MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2006
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 a large accelerated filer,
an accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer' in Rule 12b-2 of the Exchange Act. (Check
one): Large Accelerated Filer [X] Accelerated Filer[ ] Non-Accelerated Filer[ ]
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: 271,401,439 shares of Common
Stock, $0.01 par value, outstanding as of June 28, 2006.
- --------------------------------------------------------------------------------
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------------------------------------------------------------
PART I--FINANCIAL INFORMATION Page
- ------------------------------------------------------------------------------------------------------------------------------------
Item 1. Financial Statements 2
Statements of Consolidated Operations 3
Condensed Statements of Consolidated Financial Position 4
Statements 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 26
Seeds and Genomics Segment 30
Agricultural Productivity Segment 31
Restructuring 33
Financial Condition, Liquidity, and Capital Resources 34
Outlook 38
Critical Accounting Policies and Estimates 42
New Accounting Standards 43
Cautionary Statements Regarding Forward-Looking Statements 44
Item 3. Quantitative and Qualitative Disclosures About Market Risk 44
Item 4. Controls and Procedures 45
PART II--OTHER INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
Item 1. Legal Proceedings 46
Item 1A. Risk Factors 48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 48
Item 5. Other Information 49
Item 6. Exhibits 50
SIGNATURE 51
EXHIBIT INDEX 52
1
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
PART I--FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Statements of Consolidated Operations of Monsanto Company and its
consolidated subsidiaries for the three months and nine months ended May 31,
2006, and May 31, 2005, the Condensed Statements of Consolidated Financial
Position as of May 31, 2006, and Aug. 31, 2005, the Statements of Consolidated
Cash Flows for the nine months ended May 31, 2006, and May 31, 2005, 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.
2
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- -----------------------------------------------------------------------------------------------------------------------------------
Statements of Consolidated Operations
- -----------------------------------------------------------------------------------------------------------------------------
Unaudited Three Months Ended May 31, Nine Months Ended May 31,
--------------------------- ---------------------------
(Dollars in millions, except per share amounts) 2006 2005 2006 2005
- ---------------------------------------------------------------------------------------------- ---------------------------
Net Sales $ 2,348 $ 2,040 $ 5,953 $ 5,020
Cost of goods sold 1,154 1,035 2,885 2,509
- ---------------------------------------------------------------------------------------------- ---------------------------
Gross Profit 1,194 1,005 3,068 2,511
Operating Expenses:
Selling, general and administrative expenses 430 367 1,173 947
Research and development expenses 191 155 532 401
Acquired in-process research and development (see Note 3) -- 254 -- 266
Restructuring charges (reversals) -- net (2) -- (2) 8
- ---------------------------------------------------------------------------------------------- ---------------------------
Total Operating Expenses 619 776 1,703 1,622
Income from Operations 575 229 1,365 889
Interest expense 35 29 100 78
Interest income (10) (7) (37) (26)
Solutia-related expenses (see Note 15) 7 7 20 300
Other expense -- net 27 31 37 73
- ---------------------------------------------------------------------------------------------- ---------------------------
Income from Continuing Operations Before Income Taxes 516 169 1,245 464
Income tax provision 182 128 412 178
- ---------------------------------------------------------------------------------------------- ---------------------------
Income from Continuing Operations 334 41 833 286
- ---------------------------------------------------------------------------------------------- ---------------------------
Discontinued Operations (see Note 17):
Income (loss) from operations of discontinued businesses (1) 4 (1) 6
Income tax benefit (1) (2) (1) (88)
- ---------------------------------------------------------------------------------------------- ---------------------------
Income on Discontinued Operations -- 6 -- 94
- ---------------------------------------------------------------------------------------------- ---------------------------
Net Income $ 334 $ 47 $ 833 $ 380
- -------------------------------------------------------------------=========================== ===========================
Basic Earnings per Share:
Income from continuing operations $ 1.23 $ 0.16 $ 3.09 $ 1.08
Income on discontinued operations -- 0.02 -- 0.35
- ---------------------------------------------------------------------------------------------- ---------------------------
Net Income $ 1.23 $ 0.18 $ 3.09 $ 1.43
- ---------------------------------------------------------------------------------------------- ---------------------------
Diluted Earnings per Share:
Income from continuing operations $ 1.21 $ 0.15 $ 3.02 $ 1.05
Income on discontinued operations -- 0.02 -- 0.35
- ---------------------------------------------------------------------------------------------- ---------------------------
Net Income $ 1.21 $ 0.17 $ 3.02 $ 1.40
- ---------------------------------------------------------------------------------------------- ---------------------------
Weighted Average Shares Outstanding:
Basic 270.8 268.0 269.6 266.4
Diluted 276.1 273.8 275.5 272.3
Dividends Declared per Share $ -- $ 0.17 $ 0.40 $ 0.34
The accompanying notes are an integral part of these consolidated financial
statements.
3
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- -----------------------------------------------------------------------------------------------------------------------------------
Condensed Statements of Consolidated Financial Position
- ----------------------------------------------------------------------------------------------------------------------------
Unaudited As of May 31, As of Aug. 31,
------------- --------------
(Dollars in millions, except share amounts) 2006 2005
- ---------------------------------------------------------------------------------------------------------- --------------
Assets
Current Assets:
Cash and cash equivalents $ 595 $ 525
Short-term investments 22 150
Trade receivables -- net of allowances of $303 and $275, respectively 2,899 1,473
Miscellaneous receivables 350 370
Deferred tax assets 339 374
Inventories (see Note 6) 1,700 1,664
Assets of discontinued operations (see Note 17) 10 15
Other current assets 76 73
- ---------------------------------------------------------------------------------------------------------- --------------
Total Current Assets 5,991 4,644
Property, Plant and Equipment -- Net 2,331 2,378
Goodwill (see Note 7) 1,467 1,248
Other Intangible Assets -- Net (see Note 7) 1,239 1,153
Noncurrent Deferred Tax Assets 582 680
Other Assets 499 476
- ---------------------------------------------------------------------------------------------------------- --------------
Total Assets $ 12,109 $ 10,579
- ---------------------------------------------------------------------------------------------============= ==============
Liabilities and Shareowners' Equity
Current Liabilities:
Short-term debt, including current portion of long-term debt $ 666 $ 126
Accounts payable 454 525
Income taxes payable 284 208
Accrued compensation and benefits 208 273
Accrued marketing programs 470 457
Deferred revenues 50 43
Grower accruals 30 18
Liabilities of discontinued operations (see Note 17) 4 11
Miscellaneous short-term accruals 589 498
- ---------------------------------------------------------------------------------------------------------- --------------
Total Current Liabilities 2,755 2,159
Long-Term Debt 1,376 1,458
Postretirement Liabilities 740 732
Long-Term Portion of Solutia-Related Reserve (see Note 15) 164 184
Other Liabilities 498 433
Commitments and Contingencies (see Note 15)
Shareowners' Equity:
Common stock (authorized: 1,500,000,000 shares, par value $0.01)
Issued 285,144,822 and 280,851,349 shares, respectively;
Outstanding 271,405,449 and 268,191,257 shares, respectively 3 3
Treasury stock 13,739,373 and 12,660,092 shares, respectively, at cost (593) (500)
Additional contributed capital 8,838 8,588
Retained deficit (847) (1,572)
Accumulated other comprehensive loss (811) (889)
Reserve for ESOP debt retirement (14) (17)
- ---------------------------------------------------------------------------------------------------------- --------------
Total Shareowners' Equity 6,576 5,613
- ---------------------------------------------------------------------------------------------------------- --------------
Total Liabilities and Shareowners' Equity $ 12,109 $ 10,579
- ---------------------------------------------------------------------------------------------============= ==============
The accompanying notes are an integral part of these consolidated financial
statements.
4
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- -----------------------------------------------------------------------------------------------------------------------------------
Statements of Consolidated Cash Flows
- -----------------------------------------------------------------------------------------------------------------------------------
Unaudited Nine Months Ended May 31,
---------------------------
(Dollars in millions) 2006 2005
- -----------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 833 $ 380
Adjustments to reconcile cash provided (required) by operations:
Items that did not require (provide) cash:
Depreciation and amortization expense 386 348
Bad-debt expense 40 36
Stock-based compensation expense (see Note 11) 47 --
Tax benefit on employee stock options -- 67
Excess tax benefits from stock-based compensation (81) --
Deferred income taxes 159 (90)
Equity affiliate expense -- net 21 20
Acquired in-process research and development -- 266
Solutia-related charge (see Note 15) -- 284
Other items that did not require cash 30 53
Changes in assets and liabilities that provided (required) cash, net of acquisitions:
Trade receivables (1,368) (917)
Inventories (51) (10)
Accounts payable and accrued liabilities 176 156
PCB litigation settlement insurance proceeds 21 9
Solutia-related payments (see Note 15) (23) (36)
Other items (6) (33)
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 184 533
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows Provided (Required) by Investing Activities:
Purchases of short-term investments (21) --
Maturities of short-term investments 150 300
Capital expenditures (234) (144)
Acquisitions of businesses, net of cash acquired (185) (1,506)
Technology and other investments (128) (44)
Other investments and property disposal proceeds 10 23
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Required by Investing Activities (408) (1,371)
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows Provided (Required) by Financing Activities:
Net change in financing with less than 90-day maturities 448 1,154
Short-term debt proceeds 6 38
Short-term debt reductions (26) (18)
Long-term debt proceeds 4 16
Long-term debt reductions (78) (288)
Payments on debt assumed in Seminis acquisition -- (495)
Payments on other financing (5) (5)
Treasury stock purchases (87) (149)
Stock option exercises 105 144
Excess tax benefits from stock-based compensation 81 --
Dividend payments (154) (129)
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 294 268
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 70 (570)
Cash and Cash Equivalents at Beginning of Period 525 1,037
- -----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 595 $ 467
- --------------------------------------------------------------------------------------------------===========================
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 THIRD QUARTER 2006 FORM 10-Q
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
- --------------------------------------------------------------------------------
NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
- --------------------------------------------------------------------------------
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 and nine months
ended May 31, 2006, and May 31, 2005, the Statements of Consolidated Operations
have 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 Statements of
Consolidated Financial Position as of May 31, 2006, 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, and Monsanto's Reports on Form 10-Q for the quarterly periods ended
Nov. 30, 2005, and Feb. 28, 2006. Financial information for the first nine
months of fiscal year 2006 should not be annualized because of the seasonality
of the company's business.
