accounted for its severance packages under SFAS No. 88,
Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, which addresses
the accounting for other employee benefits.
The following table displays a rollforward of the liability
established for restructuring expense from Oct. 15, 2003 (the date of
board of directors approval), to Feb. 29, 2004:
Work Force Facility Asset
Continuing Operations: Reductions Closures Impairments Total
--------------- -------------- ----------------- -----------------
Restructuring liability $43 $-- $ 33 $76
Cash payments (21) -- -- (21)
Asset impairment -- -- (33) (33)
Reclassification of reserves to other balance
sheet accounts: Misc. liability (1) -- -- (1)
--------------- -------------- ----------------- -----------------
Ending liability as of Feb. 29, 2004 21 -- -- 21
Discontinued Operations:
Restructuring liability 3 2 29 34
Cash payments (2) (2) -- (4)
Asset impairment -- -- (29) (29)
--------------- -------------- ----------------- -----------------
Ending liability as of Feb. 29, 2004 1 -- -- 1
Total Restructuring
Restructuring liability 46 2 62 110
Cash payments (23) (2) -- (25)
Asset impairment -- -- (62) (62)
Reclassification of reserves to other balance
sheet accounts: Misc. liability (1) -- -- (1)
--------------- -------------- ----------------- -----------------
Ending liability as of Feb. 29, 2004 $22 $-- $ -- $22
=============== ============== ================= =================
9
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
2002 Restructuring Plan (charges recorded in calendar year 2002)
In 2002, Monsanto's management approved a restructuring plan to
further consolidate or shut down facilities and to reduce the work
force. Under this plan, various research and development programs and
sites were shut down in the United States and Europe. This
restructuring plan also involved the closure and downsizing of certain
agricultural chemical manufacturing facilities in the Asia-Pacific
region and the United States as a result of more efficient production
capacity installed at other Monsanto manufacturing sites. Certain seed
sites were consolidated within the United States and within Brazil,
and certain U.S. swine facilities were exited. Finally, the plan
included work force reductions in addition to those related to the
facility closures. These additional reductions were primarily
marketing and administrative positions in Asia-Pacific, Europe-Africa,
and the United States. In connection with this plan, Monsanto recorded
$43 million pretax of restructuring charges during the quarter ended
Feb. 28, 2003. Of these charges, $4 million was recorded in cost of
goods sold and the remainder in the restructuring line item. The
company recorded $61 million pretax of restructuring charges during
the first half of 2003. During the first half of 2003, $10 million was
recorded in cost of goods sold and the remainder in the restructuring
line item. The company also recorded reversals of $8 million and $12
million in the three months and six months ended Feb. 28, 2003,
respectively, for the 2000 and 2002 restructuring plans. Net pretax
restructuring expenses of $35 million and $49 million were recorded in
the three months and six months ended Feb. 28, 2003, respectively.
Activities related to the 2002 restructuring plan during the
first half of fiscal year 2004 were as follows:
Work Force Facility
Reductions Closures Total
---------- -------- -----
Beginning liability as of Aug. 31, 2003 $ 2 $ 3 $ 5
Costs Charged Against Reserves (1) (2) (3)
--- --- ---
Ending liability as of Feb. 29, 2004 $ 1 $ 1 $ 2
=== === ===
During the first half of fiscal year 2004, the reserve balance
was reduced by approximately $1 million for cash severance payments to
former employees and approximately $2 million for facility closure
actions that were completed. The work force separation payments for
the remaining employees associated with this plan and the remaining
asset dispositions and other exit activities are expected to be
completed during fiscal year 2004. Cash payments to complete these
restructuring actions will be funded from operations; such payments
are not expected to significantly affect the company's liquidity.
2000 Restructuring Plan (charges recorded in calendar years 2001
and 2000)
In 2000, Monsanto's management formulated a plan as part of the
company's overall strategy to focus on certain key crops and to
streamline operations. Restructuring and other special items,
primarily associated with the implementation of this plan, were
recorded during calendar years 2001 and 2000. These charges totaled
$474 million pretax ($334 million aftertax): $213 million ($137
million aftertax) recorded in calendar year 2001, and $261 million
($197 million aftertax) recorded in calendar year 2000.
Activities related to the 2000 restructuring plan during the
first half of fiscal year 2004 were as follows:
Work Force Facility
Reductions Closures Total
---------- -------- -----
Beginning liability as of Aug. 31, 2003 $ 5 $ 3 $ 8
Costs Charged Against Reserves (1) (2) (3)
--- --- ---
Ending liability as of Feb. 29, 2004 $ 4 $ 1 $ 5
=== === ===
The 2000 plan restructuring reserves decreased $3 million in the
first half of 2004. The decrease was primarily due to the sale of a
U.S. manufacturing plant during the second quarter 2004. Second
quarter reversals consisted of less than $1 million related to asset
impairments that were originally recorded as restructuring charges;
the reversal does not impact the restructuring liability rollforward.
Approximately $1 million in 2000 restructuring plan reversals were
recorded in the first half of fiscal year 2004 and consisted of less
than $1 million in facility closures and approximately $1 million in
10
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
asset impairment reversals that were originally recorded as
restructuring charges. Reversals were recorded primarily because costs
were lower than originally estimated.
The remaining restructuring actions associated with this plan are
expected to be completed during fiscal year 2004. The remaining
actions will be funded from operations; these actions are not expected
to significantly affect the company's liquidity.
Note 4 - Customer Financing Program
In April 2002, Monsanto established a new $500 million revolving
financing program for selected customers through a third-party
specialty lender. Under the financing program, Monsanto originates
customer loans on behalf of the lender, which is a special purpose
entity (SPE) that Monsanto consolidates, pursuant to Monsanto's credit
and other underwriting guidelines approved by the lender. Monsanto
services the loans and provides a first loss guarantee of up to $100
million. Following origination, the lender transfers the loans to
multi-seller commercial paper conduits through a non-consolidated
qualifying special purpose entity (QSPE). Monsanto accounts for this
transaction as a sale, in accordance with SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities.
Monsanto has no ownership interest in the lender, in the QSPE, or
in the loans. However, because Monsanto substantively originates the
loans through the SPE (which it consolidates) and partially guarantees
and services the loans, Monsanto accounts for the program as if it
were the originator of the loans and the transferor selling the loans
to the QSPE.
Monsanto records its guarantee liability at a value that
approximates fair value (except that it does not discount credit
losses, because of the short term of the loans), primarily related to
expected future credit losses. Monsanto does not recognize any
servicing asset or liability, because the servicing fee is adequate
compensation for the servicing activities. Discounts on the sale of
the customer loans, and servicing revenues collected and earned were
not significant during the first half of 2004 and 2003.
Customer loans sold through the financing program totaled $124
million for the first six months of fiscal year 2004 and $137 million
for the comparable period last year. The loan balances outstanding as
of Feb. 29, 2004, and Aug. 31, 2003, were $108 million and $198
million, respectively. The $100 million first loss guarantee will be
in place throughout the financing program. If a customer fails to pay
an obligation when due, Monsanto would incur a liability to perform
under the first loss guarantee. As of both Feb. 29, 2004, and Aug. 31,
2003, less than $1 million of loans sold through this financing
program were delinquent. As of Feb. 29, 2004, and Aug. 31, 2003,
Monsanto recorded its guarantee liability at less than $1 million,
based on the company's historical collection experience with these
customers and the company's current assessment of credit exposure.
Adverse changes in the actual loss rate would increase the liability.
If Monsanto is called upon to make payments under the first loss
guarantee, it would have the benefit under the financing program of
any amounts subsequently collected from the customer.
As discussed in Note 2 - New Accounting Standards, in January
2003, FIN 46 was issued and then amended by FIN 46R in December 2003.
The SPE is included in Monsanto's consolidated financial statements.
Because QSPEs are excluded from the scope of FIN 46R and Monsanto does
not have the unilateral right to liquidate the QSPE, this
interpretation does not have an effect on Monsanto's accounting for
the customer financing program.
11
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Note 5 - Inventories
Components of inventories were:
As of Feb. 29, As of Aug. 31,
2004 2003
----------------- ----------------
Finished Goods $ 644 $ 516
Goods In Process 413 464
Raw Materials and Supplies 276 246
------- -------
Inventories at FIFO Cost 1,333 1,226
Excess of FIFO over LIFO Cost (17) (19)
------- -------
Total $ 1,316 $ 1,207
======= =======
Note 6 - Goodwill and Other Intangible Assets
Changes in the net carrying amount of goodwill for the six months
ended Feb. 29, 2004, by segment, are as follows:
Seeds and Agricultural
Genomics Productivity Total
--------- ------------ -----
Balance as of Aug. 31, 2003 $694 $74 $768
Adjustments of goodwill (69) -- (69)
Effect of foreign currency translation adjustments 23 1 24
---- --- ----
Balance as of Feb. 29, 2004 $648 $75 $723
==== === ====
The annual goodwill impairment test was performed as of July 1,
2003, and no indications of impairment existed as of that date. The
company's decision in October 2003 to exit the European wheat and
barley business required a reevaluation for potential impairment of
goodwill and other intangible assets related to the company's global
wheat business. A potential impairment was determined in the wheat
reporting unit during the quarter ended Nov. 30, 2003. Fair value
calculations using a discounted cash flow methodology indicated a
potential goodwill impairment, which required the company to perform
the second step of the goodwill impairment test. The decision to exit
the European wheat business had a negative effect on the assumptions
underlying the fair value calculation of the remaining global wheat
business because of its effect on the probability of success of the
remaining product development efforts. The second step of the
impairment assessment was completed during the quarter ended Nov. 30,
2003, and resulted in the $69 million impairment of goodwill in the
global wheat business. The resulting impairment charge was specific to
the wheat reporting unit. This impairment charge had no effect on
Monsanto's liquidity or cash flow.
Under SFAS 142, Goodwill and Other Intangible Assets, the company
initially selected July 1 for performing the required annual
impairment testing of goodwill since July 1 was at the approximate
time that the company completed its annual reassessment of its
strategy and revised its long-term financial projections. Performing
the SFAS 142 goodwill impairment testing at this time was appropriate
as the revised long-term financial projections that were the basis for
such measurements had been updated to reflect management's current
strategic direction and considered the company's current and expected
future business environment. Accordingly, when the decision was made
to change the company's fiscal year-end from December 31 to August 31,
the company also changed its annual strategic reassessment completion
timing from approximately July 1 to approximately March 1. As a
result, the company has changed its annual goodwill impairment testing
date to March 1. The change is not intended to delay, accelerate, or
avoid an impairment charge. Therefore, the company believes that the
accounting change described above is to an alternative principle that
is preferable under the circumstances.
12
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Information regarding the company's other intangible assets is as
follows:
As of Feb. 29, 2004 As of Aug. 31, 2003
------------------------------------ -------------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------- ------------ --- -------- ------------ ---
Germplasm $ 589 $(391) $198 $ 617 $(376) $241
Acquired biotechnology
intellectual property 415 (195) 220 392 (172) 220
Trademarks 85 (23) 62 108 (26) 82
Other 48 (20) 28 44 (16) 28
------- ------ ---- ------- ------ ----
Total $ 1,137 $(629) $508 $ 1,161 $(590) $571
======= ===== ==== ======= ===== ====
In addition to the goodwill adjustment discussed above, germplasm
and trademarks with carrying values of $7 million and $19 million,
respectively, were also written off during the first quarter of fiscal
year 2004 because of the decision to exit the European wheat and
barley business. The amounts of these charges were based on the
company's estimate of fair value and were recorded within discontinued
operations. Although these write-offs affected the Seeds and Genomics
segment operating results, they did not affect Monsanto's liquidity or
cash flow. Germplasm intangible assets also decreased by $2 million in
the first quarter of fiscal year 2004 for an intangible asset
impairment recognized upon the company's decision to exit certain
non-strategic projects in Asia as a result of the fiscal year 2004
restructuring plan. This impairment expense was recorded in
restructuring charges - net for the Seeds and Genomics segment. The
decreases in germplasm intangible assets were partially offset in the
second quarter of fiscal 2004 by the purchase of an additional
interest in a Canadian seed company; approximately $4 million of the
purchase price was allocated to germplasm and is being amortized over
seven years.
The increase in the carrying amount of acquired biotechnology
intellectual property was primarily related to the acquisition of a
software license for approximately $17 million. This license will
provide enabling technology to Monsanto to improve the speed and
efficiency of moving product concepts through its pipeline and has a
useful life of seven years. Additionally, during the first half of
fiscal 2004, deliverables totaling $7 million were received under the
2002 collaboration with Ceres, Inc. This existing technology has a
weighted-average useful life of 10 years. Other intangible assets
include the company's only nonamortizing intangible asset of $21
million associated with minimum pension liabilities, most of which was
recognized in calendar year 2002.
Total amortization expense of other intangible assets for the
three months ended Feb. 29, 2004, and Feb. 28, 2003, was $31 million
and $32 million, respectively (exclusive of $2 million amortization
expense for the three months ended Feb. 28, 2003, included in
discontinued operations). Total amortization expense of other
intangible assets for the six months ended Feb. 29, 2004, and Feb. 28,
2003, was $62 million and $58 million, respectively (exclusive of the
impairment charges discussed above and $1 million and $3 million
amortization expense for the six months ended Feb. 29, 2004, and Feb.
28, 2003, respectively, included in discontinued operations).
Estimated intangible asset amortization expense for each of the five
succeeding fiscal years has not changed significantly from the amounts
disclosed in Monsanto's report on Form 10-K for the transition period
ended Aug. 31, 2003.
Note 7 - Income Taxes
Management regularly assesses the likelihood that deferred tax
assets will be recovered from future taxable income. To the extent
management believes that it is more likely than not that a deferred
tax asset will not be realized, a valuation allowance is established.
During the second quarter of fiscal 2004, the company assessed the
realizability of its deferred tax assets in Argentina and Brazil
following completion of the crop season in these countries and the
preparation of updated long-range financial projections for these
countries. The company concluded that it was more likely than not that
the deferred tax assets of $102 million related to net operating loss
carryforwards (NOLs) in Argentina will not be realizable prior to
their expiration from 2006 to 2009 and established a valuation
allowance for the entire amount. This conclusion is based on the
recent history of losses, the continued uncertain economic conditions
and also the limited tax carryforward period of five years. Management
13
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
is taking actions to attempt to realize such deferred tax assets;
however such actions are dependent, in part, on conditions that are
not entirely in management's control. The company also concluded that
it is more likely than not that it will realize its deferred tax
assets in Argentina that are not related to the NOLs noted above
through future projected taxable income.
At the beginning of fiscal 2004, Monsanto Brazil had a valuation
allowance of $90 million for deferred tax assets related to NOLs
because management believed it was more likely than not that such
deferred tax assets would not be realized. However, based on
improvements in Monsanto Brazil's operations related to business
changes that the company had begun implementing two crop seasons
previously, and improvements over that period in Brazil's overall
economy, and in particular the agricultural sector, management now
believes it is more likely than not that such deferred tax assets will
be realized. Accordingly, the previously recorded $90 million
valuation allowance, related to NOLs which have an indefinite life,
has been reversed in the second quarter of fiscal 2004. The company
also concluded that it is more likely than not that it will realize
its deferred tax assets in Brazil that are not related to the NOLs
noted above through future projected taxable income.
Note 8 - Accounting for Derivative Instruments and Hedging Activities
Monsanto's business and activities expose it to a variety of
market risks, including risks related to changes in commodity prices,
foreign-currency exchange rates, interest rates and, to a lesser
degree, security prices and natural gas prices. These financial
exposures are monitored and managed by the company as an integral part
of its market risk management program. This program recognizes the
unpredictability of financial markets and seeks to reduce the
potentially adverse effects that market volatility could have on
operating results. Monsanto's overall objective in holding derivatives
is to minimize the risks by using the most effective methods to
eliminate or reduce the effects of these exposures. Monsanto accounts
for its derivatives in accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and SFAS No. 149,
Amendment of Statement 133 Derivative Instruments and Hedging
Activities.
The company hedges a portion of its net investment in Brazilian
subsidiaries and reported an aftertax loss of $3 million in the second
quarter of fiscal year 2004 and an aftertax gain of $2 million in the
comparable period last year. The company recorded an aftertax loss of
$6 million for the first half of fiscal year 2004 and an aftertax gain
of $16 million for the comparable period last year. These gains and
losses are included in accumulated other comprehensive loss.
Note 9 - Stock-Based Compensation Plans
As permitted by current accounting literature, the company has
elected to follow the guidance of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, for
measuring and recognizing its stock-based transactions with employees.
Accordingly, no compensation expense was recognized in relation to any
of the Monsanto option plans in which Monsanto employees participate.
For further details, please refer to the disclosures in Monsanto's
report on Form 10-K for the transition period ended Aug. 31, 2003.
Had stock-based compensation expense for these plans been
determined based on the fair value consistent with the method of SFAS
148, Accounting for Stock-Based Compensation - Transition and
Disclosure, which amends SFAS 123, Accounting for Stock-Based
Compensation, Monsanto's net income and net income per share would
have been adjusted to the pro forma amounts indicated as follows:
14
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Three Months Ended Six Months Ended
------------------------ -----------------------
Feb. 29, Feb. 28, Feb. 29, Feb. 28,
2004 2003 2004 2003
-------- -------- -------- --------
Net Income:
As reported $154 $ 100 $ 57 $ 82
Less: Total stock-based employee compensation
expense determined under fair-value-based
method for all awards, net of tax (4) (3) (6) (10)
---- ----- ----- -----
Pro forma $150 $ 97 $ 51 $ 72
==== ===== ===== =====
Basic income per share:
As reported $0.58 $0.38 $0.22 $0.31
Pro forma $0.57 $0.37 $0.19 $0.28
Diluted income per share:
As reported $0.57 $0.38 $0.21 $0.31
Pro forma $0.56 $0.37 $0.19 $0.28
Note 10 - Comprehensive Income (Loss)
Comprehensive income (loss) includes all nonshareowner changes in
equity and consists of net income (loss), foreign currency translation
adjustments, unrealized gains and losses on available-for-sale
securities, additional minimum pension liability adjustments, and
accumulated derivative gains or losses on cash flow hedges not yet
realized. Information regarding comprehensive income (loss) is as
follows:
Three Months Ended Six Months Ended
------------------------ -----------------------
Feb. 29, Feb. 28, Feb. 29, Feb. 28,
2004 2003 2004 2003
-------- ------- -------- --------
Comprehensive income (loss) $203 $96 $177 $(22)
The principal difference between net income and total
comprehensive income (loss) for the periods above relates to foreign
currency translation adjustments.
Note 11 - Earnings (Loss) Per Share
Basic earnings (loss) per share (EPS) were computed using the
weighted-average number of common shares outstanding during the period
shown in the table below. Diluted EPS were computed taking into
account the effect of dilutive potential common shares, as shown in
the table below. Potential common shares consist of stock options
using the treasury stock method and are excluded if their effect is
antidilutive. Dilutive potential common shares noted below exclude
stock options of approximately 2.4 million and 19.3 million for the
three months ended Feb. 29, 2004, and Feb. 28, 2003, respectively, and
2 million and 19.4 million for the six months ended Feb. 29, 2004, and
Feb. 28, 2003, respectively. These potential common shares were
excluded because the options' exercise prices were greater than the
average market price of the common shares and, therefore, the effect
would be antidilutive.
Three Months Ended Six Months Ended
------------------------ -----------------------
Feb. 29, Feb. 28, Feb. 29, Feb. 28,
2004 2003 2004 2003
-------- -------- -------- --------
Weighted-average number of common shares 264.3 261.4 263.2 261.4
Dilutive potential common shares 4.5 -- 4.2 --
15
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Note 12 - Supplemental Cash Flow Information
The effect of exchange rate changes on cash and cash equivalents
was not material. Cash payments for interest and taxes for the six
months ended Feb. 29, 2004, were $34 million and $27 million,
respectively. Cash payments for interest and taxes for the six months
ended Feb. 28, 2003, were $36 million and $40 million, respectively.
On July 31, 2003, the Executive Committee of the board of
directors authorized the purchase of up to $500 million of the
company's common stock over a three-year period. As of Feb. 29, 2004,
the company purchased 3.8 million shares for approximately $106
million.
Note 13 - Commitments and Contingencies
Solutia Inc.: Pursuant to the Sept. 1, 2000, Separation Agreement
between Monsanto and Pharmacia, as amended (Separation Agreement),
Monsanto was required to indemnify Pharmacia for liabilities that
Solutia Inc. (Solutia) assumed from Pharmacia in connection with the
spinoff of Solutia on Sept. 1, 1997, to the extent that Solutia fails
to pay, perform or discharge those liabilities. Those liabilities
remain the present responsibility of Pharmacia. In general, this
indemnification obligation applies to Pharmacia liabilities that were
assumed by Solutia, pursuant to the Sept. 1, 1997 Distribution
Agreement between Solutia and Pharmacia, as amended (Distribution
Agreement), and which Pharmacia would otherwise be required to pay.
The liabilities that Solutia assumed from Pharmacia are referred to as
"Solutia's Assumed Liabilities." Solutia's Assumed Liabilities may
include, among others, litigation, environmental remediation, and
certain retiree liabilities relating to individuals who were employed
by Pharmacia prior to the Solutia spinoff. On Dec. 17, 2003, Solutia
and 14 of its U.S. subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the
U.S. Bankruptcy Court for the Southern District of New York. In the
Chapter 11 proceeding, Solutia is seeking relief from paying certain
liabilities, including some or all of Solutia's Assumed Liabilities.
