MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Nov. 30, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-16167
MONSANTO COMPANY
(Exact name of registrant as specified in its charter)
Delaware 43-1878297
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
800 North Lindbergh Blvd., 63167
St. Louis, MO (Zip Code)
(Address of principal executive offices)
(314) 694-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 269,376,062 shares of Common
Stock, $0.01 par value, outstanding as of Jan. 3, 2006.
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MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
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TABLE OF CONTENTS
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PART I--FINANCIAL INFORMATION Page
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Item 1. Financial Statements 2
Statement of Consolidated Operations 3
Condensed Statement of Consolidated Financial Position 4
Statement of Consolidated Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 23
Overview 23
Results of Operations -- First Quarter Fiscal Year 2006 26
Seeds and Genomics Segment 28
Agricultural Productivity Segment 29
Restructuring 31
Financial Condition, Liquidity, and Capital Resources 32
Outlook 36
Critical Accounting Policies and Estimates 41
New Accounting Standards 41
Cautionary Statements Regarding Forward-Looking Statements 42
Item 3. Quantitative and Qualitative Disclosures About Market Risk 43
Item 4. Controls and Procedures 43
PART II--OTHER INFORMATION
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Item 1. Legal Proceedings 44
Item 1A. Risk Factors 45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 46
Item 5. Other Information 46
Item 6. Exhibits 47
SIGNATURE 48
EXHIBIT INDEX 49
1
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
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PART I--FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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The Statement of Consolidated Operations of Monsanto Company and its
consolidated subsidiaries for the three months ended Nov. 30, 2005, and Nov. 30,
2004, the Condensed Statement of Consolidated Financial Position as of Nov. 30,
2005, and Aug. 31, 2005, the Statement of Consolidated Cash Flows for the three
months ended Nov. 30, 2005, and Nov. 30, 2004, and related Notes to Consolidated
Financial Statements follow. Unless otherwise indicated, "Monsanto" and the
"company" are used interchangeably to refer to Monsanto Company or to Monsanto
Company and its consolidated subsidiaries, as appropriate to the context.
Monsanto includes the operations, assets and liabilities that were previously
the agricultural business of Pharmacia Corporation, which is now a subsidiary of
Pfizer Inc. Unless otherwise indicated, "earnings (loss) per share" and "per
share" mean diluted earnings (loss) per share. In the notes to the consolidated
financial statements, all dollars are expressed in millions, except per share
amounts. Unless otherwise indicated, 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 herbicides, excluding
all lawn-and-garden herbicides, and references to "ROUNDUP and other
glyphosate-based herbicides" exclude all lawn-and-garden herbicides.
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MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
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Statement of Consolidated Operations
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Unaudited Three Months Ended Nov.30,
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(Dollars in millions, except per share amounts) 2005 2004
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Net Sales $ 1,405 $ 1,072
Cost of goods sold 771 581
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Gross Profit 634 491
Operating Expenses:
Selling, general and administrative expenses 350 266
Research and development expenses 168 119
Acquired in-process research and development (see Note 3) -- 12
Restructuring charges -- 1
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Total Operating Expenses 518 398
Income from Operations 116 93
Interest expense 32 25
Interest income (14) (9)
Solutia-related expenses (see Note 15) 6 284
Other expense (income) -- net (2) 23
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Income (Loss) from Continuing Operations Before Income Taxes 94 (230)
Income tax provision (benefit) 35 (104)
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Income (Loss) from Continuing Operations 59 (126)
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Discontinued Operations (see Note 17):
Income (loss) from operations of discontinued businesses -- --
Income tax benefit -- (86)
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Income on Discontinued Operations -- 86
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Net Income (Loss) $ 59 $ (40)
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Basic Earnings (Loss) per Share:
Income (loss) from continuing operations $ 0.22 $ (0.48)
Income on discontinued operations -- 0.33
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Net Income (Loss) $ 0.22 $ (0.15)
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Diluted Earnings (Loss) per Share:
Income (loss) from continuing operations $ 0.22 $ (0.48)
Income on discontinued operations -- 0.33
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Net Income (Loss) $ 0.22 $ (0.15)
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Weighted Average Shares Outstanding:
Basic 268.4 264.6
Diluted 273.6 264.6
Dividends per Share $ -- $ --
The accompanying notes are an integral part of these consolidated financial
statements.
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MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
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Condensed Statement of Consolidated Financial Position
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Unaudited As of Nov. 30, As of Aug. 31,
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(Dollars in millions, except share amounts) 2005 2005
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Assets
Current Assets:
Cash and cash equivalents $ 1,006 $ 525
Short-term investments 168 150
Trade receivables -- net of allowances of $289 and $275, respectively 1,413 1,473
Miscellaneous receivables 338 370
Deferred tax assets 511 374
Inventories (see Note 6) 1,890 1,664
Assets of discontinued operations (see Note 17) 10 15
Other current assets 104 73
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Total Current Assets 5,440 4,644
Property, Plant and Equipment -- Net 2,355 2,378
Goodwill (see Note 7) 1,433 1,248
Other Intangible Assets -- Net (see Note 7) 1,135 1,153
Noncurrent Deferred Tax Assets 535 680
Other Assets 438 476
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Total Assets $ 11,336 $ 10,579
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Liabilities and Shareowners' Equity
Current Liabilities:
Short-term debt $ 155 $ 282
Accounts payable 370 369
Income taxes payable 171 208
Accrued compensation and benefits 159 273
Accrued marketing programs 530 457
Deferred revenues 703 43
Grower accruals 139 18
Contingent purchase price -- Seminis (see Note 3) 125 --
Liabilities of discontinued operations (see Note 17) 4 11
Miscellaneous short-term accruals 470 498
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Total Current Liabilities 2,826 2,159
Long-Term Debt 1,445 1,458
Postretirement Liabilities 697 732
Long-Term Portion of Solutia-Related Reserve (see Note 15) 183 184
Other Liabilities 431 433
Commitments and Contingencies (see Note 15)
Shareowners' Equity:
Common stock (authorized: 1,500,000,000 shares, par value $0.01)
Issued 281,778,117 and 280,851,349 shares, respectively;
Outstanding 269,077,573 and 268,191,257 shares, respectively 3 3
Treasury stock, 12,700,544 and 12,660,092 shares, respectively, at cost (503) (500)
Additional contributed capital 8,644 8,588
Retained deficit (1,513) (1,572)
Accumulated other comprehensive loss (860) (889)
Reserve for ESOP debt retirement (17) (17)
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Total Shareowners' Equity 5,754 5,613
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Total Liabilities and Shareowners' Equity $ 11,336 $ 10,579
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The accompanying notes are an integral part of these consolidated financial
statements.
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MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
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Statement of Consolidated Cash Flows
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Unaudited Three Months Ended Nov. 30,
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(Dollars in millions) 2005 2004
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Operating Activities:
Net Income (Loss) $ 59 $ (40)
Adjustments to reconcile cash provided (required) by operations:
Items that did not require (provide) cash:
Depreciation and amortization expense 133 109
Bad-debt expense 14 10
Stock-based compensation expense (see Note 11) 13 --
Tax benefit on employee stock options -- 12
Excess tax benefits from stock-based compensation (see Note 11) (10) --
Deferred income taxes 38 (249)
Equity affiliate expense -- net 7 6
Solutia-related charge (see Note 15) -- 284
Other items that did not require (provide) cash (7) 7
Changes in assets and liabilities that provided (required) cash, net of acquisitions:
Trade receivables 825 893
Inventories (221) (221)
Accounts payable and accrued liabilities (127) 6
PCB litigation settlement proceeds 5 --
Solutia-related payments (see Note 15) (9) (21)
Pension contributions (61) (60)
Other items 114 33
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Net Cash Provided by Operating Activities 773 769
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Cash Flows Provided (Required) by Investing Activities:
Purchases of short-term investments (18) --
Maturities of short-term investments -- 201
Acquisition of businesses, net of cash acquired (53) (158)
Technology and other investments (10) (9)
Capital expenditures (56) (39)
Other investments and property disposal proceeds 2 6
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Net Cash Provided (Required) by Investing Activities (135) 1
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Cash Flows Provided (Required) by Financing Activities:
Net change in financing with less than 90-day maturities (122) (22)
Short-term debt proceeds 4 --
Short-term debt reductions (6) --
Long-term debt proceeds 3 5
Long-term debt reductions (26) (208)
Payments on other financing (1) (1)
Treasury stock purchases -- (35)
Stock option exercises 27 45
Excess tax benefits from stock-based compensation (see Note 11) 10 --
Dividend payments (46) (38)
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Net Cash Required by Financing Activities (157) (254)
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Net Increase in Cash and Cash Equivalents 481 516
Cash and Cash Equivalents at Beginning of Period 525 1,037
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Cash and Cash Equivalents at End of Period $ 1,006 $ 1,553
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See Note 14 -- Supplemental Cash Flow Information -- for further details.
The accompanying notes are an integral part of these consolidated financial
statements.
5
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
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NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
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Monsanto Company, with its subsidiaries, is a leading global provider of
agricultural products for farmers. Monsanto produces leading seed brands,
including DEKALB, ASGROW, SEMINIS and STONEVILLE, and develops biotechnology
traits that assist farmers in controlling insects and weeds. Monsanto provides
other seed companies with genetic material and biotechnology traits for their
seed brands. The company also manufactures ROUNDUP herbicide and other
herbicides. Monsanto's seeds, biotechnology trait products and herbicides
provide growers with solutions that improve productivity, reduce the costs of
farming, and produce healthier foods for consumers and better feed for animals.
Monsanto also provides lawn-and-garden herbicide products for the residential
market and animal agricultural products focused on improving dairy cow
productivity and swine genetics.
Monsanto manages its business in two segments: Seeds and Genomics, and
Agricultural Productivity. The Seeds and Genomics segment consists of the global
seeds and traits businesses and genetic technology platforms. The Agricultural
Productivity segment consists of the crop protection products (ROUNDUP and other
glyphosate-based herbicides and selective chemistries), animal agriculture
businesses and lawn-and-garden herbicide products.
In second quarter 2005, the company committed to a plan to sell the
environmental technologies businesses, and in fourth quarter 2005, substantially
all of these businesses were sold. In fiscal year 2004, the company announced
plans to exit the European breeding and seed business for wheat and barley and
to discontinue the plant-made pharmaceuticals program, and the assets associated
with the company's European wheat and barley business were sold. As a result of
these exit plans, financial data for these businesses have been presented as
discontinued operations as outlined below. The financial statements have been
recast and prepared in compliance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets (SFAS 144). Accordingly, for the three months ended Nov.
30, 2005, and Nov. 30, 2004, the Statement of Consolidated Operations has been
conformed to this presentation. Also under the guidance of SFAS 144, the
remaining assets and liabilities of the environmental technologies businesses
have been separately presented on the Condensed Statement of Consolidated
Financial Position as of Nov. 30, 2005, and Aug. 31, 2005. The European wheat
and barley business and plant-made pharmaceuticals program were previously
reported as part of the Seeds and Genomics segment, and the environmental
technologies businesses were previously reported as part of the Agricultural
Productivity segment. See Note 17 -- Discontinued Operations -- for further
details.
The accompanying consolidated financial statements have not been audited but
have been prepared in conformity with accounting principles generally accepted
in the United States for interim financial information and with instructions to
Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these
unaudited consolidated financial statements contain all adjustments necessary to
present fairly the financial position, results of operations and cash flows for
the interim periods reported. This Report on Form 10-Q should be read in
conjunction with Monsanto's Report on Form 10-K for the fiscal year ended Aug.
31, 2005. Financial information for the first three months of fiscal year 2006
should not be annualized because of the seasonality of the company's business.
NOTE 2. NEW ACCOUNTING STANDARDS
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In September 2005, the Financial Accounting Standards Board (FASB) reached a
final consensus on Emerging Issues Task Force (EITF) Issue No. 04-13, Accounting
for Purchases and Sales of Inventory with the Same Counterparty (EITF 04-13).
EITF 04-13 concludes that two or more legally separate exchange transactions
with the same counterparty should be combined and considered as a single
arrangement for purposes of applying Accounting Principles Board (APB) Opinion
No. 29, Accounting for Nonmonetary Transactions, when the transactions were
entered into in contemplation of one another. The consensus contains several
indicators to be considered in assessing whether two transactions are entered
into in contemplation of one another. If, based on consideration of the
indicators and the substance of the arrangement, two transactions are combined
and considered a single arrangement, an exchange of finished goods inventory for
either raw material inventory or work-in-process inventory should be accounted
for at fair value. The provisions of EITF 04-13 are effective for transactions
beginning in Monsanto's fourth quarter 2006. The company is currently evaluating
the impact of EITF 04-13 on the consolidated financial statements.
6
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections (SFAS 154). SFAS 154 requires retrospective application to
prior-period financial statements of changes in accounting principle, unless it
is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also redefines "restatement" as the
revising of previously issued financial statements to reflect the correction of
an error. This statement is effective for accounting changes and corrections of
errors made in fiscal years beginning after Dec. 15, 2005. The company does not
believe that the adoption of SFAS 154 will have a material impact on the
consolidated financial statements.
In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional
Asset Retirement Obligations (FIN 47) to clarify the term "conditional asset
retirement" as used in SFAS No. 143, Accounting for Asset Retirement
Obligations. FIN 47 requires that a liability be recognized for the fair value
of a conditional asset retirement obligation when incurred, if the fair value of
the liability can be reasonably estimated. Uncertainty about the timing or
method of settlement of a conditional asset retirement obligation would be
factored into the measurement of the liability when sufficient information
exists. This interpretation is effective no later than the end of fiscal years
ending after Dec. 15, 2005. Accordingly, Monsanto will adopt FIN 47 no later
than fourth quarter of fiscal year 2006. The company does not believe that the
adoption of FIN 47 will have a material impact on the consolidated financial
statements.
In December 2004, the FASB issued FASB Staff Position No. 109-1, Application of
FASB Statement No. 109 (SFAS 109), Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004 (FSP 109-1). FSP 109-1 clarifies that the manufacturer's
deduction provided for under the American Jobs Creation Act of 2004 (AJCA)
should be accounted for as a special deduction in accordance with SFAS 109 and
not as a tax rate reduction. The adoption of FSP 109-1 had no impact on
Monsanto's consolidated financial statements in 2005 because the manufacturer's
deduction is not available to Monsanto until fiscal year 2006. The company is
currently evaluating the effect that the manufacturer's deduction will have in
2006 and subsequent years. The FASB also issued FASB Staff Position No. 109-2,
Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004 (FSP 109-2). The AJCA
introduced a special one-time dividends received deduction on the repatriation
of certain foreign earnings to a U.S. taxpayer (repatriation provision),
provided certain criteria are met. FSP 109-2 provides accounting and disclosure
guidance for the repatriation provision. The range of possible amounts that the
company is currently considering eligible for repatriation is between zero and
$500 million. See Note 8 -- Income Taxes -- for additional disclosures in
accordance with FSP 109-2.
NOTE 3. BUSINESS COMBINATIONS
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2006 Acquisitions: In September 2005, Monsanto's American Seeds, Inc. (ASI)
subsidiary acquired five regional U.S. seed companies in separate transactions
for an aggregate purchase price of $53 million (net of cash acquired), inclusive
of transaction costs of $2 million. Four of the five companies acquired are the
shareowners of the CORE Group, an association of family-based seed companies
that serve farmers throughout the Corn Belt, which primarily encompasses several
states in the north central plains region. Those four companies are Fontanelle
Hybrids, Inc., Trelay Seed Company, Stone Seed Company, and Stewart Seeds, Inc.
(collectively, "the CORE Group"). In the fifth transaction, ASI acquired
Specialty Hybrids, Inc., a company serving the Eastern Corn Belt. These
acquisitions are expected to further bolster ASI's ability to directly serve
farmer-customers with a technology-rich, locally-oriented business model. The
transactions were completed on Sept. 1, 2005, from which time the results of
these acquisitions were included in the company's consolidated financial
statements. Pro forma information related to these acquisitions is not presented
because the impact of these acquisitions, either individually or in the
aggregate, on the company's consolidated results of operations is not considered
to be significant.
For all fiscal year 2006 acquisitions described above, the business operations
of the acquired entities were included in the Seeds and Genomics segment. These
acquisitions were accounted for as purchase transactions. Accordingly, the
assets and liabilities of the acquired entities were recorded at their estimated
fair values at the dates of the acquisitions. The preliminary purchase price
allocations for all fiscal year 2006 acquisitions as of Nov. 30, 2005, are
subject to adjustment upon the completion of valuations and are summarized in
the aggregate in the following table. Further, other assets and liabilities may
be identified to which a portion of the purchase price could be allocated.
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MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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Aggregate
(Dollars in millions) Acquisitions
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Tangible Assets $ 2
Goodwill 44
Other Intangible Assets 19
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Total Assets Acquired 65
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Total Liabilities Assumed 12
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Net Assets Acquired $ 53
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The primary items that generated the goodwill were the premiums paid by the
company for the right to control the businesses acquired, including the
direct-to-farmer and farmer-dealer distribution models, and the value of the
acquired assembled workforces. None of the goodwill is deductible for tax
purposes.
The acquired identifiable intangible assets of $19 million have a
weighted-average useful life of approximately seven years. Intangible assets are
comprised of acquired customer relationships of $13 million to be amortized on a
straight-line basis over seven years, trademarks and trade names of $5 million
to be amortized on a straight-line basis over lives ranging from seven to 10
years, and covenants not-to-compete of $1 million to be amortized on a
straight-line basis over five years.
2005 Acquisitions: In first quarter fiscal year 2005, Monsanto acquired the
canola seed businesses of Advanta Seeds (Advanta) from Advanta B.V., including
the ADVANTA SEEDS brand in Canada and the INTERSTATE seed brand in the United
States, for $52 million in cash (net of cash acquired), inclusive of transaction
costs of $2 million. The transaction was completed on Sept. 8, 2004, from which
time the operating results of this acquisition were included in the company's
consolidated financial statements.
In November 2004, ASI acquired Channel Bio Corp. for $104 million in cash (net
of cash acquired) and $15 million in liabilities paid in second quarter 2005. In
third quarter 2005, ASI, through its Channel Bio subsidiary, acquired NC+
Hybrids, Inc. for $40 million in cash (net of cash acquired). In addition to
these purchase price amounts, ASI paid transaction costs of $4 million for these
acquisitions. Channel Bio and NC+ Hybrids are U.S. seed companies that sell,
market and distribute primarily corn and soybean seeds. The Channel Bio
transaction was completed on Nov. 15, 2004, from which time the operating
results of this acquisition were included in the company's consolidated
financial statements. The NC+ Hybrids transaction was completed on March 1,
2005, from which time the operating results of this acquisition were included in
the company's consolidated financial statements.
In third quarter fiscal year 2005, Monsanto acquired Seminis, Inc. for $1.0
billion in cash (net of cash acquired), inclusive of transaction costs of $23
million, and paid $495 million for the repayment of its outstanding debt. The
acquisition was completed on March 23, 2005, from which time the operating
results of this acquisition were included in the company's consolidated
financial statements. Marinet Investments, LLC, which prior to the closing was a
holder of co-investment rights in Seminis, elected to reduce the cash payment to
which it was entitled upon completion of the transaction by $50 million in
exchange for a contingent payment of up to $125 million based on the achievement
of certain cumulative net sales targets over the 36-month period ending Sept.
30, 2007, or certain other factors. The cash portion of the acquisition was
funded with cash on hand plus commercial paper borrowings of $600 million issued
in March 2005. Prior to the closing of the transaction, Seminis initiated a
tender offer to redeem all of its outstanding 10 1/4% Senior Subordinated Notes.
In April 2005, payments totaling $390 million were made to settle tender offers
and were funded with commercial paper borrowings.
In order to enhance connections among Monsanto and Seminis employees, including
the sharing of technology advancements, Monsanto is finalizing plans to
integrate certain support services of Seminis with its other businesses. In
conjunction with this integration, in September 2005, Monsanto and the chief
executive officer of Seminis agreed that he would assist in the integration and
resign by Dec. 31, 2005. As a result, Monsanto determined that the timing of the
contingent payment discussed above has been accelerated and will be payable in
second quarter 2006. A $125 million liability has been recorded as of Nov. 30,
2005, resulting in additional purchase price and goodwill.
In third quarter fiscal year 2005, Monsanto acquired Emergent Genetics, Inc. and
Emergent Genetics India Ltd. (collectively, "Emergent") for $305 million (net of
cash acquired), inclusive of transaction costs of $8 million. The transaction
was completed on April 5, 2005, from which time the operating results of this
acquisition were included in the company's consolidated financial statements.