Certain prior-period amounts have been reclassified to conform with the
current-year presentation. Overdrafts were previously reported within short-term
debt in the Statements of Consolidated Financial Position but are now included
in accounts payable to better reflect the nature of the liabilities as book
overdrafts. As of Aug. 31, 2005, overdrafts were $156 million.
NOTE 2. NEW ACCOUNTING STANDARDS
- -------------------------------------------------------------------------------
In March 2006, the Financial Accounting Standards Board (FASB) issued SFAS No.
156, Accounting for Servicing of Financial Assets -- an amendment of FASB
Statement No. 140 (SFAS 156). SFAS 156 requires recognition of a servicing asset
or liability at fair value each time an obligation is undertaken to service a
financial asset by entering into a servicing contract. SFAS 156 also provides
6
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
guidance on subsequent measurement methods for each class of servicing assets
and liabilities and specifies financial statement presentation and disclosure
requirements. This statement is effective for fiscal years beginning after Sept.
15, 2006. The company is currently evaluating the impact of SFAS 156 on the
consolidated financial statements.
In September 2005, the 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 and,
as of the date of this report, did not have a material impact 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. The company does not
currently 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 in 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. Pursuant to the AJCA, the deduction for qualified
production activities is effective for the company's 2006 tax year. The effect
of the estimated deduction to be taken in the 2006 consolidated federal income
tax return is not material. 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, provided certain criteria are
met. As of May 31, 2006, the company had not yet finalized its plans for
repatriation of foreign earnings. Accordingly, as provided for in FSP 109-2, the
company has not adjusted its income taxes payable and income tax provision as of
and for the period ended May 31, 2006, to reflect the effect of the repatriation
provision. In late June 2006, the company's chief executive officer and board of
directors approved the company's domestic reinvestment plan of up to $500
million in repatriated foreign earnings under the AJCA. See Note 18 --
Subsequent Events -- for further discussion.
NOTE 3. BUSINESS COMBINATIONS
- --------------------------------------------------------------------------------
2006 Acquisitions: In September 2005, Monsanto's American Seeds, Inc. (ASI)
subsidiary acquired five regional U.S. seed companies for an aggregate purchase
price of $54 million (net of cash acquired), inclusive of transaction costs of
$2 million. In March 2006, ASI acquired two additional U.S. seed companies for
an aggregate purchase price of $6 million (net of cash acquired), inclusive of
transaction costs of less than $1 million. The financial results of these
acquisitions were included in the company's consolidated financial statements
from their respective dates of acquisition.
7
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
For all fiscal year 2006 acquisitions described above, the business operations
of the acquired entities were included in the Seeds and Genomics segment and are
expected to further bolster ASI's ability to directly serve farmer-customers
with a technology-rich, locally-oriented business model. 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 May 31, 2006, are summarized in the
aggregate in the following table. These allocations are subject to adjustment as
other assets and liabilities may be identified to which a portion of the
purchase price could be allocated. 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.
- ----------------------------------------------------------------------------------------------------------------------------
Aggregate
(Dollars in millions) Acquisitions
- ----------------------------------------------------------------------------------------------------------------------------
Tangible Assets $ 13
Goodwill 47
Other Intangible Assets 26
- ----------------------------------------------------------------------------------------------------------------------------
Total Assets Acquired 86
- ----------------------------------------------------------------------------------------------------------------------------
Total Liabilities Assumed 23
- ----------------------------------------------------------------------------------------------------------------------------
Net Assets Acquired 63
Cash Acquired 3
- ----------------------------------------------------------------------------------------------------------------------------
Purchase Price $ 60
- ---------------------------------------------------------------------------------------------------------------=============
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. The majority of the goodwill is not deductible
for tax purposes.
The acquired identifiable intangible assets of $26 million have a
weighted-average useful life of approximately seven years. Intangible assets are
comprised of acquired customer relationships of $17 million to be amortized on a
straight-line basis over seven years, trademarks and trade names of $7 million
to be amortized on a straight-line basis over lives ranging from seven to 10
years, and covenants not-to-compete of $2 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) for $52 million in cash (net
of cash acquired), and 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 Channel Bio Corp., acquired NC+
Hybrids, Inc. for $40 million in cash (net of cash acquired).
In third quarter fiscal year 2005, Monsanto acquired Seminis, Inc. for $1.0
billion in cash (net of cash acquired) and paid $495 million for the repayment
of its outstanding debt. The acquisition also included a contingent payment of
up to $125 million based on certain factors. In conjunction with the integration
of certain support services of Seminis with Monsanto's other businesses, 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
was accelerated. A $125 million liability was recorded as of Nov. 30, 2005,
resulting in additional purchase price and goodwill. This liability was paid
during second quarter 2006.
In third quarter fiscal year 2005, Monsanto acquired Stoneville Pedigreed Seed
Co. (formerly known as Emergent Genetics, Inc.) and Emergent Genetics India Ltd.
(collectively, "Stoneville") for $305 million (net of cash acquired). Debt of
$16 million was also assumed in the transaction.
In the three months and nine months ended May 31, 2005, charges of $254 million
and $266 million, respectively, were recorded in research and development (R&D)
expenses for the write-off of acquired in-process R&D (IPR&D). Management
believed that the technological feasibility of the IPR&D was not established and
that the research had no alternative future uses. Accordingly, the amounts
allocated to IPR&D were required to be expensed immediately under generally
accepted accounting principles.
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 (EITF 95-3), and primarily
8
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
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 acquired India cotton 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 acquired India cotton business include employee terminations and
relocations, exiting certain product lines and facility closures. As of May 31,
2006, estimated restructuring costs of $19 million have been recognized as
current liabilities in the purchase price allocations, and $5 million has been
charged against these liabilities, primarily related to payments for employee
terminations and relocations.
All fiscal year 2005 acquisitions described above 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.
These estimated fair values, including the EITF 95-3 liabilities discussed
above, were adjusted during the nine months ended May 31, 2006, resulting in
additional goodwill of $38 million.
NOTE 4. RESTRUCTURING
- -----------------------------------------------------------------------------------------------------------------------------
Restructuring activity was recorded in the Statements of Consolidated Operations as follows:
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
--------------------------- ---------------------------
(Dollars in millions) 2006 2005 2006 2005
- ---------------------------------------------------------------------------------------------- ------------- -------------
Restructuring Reversals (Charges) -- Net(1,2) $ 2 $ -- $ 2 $ (8)
- ---------------------------------------------------------------------------------------------- ------------- -------------
Income (Loss) from Continuing Operations Before Income Taxes 2 -- 2 (8)
Income Tax Benefit (Provision)(3) (1) -- (1) 21
- ---------------------------------------------------------------------------------------------- ------------- -------------
Income from Continuing Operations 1 -- 1 13
- ---------------------------------------------------------------------------------------------- ------------- -------------
Net Income $ 1 $ -- $ 1 $ 13
- -------------------------------------------------------------------=========================== ===========================
(1) The $2 million of restructuring reversals for the three months and nine
months ended May 31, 2006, was split by segment as follows: $1 million in
the Seeds and Genomics segment and $1 million in the Agricultural
Productivity segment.
(2) The $8 million of restructuring charges for the nine months ended May 31,
2005, was split by segment as follows: $7 million in the Seeds and Genomics
segment (recorded in the three months ended Feb.28, 2005) and $1 million in
the Agricultural Productivity segment.
(3) The $21 million of income tax benefit for the nine months ended May 31,
2005, includes $20 million related to tax losses incurred on the sale of
the European wheat and barley business. See below for further discussion.
Fiscal Year 2004 Restructuring Plan
On Oct. 15, 2003, Monsanto announced plans to continue to reduce costs primarily
associated with its agricultural chemistry business as that sector matures
globally. These plans included: (1) reducing costs associated with the company's
ROUNDUP herbicides 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 third quarter 2006, pre-tax restructuring reversals of $2 million were
recorded in the United States, primarily because severance and relocation costs
were lower than originally estimated. For the nine months ended May 31, 2005,
pre-tax restructuring charges of $8 million ($7 million aftertax) were comprised
of $7 million related to the Seeds and Genomics segment and $1 million related
to the Agricultural Productivity segment. The restructuring charges of $7
million recorded during second quarter 2005 included impairments incurred as a
result of office closures and anticipated asset sales in South Africa and the
United States. The office closure actions began in fiscal year 2004, and
additional write-downs were required in fiscal year 2005 based on revised
estimates of losses on dispositions of certain facilities in these countries.
In first quarter of fiscal year 2005, Monsanto recorded a deferred tax benefit
of $106 million, of which $20 million was recorded in continuing operations and
the remaining $86 million was recorded in discontinued operations. The $20
million tax benefit recorded in continuing operations was related to the
impairment of goodwill in the global wheat business as part of the fiscal year
2004 restructuring plan. As such, the benefit amount recorded in continuing
operations is reflected in the table above. See Note 8 -- Income Taxes -- and
9
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
Note 17 -- Discontinued Operations -- for further discussion of the $86 million
tax benefit recorded in discontinued operations.
As of Aug. 31, 2005, the remaining restructuring liability was $4 million, which
was related to work force reductions. During the nine months ended May 31, 2006,
liabilities of $2 million were reversed, primarily because severance and
relocation costs were lower than originally estimated, and $1 million was paid.
The remaining restructuring reserve was $1 million as of May 31, 2006.
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, the QSPE, or 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. Because QSPEs are excluded from
the scope of FASB Interpretation No. 46 (revised December 2003), Consolidation
of Variable Interest Entities (FIN 46R), and Monsanto does not have the
unilateral right to liquidate the QSPE, FIN 46R does not have an effect on
Monsanto's accounting for the U.S. customer financing program.
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
considered adequate compensation for the servicing activities. Discounts on the
sale of the customer loans and servicing revenues collected and earned were not
significant during the nine months ended May 31, 2006, and May 31, 2005.