If Solutia is discharged from all or a portion of Solutia's Assumed
Liabilities, Monsanto may be required to indemnify Pharmacia for all
or a portion of them. However, Solutia may retain responsibility for
all or a portion of Solutia's Assumed Liabilities; and Pharmacia or
Monsanto may have defenses to payment obligations for some or all of
Solutia's Assumed Liabilities from which Solutia is discharged. In
addition, Monsanto has legal claims for reimbursement from Solutia,
and will participate in the Chapter 11 proceeding as a creditor of
Solutia and act as appropriate to protect Monsanto's interests and the
interests of its shareowners. Although Monsanto has the right to
indemnification from Solutia, it is unclear what effect the Chapter 11
proceeding will have on Monsanto's ability to recover under this
indemnification.
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. On Feb. 17, 2004, Solutia notified
Pharmacia and Monsanto that it was repudiating its obligation to
defend litigation which Solutia had been managing, pursuant to powers
of attorney granted by Pharmacia and by Monsanto under the
Distribution Agreement, and to accept new cases relating to Solutia's
Assumed Liabilities. On Feb. 27, 2004, Solutia filed a declaratory
judgment action in the Bankruptcy Court asserting, among other things,
that the automatic stay under bankruptcy law prevented it from
continuing to perform its environmental obligations under the
Distribution Agreement, with respect to any sites where it does not
have current operations, and that its performance of its environmental
obligations at sites where it has current operations would only extend
to its property line and not beyond. The U.S. Environmental Protection
Agency (EPA) had previously filed actions and pleadings asserting that
Solutia's bankruptcy filing does not excuse its continuing legal
obligation to perform certain environmental activities. Without
waiting for a court determination on its position, Solutia has
unilaterally stopped performing its environmental obligations under
the Distribution Agreement and applicable environmental laws except
within the boundaries of its current operations. While Monsanto
believes Solutia remains obligated to continue to defend litigation
related to Solutia's Assumed Liabilities and to continue to meet its
environmental obligations unless and until those obligations are
discharged by the Bankruptcy Court, in order to protect Pharmacia's
and Monsanto's interests until that issue is resolved, Monsanto,
pursuant to its obligation to indemnify Pharmacia under the Separation
Agreement, has on an interim basis assumed the management of such
litigation that Solutia has repudiated and has stepped in as
Pharmacia's representative and funded some of Solutia's environmental
obligations. To the extent additional such matters arise in the
future, Monsanto may also assume their management in order to mitigate
damages and to protect the potential rights and positions of Pharmacia
and Monsanto. In addition, Monsanto may also settle litigation related
16
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
to Solutia's Assumed Liabilities and pay judgments entered with
respect to Solutia's Assumed Liabilities to the extent Solutia
continues to refuse to do so. For the first half of 2004, Monsanto
recorded approximately $14 million in Other expense - net in the
Statement of Consolidated Operations for the advancement of funds to
pay for Solutia's Assumed Liabilities in light of Solutia's refusal to
pay for those liabilities and for legal and other costs related to the
Solutia bankruptcy. The potential future cost to Monsanto for
advancement of funds to protect its interests related to these matters
cannot be reasonably estimated at this time. Monsanto expects to
pursue recovery of such costs from Solutia in the bankruptcy
proceedings, and may be able to recover from Solutia or other parties
for all or some of the amounts advanced or expended, although the
extent of Monsanto's ability to do so cannot be determined at this
time.
Solutia's Assumed Liabilities also include certain liabilities
related to polychlorinated biphenyls (PCBs). Solutia had been
defending significant PCB litigation, including Sabrina Abernathy et
al. v. Monsanto Company et al. (a group of consolidated cases in the
Circuit Court of Etowah County, Alabama) and Antonia Tolbert et al. v.
Monsanto Company et al. (in the U.S. District Court for the Northern
District of Alabama). In September 2003, the state and federal courts
approved a global settlement of the Abernathy and Tolbert cases. The
courts continue to administer this settlement despite the bankruptcy
filing by Solutia, and settlement funds are currently being disbursed
to plaintiffs and their counsel. Under the global settlement,
Monsanto, Solutia and Pharmacia have obligations that are joint and
several; however, the three companies agreed among themselves that
Solutia would pay $50 million of the settlement amount, over not less
than eleven years. If Solutia is discharged from this obligation in
the Chapter 11 proceeding, Monsanto may be required to pay, or to
indemnify Pharmacia for, this amount. Monsanto provided $150 million
to the settlement fund during August 2003, and $400 million during
September 2003, and expects to receive approximately $155 million in
reimbursement from commercial insurance. Monsanto and the insurers
responsible for approximately $140 million of this reimbursement have
agreed to mediation of a dispute regarding the amount due.
Miscellaneous receivables of $155 million were recorded in fiscal year
2003 for the anticipated insurance reimbursement, approximately $140
million of which the company expects to receive during fiscal year
2004.
In connection with the global settlement of the Abernathy and
Tolbert cases, Solutia agreed to issue warrants to Monsanto for the
purchase of up to 10 million shares of Solutia common stock, at an
exercise price of $1.104 per share. Solutia did not execute a final
warrant agreement or deliver the warrants prior to the Chapter 11
filing, and Monsanto anticipates that Solutia's obligation to issue
the warrants will be discharged in the Chapter 11 proceeding. Because
the warrants were not received, they have not been recorded in
Monsanto's financial statements.
In connection with Monsanto's indemnification obligation to
Pharmacia under the Separation Agreement, and pursuant to an agreement
with Pharmacia and Solutia, in 2002 Monsanto posted a $71.4 million
appeal bond on Solutia's behalf, in connection with litigation that
Solutia was defending in Pennsylvania state court. Solutia has
provided a $20 million bank letter of credit to secure a portion of
Monsanto's obligations in connection with the appeal bond. Although
this letter of credit remains available to Monsanto, Solutia has
discontinued the payment of bank fees associated with maintaining the
letter of credit. Monsanto is paying these fees and will make a claim
for recovery of such fees against Solutia in the course of the Chapter
11 proceeding.
At the time of Solutia's 1997 spinoff from Pharmacia, Solutia and
Pharmacia entered into raw material supply contracts, including a
10-year requirements contract for the supply of formalin by Solutia.
Because formalin is a raw material used in the production of
glyphosate, this formalin supply contract was assigned to Monsanto
pursuant to the Separation Agreement. In September 2003, Monsanto and
Solutia amended this contract upon mutually beneficial terms. Pursuant
to this amendment, Monsanto made a $25 million prepayment to Solutia
for formalin. Under the terms of the amended agreement, the prepayment
must either be exhausted or the remainder returned to Monsanto in cash
or credit against other product sales by Sept. 30, 2004. Through March
31, 2004, Solutia had delivered $10 million of product relating to
this prepaid amount. In consideration for making this prepayment, the
duration of Monsanto's obligation under the formalin supply contract
was reduced. At this time, Solutia has indicated that it will continue
to perform its obligations under the formalin supply contract.
It is reasonably possible that Monsanto's obligation to indemnify
Pharmacia under the Separation Agreement for Solutia's Assumed
Liabilities will result in a material adverse effect on Monsanto's
17
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
financial position, profitability and/or liquidity. However, because
of the many uncertainties relating to any plan of reorganization for
Solutia and the resolution of Solutia's Chapter 11 proceeding,
including the potential allocation of responsibility for and the
ultimate resolution of Solutia's Assumed Liabilities, at this time
Monsanto is unable to reasonably estimate the amount or range of any
potential future cost to the company.
Other Litigation: Monsanto is defending and prosecuting
litigation in its own name. Monsanto is also defending and prosecuting
certain cases that were brought in Pharmacia's name and for which
Monsanto assumed responsibility under the Separation Agreement. Such
matters relate to a variety of issues. Some of the lawsuits seek
damages in very large amounts, or seek to restrict the company's
business activities. Although the results of litigation cannot be
predicted with certainty, it is management's belief that the final
outcome of the lawsuits that Monsanto is defending or prosecuting
(excluding litigation relating to Solutia's Assumed Liabilities), will
not have a material adverse effect on Monsanto's financial position,
profitability, and/or liquidity.
Guarantees: Monsanto provides a guarantee to a bank that provides
loans to selected Monsanto customers in Poland. Terms of the guarantee
are equivalent to terms of the bank loans, which are generally six
months. When a customer fails to pay an obligation that is due,
Monsanto incurs a liability to make these payments. As of Feb. 29,
2004, the maximum potential amount of future payments under this
guarantee is approximately $7 million. Based on the company's current
assessment of credit exposure, Monsanto has recorded a liability of
less than $1 million related to this guarantee. Monsanto's recourse
under this guarantee is limited to the customer, and it is not
currently estimable.
There have been no significant changes to guarantees made by
Monsanto, except for the aforementioned guarantee, since Nov. 30,
2003. Disclosures regarding these guarantees made by Monsanto can be
found in Note 22 - Commitments and Contingencies - of the notes to
consolidated financial statements contained in Monsanto's report on
Form 10-K for the transition period ended Aug. 31, 2003, as updated in
Note 10 - Commitments and Contingencies - of the notes to consolidated
financial statements contained in Monsanto's report on Form 10-Q for
the quarterly period ended Nov. 30, 2003. Disclosure regarding the
guarantee Monsanto provides to a specialty finance company for certain
customer loans can be found in Note 4 - Customer Financing Program -
of this Form 10-Q. Information regarding Monsanto's indemnification
obligations to Pharmacia under the Separation Agreement relating to
Solutia's Assumed Liabilities can be found above.
Note 14 - Segment Information
Monsanto manages its business in two segments: Seeds and
Genomics, and Agricultural Productivity. The Seeds and Genomics
segment consists of the global seeds and related traits businesses and
biotechnology platforms. The Agricultural Productivity segment
consists of the crop protection products, animal agriculture,
residential lawn-and-garden herbicide products, and environmental
technologies businesses. Sales between segments were not significant.
Selling, general and administrative expenses are allocated between
segments based primarily on the ratio of sales of the segment to total
Monsanto sales, consistent with the company's historical practice.
Based on the Seeds and Genomics segment's increasing contribution to
total Monsanto operations, the allocation percentages were changed at
the beginning of fiscal 2004.
Segment data, as well as a reconciliation of total Monsanto
Company earnings from continuing operations before cumulative effect
of accounting change, interest and income taxes (EBIT) to net income
for the three months and six months ended Feb. 29, 2004, and Feb. 28,
2003, is presented in the table that follows.
18
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Three Months Ended Six Months Ended
------------------------ -----------------------
Feb. 29, Feb. 28, Feb. 29, Feb. 28,
2004 2003 2004 2003
-------- -------- -------- --------
Net Sales:
Seeds and Genomics $ 857 $ 647 $1,242 $1,012
Agricultural Productivity 635 646 1,278 1,127
------- ------- ------ ------
Total Monsanto $ 1,492 $ 1,293 $2,520 $2,139
======= ======= ====== ======
EBIT:
Seeds and Genomics $ 276 $ 151 $ 180 $ 196
Agricultural Productivity (16) 55 14 --
------- -------- ------ ------
Total Monsanto 260 206 194 196
Less: Interest Expense - Net (15) (19) (32) (34)
Less: Income Tax Expense (89) (72) (83) (64)
------- ------- ------ ------
Income From Continuing Operations Before Cumulative
Effect of Accounting Change 156 115 79 98
Cumulative Effect of a Change in Accounting Principle
- Net of Tax Benefit of $7 -- (12) -- (12)
------- ------- ------- ------
Income From Continuing Operations 156 103 79 86
Discontinued Operations (Note 16):
Loss from operations of discontinued businesses
(including estimated loss on disposal of $29 in
the six months ended Feb. 29, 2004) (3) (5) (31) (7)
Income tax benefit (1) (2) (9) (3)
------- ------- ------ ------
Loss on Discontinued Operations (2) (3) (22) (4)
------- ------- ------ ------
Net Income $ 154 $ 100 $ 57 $ 82
======= ======= ====== ======
Note 15 - Other Expense - Net
For the three months and six months ended Feb. 29, 2004, and Feb.
28, 2003, the significant components of other expense - net were:
Three Months Ended Six Months Ended
--------------------------- --------------------------
Feb. 29, Feb. 28, Feb. 29, Feb. 28,
2004 2003 2004 2003
-------- -------- -------- --------
Solutia's Assumed Liabilities and $14 $-- $14 $--
Bankruptcy-Related Legal and Other
Expenses
Equity Affiliate Expense - Net 10 11 20 21
Foreign-Currency Transaction Losses - Net 6 7 14 8
Hedging Losses (Gains) 6 1 6 (5)
Banking and Other Related Fees 4 3 6 4
Gains Realized Upon Sale of Equity Securities (5) -- (5) --
Other Miscellaneous Expense (Income) 2 (2) 7 (9)
--- --- --- ---
Other Expense - Net $37 $20 $62 $19
=== === === ===
Other miscellaneous expense (income) for the periods presented
comprises numerous items that are less than $5 million individually.
See Note 13 - Commitments and Contingencies - for a description of
Solutia's Assumed Liabilities and bankruptcy-related legal and other
expenses.
19
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Note 16 - Discontinued Operations
As discussed earlier in Note 3 - Restructuring, on Oct. 15, 2003,
Monsanto announced plans to (1) exit the European breeding and seed
business for wheat and barley, and (2) discontinue the plant-made
pharmaceuticals program. As a result, these businesses have been
presented as discontinued operations. Accordingly, for the three
months and six months ended Feb. 29, 2004, and Feb. 28, 2003, the
Statement of Consolidated Operations has been conformed to this
presentation. Also, as of Feb. 29, 2004, the Condensed Statement of
Consolidated Financial Position has been conformed to this
presentation. These businesses were previously reported as part of the
Seeds and Genomics segment. The assets and liabilities of these
businesses follow:
As of Feb. 29,
2004
--------------
Assets of discontinued businesses held for sale:
Accounts receivable $ 1
Miscellaneous receivables 4
Inventories 2
Property, plant and equipment - net 9
Other 1
---
Total assets of discontinued businesses held for sale $17
===
Liabilities of discontinued businesses held for sale:
Current liabilities $ 1
Postretirement liabilities 2
---
Total liabilities of discontinued businesses held for sale $ 3
===
The following amounts related to the European breeding and seed
business for wheat and barley and the plant-made pharmaceuticals
program have been segregated from continuing operations and reflected
as discontinued operations:
Three Months Ended Six Months Ended
----------------------- ------------------------
Feb. 29, Feb. 28, Feb. 29, Feb. 28,
2004 2003 2004 2003
-------- -------- -------- --------
Net sales $4 $7 $19 $19
Loss from operations of discontinued businesses
(including estimated loss on disposal of $29 for
the six months ended Feb. 29, 2004) (3) (5) (31) (7)
Income tax benefit (1) (2) (9) (3)
Net loss on discontinued operations (2) (3) (22) (4)
As discussed in Note 6 - Goodwill and Other Intangible Assets -
the loss on disposal was comprised of $26 million of impairments of
germplasm and trademarks related to the European wheat and barley
business, and the remaining $3 million loss on disposal related to
fixed asset impairments related to both businesses. In March 2004, a
definitive agreement for the divestiture of the European breeding and
seed business for wheat and barley was reached and is expected to be
finalized in the third quarter of fiscal year 2004 (see Note 17 -
Subsequent Event). The remaining work force reductions and facility
closures for the plant-made pharmaceuticals program are also expected
to be completed in fiscal year 2004.
20
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Note 17 - Subsequent Event
On March 29, 2004, Monsanto announced that it signed a definitive
agreement for the sale of assets associated with the company's
European wheat and barley business to Rodez, France-based RAGT
Genetique, S.A. (RAGT). Monsanto originally stated its intention to
exit the European wheat and barley breeding business as a part of the
fiscal year 2004 restructuring plan.
The agreement with RAGT is contingent on the customary
competition merger consents in relevant European countries. Following
the successful completion of the divestiture, Monsanto estimates that
it will record a net gain of approximately $25 million before taxes in
discontinued operations, after accounting for currency translation
adjustments and transactional costs. Under the terms of the agreement,
RAGT will assume operation of Monsanto's European wheat and barley
business, headquartered in Cambridge, U.K.
21
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Background
Monsanto Company is a leading global provider of agricultural
products and integrated solutions for farmers. We produce leading seed
brands, including DEKALB and ASGROW, and we develop biotechnology
traits that assist farmers in controlling insects and weeds. We
provide other seed companies with genetic material and biotechnology
traits for their seed brands. We also make ROUNDUP herbicide and other
herbicides. Our seeds, related biotechnology trait products, and
herbicides can be combined to provide growers with integrated
solutions that improve productivity and reduce the costs of farming.
We also provide lawn-and-garden herbicide products for the residential
market and animal agricultural products focused on improving dairy cow
productivity and swine genetics.
We manage our business in two segments: Seeds and Genomics, and
Agricultural Productivity. The Seeds and Genomics segment consists of
the global seeds and related traits businesses, and genetic technology
platforms. The Agricultural Productivity segment consists of the crop
protection products, animal agriculture, lawn-and-garden herbicide
products, and environmental technologies businesses. In October 2003,
we announced plans to exit the European breeding and seed business for
wheat and barley and to discontinue the plant-made pharmaceuticals
program. In March 2004, we signed a definitive agreement for the sale
of assets associated with our European breeding and seed business for
wheat and barley. Refer to Note 17 - Subsequent Event - for further
details. As a result of the exit plans announced in October 2003,
these businesses have been presented as discontinued operations.
Accordingly, for the three months and six months ended Feb. 29, 2004,
and Feb. 28, 2003, the Statement of Consolidated Operations has been
conformed to this presentation. Also as of Feb. 29, 2004, the
Condensed Statement of Consolidated Financial Position has been
conformed to this presentation. These businesses were previously
reported as part of the Seeds and Genomics segment. Certain
prior-period amounts have been reclassified to conform with
current-year presentation.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) should be read in conjunction with
Monsanto's consolidated financial statements and the accompanying
notes. This quarterly report on Form 10-Q should also be read in
conjunction with Monsanto's report on Form 10-K for the transition
period ended Aug. 31, 2003, and Monsanto's quarterly report on Form
10-Q for the period ended Nov. 30, 2003. Financial information for the
first six months of fiscal year 2004 should not be annualized because
of the seasonality of our business.
Change in Fiscal Year End
In July 2003, Monsanto's board of directors approved a change to
Monsanto's fiscal year end from December 31 to August 31. This change
aligned our fiscal year more closely with the seasonal nature of our
business. In view of this change, MD&A compares the unaudited
consolidated financial statements as of and for the three months and
six months ended Feb. 29, 2004 (also referred to as the second quarter
and first half, respectively, of fiscal year 2004), with the unaudited
consolidated financial statements as of and for the three months and
six months ended Feb. 28, 2003.
Financial Measures
The primary operating performance measure for our two business
segments is earnings (loss) from continuing operations before
cumulative effect of accounting change, interest and income taxes
(EBIT). We believe that EBIT is useful to investors and management to
demonstrate the operational profitability of our segments by excluding
interest and taxes, which are generally accounted for across the
entire company on a consolidated basis. EBIT is also one of the
measures used by Monsanto management in determining resource
allocation within the company.
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
22
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
or required by investing activities. We believe that free cash flow is
useful to investors and management as a measure of the ability of our
business to generate cash. This cash can be used for business needs
and obligations, to reinvest into the company for future growth, or
returned to our shareowners through dividend payments or share
repurchases. Free cash flow is also one of the performance measures
management uses to determine incentive compensation.
The presentation of EBIT and free cash flow information is
intended to supplement investors' understanding of our operating
performance and liquidity. Our EBIT and free cash flow measures may
not be comparable to other companies' EBIT and free cash flow
measures. Furthermore, these measures are not intended to replace net
income (loss), cash flows, financial position, or comprehensive income
(loss), as determined in accordance with accounting principles
generally accepted in the United States.
Results of Operations - Second Quarter Fiscal Year 2004
- --------------------------------------------------------------------------------
Three Months Ended
------------------
Feb. 29, Feb. 28,
Total Monsanto Company and Subsidiaries: 2004 2003
---------------------------------------- -------- -------
Net sales $1,492 $1,293
====== ======
Gross profit $ 748 $ 639
====== ======
Income from continuing operations before cumulative
effect of accounting change $ 156 $ 115
====== ======
Net income $ 154 $ 100
====== ======
- --------------------------------------------------------------------------------
The following factors affected the quarter-to-quarter comparison
of Monsanto's second quarter continuing operations:
Net sales improved 15 percent, largely driven by higher sales of
corn seed and traits. Corn seed sales improved in the United States,
Europe and Brazil. Both corn and soybean trait revenues increased in
the United States and to global licensees. The substantial increase in
our Seeds and Genomics segment sales was partially offset by a slight
decline in our Agricultural Productivity segment sales. Second quarter
ROUNDUP herbicide sales in the United States declined because of
timing of sales earlier in the first quarter of 2004, and a shift of
sales volume to our lower-priced branded and nonbranded glyphosate
products. The ROUNDUP herbicide sales decline in the United States was
almost entirely offset by ROUNDUP and other glyphosate-based herbicide
sales increases in Brazil and Asia. For a more detailed discussion of
the factors affecting the net sales comparison, please see "Seeds and
Genomics Segment" and "Agricultural Productivity Segment."
Gross profit was driven higher in the second quarter of fiscal
2004 by the increase in our seed and traits net sales. As a percent of
sales, gross profit increased one percentage point to 50 percent.