8
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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The cash portion of the acquisition was funded with $284 million of commercial
paper borrowings issued in April 2005. Debt of $16 million was also assumed in
the transaction.
For all fiscal year 2005 acquisitions described above, the business operations
of the acquired entities were included in the Seeds and Genomics segment. These
acquisitions were accounted for as purchase transactions. Accordingly, the
assets and liabilities of the acquired entities were recorded at their estimated
fair values at the dates of the acquisitions. The purchase price allocations for
Seminis, Emergent and NC+ Hybrids as of Nov. 30, 2005, are preliminary and are
subject to adjustment upon finalization of integration or restructuring plans,
as discussed below. Further, other assets and liabilities may be identified to
which a portion of the purchase price could be allocated.
As of the acquisition dates, management began to assess and formulate plans to
integrate or restructure the acquired entities. These activities are accounted
for in accordance with EITF Issue No. 95-3, Recognition of Liabilities in
Connection with a Purchase Business Combination, and primarily include the
potential closure of facilities, the abandonment or redeployment of equipment,
and employee terminations or relocations. In first quarter 2006, management
finalized plans to integrate or restructure certain activities of Seminis and
the Emergent India business. As a result, asset fair values were reduced by $2
million, and additional liabilities of $14 million were recorded, resulting in
additional goodwill of $16 million. The plans for Seminis and the Emergent India
business include employee terminations and relocations, exiting certain product
lines and facility closures. As of Nov. 30, 2005, estimated integration costs of
$21 million have been recognized as current liabilities in the purchase price
allocations, and $3 million has been charged against these liabilities,
primarily related to payments for employee terminations and relocations.
Charges of $12 million were recorded in first quarter 2005 for the write-off of
acquired in-process R&D (IPR&D) related to the Advanta and Channel Bio
acquisitions. Management believed that the technological feasibility of the
IPR&D was not established and that the research had no alternative future uses.
Accordingly, the amounts allocated to IPR&D were expensed immediately, in
accordance with generally accepted accounting principles.
NOTE 4. RESTRUCTURING
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Restructuring charges were recorded in the Statement of Consolidated Operations as follows:
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Three Months Ended Nov. 30,
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(Dollars in millions) 2005 2004
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Restructuring Charges(1) $ -- $ (1)
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Loss from Continuing Operations Before Income Taxes -- (1)
Income Tax Benefit -- 20
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Income from Continuing Operations -- 19
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Net Income $ -- $ 19
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(1) The $1 million of restructuring charges for the three months ended Nov. 30,
2004, was recorded in the Agricultural Productivity segment.
Fiscal Year 2004 Restructuring Plan
On Oct. 15, 2003, Monsanto announced plans to continue to reduce costs primarily
associated with its agricultural chemistry business as that sector matures
globally. Total restructuring actions approved under the fiscal year 2004
restructuring plan were estimated to be $289 million pretax. These plans
included: (1) reducing costs associated with the company's ROUNDUP herbicide
business; (2) exiting the European breeding and seed business for wheat and
barley; and (3) discontinuing the plant-made pharmaceuticals program. In fiscal
year 2004, total restructuring charges related to these actions were $165
million pretax ($105 million aftertax). Additionally, the approved plan included
a $69 million impairment of goodwill in the global wheat business. In fiscal
year 2005, the company incurred charges of $6 million pretax to complete the
restructuring actions under this plan.
In first quarter of fiscal year 2005, Monsanto recorded restructuring charges of
$1 million pretax related to workforce reductions. The company also recorded a
deferred tax benefit of $106 million, of which $20 million was recorded in
continuing operations and the remaining $86 million was recorded in discontinued
operations. The $20 million tax benefit recorded in continuing operations was
related to the impairment of goodwill in the global wheat business as part of
9
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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the fiscal year 2004 restructuring plan. As such, the benefit amount recorded in
continuing operations is reflected in the table above. See Note 8 -- Income
Taxes -- and Note 17 -- Discontinued Operations -- for further discussion of the
$86 million tax benefit recorded in discontinued operations.
The following table displays a roll forward of the remaining liability
established for restructuring expense from Aug. 31, 2005, to Nov. 30, 2005:
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Work Force
(Dollars in millions) Reductions
- ----------------------------------------------------------------------------------------------------------------------------
Continuing Operations:
Beginning liability as of Aug. 31, 2005 $ 4
Restructuring liability --
Cash payments (1)
- ----------------------------------------------------------------------------------------------------------------------------
Ending liability as of Nov. 30, 2005 $ 3
- --------------------------------------------------------------------------------------------------------------==============
NOTE 5. CUSTOMER FINANCING PROGRAMS
- --------------------------------------------------------------------------------
In April 2002, Monsanto established a revolving financing program to provide
financing of up to $500 million for selected customers in the United States
through a third-party specialty lender. The funding availability may be less
than $500 million if certain program requirements are not met. Under the
financing program, Monsanto originates customer loans on behalf of the lender,
which is a special purpose entity (SPE) that Monsanto consolidates, pursuant to
Monsanto's credit and other underwriting guidelines approved by the lender.
Monsanto services the loans and provides a first-loss guarantee of up to $100
million. Following origination, the lender transfers the loans to multi-seller
commercial paper conduits through a nonconsolidated qualifying special purpose
entity (QSPE). Monsanto accounts for this transaction as a sale, in accordance
with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities (SFAS 140).
Monsanto has no ownership interest in the lender, in the QSPE, or in the loans.
However, because Monsanto substantively originates the loans through the SPE
(which it consolidates) and partially guarantees and services the loans,
Monsanto accounts for the program as if it were the originator of the loans and
the transferor selling the loans to the QSPE.
Monsanto records its guarantee liability at a value that approximates fair value
(except that it does not discount credit losses because of the short-term nature
of the loans), primarily driven by expected future credit losses. Monsanto does
not recognize any servicing asset or liability because the servicing fee is
adequate compensation for the servicing activities. Discounts on the sale of the
customer loans and servicing revenues collected and earned were not significant
during the three months ended Nov. 30, 2005, and Nov. 30, 2004.
Proceeds from customer loans sold through the financing program totaled $18
million for first quarter 2006 and $60 million for first quarter 2005. These
proceeds are included in net cash provided by operations in the Statement of
Consolidated Cash Flows. The loan balance outstanding as of Nov. 30, 2005, and
Aug. 31, 2005, was $119 million and $171 million, respectively. The first-loss
guarantee will be in place throughout the financing program. Loans are
considered delinquent when payments are 31 days past due. If a customer fails to
pay an obligation when due, Monsanto would incur a liability to perform under
the first-loss guarantee. As of Nov. 30, 2005, and Aug. 31, 2005, less than $1
million of loans sold through this financing program were delinquent. As of Nov.
30, 2005, and Aug. 31, 2005, Monsanto recorded its guarantee liability at less
than $1 million, primarily based on the company's historical collection
experience with these customers and a current assessment of credit exposure.
Adverse changes in the actual loss rate would increase the liability. If
Monsanto is called upon to make payments under the first-loss guarantee, it
would have the benefit under the financing program of any amounts subsequently
collected from the customer.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), and amended it by issuing FIN 46R in
December 2003. The SPE is included in Monsanto's consolidated financial
statements. Because QSPEs are excluded from the scope of FIN 46R and Monsanto
does not have the unilateral right to liquidate the QSPE, this interpretation
does not have an effect on Monsanto's accounting for the U.S. customer financing
program.
10
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
In November 2004, Monsanto entered into an agreement with a lender to establish
a program to provide financing of up to $40 million for selected customers in
Brazil. The agreement, as amended in May 2005, qualifies for sales treatment
under SFAS 140. Accordingly, proceeds from the transfer of receivables
subsequent to the May 2005 amendment are included in net cash provided by
operations in the Statement of Consolidated Cash Flows. Proceeds from customer
loans sold through the financing program totaled $18 million for first quarter
2006. There were no loans sold through the program in first quarter 2005. The
loan balance outstanding as of Nov. 30, 2005, and Aug. 31, 2005, was $37 million
and $22 million, respectively. Monsanto provides a full guarantee of the loans
in the event of customer default. The liability for the guarantee is recorded at
an amount that approximates fair value and is primarily based on the company's
historical collection experience with customers that participate in the program.
The guarantee liability recorded by Monsanto was $1 million as of Nov. 30, 2005,
and less than $1 million as of Aug. 31, 2005. If performance is required under
the guarantee, Monsanto may retain amounts that are subsequently collected from
customers.
NOTE 6. INVENTORIES
- --------------------------------------------------------------------------------
Components of inventories were:
- -----------------------------------------------------------------------------------------------------------------------------
As of Nov. 30, As of Aug. 31,
------------- --------------
(Dollars in millions) 2005 2005
- ----------------------------------------------------------------------------------------------------------- -------------
Finished Goods $ 1,129 $ 934
Goods In Process 597 589
Raw Materials and Supplies 196 167
- ----------------------------------------------------------------------------------------------------------- -------------
Inventories at FIFO Cost 1,922 1,690
Excess of FIFO over LIFO Cost (32) (26)
- ----------------------------------------------------------------------------------------------------------- -------------
Total $ 1,890 $ 1,664
- ----------------------------------------------------------------------------------------------============= =============
In November 2004, the FASB issued SFAS No. 151, Inventory Costs -- an amendment
of ARB No. 43, Chapter 4 (SFAS 151), to clarify that abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage) should
be recognized as current period charges and to require the allocation of fixed
production overhead to the costs of conversion based on the normal capacity of
the production facilities. SFAS 151 was effective for Monsanto for inventory
costs incurred after Sept. 1, 2005. The adoption of SFAS 151 did not have a
material impact on the company's consolidated financial statements.
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
- --------------------------------------------------------------------------------
Changes in the net carrying amount of goodwill for the first quarter of fiscal
year 2006, by segment, are as follows:
- ----------------------------------------------------------------------------------------------------------------------------
Seeds and Agricultural
(Dollars in millions) Genomics Productivity Total
- ----------------------------------------------------------------------------------------------------------------------------
Balance as of Aug. 31, 2005 $ 1,183 $ 65 $ 1,248
Acquisition Activity (see Note 3) 185 -- 185
Effect of Foreign Currency Translation Adjustments -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Balance as of Nov. 30, 2005 $ 1,368 $ 65 $ 1,433
- -----------------------------------------------------------------------------------=========================================
Information regarding the company's other intangible assets is as follows:
- ----------------------------------------------------------------------------------------------------------------------------
As of Nov. 30, 2005 As of Aug. 31, 2005
---------------------------------------------- -----------------------------------------------
Carrying Accumulated Carrying Accumulated
(Dollars in millions) Amount Amortization Net Amount Amortization Net
- ------------------------------------------------------------------------- -----------------------------------------------
Acquired Germplasm $ 927 $ (498) $ 429 $ 926 $ (483) $ 443
Acquired Biotechnology
Intellectual Property 652 (306) 346 648 (285) 363
Trademarks and Trade Names 198 (37) 161 193 (34) 159
Customer Relationships 189 (9) 180 176 (6) 170
Other 33 (14) 19 32 (14) 18
- ------------------------------------------------------------------------- -----------------------------------------------
Total $ 1,999 $ (864) $ 1,135 $ 1,975 $ (822) $ 1,153
- ---------------------------============================================== ===============================================
11
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
The increases in other intangible assets during the first quarter of 2006
primarily resulted from the acquisitions described in Note 3 -- Business
Combinations.
Total amortization expense of other intangible assets was $42 million in first
quarter of fiscal year 2006 and $28 million in first quarter of fiscal year
2005. Estimated intangible asset amortization expense for each of the five
succeeding fiscal years has not changed significantly from the amounts disclosed
in Monsanto's Report on Form 10-K for the fiscal year ended Aug. 31, 2005.
NOTE 8. INCOME TAXES
- --------------------------------------------------------------------------------
The American Jobs Creation Act of 2004 (AJCA) was enacted on Oct. 22, 2004, and
created a temporary incentive for U.S. multinationals to repatriate accumulated
earnings outside the United States by providing an 85 percent dividends received
deduction for certain dividends from controlled foreign corporations. Monsanto
may elect to apply this provision to qualifying earnings repatriations in fiscal
year 2006. As of Nov. 30, 2005, Monsanto has not recorded deferred taxes on
foreign earnings because any taxes on dividends would be substantially offset by
foreign tax credits or because Monsanto intends to reinvest those earnings
indefinitely. Due to the complexity of the repatriation provision, the company
is still evaluating the effects of this one-time incentive. The range of
possible amounts that the company is currently considering eligible for
repatriation is between zero and $500 million. Accordingly, the company expects,
based on the information presently available, that it may record a tax liability
based on the 5.25% statutory rate in the AJCA. However, the actual cost to the
company is dependent on a number of factors that are currently being analyzed.
Therefore, as of Nov. 30, 2005, the related potential range of income tax
effects of such repatriation cannot be reasonably estimated.
The sale of the European wheat and barley business in fiscal year 2004 generated
a tax loss deductible in either the United Kingdom or the United States. As of
Aug. 31, 2004, a deferred tax asset had not been recorded for the tax loss
incurred in the United States because of the existence of a number of
uncertainties. These uncertainties diminished with the enactment of the AJCA. As
a result, Monsanto recorded a deferred tax benefit of $106 million in first
quarter 2005. Of this tax benefit, $20 million was recorded in continuing
operations related to the impairment of goodwill in the global wheat business
recorded in first quarter 2004. The remaining $86 million recorded in
discontinued operations was primarily related to the goodwill impairment loss at
the date of adoption of SFAS No. 142, Goodwill and Other Intangible Assets (SFAS
142), on Jan. 1, 2002, which was recorded as a cumulative effect of a change in
accounting principle. The recognition of this tax benefit in the United States
effectively precludes Monsanto from claiming any U.K. benefit for the U.K. tax
loss. Accordingly, the U.K. deferred tax asset of $71 million, which had a full
valuation allowance against it, was written off during first quarter 2005.
NOTE 9. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
- --------------------------------------------------------------------------------
Monsanto's business and activities expose it to a variety of market risks,
including risks related to changes in commodity prices for seed inventories
purchased from growers, foreign-currency exchange rates, interest rates and, to
a lesser degree, security prices and natural gas prices. These financial
exposures are monitored and managed by the company as an integral part of its
market risk management program. This program recognizes the unpredictability of
financial markets and seeks to reduce the potentially adverse effects that
market volatility could have on operating results. Monsanto's overall objective
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.
NOTE 10. POSTRETIREMENT BENEFITS -- PENSIONS, HEALTH CARE AND OTHER
- --------------------------------------------------------------------------------
The majority of Monsanto's employees are covered by noncontributory pension
plans sponsored by the company. The company also provides certain postretirement
health care and life insurance benefits for retired employees through insurance
contracts. The company's net periodic benefit cost for pension benefits, and
health care and other postretirement benefits include the following components:
12
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Pension Benefits Three Months Ended Nov. 30,
--------------------------
(Dollars in millions) 2005 2004
- ----------------------------------------------------------------------------------------------------------------------------
Service Cost for Benefits Earned During the Period $ 11 $ 9
Interest Cost on Benefit Obligation 25 23
Assumed Return on Plan Assets (31) (27)
Amortization of Unrecognized Net Loss 15 9
- ----------------------------------------------------------------------------------------------------------------------------
Total Net Periodic Benefit Cost $ 20 $ 14
- --------------------------------------------------------------------------------------------------==========================
- -----------------------------------------------------------------------------------------------------------------------------
Health Care and Other Postretirement Benefits Three Months Ended Nov. 30,
---------------------------
(Dollars in millions) 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------
Service Cost for Benefits Earned During the Period $ 4 $ 3
Interest Cost on Benefit Obligation 4 5
Amortization of Unrecognized Net Loss 1 1
- -----------------------------------------------------------------------------------------------------------------------------
Total Net Periodic Benefit Cost $ 9 $ 9
- --------------------------------------------------------------------------------------------------===========================
Monsanto contributed $61 million to its pension plans in first quarter 2006 and
$60 million in first quarter 2005. As of Nov. 30, 2005, management expects to
make additional contributions of approximately $1 million to the company's
pension plans in fiscal year 2006. Pending management's assessment of 2006
results of operations, the company may reassess planned contributions to its
pension plans.
NOTE 11. STOCK-BASED COMPENSATION PLANS
- --------------------------------------------------------------------------------
On Sept. 1, 2005, Monsanto adopted SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123R), which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and
directors based on estimated fair values. SFAS 123R supersedes Monsanto's
previous accounting under APB Opinion No. 25, Accounting for Stock Issued to
Employees, for periods beginning in fiscal 2006. In March 2005, the SEC issued
Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123R. Monsanto has
applied the provisions of SAB 107 in its adoption of SFAS 123R.
Monsanto adopted SFAS 123R using the modified prospective transition method.
Under this method, the company's consolidated financial statements as of and for
the three months ended Nov. 30, 2005, reflect the impact of SFAS 123R, while the
consolidated financial statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123R. Stock-based compensation
expense recognized under SFAS 123R was $13 million for first quarter 2006, which
consisted of: (1) compensation expense for all unvested share-based awards
outstanding as of Sept. 1, 2005, based on the grant date fair value estimated in
accordance with the pro forma provisions of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123) and (2) compensation expense for share-based
awards granted subsequent to adoption based on the grant date fair value
estimated in accordance with the provisions of SFAS 123R. Stock-based
compensation expense recognized during the period is based on the value of the
portion of share-based payment awards that are ultimately expected to vest.
Compensation cost capitalized as part of inventory was immaterial for first
quarter 2006. SFAS 123R amends SFAS No. 95, Statement of Cash Flows, to require
that excess tax benefits be reported as a financing cash inflow rather than as a
reduction of taxes paid, which is included within operating cash flows. The
following table shows the impact of the adoption of SFAS 123R on the Statement
of Consolidated Operations and the Statement of Consolidated Cash Flows.
13
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Three Months
Ended Nov. 30,
-----------------
(Dollars in millions, except per share amounts) 2005
- ----------------------------------------------------------------------------------------------------------------------------
Cost of Goods Sold $ (1)
Selling, General and Administrative Expenses(1) (10)
Research and Development Expenses (2)
- ----------------------------------------------------------------------------------------------------------------------------
Total stock-based compensation expense included in operating expenses (13)
Loss From Continuing Operations Before Income Taxes (13)
Income Tax Benefit (5)
- ----------------------------------------------------------------------------------------------------------------------------
Net Loss $ (8)
- -----------------------------------------------------------------------------------------------------------=================
Basic and Diluted Loss per Share $ (0.03)
- -----------------------------------------------------------------------------------------------------------=================
Net Cash Required by Operating Activities $ (10)
Net Cash Provided by Financing Activities $ 10
- ----------------------------------------------------------------------------------------------------------------------------
(1) Includes $3 million related to share-based awards for which compensation
expense was being recognized prior to the adoption of SFAS 123R.
Plan Descriptions: Share-based awards are designed to reward employees for their
long-term contributions to the company and provide incentives for them to remain
with the company. Monsanto issues stock option awards, restricted stock, and
restricted stock units with performance conditions under three fixed stock
plans. Under the Monsanto Company Long-Term Incentive Plan, as amended (LTIP),
formerly known as the Monsanto 2000 Management Incentive Plan, the company may
grant awards to key officers, directors and employees of Monsanto, including
stock options, of up to 39.3 million shares of Monsanto common stock. Other
employees may be granted options under the Monsanto Company Broad-Based Stock
Option Plan (Broad-Based Plan), which permits the granting of a maximum of 2.7
million shares of Monsanto common stock to employees other than officers and
other employees subject to special reporting requirements. In January 2005,
shareowners approved the Monsanto Company 2005 Long-Term Incentive Plan (2005
LTIP), under which the company may grant awards to key officers, directors and
employees of Monsanto, including stock options, of up to 12.0 million shares of
Monsanto common stock. As of Nov. 30, 2005, no awards have been granted under
the 2005 LTIP.
Under the plans, the grant price of any option is the average of the high price
and low price of the company's common stock on the day before the grant date.
The plans provide that the term of any option granted may not exceed 10 years
and that each option may be exercised for such period as may be specified by the
People and Compensation Committee of the board of directors or by the delegate
who administers the plans. Generally, the options vest over three years, with
one-third of the total award vesting each year. Grants of restricted stock
generally vest at the end of a three-year or five-year service period.
Restricted stock units represent the right to receive a number of shares of
restricted stock dependent upon vesting requirements. Vesting is subject to
Monsanto's attainment of specified performance criteria during the designated
performance period and the employees' continued employment during the designated
service period. Compensation expense for stock options, restricted stock and
restricted stock units is measured at fair value on the date of grant, net of
estimated forfeitures, and recognized over the vesting period of the award.