Proceeds from customer loans sold through the financing program totaled $88
million and $169 million for the first nine months of fiscal years 2006 and
2005, respectively. These proceeds are included in net cash provided by
operating activities in the Statements of Consolidated Cash Flows. The loan
balance outstanding as of May 31, 2006, and Aug. 31, 2005, was $71 million and
$171 million, respectively. 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 May 31, 2006,
and Aug. 31, 2005, less than $1 million of loans sold through this financing
program were delinquent, and Monsanto recorded its guarantee liability at less
than $1 million, 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 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, the customer receivables and the related
liabilities that had been recorded since the program was established in November
2004 were removed from the company's consolidated balance sheet in May 2005 as a
noncash transaction. Proceeds from the transfer of receivables subsequent to the
May 2005 amendment are included in net cash provided by operating activities in
the Statements of Consolidated Cash Flows. Proceeds from customer loans sold
through the financing program were $38 million for the first nine months of
fiscal year 2006. The loan balance outstanding as of May 31, 2006, and Aug. 31,
2005, was $39 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
10
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
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 May 31, 2006, 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.
Monsanto also has agreements with banks that provide financing to its customers
in Brazil through credit programs that are subsidized by the Brazilian
government. Proceeds from the transfer of receivables through these programs are
included in net cash provided by operating activities in the Statements of
Consolidated Cash Flows and totaled $42 million and $32 million for the first
nine months of fiscal years 2006 and 2005, respectively. The loan balances
outstanding as of May 31, 2006, and Aug. 31, 2005, were $73 million and $53
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 May 31, 2006,
and 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 May 31, As of Aug. 31,
------------- --------------
(Dollars in millions) 2006 2005
- ----------------------------------------------------------------------------------------------------------- --------------
Finished Goods $ 779 $ 639
Goods In Process 783 884
Raw Materials and Supplies 201 167
- ----------------------------------------------------------------------------------------------------------- -------------
Inventories at FIFO Cost 1,763 1,690
Excess of FIFO over LIFO Cost (63) (26)
- ----------------------------------------------------------------------------------------------------------- -------------
Total $ 1,700 $ 1,664
- ----------------------------------------------------------------------------------------------============= =============
The increase in the excess of FIFO over LIFO cost is primarily the result of
cost increases in certain raw materials and energy required for glyphosate and
selective chemistry herbicide production. Hurricanes in August and September
2005 disrupted the supply of petrochemical feedstocks and natural gas in the
Gulf Coast region of the United States. These natural disasters and the global
energy cost escalations have contributed to price escalations for certain raw
materials and energy.
In conjunction with the purchase price allocation and alignment of Seminis
inventory classification to Monsanto accounting policies, certain Seminis
inventory was reclassified from finished goods to goods in process in second
quarter 2006. Such amounts have been reclassified as of Aug. 31, 2005, to
conform with the current-year presentation.
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
- --------------------------------------------------------------------------------
The fiscal year 2006 annual goodwill impairment test was performed as of March
1, 2006, and no indications of goodwill impairment existed as of that date.
Changes in the carrying amount of goodwill for the first nine months of fiscal
year 2006, by segment, are as follows:
11
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
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) 210 -- 210
Effect of Foreign Currency Translation and Other Adjustments 9 -- 9
- ----------------------------------------------------------------------------------------------------------------------------
Balance as of May 31, 2006 $ 1,402 $ 65 $ 1,467
- -----------------------------------------------------------------------------------=========================================
Information regarding the company's other intangible assets is as follows:
- ----------------------------------------------------------------------------------------------------------------------------
As of May 31, 2006 As of Aug. 31, 2005
---------------------------------------------- -----------------------------------------------
Carrying Accumulated Carrying Accumulated
(Dollars in millions) Amount Amortization Net Amount Amortization Net
- ------------------------------------------------------------------------- -----------------------------------------------
Acquired Germplasm $ 929 $ (511) $ 418 $ 926 $ (483) $ 443
Acquired Biotechnology
Intellectual Property 821 (352) 469 648 (285) 363
Trademarks and Trade Names 200 (43) 157 193 (34) 159
Customer Relationships 193 (17) 176 176 (6) 170
Other 34 (15) 19 32 (14) 18
- ------------------------------------------------------------------------- -----------------------------------------------
Total $ 2,177 $ (938) $ 1,239 $ 1,975 $ (822) $ 1,153
- ---------------------------============================================== ===============================================
The increase in acquired biotechnology intellectual property during the first
nine months of 2006 primarily resulted from a license agreement with the Regents
of the University of California (UC), under which Monsanto is granted an
exclusive commercial license for the manufacture of bovine somatotropin in
exchange for an upfront payment plus future royalties. Monsanto sells bovine
somatotropin under the brand name POSILAC, which is used to improve dairy cow
productivity. As described in Monsanto's Report on Form 10-Q for the quarterly
period ended Feb. 28, 2006, Monsanto paid a $100 million upfront royalty and
recorded an additional asset and corresponding liability of $61 million for
discounted minimum royalty obligations of $5 million annually through the 2023
expiration of UC's patent estate.
The increases in other intangible assets during the first nine months of 2006
resulted from the acquisitions described in Note 3 -- Business Combinations.
Total amortization expense of other intangible assets was $36 million in third
quarter of fiscal year 2006 and $38 million in third quarter of fiscal year
2005. Total amortization expense of other intangible assets for the nine months
ended May 31, 2006, and May 31, 2005, was $113 million and $93 million,
respectively. The estimated intangible asset amortization expense for fiscal
year 2006 through fiscal year 2010 is as follows:
- ----------------------------------------------------------
Year ending Aug. 31,
(Dollars in millions) Amount
- ----------------------------------------------------------
2006 $ 145
2007 140
2008 125
2009 100
2010 85
- ----------------------------------------------------------
NOTE 8. INCOME TAXES
- --------------------------------------------------------------------------------
Management regularly assesses the tax risk of the company's return filing
positions for all open years and establishes tax reserves accordingly. During
second quarter 2006, the Internal Revenue Service completed an audit of
Pharmacia Corporation for tax years 2000 to 2002 (for which period Monsanto was
a member of Pharmacia's consolidated group). As a result of the conclusion of
this audit, and to a lesser extent, the resolution of various state income tax
issues, Monsanto recorded an income tax benefit of $32 million in the first nine
months of 2006.
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. As of May
31, 2006, Monsanto has not recorded deferred taxes on foreign earnings because
12
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
any taxes on dividends would be substantially offset by foreign tax credits or
because Monsanto intends to reinvest those earnings indefinitely. As of May 31,
2006, the company had not yet finalized its plans for repatriation of foreign
earnings. Accordingly, as provided for in FSP 109-2, the company has not
adjusted its income taxes payable and income tax provision as of and for the
period ended May 31, 2006, to reflect the effect of the repatriation provision.
In late June 2006, the company's chief executive officer and board of directors
approved the company's domestic reinvestment plan of up to $500 million in
repatriated foreign earnings under the AJCA. See Note 18 -- Subsequent Events --
for further discussion.
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. DEBT AND OTHER CREDIT ARRANGEMENTS
- --------------------------------------------------------------------------------
As of May 31, 2006, Monsanto had a committed borrowing facility of $1.0 billion,
which was unused and expires in June 2009. During February 2006, Monsanto
elected to not renew a $1.0 billion 364-day facility, and it expired on March
10, 2006.
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:
- -----------------------------------------------------------------------------------------------------------------------------
Pension Benefits Three Months Ended May 31, Nine Months Ended May 31,
--------------------------- ---------------------------
(Dollars in millions) 2006 2005 2006 2005
- ---------------------------------------------------------------------------------------------- ---------------------------
Service Cost for Benefits Earned During the Period $ 10 $ 8 $ 31 $ 25
Interest Cost on Benefit Obligation 22 24 70 70
Assumed Return on Plan Assets (28) (27) (86) (80)
Amortization of Unrecognized Net Loss 14 9 41 27
- ---------------------------------------------------------------------------------------------- ---------------------------
Total Net Periodic Benefit Cost $ 18 $ 14 $ 56 $ 42
- -------------------------------------------------------------------=========================== ===========================
- -----------------------------------------------------------------------------------------------------------------------------
Health Care and Other Postretirement Benefits Three Months Ended May 31, Nine Months Ended May 31,
--------------------------- ---------------------------
(Dollars in millions) 2006 2005 2006 2005
- ---------------------------------------------------------------------------------------------- ---------------------------
Service Cost for Benefits Earned During the Period $ 4 $ 3 $ 11 $ 9
Interest Cost on Benefit Obligation 4 5 13 15
Amortization of Unrecognized Net Loss 1 1 4 3
- ---------------------------------------------------------------------------------------------- ---------------------------
Total Net Periodic Benefit Cost $ 9 $ 9 $ 28 $ 27
- -------------------------------------------------------------------=========================== ===========================
Monsanto contributed $62 million and $60 million to its pension plans in the
nine months ended May 31, 2006, and May 31, 2005, respectively. Pension
contributions were $1 million and less than $1 million for the three months
ended May 31, 2006, and May 31, 2005, respectively. As of May 31, 2006,
management expects to make additional contributions of less than $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.
13
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
NOTE 11. STOCK-BASED COMPENSATION PLANS
- --------------------------------------------------------------------------------
As described in Monsanto's Report on Form 10-Q for the quarterly period ended
Nov. 30, 2005, 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. 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 and nine months ended
May 31, 2006, reflect the impact of SFAS 123R, while the consolidated financial
statements for prior fiscal years have not been restated to reflect, and do not
include, the impact of SFAS 123R. The following table shows total stock-based
compensation expense included in the Statements of Consolidated Operations for
the three months and nine months ended May 31, 2006. Stock-based compensation
cost capitalized in inventories was not significant for the three months and
nine months ended May 31, 2006.
- ------------------------------------------------------------------------------------------------------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
-------------------------- ------------------------
(Dollars in millions) 2006 2006
- ------------------------------------------------------------------------------------------------ -----------------------
Cost of Goods Sold $ -- $ 2
Selling, General and Administrative Expenses(1) 10 36
Research and Development Expenses 3 9
- ------------------------------------------------------------------------------------------------ -----------------------
Pre-Tax Stock-Based Compensation Expense 13 47
Income Tax Benefit (5) (17)
- ------------------------------------------------------------------------------------------------ -----------------------
Net Stock-Based Compensation Expense $ 8 $ 30
- -------------------------------------------------------------------------======================= =======================
(1) Includes $1 million and $10 million for the three months and nine months
ended May 31, 2006, respectively, related to share-based awards for which
compensation expense was being recognized prior to the adoption of SFAS
123R, resulting in incremental expense of $9 million and $26 million,
respectively.