Gross profit as a percent of sales would have been even higher if we
excluded the restructuring expenses recorded in cost of goods sold. In
the current quarter, we recorded $17 million of restructuring charges
related to the fiscal year 2004 restructuring plan in cost of goods
sold. During the comparable quarter last year, we recorded $4 million
in cost of goods sold for the 2002 restructuring plan. For further
details on our restructuring plans, please see the "Restructuring"
section of MD&A and Note 3 - Restructuring.
Operating expenses increased to $451 million for the quarter,
from $413 million for the same period last year.
o Selling, general and administrative (SG&A) expenses increased $34
million. Increased accrued incentive compensation was the primary
driver of the higher SG&A expenses in the second quarter 2004.
23
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
These accrued incentive levels are commensurate with our improved
operational results this year. SG&A also increased in second
quarter 2004 because of higher employee-benefit related expenses
and higher expenses associated with the institution of a royalty
system for ROUNDUP READY soybean traits in Brazil. SG&A also
reflects a contribution from Monsanto Company to the Monsanto
Fund, necessitated by the depletion of a contribution made in
1999, which provided multi-year funding.
o Restructuring charges were recorded in both second quarter
periods. Restructuring expenses were recorded within cost of
goods sold, restructuring charges - net and discontinued
operations. Restructuring charges - net are included in operating
expenses. Restructuring charges recorded in second quarter 2004
for the fiscal year 2004 restructuring plan were $29 million. Our
second quarter 2004 restructuring charges were reduced by $1
million in restructuring reversals related to our prior
restructuring plans. During the prior year comparable period, we
recognized $39 million of restructuring charges in operating
expenses related to our 2002 restructuring plan. These
restructuring charges were offset by $8 million in restructuring
reversals related to the 2000 and 2002 restructuring plans. Thus,
restructuring charges - net were $28 million in second quarter
2004 and $31 million in the prior year comparable period. For
further details on our restructuring plans, please see the
"Restructuring" section of MD&A and Note 3 - Restructuring.
o The increase in bad-debt expense of $8 million was primarily for
uncollectible Argentine trade receivables. During the current
year quarter, we increased our reserves due to the continued weak
economic conditions in Argentina.
o Research and development (R&D) expenses were relatively unchanged
from last year's second-quarter levels. As a percent of sales,
second quarter 2004 R&D expenses declined two percent from the
comparable prior year period because of higher sales in second
quarter 2004.
Net interest expense decreased slightly for the second quarter to
$15 million.
We recorded net other expense of $37 million in the second
quarter of fiscal year 2004, versus $20 million during the comparable
period last year. During the current quarter, other expense contained
approximately $14 million for the advancement of funds to pay for
Solutia's Assumed Liabilities in light of Solutia's refusal to pay for
those liabilities and for legal and other expenses related to the
Solutia bankruptcy. Refer to Note 13 - Commitments and Contingencies -
for further details. Both second quarter periods included equity
affiliate expense related to our Renessen LLC joint venture, which
totaled $10 million in second quarter fiscal 2004 and $11 million in
the same period a year ago. Please see Note 15 - Other Expense - Net -
for further details of the increase in this line item.
Income tax expense for the quarter increased 24 percent to $89
million, compared to an increase in pretax earnings of 31 percent. The
effective tax rate was 36 percent, a reduction of three percent versus
the prior year period. This decrease was driven by the mix of earnings
projected for fiscal 2004 versus those in fiscal 2003. In addition,
the tax provision for second quarter 2004 includes two adjustments for
valuation allowances against our deferred tax assets. During the
second quarter of fiscal 2004, we assessed the realizability of our
deferred tax assets in Argentina and Brazil following completion of
the crop season in these countries and the preparation of updated
long-range financial projections for these countries. In Argentina, we
have assessed the need to establish a valuation allowance of $102
million, primarily as a result of the recent history of losses, the
continued uncertain economic conditions in Argentina (discussed in the
"Outlook - Update - Focused Strategy" section of MD&A), and the
limited tax carryforward period of five years. In Brazil, we have
reassessed the need for a valuation allowance and have reversed the
existing valuation allowance of $90 million, primarily as a result of
the improved operating results in Brazil and improvements in the
Brazilian economy. For further details on these adjustments, please
see Note 7 - Income Taxes.
The factors above explain the change in income from continuing
operations before cumulative effect of accounting change. In the prior
year quarter, a new accounting standard relating to asset retirement
obligations adopted on Jan. 1, 2003, negatively affected net income
for the three months ended Feb. 28, 2003, by $12 million, or $0.05 per
share, aftertax.
Discontinued operations generated an aftertax loss of $2 million
in second quarter 2004 and $3 million in the same period a year ago.
Restructuring expenses recorded in discontinued operations were
24
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
approximately $1 million pretax for the second quarter of fiscal 2004.
For further details of our discontinued operations, please refer to
Note 16 - Discontinued Operations.
Seeds and Genomics Segment
The Seeds and Genomics segment consists of our global seeds and
related trait businesses, and our genetic technology platforms. We
produce leading seed brands, including DEKALB and ASGROW, and we
develop biotechnology traits that assist farmers in controlling
insects and weeds. We also provide genetic material and biotechnology
traits to other seed companies for their seed brands.
Three Months Ended
-------------------
Feb. 29, Feb. 28,
2004 2003
---- ----
Net sales
Corn seed and traits $479 $327
Soybean seed and traits 308 260
All other crops seed and traits 70 60
---- ----
Total net sales $857 $647
==== ====
Gross profit
Corn seed and traits $292 $185
Soybean seed and traits 224 176
All other crops seed and traits (1) 23 31
---- ----
Total gross profit $539 $392
==== ====
EBIT(2) $276 $151
==== ====
(1) Includes any net restructuring charges for the segment that were recorded
within cost of goods sold. See Note 3 - Restructuring, and "Restructuring"
in MD&A for further details.
(2) Earnings (loss) from continuing operations before cumulative effect of
accounting change, interest and income taxes. See Note 14 - Segment
Information - for further details.
Net sales for the Seeds and Genomics segment increased 32 percent
to $857 million in second quarter fiscal 2004 from $647 million in the
comparable prior year second quarter. Gross profit for this segment
increased 38 percent to $539 million from last year's second quarter
of $392 million. As a percent of net sales, gross profit improved two
percentage points to 63 percent.
Corn seed and traits net sales increased 46 percent, or $152
million, in second quarter 2004 over the prior year second quarter.
The United States, Europe and Brazil all experienced higher second
quarter fiscal 2004 net sales of corn seed because of higher average
net selling prices and higher volume. To a lesser extent, the net
sales increase for U.S. branded corn seed was also because of earlier
season sales in second quarter 2004 from the same period a year ago.
Favorable market conditions, including a fiscal 2004 price increase,
the favorable effect of the Brazilian real exchange rate and an
improved product mix, were the primary drivers of the sales increase
for corn seed in Brazil. Corn seed sales in Europe were also
positively affected by an increase in market share, favorable exchange
rates and earlier season sales in second quarter 2004 versus the
comparable prior year period. Partially offsetting the increases in
the United States, Europe and Brazil, Argentina experienced a slight
decrease in net sales for corn seed and traits in second quarter of
fiscal 2004. Argentine corn seed and traits sales were lower than
prior year because of drought conditions leading to reduced plantings
this year. The unfavorable weather conditions caused farmers to switch
to other crops, primarily soybeans.
Net sales of corn traits in the United States and to global
licensees increased substantially in the second quarter 2004 over the
prior year second quarter period. U.S. corn traits sales increased
because of growth in stacked corn traits and higher corn trait
penetration. The second quarter 2004 U.S. corn trait revenues also
reflect an increase in the average prices of our branded seed, which
includes ROUNDUP READY traits, to reflect the value those products
25
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
provide to growers. The timing of corn trait revenues from global
licensees within the first half of the fiscal year increased
quarter-over-quarter sales in second quarter 2004.
Net sales of soybean seed and traits increased 18 percent, or $48
million, in second quarter fiscal 2004 over sales in the prior year
comparable period. Soybean trait revenues in the United States and to
global licensees drove the quarter-over-quarter sales increase. U.S.
soybean trait revenues benefited from higher trait prices for branded
soybeans and royalties from seed licensees. Similar to global
licensees for corn traits, the timing between fiscal year 2004 first
and second quarters versus the prior year periods also contributed to
the current year quarter sales increase for soybean trait revenues.
All other crops seed and traits net sales increased 17 percent,
or $10 million, in second quarter 2004 from the comparable prior year
period. The increase was primarily because of earlier season sales in
second quarter 2004 versus sales in the same period a year ago for
Canadian canola seed and traits. A price increase for Canadian canola
seed in fiscal 2004 and a favorable currency exchange rate on canola
seed and traits sales also contributed to higher sales in second
quarter 2004. Gross profit for all other crops seed and traits
decreased 26 percent, or $8 million, to $23 million in second quarter
2004 because of higher inventory write-offs and restructuring. In
second quarter 2004, we recorded $6 million in restructuring charges
to cost of goods sold, versus no restructuring charges recorded to
this segment in the prior year comparable period.
The Seeds and Genomics segment second quarter 2004 EBIT improved
83 percent, or $125 million. Gross profit as a percent of net sales
improved two percent in second quarter 2004 primarily because of
higher branded corn and soybean trait prices and royalties from seed
licensees, and the gross profit improvement that comes from stacking
more than one biotech trait in corn. SG&A expenses increased because a
higher percentage of expenses were allocated to this segment in second
quarter 2004 versus the same period a year ago based on the Seeds and
Genomics segment's increasing contribution to total Monsanto
operations. The allocation percentages were changed at the beginning
of fiscal 2004. Our allocation methodology is primarily based on the
ratio of sales of the Seeds and Genomics segment to total Monsanto
sales, and is consistent with our historical practice. SG&A expenses
also increased in the second quarter 2004 because of higher accrued
incentive compensation, higher employee-benefit related expenses and
higher expenses associated with the institution of a royalty system
for ROUNDUP READY soybean traits in Brazil. Total net restructuring
charges recorded in EBIT for the Seeds and Genomics segment were $9
million in second quarter 2004, versus $20 million recorded to this
segment in the prior year comparable period.
26
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Agricultural Productivity Segment
Our Agricultural Productivity segment consists of our crop
protection products (ROUNDUP and other glyphosate-based herbicides and
selective chemistries) and our animal agriculture, lawn-and-garden
herbicides, and environmental technologies businesses. We are a
leading worldwide developer, producer and marketer of crop protection
products, including ROUNDUP herbicides.
Three Months Ended
-----------------------
Feb. 29, Feb. 28,
2004 2003
---- ----
Net sales
ROUNDUP and other glyphosate-based herbicides $363 $ 373
All other agricultural productivity products 272 273
---- -----
Total net sales $635 $ 646
==== =====
Gross profit
ROUNDUP and other glyphosate-based herbicides $ 98 $ 134
All other agricultural productivity products (1) 111 113
---- -----
Total gross profit $209 $ 247
==== =====
EBIT(2) $(16) $ 55
==== ======
(1) Includes any net restructuring charges for the segment that were recorded
within cost of goods sold. See Note 3 - Restructuring, and "Restructuring"
in MD&A for further details.
(2) Earnings (loss) from continuing operations before cumulative effect of
accounting change, interest and income taxes. See Note 14 - Segment
Information - for further details.
Net sales for the Agricultural Productivity segment decreased two
percent to $635 million in second quarter fiscal 2004 from $646
million in the comparable prior year period. Gross profit for this
segment decreased 15 percent to $209 million from last year's same
period level of $247 million. As a percent of net sales, gross profit
declined five percentage points to 33 percent.
ROUNDUP and other glyphosate-based herbicides net sales decreased
three percent, or $10 million, in second quarter 2004 from the same
period a year ago. Net sales decreases in the United States and
Argentina were almost entirely offset by net sales increases in Brazil
and Asia. ROUNDUP herbicide net sales in the United States declined
significantly in the second quarter 2004 from the comparable prior
year period primarily because of timing in the first half of 2004.
Refer to the first half of fiscal 2004 Agricultural Productivity
segment discussion in MD&A, which explains U.S. ROUNDUP herbicide net
sales were slightly up for the first half of 2004 versus the first
half of the prior year. During second quarter 2004, we continued to
experience competitive pressures and a shift of sales volumes to our
lower-priced branded and nonbranded glyphosate products. The shift in
product mix was reflected in our average net selling price for ROUNDUP
herbicides in the United States, which declined during second quarter
2004 from the prior year same period.
Brazil continued its fiscal 2004 success with net sales gains in
the second quarter compared to the same period a year ago. Net sales
gains were driven by higher sales volumes of branded and nonbranded
glyphosate products, which increased in the second quarter 2004 as a
result of improved market and pricing conditions, and the favorable
effect of the Brazilian real exchange rate. Quarter-over-quarter sales
were also favorably affected by our fiscal year 2003 operational
changes in Brazil. Australian second quarter 2004 net sales increased
from the same period a year ago because of increased sales volume. The
increase was driven by strong market demand because of a return to
normal weather conditions compared to drought conditions in the prior
year period. Favorable exchange rates also contributed to the
Australian sales increase.
27
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Despite increased volumes for both branded and nonbranded
glyphosate products, Argentina net sales decreased for the second
quarter 2004 due to lower average net selling prices. Competitive
conditions and a shift in product mix were both factors in the lower
average net selling price.
Second quarter 2004 sales of our other Agricultural Productivity
products were relatively consistent with the sales in the same period
a year ago. Earlier season sales in the second quarter 2004 for the
lawn-and-garden herbicide business offset sales declines in animal
agriculture products, and to a lesser extent, other herbicides.
Lawn-and-garden herbicide sales were higher in the first half of 2004
versus the prior year first half primarily because of timing. Sales of
animal agriculture products decreased primarily because of the POSILAC
product allocation resulting from corrections and improvements being
made by Sandoz GmbH at their manufacturing facility in Austria. These
changes are being made in response to issues raised by the U.S. Food
and Drug Administration (FDA) during and following a November 2003
inspection of Sandoz's facility and further identified in a March 29,
2004, warning letter to Sandoz. Sandoz manufactures the finished dose
formulation of POSILAC, and is our sole supplier of the finished dose
formulation until we receive FDA approval at our Augusta, Georgia
facility. For a further discussion of POSILAC refer to the "Outlook -
Update - Agricultural Productivity" section of MD&A. Other
Agricultural Productivity products gross profit as a percent of sales
was 41 percent in both three-month periods. Second quarter 2004 cost
of goods sold included $11 million of restructuring charges related to
the fiscal year 2004 restructuring plan. During the comparable period
last year, we recorded $4 million in cost of goods sold for the 2002
restructuring plan.
EBIT for the Agricultural Productivity segment declined $71
million in second quarter 2004 from the same period a year ago. Gross
profit as a percent of sales declined five percent from the prior year
comparable period primarily because of the unfavorable U.S. mix shift
to our lower-priced branded and nonbranded glyphosate products in the
second quarter of fiscal 2004. Operating expenses were higher than the
prior year comparable period primarily because of increases in other
expense - net, net restructuring charges and bad-debt expense. The
increase in other expense - net was primarily because of the
advancement of funds to pay for Solutia's Assumed Liabilities in light
of Solutia's refusal to pay for those liabilities and for legal and
other expenses of $14 million related to the Solutia bankruptcy.
Additionally, hedging losses on grain, which Latin America receives as
payment for certain customer accounts, contributed to higher second
quarter 2004 other expenses. SG&A expenses for the Agricultural
Productivity segment increased slightly for the second quarter 2004.
Higher incentives and employee-benefit related expenses were nearly
offset by the lower allocation of SG&A expenses to the Agricultural
Productivity segment in second quarter 2004. Refer to the previous
section "Seeds and Genomics Segment" for a further explanation of the
change in allocation of SG&A expenses.
Results of Operations - First Half of Fiscal Year 2004
- --------------------------------------------------------------------------------
Six Months Ended
--------------------
Feb. 29, Feb. 28,
Total Monsanto Company and Subsidiaries: 2004 2003
---------------------------------------- ---- ----
Net sales $2,520 $2,139
====== ======
Gross profit $1,216 $ 989
====== ======
Income from continuing operations before cumulative
effect of accounting change $ 79 $ 98
====== ======
Net income $ 57 $ 82
====== ======
- --------------------------------------------------------------------------------
Net sales improved 18 percent, or $381 million, in the first half
of fiscal 2004 from last year's first half net sales. Sales increased
23 percent, or $230 million, for the Seeds and Genomics segment and 13
28
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
percent, or $151 million, for the Agricultural Productivity segment.
Net sales increased in nearly all seed and traits crops in the first
half of 2004, and were led by gains in corn seed in the United States,
Brazil and Europe. Also, both corn and soybean trait revenues
increased in the United States and to global licensees. Argentina's
decline in corn seed and traits sales partially offset the upside in
these regions for the first half of 2004. ROUNDUP herbicides and, to a
lesser extent, other glyphosate-based herbicides represented the
majority of the Agricultural Productivity segment sales increase.
Brazil ROUNDUP and other glyphosate-based herbicide sales increased
substantially for the first half of fiscal 2004 because of improved
market and pricing conditions, and the favorable year-over-year impact
on net sales from the fiscal year 2003 operational changes. Australia
and Argentina also had sales increases in ROUNDUP and other
glyphosate-based herbicides during the first half of 2004 versus the
year ago period. Sales of nonbranded glyphosate products were slightly
down in the United States in the first half of 2004. For a more
detailed discussion of the factors affecting the net sales comparison,
please see "Seeds and Genomics Segment" and "Agricultural Productivity
Segment."
Gross profit as a percent of net sales increased two percentage
points to 48 percent in the first half of 2004 from the comparable
prior year period. The Seeds and Genomics segment gross profit as a
percent of net sales increased two percentage points to 62 percent
primarily because of the gross profit improvement that comes from
stacking more than one biotech trait in corn, and higher volumes and
average net selling prices for branded corn seed. The Agricultural
Productivity segment gross profit percentage increased one percentage
point to 35 percent. The increase in gross profit as a percent of
sales would have been higher if restructuring expenses were excluded
from cost of goods sold. In the first half of 2004, we recorded $17
million of restructuring charges related to the fiscal year 2004
restructuring plan in cost of goods sold. During the prior year
comparable first half, we recorded $10 million in cost of goods sold
for the 2002 restructuring plan. For further details on our
restructuring plans, please see the "Restructuring" section of MD&A
and Note 3 - Restructuring.
Operating expenses increased 24 percent, or $186 million, to $960
million for the first half of 2004 from $774 million for the same
period last year.
o SG&A expenses increased 21 percent, or $94 million. Increased
employee-related costs, primarily related to accrued incentive
compensation, were the primary drivers of the increase in SG&A
expenses for the first half of 2004. SG&A expenses also increased
because of higher marketing-related activities in the United
States and Brazil, and higher employee-benefit related expenses.
o We recognized $69 million of noncash goodwill adjustments during
the first half of 2004, related to our global wheat business. Our
decision to exit the European wheat business required us to
reevaluate the goodwill related to the wheat reporting unit for
impairment.
o Restructuring charges were recorded in both six-month periods.
Restructuring expenses were recorded within cost of goods sold,
restructuring charges - net and discontinued operations.
Restructuring charges recorded in the first half of 2004 for the
fiscal 2004 restructuring plan were $59 million. Our first half
of 2004 restructuring charges were reduced by $2 million of
restructuring reversals related to our prior restructuring plans.
During the prior year comparable period, we recognized $51
million of restructuring charges in operating expenses related to
our 2002 restructuring plan. These restructuring charges were
offset by $12 million of restructuring reversals related to the
2000 and 2002 restructuring plans. Thus, restructuring charges -
net were $57 million for the first half of 2004 and $39 million
in the prior year comparable period.
o The increase in bad-debt expense of $6 million was primarily for
uncollectible Argentine trade receivables. During the first half
of 2004, we determined an additional reserve was needed due to
the continued weak economic conditions in Argentina. Excluding
the Argentine additional reserves, bad-debt expense decreased in
the first half of 2004 from the same period a year ago.
o R&D expenses were relatively unchanged form last year's first
half. As a percent of sales, R&D expenses for the first half of
2004 declined one percent from the comparable prior year period.
Net interest expense for the first half of 2004 totaled $32
million, which was relatively consistent with last year's first half
net interest expense of $34 million. Our average borrowing level in
the first half of the current fiscal year of $1.5 billion was
consistent with our average borrowing levels in the prior year
comparable period.
We recorded net other expense of $62 million in the first half of
2004 and $19 million in the comparable period last year. During the
29
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
first half of 2004, we recorded approximately $14 million for the
advancement of funds to pay for Solutia's Assumed Liabilities in light
of Solutia's refusal to pay for those liabilities and for legal and
other expenses related to the Solutia bankruptcy. Refer to Note 13 -
Commitments and Contingencies - for further details. Both six-month
periods included equity affiliate expense related to Renessen, which
totaled $20 million in the first half of 2004 and $21 million in the
same period a year ago. Foreign-currency translation losses, hedging
losses and several individually immaterial items in other
miscellaneous expense caused the remainder of the year-over-year
increase. Please see Note 15 - Other Expense - Net - for further
details.