Certain Monsanto employees outside the United States may receive stock
appreciation rights as part of Monsanto's stock compensation plans. These rights
entitle those employees to receive a cash amount determined by the appreciation
in the fair market value of the company's common stock between the date of the
award and the date of exercise. The fair value of these awards was $2 million as
of Nov. 30, 2005. The fair value is remeasured at the end of each reporting
period and compensation expense is recognized over the requisite service period
in accordance with SFAS 123R.
Monsanto also issues share-based awards under the Monsanto Non-Employee Director
Equity Incentive Compensation Plan (Director Plan) for directors who are not
employees of Monsanto or its affiliates. Under the Director Plan, half of the
annual retainer for each nonemployee director is paid in the form of deferred
stock -- shares of common stock to be delivered at a specified future time. The
remainder is payable, at the election of each director, in the form of
restricted common stock, deferred common stock, current cash and/or deferred
cash. The Director Plan also provides that a nonemployee director will receive a
grant of three thousand shares of restricted stock upon commencement of service
as a member of Monsanto's board of directors. Awards of deferred stock and
restricted stock under the Director Plan are automatically granted under the
LTIP as provided for in the Director Plan. There were no share-based liabilities
paid under the Director Plan in first quarter 2006 or 2005.
14
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
A summary of the status of Monsanto's stock option plans for the first quarter
of fiscal year 2006 follows:
- ----------------------------------------------------------------------------------------------------------------------------
Outstanding
Weighted-Average
Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
Balance Outstanding as of Aug. 31, 2005 14,682,796 $27.72
Granted 2,944,560 $58.84
Exercised (872,458) $29.58
Forfeited (49,554) $44.57
- ----------------------------------------------------------------------------------------------------------------------------
Balance Outstanding as of Nov. 30, 2005 16,705,344 $32.64
- --------------------------------------------------------------------------------============================================
Monsanto stock options outstanding and exercisable as of Nov. 30, 2005, are
summarized by exercise price as follows:
- ----------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------------------- ----------------------------------------
Weighted-Average Aggregate Aggregate
Remaining Intrinsic Weighted-Average Intrinsic
Contractual Weighted-Average Value(1) Exercise Value(1)
Range of Exercise Life Exercise Price (dollars in Price (dollars in
Prices Shares (years) per Share millions) Shares per Share millions)
- --------------------------------------------------------------------------------- ----------------------------------------
$14.66 - $20.00 6,673,154 6.8 $17.64 $371 4,558,631 $18.30 $251
$20.01 - $40.00 3,558,664 6.7 $31.41 $149 1,841,500 $31.73 $76
$40.01 - $60.00 6,364,416 9.2 $48.41 $158 1,094,181 $41.69 $35
$60.01 - $73.43 109,110 9.6 $70.35 -- -- -- --
- --------------------------------------------------------------------------------- ----------------------------------------
16,705,344 $678 7,494,312 $25.01 $362
========== =============== ========================================
(1) The aggregate intrinsic value represents the total pre-tax intrinsic value,
based on Monsanto's closing stock price of $73.27 as of Nov. 30, 2005,
which would have been received by the option holders had all option holders
exercised their options as of that date.
The number of options exercisable and the corresponding weighted-average
exercise price were 7,143,654 and $22.82 as of Aug. 31, 2005. The total pre-tax
intrinsic value of options exercised during the three months ended Nov. 30,
2005, and 2004, was $34 million and $40 million, respectively. Pre-tax
unrecognized compensation expense for stock options, net of estimated
forfeitures, was $81 million as of Nov. 30, 2005, and will be recognized as
expense over a weighted-average period of 2.3 years.
A summary of the status of Monsanto's restricted stock and restricted stock
units compensation plans for the first quarter of fiscal year 2006 follows:
- ----------------------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average
Restricted Grant Date Restricted Grant Date
Stock Fair Value Stock Units Fair Value
- ----------------------------------------------------------------------------------------------------------------------------
Nonvested as of Aug. 31, 2005 193,200 $25.02 136,410 $63.84
Granted 22,500 $58.65 59,420 $58.44
Vested 107,000 $17.12 -- --
Forfeited -- -- -- --
- ------------------------------------------------------------------------------------- -----------------------------------
Nonvested as of Nov. 30, 2005 108,700 $39.75 195,830 $62.20
- ------------------------------------------------------=============================== ===================================
The total fair value of restricted stock that vested during first quarter 2006
and 2005 was $2 million and less than one million, respectively. Pre-tax
unrecognized compensation expense, net of estimated forfeitures, for nonvested
restricted stock and restricted stock units was $3 million and $15 million,
respectively, as of Nov. 30, 2005, which will be recognized as expense over the
weighted-average remaining requisite service periods. The weighted-average
remaining requisite service periods for nonvested restricted stock and
restricted stock units were 3.0 years and 2.0 years, respectively, as of Nov.
30, 2005.
Valuation and Expense Information under SFAS 123R: Upon adoption of SFAS 123R,
Monsanto began estimating the value of employee stock options on the date of
grant using a lattice-binomial model. Prior to adoption of SFAS 123R, the value
of employee stock options was estimated on the date of grant using the
Black-Scholes model, for the disclosures of pro forma financial information
required under SFAS 123. A lattice-binomial model requires the use of extensive
actual employee exercise behavior data and a number of complex assumptions
including volatility, risk-free interest rate and expected dividends. Expected
volatilities utilized in the model are based on implied volatilities from traded
options on Monsanto's stock and historical volatility of Monsanto's stock price.
The expected life represents the weighted-average period the stock options are
15
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
expected to remain outstanding and is a derived output of the model. The
lattice-binomial model incorporates exercise and post-vesting forfeiture
assumptions based on an analysis of historical data. The following assumptions
were used to calculate the estimated value of employee stock options:
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
------------------------------------------
2005 2004
------------------------------------------
Assumptions Lattice-binomial Black-Scholes
- ----------------------------------------------------------------------------------------------------------------------------
Expected Dividend Yield 1.2% 1.5%
Expected Volatility 32% - 36% 29.2%
Weighted-Average Volatility 33.2% NA
Risk-Free Interest Rates 4.2% - 4.58% 3.1%
Weighted-Average Risk-Free Interest Rate 4.4% NA
Expected Option Life (in years) 5.9 4.0
- ----------------------------------------------------------------------------------------------------------------------------
NA = Not Applicable
The weighted-average estimated value of employee stock options granted during
the first three months of fiscal years 2006 and 2005 was $18.91 and $9.94,
respectively.
In accordance with the modified prospective transition method, Monsanto's
consolidated financial statements for prior periods have not been restated and
do not include the impact of SFAS 123R. Accordingly, no compensation expense
related to stock option awards was recognized in the first quarter of fiscal
year 2005, as all stock options granted had an exercise price equal to the fair
market value of the underlying common stock on the date of grant. The following
table shows the effect on net loss and loss per share as if the fair-value-based
method of accounting had been applied to all outstanding and unvested stock
option awards prior to adoption for SFAS 123R. Stock-based compensation included
in net income in the first quarter of 2005 included expense for awards of
restricted stock, restricted stock units, stock appreciation rights and awards
granted under the Director Plan. For purposes of this pro forma disclosure, the
estimated fair value of the award is assumed to be expensed over the award's
vesting periods using the Black-Scholes model.
- ----------------------------------------------------------------------------------------------------------------------------
Three Months
Ended Nov. 30,
-----------------
(Dollars in millions, except per share amounts) 2004
- ----------------------------------------------------------------------------------------------------------------------------
Net Loss:
As reported $ (40)
Add: Stock-based compensation expense included in reported Net Loss, net of tax 2
Less: Total stock-based compensation expense determined under the fair-value-based method for all
awards, net of tax (8)
- ----------------------------------------------------------------------------------------------------------------------------
Pro forma $ (46)
- -----------------------------------------------------------------------------------------------------------=================
Basic and Diluted Loss per Share:
As reported $ (0.15)
Pro forma $ (0.17)
- ---------------------------------------------------------------------------------------------------------- -----------------
For stock option awards with accelerated vesting provisions that are granted to
retirement-eligible employees and to employees that become eligible for
retirement subsequent to the grant date, Monsanto previously followed the
guidance of APB 25 and SFAS 123, which allowed compensation costs to be
recognized ratably over the vesting period of the award. SFAS 123R requires
compensation costs to be recognized over the requisite service period of the
award instead of ratably over the vesting period stated in the grant. For awards
granted prior to adoption, the SEC clarified that companies should continue to
follow the vesting method they had previously been using. As a result, for
awards granted prior to adoption, Monsanto will continue to recognize
compensation costs ratably over the vesting period with accelerated recognition
of the unvested portion upon actual retirement. The impact of accelerated
vesting on the pro forma disclosure shown above is immaterial. Monsanto will
follow the guidance of SFAS 123R for awards granted subsequent to the adoption
date.
Monsanto's income taxes currently payable have been reduced by the tax benefits
from employee stock option exercises. These benefits totaled $10 million and $12
million for the three months ended Nov. 30, 2005, and 2004, respectively, and
were recorded as an increase to additional paid-in capital.
16
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
NOTE 12. COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
Comprehensive income includes all nonshareowner changes in equity and consists
of net income (loss), foreign currency translation adjustments, gains and losses
on the foreign currency hedge of the company's net investment in a foreign
subsidiary, net unrealized gains and losses on available-for-sale securities,
additional minimum pension liability adjustments, and net accumulated derivative
gains or losses on cash flow hedges not yet realized. Information regarding
comprehensive income is as follows:
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
-----------------------------
(Dollars in millions) 2005 2004
- ----------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 88 $ 106
- ----------------------------------------------------------------------------------------------------------------------------
The components of accumulated other comprehensive loss are as follows:
- ----------------------------------------------------------------------------------------------------------------------------
As of Nov. 30, As of Aug. 31,
------------- -------------
(Dollars in millions) 2005 2005
- ------------------------------------------------------------------------------------------------------------ -------------
Accumulated Foreign Currency Translations $ (548) $ (593)
Net Unrealized Gains on Investments, Net of Taxes 6 7
Net Accumulated Derivative Loss, Net of Taxes (17) (2)
Minimum Pension Liability, Net of Taxes (301) (301)
- ----------------------------------------------------------------------------------------------------------- ------------
Accumulated Other Comprehensive Loss $ (860) $ (889)
- -----------------------------------------------------------------------------------------------============ ============
NOTE 13. EARNINGS (LOSS) PER SHARE
- --------------------------------------------------------------------------------
Basic earnings (loss) per share (EPS) was computed using the weighted-average
number of common shares outstanding during the period shown in the table below.
For first quarter 2006, diluted EPS was computed taking into account the effect
of dilutive potential common shares, as shown in the table below. Because
Monsanto reported a loss from continuing operations for the three months ended
Nov. 30, 2004, SFAS No. 128, Earnings per Share, requires diluted loss per share
to be calculated using weighted-average common shares outstanding, excluding
dilutive potential common shares. If diluted EPS were computed taking into
account the effect of dilutive potential common shares, the number of shares
that would be included in the calculation of dilutive EPS is noted in the table
below. Potential common shares consist primarily of stock options using the
treasury stock method and are excluded if their effect is antidilutive. Dilutive
potential common shares noted below exclude stock options of approximately 0.1
million and 1.9 million for the three months ended Nov. 30, 2005, and Nov. 30,
2004, respectively. These potential common shares were excluded because the
options' exercise prices were greater than the average market price of the
common shares.
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
--------------------------
2005 2004
- ----------------------------------------------------------------------------------------------------------------------------
Weighted-Average Number of Common Shares 268.4 264.6
Dilutive Potential Common Shares 5.2 5.0
- ----------------------------------------------------------------------------------------------------------------------------
17
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
NOTE 14. SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------------------------------------------
The effect of exchange rate changes on cash and cash equivalents was not
material. Cash payments for interest and taxes were as follows:
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
--------------------------
(Dollars in millions) 2005 2004
- ----------------------------------------------------------------------------------------------------------------------------
Interest $ 17 $ 13
Taxes 26 19
- ----------------------------------------------------------------------------------------------------------------------------
In first quarter fiscal year 2006, the company recognized noncash transactions
related to acquisitions. See Note 3 -- Business Combinations -- for details of
liabilities assumed in acquisitions.
NOTE 15. COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
Litigation and Indemnification: Monsanto is defending and prosecuting litigation
in its own name. In addition, Monsanto is defending and prosecuting certain
cases that were brought in Pharmacia's name and for which Monsanto assumed
responsibility under the Separation Agreement (defined below). 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. Information with
respect to these lawsuits appears in Part I -- Item 3 -- Legal Proceedings in
Monsanto's Report on Form 10-K for the fiscal year ended August 31, 2005, and in
Part II -- Item 1 -- Legal Proceedings in this Report on Form 10-Q. While the
ultimate liabilities resulting from such lawsuits may be significant to
profitability in the period recognized, management does not anticipate they will
have a material adverse effect on Monsanto's consolidated financial position or
liquidity, excluding liabilities relating to Solutia.
On Dec. 4, 2000, Monsanto filed suit in the U.S. District Court for the Eastern
District of Missouri for a declaratory judgment against Bayer CropScience AG, a
subsidiary of Bayer AG, and its affiliates that four patents, which had been
assigned to Bayer CropScience by Plant Genetics Systems, N.V. and which involve
claims to truncated Bt technology, were invalid and not infringed by the MON810
corn product contained in YIELDGARD corn. Bayer CropScience counterclaimed to
request royalties for prior sales of YIELDGARD corn and injunctive relief but
later dismissed with prejudice its claims on three of the four patents in
dispute and agreed not to sue Monsanto, its affiliates or its sublicensees under
those patents for any of Monsanto's current commercial products. On Nov. 22,
2005, a jury returned a verdict in Monsanto's favor and determined that MON810
did not infringe the remaining patent at issue and that the patent was invalid.
Monsanto intends to seek recovery from Bayer CropScience of its attorneys' fees
involved in defending against the claims and an appeal will be taken by Bayer to
overturn the trial court's judgment in favor of Monsanto.
Following receipt of a patent relating to bovine growth hormone, on Feb. 17,
2004, the Regents of the University of California (UC) filed suit against
Monsanto in the U.S. District Court for the Northern District of California. As
part of its order construing the terms of patent, the court has ruled that the
claims are extremely broad. UC seeks damages, including a paid-up license, and
an injunction for the alleged infringement of the patent by sales of Monsanto's
POSILAC bovine somatotropin product. Monsanto has strong defenses to these
claims, including non-infringement of the patent, and invalidity on multiple
grounds including lack of enablement. On Dec. 16, 2005, the District Court
granted in part and denied in part motions of the parties for summary judgment.
As a result of numerous contested issues of fact, the case will proceed to jury
trial on Feb. 27, 2006.
Solutia Inc.: The following discussion provides new and updated information
regarding proceedings related to Solutia. Other information with respect to
Solutia matters appears in Monsanto's Report on Form 10-K for the fiscal year
ended Aug. 31, 2005. Pursuant to the Sept. 1, 2000, Separation Agreement between
Monsanto and Pharmacia, as amended (Separation Agreement), Monsanto was required
to indemnify Pharmacia for liabilities that Solutia assumed from Pharmacia under
a Distribution Agreement entered into between those companies in connection with
the spinoff of Solutia on Sept. 1, 1997, as amended (Distribution Agreement), to
the extent that Solutia fails to pay, perform or discharge those liabilities.
18
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
Those liabilities are referred to as "Solutia's Assumed Liabilities." Solutia's
Assumed Liabilities may include, among others, litigation, environmental
remediation, and certain retiree liabilities relating to individuals who were
employed by Pharmacia prior to the Solutia spinoff.
Both immediately prior to and since its Chapter 11 filing, Solutia has failed to
perform its obligations relating to some of Solutia's Assumed Liabilities.
Monsanto believes Solutia is required to meet its obligations unless and until
those obligations are discharged by the Bankruptcy Court. However, in order to
protect Pharmacia's and Monsanto's interests until that issue is resolved,
pursuant to Monsanto's obligation to indemnify Pharmacia and on an interim
basis, Monsanto has assumed the management and defense of certain third-party
tort litigation and funded some of Solutia's environmental obligations. In the
process of managing such litigation and environmental liabilities, and through
Monsanto's involvement in the bankruptcy process, Monsanto determined that it
was probable that Monsanto would incur some expenses related to third-party tort
litigation and environmental liabilities and that the amount of certain of these
expenses could be reasonably estimated. In December 2004, Monsanto determined
that it was appropriate to establish a reserve for such expenses based on the
best estimates by Monsanto's management with input from its legal and other
outside advisors. Accordingly, a charge in the amount of $284 million (the
"Solutia-related charge" or the "charge") was recorded in Monsanto's first
quarter fiscal 2005 results. As of Nov. 30, 2005, $232 million was recorded in
the Condensed Statement of Consolidated Financial Position ($49 million in
current liabilities and $183 million in other liabilities).
Monsanto believes that the Solutia-related charge represents the discounted cost
that Monsanto would expect to incur in connection with these litigation and
environmental matters. Monsanto expects to pay for these potential liabilities
over time as the various legal proceedings are resolved and remediation is
performed at the various environmental sites. Actual costs to Monsanto may
differ materially from this estimate. Further, additional litigation or
environmental matters that are not reflected in the charge may arise in the
future, and Monsanto may also manage, settle, or pay judgments or damages with
respect to litigation or environmental matters in order to mitigate contingent
potential liability and protect Pharmacia and Monsanto, if Solutia refuses to do
so.
Receivables of $64 million were recorded as of Nov. 30, 2005 ($27 million was
recorded in miscellaneous receivables and $37 million was recorded in other
assets), for the anticipated insurance reimbursement of a portion of the $150
million and $400 million settlement amounts paid by Monsanto during August and
September 2003. Monsanto expects these receivables to be paid over three years,
in quarterly installments which began in March 2005.
In addition to the Solutia-related charge, Monsanto has incurred legal and other
costs related to the Chapter 11 proceeding and its Solutia-related
indemnification obligations to Pharmacia. These costs are expensed as incurred,
because the potential future costs to Monsanto to protect its interests cannot
be reasonably estimated. The legal and other costs, together with the
Solutia-related charge recorded in first quarter 2005, are reflected in the
Statement of Consolidated Operations as Solutia-related expenses.
The degree to which Monsanto may ultimately be responsible for the particular
matters reflected in the charge or other of Solutia's Assumed Liabilities or
Solutia-related expenses is uncertain, although, as described in Monsanto's
Report on Form 10-K for the fiscal year ended Aug. 31, 2005, Monsanto announced
on June 7, 2005, that it had reached an agreement in principle with Solutia and
the Official Committee of Unsecured Creditors for a proposal for Solutia's
reorganization. Solutia has not filed a plan of reorganization, and thus any
projection of the outcome of Monsanto's claims remains uncertain, but it is
possible that Monsanto could receive equity in any reorganized Solutia in
satisfaction or partial satisfaction of Monsanto's claims. However, discussions
between and among the various parties involved in the Solutia bankruptcy are
continuing, and any formal reorganization plan must ultimately be affirmed by
several constituencies and the Bankruptcy Court.
On Dec. 16, 2005, Solutia filed a complaint against Pharmacia and Monsanto to
recover alleged preferential transfers from Monsanto and avoid the transfers of
certain liabilities allegedly fraudulently transferred to Solutia by Pharmacia
and Monsanto. This complaint was filed by Solutia prior to a two-year statutory
deadline from Solutia's Chapter 11 petition date (Dec. 17, 2003) to preserve
rights, if any, of Solutia's bankruptcy estate. Concurrent with this filing,
Solutia announced that (i) it filed this action to preserve the legal rights of
Solutia's bankruptcy estate; (ii) Solutia has made no decision to pursue this
action; and (iii) Solutia remains committed to the agreement in principle
announced on June 7, 2005. The complaint is redundant in many respects to other
pending actions filed against Monsanto and Pharmacia by other constituents in
the case (including the Official Committee of Equity Security Holders and the
Official Committee of Retirees). Monsanto remains committed to the agreement in
19
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
principle which would render this complaint moot if the agreement in principle
becomes effective and binding.
Solutia Environmental Obligations: Included in the Solutia-related charge are
amounts related to certain of Solutia's environmental liabilities, particularly
expenses for environmental remediation of sites Solutia never owned or operated
and sites beyond the property lines of Solutia's current or former operations.
The following discussion updates information regarding the significant
environmental matters reflected in the Solutia-related charge. Other information
with respect to such matters appears in Monsanto's Report on Form 10-K for the
fiscal year ended Aug. 31, 2005.