As of May 31, 2006, pre-tax unrecognized compensation expense, net of estimated
forfeitures, was $53 million for stock options, which will be recognized as
expense over a weighted-average period of 2.0 years; $11 million for nonvested
restricted stock units, which will be recognized over a weighted-average period
of 1.7 years; and $2 million for nonvested restricted stock, which will be
recognized over a weighted-average period of 2.6 years.
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 No. 123, Accounting for Stock-Based
Compensation.
In accordance with the modified prospective transition method, Monsanto's
consolidated financial statements for prior fiscal years have not been restated
and do not include the impact of SFAS 123R. The following t
able shows the effect
on net income and earnings 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 of SFAS 123R. Stock-based compensation included in net income
in the three months and nine months ended May 31, 2005, included expense for
awards of restricted stock, restricted stock units, stock appreciation rights,
phantom stock and awards granted under the Monsanto Non-Employee Director Equity
Incentive Compensation 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 period using the Black-Scholes model.
14
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Nine Months
Ended Ended
--------------- ---------------
(Dollars in millions, except per share amounts) May 31, 2005 May 31, 2005
- --------------------------------------------------------------------------------------------------------- ---------------
Net Income:
As reported $ 47 $ 380
Add: Stock-based compensation expense included in reported Net Income, net of tax 1 6
Less: Total stock-based compensation expense determined under the fair-value-based
method for all awards, net of tax (6) (22)
- --------------------------------------------------------------------------------------------------------- ---------------
Pro forma $ 42 $ 364
- ------------------------------------------------------------------------------------------=============== ===============
Basic Earnings per Share:
As reported $ 0.18 $ 1.43
Pro forma $ 0.16 $ 1.37
Diluted Earnings per Share:
As reported $ 0.17 $ 1.40
Pro forma $ 0.15 $ 1.34
- ------------------------------------------------------------------------------------------=============== ===============
NOTE 12. COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
Comprehensive income includes all nonshareowner changes in equity and consists
of net income (loss), foreign currency translation adjustments including 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 May 31, Nine Months Ended May 31,
-------------------------- ---------------------------
(Dollars in millions) 2006 2005 2006 2005
- ---------------------------------------------------------------------------------------------- ---------------------------
Comprehensive Income $ 310 $ 51 $ 911 $ 614
- ---------------------------------------------------------------------------------------------- ---------------------------
The components of accumulated other comprehensive loss are as follows:
- ------------------------------------------------------------------------------------------------------------------------------
As of May 31, As of Aug. 31,
------------- --------------
(Dollars in millions) 2006 2005
- ------------------------------------------------------------------------------------------------------------ --------------
Accumulated Foreign Currency Translations $ (489) $ (593)
Net Unrealized Gains on Investments, Net of Taxes 9 7
Net Accumulated Derivative Loss, Net of Taxes (30) (2)
Minimum Pension Liability, Net of Taxes (301) (301)
- ----------------------------------------------------------------------------------------------------------- ------------
Accumulated Other Comprehensive Loss $ (811) $ (889)
- -----------------------------------------------------------------------------------------------============ ============
NOTE 13. EARNINGS PER SHARE
- --------------------------------------------------------------------------------
Basic earnings per share (EPS) was computed using the weighted-average number of
common shares outstanding during the period shown in the table below. Diluted
EPS was computed taking into account the effect of dilutive potential common
shares, as shown in the table below. Potential common shares consist of stock
options using the treasury stock method. Dilutive potential common shares noted
below exclude stock options of 0.1 million and less than 0.1 million for the
three months ended May 31, 2006, and May 31, 2005, respectively, and less than
0.1 million for the nine months ended May 31, 2006, and May 31, 2005. These
potential common shares were excluded because their effect was antidilutive or
because the options' exercise prices were greater than the average market price
of the common shares.
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
--------------------------- ---------------------------
2006 2005 2006 2005
- ---------------------------------------------------------------------------------------------- ---------------------------
Weighted-Average Number of Common Shares 270.8 268.0 269.6 266.4
Dilutive Potential Common Shares 5.3 5.8 5.9 5.9
- ---------------------------------------------------------------------------------------------- ---------------------------
15
MONSANTO COMPANY THIRD 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:
- ----------------------------------------------------------------------------------------------------------------------------
Nine Months Ended May 31,
--------------------------
(Dollars in millions) 2006 2005
- ----------------------------------------------------------------------------------------------------------------------------
Interest $ 76 $ 63
Taxes 92 56
- ----------------------------------------------------------------------------------------------------------------------------
During the first nine months of fiscal 2006, the company recorded the following
noncash investing and financing transactions:
o In October 2005, the board of directors authorized the purchase of up to
$800 million of the company's common stock over a four-year period. Through
May 31, 2006, the company had acquired 1.1 million shares for $90 million,
$3 million of which is included in accrued liabilities as of May 31, 2006.
o During the first nine months of fiscal 2006, the company recognized noncash
transactions related to acquisitions. See Note 3 -- Business Combinations
-- for details of assets acquired and liabilities assumed in acquisitions.
o In second quarter 2006, an intangible asset and a liability in the amount
of $61 million was recorded as a result of minimum annual royalty
provisions in the UC license agreement described in Note 7 -- Goodwill and
Other Intangible Assets.
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 Monsanto's business activities. Information with
respect to these lawsuits appears in Part II -- Item 8 -- Note 23 -- Commitments
and Contingencies and Part I -- Item 3 -- Legal Proceedings in Monsanto's Report
on Form 10-K for the fiscal year ended Aug. 31, 2005, in Part I -- Item 1 --
Note 15 -- Commitments and Contingencies and Part II -- Item 1 -- Legal
Proceedings in Monsanto's Reports on Form 10-Q for the quarterly periods ended
Nov. 30, 2005, and Feb. 28, 2006, and in this report. Monsanto believes it has
meritorious legal arguments and will continue to represent its interests
vigorously in all of the proceedings that Monsanto is defending or prosecuting.
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.
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, and in Monsanto's Reports on Form 10-Q for the quarterly
periods ended Nov. 30, 2005, and Feb. 28, 2006. Pursuant to the Sept. 1, 2000,
Separation Agreement between Monsanto and Pharmacia, as amended (Separation
Agreement), Monsanto was required to indemnify Pharmacia for liabilities that
Solutia assumed from Pharmacia under a Distribution Agreement entered into
between those companies in connection with the spinoff of Solutia on Sept. 1,
1997, as amended (Distribution Agreement), to the extent that Solutia fails to
pay, perform or discharge those liabilities. Those liabilities are referred to
as "Solutia's Assumed Liabilities." Solutia's Assumed Liabilities may include,
among others, litigation, environmental remediation, and certain retiree
liabilities relating to individuals who were employed by Pharmacia prior to the
Solutia spinoff.
16
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
Following is an update of certain of the proceedings related to Solutia's
bankruptcy:
o Monsanto filed its proof of claim on Nov. 29, 2004, and it remains
effective. Solutia, the Creditors' Committee, Monsanto and Pharmacia have
agreed that Monsanto and Pharmacia may amend their initial proofs of claim
and file additional claims through Oct. 1, 2006, which date may be extended
by further agreement of the parties.
o On March 7, 2005, the Official Committee of Equity Security Holders filed a
Complaint and Objection to Claim against Monsanto and Pharmacia, objecting
to the claims filed by Monsanto and Pharmacia against Solutia on the
grounds that Solutia was undercapitalized at its inception, Pharmacia
failed to disclose the full extent of the potential legacy liabilities at
the time of Solutia's spinoff, and Solutia's indemnity obligations to
Pharmacia and Monsanto are unduly burdensome. The Complaint and Objection
to Claim seeks, among other things, to: (i) recharacterize Monsanto's and
Pharmacia's claims as equity interests and subordinate these equity
interests; (ii) disallow and expunge any claims of Monsanto and Pharmacia
related to the spinoff; (iii) obtain a declaration that the provisions of
the Distribution Agreement requiring Solutia to assume the legacy
liabilities and requiring Solutia to indemnify Monsanto and Pharmacia were
unconscionable and may be avoided; and (iv) allocate all liability for
claims related to environmental contamination allegedly caused by Pharmacia
to Monsanto and Pharmacia and obtain a declaration that Solutia is entitled
to an implied indemnity in contract or in tort from Pharmacia and Monsanto
for any liability of Solutia arising from the legacy liabilities of
Pharmacia. On May 24, 2005, Monsanto and Pharmacia filed a motion to
dismiss the Complaint and Objection to Claim, and on April 11, 2006, the
Bankruptcy Court announced that it would deny Pharmacia's and Monsanto's
motion to dismiss and permit this litigation to proceed. Pharmacia and
Monsanto intend to challenge this ruling. The Court has set a trial
commencement date of Sept. 11, 2006.
o Various parties participating in Solutia's bankruptcy proceeding, including
the Official Committee of Equity Security Holders, have filed objections to
Solutia's Disclosure Statement. The Bankruptcy Court has deferred a hearing
to consider the legal adequacy of the Disclosure Statement pending rulings
on the above-described lawsuit by the Official Committee of Equity Security
Holders and a lawsuit filed against Solutia by JPMorgan Chase Bank, as
indenture trustee for certain of Solutia's bondholders. Since May 23, 2006,
a trial regarding JPMorgan Chase Bank's claim has been ongoing, and various
parties have asserted that a determination of this claim is an essential
component of the Disclosure Statement. If and when the Court resolves all
objections and determines that the Disclosure Statement provides sufficient
information for creditors and other parties to vote on the Plan, the Plan
and Disclosure Statement will be distributed to all parties for voting
purposes. Following the voting process, the Court will hold a hearing to
consider court approval or "confirmation" of the Plan. If the Court
confirms the Plan, Solutia would emerge from Chapter 11 thereafter.