Income tax expense for the first half of the current fiscal year
increased 30 percent to $83 million, despite no change in
year-over-year pretax earnings. This disparity was primarily the
result of our goodwill adjustment in the first quarter of fiscal 2004,
which was not deductible for tax purposes. Absent the goodwill
adjustment, the effective tax rate would have been 36 percent, a
reduction of four percent versus the prior period. This decrease was
driven by the mix of earnings projected for fiscal 2004 versus those
in fiscal 2003. In addition, the tax provision for the current period
included two adjustments for valuation allowances against our deferred
tax assets. During the second quarter of fiscal 2004, the company
assessed the realizability of its deferred tax assets in Argentina and
Brazil following completion of the crop season in these countries and
the preparation of updated long-range financial projections for these
countries. In Argentina, we have assessed the need to establish a
valuation allowance of $102 million, primarily as a result of the
recent history of losses, the continued uncertain economic conditions
in Argentina (discussed in the "Outlook - Update - Focused Strategy"
section of MD&A), and the limited tax carryforward period of five
years. In Brazil, we have reassessed the need for a valuation
allowance and have reversed the existing valuation allowance of $90
million, primarily as a result of the improved operating results in
Brazil and improvements in the Brazilian economy. For further details
on these adjustments, please see Note 7 - Income Taxes.
The factors above explain the change in income from continuing
operations before cumulative effect of accounting change. In the first
half of the prior year, a new accounting standard relating to asset
retirement obligations was adopted on Jan. 1, 2003, which negatively
affected our net income by $12 million, or $0.05 per share, aftertax.
Discontinued operations generated an aftertax loss of $22 million
in the first half of 2004, reflecting $24 million in aftertax
restructuring charges ($34 million pretax). Operating activities
slightly offset these charges. Discontinued operations in the prior
year period generated an aftertax loss of $4 million. For further
details of our discontinued operations, please refer to Note 16 -
Discontinued Operations.
30
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Seeds and Genomics Segment
Six Months Ended
------------------------
Feb. 29, Feb. 28,
2004 2003
---- ----
Net sales
Corn seed and traits $ 665 $ 515
Soybean seed and traits 477 418
All other crops seed and traits 100 79
------ -------
Total net sales $1,242 $ 1,012
====== =======
Gross profit
Corn seed and traits $ 412 $ 302
Soybean seed and traits 323 271
All other crops seed and traits (1) 39 34
------ -------
Total gross profit $ 774 $ 607
====== =======
EBIT(2) $ 180 $ 196
====== =======
(1) Includes any net restructuring charges for the segment that were recorded
within cost of goods sold. See Note 3 - Restructuring, and "Restructuring"
in MD&A for further details.
(2) Earnings (loss) from continuing operations before cumulative effect of
accounting change, interest and income taxes. See Note 14 - Segment
Information - for further details.
Net sales for corn seed and traits in the first half of 2004
increased 29 percent, or $150 million, from the prior year comparable
period. Corn seed and traits sales were driven higher primarily by
increases in the United States. Corn seed net sales also increased in
Brazil and Europe, and to a lesser extent, in Mexico. Argentina corn
seed and trait sales slightly offset the gains in these regions.
The increase in U.S. corn seed was because of stronger market
performance and increased average net selling prices. To a lesser
extent, the net sales increase for U.S. branded corn seed was also
because of earlier season sales in the first half of 2004 from the
same period a year ago. Sales of U.S. corn traits increased primarily
because of growth in stacked traits, higher corn trait penetration,
and to a lesser extent, timing. Corn seed net sales in Brazil
increased from the same period a year ago because of improved market
conditions, which included a fiscal 2004 price increase, a mix shift
to higher value products, and the favorable Brazilian real exchange
rate. Europe corn seed sales increased because of stronger market
performance in France, favorable exchange rates and sales earlier in
the season versus the prior year. Argentina experienced severe drought
conditions in the first half of 2004, which led to a decrease in net
sales of corn seed and traits from the prior year comparable period.
The unfavorable weather conditions caused many farmers to reduce
plantings in the first half of 2004, and to shift to other crops such
as soybeans.
Soybean seed and traits net sales increased 14 percent, or $59
million, in the first half of 2004 and were driven by higher soybean
trait sales in the United States from the same period a year ago. U.S.
soybean trait revenues benefited from higher prices for branded
soybeans and royalties from seed licensees. All other crops seed and
traits sales in the first half of 2004 increased 27 percent, or $21
million, from the first half of 2003. The increase was partially
because of timing between second and third quarters of fiscal 2004
versus the prior year periods for Canadian canola seed and traits. A
price increase for Canadian canola seed in fiscal 2004 and a favorable
Canadian exchange rate also impacted the sales increase in the first
half of 2004 for Canadian canola seeds and traits. Higher cotton trait
revenues in Australia and the United States also increased sales for
the other crops.
EBIT for the Seeds and Genomics segment decreased $16 million in
the first half of 2004 from the prior year comparable period. Gross
profit as a percent of sales for the Seeds and Genomics segment
increased two percentage points to 62 percent because of the gross
31
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
profit improvement that comes from stacking more than one biotech
trait in corn, and higher volumes and average net selling prices for
branded corn. This percentage would have increased an additional
percentage point if we excluded the first half of 2004 restructuring
charges recorded in cost of goods sold of $6 million. Operating
expenses increased primarily because of the $69 million global wheat
goodwill impairment and higher SG&A expenses for this segment during
the first half of 2004. SG&A expenses increased because a higher
percentage of expenses were allocated to this segment in the first
half of 2004 versus the same period a year ago based on the Seeds and
Genomics segment's increasing contribution to total Monsanto
operations. The allocation percentages were changed at the beginning
of fiscal 2004. Our allocation methodology is primarily based on the
ratio of sales of the Seeds and Genomics segment to total Monsanto
sales, and is consistent with our historical practice. SG&A expenses
also increased in the first half of 2004 because of higher accrued
incentive compensation, higher sales and marketing-related expenses in
the United States and Brazil, and higher employee-benefit related
expenses.
Agricultural Productivity Segment
Six Months Ended
---------------------
Feb. 29, Feb. 28,
2004 2003
---- ----
Net sales
ROUNDUP and other glyphosate-based herbicides $ 792 $ 633
All other agricultural productivity products 486 494
------- -------
Total net sales $ 1,278 $ 1,127
======= =======
Gross profit
ROUNDUP and other glyphosate-based herbicides $ 254 $ 192
All other agricultural productivity products (1) 188 190
------- -------
Total gross profit $ 442 $ 382
======= =======
EBIT(2) $ 14 $ --
======= =======
(1) Includes any net restructuring charges for the segment that were recorded
within cost of goods sold. See Note 3 - Restructuring, and "Restructuring"
in MD&A for further details.
(2) Earnings (loss) from continuing operations before cumulative effect of
accounting change, interest and income taxes. See Note 14 - Segment
Information - for further details.
Net sales for the Agricultural Productivity segment increased 13
percent to $1,278 million in the first half of 2004 from $1,127
million in the comparable prior year period. Gross profit for this
segment increased 16 percent to $442 million from last year's same
period level of $382 million. As a percent of net sales, gross profit
increased one percentage point to 35 percent. An increase in ROUNDUP
herbicides and, to a lesser extent, other glyphosate-based herbicides
contributed to the net sales increase in the first half of 2004 for
the Agricultural Productivity segment.
Brazil was the largest contributor to the net sales increase in
ROUNDUP and other glyphosate-based herbicides for the Agricultural
Productivity segment. Brazil's net sales in the first half of 2004
benefited from our operational changes that took place in the prior
year, improved market and pricing conditions, and the favorable effect
of the Brazilian real exchange rate. Sales of glyphosate products in
Australia increased for the first half of 2004 from the same period a
year ago because of improved market conditions and favorable exchange
rates. Year-over-year net sales of ROUNDUP herbicides in Argentina
increased. Argentine sales for the earlier months of the first half of
2003 included the effect of actions taken in conjunction with our
customers during a time of economic and market turmoil. A one-time
exception to our policy regarding crop protection product returns
reduced the first half of 2003's sales by approximately $60 million,
but also reduced risks for both parties. During the first half of
2004, ROUNDUP net sales in Argentina were negatively affected by
competitive conditions and dry weather.
32
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Total net sales of ROUNDUP and other glyphosate-based herbicides
in the United States were down three percent from the first half of
the prior year. A decrease in nonbranded glyphosate product net sales
in the United States was partially offset by an increase in branded
ROUNDUP net sales in the United States for the first half of 2004 from
the same period a year ago. A higher percentage of our glyphosate
sales consisted of branded product, as the first half of 2004 results
reflect the successful launch of ROUNDUP ORIGINAL MAX for the 2004
growing season. For the first half of 2004, volumes were slightly down
for both branded and nonbranded glyphosate products, partially offset
by sales of higher value branded products. For the full year, we
continue to expect a decline in the market share and average net
selling price of ROUNDUP herbicides in the United States.
Net sales of all other agricultural productivity products were
down $8 million in the first half of 2004 from the prior year same
period. This decrease was primarily related to triallate herbicide
sales as we gradually exit the business. Lawn-and-garden herbicide net
sales increased in the first half of 2004 because of timing between
the first half and second half of the fiscal year.
EBIT for the Agricultural Productivity segment increased $14
million for the first half of 2004. Gross profit as a percent of sales
was up one percent year over year. The gross profit increase was
primarily because of the improved pricing and operating conditions in
Brazil and improved market conditions in Australia. Other expenses
were $34 million higher in the first half of 2004 from the same period
a year ago. The increase in other expense was primarily because of the
advancement of funds to pay for Solutia's Assumed Liabilities in light
of Solutia's refusal to pay for those liabilities and for legal and
other expenses related to the Solutia bankruptcy of $14 million, and
hedging losses on grain, which Latin America receives as payment for
certain customer accounts. Net restructuring charges recorded in the
first half of 2004 were $42 million versus $29 million recorded in the
same period a year ago. SG&A expenses for the Agricultural
Productivity segment increased slightly for the first half of 2004.
Higher incentives and employee-benefit related expenses were nearly
offset by the lower allocation of SG&A expenses to the Agricultural
Productivity segment in the first half of 2004. Please see the
previous section "Seeds and Genomics Segment" for a further
explanation of the change in allocation of SG&A expenses.
Our Agreement with The Scotts Company
In 1998, Monsanto entered into an agency and marketing agreement
with The Scotts Company (Scotts) with respect to our lawn-and-garden
herbicide business. Under the agreement, beginning in the fourth
quarter of 1998, Scotts was obligated to pay us a $20 million fixed
fee each year to defray costs associated with the lawn-and-garden
business. Scotts' payment of a portion of this fee owed in each of the
first three years of the agreement was deferred and is required to be
paid at later dates, with interest. Monsanto is accruing the deferred
portions of the $20 million annual fixed fee owed by Scotts ratably
over the periods during which it is being earned as a reduction of
SG&A expenses. We are also accruing the interest on the amounts owed
by Scotts and including it in interest income. The total amount owed
by Scotts, including accrued interest, was approximately $49 million
and $50 million as of Feb. 29, 2004, and Aug. 31, 2003, respectively.
Scotts began paying these deferred amounts ($5 million per year in
monthly installments) beginning in October 2002.
Restructuring
During the three months and six months ended Feb. 29, 2004, and
Feb. 28, 2003, we recorded charges relating to our restructuring
plans. These net charges were recorded in the Statement of
Consolidated Operations as outlined below. Please see Note 3 -
Restructuring - for further details.
33
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Three Months Ended Six Months Ended
------------------------ -----------------------
Feb. 29, Feb. 28, Feb. 29, Feb. 28,
2004 2003 2004 2003
---- ---- ---- ----
Cost of goods sold $(17) $ (4) $(17) $(10)
Restructuring charges - net(1) (28) (31) (57) (39)
---- ----- ---- ----
Loss from continuing operations before income
taxes (45) (35) (74) (49)
Income tax benefit 13 13 24 18
---- ----- ---- ----
Loss from continuing operations (32) (22) (50) (31)
Loss from operations of discontinued businesses(2) (1) -- (34) --
Income tax benefit 1 -- 10 --
---- ----- ---- ----
Loss on discontinued operations -- -- (24) --
---- ----- ---- ----
Net loss $(32) $ (22) $(74) $(31)
==== ===== ==== ====
(1) The restructuring charges for the three months ended Feb. 29, 2004, and
Feb. 28, 2003, were offset by $1 million and $8 million, respectively, in
restructuring reversals related to prior plans. Restructuring charges for
the six months ended Feb. 29, 2004, and Feb. 28, 2003, were offset by $2
million and $12 million, respectively.
(2) Fiscal year 2004 contains restructuring charges related to discontinued
businesses (refer to Note 16 - Discontinued Operations). These
restructuring charges were recorded in discontinued operations.
Fiscal Year 2004 Restructuring Plan
In October 2003, we announced plans to continue to reduce the
costs associated with our agricultural chemistry business as that
segment matures globally. Total restructuring charges approved under
the fiscal year 2004 restructuring plan were $289 million pretax. We
will further concentrate our resources on our core seeds and traits
businesses. These plans include: (1) reducing costs associated with
our ROUNDUP herbicide business, (2) exiting the European breeding and
seed business for wheat and barley, and (3) discontinuing the
plant-made pharmaceuticals program. These actions will require
restructuring charges of up to $220 million pretax ($155 million
aftertax) in fiscal year 2004. Additionally, the approved plan
included the $69 million impairment of goodwill in the global wheat
business (refer to Note 6 - Goodwill and Other Intangible Assets). The
goodwill impairment was not deductible for tax purposes. The following
table outlines the pretax restructuring charges related to our fiscal
year 2004 restructuring plan recorded by segment in continuing
operations and discontinued operations for the three months and six
months ended Feb. 29, 2004. We are following SFAS 144 and SFAS 146 to
account for these actions.
Three Months Six Months
Ended Ended
Feb. 29, 2004 Feb. 29, 2004
------------- -------------
Continuing Operations:
Seeds and Genomics $ 10 $ 33
Agricultural Productivity 36 43
------------- -------------
Total Continuing Operations 46 76
Discontinued Operations:
Seeds and Genomics 1 34
Agricultural Productivity -- --
------------- -------------
Total Discontinuing Operations 1 34
Total Segment
Seeds and Genomics 11 67
Agricultural Productivity 36 43
------------- -------------
Total $ 47 $110
============= =============
In the first half of fiscal year 2004, we recorded charges of $46
million related to work force reductions. Work force reductions in
continuing operations of $43 million were primarily R&D, information
34
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
technology, and marketing in the United States; downsizing the
regional structure and key country focus in Europe; and downsizing the
sales force in Canada as a result of the realignment of the Canadian
business to focus on the Seeds and Genomics segment. Discontinued
operations work force reductions of $3 million were related to
employees of the plant-made pharmaceuticals program. Facility closure
charges of $2 million related to shutdown expenses resulting from the
exit of the plant-made pharmaceuticals site. Asset impairments in
continuing operations were $33 million of which $17 million was
recorded in cost of goods sold and the remainder in restructuring
charges - net. Property, plant and equipment impairments of $9 million
were recorded in the United States and, to a lesser extent, Asia for
the shutdown of production lines and equipment. We also recorded $8
million in inventory impairments related to discontinued seed hybrids
in Argentina, discontinued agricultural chemical products and seed
hybrids in Brazil, and discontinued agricultural chemical products in
Asia. Asset impairments in restructuring charges - net consisted of
$11 million for the closure of an office building in the United
States, $2 million for the closure of a research facility in Canada,
an intangible asset impairment of $2 million in Asia, and
approximately $1 million for the disposal of a computer system in
Asia. Discontinued operations asset impairments of $29 million
consisted of $26 million of other intangible assets and $2 million of
property, plant and equipment impairments, both associated with the
European wheat and barley business; and property, plant and equipment
impairments of $1 million associated with the plant-made
pharmaceuticals business.
For fiscal year 2004, we expect approximately $144 million of
pretax charges to relate to the Seeds and Genomics segment and $145
million to relate to the Agricultural Productivity segment. We
estimate that this restructuring will require approximately $136
million of cash, relating to work force reductions and to a lesser
extent, facility closures. We also estimate we will incur $84 million
of noncash pretax asset impairments during fiscal year 2004, not
including the $69 million impairment of goodwill related to the global
wheat reporting unit. The actions relating to this restructuring plan
are expected to produce aftertax savings of approximately $80 million
to $95 million in fiscal year 2005, and approximately $90 million to
$105 million in fiscal year 2006, with continuing savings going
forward. We expect that these actions will lower our costs, primarily
SG&A, as a percent of sales.
2002 Restructuring Plan (charges recorded in calendar year 2002)
In 2002, Monsanto's management approved a restructuring plan to
further consolidate or shut down facilities and to reduce the work
force. Under this plan, various research and development programs and
sites were shut down, and certain agricultural chemical manufacturing
facilities in the Asia-Pacific region and the United States were
closed or downsized. Certain seed sites were consolidated, and certain
U.S. swine facilities were exited. In connection with this plan,
Monsanto recorded $43 million pretax of restructuring charges during
the quarter ended Feb. 28, 2003. Of these charges, $4 million was
recorded in cost of goods sold and the remainder in the restructuring
line item. We recorded $61 million pretax of restructuring charges
during the first half of 2003. During the first half of 2003, $10
million was recorded in cost of goods sold and the remainder in the
restructuring line item. The company also recorded reversals of $8
million and $12 million in the three months and six months ended Feb.
28, 2003, respectively, for the 2000 and 2002 restructuring plans. Net
pretax restructuring expenses of $35 million and $49 million were
recorded in the three months and six months ended Feb. 28, 2003,
respectively.
During the first half of 2004, the reserve balance was reduced by
approximately $1 million for cash severance payments to former
employees and by approximately $2 million for facility closure actions
that were completed. As of Feb. 29, 2004, the reserve balance related
to this plan was $2 million: $1 million for work force reductions and
$1 million for facility closures. Cash payments to complete these
restructuring actions are expected to be made during fiscal year 2004
and will be funded from operations. These payments are not expected to
significantly affect the company's liquidity. We anticipate that the
actions related to this plan will yield annual cash savings of more
than $50 million.
2000 Restructuring Plan (charges recorded in calendar years 2001
and 2000)
In 2000, Monsanto's management formulated a plan as part of the
company's overall strategy to focus on certain key crops and to
streamline operations. Restructuring and other special items,
primarily associated with the implementation of this plan, were
recorded during calendar years 2001 and 2000. These charges totaled
$474 million pretax ($334 million aftertax): $213 million ($137
million aftertax) recorded in calendar year 2001 and $261 million
($197 million aftertax) recorded in calendar year 2000.
35
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The 2000 plan restructuring reserves decreased $3 million in the
first half of 2004. The decrease was primarily because of the sale of
a U.S. manufacturing plant during second quarter 2004. Second quarter
reversals consisted of less than $1 million related to asset
impairments that were originally recorded as restructuring charges.
The second quarter 2004 reversals did not impact the restructuring
liability rollforward. Approximately $1 million in 2000 restructuring
plan reversals were recorded in first quarter 2004, and consisted of
less than $1 million in facility closures and approximately $1 million
in asset impairment reversals that were originally recorded as
restructuring charges. Both items were individually less than $1
million and therefore did not change the liability balance, however,
totaled $1 million in first quarter 2004 reversals. Reversals were
recorded primarily because costs were lower than originally estimated.
The remaining restructuring actions associated with this plan are
expected to be completed during fiscal year 2004. The remaining
restructuring actions will be funded from operations; these actions
are not expected to significantly affect the company's liquidity.
These actions under the 2000 restructuring plan have yielded annual
cash savings of more than $100 million.
Financial Condition, Liquidity, and Capital Resources
Working Capital and Capital Resources
As of As of As of
Feb. 29, 2004 Aug. 31, 2003 Feb. 28, 2003*
------------- ------------- --------------
Working capital $3,185 $2,995 $2,642
Current ratio 3.08:1 2.54:1 2.43:1
*All data as of Feb. 28, 2003, are derived from our unaudited consolidated statement of financial
position, which is not presented herein.
Working capital as of Feb. 29, 2004, increased $190 million from
Aug. 31, 2003. As of Feb. 29, 2004, working capital increased because
the decrease in current assets of $223 million was lower than the
decrease in current liabilities of $413 million from balances as of
Aug. 31, 2003. Trade receivables as of Feb. 29, 2004, were down $236
million from Aug. 31, 2003. Worldwide collections for the first half
of 2004 have been strong with the most significant impact in the
United States. U.S. customers paid earlier this season, a signal of
the strengthening of the agricultural economy. There was no impact to
working capital between Feb. 29, 2004, and Aug. 31, 2003, for the
taxes related to the PCB litigation settlement. When the PCB
litigation settlement was funded in September 2003, the deferred tax
asset balance was reduced and the current tax liability decreased.
Inventory increased $109 million as of Feb. 29, 2004, from Aug. 31,
2003, primarily because of the seasonal nature of our U.S. seed
business and U.S. other selective herbicides business. Inventories for
both seed and other selective herbicides in the United States were
lower as of Aug. 31, 2003, and have increased over the first and
second quarters of fiscal 2004 in preparation for sales in the second
half of fiscal 2004. Current liabilities decreased from Aug. 31, 2003,
to Feb. 29, 2004, primarily because of the $400 million payment for
the PCB litigation settlement.