On behalf of Pharmacia, Monsanto is a party to performing various remedial
activities at the IndustriPlex site in Woburn, Massachusetts. In January 2006,
the EPA is expected to publish a Record of Decision identifying additional
remedial work it anticipates for the Aberjona River which is downstream of the
IndustriPlex Site. It is unclear what Monsanto's responsibilities on Pharmacia's
behalf will be for that additional remedial work.
On Aug. 4, 2003, the U.S. District Court for the Northern District of Alabama
approved a Revised Partial Consent Decree (RPCD), pursuant to which Pharmacia
and Solutia are obligated to perform PCB residential cleanup work and a remedial
investigation/feasibility study of PCB contamination in Anniston, among other
things. Based on Solutia's failure to perform, on March 25, 2004, Monsanto,
acting on behalf of Pharmacia, entered into an arrangement with the EPA and
Solutia to perform certain environmental obligations at the Anniston, Alabama,
and Sauget, Illinois, sites under the RPCD and other orders where both Solutia
and Pharmacia are named parties. As a part of this arrangement, Monsanto has
agreed with the EPA to perform certain remediation in Anniston and Sauget until
Monsanto invokes a 60-day notice of termination provision, which Monsanto has
not invoked. By letter dated Dec. 29, 2005, the EPA notified Pharmacia and
Solutia of a demand for penalties amounting to $1.4 million as of that date,
based on alleged failure to comply with the Anniston RPCD. Monsanto believes
that Pharmacia is in full compliance with the RPCD, and will contest these
penalties on Pharmacia's behalf.
Guarantees: As disclosed in Monsanto's Report on Form 10-K for the fiscal year
ended Aug. 31, 2005, Monsanto provides guarantees to certain banks that provide
loans to Monsanto customers in Brazil. Due to the seasonal nature of Monsanto's
business and increased customer participation in the loan programs, the level of
customer loans with these banks and related Monsanto guarantees has increased
since Aug. 31, 2005. As a result, the maximum potential amount of future
payments under these guarantees was $113 million as of Nov. 30, 2005. Based on a
current assessment of credit exposure, Monsanto has recorded a liability of $2
million related to these guarantees. Monsanto's recourse under these guarantees
is limited to the customer, and it is not currently estimable.
Except as described above, there have been no significant changes to guarantees
made by Monsanto since Aug. 31, 2005. Disclosures regarding these guarantees
made by Monsanto can be found in Note 23 -- Commitments and Contingencies -- of
the notes to the consolidated financial statements contained in Monsanto's
Report on Form 10-K for the fiscal year ended Aug. 31, 2005. Disclosure
regarding the guarantees Monsanto provides for certain customer loans in the
United States and Brazil can be found in Note 5 -- Customer Financing Programs
- -- of this Form 10-Q. Information regarding Monsanto's indemnification
obligations to Pharmacia under the Separation Agreement relating to Solutia's
Assumed Liabilities can be found above.
NOTE 16. SEGMENT INFORMATION
- --------------------------------------------------------------------------------
Operating segments are organized primarily by similarity of products and
aggregated into two reportable segments: Seeds and Genomics, and Agricultural
Productivity. The Seeds and Genomics segment consists of the global seeds and
traits businesses and genetic technology platforms. The Agricultural
Productivity segment consists of the crop protection products, animal
agriculture businesses and lawn-and-garden herbicide products. Sales between
segments were not significant. Certain selling, general and administrative
expenses are allocated between segments primarily by the ratio of segment sales
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 year 2006. Segment data is presented in the table that follows.
20
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
--------------------------
(Dollars in millions) 2005 2004
- ----------------------------------------------------------------------------------------------------------------------------
Net Sales(1)
Corn seed and traits $ 267 $ 227
Soybean seed and traits 173 180
Vegetable and fruit seed(2) 125 --
All other crops seeds and traits 91 61
- ----------------------------------------------------------------------------------------------------------------------------
Total Seeds and Genomics $ 656 $ 468
- ----------------------------------------------------------------------------------------------------------------------------
ROUNDUP and other glyphosate-based herbicides $ 549 $ 435
All other agricultural productivity products 200 169
- ----------------------------------------------------------------------------------------------------------------------------
Total Agricultural Productivity $ 749 $ 604
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 1,405 $ 1,072
- ----------------------------------------------------------------------------------------------------------------------------
EBIT(3)
Seeds and Genomics $ 19 $ 14
Agricultural Productivity 93 (228)
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 112 $ (214)
- ----------------------------------------------------------------------------------------------------------------------------
Depreciation and Amortization Expense
Seeds and Genomics $ 89 $ 63
Agricultural Productivity 44 46
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 133 $ 109
- ----------------------------------------------------------------------------------------------------------------------------
(1) Represents net sales from continuing operations.
(2) Consists of net sales from Seminis, which was acquired by Monsanto in the
third quarter of fiscal year 2005. See Note 3 -- Business Combinations --
for further discussion of the Seminis acquisition.
(3) EBIT is defined as earnings (loss) before interest and taxes; see the
following table for reconciliation. Earnings (loss) is intended to mean net
income (loss) as presented in the Statement of Consolidated Operations
under generally accepted accounting principles. EBIT is the primary
operating performance measure for the two business segments.
A reconciliation of EBIT to net income (loss) for each quarter follows:
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
--------------------------
(Dollars in millions) 2005 2004
- ----------------------------------------------------------------------------------------------------------------------------
EBIT $ 112 $ (214)
Interest Expense -- Net 18 16
Income Tax Provision (Benefit)(1) 35 (190)
- ----------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 59 $ (40)
- --------------------------------------------------------------------------------------------------==========================
(1) Includes the income tax provision (benefit) from continuing operations and
the income tax benefit on discontinued operations.
NOTE 17. DISCONTINUED OPERATIONS
- --------------------------------------------------------------------------------
Environmental technologies businesses: In second quarter 2005, Monsanto
committed to a plan to sell Enviro-Chem Systems, Inc. ("Enviro-Chem" or the
"environmental technologies businesses") that met the "held for sale" criteria
under SFAS 144. The environmental technologies businesses provided engineering,
procurement and construction management services, and sold proprietary equipment
and process technologies. The environmental technologies businesses were
previously reported as part of the Agricultural Productivity segment. The
company determined that these businesses were no longer consistent with its
strategic business goals. In August 2005, the company completed the sale of
substantially all of Enviro-Chem to a new company formed by the management of
the businesses and an outside investor.
In April 2001, Enviro-Chem entered into an agreement with a third party related
to the engineering, design and construction of a power generation plant in
Oregon. As of the date of the divestiture, the receivable related to this power
plant and related fixed assets had not been collected. The title to the
receivable was transferred to the buyer of Enviro-Chem, and the buyer entered
into an agreement with Monsanto in August 2005 to remit the proceeds of this
receivable to Monsanto upon repayment by the third party. As such, the
receivable that the third party owed to Enviro-Chem has been recorded as an
asset of discontinued operations as of Nov. 30, 2005, and Aug. 31, 2005. The
company evaluated the carrying amount of the receivable as of Aug. 31, 2005, and
21
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
recorded a $4 million after-tax charge in discontinued operations to adjust the
receivable to fair value based on a third-party valuation. As of Nov. 30, 2005,
and Aug. 31, 2005, the miscellaneous receivable of $10 million was recorded as
an asset of discontinued operations. As of Aug. 31, 2005, this receivable had a
related deferred tax asset of $5 million recorded as an asset of discontinued
operations. As of Nov. 30, 2005, this receivable had a deferred tax liability of
$4 million recorded as a liability of discontinued operations due to
management's decision to include this receivable as part of the disposition for
income tax purposes. Monsanto expects that it will collect the outstanding
receivable balance in fiscal year 2006.
As of Aug. 31, 2005, liabilities of discontinued operations consisted of $6
million for the resolution of a purchase price adjustment and an accrual of $5
million for the resolution of a warranty obligation that was related to the
operations of the environmental technologies businesses prior to its disposal.
In first quarter 2006, Monsanto resolved and paid $6 million for the purchase
price adjustment and $5 million for the warranty obligation.
European wheat and barley business and plant-made pharmaceuticals program: As
discussed earlier in Note 4 -- Restructuring, in October 2003, Monsanto
announced plans to exit the European breeding and seed business for wheat and
barley and to discontinue the plant-made pharmaceuticals program. The European
wheat and barley business and plant-made pharmaceuticals program were previously
reported as part of the Seeds and Genomics segment. In fiscal year 2004, the
sale of assets associated with the European wheat and barley business to RAGT
Genetique, S.A. in Rodez, France, was finalized.
The divestiture also generated a tax loss that was recognized as a tax benefit
in the United States. In first quarter 2005, Monsanto recorded a deferred tax
benefit of $106 million, $20 million in continuing operations and the remaining
$86 million in discontinued operations. The tax benefit of $86 million recorded
in discontinued operations was related primarily to the wheat reporting unit
goodwill impairment loss at the date of adoption of SFAS 142 on Jan. 1, 2002,
which was recorded as a cumulative effect of a change in accounting principle.
See Note 4 for discussion of the $20 million tax benefit recorded in continuing
operations and Note 8 -- Income Taxes -- for further discussion of the tax
benefit.
As a result of the plans to sell the three businesses discussed above, certain
financial data for these businesses has been presented as discontinued
operations in accordance with SFAS 144. Accordingly, for first quarter 2006 and
first quarter 2005 the Statement of Consolidated Operations has been conformed
to this presentation. As of Nov. 30, 2005, and Aug. 31, 2005, the Statement of
Consolidated Financial Position has been conformed to this presentation. The
remaining assets and liabilities of the environmental technologies businesses as
of Nov. 30, 2005, and Aug. 31, 2005, follow:
- ----------------------------------------------------------------------------------------------------------------------------
As of Nov. 30, As of Aug. 31,
------------- -------------
(Dollars in millions) 2005 2005
- ----------------------------------------------------------------------------------------------------------- -------------
Assets of Discontinued Businesses Held for Sale:
Miscellaneous receivables $ 10 $ 10
Deferred tax assets -- 5
- ----------------------------------------------------------------------------------------------------------- -------------
Total Assets of Discontinued Businesses Held for Sale $ 10 $ 15
- ----------------------------------------------------------------------------------------------============= =============
Liabilities of Discontinued Businesses Held for Sale:
Current liabilities $ 4 $ 11
- ----------------------------------------------------------------------------------------------------------- -------------
Total Liabilities of Discontinued Businesses Held for Sale $ 4 $ 11
- ----------------------------------------------------------------------------------------------============= =============
The following amounts related to the environmental technologies businesses,
European wheat and barley business and the plant-made pharmaceuticals program
have been segregated from continuing operations and reflected as discontinued
operations:
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
----------------------------------
(Dollars in millions) 2005 2004
- ----------------------------------------------------------------------------------------------------------- ----------------
Net Sales $ -- $ 41
Income (Loss) from Operations of Discontinued Businesses -- --
Income Tax Benefit -- (86)
- ----------------------------------------------------------------------------------------------------------- ----------------
Net Income on Discontinued Operations $ -- $ 86
- ------------------------------------------------------------------------------------------================= ================
22
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
Background
Monsanto Company, along with its subsidiaries, is a global provider of
agricultural products for farmers. We produce leading seed brands, including
DEKALB, ASGROW, SEMINIS and STONEVILLE, and we develop biotechnology traits that
assist farmers in controlling insects and weeds. We provide other seed companies
with genetic material and biotechnology traits for their seed brands. We also
manufacture ROUNDUP brand herbicides and other herbicides. Our seeds,
biotechnology trait products and herbicides provide growers with solutions that
improve productivity, reduce the costs of farming, and produce healthier foods
for consumers and better feed for animals. We also provide lawn-and-garden
herbicide products for the residential market and animal agricultural products
focused on improving dairy cow productivity and swine genetics.
We manage our business in two segments: Seeds and Genomics, and Agricultural
Productivity. The Seeds and Genomics segment consists of the global seeds and
traits businesses, and genetic technology platforms. The Agricultural
Productivity segment consists of our crop protection products (ROUNDUP and other
glyphosate-based herbicides and selective chemistries), animal agriculture
businesses and lawn-and-garden herbicide products.
In second quarter 2005, we committed to a plan to sell the environmental
technologies businesses, and in fourth quarter 2005, we sold substantially all
of these businesses. In fiscal year 2004, we announced plans to exit the
European breeding and seed business for wheat and barley and to discontinue the
plant-made pharmaceuticals program, and we sold the assets associated with our
European wheat and barley business. As a result of these exit plans, financial
data for these businesses have been presented as discontinued operations as
outlined below. The financial statements have been recast and prepared in
compliance with the provisions of Statement of Financial Accounting Standard
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS 144). Accordingly, for the three months ended Nov. 30, 2005, and Nov. 30,
2004, the Statement of Consolidated Operations has been conformed to this
presentation. Also, under the guidance of SFAS 144, the remaining assets and
liabilities of the environmental technologies businesses have been separately
presented on the Condensed Statement of Consolidated Financial Position as of
Nov. 30, 2005, and Aug. 31, 2005. The European wheat and barley business and the
plant-made pharmaceuticals program were previously reported as part of the Seeds
and Genomics segment, and the environmental technologies businesses were
previously reported as part of the Agricultural Productivity segment. See Item 1
- -- Note 17 -- Discontinued Operations -- for further details.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) should be read in conjunction with Monsanto's consolidated
financial statements and the accompanying notes. This Report on Form 10-Q should
also be read in conjunction with Monsanto's Report on Form 10-K for the fiscal
year ended Aug. 31, 2005. Financial information for the first three months of
fiscal year 2006 should not be annualized because of the seasonality of our
business. The notes to the consolidated financial statements referred to
throughout this MD&A are included in Part I -- Item 1 -- Financial Statements --
of this Report on Form 10-Q. Unless otherwise indicated, "Monsanto," the
"company," "we," "our" and "us" are used interchangeably to refer to Monsanto
Company or to Monsanto Company and its consolidated subsidiaries, as appropriate
to the context. Monsanto includes the operations, assets and liabilities that
were previously the agricultural business of Pharmacia Corporation, which is now
a subsidiary of Pfizer Inc. Unless otherwise indicated, "earnings (loss) per
share" and "per share" mean diluted earnings (loss) per share. Unless otherwise
indicated, in MD&A, all dollar amounts are expressed in millions, except per
share amounts. Unless otherwise noted, all amounts and analyses are based on
continuing operations. Unless otherwise indicated, 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
herbicides, excluding all lawn-and-garden herbicides, and references to "ROUNDUP
and other glyphosate-based herbicides" exclude all lawn-and-garden herbicides.
Non-GAAP Financial Measures
MD&A includes financial information prepared in accordance with U.S. generally
accepted accounting principles (GAAP), as well as two other financial measures,
EBIT and free cash flow, that are considered "non-GAAP financial measures."
Generally, a non-GAAP financial measure is a numerical measure of a company's
financial performance, financial position or cash flows that exclude (or
include) amounts that are included in (or excluded from) the most directly
comparable measure calculated and presented in accordance with GAAP. The
23
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
presentation of EBIT and free cash flow information is intended to supplement
investors' understanding of our operating performance and liquidity. Our EBIT
and free cash flow measures may not be comparable to other companies' EBIT and
free cash flow measures. Furthermore, these measures are not intended to replace
net income (loss), cash flows, financial position, or comprehensive income
(loss), as determined in accordance with U.S. GAAP.
EBIT is defined as earnings (loss) before interest and taxes. Earnings (loss) is
intended to mean net income (loss) as presented in the Statement of Consolidated
Operations under GAAP. EBIT is the primary operating performance measure for our
two business segments. We believe that EBIT is useful to investors and
management to demonstrate the operational profitability of our segments by
excluding interest and taxes, which are generally accounted for across the
entire company on a consolidated basis. EBIT is also one of the measures used by
Monsanto management to determine resource allocations within the company. See
Note 16 -- Segment Information -- for a reconciliation of EBIT to net income
(loss) for the three months ended Nov. 30, 2005, and Nov. 30, 2004.
We also provide information regarding free cash flow, an important liquidity
measure for Monsanto. We define free cash flow as the total of net cash provided
or required by operations and provided or required by investing activities. We
believe that free cash flow is useful to investors and management as a measure
of the ability of our business to generate cash. This cash can be used to meet
business needs and obligations, to reinvest in the company for future growth, or
to return to our shareowners through dividend payments or share repurchases.
Free cash flow is also used by management as one of the performance measures in
determining incentive compensation. See the "Financial Condition, Liquidity, and
Capital Resources -- Cash Flow" section of MD&A for a reconciliation of free
cash flow to net cash provided by operations and net cash provided (required) by
investing activities on the Statement of Consolidated Cash Flows.
Executive Summary
Consolidated Operating Results -- Net sales increased $333 million, or 31
percent, in the three-month comparison as a result of sales from the Seminis
vegetable and fruit seed business that we acquired in March 2005, and increased
sales of ROUNDUP herbicides in the United States, Argentina and Europe, U.S.
corn traits and Australian cotton traits. Net income in first quarter 2006 was
$0.22 per share, compared with a net loss of $0.15 per share in first quarter
2005.
The following factors affected the first quarter 2005 results:
o We recorded an after-tax charge of $181 million ($284 million pretax),
or $0.68 per share, associated with certain liabilities in connection
with the Solutia bankruptcy.
o We recorded a deferred tax benefit of $106 million, or $0.40 per
share, as a result of the loss incurred on the European wheat and
barley business. Of this tax benefit, $20 million was recorded in
continuing operation and $86 million was recorded in discontinued
operations.
Financial Condition, Liquidity, and Capital Resources -- In first quarter 2006,
net cash provided by operations was $773 million, compared with $769 million in
the prior-year quarter. Net cash required by investing activities was $135
million in first quarter 2006, compared with net cash provided by investing
activities of $1 million in first quarter 2005. Free cash flow was $638 million
in first quarter 2006 compared with $770 million in the prior-year quarter. In
first quarter 2005, the timing of the maturities of our short-term investments
was a source of cash of $201 million compared with no maturities in the
current-year quarter. We used cash of $53 million for ASI's acquisition of five
regional seed companies in first quarter 2006. In first quarter 2005, we used
cash of $158 million for the Advanta acquisition and ASI's acquisition of
Channel Bio.
Outlook -- We have evolved to a company led by its strengths in plant breeding,
seeds and biotechnology traits as a means of delivering value to our customers.
We aim to continually improve our products in order to maintain market
leadership and to support near-term performance. We are focused on applying
innovation and technology to make our farmer customers more productive and
profitable by improving the ways they can produce food, fiber and feed. We use
the tools of modern biology to make seeds easier to grow, to allow farmers to do
more with fewer resources, and to produce healthier foods for consumers and
better feed for animals. Our current research-and-development strategy and
commercial priorities are focused on bringing our farmer customers
second-generation traits, on delivering multiple solutions in one seed
("stacking"), and on developing new pipeline products. We aspire to bring new
solutions to our customers' unmet needs, for example, crops with improved oil
and protein composition or with drought tolerance. Our capabilities in
24
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
biotechnology and breeding research are generating a rich product pipeline that
is expected to drive long-term growth. Our biotechnology and trait pipeline is
focused on products that provide beneficial genetic traits to enhance plants'
growth or to provide nutritional or other benefits to farmers, food and feed
processors, or consumers. The viability of our product pipeline depends in part
on the speed of regulatory approvals globally, and on continued patent and legal
rights to offer our products. As a key determinant of our ability to launch new
products, we have focused on aspects of the process we can control. We also
continue to focus on different sales and distribution opportunities for our
products.
In fiscal year 2005, we completed the acquisitions of Advanta, Seminis and
Emergent and formed American Seeds, Inc., which acquired Channel Bio and NC+
Hybrids. In first quarter 2006, ASI acquired five regional U.S. seed companies.
Seminis is well positioned to capitalize on the fast-growing vegetable and fruit
segment of the agriculture industry, and the acquisition expands our ability to
grow. We aim to improve and to grow the Seminis business by applying our
molecular breeding and marker capabilities to its library of vegetable and fruit
germplasm. Further, the addition of Emergent completes a strategic cotton
germplasm and traits platform modeled on our branded and licensing strategies
for corn and soybeans. Over the next year, we plan to focus on accelerating the
potential growth of these new businesses and executing our business plan.
ROUNDUP herbicides remain the market leader. We are focused on optimizing the
supply chain and managing the costs associated with our agricultural chemistry
business as that sector matures globally. The mix of our glyphosate products
sold reflects the increased competitive dynamics of the marketplace.