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 to
reflect the discounted cost that Monsanto expects to incur in connection with
the third-party tort litigation and environmental liabilities that Monsanto is
managing, defending and funding on Pharmacia's behalf and which are Solutia's
Assumed Liabilities. As of May 31, 2006, $219 million was recorded in the
Condensed Statement of Consolidated Financial Position ($55 million in current
liabilities and $164 million in long-term liabilities). Actual costs to Monsanto
may differ materially from this estimate.
Receivables of $50 million were recorded as of May 31, 2006 ($27 million was
recorded in miscellaneous receivables and $23 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
Statements of Consolidated Operations as Solutia-related expenses.
17
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
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 until the outcome of all matters in the
Chapter 11 proceeding are resolved. The Plan is supported by the Creditors'
Committee, the Official Committee of Retirees, Pharmacia and Monsanto; however,
no assurance can be given that the Plan will be approved. The Plan must be voted
upon by Solutia's creditors and other interested parties and must be approved by
the Bankruptcy Court.
Solutia Litigation Obligations: Included in the Solutia-related charge are
amounts related to certain of Solutia's third-party tort litigation, including
lawsuits involving polychlorinated biphenyls (PCBs) and other chemical and
premises liability litigation. The following describes the significant
third-party tort proceedings reflected in the Solutia-related charge.
As described in Monsanto's Report on Form 10-K for the fiscal year ended Aug.
31, 2005, Pharmacia is a defendant to a case filed by the Commonwealth of
Pennsylvania, which is pending in the Commonwealth Court of Pennsylvania and
related to the Transportation and Safety Building in Harrisburg, Pennsylvania.
In June 1994, a fire broke out in the building. The Commonwealth claims that
PCBs in the building's fireproofing contaminated the building and necessitated
its demolition and temporary relocation of Commonwealth employees. The
Commonwealth had sought the cost of constructing a new building on the site, and
the jury returned a verdict of $90 million against Pharmacia, which was reduced
to $45 million by the trial court. The verdict was appealed to the Supreme Court
of Pennsylvania and on May 25, 2006, was reversed, vacated and remanded for a
new trial limited to alleged damage to the building from the presence of PCBs in
the building before the fire, and subject to rulings that depreciation must be
considered in determining the extent of property damage. Application has been
made in the appeal to recover the costs associated with the appeal.
As described in Monsanto's Report on Form 10-K for the fiscal year ended Aug.
31, 2005, 66 cases pending in state or federal court in Alabama, which involve a
total of 4,677 plaintiffs, claim personal injury or property damage allegedly
arising from exposure to PCBs discharged from an Anniston, Alabama, plant site
that was formerly owned by Pharmacia and was transferred to Solutia. These cases
purport to involve claims by individuals not included within the August 2003
global settlement for the Tolbert and Abernathy cases.
As described in Monsanto's Report on Form 10-K for the fiscal year ended Aug.
31, 2005, on Dec. 17, 2004, 15 plaintiffs filed a purported class action
lawsuit, styled Virdie Allen, et al. v. Monsanto, et al., in the Putnam County,
West Virginia, state court against Monsanto, Pharmacia and seven other
defendants. Monsanto is named as the successor in interest to the liabilities of
Pharmacia. The alleged class consists of all current and former residents,
workers, and students who, between 1949 and the present, were allegedly exposed
to dioxins/furans contamination in counties surrounding Nitro, West Virginia.
The complaint alleges that the source of the contamination is a chemical plant
in Nitro, formerly owned and operated by Pharmacia and later by Flexsys, a joint
venture between Solutia and Akzo Nobel Chemicals, Inc. (Akzo Nobel). Akzo Nobel
and Flexsys are named defendants in the case but Solutia is not, due to its
pending bankruptcy proceeding. The suit seeks damages for property clean up
costs, loss of real estate value, funds to test property for contamination
levels, funds to test for human contamination and future medical monitoring
costs. The complaint also seeks an injunction against further contamination and
punitive damages. Akzo Nobel and the Flexsys group of defendants tendered their
cases to Monsanto for indemnification and defense. Monsanto rejected the tender
by Akzo Nobel but agreed to indemnify and defend the Flexsys defendant group.
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 describes the significant environmental matters reflected in the
Solutia-related charge.
As described in Monsanto's Report on Form 10-K for the fiscal year ended Aug.
31, 2005, and Monsanto's Report on Form 10-Q for the quarterly period ended Nov.
30, 2005, on Aug. 4, 2003, the U.S. District Court for the Northern District of
Alabama approved a Revised Partial Consent Decree (RPCD), pursuant to which
Pharmacia and Solutia are obligated to perform PCB residential cleanup work and
a remedial investigation/feasibility study of PCB contamination in Anniston,
among other things. Based on Solutia's failure to perform, on March 25, 2004,
Monsanto, acting on behalf of Pharmacia, entered into an arrangement with the
EPA and Solutia to perform certain environmental obligations at the Anniston,
Alabama, and Sauget, Illinois, sites under the RPCD and other orders where both
Solutia and Pharmacia are named parties. As a part of this arrangement, Monsanto
18
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
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 of approximately $1 million as of that date,
based on an alleged failure to comply with the Anniston RPCD. Monsanto believes
that Pharmacia is in full compliance with the RPCD and is in the process of
negotiating with the EPA a resolution of this matter on Pharmacia's behalf.
Other Solutia-Related Matters: Monsanto is a party to several agreements with
Solutia for the supply of raw materials and services used in the production of
an intermediate for glyphosate at Monsanto's facility at Chocolate Bayou, Texas.
In February 2006, Monsanto prepaid Solutia $29 million for raw materials and
services in consideration for a reduction in future payments owed by Monsanto
under the supply agreements. As of May 31, 2006, approximately $20 million of
the prepayment amount remains outstanding.
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 $114 million as of May 31, 2006. Based on a
current assessment of credit exposure, Monsanto has recorded a liability of $2
million related to the fair value of these guarantees. Monsanto's recourse under
these guarantees is limited to the customers, and it is not currently estimable.
Disclosure regarding these guarantees and other guarantees Monsanto provides for
certain customer loans in the United States can be found in Note 5 -- Customer
Financing Programs -- of this Form 10-Q.
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. 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.
19
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
--------------------------- ---------------------------
(Dollars in millions) 2006 2005 2006 2005
- ---------------------------------------------------------------------------------------------- ---------------------------
Net Sales(1)
Corn seed and traits $ 502 $ 431 $ 1,580 $ 1,304
Soybean seed and traits 311 204 933 827
Vegetable and fruit seed(2) 142 87 415 87
All other crops seeds and traits 380 336 568 489
- ---------------------------------------------------------------------------------------------- ---------------------------
Total Seeds and Genomics $ 1,335 $ 1,058 $ 3,496 $ 2,707
- ---------------------------------------------------------------------------------------------- ---------------------------
ROUNDUP and other glyphosate-based herbicides $ 654 $ 626 $ 1,630 $ 1,541
All other agricultural productivity products 359 356 827 772
- ---------------------------------------------------------------------------------------------- ---------------------------
Total Agricultural Productivity $ 1,013 $ 982 $ 2,457 $ 2,313
- ---------------------------------------------------------------------------------------------- ---------------------------
Total $ 2,348 $ 2,040 $ 5,953 $ 5,020
- -------------------------------------------------------------------=========================== ===========================
EBIT(3)
Seeds and Genomics $ 393 $ 4 $ 1,027 $ 510
Agricultural Productivity 147 191 280 12
- ---------------------------------------------------------------------------------------------- ---------------------------
Total $ 540 $ 195 $ 1,307 $ 522
- -------------------------------------------------------------------=========================== ==========================
Depreciation and Amortization Expense
Seeds and Genomics $ 79 $ 81 $ 248 $ 209
Agricultural Productivity 48 46 138 139
- ---------------------------------------------------------------------------------------------- ---------------------------
Total $ 127 $ 127 $ 386 $ 348
- -------------------------------------------------------------------=========================== ===========================
(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 before interest and taxes; see the following
table for reconciliation. Earnings is intended to mean net income as
presented in the Statements 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 for each period follows:
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
--------------------------- ---------------------------
(Dollars in millions) 2006 2005 2006 2005
- ---------------------------------------------------------------------------------------------- ---------------------------
EBIT $ 540 $ 195 $ 1,307 $ 522
Interest Expense -- Net 25 22 63 52
Income Tax Provision(1) 181 126 411 90
- ---------------------------------------------------------------------------------------------- ---------------------------
Net Income $ 334 $ 47 $ 833 $ 380
- -------------------------------------------------------------------=========================== ===========================
(1) Includes the income tax provision from continuing operations and the income
tax benefit from discontinued operations.
NOTE 17. DISCONTINUED OPERATIONS
- --------------------------------------------------------------------------------
Environmental technologies businesses: As described in Monsanto's Report on Form
10-K for the fiscal year ended Aug. 31, 2005, 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, and 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. The environmental technologies
businesses were previously reported as part of the Agricultural Productivity
segment.
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. The title to the receivable related to this power plant and related
fixed assets 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 May 31, 2006, and Aug. 31, 2005. 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 May 31, 2006, this
receivable had a deferred tax liability of $4 million recorded as a liability of
20
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
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 the three and nine
months ended May 31, 2006, and May 31, 2005, the Statements of Consolidated
Operations have been conformed to this presentation. As of May 31, 2006, and
Aug. 31, 2005, the Condensed Statements of Consolidated Financial Position have
been conformed to this presentation. The remaining assets and liabilities of the
environmental technologies businesses as of May 31, 2006, and Aug. 31, 2005,
follow:
- ----------------------------------------------------------------------------------------------------------------------------
As of May 31, As of Aug. 31,
------------- -------------
(Dollars in millions) 2006 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 May 31, Nine Months Ended May 31,
--------------------------- ---------------------------
(Dollars in millions) 2006 2005 2006 2005
- ---------------------------------------------------------------------------------------------- ---------------------------
Net Sales $ -- $ 44 $ -- $ 121
Income (Loss) from Operations of Discontinued Businesses (1) 4 (1) 6
Income Tax Benefit (1) (2) (1) (88)
- ---------------------------------------------------------------------------------------------- ---------------------------
Income on Discontinued Operations $ -- $ 6 $ -- $ 94
- -------------------------------------------------------------------=========================== ===========================
21
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
NOTE 18. SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
In June 2006, ASI entered into agreements to acquire five additional U.S. seed
companies for an aggregate purchase price of $77 million.