Our working capital increased on a February-to-February
comparison by $543 million, reflecting approximately $200 million of
higher current assets and approximately $300 million of lower
liabilities. Cash and cash equivalents was the primary driver of the
higher asset levels. Short-term debt was approximately $300 million
lower as of Feb. 29, 2004. However, total debt outstanding was
approximately $1.5 billion for both periods. The current tax liability
was approximately $165 million lower than the balance as of Feb. 28,
2003. The current tax liability decreased between Feb. 28, 2003, and
Feb. 29, 2004, because of the taxes related to the PCB litigation
settlement, which became deductible in September 2003 when we funded
the PCB litigation settlement, and the payment of income taxes owed to
Pharmacia in the first half of 2004. The decrease in short-term debt
and the current tax liability was offset by an increase in incentive
compensation accruals as of Feb. 29, 2004, compared to Feb. 28, 2003,
which was because of the improved operational performance in fiscal
2004.
36
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Cash Flow
Six Months Ended
-----------------------
Feb. 29, Feb. 28,
2004 2003
---- ----
Net cash provided by operations $ 217 $ 801
Net cash required by investing activities (146) (388)
----- -----
Free Cash Flow 71 413
Net cash required by financing activities (54) (463)
----- -----
Net Increase (Decrease) in Cash and Cash
Equivalents $ 17 $ (50)
===== =====
Free cash flow decreased $342 million for the first half of 2004
to $71 million from $413 million in the prior year six-month period.
The primary driver of the decrease was a $584 million decrease in cash
provided by operations. In September 2003, we paid $400 million
related to the Solutia PCB litigation settlement. We are also
continuing to voluntarily contribute to our U.S. qualified pension
plan, with $150 million contributed in the first half of 2004 compared
to $20 million in the first half of 2003.
The change in accounts receivables provided cash of $478 million
in the first half of 2004 and $693 million in the first half of 2003.
This fluctuation is caused by the fact that, as compared to the six
months ended Feb. 28, 2003, sales increased in the current six-month
period at a rate higher than our rate of collections during this time
period. Although our year to date collections have increased
substantially as compared to the six months ended Feb. 28, 2003, our
increase in year to date sales of nearly $400 million more than offset
this improvement in collections in the cash flow statement. The
increase in collections was driven primarily by improvements in Brazil
because of the operational changes in fiscal 2003. Collections in the
first half of 2004 were also higher because U.S. customers paid
earlier in the season. The accounts receivable created by the
increased sales experienced in the current period will be collected in
future quarters under the normal trade terms.
Accounts payable and accrued liabilities were a use of cash of
$400 million in the first half of 2004 versus a use of $107 million in
the prior year same period. The increase in use of cash translates
into lower accounts payable and accrued liabilities as of Feb. 29,
2004, compared to Feb. 28, 2003. The lower balance as of Feb. 29,
2004, was primarily impacted by the current tax liability. The current
tax liability fluctuation was driven by the deferred tax effects of
funding the PCB litigation settlement in September 2003 and the
pension funding in the first half of fiscal 2004. In addition, the
income tax liability of $44 million owed to Pharmacia was paid in
September 2003.
Deferred income taxes were a source of cash of $246 million in
the first half of 2004 and a use of cash of $54 million in the
comparable prior year period. Similar to current tax liability, the
PCB litigation settlement expense was the primary driver of this line.
The tax impact of the PCB litigation settlement was recorded in the
current deferred tax asset account as of Aug. 31, 2003. In September
2003 after the PCB litigation settlement was funded, this amount was
recorded to current tax liability. Essentially the higher use of cash
from deferred income taxes was offset by the higher source of cash for
accounts payable and accrued liabilities in the first half of 2004
from the same period in the prior year. Thus, overall net cash from
operations was unaffected by taxes related to the PCB litigation
settlement in the first half of 2004.
Net cash required by investing activities was $146 million for
the first half of 2004 compared to $388 million in the first half of
2003. The primary change was the difference between purchases and
maturities of short-term investments. For the first half of 2003, we
invested $250 million in short-term securities, which was reflected as
a use of cash of $250 million. During the first half of 2004,
short-term investments of $230 million matured, and we subsequently
reinvested $250 million in short-term securities, which produced a net
impact of a use of cash in the amount of $20 million. Capital
expenditures decreased 10 percent, or $11 million, to $103 million for
the first half of 2004.
37
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Net cash required by financing activities was $54 million in the
first half of 2004 compared to $463 million for the first half of
2003. The net change in cash required for short-term financing was $54
million in the first half of 2004 and $370 million in the first half
of 2003. During the first half of 2004, we had less free cash flow to
pay down our short-term debt compared to the same period in the prior
year. Strong cash flows over the past 12 months have reduced our need
for seasonal borrowings. Commercial paper outstanding decreased
approximately $400 million between Aug. 31, 2002, and Feb. 28, 2003.
No commercial paper was outstanding as of Aug. 31, 2003, and Feb. 29,
2004. Stock option exercises totaling $119 million during the first
half of 2004 were almost entirely offset by treasury share purchases.
During the first half of 2004, treasury share purchases totaled $106
million. The share repurchases are part of our three-year, $500
million share repurchase program. Dividend payments increased eight
percent, or $5 million, for the first half of 2004. In April 2003, the
board of directors approved an increase in the quarterly dividend.
Customer Financing Program: In connection with a financing option
that is available to certain of our customers, we collected
approximately $124 million in the first half of 2004 and $137 million
during the same period last year. This $500 million revolving credit
and liquidity facility allows certain U.S. customers to finance
product purchases, and allows us to reduce our reliance on commercial
paper borrowings. The company originates these loans on behalf of the
third-party specialty lender using Monsanto's credit guidelines
approved by the lender, a special purpose entity. The loans are sold
to multi-seller commercial paper conduits through a non-consolidated
qualifying special purpose entity (QSPE). We have no ownership
interest in the lender, the QSPE, or the loans. We service the loans
and provide a first loss guarantee of up to $100 million. We have not
issued, nor are we obligated to issue, any debt or equity securities
in connection with this arrangement.
The customer loan balance outstanding as of Feb. 29, 2004, and
Feb. 28, 2003, was $108 million and $113 million, respectively. The
lender or the conduits may restrict or discontinue the facility at any
time. If the facility were to terminate, existing sold loans would be
collected by the QSPE over their remaining terms (generally 12 months
or less), and we would revert to our past practice of providing
customers with direct credit purchase terms. Servicing fee revenues
were not significant. As of Feb. 29, 2004, Monsanto's guarantee
liability was less than $1 million, based on our historical collection
experience with these customers and our current assessment of credit
exposure. Adverse changes in the actual loss rate would increase the
liability.
Contingent Liabilities Relating to Solutia Inc. (Off-Balance Sheet
Arrangement)
Under our Separation Agreement with Pharmacia, we were required
to indemnify Pharmacia for liabilities that Solutia assumed from
Pharmacia in connection with the spinoff of Solutia on Sept. 1, 1997
(Solutia's Assumed Liabilities), to the extent that Solutia fails to
pay, perform or discharge those liabilities. Those liabilities remain
the present responsibility of Pharmacia. In general, this
indemnification obligation applies to Solutia's Assumed Liabilities
for which Pharmacia would otherwise be required to pay. Solutia's
Assumed Liabilities may include, among others, litigation,
environmental remediation, and certain retiree liabilities relating to
individuals who were employed by Pharmacia prior to the Solutia
spinoff. Solutia and 14 of its U.S. subsidiaries filed a voluntary
petition for reorganization under Chapter 11 of the U.S. Bankruptcy
Code in the U.S. Bankruptcy Court for the Southern District of New
York. In the Chapter 11 proceeding, Solutia is seeking relief from
paying certain liabilities, including Solutia's Assumed Liabilities.
Solutia has notified Pharmacia and Monsanto that it is repudiating its
obligation to defend litigation which Solutia had been managing or to
accept new cases relating to Solutia's Assumed Liabilities pursuant to
the terms of agreements between Pharmacia, Solutia and Monsanto.
Solutia has also taken the position that the bankruptcy proceeding
prevents it from continuing to perform its environmental obligations
except within the boundaries of its current operations. If Solutia is
discharged from all or a portion of Solutia's Assumed Liabilities,
Monsanto may be required to indemnify Pharmacia for all or a portion
of them. Under the rules of the SEC, these contingent liabilities are
considered to be an off-balance sheet arrangement. Item 1 - Note 13 -
Commitments and Contingencies - includes further information regarding
Solutia's Assumed Liabilities and the reasonable possibility of a
material adverse effect on our financial position, profitability
and/or liquidity. Also see Item 1 - Legal Proceedings and Item 5 -
Other Information - Relationships Among Monsanto Company, Pharmacia
Corporation and Solutia Inc. for further information.
38
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Outlook - Update
Focused Strategy
Monsanto has established leadership in agricultural markets by
applying advanced technology to develop high-value products ahead of
competitors, and by reinforcing strong brands and customer
relationships. We continually improve our products to maintain market
leadership and support near-term performance. Our capabilities in
biotechnology research are generating a rich product pipeline that is
expected to drive long-term growth. We believe that our focused
approach to our business and the value we bring to our customers will
allow us to maintain an industry leadership position in a highly
competitive and difficult agricultural and economic environment.
Our strategic actions will allow us to focus on continued growth
in our seeds and traits businesses, with the goal of ensuring that
ROUNDUP and our other herbicides continue to make strong contributions
to cash flow and income. Monsanto is continuing to evolve into a
company led by its strengths in seeds and biotechnology traits as a
means of delivering solutions to our customers. As we concentrate our
resources on this growth sector of the agricultural industry, we are
taking steps to reduce SG&A costs - particularly those associated with
our agricultural chemistry business as that sector matures globally.
Monsanto remains the leading manufacturer of the best-selling
herbicide, ROUNDUP, and maintains a very strong manufacturing cost
position.
As part of this seed and technology-based strategic initiative,
we are focusing on projects that we believe have the best commercial
potential. Our research and marketing focuses on three crops grown on
significant acreage: corn, soybeans and cotton. Following our
announced exit from our European breeding and seed business for wheat
and barley in March 2004, we entered into a definitive agreement for
the sale of assets associated with that business. Monsanto continues
to evaluate resourcing for ROUNDUP READY wheat in competition with
resourcing of other commercial opportunities for current and future
traits in corn, soybeans, cotton, and other crops, and in the context
of continuing discussions with potential customers about the demand
for our technology in wheat.
We will also focus geographically on our top agricultural
markets, where we can bring together a broad complement of our
products and technologies, while pursuing ways to best participate in
other markets. We have accordingly adopted different business models
for different markets. These actions allow us to diversify our
exposure to risk from changes in the marketplace.
Our financial strategy will continue to emphasize both earnings
and cash flow, and we believe that Monsanto is positioned to sustain
earnings growth and strong cash flow. We remain committed to returning
cash to shareowners. We began our recently approved share repurchase
program in the first quarter 2004, and our board of directors
increased our dividend rate in April 2003. We expect to continue the
share repurchase program until July 2006 or until we have reached the
$500 million amount authorized by the board of directors. We also
applied our strong cash position to participate in a settlement of
Solutia's PCB litigation and continue to make voluntary contributions
to our pension plan. We will also evaluate using our cash position for
acquisition opportunities that meet the strategic needs of our seed
and traits businesses or for technology arrangements that have the
potential to increase the efficiency and effectiveness of our research
and development efforts.
We have taken decisive steps to address key risks in our business
position. These include the measures noted above, reducing costs in
our agricultural chemistry business and pursuing the evolution of our
business to an emphasis on seeds and traits. We have also taken steps
to reduce risk and stabilize our business position in Latin America.
We remain focused on cost and cash management both to support the
progress we have made in managing our investment in working capital -
in particular, receivables and inventories - and to realize the full
earnings potential of our businesses. We will continue to seek
additional external financing opportunities for our customers.
We implemented changes in how we approach our Argentina business
that negatively impacted our sales and earnings in fiscal year 2003
and the first half of 2004 but are intended to stabilize our business
position in this important agricultural market. The actions we have
39
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
taken with our customers were designed to reduce risk and to balance
earnings and cash during a particularly difficult economic period. We
continue to follow through on business decisions made in recent years
aimed at maintaining market leadership and restoring profitability in
Argentina. Although economic and market uncertainties remain, we
believe we are making progress. In addition, we continue to focus on
reducing inventories and receivables in Argentina.
Seeds and Genomics
Monsanto has built a leading global position in seeds, and the
successful integration of seed businesses acquired in the 1990s has
allowed us to improve our seed portfolio. We continue to make
improvements in our base seed business, as advanced breeding
techniques combined with production practices and plant capital
investments have significantly improved germplasm quality, yields and
cost. The performance of Monsanto germplasm is reflected in market
share gains for both our branded and licensed seed businesses. We also
use our genetic material to develop new varieties for other seed
companies' brands.
Outstanding seed quality and leading germplasm provide a vehicle
for introducing biotechnology seed traits, such as herbicide tolerance
and insect protection. Biotechnology traits offer growers several
benefits: Lower costs, greater convenience and flexibility, higher
yields, and the ability to adopt environmentally responsible practices
such as conservation tillage and reduced pesticide use.
We invest more than 80 percent of our R&D in the areas of seeds,
genomics and biotechnology. These are the fastest-growing segments of
the agriculture industry. By shifting our focus to create value for
farmers in seeds and traits, we have set Monsanto on a path of
sustainable growth, as we expect increasing gross profit from seeds
and traits to more than offset a declining contribution from
agricultural chemicals. At the same time, we expect to continue to
reduce seed production costs through higher yields on seed production
acres and careful management of our seed product portfolio.
ROUNDUP and other glyphosate-based herbicides can be applied over
the top of glyphosate-tolerant ROUNDUP READY crops, controlling weeds
without injury to the crop. This integration of agricultural chemicals
and enhanced seeds offers growers a cost-effective solution for weed
control. To date, we have introduced ROUNDUP READY traits in soybeans,
corn, canola and cotton. In addition, our insect-protection seed
traits, such as YIELDGARD for corn and BOLLGARD and BOLLGARD II for
cotton, serve as alternatives to certain chemical pesticides.
Key near-term growth opportunities in seeds and traits include
o Continued growth in Monsanto's branded and licensed seed
market shares, through successful breeding of
high-performance germplasm and continuous improvement in the
quality of our seeds;
o Continued growth in licensing of seed germplasm and
biotechnology traits to other seed companies through our
Holden's/Corn States business and the newly established
Cotton States business; and,
o Expansion of existing traits, especially in corn, and
stacking of additional traits in current biotechnology
products.
We can achieve continued growth through stacking and increased
penetration of traits in approved markets. Trait stacking is a key
growth driver in our seeds and traits business, because it allows
Monsanto to earn a greater share of the farmer's expenditures on each
acre. Our past successes provide a significant competitive advantage
in delivering stacked-trait products and improved, second-generation
traits. Stacked-trait cotton overtook single-trait cotton products in
Monsanto's product mix in 2003. We are seeing the same trend in our
corn seed business, where higher-value, stacked-trait products
represent a growing share of total seed sales.
We are currently developing the first triple-stack product,
YIELDGARD Plus corn with ROUNDUP READY. Another source of growth in
the near term is the commercialization of second-generation traits,
such as BOLLGARD II cotton. In addition to delivering new
40
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
stacked-trait products and second-generation traits in the near term,
we are working toward developing products to generate long-term
growth. Our strategic head start in first- and second-generation input
traits gives us a leadership position in developing output traits that
provide consumer benefits and create value for the food industry.
We are working to achieve greater acceptance and to secure
additional approvals for our existing biotechnology products globally,
and toward the development and timely commercialization of additional
products in our pipeline. We are prioritizing our efforts to gain
approvals for biotechnology crops, and while we continue to gain new
approvals in global markets, we are pursuing strategies that enable
growth even with delays in some global regulatory approvals. The
Brazilian government recently passed a measure, which legalizes the
planting of ROUNDUP READY soybeans in Brazil for the 2003-2004 crop
year. Monsanto is working with the Brazilian grain industry to collect
royalties for the use of our technology. We are continuing our efforts
to obtain long-term approval for the planting of ROUNDUP READY
soybeans in Brazil, and plan to continue to develop a royalty system,
which matches the decisions made by the government of Brazil. More
than 95 percent of the grain handlers in two southern Brazil states
have signed contracts to collect this royalty upon the delivery and
sale of the grain produced with ROUNDUP READY soybean technology. This
same approach may also be applicable to other parts of Latin America.
However, there is no certainty that royalties on ROUNDUP READY
soybeans will be profitably collected in Brazil or other parts of
Latin America. Additionally, Monsanto is pursuing approvals to enable
the importation of corn and processed corn products that contain the
ROUNDUP READY and YIELDGARD rootworm traits into Europe. Crop import
restrictions in some key markets, most notably the European Union
(EU), reduce potential expansion of current and future biotechnology
crops in the United States and other markets where they are approved.
The development of effective systems to enable farmers growing crops
in the United States to sell into elevator systems that do not export
to the EU, however, is mitigating the effect of these restrictions.
We are committed to addressing concerns raised by consumers and
by public interest groups and questions from government regulators
regarding agricultural and food products developed through
biotechnology. We also continue to address concerns about the
adventitious or certain unintended trace presence of biotechnology
materials in seed, grain or feed and food products. We are responding
to the issue of adventitious presence in several ways. These include
seeking sound, science-based rules and regulations that clarify and
allow for trace amounts, and providing industry leadership to
establish the highest standards of purity reasonably achievable and to
establish global standards for quality. We are also working with the
seed industry to develop strategies on production interventions that
may reduce the likelihood of adventitious presence.
Agricultural Productivity
In recent years, we have seen reduced revenues and earnings from
ROUNDUP herbicides, which reflect both the overall decline in the
agricultural chemicals market and the expiration of U.S. patent
protection for the active ingredient in ROUNDUP in 2000. By aligning
our infrastructure and costs with our expectations for the glyphosate
herbicide market, however, we believe the ROUNDUP franchise can
continue to be a significant and sustainable source of cash and income
generation for Monsanto, even in the face of increased competition.
As expected, the market share and price of ROUNDUP herbicides in
the United States have declined since the patent expired in 2000. We
expect these trends to continue until we reach steady-state postpatent
levels. In postpatent markets around the world, ROUNDUP has maintained
a leading market position and a price premium compared with generics.
We will continue to support the market leadership of ROUNDUP with
product innovations, superior customer service and logistics, low-cost
manufacturing, and further expansion of ROUNDUP READY crops and
conservation tillage.
We have several patents on our glyphosate formulations and
manufacturing processes in the United States and in other countries.
We continue to differentiate ROUNDUP with innovations using
proprietary technology. We also provide more concentrated formulations
that provide greater convenience for farmers while reducing production
and logistics costs. We offer a variety of products to meet farmers'
needs. The U.S. launch of premium ROUNDUP WEATHERMAX was followed by
successful introduction of ROUNDUP ORIGINAL MAX, which offers key
brand advantages versus imitator products at a very competitive price,
for the 2004 growing season.
41
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Monsanto will support ROUNDUP through expansion of ROUNDUP READY
crops and promotion of conservation tillage. Conservation tillage
helps farmers reduce soil erosion by replacing plowing with the
judicious use of herbicides to control weeds. Further penetration of
ROUNDUP READY crops also enhances the market position of ROUNDUP as a
brand-name product that farmers trust to avoid the risk of crop injury
in over-the-top use on these crops.
Monsanto maintains strong distribution relationships and a unique
bulk tank system to support retailers. Monsanto remains the primary
global producer of glyphosate, the active ingredient in ROUNDUP, with
agreements to supply glyphosate to many of our competitors. Our high
volume combined with patented process technology allows us to maintain
low unit costs. We continue to reduce production costs, and we are
also achieving reductions in working capital through careful
management of inventories. In recent years, distribution channel
inventories had increased significantly in the United States. However,
ROUNDUP distribution inventory levels at the end of fiscal year 2003
were slightly down from levels at the end of fiscal year 2002.
Like most chemical herbicides, Monsanto's selective herbicides
face declining markets and increasing competitive pressures, but they
continue to complement our ability to offer fully integrated
solutions, particularly in ROUNDUP READY corn. While rapid penetration
of ROUNDUP READY corn in the United States has also had a negative
effect on sales of Monsanto selective corn herbicides, increased gross
profit from the ROUNDUP READY trait and the ROUNDUP used on these
acres are significantly higher than the lost selective herbicide
sales.
Our lawn-and-garden herbicide business remains a strong cash
generator and supports Monsanto's brand equity in the marketplace.
Another key product in our Agricultural Productivity segment is
POSILAC bovine somatotropin, which improves dairy cow productivity.
The active ingredient for POSILAC is manufactured both at our new
plant in Augusta, Georgia, and by Sandoz GmbH in Austria. Sandoz also
manufactures the finished dose formulation of POSILAC, and will remain
the sole supplier of the finished dose formulation until we obtain
approval from the FDA to manufacture the finished dose formulation at
Augusta. We recently notified our customers that supplies of POSILAC
will be temporarily limited while Sandoz completes necessary
corrections and improvements at its facility in response to issues
identified by the FDA. This limitation has temporarily reduced volumes
of POSILAC available for sale and required us to allocate available
supplies. The allocation is expected to have a material adverse effect
on POSILAC revenues as long as it continues.
Other Information
As discussed in Item 1 - Note 13 - Commitments and Contingencies,
Monsanto is involved in a number of lawsuits and claims relating to a
variety of issues. Many of these lawsuits relate to intellectual
property disputes. We expect that such disputes will continue to occur
as the agricultural biotechnology industry evolves.
For additional information on the outlook for Monsanto, see
"Cautionary Statements: Risk Factors Regarding Forward-Looking
Statements."