We are required to indemnify Pharmacia for Solutia's Assumed Liabilities
(defined in Note 15), to the extent that Solutia fails to pay, perform or
discharge those liabilities. Prior to and following its filing for bankruptcy
protection, Solutia has disclaimed responsibility for some of Solutia's Assumed
Liabilities. See Note 15 for further details. Accordingly, in first quarter
2005, we recorded a pre-tax charge of $284 million for estimated litigation and
environmental costs we expect to incur in connection with Solutia's bankruptcy.
The charge may not reflect all potential liabilities that we may incur in
connection with Solutia's bankruptcy and does not reflect any insurance
reimbursement or any recoveries we might receive through the bankruptcy process.
See the "Outlook" section of MD&A for a more detailed discussion of certain of
the opportunities, challenges and risks we have identified for our business.
25
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS -- FIRST QUARTER FISCAL YEAR 2006
- -------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
---------------------------
2005 2004 % Change
- -----------------------------------------------------------------------------------------------------------------------------
Net Sales $ 1,405 $ 1,072 31%
Gross Profit 634 491 29%
Operating Expenses:
Selling, general and administrative expenses 350 266 32%
Research and development expenses 168 119 41%
Acquired in-process research and development (see Note 3) -- 12 (100)%
Restructuring charges -- 1 (100)%
- -----------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 518 398 30%
- -----------------------------------------------------------------------------------------------------------------------------
Income from Operations 116 93 25%
Interest expense 32 25 28%
Interest income (14) (9) 56%
Solutia-related expenses (see Note 15) 6 284 (98)%
Other expense (income) -- net (2) 23 (109)%
- -----------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations Before Income Taxes 94 (230) 141%
Income tax provision (benefit) 35 (104) 134%
- -----------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations 59 (126) 147%
Discontinued Operations:
Income (loss) from operations of discontinued businesses -- -- --
Income tax benefit -- (86) 100%
- -----------------------------------------------------------------------------------------------------------------------------
Income on Discontinued Operations -- 86 100%
- -----------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 59 $ (40) 248%
- --------------------------------------------------------------------------------------------------===========================
Diluted Earnings (Loss) per Share:
Income (loss) from continuing operations $ 0.22 $ (0.48) 146%
Income on discontinued operations -- 0.33 (100)%
- -----------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 0.22 $ (0.15) 247%
- --------------------------------------------------------------------------------------------------===========================
Effective Tax Rate (continuing operations) 37% 45%
Comparison as a Percent of Net Sales:
Gross profit 45% 46%
Selling, general and administrative expenses 25% 25%
Research and development expenses (excluding acquired IPR&D) 12% 11%
Total operating expenses 37% 37%
Income (loss) from continuing operations before income taxes 7% (21)%
Net income (loss) 4% (4)%
The following explanations discuss the significant components of our results of
operations that affected the quarter-to-quarter comparison of our first quarter
income from continuing operations:
Net sales increased 31 percent in first quarter 2006 from the same quarter a
year ago. Our Seeds and Genomics segment net sales improved 40 percent and our
Agricultural Productivity segment net sales improved 24 percent. The following
table presents the percentage changes in first quarter 2006 worldwide net sales
by segment compared with the prior-year quarter, including the effect volume,
price, currency and acquisitions had on these percentage changes:
- ----------------------------------------------------------------------------------------------------------------------------
First Quarter 2006 Percentage Change in Net Sales vs. First Quarter 2005
----------------------------------------------------------------------------------------------
Impact of
Volume Price Currency Subtotal Acquisitions(1) Net Change
----------------------------------------------------------------------------------------------
Seeds and Genomics Segment 2% 8% 3% 13% 27% 40%
Agricultural Productivity
Segment 26% (7)% 5% 24% -- 24%
Total Monsanto Company 16% (1)% 4% 19% 12% 31%
- ----------------------------------------------------------------------------------------------------------------------------
(1) See Note 3 -- Business Combinations -- and "Financial Condition, Liquidity,
and Capital Resources" in MD&A for details of our acquisitions in fiscal
years 2006 and 2005. Acquisitions are segregated in this presentation for
one year from the acquisition date.
26
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
For a more detailed discussion of the factors affecting the net sales
comparison, see the "Seeds and Genomics Segment" and the "Agricultural
Productivity Segment" sections.
Gross profit increased 29 percent in the three-month comparison. Total company
gross profit as a percent of net sales decreased 1 percentage point to 45
percent in first quarter 2006.
o Gross profit as a percent of sales for the Seeds and Genomics segment
decreased 1 percentage point in the quarter-over-quarter comparison to
59 percent. Amortization of inventory step-up was $11 million for the
Seminis acquisition, which negatively affected gross profit as a
percent of sales. An inventory step-up is a purchase accounting
requirement to write-up inventory to its market value at the time the
acquisition is completed. Until the acquired inventory is sold, we
earn less gross profit on our sales for the acquired businesses.
o Gross profit as a percent of sales declined 2 percentage points for
the Agricultural Productivity segment to 33 percent in first quarter
2006 because of lower average net selling prices of our branded U.S.
glyphosate-based herbicides due to a mix shift to our lower-priced
branded products and an August 2005 price reduction for certain
branded herbicides. Also, as a result of the hurricanes in August and
September 2005, we experienced slightly higher cost of goods sold for
U.S. ROUNDUP herbicides due to volume variances and higher conversion
costs. As a percent of net sales, POSILAC gross profit declined in the
three-month comparison because of increased cost of goods sold
primarily driven by actions implemented to further reduce bulk powder
production to better manage working capital. A favorable mix and a
price increase for our U.S. acetanilide-based herbicides coupled with
first quarter 2005 portfolio rationalization of other selective
herbicides in Argentina somewhat offset these factors.
Operating expenses increased 30 percent, or $120 million, in first quarter 2006
from the prior-year comparable quarter. In the three-month comparison, selling,
general and administrative (SG&A) expenses increased 32 percent and research and
development (R&D) expenses increased 41 percent primarily because of expenses
for the businesses we acquired in 2005, largely Seminis and, to a lesser extent,
ASI's acquisitions of Channel Bio and NC+ Hybrids, and Emergent. Further, in
first quarter 2006, we began to expense stock options in accordance with SFAS
123R; accordingly, we recorded $7 million in SG&A expenses and $2 million in R&D
expenses (see Note 11 -- Stock-Based Compensation). As a percent of net sales,
SG&A expenses were 25 percent in both three-month periods, and R&D expenses
increased 1 percentage point to 12 percent in first quarter 2006. Lastly, in
first quarter 2005, we recorded charges of $12 million related to the
acquisitions of Channel Bio and Advanta for the write-off of acquired in-process
R&D (IPR&D). Management believed the technological feasibility of the acquired
IPR&D was not established and that the research had no alternative future uses.
Accordingly, the amounts allocated to IPR&D were required to be expensed
immediately under generally accepted accounting principles.
Interest expense increased $7 million in the three-month comparison because of
higher interest payments related to the 5 1/2% 2035 Senior Notes we issued in
July 2005 and interest paid on commercial paper outstanding in first quarter
2006. There was no commercial paper outstanding in first quarter 2005.
Interest income increased $5 million in the quarter-over-quarter comparison
because of higher average cash balances in first quarter 2006 and interest
earned on short-term investments in the United States.
In first quarter 2005, we recorded a Solutia-related charge of $284 million
pretax in anticipation of certain litigation and environmental liabilities
reverting to Pharmacia, and by extension, to Monsanto. This charge was based on
the best estimates by our management with input from our legal and other outside
advisors. Discussions between and among the various parties involved in the
Solutia bankruptcy will continue for some time, and a formal reorganization plan
must ultimately be affirmed by several constituencies and the bankruptcy court.
We believe that this charge, based on what is known at the time of filing this
report, represents the estimated discounted cost that we would expect to incur
in connection with these litigation and environmental matters. However, actual
costs to the company may be materially different from this estimate. See Note 15
- -- Commitments and Contingencies -- for further details.
Other income -- net was $2 million in first quarter 2006, compared with other
expense -- net of $23 million in first quarter 2005. In first quarter 2006, we
recorded foreign-currency transaction gains of $7 million compared with
foreign-currency transaction losses of $3 million in first quarter 2005. In
first quarter 2005, we established a $15 million reserve for legal proceedings
(unrelated to Solutia's Assumed Liabilities) that we believed were probable and
reasonably estimable as of Nov. 30, 2004.
Income tax provision was $35 million in first quarter 2006, compared with an
income tax benefit of $104 million in the prior-year quarter. The effective tax
rate decreased to 37 percent from 45 percent in first quarter 2005. First
27
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
quarter 2006 includes a charge to establish a reserve for tax exposures in
Brazil. The prior-year quarter includes a tax benefit of $20 million in
continuing operations as a result of the loss incurred on the European wheat and
barley business (see the discontinued operations discussion in this section and
Note 8 -- Income Taxes). The first quarter 2005 effective tax rate was also
affected by the $284 million Solutia-related charge and the $12 million
nondeductible IPR&D write-off. Without these items, our effective tax rate would
have been somewhat higher in first quarter 2006 compared to first quarter 2005.
This increase was driven by a shift in Monsanto's projected earnings mix to
higher tax rate jurisdictions, primarily the United States.
The factors above explain the change in income (loss) from continuing
operations. In first quarter 2005, we recorded income on discontinued operations
of $86 million. As discussed in Note 8, the sale of the European wheat and
barley business in fiscal year 2004 generated a tax loss deductible in either
the United Kingdom or the United States. As of Aug. 31, 2004, a deferred tax
asset had not been recorded for the tax loss incurred in the United States
because of the existence of a number of uncertainties. These uncertainties
diminished with the enactment of the American Jobs Creation Act of 2004 (AJCA)
on Oct. 22, 2004. As a result, Monsanto recorded a deferred tax benefit of $106
million, or $0.40 per share, in first quarter 2005. Of this tax benefit, $20
million was recorded in continuing operations, and the remaining $86 million was
recorded in discontinued operations. The tax benefit of $20 million recorded in
continuing operations was related to the $69 million goodwill impairment related
to our global wheat business recorded in continuing operations in fiscal year
2004. Since the goodwill impairment was recorded in continuing operations, the
related tax benefit was also recorded in continuing operations. The tax benefit
of $86 million recorded in discontinued operations was primarily related to the
wheat reporting unit goodwill impairment loss at the date of adoption of SFAS
142 on Jan. 1, 2002, which was recorded as a cumulative effect of a change in
accounting principle. The recognition of this tax benefit in the United States
effectively precludes Monsanto from claiming any U.K. benefit for the U.K. tax
loss. Accordingly, the U.K. deferred tax asset of $71 million, which had a full
valuation allowance against it, was written off during the quarter ended Nov.
30, 2004.
SEEDS AND GENOMICS SEGMENT
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
---------------------------------
2005 2004 % Change
- ----------------------------------------------------------------------------------------------------------------------------
Net Sales
Corn seed and traits $ 267 $ 227 18%
Soybean seed and traits 173 180 (4)%
Vegetable and fruit seed 125 -- NM
All other crops seeds and traits 91 61 49%
- ----------------------------------------------------------------------------------------------------------------------------
Total Net Sales $ 656 $ 468 40%
- -------------------------------------------------------------------------------------------=================================
Gross Profit
Corn seed and traits $ 153 $ 128 20%
Soybean seed and traits 114 115 (1)%
Vegetable and fruit seed 63 -- NM
All other crops seeds and traits 56 39 44%
- ----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit $ 386 $ 282 37%
- -------------------------------------------------------------------------------------------=================================
EBIT(1) $ 19 $ 14 36%
- ----------------------------------------------------------------------------------------------------------------------------
NM = Not Meaningful
(1) EBIT is defined as earnings (loss) before interest and taxes. Interest and
taxes are recorded on a total company basis. We do not record these items
at the segment level. See Note 16 -- Segment Information and the "Overview
-- Non-GAAP Financial Measures" section of MD&A for further details.
Seeds and Genomics Financial Performance -- First Quarter Fiscal Year 2006
Net sales of corn seed and traits increased 18 percent, or $40 million, in the
three-month comparison. Higher sales of U.S. corn traits drove the increase. In
first quarter 2006, our U.S. trait mix was favorable because of sales of our
triple-stack product, YIELDGARD Plus with ROUNDUP READY Corn 2. In 2005, our
YIELDGARD Plus with ROUNDUP READY Corn 2 product was not available for sale
until second quarter. Sales of our U.S. corn traits also improved because of
increased trait penetration in our branded, licensed and ASI channels, higher
sales volume of branded traits due to market share gain and timing of seed
shipments, and favorable ROUNDUP Rewards claim adjustments related to 2005. Our
corn seed sales increased modestly in the three-month comparison. Higher corn
seed sales in Mexico and Brazil were nearly offset by lower corn seed sales in
South Africa.
In first quarter 2006, vegetable and fruit seed net sales of $125 million
represented nearly 20 percent of total Seed and Genomics net sales. In March
2005, we acquired Seminis Inc., the leading global vegetable and fruit seed
company.
28
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
All other crops seed and trait net sales increased 49 percent, or $30 million,
in first quarter 2006 primarily because of higher cotton trait sales in
Australia. In the three-month comparison, our cotton trait sales mix consisted
of a higher percentage of the BOLLGARD II with ROUNDUP READY cotton stacked
offering. Planted cotton acres in Australia declined slightly in first quarter
2006 compared with first quarter 2005, but our sales volume increased in the
three-month comparison because of increased trait penetration. In 2006, we
expect that Australian cotton growers are using a Monsanto trait on
approximately 90 percent of cotton acres planted compared with approximately 78
percent in the 2005 season.
EBIT for the Seeds and Genomics segment increased $5 million to $19 million in
first quarter 2006. The sales increases discussed throughout this section
resulted in $104 million higher gross profit in first quarter 2006. Gross profit
as a percent of sales for this segment decreased 1 percentage point in the
quarter-over-quarter comparison to 59 percent primarily because of the
amortization of the inventory step-up related to the Seminis acquisition of $11
million. In the three-month comparison, increased SG&A and R&D expenses related
to the 2005 acquisitions offset the gross profit improvement.
AGRICULTURAL PRODUCTIVITY SEGMENT
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
----------------------------------
2005 2004 % Change
- -----------------------------------------------------------------------------------------------------------------------------
Net Sales
ROUNDUP and other glyphosate-based herbicides $ 549 $ 435 26%
All other agricultural productivity products 200 169 18%
- -----------------------------------------------------------------------------------------------------------------------------
Total Net Sales $ 749 $ 604 24%
- -------------------------------------------------------------------------------------------==================================
Gross Profit
ROUNDUP and other glyphosate-based herbicides $ 182 $ 151 21%
All other agricultural productivity products 66 58 14%
- -----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit $ 248 $ 209 19%
- -------------------------------------------------------------------------------------------==================================
EBIT(1) $ 93 $ (228) 141%
- -----------------------------------------------------------------------------------------------------------------------------
(1) EBIT is defined as earnings (loss) before interest and taxes. Interest and
taxes are recorded on a total company basis. We do not record these items
at the segment level. See Note 16 -- Segment Information and the "Overview
-- Non-GAAP Financial Measures" section of MD&A for further details.
Agricultural Productivity Financial Performance -- First Quarter Fiscal
Year 2006
Net sales of ROUNDUP and other glyphosate-based herbicides increased 26 percent,
or $114 million, in the quarter-to-quarter comparison. In the three-month
comparison, sales volumes of ROUNDUP herbicides increased significantly in the
United States, Argentina and Europe. The net average selling price of ROUNDUP
herbicides declined primarily because of a shift in mix to our lower-priced
branded herbicides in the United States coupled with U.S. and Brazilian price
reductions for certain branded products in the three-month comparison. Also, the
Brazilian real exchange rate favorably impacted our first quarter 2006 sales. In
fiscal year 2005, the supply of generic glyphosate from China continued to grow
somewhat, but because of major energy and raw material shortages, it was
generally supplied at higher prices. The tight supply and higher Chinese prices
provided greater pricing flexibility outside of the United States to everyone in
the industry. Recently, the Chinese price has softened from the peak observed
earlier in 2005 to the average prices recorded over the 2003-2004 period.
In 2005, we made logistical changes that aligned inventory levels of ROUNDUP
herbicides in the United States closer to market demand. We continue to optimize
the supply chain to improve our working capital. As a result of these actions,
the sales volume of U.S. ROUNDUP herbicides increased in first quarter 2006,
even though branded glyphosate herbicide inventories in the U.S. distribution
channel were at similar levels at both Nov. 30, 2005, and Nov. 30, 2004. In the
three-month comparison, the average net selling price of our U.S. branded
glyphosate herbicides decreased as a result of a shift of sales volumes to our
lower-priced branded products, particularly ROUNDUP ORIGINAL MAX, and a price
reduction for ROUNDUP WEATHERMAX and RT MASTER that occurred in August 2005.
In the three-month comparison, Argentine sales volume of ROUNDUP herbicides
increased because of a change in distribution strategy and a successful October
2005 launch of the ROUNDUP ULTRAMAX brand. In Argentina, we previously sold our
crop protection products primarily through distributors. In fiscal year 2004, we
changed our Argentine distribution strategy to sell directly to growers. Our
sales were lower in first quarter 2005 compared with first quarter 2006
primarily because Argentine distributors still had some remaining quantities of
our products on hand for sale in first quarter 2005.
29
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
Sales volume of ROUNDUP herbicides increased in Europe, most notably in France,
primarily because of a timing shift between first and second quarters of 2006
compared with 2005. In 2006, sales occurred earlier in France because certain
customers purchased ROUNDUP herbicides prior to the implementation of an ecology
tax on herbicide sales in November 2005.
Sales of ROUNDUP herbicides in Brazil decreased slightly in the
quarter-over-quarter comparison. The average net selling price was lower in
first quarter 2006 because we decreased the price of ROUNDUP herbicides twice
after first quarter 2005 as a result of competitive conditions. The price
decreases also resulted from the appreciation of the Brazilian real because the
local price is tied to the U.S. dollar. Lower prices were nearly offset by the
favorable effect of the Brazilian real exchange rate and a slight increase in
volume.
Sales of all other agricultural productivity products increased 18 percent, or
$31 million, in the quarter-over-quarter comparison. Sales of animal agriculture
products increased primarily because we increased the number of doses allocated
among customers for our POSILAC product four times after first quarter 2005. See
the "Outlook -- Agricultural Productivity" section of MD&A for the background of
the POSILAC product allocation.
EBIT for the Agricultural Productivity segment increased $321 million to income
of $93 million in first quarter 2006. In first quarter 2005, the largest driver
of the negative EBIT was the $284 million Solutia-related charge. Also
contributing to the quarter-over-quarter EBIT improvement was higher gross
profit of $39 million resulting from the net sales increases discussed
throughout this section. Gross profit as a percent of sales for the Agricultural
Productivity segment declined 2 percentage points to 33 percent in first quarter
2006. See the "Results of Operations -- First Quarter Fiscal Year 2006" section
of MD&A for the gross profit discussion for this segment.
Our Agreement with Scotts
In 1998, Former Monsanto entered into an agency and marketing agreement with the
Scotts Miracle-Gro Company (Scotts) with respect to the lawn-and-garden
herbicide business, which was transferred to us in connection with our
separation from Pharmacia. See the "Agricultural Productivity Segment -- Our
Agreement with Scotts" section of MD&A in our Report on Form 10-K for the fiscal
year ended Aug. 31, 2005, for a detailed discussion of this agreement. Under the
agreement, Scotts is obligated to pay us a $20 million fixed fee each year for
the length of the contract to defray costs associated with the lawn-and-garden
herbicide business. Of the total fixed fee that was owed for the first three
years of the agreement, Scotts deferred $40 million and was contractually
required to repay this amount in full, with interest. Beginning in program year
2003 (the program year is defined as October 1 to September 30), Scotts began
paying these deferred amounts ($5 million per year for both the deferred portion
of the fixed fee and interest in monthly installments) plus an accelerated
payment if certain earnings thresholds were achieved, starting with program year
2001. As of Aug. 31, 2005, the total amount owed by Scotts, including accrued
interest, was $44 million. In September 2005, Scotts made an accelerated payment
of $1 million, and in October 2005, Scotts elected to pay us the entire amount
of the deferred payment, including accrued interest, of $43 million. This
payment is reflected in the other items line of the operating activities section
on the Statement of Consolidated Cash Flows.
We are obligated to pay Scotts an annual commission based on the earnings of the
lawn-and-garden herbicide business (before interest and income taxes). The
amount of the commission due to Scotts varies depending on whether or not the
earnings of the lawn-and-garden herbicide business exceed certain thresholds
that vary by program year. The commission expense, which is not netted with any
payments received from Scotts, was $4 million in both first quarter 2006 and
first quarter 2005, and is included in SG&A expenses.
30
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
RESTRUCTURING
- --------------------------------------------------------------------------------
Our results include restructuring activities that affected net income (loss).