On June 27, 2006, after approval by the company's chief executive officer, the
board of directors approved a domestic reinvestment plan of up to $500 million
in repatriated foreign earnings pursuant to the temporary repatriation incentive
under the American Jobs Creation Act of 2004 described in Note 8 - Income Taxes.
Accordingly, the company expects to repatriate foreign earnings totaling between
$425 million and $500 million and will record a tax charge and related tax
liability of $20 million to $25 million in the fourth quarter of 2006. Planned
uses of the repatriated funds include domestic expenditures relating to research
and development, capital expenditures, and other permitted activities.
On June 27, 2006, the board of directors approved a two-for-one split of the
company's common shares. The additional shares resulting from the stock split
will be payable on July 28, 2006, to shareowners of record on July 7, 2006.
Basic earnings per share and diluted earnings per share for the three and nine
months ended May 31, 2006, and May 31, 2005, are presented below on a pro forma
basis to reflect the effect of the two-for-one stock split.
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
--------------------------- ---------------------------
2006 2005 2006 2005
- ---------------------------------------------------------------------------------------------- ---------------------------
Pro Forma Weighted Average Shares Outstanding:
Basic 541.6 536.0 539.2 532.8
Diluted 552.2 547.6 551.0 544.6
Pro Forma Basic Earnings per Share:
Income from continuing operations $ 0.62 $ 0.08 $ 1.54 $ 0.54
Income on discontinued operations -- 0.01 -- 0.17
- ---------------------------------------------------------------------------------------------- ---------------------------
Net Income $ 0.62 $ 0.09 $ 1.54 $ 0.71
- -------------------------------------------------------------------=========================== ===========================
Pro Forma Diluted Earnings per Share:
Income from continuing operations $ 0.60 $ 0.08 $ 1.51 $ 0.53
Income on discontinued operations -- 0.01 -- 0.17
- ---------------------------------------------------------------------------------------------- ---------------------------
Net Income $ 0.60 $ 0.09 $ 1.51 $ 0.70
- -------------------------------------------------------------------=========================== ===========================
22
MONSANTO COMPANY THIRD 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 and nine months ended May 31, 2006, and
May 31, 2005, the Statements of Consolidated Operations have 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 Statements of Consolidated Financial
Position as of May 31, 2006, 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, and Monsanto's Reports on Form 10-Q for the quarterly
periods ended Nov. 30, 2005, and Feb. 28, 2006. Financial information for the
first nine 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
23
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
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
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, cash flows, financial position, or comprehensive income, 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 Statements 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 for the three and nine months ended May 31, 2006, and May 31,
2005.
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 operating activities 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 operating activities
and net cash required by investing activities on the Statements of Consolidated
Cash Flows.
Executive Summary
Consolidated Operating Results -- Net sales increased $308 million in the
three-month comparison and $933 million in the nine-month comparison. In third
quarter 2006, net sales improved as a result of increased sales of U.S. soybean
seed and traits, improved sales of U.S. corn seed and traits, and incremental
sales from the Seminis Inc. vegetable and fruit seed business (Seminis) that we
acquired in March 2005. Sales of U.S. cotton traits and U.S. ROUNDUP and other
glyphosate-based herbicides also increased. In the first nine months of 2006,
net sales increased as a result of sales from Seminis, increased sales of U.S.
corn seed and traits, improved sales of U.S. soybean seed and traits, and
increased sales of cotton traits in the United States and Australia. Further,
Agricultural Productivity net sales improved primarily because of increased
sales volume of ROUNDUP and other glyphosate-based herbicides, acetanilide-based
herbicides, and animal agriculture products all in the United States. The
effective tax rate for the third quarter 2006 was 35 percent, compared with 76
percent in the third quarter 2005, which included nondeductible in-process
research and development (IPR&D) write-offs that increased our effective tax
rate by 46 percentage points. The effective tax rate for the first nine months
of 2006 was 33 percent, compared with 38 percent in the prior-year comparable
period. Net income in third quarter 2006 was $1.21 per share, compared with
$0.17 per share in third quarter 2005. Net income in the first nine months of
2006 was $3.02 per share, compared with $1.40 per share in the prior-year
comparable period.
We adopted SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R) on Sept.
1, 2005. As a result, the third quarter and first nine months results of 2006
included incremental after-tax stock-based compensation expense of $8 million
($0.03 per share) and $24 million ($0.09 per share), respectively. See Note 11
- -- Stock-Based Compensation Plans -- for additional discussion.
The following are significant factors which affected the first nine months 2005
results:
o We wrote off IPR&D related to acquisitions of $254 million and $266 million
in the three months and nine months ended May 31, 2005, respectively.
o In first quarter 2005, we recorded an after-tax charge of $181 million
($284 million pretax), or $0.66 per share, associated with certain
liabilities in connection with the Solutia bankruptcy.
o In first quarter 2005, we recorded a deferred tax benefit of $106 million,
or $0.39 per share, as a result of the loss incurred on the European wheat
and barley business. Of this tax benefit, $20 million was recorded in
continuing operations and $86 million was recorded in discontinued
operations.
24
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
Financial Condition, Liquidity, and Capital Resources -- In the first nine
months of 2006, net cash provided by operating activities was $184 million,
compared with $533 million in the prior-year first nine months. Net cash
required by investing activities was $408 million in the first nine months of
2006, compared with $1.4 billion in the first nine months of 2005. Free cash
flow was a negative $224 million in the first nine months of 2006, compared with
a negative $838 million in the prior-year first nine months. In the first nine
months of 2006, we used cash for acquisitions of businesses of $185 million
compared to $1.5 billion in the prior year period. Cash required by the change
in trade receivables increased $451 million in the first nine months of 2006 as
the sales increase from our core business was more significant than the
collections improvement. In the first nine months of 2005, the timing of the
maturities of our short-term investments created a source of cash of $300
million, compared with $150 million in the current-year first nine months. In
the first nine months of 2006, we used cash of $234 million for capital
expenditures. In the first nine months of 2005, we used cash of $144 million for
capital expenditures. For a more detailed discussion of the factors affecting
the free cash flow comparison, see the "Cash Flow" section of the "Financial
Condition, Liquidity, and Capital Resources" section in this MD&A.
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 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 (R&D) 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 biotechnology and breeding research are
generating a potentially 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. We also continue to focus on different sales and distribution
opportunities for our products.
In fiscal year 2005, we completed the acquisitions of Advanta and Seminis and
formed ASI, which acquired Channel Bio and NC+ Hybrids. In fiscal year 2005, we
also completed the acquisition of Stoneville Pedigreed Seed Co. (formerly known
as Emergent Genetics, Inc.) and Emergent Genetics India Ltd. (collectively,
"Stoneville"). As of May 31, 2006, ASI has acquired several regional U.S. seed
companies in 2006. Seminis is well positioned to capitalize on the vegetable and
fruit segment of the agriculture industry and 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 Stoneville completes a strategic cotton
germplasm and traits platform modeled on our branded and licensing strategies
for corn and soybeans. In fiscal year 2006, we will continue 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 (see
Note 15 -- Commitments and Contingencies -- for further details), 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. 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 THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
------------------------------- -------------------------------
2006 2005 % Change 2006 2005 % Change
- ----------------------------------------------------------------------------------------- -------------------------------
Net Sales $ 2,348 $ 2,040 15% $ 5,953 $ 5,020 19%
Gross Profit 1,194 1,005 19% 3,068 2,511 22%
Operating Expenses:
Selling, general and administrative expenses 430 367 17% 1,173 947 24%
Research and development expenses 191 155 23% 532 401 33%
Acquired in-process research and development (see -- 254 (100)% -- 266 (100)%
Note 3)
Restructuring charges (reversals) -- net (2) -- (100)% (2) 8 (125)%
- ----------------------------------------------------------------------------------------- -------------------------------
Total Operating Expenses 619 776 (20)% 1,703 1,622 5%
- ----------------------------------------------------------------------------------------- -------------------------------
Income from Operations 575 229 151% 1,365 889 54%
Interest expense 35 29 21% 100 78 28%
Interest income (10) (7) 43% (37) (26) 42%
Solutia-related expenses (see Note 15) 7 7 -- 20 300 (93)%
Other expense -- net 27 31 (13)% 37 73 (49)%
- ----------------------------------------------------------------------------------------- -------------------------------
Income from Continuing Operations Before Income Taxes 516 169 205% 1,245 464 168%
Income tax provision 182 128 42% 412 178 131%
- ----------------------------------------------------------------------------------------- -------------------------------
Income from Continuing Operations 334 41 715% 833 286 191%
Discontinued Operations (see Note 17):
Income (loss) from operations of discontinued (1) 4 (125)% (1) 6 (117)%
businesses
Income tax benefit (1) (2) (50)% (1) (88) (99)%
- ----------------------------------------------------------------------------------------- -------------------------------
Income on Discontinued Operations -- 6 (100)% -- 94 (100)%
- ----------------------------------------------------------------------------------------- -------------------------------
Net Income $ 334 $ 47 611% $ 833 $ 380 119%
- ----------------------------------------------------------=============================== ================================
Diluted Earnings per Share:
Income from continuing operations $ 1.21 $ 0.15 707% $ 3.02 $ 1.05 188%
Income on discontinued operations -- 0.02 (100)% -- 0.35 (100)%
- ----------------------------------------------------------------------------------------- -------------------------------
Net Income $ 1.21 $ 0.17 612% $ 3.02 $ 1.40 116%
- ----------------------------------------------------------=============================== ===============================
Effective Tax Rate (continuing operations) 35% 76% 33% 38%
Comparison as a Percent of Net Sales:
Gross profit 51% 49% 52% 50%
Selling, general and administrative expenses 18% 18% 20% 19%
Research and development expenses 8% 8% 9% 8%
Total operating expenses 26% 38% 29% 32%
Income from continuing operations before income 22% 8% 21% 9%
taxes
Net income 14% 2% 14% 8%
26
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
Third Quarter Fiscal Year 2006
- --------------------------------------------------------------------------------
The following explains the significant components of our results of operations
that affected the quarter-to-quarter comparison of our third quarter income from
continuing operations:
Net sales increased 15 percent in third quarter 2006 from the same quarter a
year ago. Our Seeds and Genomics segment net sales improved 26 percent, and our
Agricultural Productivity segment net sales increased 3 percent. The following
table presents the percentage changes in third quarter 2006 worldwide net sales
by segment compared with the prior-year quarter, including the effect that
volume, price, currency and acquisitions had on these percentage changes:
- ----------------------------------------------------------------------------------------------------------------------------
Third Quarter 2006 Percentage Change in Net Sales vs. Third Quarter 2005
----------------------------------------------------------------------------------------------
Impact of
Volume Price Currency Subtotal Acquisitions(1) Net Change
----------------------------------------------------------------------------------------------
Seeds and Genomics Segment 12% 3% -- 15% 11% 26%
Agricultural Productivity
Segment 2% 1% -- 3% -- 3%
Total Monsanto Company 7% 2% -- 9% 6% 15%
- ----------------------------------------------------------------------------------------------------------------------------
(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.