Critical Accounting Policies and Estimates
In preparing our financial statements, we must select and apply
various accounting policies. Our most significant policies are
described in Note 2 -- Significant Accounting Policies -- to the
consolidated financial statements contained in our report on Form 10-K
for the transition period ended Aug. 31, 2003. In order to apply our
accounting policies, we often need to make estimates based on
judgments about future events. In making such estimates, we rely on
historical experience, market and other conditions, and on assumptions
that we believe to be reasonable. However, the estimation process is
by its nature uncertain given that estimates depend on events over
which we may not have control. If market and other conditions change
from those that we anticipate, our financial condition, results of
operations, or liquidity may be affected materially. In addition, if
our assumptions change, we may need to revise our estimates, or take
other corrective actions, either of which may have a material effect
on our financial condition, results of operations, or liquidity.
42
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The estimates that have a higher degree of inherent uncertainty
and require our most significant judgments are outlined in
Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in our report on Form 10-K for the
transition period ended Aug. 31, 2003. During the second quarter of
2004, management evaluated those estimates and determined our critical
accounting policies and estimates should be expanded to include
litigation and other contingencies as discussed below. Had we used
estimates different from any of those contained in such report on Form
10-K, our financial condition, profitability, or liquidity for the
current period could have been materially different from those
presented.
Litigation and Other Contingencies: We are involved in various
patent, product liability, consumer, commercial, environmental and
other litigation, claims and legal proceedings, for example
proceedings relating to Solutia's bankruptcy filing; environmental
remediation; and government investigations. We routinely assess the
likelihood of adverse judgments or outcomes to those matters, as well
as ranges of probable losses, to the extent losses are reasonably
estimable. We record accruals for such contingencies to the extent
that we conclude their occurrence is probable and the financial
impact, should an adverse outcome occur, is reasonably estimable.
Disclosure for specific legal contingencies is provided if the
likelihood of occurrence is at least reasonably possible and the
exposure is considered material to the consolidated financial
statements. In making determinations of likely outcomes of litigation
matters, management considers many factors. These factors include, but
are not limited to, past history, scientific and other evidence, and
the specifics and status of each matter. If our assessment of the
various factors change, we may change our estimates. That may result
in the recording of an accrual or a change in a previously recorded
accrual. Predicting the outcome of claims and litigation, and
estimating related costs and exposure involves substantial
uncertainties that could cause actual costs to vary materially from
estimates and accruals.
New Accounting Standards
In January 2003, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46), and amended it by issuing FIN 46R in December 2003.
Application of this interpretation is required in our financial
statements for the quarter ended Feb. 29, 2004, for interests in
variable interest entities that are considered to be special-purpose
entities. Application of FIN 46R for all other types of variable
interest entities is required for Monsanto effective May 31, 2004.
FIN 46R addresses the consolidation of business enterprises to
which the usual condition of consolidation (ownership of a majority
voting interest) does not apply. This interpretation focuses on
controlling financial interests that may be achieved through
arrangements that do not involve voting interests. It concludes that,
in the absence of clear control through voting interests, a company's
exposure (variable interest) to the economic risks and potential
rewards from the variable interest entity's assets and activities are
the best evidence of control. If an enterprise holds a majority of the
variable interests of an entity, it would be considered the primary
beneficiary. The primary beneficiary is required to include the
assets, liabilities and results of operations of the variable interest
entity in its financial statements.
Monsanto has an arrangement with a special-purpose entity to
provide a financing program for selected Monsanto customers. See Note
4 - Customer Financing Program - for a description of this
arrangement. This special-purpose entity is consolidated. Other
variable interest entities with which the company is involved must be
evaluated prior to May 31, 2004, to determine the primary beneficiary.
In January 2004, the FASB issued FASB Staff Position No. 106-1
(FSP 106-1), Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003.
FSP 106-1 permits a sponsor of a postretirement health care plan that
provides a prescription drug benefit to make a one-time election to
defer accounting for the effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act), which was signed
into law on Dec. 8, 2003. The Act introduced a prescription drug
benefit under Medicare, as well as a federal subsidy to sponsors of
retiree health care benefit plans that provide a benefit that is at
least actuarially equivalent to Medicare. These provisions of the new
law will affect accounting measurements of our postretirement benefit
obligation and expense. As permitted by FSP 106-1, we made a one-time
election to defer accounting for the effect of the Act until specific
authoritative guidance is issued. Therefore, the amounts included in
the consolidated financial statements related to our postretirement
43
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
benefit plans do not reflect the effects of the Act. Final
authoritative guidance could require the company to change previously
reported information.
In December 2003, the FASB issued SFAS No. 132 (Revised 2003),
Employers' Disclosures about Pensions and Other Postretirement
Benefits, which enhanced the required disclosures about pension plans
and other postretirement benefit plans, but did not change the
measurement or recognition principles for those plans. The statement
requires additional interim and annual disclosures about the assets,
obligations, cash flows, and net periodic benefit cost of defined
benefit pension plans and other defined benefit postretirement plans.
The required interim disclosures are effective for Monsanto in the
third quarter of fiscal year 2004, and the required annual disclosures
are effective for Monsanto's Form 10-K for the fiscal year ended Aug.
31, 2004.
In December 2003, the SEC issued SAB No. 104, Revenue Recognition
(SAB 104). SAB 104 updates portions of the interpretive guidance
included in Topic 13 of the codification of Staff Accounting Bulletins
in order to make this interpretive guidance consistent with current
authoritative accounting and auditing guidance and SEC rules and
regulations. The company believes it is following the guidance of SAB
104.
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS 143). SFAS 143, which was effective for
Monsanto on Jan. 1, 2003, addresses financial accounting for and
reporting of costs and obligations associated with the retirement of
tangible long-lived assets. Upon adopting this standard, in accordance
with APB Opinion 20, we recorded an aftertax cumulative effect of
accounting change of $12 million, or $0.05 per share. This noncash
charge was recorded as of Jan. 1, 2003. In addition, as required by
SFAS 143, as of Jan. 1, 2003, net property, plant and equipment
increased by $10 million, and asset retirement obligations (a
component of noncurrent liabilities) of $30 million were recorded.
Adoption of this standard did not affect the company's liquidity. If
SFAS 143 would have been effective for all periods presented, net
earnings would have been reduced by less than $1 million and $1
million for the three months and six months ended Feb. 28, 2003,
respectively, with no change to reported diluted earnings per share in
either period.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). SFAS 146
replaced EITF Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS 146
requires companies to recognize costs associated with exit or disposal
activities when they are actually incurred, rather than on the date
the company commits itself to the exit or disposal plan. This
statement is effective for any exit or disposal activities initiated
after Dec. 31, 2002. We are following the guidance of SFAS 146 for the
fiscal year 2004 restructuring plan. Refer to Note 3 -- Restructuring
-- for further details. The adoption of SFAS 146 had no effect on our
2002 and 2000 restructuring plans, which were both initiated prior to
Dec. 31, 2002.
Cautionary Statements: Risk Factors Regarding Forward-Looking
Statements
In this report, and from time to time throughout the year, we
share our expectations for our company's future performance. These
forward-looking statements represent our best estimates and
expectations at the time that we make those statements. However, by
their nature, these types of statements are uncertain and are not
guarantees of our future performance. Many events beyond our control
will determine whether our expectations will be realized. In the
interests of our investors, and in accordance with the "safe harbor"
provisions of the U.S Private Securities Litigation Reform Act of
1995, this section of our report explains some of the important
reasons that actual results may be materially different from those
that we anticipate.
Our forward-looking statements include statements about: our
business plans; the potential development, regulatory approval, and
public acceptance of our products; our expected financial performance
and the anticipated effect of our strategic actions; domestic or
international economic, political and market conditions; and other
factors that could affect our future operations or financial position.
Any statements we make that are not matters of current reportage or
historical fact should be considered forward looking. Such statements
often include words such as "believes," "expects," "anticipates,"
"intends," "plans," "estimates," "will," and similar expressions.
44
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Our forward-looking statements are current only as of the date of
this report. Circumstances change constantly, often unpredictably, and
investors should not place undue reliance on these statements. We
disclaim any current intention to revise or update any forward-looking
statements, or the factors that may affect their realization, whether
in light of new information, future events or otherwise, and investors
should not rely on us to do so.
Competition for ROUNDUP Herbicides: We expect to face continued
competition for our branded ROUNDUP herbicide product line. The extent
to which we can realize cash and gross profit from these products will
depend on our ability to predict and respond effectively to competitor
pricing, to provide marketing programs meeting the needs of our
customers and of the farmers who are our end-users, to maintain an
efficient distribution system, to control manufacturing and marketing
costs without adversely affecting sales, and to develop new
formulations with features attractive to our end-users.
Regulation and Public Acceptance of Seed Biotechnology:
Regulatory and legislative requirements affect the testing and
planting of seeds containing our biotechnology traits, and the import
of crops grown from those seeds. Obtaining testing, planting and
import approvals can be lengthy and costly, with no guarantee of
success. Planting approvals may also include significant regulatory
requirements that can limit our sales. Lack of approval to import
crops containing biotechnology traits into key markets (particularly
those influenced by the European Union) can affect sales of our
traits, even in jurisdictions where planting has been approved. For
example, several wheat industry stakeholders in the U.S. and Canada
have expressed concerns about the potential for impacts of the launch
of ROUNDUP READY wheat on those countries' wheat export markets. This
could significantly adversely affect the timing, profitability and/or
probability of that product's launch. Legislation or regulation may
also require the tracking of biotechnology products and the labeling
of food or feed products with ingredients grown from seeds containing
biotechnology traits. Such traceability and labeling requirements may
cause food processors and food companies to avoid biotechnology and
select non-biotechnology crop sources, which can affect grower seed
purchase decisions and the sale of our products. Some opponents of the
technology publicly express concern about potential effects of our
biotechnology traits on other plants and on the environment, and about
potential effects of crops containing these traits on animals and
human health. Such concerns can affect government approvals and may
adversely affect sales of our traits, even after approvals are
granted. In addition, violent opponents of agricultural biotechnology
have attacked facilities used by agricultural biotechnology companies,
and may launch future violent attacks against our field testing sites,
and research, production, or other facilities.
Adventitious Presence of Biotechnology Traits: The detection of
unintended but unavoidable trace amounts (sometimes called
"adventitious presence") of commercial biotechnology traits in
conventional (non-biotechnology) seed, or in the grain or products
produced from seeds containing these traits, may negatively affect our
business or results of operations. The detection of adventitious
presence of traits not approved in the country where detected may
result in the withdrawal of seed lots from sale, or in compliance
actions such as crop destruction or product recalls. Some growers of
organic and conventional crops have claimed that the adventitious
presence of any biotechnology traits in their crops will cause them
commercial harm. The potential for adventitious presence of
biotechnology traits is a factor in general public acceptance of these
traits. Concern about adventitious presence may also lead to more
stringent regulation, which may include: requirements for labeling and
traceability; financial protection such as surety bonds, liability or
insurance; and/or restrictions or moratoria on testing, planting or
use of biotechnology traits.
Regulation and Legislation Affecting Agricultural Products: In
addition to regulation and legislation specifically affecting our seed
biotechnology products, agricultural products and their manufacturers
are subject to other government regulation, which affects our sales
and profitability. These regulations affect the development,
manufacture and distribution of our products, and non-compliance could
affect our sales and profitability. Farm legislation encouraging or
discouraging the planting of specific crops can affect our sales. In
addition, claims that increased use of glyphosate herbicides increases
the potential for the development of glyphosate-resistant weeds could
result in restrictions on the use of glyphosate and of seeds
containing our ROUNDUP READY traits, and thereby reduce our sales.
45
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Intellectual Property: Intellectual property rights are crucial
to our business, and we endeavor to obtain and protect these rights in
jurisdictions in which our products are produced or used, and in
jurisdictions into which our products are imported. Intellectual
property rights are particularly important with respect to our seeds
and genomics segment. However, we may be unable to obtain protection
for our intellectual property in key jurisdictions. Even if protection
is obtained, competitors, growers, or others in the chain of commerce
may illegally infringe on our rights, and such infringement may be
difficult to prevent or detect. For example, the practice of saving
seeds from non-hybrid crops (including, for example, soybeans, canola
and cotton) containing our biotechnology may prevent us from realizing
the full value of our intellectual property, particularly outside the
United States. We must also protect our intellectual property against
legal challenges by competitors. Efforts to protect our intellectual
property rights against infringement and legal challenges can increase
our costs, and will not always succeed. In addition, because of the
rapid pace of technological change, and the confidentiality of patent
applications in some jurisdictions, competitors may be issued patents
from applications that were unknown to us prior to issuance. These
patents could reduce the value of our commercial or pipeline products.
Because of the rapid pace of change and the complexity of the legal
and factual issues involved, we could unknowingly rely on key
technologies that are or become patent-protected by others, which
would require that we seek to obtain licenses or cease using the
technology, no matter how valuable to our business.
Research and Development: The continued development and
commercialization of pipeline products is key to our growth. The
ability to develop and bring new products to market, especially
agricultural biotechnology products, requires adequately funded,
efficient and successful research and development programs. Inadequate
availability of funds, failure to focus R&D efforts efficiently, or
lack of productivity in R&D, would hurt our future growth.
Competition in Plant Biotechnology: Many companies engage in
plant biotechnology research. Their success could render our existing
products less competitive. In addition, a company's speed in getting
its new product to market can be a significant competitive advantage.
We expect to see more competition, from agricultural biotechnology
firms and from major agrichemical, seed and food companies, some of
which have substantially greater financial and marketing resources
than we do.
Weather, Natural Disasters and Accidents: Our sales and
profitability are subject to significant risk from weather conditions
and natural disasters that affect commodity prices, seed yields, and
grower decisions about purchases of our products. Weather conditions
also affect the quality, cost and volumes of the seed that we are able
to produce and sell. Natural disasters or industrial accidents could
also affect our own manufacturing facilities, our major suppliers, or
our major customers.
Manufacturing: Because we use hazardous and other regulated
materials in our product development programs and chemical
manufacturing processes, we are subject to risks of accidental
environmental contamination, and therefore to potential personal
injury claims and fines. We are also subject to regulation of air
emissions, waste water discharges and solid waste. Compliance may be
costly, and failure to comply may result in penalties and remediation
obligations. In addition, lapses in quality or other manufacturing
controls could affect our sales and result in claims for defective
products.
Short-Term Financing: We regularly extend credit to our customers
in certain areas of the world so that they can buy agricultural
products at the beginning of their growing seasons. Because of these
credit practices and the seasonality of our sales, we may need to
issue short-term debt at certain times of the year to fund our cash
flow requirements. The amount of short-term debt will be greater to
the extent that we are unable to collect customer receivables when
due, to repatriate funds from ex-U.S. operations, and to manage our
costs and expenses. Any downgrade in our credit rating, or other
limitation on our access to short-term financing or refinancing, would
increase our interest cost and adversely affect our profitability.
Litigation and Contingencies: We are involved in major lawsuits
concerning contracts, intellectual property, biotechnology, antitrust
allegations, and other matters. Adverse outcomes could subject us to
substantial damages or limit our ability to sell our products. In
addition, in connection with the separation of our businesses from
those of Pharmacia on Sept. 1, 2000, we were required to indemnify
Pharmacia for liabilities that Solutia had assumed from Pharmacia in
connection with the spinoff of Solutia on Sept. 1, 1997 ("Solutia's
Assumed Liabilities"), to the extent that Solutia fails to pay,
46
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
perform or discharge those liabilities. Solutia has filed a voluntary
petition for reorganization under Chapter 11 of the U.S. Bankruptcy
Code, and is seeking relief from paying certain liabilities, including
Solutia's Assumed Liabilities. Both prior to and since its Chapter 11
filing, Solutia has failed to perform obligations relating to some of
Solutia's Assumed Liabilities including repudiating its obligation to
defend certain litigation proceedings and refusing to perform certain
of its environmental obligations. In order to protect its and
Pharmacia's interest, Monsanto has advanced, and expects to advance in
the future, funds to pay for some of Solutia's Assumed Liabilities in
light of Solutia's refusal to pay for those liabilities and for legal
and other expenses related to Solutia's bankruptcy. If Solutia is
discharged from all or a portion of these liabilities and obligations
in its Chapter 11 proceeding, Monsanto may be required to indemnify
Pharmacia for all or a portion of them. It is reasonably possible that
such advancement of funds and/or obligation to indemnify Pharmacia
will result in a material adverse effect on Monsanto's financial
position, profitability and/or liquidity. Additional information about
our relationship with Solutia and risks related to Solutia may be
found in other sections of this report.
Product Distribution: To market our products successfully, we
must estimate growers' future needs, and match our production and the
level of product at our distributors to those needs. However, growers'
decisions are affected by market and economic conditions that are not
known in advance. Failure to provide distributors with enough
inventory of our products will reduce our current sales. However, high
product inventory levels at our distributors may reduce sales in
future periods, as those distributor inventories are worked down.
Large distributor inventories also diminish our ability to react to
changes in the market, and increase the risk of obsolescence and seed
returns. In addition, inadequate distributor liquidity could affect
distributors' ability to pay for our products.
Cost Management: In October 2003, we announced strategic
initiatives that include cost reductions in our ROUNDUP business.
Inability to implement these cost reductions while maintaining sales,
or unanticipated increases in our costs, could reduce our
profitability.
Commodity Prices: Fluctuations in commodity prices can affect our
costs and our sales. We purchase our seed inventories from production
growers at market prices, and retain the seed in inventory until it is
sold. We use hedging strategies to mitigate the risk of changes in
these prices. In addition, the prices of our seeds and traits could be
affected by commodity prices. Farmers' income, and therefore their
ability to purchase our herbicides, seeds and traits, is also affected
by commodity prices.
Accounting Policies and Estimates: Changes to our accounting
policies could affect future results. In addition, changes to
generally accepted accounting principles could require adjustments to
financial statements for prior periods and changes to our policies for
future periods. In addition, if actual experience differs from the
estimates, judgments and assumptions that we used in order to prepare
our financial statements, adjustments will need to be made in future
periods, which may affect revenues and profitability. Finally, changes
in our business practices may result in changes to the way we account
for transactions, and may affect comparability between periods.
Operations Outside the United States: Sales outside the United
States represent more than 40 percent of our revenues. In addition, we
engage in manufacturing, seed production, sales, and/or research and
development in many parts of the world. Although we have operations in
virtually every region, our ex-U.S. sales are principally to external
customers in Argentina, Brazil, Canada, France and Mexico.
Accordingly, developments in those parts of the world generally have a
more significant effect on our operations than developments in other
places. Operations outside the United States are subject to special
risks and limitations, including: fluctuations in currency values and
foreign-currency exchange rates; exchange control regulations; changes
in local political or economic conditions; import and trade
restrictions; import or export licensing requirements and trade
policy; restrictions on the ability to repatriate funds; and other
potentially detrimental domestic and foreign governmental practices or
policies affecting U.S. companies doing business abroad. Acts of
terror or war may impair our ability to operate in particular
countries or regions, and may impede the flow of goods and services
between countries. Customers in weakened economies may be unable to
purchase our products, or we may be unable to collect receivables; and
imported products could become more expensive for customers to
47
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
purchase in their local currency. Changes in exchange rates may affect
our earnings, the book value of our assets outside the United States,
and our equity.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes related to market risk from the
disclosures in Monsanto's report on Form 10-K for the transition
period ended Aug. 31, 2003.
Item 4. CONTROLS AND PROCEDURES
We maintain a comprehensive set of disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (Exchange Act)) designed to ensure
that information required to be disclosed in our filings under the
Exchange Act is recorded, processed, summarized and reported
accurately and within the time periods specified in the SEC's rules
and forms. As of Feb. 29, 2004 (the Evaluation Date), an evaluation
was carried out under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded
that, as of the Evaluation Date, the design and operation of these
disclosure controls and procedures were effective to provide
reasonable assurance of the achievement of the objectives described
above.
During the quarter that ended on the Evaluation Date, there were
two changes in internal controls over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
1) The company converted its global Human Resources information
system from Pfizer's PeopleSoft system to SAP effective Dec.
22, 2003. On a global basis the Human Resource module of SAP
will track basic employee information, organization
management, and incentive and stock compensation processing.
The U.S. payroll function was also transitioned to the SAP
Human Resource module from Pfizer's PeopleSoft system.
2) The company's U.S. engineering group converted the tracking
of construction in progress from a home-grown legacy system
built on a Virtual Memory System (VMS) platform to SAP. The
conversion occurred during the first half of fiscal 2004 and
integrated the U.S. engineering group with the remainder of
Monsanto.
The company is taking the necessary steps to monitor and maintain
appropriate internal controls during the period of change. The
conversions included deploying resources to mitigate internal control
risks and performing additional verifications and testing to ensure
data integrity.
48
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
This portion of the report on Form 10-Q describes material legal
proceedings that we are defending or prosecuting. These include
proceedings to which we are party in our own name, as well as
proceedings to which Pharmacia is a named party, but for which we have
assumed responsibility pursuant to the Separation Agreement between
Monsanto and Pharmacia, effective Sept. 1, 2000, as amended
(Separation Agreement). Under that agreement, we assumed
responsibility for, among other things described below, legal
proceedings primarily related to the agricultural business that
Pharmacia transferred to us on that date. As a result, although
Pharmacia may remain the defendant or plaintiff in some of these
cases, we manage and are responsible for the litigation. In the
following discussion, we may use the phrase "the former Monsanto
Company" to refer to Pharmacia prior to the date of the Separation
Agreement. As required by the Separation Agreement, in the proceedings
primarily related to the agricultural business that Pharmacia
transferred to us where Pharmacia is the defendant, we will indemnify
Pharmacia for costs, expenses and any judgments or settlements; and in
such proceedings where Pharmacia is the plaintiff, we will pay the
fees and costs of, and receive any benefits from, the litigation. We
are also defending or prosecuting other legal proceedings, not
described in this section, which arise in the ordinary course of our
business.