Restructuring charges were recorded in the Statement of Consolidated Operations
as follows:
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
---------------------------
(Dollars in millions) 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------
Restructuring Charges(1) $ -- $ (1)
- -----------------------------------------------------------------------------------------------------------------------------
Loss from Continuing Operations Before Income Taxes -- (1)
Income Tax Benefit -- 20
- -----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations -- 19
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $ -- $ 19
- --------------------------------------------------------------------------------------------------===========================
(1) The $1 million of restructuring charges for the three months ended Nov. 30,
2004, was recorded in the Agricultural Productivity segment.
Fiscal Year 2004 Restructuring Plan: In October 2003, we announced plans to
continue to reduce costs primarily associated with our agricultural chemistry
business as that sector matures globally. These plans included: (1) reducing
costs associated with our ROUNDUP herbicide business, (2) exiting the European
breeding and seed business for wheat and barley, and (3) discontinuing the
plant-made pharmaceuticals program. Additionally, the approved plan included a
$69 million impairment of goodwill in the global wheat business. Total
restructuring charges related to these actions were $165 million pretax ($105
million aftertax) in fiscal year 2004 and $6 million pretax in fiscal year 2005.
In first quarter 2005, we recorded restructuring charges of $1 million pretax
related to workforce reductions. Also, in first quarter 2005, we recorded a
deferred tax benefit of $106 million, of which $20 million was recorded in
continuing operations, and the remaining $86 million was recorded in
discontinued operations. The $20 million tax benefit recorded in continuing
operations was related to the impairment of goodwill in the global wheat
business as part of the fiscal year 2004 restructuring plan. As such, the
benefit amount recorded in continuing operations is reflected in the table
above. See Note 17 -- Discontinued Operations -- and the "Results of Operations"
section of MD&A for a further discussion of the $86 million tax benefit recorded
in discontinued operations.
The actions relating to this restructuring plan resulted in after-tax savings of
approximately $85 million and $40 million in fiscal years 2005 and 2004,
respectively, and they are expected to produce after-tax savings of
approximately $85 million to $90 million in fiscal year 2006, with continuing
savings thereafter. We expect that these actions will lower our costs, primarily
SG&A, as a percent of sales.
31
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Working Capital and Financial Condition
- ----------------------------------------------------------------------------------------------------------------------------
As of
As of Nov. 30, Aug. 31,
--------------------------- ------------
(Dollars in millions, except current ratio) 2005 2004 2005
- ------------------------------------------------------------------------------- --------------------------- ------------
Cash and cash equivalents $ 1,006 $ 1,553 $ 525
Short-term investments 168 100 150
Trade receivables -- net 1,413 1,381 1,473
Inventories 1,890 1,452 1,664
Other current assets(1) 963 887 832
- ----------------------------------------------------------------------------------------------------------- ------------
Total Current Assets $ 5,440 $ 5,373 $ 4,644
- ----------------------------------------------------------------------------------------------------------- ------------
Short-term debt $ 155 $ 239 $ 282
Accounts payable 370 373 369
Accrued liabilities(2) 2,301 1,792 1,508
- ----------------------------------------------------------------------------------------------------------- ------------
Total Current Liabilities $ 2,826 $ 2,404 $ 2,159
- ----------------------------------------------------------------------------------------------------------- ------------
Working Capital(3) $ 2,614 $ 2,969 $ 2,485
Current Ratio(3) 1.92:1 2.24:1 2.15:1
- --------------------------------------------------------------------------------=============================================
(1) Includes miscellaneous receivables, current deferred tax assets, assets of
discontinued operations and other current assets.
(2) Includes income taxes payable, accrued compensation and benefits, accrued
marketing programs, deferred revenues, grower accruals, contingent purchase
price -- Seminis (only as of Nov. 30, 2005), liabilities of discontinued
operations and miscellaneous short-term accruals.
(3) Working capital is total current assets less total current liabilities;
current ratio represents total current assets divided by total current
liabilities.
Nov. 30, 2005, compared with Aug. 31, 2005: Working capital increased $129
million between Aug. 31, 2005, and Nov. 30, 2005, because of the following
factors:
o Cash and cash equivalents increased $481 million between the
respective periods. See the "Cash Flow" section in this section of
MD&A for further details of this increase.
o Inventories increased $226 million between the respective periods
primarily because the seasonality of our U.S. corn and soybean seed
business in which the fall harvest of seed products occurs in first
quarter of the fiscal year resulting in a higher inventory balance as
of Nov. 30, 2005.
o Other current assets increased $131 million primarily because of an
increase in deferred tax assets. We reclassified $138 million of
non-current deferred tax assets on net operating losses to current
deferred tax assets because we expect it will be utilized in fiscal
year 2006.
o Short-term debt decreased $127 million in the three-month comparison
because of lower technical overdrafts and lower short-term borrowings.
See the "Capital Resources and Liquidity" section within this section
of MD&A for the explanation.
These increases to working capital between Aug. 31, 2005, and Nov. 30, 2005,
were offset by $793 million of higher accrued liabilities as of Nov. 30, 2005.
Our deferred revenue balance increased from $43 million as of Aug. 31, 2005, to
$703 million as of Nov. 30, 2005, due to U.S. customer prepayments in first
quarter 2006. Also, we recorded a liability of $125 million as of Nov. 30, 2005,
for a payment related to the Seminis acquisition (see the discussion in "Capital
Resources and Liquidity" of this section).
Nov. 30, 2005, compared with Nov. 30, 2004: Working capital decreased $355
million in the comparison between Nov. 30, 2005, and Nov. 30, 2004. The
following factors decreased working capital as of Nov. 30, 2005, compared with
Nov. 30, 2004:
o Cash and cash equivalents decreased $547 million between the
respective periods. As presented on the Statement of Consolidated Cash
Flows, the net increase in cash and cash equivalents was $481 million
in first quarter 2006 compared with $516 million in first quarter
2005. The cash and cash equivalents balance was lower as of Aug. 31,
2005, compared with Aug. 31, 2004, by $512 million primarily because
of payments for acquisitions in 2005.
32
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
o Accrued liabilities increased $509 million primarily because customer
prepayments were approximately $140 million higher in first quarter
2006 compared with first quarter 2005. As discussed previously in this
section, we recorded a $125 million liability related to the Seminis
acquisition as of Nov. 30, 2005. Also, accrued rebates increased
between the respective periods primarily because of new U.S. marketing
programs introduced in fourth quarter 2005. Lastly, accrued
liabilities related to the Seminis and Emergent acquisitions were
approximately $95 million as of Nov. 30, 2005.
The working capital decreases were offset by an increase in inventory of $438
million between the respective periods primarily because of inventory related to
the acquisitions of Seminis and, to a lesser extent, Emergent, which was
approximately $435 million as of Nov. 30, 2005.
Customer Financing Programs: We refer certain of our interested U.S. customers
to a third-party specialty lender that makes loans directly to our customers. In
April 2002, we established this revolving financing program of up to $500
million, which allows certain U.S. customers to finance their product purchases,
royalties and licensing fee obligations. The funding availability may be less
than $500 million if certain program requirements are not met. It also allows us
to reduce our reliance on commercial paper borrowings. We received $18 million
in first quarter 2006 and $60 million in first quarter 2005 from the proceeds of
loans made to our customers through this financing program. These proceeds are
included in the net cash provided by operations in the Statement of Consolidated
Cash Flows. We originate these customer loans on behalf of the third-party
specialty lender, a special purpose entity (SPE) that we consolidate, using our
credit and other underwriting guidelines approved by the lender. We service the
loans and provide a first-loss guarantee of up to $100 million. Following
origination, the lender transfers the loans to multi-seller commercial paper
conduits through a nonconsolidated qualifying special purpose entity (QSPE). We
have no ownership interest in the lender, in the QSPE, or in the loans. We
account for this transaction as a sale, in accordance with SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities.
As of Nov. 30, 2005, and Aug. 31, 2005, the customer loans held by the QSPE and
the QSPE's liability to the conduits were $119 million and $171 million,
respectively. The lender or the conduits may restrict or discontinue the
facility at any time. If the facility were to be terminated, the existing loans
would be collected by the QSPE over their remaining terms (generally 12 months
or less), and we would revert to our past practice of providing these customers
with direct credit purchase terms. Our servicing fee revenues collected and
earned from the program were not significant during the first quarters of 2006
and 2005. As of Nov 30, 2005, and Aug. 31, 2005, our recorded guarantee
liability was less than $1 million, primarily based on our historical collection
experience with these customers and a current assessment of credit exposure.
Adverse changes in the actual loss rate would increase the liability.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), and amended it by issuing FIN 46R in
December 2003. The SPE is included in our consolidated financial statements.
Because QSPEs are excluded from the scope of FIN 46R and we do not have the
unilateral right to liquidate the QSPE, this interpretation does not have an
effect on our accounting for the U.S. customer financing program.
In November 2004, we entered into an agreement with a lender to establish a
program to provide financing of up to $40 million for selected customers in
Brazil. The agreement as amended in May 2005 qualifies for sales treatment under
SFAS 140. Proceeds from the transfer of the receivables subsequent to the May
2005 amendment are included in net cash provided by operations in the Statement
of Consolidated Cash Flows. In first quarter 2006, the total amount of customer
receivables transferred through the program was $18 million. The amount of loans
outstanding was $37 million and $22 million as of Nov. 30, 2005, and Aug. 31,
2005, respectively. We provide a full guarantee of the loans in the event of
customer default. The liability for the guarantee is recorded at an amount that
approximates fair value and is primarily based on our historical collection
experience with customers that participate in the program. The guarantee
liability recorded by Monsanto was $1 million as of Nov. 30, 2005, and less than
$1 million as of Aug. 31, 2005. If performance is required under the guarantee,
we may retain amounts that are subsequently collected from customers.
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MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
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Cash Flow
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
--------------------------
(Dollars in millions) 2005 2004
- ----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operations $ 773 $ 769
Net Cash Provided (Required) by Investing Activities (135) 1
- ----------------------------------------------------------------------------------------------------------------------------
Free Cash Flow(1) 638 770
Net Cash Required by Financing Activities (157) (254)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 481 516
Cash and Cash Equivalents at Beginning of Period 525 1,037
- ----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 1,006 $ 1,553
- --------------------------------------------------------------------------------------------------==========================
(1) Free cash flow represents the total of net cash provided or required by
operations and provided or required by investing activities (see the
"Non-GAAP Financial Measures" section in MD&A for a further discussion).
Cash provided by operations improved $4 million in the quarter-over-quarter
comparison. The change in accounts payable and accrued liabilities was a use of
cash of $127 million in first quarter 2006 compared with a source of cash of $6
million in the prior-year quarter. The higher use of cash for these items in
first quarter 2006 was mainly the result of higher employee incentive payouts as
a result of the plan change to a fiscal year basis. Our incentive accrual as of
Aug. 31, 2004, which was paid in first quarter 2005, represented an eight-month
incentive period. Our incentive plan was changed in fiscal year 2005 to match
our change in fiscal year. The incentive accrual as of Aug. 31, 2005, was based
on a 12-month incentive period, and was also higher because financial
performance improved in 2005 compared with 2004. Further, the timing of U.S.
income tax accruals and payments contributed to the increased use of cash in the
three-month comparison. In first quarter 2006, other items were a source of cash
of $114 million, which the largest item was the $43 million payment we received
from Scotts (see the "Agricultural Productivity Segment" section of MD&A).
Cash required by investing activities was $135 million in first quarter 2006
compared with cash provided by investing activities of $1 million in first
quarter 2005. In first quarter 2005, the timing of the maturities of our
short-term investments was a source of cash of $201 million compared with no
maturities in the current-year quarter. We used cash of $53 million for ASI's
acquisition of five regional seed companies in first quarter 2006. In first
quarter 2005, we used cash of $158 million for the Channel Bio and Advanta
acquisitions. These acquisitions are explained in more detail in the "Capital
Resources and Liquidity" section below. Lastly, our capital expenditures were 44
percent, or $17 million, higher in first quarter 2006 compared with the
prior-year quarter. This increase was primarily driven by expansion of seed
production facilities for corn and cotton as well as projects related to R&D. We
expect fiscal 2006 capital expenditures to be in the range of $350 million
compared with fiscal year 2005 capital spending of $281 million.
The amount of cash required by financing activities decreased $97 million to
$157 million in first quarter 2006. The net change in short-term financing
required cash of $122 million in first quarter 2006 compared with $22 million in
the prior-year quarter. Cash required for long-term debt reductions was $26
million in first quarter 2006 compared with $208 million in first quarter 2005.
Certain medium-term notes matured in 2005. On Oct. 25, 2005, our board of
directors authorized the purchase of up to $800 million of the company's stock
over a four-year period; no shares were repurchased under this plan in first
quarter 2006. In first quarter 2005, treasury stock purchases required cash of
$35 million under the $500 million share repurchase program, which was completed
in July 2005. Stock option exercises provided $27 million of cash in first
quarter 2006 compared with $45 million in the prior-year quarter. Dividend
payments increased 21 percent, or $8 million, in first quarter 2006. In first
quarter 2005, we paid a dividend of 14.5 cents per share compared with 17 cents
per share in first quarter 2006.
Capital Resources and Liquidity
- ---------------------------------------------------------------------------------------------------------------------------
As of Nov. 30, As of Aug. 31,
-------------------------------- ---------------
(Dollars in millions, except debt-to-capital ratio) 2005 2004 2005
- ------------------------------------------------------------------------------------------------------- ---------------
Short-Term Debt $ 155 $ 239 $ 282
Long-Term Debt 1,445 1,070 1,458
Total Shareowners' Equity 5,754 5,386 5,613
Debt-to-Capital Ratio 22% 20% 24%
- ------------------------------------------------------------------------------------------------------- ---------------
Total debt outstanding decreased $140 million between Aug. 31, 2005, and Nov.
30, 2005, primarily because of lower technical overdrafts and lower short-term
borrowings. The technical overdraft balance was higher as of Aug. 31, 2005,
34
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
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because of the timing of U.S. market funding payments, which occurred in August
2005. Also, commercial paper outstanding decreased from $43 million as of Aug.
31, 2005, to zero as of Nov. 30, 2005.
2006 Acquisitions: In September 2005, our American Seeds, Inc. (ASI) subsidiary
acquired five regional U.S. seed companies in separate transactions for an
aggregate purchase price of $53 million (net of cash acquired), inclusive of
transaction costs of $2 million. Four of the five companies acquired are the
shareowners of the CORE Group, an association of family-based seed companies
that serve farmers throughout the Corn Belt, which primarily encompasses several
states in the north central plains region. Those four companies are Fontanelle
Hybrids, Inc., Trelay Seed Company, Stone Seed Company, and Stewart Seeds, Inc.
(collectively, "the CORE Group"). In the fifth transaction, ASI acquired
Specialty Hybrids, Inc., a company serving the Eastern Corn Belt. These
acquisitions are expected to further bolster ASI's ability to directly serve
farmer-customers with a technology-rich, locally-oriented business model. The
transactions were completed on Sept. 1, 2005, from which time the results of
these acquisitions were included in the our consolidated financial statements.
For all fiscal year 2006 acquisitions, the business operations of the acquired
entities were included in the Seeds and Genomics segment. See Note 3 -- Business
Combinations for the preliminary purchase price allocations as of Nov. 30, 2005.
2005 Acquisitions: In first quarter 2005, we acquired the canola seed businesses
of Advanta Seeds from Advanta B.V., including the ADVANTA SEEDS brand in Canada
and the INTERSTATE seed brand in the United States, for $52 million in cash (net
of cash acquired), inclusive of transaction costs of $2 million. The transaction
was completed on Sept. 8, 2004, from which time the operating results of this
acquisition were included in our consolidated financial statements.
In November 2004, ASI acquired Channel Bio Corp. for $104 million in cash (net
of cash acquired) and $15 million in liabilities paid in second quarter 2005. In
third quarter 2005, ASI, through its Channel Bio subsidiary, acquired NC+
Hybrids, Inc. for $40 million in cash (net of cash acquired). In addition to
these purchase price amounts, ASI paid transaction costs of $4 million for these
acquisitions. Channel Bio and NC+ Hybrids are U.S. seed companies that sell,
market and distribute primarily corn and soybean seeds. The Channel Bio
transaction was completed on Nov. 15, 2004, from which time the operating
results of this acquisition were included in our consolidated financial
statements. The NC+ Hybrids transaction was completed on March 1, 2005, from
which time the operating results of this acquisition were included in our
consolidated financial statements.
In third quarter 2005, we acquired Seminis for $1.0 billion in cash (net of cash
acquired), inclusive of transaction costs of $23 million, and we paid $495
million for repayment of its outstanding debt. The acquisition was completed on
March 23, 2005, from which time the operating results of this acquisition were
included in our consolidated financial statements. Marinet Investments, LLC,
which prior to the closing was a holder of co-investment rights in Seminis,
elected to reduce the cash payment to which it was entitled upon completion of
the transaction by $50 million in exchange for a contingent payment of up to
$125 million based on the achievement of certain cumulative net sales targets
over the 36-month period ending Sept. 30, 2007, or certain other factors. The
cash portion of the acquisition was funded with cash on hand plus commercial
paper borrowings of $600 million issued in March 2005. Prior to the closing of
the transaction, Seminis initiated a tender offer to redeem all of its
outstanding 10 1/4% Senior Subordinated Notes. Commercial paper borrowings were
also issued in April 2005 to fund the payments pursuant to the tender offer,
which totaled approximately $390 million.
In order to enhance connections among Monsanto and Seminis employees, including
the sharing of technology advancements, we are finalizing plans to integrate
certain support services of Seminis with our other businesses. In conjunction
with this integration, in September 2005, Monsanto and the chief executive
officer of Seminis agreed that he would assist in the integration and resign by
Dec. 31, 2005. As a result, Monsanto determined that the timing of the
contingent payment discussed above has been accelerated and will be payable in
second quarter 2006. A liability has been recorded as of Nov. 30, 2005,
resulting in additional purchase price and goodwill of $125 million.
In third quarter 2005, we acquired Emergent Genetics, Inc. and Emergent Genetics
India Ltd. (collectively, "Emergent") for $305 million (net of cash acquired),
inclusive of transaction costs of $8 million. The transaction was completed on
April 5, 2005, from which time the operating results of this acquisition were
included in our consolidated financial statements. The cash portion of the
acquisition was funded with $284 million of commercial paper borrowings issued
in April 2005. We also assumed debt of $16 million.
For all fiscal year 2005 acquisitions described above, the business operations
of the acquired entities were included in the Seeds and Genomics segment. As of
the acquisition dates, we began to assess and formulate plans to integrate or
restructure the acquired entities. These activities are accounted for in
accordance with EITF Issue No. 95-3, Recognition of Liabilities in Connection
35
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
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with a Purchase Business Combination, and primarily include the potential
closure of facilities, the abandonment or redeployment of equipment, and
employee terminations or relocations. In first quarter 2006, we finalized plans
to integrate or restructure certain activities of Seminis and the Emergent India
business. As a result, asset fair values were reduced by $2 million, and
additional liabilities of $14 million were recorded, resulting in additional
goodwill of $16 million. The plans for Seminis and the Emergent India business
include employee terminations and relocations, exiting certain product lines and
facility closures. As of Nov. 30, 2005, estimated integration costs of $21
million have been recognized as current liabilities in the purchase price
allocations, and $3 million has been charged against the liabilities, primarily
related to payments for employee terminations and relocations.
Contingent Liabilities Relating to Solutia Inc. (Off-Balance Sheet Arrangement)
There are no material changes related to our off-balance sheet arrangement
relating to Solutia from the disclosure in Monsanto's Report on Form 10-K for
the fiscal year ended Aug. 31, 2005. See Note 15 -- Commitments and
Contingencies under the subheading "Solutia Inc." for further information
regarding Solutia's Assumed Liabilities, the charge taken in connection with
Solutia's Assumed Liabilities, and an agreement in principle which we have
reached with certain other parties in Solutia's bankruptcy proceeding. Also see
Part II -- Item 1 -- Legal Proceedings and Item 5 -- Relationships Among
Monsanto Company, Pharmacia Corporation, Pfizer Inc. and Solutia Inc. for
further information.
OUTLOOK
- --------------------------------------------------------------------------------
Focused Strategy
Monsanto has established leadership in agricultural markets by applying advanced
technology to develop high-value products ahead of its competitors, and by
reinforcing strong brands and customer relationships. We aim to continually
improve our products in order to maintain market leadership and to support
near-term performance. Our capabilities in plant breeding and biotechnology
research are generating a rich product pipeline that is expected to drive
long-term growth. We believe that our focused approach to our business and the
value we bring to our customers will allow us to maintain an industry leadership
position in a highly competitive environment.