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 19 percent in the three-month comparison. Total company
gross profit as a percent of net sales increased 2 percentage points to 51
percent in third quarter 2006 driven by the increase in sales and gross profit
from the Seeds and Genomics segment. Gross profit as a percent of sales for the
Seeds and Genomics segment increased 3 percentage points in the
quarter-over-quarter comparison to 61 percent. This improvement was primarily
driven by the increased net selling price of U.S. soybean traits and increased
penetration of higher margin stacked traits, particularly in U.S. corn. Gross
profit as a percent of sales for the Agricultural Productivity segment decreased
3 percentage points in the quarter-over-quarter comparison to 37 percent. A key
contributor to this decline was higher cost of goods sold for herbicides because
of price increases for certain raw materials and energy required for herbicide
production.
Operating expenses decreased 20 percent, or $157 million, in third quarter 2006
from the prior-year comparable quarter. We wrote-off IPR&D of $254 million
related to acquisitions in third quarter 2005. In the three-month comparison,
selling, general and administrative (SG&A) expenses increased 17 percent and R&D
expenses increased 23 percent primarily because of expenses of the businesses we
acquired in 2005, largely Seminis and, to a lesser extent, Stoneville. Also,
SG&A and R&D expenses increased because of higher staffing levels in 2006.
Further, in 2006, we recorded stock-based compensation expense in accordance
with SFAS 123R; accordingly, we recorded an incremental $9 million in SG&A
expenses and an incremental $3 million in R&D expenses (see Note 11 --
Stock-Based Compensation Plans). As a percent of net sales, SG&A expenses and
R&D expenses were 18 percent and 8 percent, respectively, in both three month
periods.
Interest expense increased $6 million in the three-month comparison because of
higher long-term debt in 2006, when compared to 2005.
Interest income increased $3 million in the quarter-over-quarter comparison
because of interest earned on higher cash balances in Brazil in the third
quarter 2006.
Income tax provision was $182 million in third quarter 2006, compared with $128
million in the prior-year quarter. The effective tax rate decreased to 35
percent from 76 percent in third quarter 2005. Third quarter 2005 included
nondeductible IPR&D write-offs related to our acquisitions of Seminis,
Stoneville and NC+ Hybrids of $254 million, increasing our effective tax rate by
46 percentage points. Excluding this unfavorable adjustment in third quarter
2005, the effective rate would have been higher in third quarter 2006, when
compared to 2005, primarily driven by a shift in Monsanto's projected earnings
mix to higher tax rate jurisdictions.
27
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
First Nine Months of Fiscal Year 2006
The following explains the significant components of our results of operations
that affected the comparison of our first nine months of fiscal years 2006 and
2005 income from continuing operations:
Net sales increased 19 percent in the first nine months of 2006 from the same
period a year ago. Our Seeds and Genomics segment net sales improved 29 percent,
and our Agricultural Productivity segment net sales improved 6 percent. The
following table presents the percentage changes in the first nine months of 2006
worldwide net sales by segment compared with the prior-year first nine months,
including the effect that volume, price, currency and acquisitions had on these
percentage changes:
- ----------------------------------------------------------------------------------------------------------------------------
First Nine Months 2006 Percentage Change in Net Sales vs. First Nine Months 2005
----------------------------------------------------------------------------------------------
Impact of
Volume Price Currency Subtotal Acquisitions(1) Net Change
----------------------------------------------------------------------------------------------
Seeds and Genomics Segment 10% 3% -- 13% 16% 29%
Agricultural Productivity
Segment 4% 1% 1% 6% -- 6%
Total Monsanto Company 7% 2% 1% 10% 9% 19%
- ----------------------------------------------------------------------------------------------------------------------------
(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.
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 22 percent in the nine-month comparison. Total company
gross profit as a percent of net sales increased 2 percentage points to 52
percent in the first nine months of 2006 from the same period a year ago.
o Gross profit as a percent of sales for the Seeds and Genomics segment
increased 1 percentage point to 63 percent in the first nine-months
comparison. This improvement was primarily driven by increased penetration
of higher margin stacked traits, particularly in U.S. corn, and to a lesser
extent, the increase in the net selling price of U.S. soybean traits. These
positive factors were partially offset by an incremental $28 million in
amortization associated with the inventory step-up 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 1 percentage point for the
Agricultural Productivity segment to 35 percent in the first nine months of
2006. A key contributor to this decline was higher cost of goods sold for
herbicides because of price increases for certain raw materials and energy
required for herbicide production. Also, as a percent of net sales, POSILAC
gross profit declined in the nine-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 a 2005 portfolio rationalization of other selective herbicides in
Argentina, offset these factors.
Operating expenses increased 5 percent, or $81 million, in the first nine months
of 2006 from the prior-year comparable nine months. In the nine-month
comparison, SG&A expenses increased 24 percent, and R&D expenses increased 33
percent, primarily because of expenses of the businesses we acquired in 2005,
higher staffing levels, and stock-based compensation. In accordance with SFAS
123R, we recorded an incremental $26 million in SG&A expenses and an incremental
$9 million in R&D expenses for stock-based compensation (see Note 11 --
Stock-Based Compensation Plans). As a percent of net sales, SG&A expenses
increased 1 percentage point to 20 percent, and R&D expenses increased 1
percentage point to 9 percent in the first nine months of 2006. Additionally,
these increases were partially offset by the $266 million IPR&D write-off in the
first nine months of 2005.
Interest expense increased $22 million in the nine-month comparison because of
higher long-term borrowings and higher commercial paper usage in the first nine
months of 2006, when compared to the first nine months of 2005.
Interest income increased $11 million in the nine-month comparison because of
interest earned on higher cash balances in Brazil in the first nine months of
2006.
28
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
In the first nine months of 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. 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 expense -- net was $37 million in the first nine months of 2006, compared
with $73 million in the first nine months of 2005. In first quarter 2005, we
established a $15 million reserve for litigation (unrelated to Solutia's Assumed
Liabilities), which was paid out in second quarter 2005. Net foreign-currency
transaction losses decreased $13 million to $3 million.
Income tax provision increased from $178 million in the first nine months of
2005 to $412 million in the first nine months of 2006, and the effective tax
rate decreased from 38 percent to 33 percent, respectively, primarily as a
result of the following items:
o The effective tax rate for the first nine months of fiscal 2005 was
affected by the $284 million Solutia-related charge ($181 million
aftertax).
o The first nine months of 2005 included nondeductible IPR&D write-offs
related to the 2005 acquisitions.
o A tax benefit of $32 million was recorded in the first nine months of 2006
as a result of the conclusion of an audit of Pharmacia for tax years 2000
to 2002 (for which period we were a member of Pharmacia's consolidated
group) by the IRS and, to a lesser extent, favorable adjustments related to
various state income tax issues.
o A tax benefit of $20 million was recorded in continuing operations in the
first nine months of 2005 as a result of the loss incurred on the European
wheat and barley business (see the discontinued operations discussion in
this section and Note 8 -- Income Taxes).
Without these items, our effective tax rate for the first nine months of 2006
would have been higher than the 2005 rate, primarily driven by a shift in our
projected earnings mix to higher tax rate jurisdictions.
The factors above explain the change in income from continuing operations. In
the first nine months of 2005, we recorded income on discontinued operations of
$94 million. As discussed in Note 8, the sale of the European wheat and barley
business in fiscal year 2004 generated a tax loss deductible in either the
United Kingdom or the United States. As of Aug. 31, 2004, a deferred tax asset
had not been recorded for the tax loss incurred in the United States because of
the existence of a number of uncertainties. These uncertainties diminished with
the enactment of the American Jobs Creation Act of 2004 (AJCA) on Oct. 22, 2004.
As a result, Monsanto recorded a deferred tax benefit of $106 million, or $0.39
per share, in the first nine months of 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 us 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.
29
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
SEEDS AND GENOMICS SEGMENT
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
------------------------------------ ---------------------------------------
2006 2005 % Change 2006 2005 % Change
- ---------------------------------------------------------------------------------- ---------------------------------------
Net Sales
Corn seed and traits $ 502 $ 431 16% $ 1,580 $ 1,304 21%
Soybean seed and traits 311 204 52% 933 827 13%
Vegetable and fruit seed 142 87 NM 415 87 NM
All other crops seeds and traits 380 336 13% 568 489 16%
- ---------------------------------------------------------------------------------- ---------------------------------------
Total Net Sales $ 1,335 $ 1,058 26% $ 3,496 $ 2,707 29%
- ----------------------------------------------==================================== =======================================
Gross Profit
Corn seed and traits $ 257 $ 215 20% $ 948 $ 750 26%
Soybean seed and traits 203 115 77% 655 564 16%
Vegetable and fruit seed 72 42 NM 221 42 NM
All other crops seeds and traits 287 240 20% 390 313 25%
- ---------------------------------------------------------------------------------- ---------------------------------------
Total Gross Profit $ 819 $ 612 34% $ 2,214 $ 1,669 33%
- ----------------------------------------------==================================== =======================================
EBIT(1) $ 393 $ 4 NM $ 1,027 $ 510 101%
- ---------------------------------------------------------------------------------- ---------------------------------------
NM = Not Meaningful
(1) EBIT is defined as earnings 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 -- Third Quarter Fiscal Year 2006
- --------------------------------------------------------------------------------
Soybean seed and trait net sales increased 52 percent, or $107 million, in third
quarter 2006. This sales increase was driven by an increase in the average net
selling price of ROUNDUP READY soybean traits in the United States stemming from
lower sales discounts. Sales volume of U.S. soybean traits increased because of
a timing shift between second and third quarters of 2006 compared with the
timing of sales in 2005. In 2006, sales occurred later because of weather and
the related delay in certain sales reporting by our customers. Net sales of ASI
soybean seed and traits improved because of revenues from recently acquired ASI
subsidiaries which were not part of the company's operations during this period
last year. Further, net sales of soybean traits increased in Brazil because of
an increase in the volume of the grain-based payment system related to saved and
replanted ROUNDUP READY soybeans.