Pursuant to the Separation Agreement, we were also required to
indemnify Pharmacia for liabilities that Solutia Inc. (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, (the Distribution Agreement), to the extent
that Solutia fails to pay, perform or discharge those liabilities.
Those liabilities remain the present responsibility of Pharmacia. In
general, this indemnification obligation applies to Pharmacia
liabilities that were assumed by Solutia, pursuant to the Distribution
Agreement,and which Pharmacia would otherwise be required to pay. The
liabilities that Solutia assumed from Pharmacia are referred to as
"Solutia's Assumed Liabilities." Solutia's Assumed Liabilities may
include, among others, litigation, environmental remediation, and
certain retiree liabilities relating to individuals who were employed
by Pharmacia prior to the Solutia spinoff.
On Dec. 17, 2003, Solutia and 14 of its U.S. subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District
of New York (Bankruptcy Court). In the Chapter 11 proceeding, Solutia
is seeking relief from paying certain liabilities, including some or
all of Solutia's Assumed Liabilities. On Feb. 17, 2004, Solutia
notified Pharmacia and Monsanto that it was repudiating its obligation
to defend litigation which Solutia had been managing, pursuant to
powers of attorney granted by Pharmacia and by Monsanto under the
Distribution Agreement, and to accept new cases relating to Solutia's
Assumed Liabilities. We believe Solutia remains obligated to continue
to defend such litigation unless and until discharged from such
obligations by the Bankruptcy Court. However, in order to protect our
interests and those of Pharmacia while that issue is resolved, we have
assumed, on an interim basis, the management of that litigation for
which Solutia has repudiated responsibility. To the extent additional
such matters arise in the future, we may also assume management of
additional matters for purposes of defense and resolution. We are
advancing and expect to continue to advance funds for the defense,
performance or disposition of these matters and will pursue recovery
of our expenses from Solutia in the Chapter 11 proceeding. For
additional information, see Item 1 - Note 13 - Commitments and
Contingencies and Item 5 - Other Information - Relationships Among
Monsanto Company, Pharmacia Corporation and Solutia Inc.
While the results of litigation cannot be predicted with
certainty, we do not believe that the resolution of the proceedings
that we are defending or prosecuting, excluding litigation relating to
Solutia's Assumed Liabilities, either individually or taken as a
whole, will have a material adverse effect on our financial position,
profitability and/or liquidity. As discussed in Item 1 - Note 13 -
Commitments and Contingencies, it is reasonably possible that the
resolution of Solutia's bankruptcy proceeding, including the
allocation of responsibility for the litigation relating to Solutia's
Assumed Liabilities, could have a material effect on our financial
position, profitability and/or liquidity. We have meritorious legal
arguments and will continue to represent our interests vigorously in
all of the proceedings that we are defending or prosecuting, including
those related to Solutia's Assumed Liabilities.
49
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
transition period ended Aug. 31, 2003, and in our report on Form 10-Q
for the quarterly period ended Nov. 30, 2003.
Patent and Commercial Proceedings
The following updates proceedings involving Mycogen Plant Science
Inc. (Mycogen Plant Science), now part of Dow AgroSciences LLC, a
subsidiary of The Dow Chemical Company:
o As described in our report on Form 10-K for the transition
period ended Aug. 31, 2003, on May 19, 1995, Mycogen Plant
Science filed suit against the former Monsanto Company in
the U.S. District Court in California alleging infringement
of its patent involving synthetic Bt genes, and seeking
unspecified damages and injunctive relief (the "Synthetic Bt
case"). Monsanto prevailed on summary judgment in dismissing
all claims. On May 30, 2001, the U.S. Court of Appeals for
the Federal Circuit affirmed the summary judgment, finding
that current products of Monsanto do not infringe the
Mycogen Plant Science patent. The appellate court also
determined that certain factual issues prevented complete
entry of summary judgment on the issue of prior invention by
the former Monsanto Company and remanded the matter to the
District Court. We are defending the litigation on the basis
of patent invalidity, prior invention and other defenses
including collateral estoppel. We believe that a prior
judgment won by the former Monsanto Company against Mycogen
Plant Science, in U.S. District Court in Delaware, is
dispositive of all claims asserted by Mycogen Plant Science.
The District Court in California has set this matter for
trial commencing July 13, 2004.
o As described in our report on Form 10-K for the transition
period ended Aug. 31, 2003, Monsanto was also involved in
interference proceedings against Mycogen Plant Science in
the U.S. Patent and Trademark Office to determine the first
party to invent certain inventions related to the synthetic
Bt technology at issue in the California case. Under U.S.
law, patents issue to the first to invent, not the first to
file for a patent on, a subject invention. If two or more
parties seek patent protection on the same invention, as is
the case with our synthetic Bt technology, the U.S. Patent
and Trademark Office may hold interference proceedings to
identify the party who first invented the particular
invention in dispute. In prior litigation between the
parties Monsanto has been determined to be the prior
inventor of patent claims associated with synthetic Bt
technology. On Jan. 29, 2004, the Board of Patent Appeals
determined that Monsanto scientists were the first to invent
synthetic Bt genes for expression in plants. As a result of
this decision, we expect that Monsanto's scientists will
receive a patent covering this technology. On March 29,
2004, Mycogen Plant Science filed with the United States
District Court for the Southern District of Indiana a
Section 146 appeal from the decision of the Board of Patent
Appeals in which it seeks to have the decision of the Board
of Patent Appeals reversed. Monsanto has moved to transfer
Mycogen Plant Science's appeal to the United States District
Court in California in which the Synthetic Bt case is
pending.
The following updates certain proceedings involving Bayer
CropScience AG (formerly Aventis CropScience S.A., previously Rhone
Poulenc Agrochimie S.A.) (Bayer CropScience), a subsidiary of Bayer
AG, and its affiliates:
o As described in our report on Form 10-K for the transition
period ended Aug. 31, 2003, as updated in our report on Form
10-Q for the quarterly period ended Nov. 30, 2003, on Nov.
20, 1997, Bayer CropScience filed suit in U.S. District
Court in North Carolina against the former Monsanto Company
and DEKALB Genetics Corporation (subsequently acquired by
the former Monsanto Company) (DEKALB Genetics). The suit
alleged that because DEKALB Genetics had failed to disclose
a research report involving the testing of plants to
determine glyphosate tolerance, Bayer CropScience had been
induced by fraud to enter into a 1994 license agreement
relating to technology incorporated into a specific type of
herbicide-tolerant corn. Jury trial of the fraud claims
ended April 22, 1999, with a verdict against DEKALB Genetics
for $15 million in actual damages and $50 million in
punitive damages. The damage awards have been paid in full.
DEKALB Genetics appealed the jury verdict and the U.S. Court
50
of Appeals for the Federal Circuit upheld the judgment. The
U.S. Supreme Court vacated the punitive damage award and
remanded the case to the Court of Appeals for the Federal
Circuit to reconsider the issue in light of the Supreme
Court's punitive damages decision in State Farm Mutual
Automobile Insurance Co. v. Campbell. On Sept. 29, 2003, the
Federal Circuit once again affirmed the judgment of the
District Court, stating that the central holding of State
Farm had no bearing on the case. On February 23, 2004, the
U.S. Supreme Court denied Monsanto's request to review the
decision of the Federal Circuit, bringing this matter to an
end.
o As described in our report on Form 10-K for the transition
period ended Aug. 31, 2003, as updated in our report on Form
10-Q for the quarterly period ended Nov. 30, 2003, on Dec.
4, 2000, in view of threats of patent infringement made by
Bayer CropScience against Monsanto's licensees for its
YIELDGARD corn, Monsanto filed suit in the U.S. District
Court for the Eastern District of Missouri for a declaratory
judgment against Bayer CropScience to invalidate four
patents that had been assigned to Bayer CropScience by Plant
Genetics Systems, N.V. (PGS). Monsanto successfully
maintained that the patents, which involve claims to
truncated Bt technology, were invalid and not infringed by
MON810 in YIELDGARD corn. Bayer CropScience counterclaimed
to request royalties for prior sales of YIELDGARD corn and
injunctive relief. On Dec. 27, 2002, Monsanto's motion for
summary judgment was granted. Bayer CropScience appealed the
District court's judgment to the U.S. Court of Appeals for
the Federal Circuit. On Nov. 14, 2003, in light of its
finding of inequitable conduct against Bayer CropScience,
the District Court ordered Bayer CropScience to pay Monsanto
$4.78 million in attorneys' fees and costs. Bayer
CropScience has deposited with the District Court funds
sufficient to satisfy that judgment if the Federal Circuit
upholds it on appeal. On March 30, 2004, the Federal Circuit
determined that possible contested issues of fact exist that
made summary judgment inappropriate and reversed the
District Court's decision. Monsanto anticipates moving for
reconsideration of the Federal Circuit's decision. If that
is unsuccessful, the case will be sent back to the District
Court for trial.
The following updates proceedings involving affiliates of
Syngenta AG:
o As described in our report on Form 10-K for the transition
period ended Aug. 31, 2003, on July 25, 2002, Syngenta
Biotechnology, Inc. (Syngenta Biotechnology) filed suit
against Monsanto and Delta and Pine Land Company (Delta and
Pine Land) in the U.S. District Court for Delaware alleging
infringement of a patent issued in April 2000, under which
Syngenta Biotechnology is a licensee, and which allegedly
relates to certain agro-transformed cotton technology
products, including all of our current biotechnology cotton
traits. Monsanto also is defending Delta and Pine Land, and
will indemnify Delta and Pine Land for any damages, pursuant
to its license agreement. Syngenta Biotechnology seeks
injunctive relief and monetary damages. On Feb. 23, 2004,
Monsanto announced an agreement with Syngenta Biotechnology
to resolve a closely-related patent interference proceeding
in the U.S. Patent and Trademark Office involving transgenic
broad leaf crops and to dismiss the patent infringement
lawsuit brought by Syngenta Biotechnology. Under the
agreement, Syngenta Biotechnology and Monsanto will provide
each other with royalty-free, non-exclusive licenses related
to the development, use and sale of transgenic crops
containing agricultural technologies such as
insect-protection and herbicide-tolerance produced through
the use of the cross-licensed agrobacterium-mediated
transformation technology. As a result, on February 26,
2004, this case was dismissed.
On Feb. 17, 2004, the Regents of the University of California
received U.S. Patent No. #6,692,941 relating to bovine growth hormone.
Certain claims of the patent are extremely broad and the patent could
be characterized as a composition of matter patent. Suit was filed by
the University against Monsanto on the same date in U.S. District
Court for the Northern District of California. The litigation seeks
damages for the alleged infringement of the patent by sales of our
POSILAC bovine somatotropin product.
As described in our report on Form 10-K for the transition period
ended Aug. 31, 2003, as updated in our report on Form 10-Q for the
quarterly period ended Nov. 30, 2003, Monsanto is defending several
lawsuits which allege that, beginning in 1988, the former Monsanto
Company, and later Monsanto, conspired with competitors, through a
series of negotiations and legal settlements, to fix the price of
glyphosate-based herbicides and paraquat-based herbicides at prices
51
higher than the market would otherwise bear. These lawsuits all seek
monetary damages. The following two cases (the "Federal Cases") were
consolidated in U.S. District Court for the Eastern District of
Missouri, and were filed alleging claims on behalf of all direct
purchasers of glyphosate-based herbicides or paraquat-based herbicides
in the United States from March 1, 1988, to the present: (i) a suit
filed by S&M Farm Supply, Inc. on Nov. 21, 2001, in the U.S. District
Court for the Northern District of California; and (ii) a suit filed
by Orange Cove Ag-Chem and Sidehill Citrus Grove, Inc., on March 11,
2002, in the U.S. District Court for the Eastern District of
California. On Oct. 16, 2003, the District Court denied plaintiffs'
motion to certify these actions as class actions. On Dec. 16, 2003,
the U.S. Court of Appeals for the Eighth Circuit denied plaintiffs'
request for immediate appellate review of the District Court's
decision. On Feb. 13, 2004, the Federal Cases were settled without
Monsanto paying any money or other financial consideration. As a
result, on February 13, 2004, the Federal Cases were dismissed. In
addition to the Federal Cases, three other purported class action
lawsuits alleging the same facts were filed by individuals, two in
state courts in California and one in state court in Tennessee. As
part of the settlement of the Federal Cases, one of the state court
actions pending in California was also dismissed without Monsanto
paying any money or other financial consideration.
On July 10, 2003, PT Panen Buah Emas (Emas) commenced proceedings
in the South Jakarta District Court against Monsanto and two of its
Indonesian affiliates regarding an alleged wrongful termination of a
Cotton Processing Agreement (CPA) between one of the affiliates and
Emas. Emas is seeking damages for alleged material damage and loss of
business reputation arising from the termination. The CPA contains an
arbitration clause prescribing exclusive dispute resolution by
arbitration in Singapore. Monsanto and its affiliates believe such
clause should be dispositive but were not successful in their initial
challenge to the jurisdiction of the South Jakarta District Court.
That matter is now on appeal. Recently the trial court requested that
all parties submit their final papers, indicating an initial decision
on the claims may be imminent.
Grower Lawsuits
As described in our report on Form 10-K for the transition period
ended Aug. 31, 2003, two purported class action lawsuits by farmers,
concerning our biotechnology trait products have been consolidated in
the U.S. District Court for the Eastern District of Missouri. The
suits were initially filed against the former Monsanto Company by two
groups of farmers: one on Dec. 14, 1999, in the U.S. District Court
for the District of Columbia; and the other on Feb. 14, 2002, in the
U.S. District Court for the Southern District of Illinois. In March
2001, plaintiffs amended their complaint to add Pioneer, Syngenta
Seeds, Syngenta Crop Protection, and Bayer CropScience as defendants.
The complaints included both tort and antitrust allegations. The tort
claims included alleged violations of unspecified international laws
through patent license agreements, alleged breaches of an implied
warranty of merchantability, and alleged violations of unspecified
consumer fraud and deceptive business practices laws, all in
connection with the sale of genetically modified seed. The antitrust
claims included allegations of violations of various antitrust laws,
including allegations of a conspiracy among defendants to fix seed
prices in the United States in violation of federal antitrust laws.
Plaintiffs sought declaratory and injunctive relief in addition to
antitrust, treble, compensatory and punitive damages and attorneys'
fees. On Sept. 22, 2003, the District Court granted Monsanto's motion
for summary judgment on all tort claims and denied plaintiffs' motion
to allow the tort claims to proceed as a class action. On Sept. 30,
2003, the District Court denied plaintiffs' motion to allow their
antitrust claims to proceed as a class action. On Dec. 16, 2003, the
U.S. Court of Appeals for the Eighth Circuit granted plaintiffs'
request for immediate appellate review of the District Court's
decision denying class certification of their antitrust claims. In
addition to this action, during the week of March 7, 2004, individual
plaintiffs filed essentially identical purported class actions, on
behalf of indirect purchasers in 15 different state courts essentially
realleging that Monsanto supposedly conspired with Pioneer and Dupont
to fix seed prices in violation of state antitrust and consumer
protection laws.
Agent Orange
As described in our report on Form 10-K for the transition period
ended Aug. 31, 2003, as updated in our report on Form 10-Q for the
quarterly period ended Nov. 30, 2003, various manufacturers of
herbicides used by the U.S. armed services during the Vietnam War,
including the former Monsanto Company, have been parties to lawsuits
filed on behalf of veterans and others alleging injury from exposure
to the herbicides. In the United States this litigation has been
assigned to Judge Weinstein of the U.S. District Court for the Eastern
52
District of New York, as part of In re Agent Orange Product Liability
Litigation, MDL 381, a multidistrict litigation proceeding established
in 1977 to coordinate Agent Orange-related litigation in the United
States (MDL). In 1984, a settlement in the MDL proceeding concluded
all class action litigation filed on behalf of U.S. and certain other
groups of plaintiffs. Approximately 30 suits filed by individual U.S.
veterans contesting the denial of their claims subsequent to the class
action settlement have been consolidated in the MDL and are currently
pending in the District Court. On June 9, 2003, the U.S. Supreme Court
allowed two claims (Isaacson and Stephenson) to proceed
notwithstanding the 1984 class action settlement. On Feb. 9, 2004, the
District Court determined that all cases filed by plaintiffs in state
court were properly removable to federal court. That same day, the
District Court granted defendants' motion for summary judgment on all
claims made in the Isaacson and Stephenson cases on the basis of the
government contractor defense. The District Court, however, stayed
entry of that judgment and granted plaintiffs' request for an
additional six months to conduct further discovery solely relating to
the government contractor defense. On March 18, 2004, the District
Court ordered that all other plaintiffs in all other lawsuits
currently pending before the court in this matter were to adhere to
the same schedule, unless they specifically requested not to be so
bound.
On Feb. 5, 2004, a new putative class action suit was filed in
the United States District Court for the Eastern District of New York
by certain citizens of Vietnam alleging that the manufacturers of
Agent Orange conspired with the United States to commit war crimes and
crimes against humanity in connection with the spraying of Agent
Orange. This case has also been assigned to Judge Weinstein.
Activities of Foreign Affiliates
As described in our report on Form 10-K for the transition period
ended Aug. 31, 2003, during an internal audit and follow-up review
conducted by management and outside counsel, management learned of
certain books and records and compliance irregularities involving the
company's Indonesian affiliate companies and certain of their foreign
national employees. The employment of those employees involved in the
irregularities has been terminated. The company notified the SEC of
this matter on Nov. 12, 2002, and thereafter provided a full report of
its internal review to the SEC, and provided a copy to the U.S.
Department of Justice. On March 22, 2004, the company issued a press
release announcing that the Department of Justice has advised the
company that its investigation has expanded to include an inquiry into
whether a former outside consultant made an improper $50,000 payment
to an Indonesian government official in early 2002 at the direction of
a former Monsanto employee. The company will continue to cooperate
with further review of this matter. For the eight months ended Aug.
31, 2003, and for the years ended Dec. 31, 2002 and 2001, the net
combined revenues from customers in Indonesia were less than 0.8
percent of total company revenues. The loss for each of these periods
was approximately $7 million, $1 million and $15 million,
respectively, including restructuring charges of approximately $5
million in each of 2002 and 2001.
Environmental Proceedings
As described in our report on Form 10-K for the transition period
ended Aug. 31, 2003, as updated in our report on Form 10-Q for the
quarterly period ended Nov. 30, 2003, since the late 1990s, the U.S.
Environmental Protection Agency (EPA) has focused attention on the
presence of dioxin in the Kanawha River in West Virginia. As part of
its efforts in this regard, the EPA is conducting preliminary
assessments at more than 20 sites identified as potential sources of
dioxin in the Kanawha River. Among these sites are three landfills --
the Heizer Creek landfill, the Poca Strip Mine landfill, and the
Manila Creek landfill -- that Pharmacia used in the late 1950s to
dispose of plant waste from its former Nitro, West Virginia,
manufacturing location. Through the preliminary assessment work, the
EPA identified an elevated dioxin level in one soil sample taken at
the Heizer Creek landfill, and notified Pharmacia of its potential
liability at that landfill. Pursuant to a September 1999 consent order
with the EPA, Pharmacia and (after Sept. 1, 2000) Monsanto prepared
and submitted to the EPA an Engineering Evaluation/Cost Analysis
(EE/CA) Report, which contained, among other things, our recommended
remedy. The cost to implement the recommended remedy was estimated at
$1.5 million, and funds were reserved for this amount. The EPA has
approved the EE/CA Report. As of this time, the EPA has not identified
elevated dioxin levels at the Poca Strip Mine or Manila Creek
landfills. Also with regard to the EPA's focus on dioxin in the
Kanawha River, in May 2002, the EPA sent Monsanto, as well as Solutia,
a "notice of potential liability and offer to negotiate for removal
action" regarding the Kanawha River Site in Putnam and Kanawha
counties, West Virginia. The EPA's communication to Monsanto and
53
Solutia was premised on Pharmacia's former operations at the Nitro
plant. Pharmacia, Solutia, and Monsanto have all been in communication
with the EPA regarding the notice and offer. Monsanto believes that
the Kanawha River Site is the responsibility of Solutia under the
terms of the Distribution Agreement between Pharmacia and Solutia
relating to Solutia's 1997 spinoff; however, prior to Solutia's
Chapter 11 filing, Solutia refused to accept responsibility for this
matter. In order to mitigate damages and protect the rights and
positions of Monsanto and Pharmacia, Monsanto has been managing this
matter on behalf of Pharmacia, and will make a claim for recovery
against Solutia in the course of its bankruptcy proceeding. The EPA,
Monsanto and Pharmacia have negotiated a consent order under which
Monsanto will prepare an EE/CA Report, which will contain the results
of our investigation of dioxin contamination in the Kanawha River, the
sources of such contamination, an evaluation of removal options, and a
recommended approach to removing or otherwise addressing the
contaminated sediments. At this point, the degree to which Monsanto,
Solutia, and Pharmacia, as opposed to third parties, could ultimately
be responsible for costs associated with this matter is unclear.