We have evolved to a company led by its strengths in seeds and biotechnology
traits as a means of delivering solutions to our customers. We also remain the
leading manufacturer of the best-selling herbicide brand, ROUNDUP, and maintain
a very strong manufacturing cost position. We will 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.
We believe that Monsanto is positioned to sustain earnings growth and strong
cash flow. We remain committed to returning value to shareowners through
vehicles such as investments that grow and expand the business, an increased
dividend rate and share repurchases. We have recently used our cash position for
strategic acquisitions and technology investments, and we have used a
combination of cash and debt to fund our 2005 acquisitions. We will continue to
evaluate technology arrangements that have the potential to increase the
efficiency and effectiveness of our R&D efforts, and acquisition opportunities
that meet our strategic needs, although we have no current plans to pursue any
major acquisitions.
We have taken decisive steps to address key risks in our business position,
which include reducing costs in our agricultural chemistry business and pursuing
the evolution of our business to an emphasis on seeds and traits. We remain
focused on cost and cash management, both to support the progress we have made
in managing our investment in working capital -- in particular, receivables and
inventories -- and to realize the full earnings potential of our businesses. We
will continue to seek additional external financing opportunities for our
customers.
We have taken steps to reduce risk and stabilize our business position in Latin
America. We continue to monitor the business environment and the related impact
on our working capital in Latin American countries, particularly Brazil and
Argentina. Brazil experienced drought conditions in fiscal years 2004 and 2005
in some regions, including the regions where we have been focusing our
point-of-delivery payment system collection efforts. Also, the combination of
lower commodity prices and the appreciation of the Brazilian real affected some
of our customers' liquidity in several other Brazilian regions during fiscal
36
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
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year 2005, which we expect to continue in 2006. We took actions to mitigate
these credit risks in 2005 and will continue to carefully monitor our Brazilian
trade receivables in 2006.
Seeds and Genomics
Monsanto has built a leading global position in seeds. We continue to make
improvements in our base seed business. Advanced breeding techniques combined
with production practices and plant capital investments have significantly
improved germplasm quality, yields and cost. The performance of Monsanto
germplasm is reflected in market-share gains for both our branded and licensed
seed businesses. We also use our genetic material to develop new varieties for
other seed companies' brands. Outstanding seed quality and leading germplasm
provide a vehicle for delivering biotechnology seed traits such as herbicide
tolerance and insect protection. Biotechnology traits offer growers several
benefits: lower costs, greater convenience and flexibility, higher yields, and
the ability to adopt environmentally responsible practices such as conservation
tillage and reduced pesticide use.
As part of this seed and technology-based strategic initiative, we are focusing
on projects that we believe have the best commercial potential. To date, our
research and marketing have focused on crops grown on significant acreage: corn,
cotton and oilseeds, which include soybeans and canola. The acquisition of
Seminis will broaden our research and marketing focus to other vegetable and
fruit crops. We invest more than 85 percent of our R&D in the areas of seeds,
genomics and biotechnology. These are the fastest-growing segments of the
agriculture industry. By shifting our focus to create value for farmers in seeds
and traits, we have set Monsanto on a path of sustainable growth. 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.
Key near-term growth opportunities in our seeds and traits include:
o Continued growth in Monsanto's branded and licensed seed market
shares, through acquisitions, successful breeding of high-performance
germplasm and continuous improvement in the quality of our seeds;
o Continued growth in licensing of seed germplasm and biotechnology
traits to other seed companies through our Holden's/Corn States
business and Cotton States business;
o Expansion of existing traits, especially in corn, and stacking of
additional traits in current biotechnology products;
o Ability to have flexibility to price our traits in line with the value
growers have experienced and expect to continue to experience from our
traits;
o Commercialization of second-generation traits, such as BOLLGARD II
cotton and ROUNDUP READY Flex cotton; and
o Improve and grow the Seminis vegetable and fruit seed business by
applying our molecular breeding and marker capabilities to Seminis'
library of germplasm.
In first quarter 2005, we formed ASI, a holding company established to support
regional seed businesses with capital, genetics and technology investments. ASI
intends to continue investing in independent seed businesses and to operate them
autonomously as subsidiaries. These investments will allow the operating
companies of ASI to more rapidly connect their customers to significant
innovations in genetics-based breeding and other new technologies while
continuing to operate autonomously and locally, providing service to their
customers and building value of their brands. Within our U.S. business, we now
have three approaches to the market, each serving unique customers in unique
ways: we are selling our branded DEKALB and ASGROW seeds through the
distribution channel; we are licensing to more than 250 regional seed companies
through our Holden's/Corn States business; and with the addition of ASI, we are
now selling directly to farmers in localized markets. ASI completed the
acquisition of Channel Bio in first quarter 2005 and the acquisition of NC+
Hybrids in third quarter 2005. In September 2005, ASI acquired five companies
that collectively represented approximately 1 percent of the U.S. corn seed
market.
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MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
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In third quarter 2005, we completed the acquisition of Seminis, the global
leader in the vegetable and fruit seed industry. Seminis continues to operate as
a wholly owned subsidiary of Monsanto. Other than corn seed, oilseeds and cotton
seed, vegetable seeds have the best prospect for consistent growth at high
margins. Similar to Monsanto, Seminis has captured a leading position in its
respective global markets, and has done so by focusing on molecular breeding and
the value it creates for the farmer. From a technology perspective, we intend to
continue on the path taken by Seminis for its business, which is to focus on
developing products via advanced molecular breeding techniques, and to leverage
our research on the seed breeding side for Seminis. We believe Seminis is an
attractive investment for us because of its market leadership, innovation and
financial growth. As discussed in the "Financial Condition, Liquidity, and
Capital Resources" section of MD&A, we are integrating certain support services
of Seminis with our other businesses. We finalized plans to integrate or
restructure certain activities of Seminis and recorded a liability in first
quarter 2006, which was considered part of the purchase price allocation.
In third quarter 2005, we completed the acquisition of Emergent, a cotton seed
business, which we are integrating into our cotton traits business. Through the
Emergent brands, we will have a branded presence in cotton as we do in corn and
soybeans. Emergent will join a foundation cotton seed company called Cotton
States that we created in the last three years. We will use the same model that
we adopted in corn and soybeans, and we will be broadly licensing both our
biotech traits and our germplasm to other companies. The decision to purchase
Emergent is key to the future of our cotton business, core to accelerating the
value of our new second-generation cotton traits, and complementary to the
introduction of our new Cotton States foundation seed business. We expect growth
to come from the combination of improved breeding and continued growth of
biotech traits, particularly stacked and second-generation traits.
We can achieve continued growth through stacking and increased penetration of
traits in approved markets. Trait stacking is a key growth driver in our seeds
and traits business because it allows Monsanto to earn a greater share of the
farmer's expenditures on each acre. Our past successes provide a significant
competitive advantage in delivering stacked-trait products and improved,
second-generation traits. During the past three years, stacked-trait cotton
overtook single-trait cotton products in Monsanto's product mix. We are seeing
the same trend in our corn seed business, where higher-value, stacked-trait
products represent a growing share of total seed sales.
We have completed the regulatory approval processes in the United States, Japan
and Canada for YIELDGARD Plus with ROUNDUP READY Corn 2, Monsanto's three-way
stacked product that includes the YIELDGARD Corn Borer, YIELDGARD Rootworm and
ROUNDUP READY Corn 2 biotech traits. YIELDGARD Plus with ROUNDUP READY Corn 2
hybrids were available for sale and planting in limited quantities in fiscal
year 2005 with broader product availability in fiscal year 2006 in the United
States. Monsanto corn products designed to be tolerant to the active ingredient
in ROUNDUP herbicides are currently marketed as ROUNDUP READY Corn 2 in the
United States.
In January 2006, the U.S. Department of Agriculture granted deregulated status
for our MON88017 -- second generation product combining our rootworm and ROUNDUP
READY Corn 2 trait technologies in a single event -- and MON88017 stacked with
YIELDGARD Corn Borer. The EPA and FDA have also completed their reviews of
MON88017. We are seeking the necessary regulatory clearances for MON88017 and
MON88017 stacked with YIELDGARD Corn Borer on the U.S. state level and approvals
in countries that are major importers of U.S. corn. The commercial launch timing
of these products has not been announced.
We are working toward developing products to generate long-term growth. We
believe that our strategic head start in first- and second-generation input
traits will give us a leadership position in developing output traits that
provide consumer benefits and create value for the food industry. We are working
to achieve greater acceptance and to secure additional approvals for our
existing biotechnology products globally, and toward the development and timely
commercialization of additional products in our pipeline. We are prioritizing
our efforts to gain approvals for biotechnology crops, and while we continue to
gain new approvals in global markets, we are pursuing strategies for growth even
with delays in some global regulatory approvals.
The Brazilian government passed measures legalizing the planting and harvest of
ROUNDUP READY soybeans in Brazil for our 2004 and 2005 fiscal years. A
grain-based payment system was successfully launched in fiscal year 2004. In
March 2005, Brazil's President signed a biosafety bill into law that established
a regulatory process for the approval of biotech crops. The implementation of
our point-of-delivery, grain-based payment system in fiscal year 2004 laid the
groundwork for ensuring that we capture value on biotech crops grown in Brazil.
The legalization of biotechnology in Brazil should make our system more
effective and allow Brazil to be a greater contributor to revenue in seeds and
traits in the near term. Most grain handlers in Brazil have enrolled or are
expected to enroll in this grain-based payment system for the 2006 harvest. Many
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MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
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of the southern states have already enrolled as part of a two-year contract,
entered into starting with the 2005 harvest. The largest grain exporters have
accepted this contract and have implemented the agreement for the past two
seasons. Compliance with the system from the 2005 and 2004 harvest was estimated
to be above 98 percent. It is likely that court rulings on our Brazilian patents
from these non-complying cases, or new cases, will occur in fiscal year 2006 or
2007. As ROUNDUP READY soybeans have now been fully approved in Brazil, a
limited amount of certified seed containing the ROUNDUP READY gene was sold in
2005, in addition to continuing with the grain-based payment system on saved and
replanted seed.
A similar grain-based system has been established for Paraguay; it was
successfully operated in the 2005 harvest and is expected to be operated for the
2006 harvest. As Paraguay has only five million acres of soybean production, it
is expected to be a modest contributor to earnings in 2006. Efforts continue to
develop systems in Argentina and Uruguay. It is likely that court cases in
Europe will be required to determine the applicability of patent rights for
ROUNDUP READY soybeans grown in Argentina and exported to Europe. The first two
of these cases have been filed, and may take two or more years to be completed.
It is not certain that payments on ROUNDUP READY soybeans will be profitable in
these Latin American countries.
Crop import restrictions in some key markets, most notably the European Union,
reduce potential expansion of current and future biotechnology crops in the
United States and other markets where they are approved. However, the
development of effective systems to enable farmers growing crops in the United
States to sell into elevator systems that do not export to the EU is mitigating
the effect of these restrictions. Additionally, Monsanto is pursuing approvals
to enable the importation of corn and processed corn products that contain the
ROUNDUP READY and YIELDGARD Rootworm traits into the EU, including those traits
as a part of various stacked-trait combinations, and has received approval from
the EU for human consumption, and the import, processing and use in animal feed,
of ROUNDUP READY Corn 2.
We are committed to addressing the concerns raised by consumers and by public
interest groups regarding agricultural and food products developed through
biotechnology. We also continue to address concerns about the adventitious or
certain unintended trace presence of biotechnology materials in seed, grain or
feed and food products by seeking sound, science-based rules and regulations
that clarify and allow for trace amounts, and providing industry leadership to
establish the highest standards of purity reasonably achievable and to establish
global standards for quality. We are also working with the seed industry to
develop strategies on production interventions that may reduce the likelihood of
adventitious presence.
Agricultural Productivity
In recent years, we have seen reduced revenues and earnings from ROUNDUP
herbicides, which reflect both the overall decline in the agricultural chemicals
market and the expiration of U.S. patent protection for the active ingredient in
ROUNDUP products in 2000. By aligning our infrastructure and costs with our
expectations for the glyphosate herbicide market, however, we believe the
ROUNDUP business can continue to be a significant and sustainable source of cash
and income generation for Monsanto, even in the face of increased competition.
In postpatent markets around the world, ROUNDUP herbicides have maintained a
leading market position and a price premium compared with generics.
We will continue to support the market leadership of ROUNDUP herbicides with
product innovations, superior customer service and logistics, low-cost
manufacturing, further expansion of ROUNDUP READY crops, and the ROUNDUP Rewards
program. ROUNDUP Rewards offers added protection and reduced risk program
elements for farmers who use certain Monsanto technologies and agricultural
herbicides. Further penetration of ROUNDUP READY crops also enhances the market
position of ROUNDUP herbicides as a brand-name product that farmers trust to
avoid the risk of crop injury in over-the-top use on these crops.
Hurricanes -- Katrina and Rita -- seriously disrupted the supply of
petrochemical feedstocks and natural gas in the Gulf Coast region of the United
States in August and September 2005. The result has been dramatic price
escalation for certain raw materials and energy required for glyphosate
production. We continue to monitor the effect of changes in petroleum-based
products and natural gas prices on our raw materials. Although these conditions
are not expected to impact our long-term results of operations, they could have
a material adverse affect on our 2006 results of operations as our suppliers
pass along a portion of their higher raw material costs to us.
We have several patents on our glyphosate formulations and manufacturing
processes in the United States and in other countries. We continue to
differentiate ROUNDUP herbicides with innovations using proprietary technology.
39
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
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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.
In the United States, Monsanto maintains strong distribution relationships and a
unique bulk tank system to support retailers. Monsanto remains the primary
global producer of glyphosate, the active ingredient in ROUNDUP herbicides, with
agreements to supply glyphosate to many of our competitors. Our high volume
combined with patented process technology allows us to maintain low unit costs.
We also achieved reductions in working capital by decreasing distribution
channel inventory to optimize our working capital and adjust to current market
conditions. ROUNDUP herbicides distribution channel inventories in the United
States have declined significantly over the last several years. In 2006, we
expect our U.S. branded herbicide sales to correlate with the application of
ROUNDUP herbicides on the farm and with our share of the overall market.
Like most other selective herbicides, Monsanto's selective herbicides face
declining markets and increasing competitive pressures, but they continue to
support our ability to offer fully integrated crop-protection solutions,
particularly in ROUNDUP READY corn. While rapid penetration of ROUNDUP READY
corn in the United States has also had a negative effect on sales of Monsanto's
selective corn herbicides, gross profit from the ROUNDUP READY trait and from
the ROUNDUP herbicides used on these acres are significantly higher than the
gross profit on the lost selective herbicide sales.
Our lawn-and-garden herbicide products remain a strong cash generator and
support Monsanto's brand equity in the marketplace.
Another key product in our Agricultural Productivity segment is POSILAC bovine
somatotropin, which improves dairy cow productivity. The active ingredient for
POSILAC is manufactured at our plant in Augusta, Georgia, and in Austria by
Sandoz GmbH. Sandoz also manufactures the finished dose formulation of POSILAC.
In second quarter 2005, we applied for U.S. FDA approval for finished dose
formulation at our Augusta facility. Sandoz has implemented corrections and
improvements at its facility in response to issues raised by the FDA during and
following a November 2003 inspection of Sandoz's facility and further identified
in a March 2004 FDA warning letter to Sandoz. Sandoz is currently awaiting
reinspection and final resolution of FDA concerns. In second quarter 2004, we
notified our customers that supplies of POSILAC would be limited because of a
combination of factors, including the time needed for Sandoz to complete
corrections and improvements at its facility in cooperation with the FDA. The
reduction in finished doses of POSILAC available for sale has required us to
allocate available supplies. Three times in 2005 and again in first quarter
2006, we were able to increase the number of finished doses allocated among our
customers, but expect the supply of finished doses of POSILAC to continue to be
limited through most of calendar year 2006. The allocation is expected to hinder
POSILAC sales growth for as long as it continues. The allocation is unrelated to
our level of inventory of bulk powder (active ingredient). We continue to reduce
production of bulk powder while continuing to convert existing bulk powder
inventory into finished doses, both of which have reduced our overall bulk
powder inventory.
Recently, Monsanto and Sandoz have been negotiating changes to the current
contract and, in December 2005, Sandoz delivered a notice of termination to
Monsanto, which had an effective date of Dec. 31, 2008. By contract, either
Monsanto or Sandoz may terminate with a two-year or three-year notice,
respectively, without cause. Negotiations between Monsanto and Sandoz are
expected to continue. We do not expect any issues with our product supply as a
result of these negotiations or the notice of termination.
Other Information
As discussed in Note 15 -- Commitments and Contingencies and Part II -- Item 1
- -- Legal Proceedings, Monsanto is involved in a number of lawsuits and claims
relating to a variety of issues. Many of these lawsuits relate to intellectual
property disputes. We expect that such disputes will continue to occur as the
agricultural biotechnology industry evolves.
As mentioned in the "Overview -- Executive Summary -- Outlook" section of MD&A,
we are required to indemnify Pharmacia for Solutia's Assumed Liabilities. Our
obligation to indemnify Pharmacia for Solutia's Assumed Liabilities is discussed
in Note 15.
For additional information on the outlook for Monsanto, see "Cautionary
Statements Regarding Forward-Looking Statements" contained in our Report on Form
10-K for the fiscal year ended Aug. 31, 2005, and Part II -- Item 1A -- Risk
Factors of this Form 10-Q.
40
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- --------------------------------------------------------------------------------
In preparing our financial statements, we must select and apply various
accounting policies. Our most significant policies are described in Part II --
Item 8 -- Note 2 -- Significant Accounting Policies -- to the consolidated
financial statements contained in our Report on Form 10-K for the fiscal year
ended Aug. 31, 2005. In order to apply our accounting policies, we often need to
make estimates based on judgments about future events. In making such estimates,
we rely on historical experience, market and other conditions, and on
assumptions that we believe to be reasonable. However, the estimation process
is, by its nature, uncertain given that estimates depend on events over which we
may not have control. If market and other conditions change from those that we
anticipate, our financial condition, results of operations, or liquidity may be
affected materially. In addition, if our assumptions change, we may need to
revise our estimates, or take other corrective actions, either of which may have
a material effect on our financial condition, results of operations, or
liquidity.
The estimates that have a higher degree of inherent uncertainty and require our
most significant judgments are outlined in Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in our Report on Form
10-K for fiscal year ended Aug. 31, 2005. Had we used estimates different from
any of those contained in such Report on Form 10-K, our financial condition,
profitability, or liquidity for the current period could have been materially
different from those presented.
NEW ACCOUNTING STANDARDS
- --------------------------------------------------------------------------------
In September 2005, the FASB reached a final consensus on EITF Issue No. 04-13,
Accounting for Purchases and Sales of Inventory with the Same Counterparty (EITF
04-13). EITF 04-13 concludes that two or more legally separate exchange
transactions with the same counterparty should be combined and considered as a
single arrangement for purposes of applying APB Opinion No. 29, Accounting for
Nonmonetary Transactions, when the transactions were entered into in
contemplation of one another. The consensus contains several indicators to be
considered in assessing whether two transactions are entered into in
contemplation of one another. If, based on consideration of the indicators and
the substance of the arrangement, two transactions are combined and considered a
single arrangement, an exchange of finished goods inventory for either raw
material inventory or work-in-process inventory should be accounted for at fair
value. The provisions of EITF 04-13 are effective for transactions beginning in
our fourth quarter 2006. We are currently evaluating the impact of EITF 04-13 on
the consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections (SFAS 154). SFAS 154 requires retrospective application to
prior-period financial statements of changes in accounting principle, unless it
is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also redefines "restatement" as the
revising of previously issued financial statements to reflect the correction of
an error. This statement is effective for accounting changes and corrections of
errors made in fiscal years beginning after Dec. 15, 2005. We do not believe
that the adoption of SFAS 154 will have a material impact on the consolidated
financial statements.
In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional
Asset Retirement Obligations (FIN 47), to clarify the term "conditional asset
retirement" as used in SFAS 143, Accounting for Asset Retirement Obligations.
FIN 47 requires that a liability be recognized for the fair value of a
conditional asset retirement obligation when incurred, if the fair value of the
liability can be reasonably estimated. Uncertainty about the timing or method of
settlement of a conditional asset retirement obligation would be factored into
the measurement of the liability when sufficient information exists. This
interpretation is effective no later than the end of fiscal years ending after
Dec. 15, 2005. Accordingly, we will adopt FIN 47 no later than fourth quarter of
fiscal year 2006. We do not believe that the adoption of FIN 47 will have a
material impact on the consolidated financial statements.
In December 2004, the FASB issued FASB Staff Position No. 109-1, Application of
FASB Statement No. 109 (SFAS 109), Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004 (FSP 109-1). FSP 109-1 clarifies that the manufacturer's
deduction provided for under the American Jobs Creation Act of 2004 (AJCA)
should be accounted for as a special deduction in accordance with SFAS 109 and
not as a tax rate reduction. The adoption of FSP 109-1 had no impact on our
consolidated financial statements in 2005 because the manufacturer's deduction
is not available to us until fiscal year 2006. We are currently evaluating the
effect that the manufacturer's deduction will have in 2006 and subsequent years.
The FASB also issued FASB Staff Position No. 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
41
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
Jobs Creation Act of 2004 (FSP 109-2). The AJCA introduced a special one-time
dividends received deduction on the repatriation of certain foreign earnings to
a U.S. taxpayer (repatriation provision), provided certain criteria are met. FSP
109-2 provides accounting and disclosure guidance for the repatriation
provision. The range of possible amounts that we are currently considering
eligible for repatriation is between zero and $500 million. See Note 8 -- Income
Taxes -- for additional disclosures in accordance with FSP 109-2.
Accounting Guidance Adopted in First Quarter 2006:
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123R). SFAS 123R replaced SFAS No. 123, Accounting for Stock-Based
Compensation, and superseded APB Opinion No. 25, Accounting for Stock Issued to
Employees. In March 2005, the SEC issued Staff Accounting Bulletin No. 107,
which expresses views of the SEC staff regarding the interaction between SFAS
123R and certain SEC rules and regulations, and provides the staff's views
regarding the valuation of share-based payment arrangements for public
companies. On Sept. 1, 2005, we adopted SFAS 123R, which requires the
measurement and recognition of compensation expense for all share-based payment
awards made to employees and directors based on estimated fair values. We
adopted SFAS 123R using the modified prospective transition method. Under this
method, our consolidated financial statements as of and for the three months
ended Nov. 30, 2005, reflect the impact of SFAS 123R, while the consolidated
financial statements for prior periods have not been restated to reflect, and do
not include, the impact of SFAS 123R. Stock-based compensation expense
recognized under SFAS 123R was $13 million for first quarter 2006 (including $3
million related to share-based awards for which compensation expense was being
recognized prior to the adoption of SFAS 123R).
Upon adoption of SFAS 123R, we began estimating the value of employee stock
options on the date of grant using a lattice-binomial model. Prior to adoption
of SFAS 123R, the value of employee stock options was estimated on the date of
grant using the Black-Scholes model, for the disclosures of pro forma financial
information required under SFAS 123. Pre-tax unrecognized compensation expense,
net of estimated forfeitures, for stock options, nonvested restricted stock and
nonvested restricted stock units was $99 million as of Nov. 30, 2005, which will
be recognized over weighted-average periods of two to three years. See Note 11
- -- Stock-Based Compensation Plans-- for pro forma disclosure of stock-based
compensation expense for first quarter 2005 and additional disclosures in
accordance with SFAS 123R.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs -- an amendment
of ARB No. 43, Chapter 4 (SFAS 151), to clarify that abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage) should
be recognized as current period charges and to require the allocation of fixed
production overhead to the costs of conversion based on the normal capacity of
the production facilities. SFAS 151 was effective prospectively for our
inventory costs incurred after Sept. 1, 2005. The adoption of SFAS 151 did not
have a material impact on our consolidated financial statements.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
- --------------------------------------------------------------------------------
Certain statements contained in this Report on Form 10-Q are "forward-looking
statements," such as statements concerning the company's anticipated financial
results, current and future product performance, regulatory approvals, business
and financial plans and other non-historical facts. These statements are based
on current expectations and currently available information. However, since
these statements are based on factors that involve risks and uncertainties, the
company's actual performance and results may differ materially from those
described or implied by such forward-looking statements. Factors that could
cause or contribute to such differences include, among others: continued
competition in seeds, traits and agricultural chemicals; the company's exposure
to various contingencies, including those related to intellectual property
protection, regulatory compliance and the speed with which approvals are
received, and public acceptance of biotechnology products; the success of the
company's research and development activities; the outcomes of major lawsuits,
including proceedings related to Solutia Inc.; developments related to foreign
currencies and economies; successful completion and operation of recent and
proposed acquisitions; fluctuations in commodity prices; compliance with
regulations affecting our manufacturing; the accuracy of the company's estimates
related to distribution inventory levels; the company's ability to fund its
short-term financing needs and to obtain payment for the products that it sells;
the effect of weather conditions, natural disasters and accidents on the
agriculture business or the company's facilities; and other risks and factors
detailed in the company's Report on Form 10-K for the fiscal year ended Aug. 31,
2005, filed with the SEC. Undue reliance should not be placed on these
forward-looking statements, which are current only as of the date of this
report. The company disclaims any current intention or obligation to update any
forward-looking statements or any of the factors that may affect actual results.
See "MD&A -- Cautionary Statements Regarding Forward-Looking Statements," in
42
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
Part II -- Item 7 of our Report on Form 10-K for the fiscal year ended Aug. 31,
2005, for a further discussion regarding some of the reasons that actual results
may be materially different from those that we anticipate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
There are no material changes related to market risk from the disclosures in
Monsanto's Report on Form 10-K for the fiscal year ended Aug. 31, 2005.
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) designed to ensure that information required to be disclosed in our
filings under the Exchange Act is recorded, processed, summarized and reported
accurately and within the time periods specified in the SEC's rules and forms.
As of Nov. 30, 2005 (the Evaluation Date), an evaluation was carried out under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the Evaluation Date, the design and operation of these disclosure
controls and procedures were effective to provide reasonable assurance of the
achievement of the objectives described above.
During the quarter that ended on the Evaluation Date, there was no change in
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
43
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
PART II--OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
This section of the Report on Form 10-Q provides information regarding material
legal proceedings that we are defending or prosecuting. These include
proceedings to which we are party in our own name and proceedings to which
Pharmacia is a party but that we manage and for which we are responsible, and
proceedings that we are managing related to Solutia's Assumed Liabilities.
Information regarding certain legal proceeding and the possible effects on our
business of litigation we are defending is disclosed in Note 15 under the
subheading "Litigation and Indemnification" and is incorporated by reference
herein. We are also defending or prosecuting other legal proceedings, not
described in this section, which arise in the ordinary course of our business.
We believe we have meritorious legal arguments and will continue to represent
our interests vigorously in all of the proceedings that we are defending or
prosecuting.
The following discussion provides new and updated information regarding certain
proceedings to which Pharmacia or Monsanto is a party and for which we are
responsible. Other information with respect to legal proceedings appears in our
Report on Form 10-K for the fiscal year ended Aug. 31, 2005.
Patent and Commercial Proceedings
The following proceedings involve Syngenta AG and its affiliates:
o As described in our Report on Form 10-K for the fiscal year ended Aug.
31, 2005, on May 10, 2004, we filed suit against Syngenta Seeds in the
Circuit Court of St. Louis County, Missouri, for declaratory judgment
seeking a determination that, under its license from us for ROUNDUP
READY soybeans, Syngenta Seeds is limited to commercializing its
ROUNDUP READY soybeans under one product brand. On Dec. 20, 2005, the
court conducted a bench trial. The case is now under submission and a
decision is pending.
o As described in our Report on Form 10-K for the fiscal year ended Aug.
31, 2005, on Aug. 25, 2005, Syngenta filed suit against us in the
Circuit Court of Hennepin County, Minnesota, seeking access to our new
patented next generation glyphosate-tolerant soybean technology under
a license for our current soybean technology that we previously
entered into with Ciba Seeds, which is now owned by Syngenta. This
case has no trial setting.
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2005,
on July 26, 2005, American Seed Company filed a purported class action against
us in the U.S. District Court for the District of Delaware, supposedly on behalf
of direct purchasers of corn seed containing our transgenic traits. American
Seed essentially alleges that we have monopolized or attempted to monopolize
markets for glyphosate-tolerant corn seed, European corn borer-protected corn
seed and foundation corn seed. Plaintiffs seek an unspecified amount of damages
and injunctive relief. On Dec. 6, 2005, the court denied our motion to transfer
the case to the U.S. District Court for the Eastern District of Missouri and to
consolidate it with an action we already have pending against American Seed for
unpaid royalties. This case has been set for trial on Oct. 15, 2007.
Grower Lawsuits
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2005,
on Feb. 14, 2000, a lawsuit (Randy Blades, et al v. Monsanto Company, Cause No.
00-403JLF) was filed in U.S. District Court for the Southern District of
Illinois, on behalf of five farmers purporting to represent various classes of
farmers and alleging that we and others violated antitrust laws by allegedly
fixing the price of seed containing biotech traits and violated tort and
international law through the commercialization of biotech traits. After the
lawsuit was transferred to the U.S. District Court for the Eastern District of
Missouri, the District Court granted our motion for summary judgment on all the
plaintiffs' tort claims, including all claims relating to alleged violations of
law. The District Court also denied the plaintiffs' motion to certify for class
action status the plaintiffs' claims that we and the other defendants have
violated various antitrust laws, which decision was affirmed by the U.S. Court
of Appeals for the Eighth Circuit. On Nov. 9, 2005, the District Court denied
the plaintiffs' motion seeking to certify a class only of growers of
glyphosate-tolerant soybeans from the states of Minnesota, Iowa, Illinois and
Indiana.
44
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
Agent Orange Proceedings
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2005,
certain Korean veterans of the Vietnam War have filed suit in Seoul, South
Korea, against The Dow Chemical Company and the former Monsanto Company.
Plaintiffs allege that they were exposed to herbicides, and that they suffered
injuries or their children suffered birth defects as a result. Three separate
complaints filed in October 1999 are being handled collectively and currently
involve approximately 16,700 plaintiffs. The complaints seek damages of 300
million won (approximately $287,000) per plaintiff. In 2002, the Seoul District
Court ruled in favor of the manufacturers and dismissed all claims of the
plaintiffs on the basis of lack of causation and statutes of limitations.
Plaintiffs have filed an appeal de novo with the Seoul High Court and the
parties have engaged in the briefing process required by that court. At its last
formal hearing on Dec. 27, 2005, the Court announced that it will issue its
decision in this matter on Jan. 26, 2006.
Proceedings Regarding Tax Matters
On Dec. 2, 2005, the Federal Revenue Service of the Ministry of Finance of
Brazil issued a tax assessment against our wholly owned subsidiary, Monsanto do
Brasil Ltda., challenging the tax treatment of $575 million of notes issued in
1998. The tax assessment reflects the view of the Federal Revenue Service that
the transactions involving the notes represented contributions to the capital of
Monsanto do Brasil rather than funding through issuance of notes. The assessment
denies tax deductions for approximately $915 million (subject to currency
exchange rates) of interest expense and currency exchange losses that were
claimed by Monsanto do Brasil under the notes. The assessment seeks payment of
approximately $42 million of tax, excluding penalties and interest, related to
the notes (subject to currency exchange rates), and would preclude Monsanto do
Brasil from using a net operating loss carryforward of approximately $800
million (subject to currency exchange rates). The issuance of the notes was
properly registered with the Central Bank of Brazil and we believe that there is
no basis in law for this tax assessment. On Dec. 29, 2005, Monsanto do Brasil
filed an appeal of this assessment with the Federal Revenue Service. Under the
terms of a tax sharing agreement concluded with Pharmacia at the time of our
separation from Pharmacia, Pharmacia would be responsible for a portion of any
liability incurred by virtue of the tax assessment. All dollar amounts have been
calculated based on an exchange rate of 2.207 Brazilian reais per U.S. dollar,
and will fluctuate with exchange rates in the future.
Proceedings Related to Solutia's Assumed Liabilities
On Dec. 6, 2005, a products liability lawsuit was filed against Monsanto,
Pharmacia Corporation, and Solutia Inc. in the Supreme Court of New York County,
New York. The suit claims that all defendants manufactured and sold PCB products
to General Electric Company and is brought by 590 current employees of General
Electric who allege exposure to chemicals used by General Electric in and around
its plant in Schenectady, New York from the 1970s to the present. The suit seeks
actual and punitive damages for alleged personal injuries and fear of future
disease.
See Note 15 for additional information regarding legal proceedings related to
Solutia's Assumed Liabilities.
See "MD&A -- Cautionary Statements Regarding Forward-Looking Statements," in
Part I -- Item 2 of this Report on Form 10-Q and in Part II -- Item 7 of our
Report on Form 10-K for the fiscal year ended Aug. 31, 2005, which are
incorporated herein by reference, for information regarding the risk factors
that may affect any forward-looking statements regarding our legal proceedings.
ITEM 1A. RISK FACTORS
- --------------------------------------------------------------------------------
Information regarding risk factors appears in "MD&A -- Cautionary Statements
Regarding Forward-Looking Statements," in Part I -- Item 2 of this Report on
Form 10-Q and in Part II -- Item 7 of our Report on Form 10-K for the fiscal
year ended Aug. 31, 2005. There have been no material changes from the risk
factors previously disclosed in our Report on Form 10-K.
45
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
The following table is a summary of any purchases of equity securities during
the first quarter of fiscal year 2006 by Monsanto and any affiliated purchasers,
pursuant to SEC rules.
- -----------------------------------------------------------------------------------------------------------------------------------
(c) Total Number (d) Approximate
of Shares Dollar Value of
Purchased as Part Shares that May Yet
of Publicly Be Purchased Under
(a) Total Number of (b) Average Price Announced Plans the Plans or
Period Shares Purchased Paid per Share(1) or Programs Programs
- -----------------------------------------------------------------------------------------------------------------------------------
September 2005:
Sept. 1, 2005, through Sept. 30, 2005 32,610(2) $ 63.53 -- --
October 2005:
Oct. 1, 2005, through Oct. 31, 2005 7,842(2) $ 60.26 -- $ 800,000,000
November 2005:
Nov. 1, 2005, through Nov. 30, 2005 -- $ -- -- $ 800,000,000
----------------------------------------------------------------------------------------------------------------------------------
Total 40,452 $ 62.90 -- $ 800,000,000
-----------------------------------------------------=============================================================================
(1) The average price paid per share is calculated on a settlement basis and
excludes commission.
(2) Represents total number of restricted shares withheld to cover the
withholding taxes upon the vesting of restricted stock.
On Oct. 25, 2005, the board of directors authorized the purchase of up to $800
million of the company's common stock over a four-year period. The plan expires
on Oct. 25, 2009. There were no other publicly announced plans outstanding as of
Nov. 30, 2005.
ITEM 5. OTHER INFORMATION
- --------------------------------------------------------------------------------
RELATIONSHIPS AMONG MONSANTO COMPANY, PHARMACIA CORPORATION, PFIZER INC. AND
SOLUTIA INC.
- --------------------------------------------------------------------------------
Prior to Sept. 1, 1997, a corporation that was then known as Monsanto Company
(Former Monsanto) operated an agricultural products business (the Ag Business),
a pharmaceuticals and nutrition business (the Pharmaceuticals Business) and a
chemical products business (the Chemicals Business). Former Monsanto is today
known as Pharmacia. Pharmacia is now a wholly owned subsidiary of Pfizer Inc.,
which together with its subsidiaries operates the Pharmaceuticals Business. Our
business includes the operations, assets and liabilities that were previously
the Ag Business. Solutia comprises the operations, assets and liabilities that
were previously the Chemicals Business. The following table sets forth a
chronology of events that resulted in the formation of Monsanto, Pharmacia and
Solutia as three separate and distinct corporations, and provides a brief
background on the relationships among these corporations.
Date of Event Description of Event
- -----------------------------------------------------------------------------------------------------------------------------------
Sept. 1, 1997 o Pharmacia (then known as Monsanto Company) entered into a Distribution
Agreement (Distribution Agreement) with Solutia related to the transfer of the
operations, assets and liabilities of the Chemicals Business from Pharmacia
(then known as Monsanto Company) to Solutia.
o Pursuant to the Distribution Agreement, Solutia assumed and agreed to indemnify Pharmacia
(then known as Monsanto Company) for certain liabilities related to the Chemicals
Business.
- -----------------------------------------------------------------------------------------------------------------------------------
Dec. 19, 1999 o Pharmacia (then known as Monsanto Company) entered into an agreement with
Pharmacia & Upjohn, Inc. (PNU) relating to a merger (the Merger).
- -----------------------------------------------------------------------------------------------------------------------------------
Feb. 9, 2000 o We were incorporated in Delaware as a wholly owned subsidiary of Pharmacia
(then known as Monsanto Company) under the name "Monsanto Ag Company."
- -----------------------------------------------------------------------------------------------------------------------------------
March 31, 2000 o Effective date of the Merger.
o In connection with the Merger, (1) PNU became a wholly owned subsidiary of
Pharmacia (then known as Monsanto Company); (2) Pharmacia (then known as
Monsanto Company) changed its name from "Monsanto Company" to "Pharmacia
Corporation;" and (3) we changed our name from "Monsanto Ag Company" to
"Monsanto Company."
- -----------------------------------------------------------------------------------------------------------------------------------
46
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Sept. 1, 2000 o We entered into a Separation Agreement (Separation Agreement) with
Pharmacia related to the transfer of the operations, assets and liabilities of
the Ag Business from Pharmacia to us.
o Pursuant to the Separation Agreement, we were required to indemnify Pharmacia for any
liabilities primarily related to the Ag Business or the Chemicals Business, and for
liabilities assumed by Solutia pursuant to the Distribution Agreement, to the extent that
Solutia fails to pay, perform or discharge those liabilities.
- -----------------------------------------------------------------------------------------------------------------------------------
Oct. 23, 2000 o We completed an initial public offering in which we sold approximately 15
percent of the shares of our common stock to the public. Pharmacia continued to
own 220 million shares of our common stock.
- -----------------------------------------------------------------------------------------------------------------------------------
July 1, 2002 o Pharmacia, Solutia and we amended the Distribution Agreement to provide
that Solutia will indemnify us for the same liabilities for which it had agreed
to indemnify Pharmacia and to clarify the parties' rights and obligations.
o Pharmacia and we amended the Separation Agreement to clarify our respective rights and
obligations relating to our indemnification obligations.
- -----------------------------------------------------------------------------------------------------------------------------------
Aug. 13, 2002 o Pharmacia distributed the 220 million shares of our common stock that it
owned to its shareowners via a tax-free stock dividend (the Monsanto Spinoff).
o As a result of the Monsanto Spinoff, Pharmacia no longer owns any equity
interest in Monsanto.
- -----------------------------------------------------------------------------------------------------------------------------------
April 16, 2003 o Pursuant to a merger transaction, Pharmacia became a wholly owned
subsidiary of Pfizer.
- -----------------------------------------------------------------------------------------------------------------------------------
Dec. 17, 2003 o Solutia and 14 of its U.S. subsidiaries filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code.
- -----------------------------------------------------------------------------------------------------------------------------------
Part II -- Item 1 -- Legal Proceedings includes information concerning
litigation matters that Monsanto is managing pursuant to its obligation under
the Separation Agreement to indemnify Pharmacia. Note 15 includes further
information regarding litigation and environmental matters that we are managing
pursuant to our obligation under the Separation Agreement to indemnify
Pharmacia, Solutia's bankruptcy, the related charge we recorded associated with
certain of Solutia's litigation and environmental obligations, and other
arrangements between Solutia and us.
ITEM 6. EXHIBITS
- --------------------------------------------------------------------------------
Exhibits: The list of exhibits in the Exhibit Index to this Report is
incorporated herein by reference.
47
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
SIGNATURE
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONSANTO COMPANY
(Registrant)
By: /s/ RICHARD B. CLARK
---------------------
Richard B. Clark
Vice President and Controller
(On behalf of the Registrant and as
Principal Accounting Officer)
Date: Jan. 9, 2006
48
MONSANTO COMPANY FIRST QUARTER 2006 FORM 10-Q
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EXHIBIT INDEX
- -------------------------------------------------------------------------------
These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K.
- -----------------------------------------------------------------------------------------------------------------------------------
Exhibit
No. Description
- -----------------------------------------------------------------------------------------------------------------------------------
2 Omitted
3 Omitted
4 Omitted
10 Omitted
11 Omitted -- see Note 13 of Notes to Consolidated Financial Statements -- Earnings (Loss) Per Share.
12 Computation of Ratio of Earnings to Fixed Charges.
15 Omitted
18 Omitted
19 Omitted
22 Omitted
23 Omitted
24 Omitted
31.1 Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, executed by the Chief Executive Officer).
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).
32 Rule 13(a)-14(b) Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
executed by the Chief Executive Officer and the Chief Financial Officer).
49