Litigation Relating to Solutia's Assumed Liabilities
As described above, Solutia managed and directed the defense of
litigation with respect to Solutia's Assumed Liabilities until
approximately Feb. 17, 2004, when Solutia notified Pharmacia and
Monsanto of its intention to cease or suspend performance. In order to
protect the interests of Pharmacia and Monsanto, we have assumed
management of these matters on an interim basis or until resolution of
Solutia's Chapter 11 proceeding. As we are now managing litigation
relating to Solutia's Assumed Liabilities, a description of material
proceedings relating to those liabilities is included in this portion
of this report on Form 10-Q. However, because we have only recently
begun to manage this litigation, both the selection of matters
described in this section, and the descriptions of those matters,
necessarily rely on information received from Solutia.
The following cases concern alleged damages arising from exposure
to polychlorinated biphenyls (PCBs), which were discharged from an
Anniston, Alabama, plant site that was formerly owned by Pharmacia and
that was transferred to Solutia as part of the spinoff of Solutia from
Pharmacia:
o Abernathy v. Monsanto and Tolbert v. Monsanto: As described
in Item 1 - Note 13 - Commitments and Contingencies,
Monsanto, Pharmacia and Solutia participated in the
settlement of these cases in September 2003.
o Owens v. Monsanto: On Oct. 27, 2003, a motion was filed in
U.S. District Court for the Northern District of Alabama,
contending that the global settlement agreement in Tolbert
and Abernathy also requires the payment of additional funds
to plaintiffs in Owens v. Monsanto, another Anniston-related
PCB case that was settled by Solutia in April 2001 on behalf
of itself and Pharmacia. On Jan. 8, 2004, the court
substantially denied plaintiffs' claim but awarded an
additional amount of approximately $800 per plaintiff, for a
total additional award of $1.3 million. We have paid this
amount on behalf of Pharmacia and will file a claim for this
amount against Solutia in its Chapter 11 proceeding.
Plaintiffs' motion for reconsideration was denied on Jan.
24, 2004, and plaintiffs have filed a timely appeal to the
U. S. Court of Appeals for the Eleventh Circuit.
o Payton v. Monsanto: This case was brought in Circuit Court
in Shelby County, Alabama on July 15, 1997, against
Pharmacia, on behalf of a purported class of owners, lessees
and licensees of properties located on Lay Lake, which is
downstream from Lake Logan Martin on the Coosa River.
Plaintiffs seek compensatory and punitive damages in an
unspecified amount for an alleged increased risk of physical
injury and illness, emotional distress caused by fear of
future injury or illness, medical monitoring and
diminishment in the value of their properties and their
riparian rights. The plaintiffs and Solutia (on behalf of
Pharmacia) reached a tentative agreement to settle this case
for a cash payment of $5 million, but an equitable component
has yet to be determined and the tentative settlement is not
final or approved by the court.
o Other Anniston Cases: Approximately ten cases remained
pending in various Circuit Courts in the state of Alabama.
Three additional cases brought by three pro se plaintiffs
have been filed with various courts, but have not been
served on any defendants. On March 15, 2004, Monsanto, on
behalf of Pharmacia removed all but one of those to the
54
United States District Court for the Northern District of
Alabama. At the same time, Monsanto moved to consolidate all
the removed cases before the same court in which the Tolbert
matter remains pending for administrative purposes.
o Anniston Partial Consent Decree: In October 2000 Solutia
entered into an Administrative Order on Consent (AOC) with
the EPA providing for sampling of certain residential
properties and removal of soils found on those properties if
PCBs were found at a level of 10 parts per million (ppm) or
above. That order was amended in October 2001 to encompass
additional areas for sampling and possible soil removal.
Following entry of the October 2000 AOC, Solutia and the EPA
commenced negotiations on a comprehensive agreement that
would address the steps leading to a final remedy. On March
25, 2002, in an action captioned United States of America v.
Pharmacia Corporation (p/k/a Monsanto Company) and Solutia,
the EPA lodged a Partial Consent Decree with the United
States District Court for the Northern District of Alabama.
After the parties amended the Partial Consent Decree in
response to public comment, the District Court approved the
Partial Consent Decree on Aug. 4, 2003. Pursuant to that
decree, Solutia and Pharmacia agreed to conduct a Remedial
Investigation and Feasibility Study to provide information
for the selection by the EPA of a cleanup remedy for the
Anniston PCB site. Solutia has since stated that it will
only perform remediation on sites where it has current
operations. Monsanto has therefore stepped in as Pharmacia's
representative and funded some of the remaining
environmental obligations. The decree also provided for the
creation of an educational trust fund of $3.2 million to be
funded over a 12-year period to provide supplemental
educational services for school children in west Anniston.
On June 5, 2003, Solutia and Pharmacia filed suit against
nineteen parties for contribution and cost recovery under the
Comprehensive Environmental Response Compensation and (Liability)
Act (CERCLA) in the U.S. District Court for the Northern District
of Alabama in an action captioned Solutia Inc. and Pharmacia
Corporation v. McWane, Inc. et al. Prior to this suit, Solutia
had been performing various investigation and cleanup activities
under agreements with regulatory agencies. During these
activities, it became apparent that many other manufacturing
facilities other than the Pharmacia/Solutia plant in west
Anniston were responsible for a major share of the PCB
contamination found throughout Anniston. As allowed under CERCLA,
Solutia and Pharmacia filed suit against the owners and operators
of these other facilities to force them to pay their fair share
toward past and future investigation and cleanup costs. It is
anticipated that this suit will result in a greater number of
parties becoming actively engaged in addressing the presence of
PCBs and other contaminants, unrelated to the Pharmacia/Solutia
plant in Anniston and, in the recovery of a portion of Solutia's
and Pharmacia's investigation and cleanup costs. Under terms of
the Distribution Agreement, Solutia was managing this suit until
it filed for bankruptcy protection on December 17, 2003. Monsanto
and Solutia are currently negotiating an arrangement for the
continued management and vigorous prosecution of this suit.
Pharmacia is one of several defendants added on Feb. 7, 1997, to
a case then pending in the Commonwealth Court of Pennsylvania. This
action was originally filed against United States Mineral Products
Company in 1990 by the Commonwealth, seeking damages caused by the
presence of asbestos fireproofing in 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 contaminated the building and necessitated its demolition. The
Commonwealth seeks recovery of costs it allegedly incurred in testing,
monitoring, cleanup, demolition and temporary relocation of
Commonwealth employees caused by the alleged contamination. In
addition, 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 and, on Aug. 23, 2000, the jury returned a verdict of $90
million against Pharmacia. The verdict was reduced to $45 million by
the trial court. On Nov. 15, 2002, Solutia filed an appeal to the
Supreme Court of Pennsylvania. Please refer to Item 1 - Note 13 -
Commitments and Contingencies - for more information regarding the
appeal bond posted by Monsanto on Solutia's behalf in this matter. On
Nov. 17, 2003, in response to Solutia's application, the Supreme Court
of Pennsylvania ordered the trial court to file an opinion on the
issue of juror misconduct. On March 11, 2004, the trial court filed an
opinion holding that Pharmacia was not prejudiced by any possible
juror misconduct. Oral argument before the Supreme Court of
Pennsylvania on this matter is scheduled for May 11, 2004.
In January 1984, Pharmacia was served in Furch v. General
Electric Company, et al., the first of five cases brought in state
court in Broome County, New York, relating to claims of injury
allegedly resulting from exposure to PCBs during and immediately after
55
a fire in a State office building in Binghamton, New York. Plaintiffs
are 43 emergency responders or individuals involved in cleanup
activities immediately after the fire and their spouses or
representatives, for a total of 81 plaintiffs. Plaintiffs claim that
PCBs, dibenzofurans and dibenzodioxins were spread throughout the
building when a transformer, located in an equipment room in the
basement of the building, ruptured during the fire. Plaintiffs have
made claims for various personal injuries, including in some cases
death, and allege fear of future disease and the need for medical
monitoring. They seek compensatory and punitive damages in an
unspecified amount. A trial of the claims of three plaintiffs is
scheduled to begin on July 19, 2004.
There are currently pending 11 cases originally brought in state
courts in Copiah County and Hinds County, Mississippi on behalf of a
total of 783 plaintiffs. For the most part, plaintiffs are present or
former employees of Kuhlman Electric Company's Crystal Springs,
Mississippi transformer manufacturing facility. In addition, some
plaintiffs live in the community in which the Kuhlman Electric Company
facility is located. Pharmacia is a defendant on product liability
claims alleging that PCB products sold to Kuhlman for use were
defective or improperly labeled. As to Pharmacia, plaintiffs claim
exposure to PCBs, allegedly resulting in unspecified physical injuries
and emotional distress. Plaintiffs claim to fear the development of
disease in the future and allege the need for medical monitoring. They
seek compensatory and punitive damages in an unspecified amount. On
Feb. 20 and 24, 2004, Monsanto, on behalf of Pharmacia, removed these
cases to U.S. District Court for the Southern District of Mississippi.
On Feb. 26, 2004, plaintiffs in one case involving 168 plaintiffs
filed a motion to remand to state court. Pharmacia was named as one of
many defendants in one additional action filed in state court in
Copiah County, Mississippi on Dec. 31, 2002 on behalf of a single
plaintiff who worked at the Ingalls Shipyard in Pascagoula,
Mississippi. This case makes claims similar to those previously
described and has also been removed to U.S. District Court for the
Southern District of Mississippi.
Item 2. SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
The following table includes all issuer repurchases, including
those made pursuant to publicly announced plans or programs and those
not made pursuant to publicly announced plans or programs.
-----------------------------------------------------------------------------------------------------------
(c) Total Number
of Shares (d)Approximate Dollar
(a) Total (b) Purchased as Part Value of Shares that
number of Average of Publicly May Yet Be Purchased
Shares Price Paid Announced Plans Under the Plans or
Period Purchased per Share or Programs Programs
-----------------------------------------------------------------------------------------------------------
December 2003:
(Dec. 1, 2003 through Dec. 31, 2003) -- -- -- $445,065,321
-----------------------------------------------------------------------------------------------------------
January 2004:
(Jan. 1, 2004 through Jan. 31, 2004) -- -- -- $445,065,321
-----------------------------------------------------------------------------------------------------------
February 2004:
(Feb. 1, 2004 through Feb. 29, 2004) 1,622,400 $31.69 1,622,400 $393,658,449
-----------------------------------------------------------------------------------------------------------
Total 1,622,400 $31.69 1,622,400 $393,658,449
-----------------------------------------------------------------------------------------------------------
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 Feb. 29, 2004.
56
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the company's Annual Meeting of Shareowners on Jan. 29, 2004, six
matters were submitted to a vote of shareowners.
1. The following individuals were nominated and elected to serve as
directors: Frank V. AtLee III, Gwendolyn S. King and Sharon R.
Long, Ph.D. were elected to serve until the 2007 Annual Meeting
or until a successor is elected and has qualified or until his or
her earlier death, resignation or removal. Votes were cast as
follows:
Votes Votes to
Name "For" "Withhold Authority"
---- ----- --------------------
Frank V. AtLee III 232,114,100 5,356,406
Gwendolyn S. King 206,430,410 31,040,096
Sharon R. Long, Ph.D. 206,715,139 30,755,367
2. The appointment by the Board of Directors of Deloitte & Touche
LLP as principal independent auditors for the year 2004 was
ratified by a vote of the shareowners. A total of 227,821,194
votes were cast in favor of ratification, 8,373,152 votes were
cast against, and 1,276,158 votes were counted as abstentions.
3. The first amendment to the Monsanto Company Long-Term Incentive
Plan was approved by a vote of the shareowners. The Board
recommended a vote for the proposal. A total of 179,790,910 votes
were cast in favor of the proposal, 32,510,297 votes were cast
against, 1,892,543 votes were counted as abstentions, and
23,276,758 were counted as broker non-votes.
4. The shareowner proposal requesting that the Board review the
Company's policies for genetically engineered seed and report to
shareowners was not approved by a vote of the shareowners. The
Board recommended a vote against the proposal. A total of
13,767,869 votes were cast in favor of the proposal, 169,320,829
votes were cast against, and 31,105,497 votes were counted as
abstentions.
5. The shareowner proposal requesting that the Board provide a
report to shareowners regarding pesticides was not approved by a
vote of the shareowners. The Board recommended a vote against the
proposal. A total of 23,889,640 votes were cast in favor of the
proposal, 159,108,357 votes were cast against, and 31,196,202
votes were counted as abstentions.
6. The shareowner proposal requesting that the Board submit any
adoption, maintenance or extension of a "Poison Pill" to a
shareowner vote was approved by a vote of the shareowners. The
Board recommended a vote against the proposal. A total of
151,463,481 votes were cast in favor of the proposal, 60,546,529
votes were cast against, and 2,181,273 votes were counted as
abstentions.
Item 5. OTHER INFORMATION
Relationships Among Monsanto Company, Pharmacia Corporation and
Solutia Inc.
Prior to Sept. 1, 1997, a corporation that was then known as
Monsanto Company (Former Monsanto) operated an agricultural products
business (the Ag Business), a pharmaceuticals and nutrition business
(the Pharmaceuticals Business) and a chemical products business (the
Chemicals Business). Former Monsanto is today known as Pharmacia
Corporation (Pharmacia). Pharmacia is now a wholly owned subsidiary of
Pfizer, which together with its subsidiaries operates the
Pharmaceuticals Business. Our business consists of the operations,
assets and liabilities that were previously the Ag Business. Solutia
Inc. comprises the operations, assets and liabilities that were
previously the Chemicals Business. The following table sets forth a
chronology of events that resulted in the formation of Monsanto,
Pharmacia and Solutia as three separate and distinct corporations, and
provides a brief background on the relationships among these three
corporations.
57
-------------------- --------------------------------------------------------------------------------
Date of Event Description of Event
-------------------- --------------------------------------------------------------------------------
Sept. 1, 1997 o Pharmacia (then known as Monsanto Company) entered into a
Distribution Agreement with Solutia related to the transfer of the
operations, assets and liabilities of the Chemical Business from Pharmacia
(then known as Monsanto Company) to Solutia.
o Pursuant to the Distribution Agreement, Solutia assumed and agreed to indemnify
Pharmacia (then known as Monsanto Company) for certain liabilities
related to the Chemicals Business.
-------------------- --------------------------------------------------------------------------------
Dec. 19, 1999 o Pharmacia (then known as Monsanto Company) entered into an agreement
with Pharmacia & Upjohn, Inc. (PNU) relating to a merger (the Merger).
-------------------- --------------------------------------------------------------------------------
Feb. 9, 2000 o We were incorporated in Delaware as a wholly owned subsidiary of
Pharmacia (then known as Monsanto Company) under the name "Monsanto Ag
Company."
-------------------- --------------------------------------------------------------------------------
March 31, 2000 o Effective date of the Merger.
o In connection with the Merger, (1) PNU became a wholly owned subsidiary of
Former Monsanto (now Pharmacia); (2) Former Monsanto changed its name from
"Monsanto Company" to "Pharmacia Corporation"; and (3) we changed our
name from "Monsanto Ag Company" to "Monsanto Company."
-------------------- --------------------------------------------------------------------------------
Sept. 1, 2000 o We entered into a Separation Agreement with Pharmacia related to the
transfer of the operations, assets and liabilities of the Ag Business from
Pharmacia to us.
o Pursuant to the Separation Agreement, we were required to indemnify Pharmacia
for any liabilities primarily related to the Ag Business or the Chemicals
Business, and for liabilities assumed by Solutia pursuant to the Sept. 1,
1997 Distribution Agreement, to the extent that Solutia fails to pay,
perform or discharge those liabilities.
-------------------- --------------------------------------------------------------------------------
Oct. 23, 2000 o We completed an initial public offering in which we sold
approximately 15 percent of the shares of our common stock to the public.
Pharmacia continued to own 220 million shares of our common stock.
-------------------- --------------------------------------------------------------------------------
July 1, 2002 o We, Pharmacia and Solutia amended the Sept. 1, 1997 Distribution
Agreement, to provide that Solutia will indemnify us for the same
liabilities for which it had agreed to indemnify Pharmacia, and to clarify
the parties' rights and obligations.
o We and Pharmacia amended the Sept. 1, 2000 Separation Agreement, to clarify
our respective rights and obligations relating to our indemnification
obligations.
-------------------- --------------------------------------------------------------------------------
Aug. 13, 2002 o Pharmacia distributed the 220 million shares of our common stock that
it owned to its shareowners via a tax-free stock dividend (the Monsanto
Spinoff).
o As a result of the Monsanto Spinoff, Pharmacia no longer owns any equity
interest in Monsanto.
-------------------- --------------------------------------------------------------------------------
April 16, 2003 o Pursuant to a merger transaction, Pharmacia became a wholly owned
subsidiary of Pfizer.
-------------------- --------------------------------------------------------------------------------
Dec. 17, 2003 o Solutia and 14 of its U.S. subsidiaries filed a voluntary petition
for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
-------------------- --------------------------------------------------------------------------------
The liabilities for which we were required to indemnify
Pharmacia, pursuant to the Sept. 1, 2000, Separation Agreement,
include the liabilities that Solutia assumed from Pharmacia under the
Distribution Agreement in connection with the spinoff of Solutia on
Sept. 1, 1997 (Solutia's Assumed Liabilities), to the extent that
Solutia fails to pay, perform or discharge those liabilities.
58
Solutia's Assumed Liabilities include, among others, litigation,
environmental remediation, and certain retiree liabilities relating to
individuals who were employed by Pharmacia prior to the Solutia
spinoff. These include liabilities that were Pharmacia liabilities
prior to the spinoff of Solutia, and from which Pharmacia could not be
released, either by operation of law, because of the unavailability of
third-party consents, or otherwise. Solutia is contractually obligated
to indemnify both Pharmacia and us for any liabilities that we incur
in connection with any of Solutia's Assumed Liabilities.
On Dec. 17, 2003, Solutia and 14 of its U.S. subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District
of New York (Bankruptcy Court). In the Chapter 11 proceeding, Solutia
is seeking relief from paying certain liabilities, including Solutia's
Assumed Liabilities. On Feb. 17, 2004, Solutia notified Pharmacia and
Monsanto that it was repudiating its obligation to defend litigation,
which Solutia had been managing, or to accept cases relating to
Solutia's Assumed Liabilities pursuant to powers of attorney granted
by Pharmacia and Monsanto under the Distribution Agreement. On
February 27, 2004, Solutia filed a declaratory judgment action in the
Bankruptcy Court asserting, among other things, that the automatic
stay under bankruptcy law prevented it from continuing to perform its
environmental obligations under the Distribution Agreement with
respect to any sites where it does not have current operations and
that its performance of its environmental obligations at sites where
it has current operations only extended to its property line and not
beyond. Item 1 - Legal Proceedings, includes further information
concerning such matters. Item 1 - Note 13 - Commitments and
Contingencies, includes further information regarding Solutia's
bankruptcy, and the related reasonable possibility of a material
adverse effect on our financial position, profitability and/or
liquidity.
At the time of Solutia's 1997 spinoff from Pharmacia, Solutia and
Pharmacia entered into raw material supply contracts, including a
10-year requirements contract for the supply of formalin by Solutia.
Because formalin is a raw material used in the production of
glyphosate, this formalin supply contract was assigned to us when we
separated from Pharmacia in 2000. In September 2003, Solutia and we
amended this contract upon mutually beneficial terms. Pursuant to this
amendment, we made a $25 million prepayment to Solutia for formalin.
The prepayment must either be exhausted or the remainder returned to
us in cash or credit against other product sales by Sept. 30, 2004. In
consideration for making the prepayment, the duration of our
obligation under the formalin supply contract was reduced. Item 1 -
Note 13 - Commitments and Contingencies, includes further information
regarding this arrangement with Solutia.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits: See Exhibit Index
(B) Reports on Form 8-K:
Date Filed or
Furnished Item No. Description
--------- ------- -----------
Dec. 18, 2003 Item 12 The company furnished a report on Form 8-K (Item 12), providing a press
release announcing that it increased its fiscal year 2004 earnings per share
guidance.
Jan. 12, 2004 Item 12 The company furnished a report on Form 8-K (Item 12), providing: (i) a press
release announcing Monsanto Company's financial and operating results for the
period ended Nov. 30, 2003; (ii) first quarter fiscal year 2004 unaudited
supplemental data; and (iii) a slide presentation which accompanied the
company's webcast financial results conference call held on Jan. 7, 2004.
Feb. 5, 2004 Item 12 The company furnished a report on Form 8-K (Item 12), providing a press
release announcing selected financial information for the eight-month
transition period ended Aug. 31, 2003, as well as the four-months ended Dec.
31, 2003.
59
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONSANTO COMPANY
------------------------------------
(Registrant)
/S/ Richard B. Clark
------------------------------------
RICHARD B. CLARK
Vice President and Controller
(On behalf of the Registrant and
as Principal Accounting Officer)
Date: April 14, 2004
60
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
2 Omitted
3 Omitted
4 Omitted
10.16.1 Monsanto Company Long Term Incentive Plan, as amended, approved by shareowners at the Annual Meeting of
Shareowners held Jan. 29, 2004
11 Omitted - see Note 11 of Notes to Consolidated Financial Statements
15 Omitted
18 Letter from Deloitte & Touche LLP, dated April 12, 2004, regarding change to alternative accounting
principle
19 Omitted
22 Omitted
23 Omitted
24 Omitted
31.1 Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
executed by the Chief Executive Officer of Monsanto Company)
31.2 Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
executed by the Chief Financial Officer of Monsanto Company)
32 Section 1350 Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
executed by the Chief Executive Officer and the Chief Financial Officer of Monsanto Company)
99 Computation of Ratio of Earnings to Fixed Charges
61