Net sales of corn seed and traits increased 16 percent, or $71 million, in the
three-month comparison primarily because of an increase in sales of U.S. corn
seed and traits. In third quarter 2006, our corn seed and traits sales volume
and sales mix improved because of higher sales volume of branded seed and traits
stemming from stronger customer demand in the United States. Increased trait
penetration and growth in stacked traits also favorably impacted our licensed
and ASI channels in the United States. Net sales of ASI corn seed and traits
improved because of revenues from recently acquired ASI subsidiaries, which were
not part of the company's operations during this period last year.
In third quarter 2006, vegetable and fruit seed net sales increased $55 million,
because of our March 23, 2005, acquisition of Seminis. The results of Seminis
are included for the full three months ended May 31, 2006, compared to a partial
quarter in the three months ended May 31, 2005.
All other crops seeds and traits net sales increased 13 percent, or $44 million,
in the three-month comparison primarily because of higher cotton trait volume in
the United States, stemming from improved mix consisting of more stacked traits
and an increase in total cotton acres. Net sales of cotton seed and traits also
improved because of revenues from the acquisition of Stoneville on April 5,
2005. The results of Stoneville are included for the full three months ended May
31, 2006, compared to a partial quarter in the three months ended May 31, 2005.
Gross profit as a percent of sales for this segment increased 3 percentage
points in the quarter-over-quarter comparison to 61 percent. This improvement
was primarily driven by lower sales discounts for soybean traits and increased
penetration of higher margin traits, particularly in U.S. corn. EBIT for the
Seeds and Genomics segment increased $389 million to $393 million in third
quarter 2006. The IPR&D write-off that resulted from the acquisitions negatively
impacted EBIT by $254 million in third quarter 2005. In the three-month
comparison, increased SG&A and R&D expenses related to the 2005 acquisitions
partially offset the gross profit improvement.
30
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
Seeds and Genomics Financial Performance--First Nine Months of Fiscal Year 2006
- --------------------------------------------------------------------------------
The corn and soybean sales variance explanations provided in the "Seeds and
Genomics Financial Performance -- Third Quarter Fiscal Year 2006" section of
MD&A are also applicable for this comparison. Net sales of corn seed and traits
increased 21 percent, or $276 million, in the nine-month comparison. Net sales
of soybean seed and traits increased 13 percent, or $106 million, in the
nine-month comparison.
In the first nine months of 2006 vegetable and fruit seed net sales increased
$328 million because of our March 2005 acquisition of Seminis. The results of
Seminis are included for the full nine months ended May 31, 2006, compared to
approximately two months for the comparable period ended May 31, 2005.
The all other crops seeds and traits sales increase explanations related to the
United States business provided in the "Seeds and Genomics Financial Performance
- - Third Quarter Fiscal Year 2006" section of MD&A are also applicable for the
nine-month comparison. Other contributing factors to the other crops seeds and
traits net sales increase of 16 percent, or $79 million, in the first nine
months of 2006, were higher cotton seed and traits sales in Australia because of
increased cotton trait penetration and an improvement in our cotton sales mix to
a higher percentage of the BOLLGARD II with ROUNDUP READY cotton stacked
offering.
Gross profit as a percent of sales for this segment increased 1 percentage point
in the nine-month comparison to 63 percent. This improvement was primarily
driven by increased penetration of higher margin traits, particularly in U.S.
corn. This positive factor was partially offset by an incremental $28 million in
amortization associated with the inventory step-up for the Seminis acquisition,
which negatively affected gross profit as a percent of sales. EBIT for the Seeds
and Genomics segment increased $517 million to $1.0 billion in the first nine
months of 2006. The IPR&D write offs that resulted from the Seminis, Stoneville,
NC+ Hybrid, Channel Bio and Advanta acquisitions negatively impacted EBIT by
$266 million in the first nine months of 2005. In the nine-month comparison,
increased SG&A and R&D expenses related to the 2005 acquisitions partially
offset the gross profit improvement.
AGRICULTURAL PRODUCTIVITY SEGMENT
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
------------------------------------- -------------------------------------
2006 2005 % Change 2006 2005 % Change
- ----------------------------------------------------------------------------------- -------------------------------------
Net Sales
ROUNDUP and other glyphosate-based $ 654 $ 626 4% $ 1,630 $ 1,541 6%
herbicides
All other agricultural productivity 359 356 1% 827 772 7%
products
- ----------------------------------------------------------------------------------- -------------------------------------
Total Net Sales $ 1,013 $ 982 3% $ 2,457 $ 2,313 6%
- ----------------------------------------------===================================== =====================================
Gross Profit
ROUNDUP and other glyphosate-based $ 216 $ 241 (10)% $ 502 $ 529 (5)%
herbicides
All other agricultural productivity 159 152 5% 352 313 12%
products
- ----------------------------------------------------------------------------------- -------------------------------------
Total Gross Profit $ 375 $ 393 (5)% $ 854 $ 842 1%
- ----------------------------------------------===================================== =====================================
EBIT(1, 2) $ 147 $ 191 (23)% $ 280 $ 12 NM
- ----------------------------------------------------------------------------------- -------------------------------------
NM = Not Meaningful
(1) EBIT is defined as earnings 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.
(2) The nine months ended May 31, 2005, includes the $284 million charge
associated with certain liabilities in connection with the Solutia
bankruptcy.
Agricultural Productivity Financial Performance--Third Quarter Fiscal Year 2006
- --------------------------------------------------------------------------------
Net sales of ROUNDUP and other glyphosate-based herbicides increased 4 percent,
or $28 million, in the quarter-over-quarter comparison. Net sales of ROUNDUP and
other glyphosate-based herbicides increased primarily due to increased sales
volumes in the United States.
Gross profit decreased $18 million because of higher cost of goods sold for U.S.
ROUNDUP herbicides. Gross profit as a percent of sales for the Agricultural
Productivity segment decreased 3 percentage points to 37 percent. See the
"Results of Operations -- Third Quarter Fiscal Year 2006" section of MD&A for
31
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
the gross profit discussion for this segment. EBIT for the Agricultural
Productivity segment decreased $44 million in third quarter 2006. Key
contributors to this decline included the decreased gross profit and $9 million
of additional bad debt reserves related to our business in Brazil.
Agricultural Productivity Financial Performance -- First Nine Months of Fiscal
Year 2006
- --------------------------------------------------------------------------------
Net sales of ROUNDUP and other glyphosate-based herbicides increased 6 percent,
or $89 million, in the first nine months of 2006. In the nine-month comparison,
sales volumes of ROUNDUP herbicides increased in the United States and
Argentina, which were offset by declines in the Asia-Pacific region and Brazil.
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 the first nine months
of 2006.
In the nine-month comparison, the 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 the first nine months of 2005, compared with the first nine
months of 2006 primarily because Argentine distributors still had some remaining
quantities of our products on hand for sale in the first nine months of 2005.
Sales of ROUNDUP herbicides in Brazil decreased in the nine-month comparison.
The average net selling price was lower in the first nine months of 2006 because
we decreased the price of ROUNDUP herbicides twice since August 2005 as a result
of competitive conditions. These decreases were partially offset by the positive
impact from the strengthening of the Brazilian real compared to the U.S. dollar.
Sales volume of ROUNDUP and other glyphosate-based herbicides in Brazil
decreased as a result of competitive conditions and a reduction of customer
liquidity because of lower commodity prices and the appreciation of the
Brazilian real.
In the nine-month comparison, volumes of our ROUNDUP and other glyphosate-based
herbicides in the Asia-Pacific region decreased primarily in response to lower
pricing offered by our competitors related to their Chinese-sourced product and
less favorable weather conditions in Australia in 2006 compared with conditions
in 2005.
Sales of all other agricultural productivity products increased 7 percent, or
$55 million, in the nine-month comparison. Sales of our POSILAC product
increased because we were able to increase the number of finished doses
allocated among our customers. See the "Outlook -- Agricultural Productivity"
section in MD&A for background on the POSILAC product allocation. In 2005, we
made logistical changes that aligned inventory levels of acetanilide-based
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. acetanilide-based herbicides increased in the first
nine months of 2006. In the nine-month comparison, the average net selling price
of our U.S. acetanilide-based herbicides increased as a result of lower
marketing program discounts.
Gross profit as a percent of sales for the Agricultural Productivity segment
declined 1 percentage point to 35 percent in the first nine months of 2006. See
the "Results of Operations -- First Nine Months of Fiscal Year 2006" section of
MD&A for the gross profit discussion for this segment. EBIT for the Agricultural
Productivity segment increased $268 million to $280 million in the first nine
months of 2006. In the first nine months of 2005, the largest driver of EBIT was
the $284 million Solutia-related charge. Other key contributors to the EBIT
change were higher gross profit of $12 million offset by $19 million of
additional bad debt reserves related to our business in Brazil.
32
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
RESTRUCTURING
- ------------------------------------------------------------------------------------------------------------------------------------
Restructuring activity was recorded in the Statements of Consolidated Operations
as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
--------------------------- ---------------------------
2006 2005 2006 2005
- ---------------------------------------------------------------------------------------------- ---------------------------
Restructuring Reversals (Charges) -- Net(1, 2) $ 2 $ -- $ 2 $ (8)
- ---------------------------------------------------------------------------------------------- ---------------------------
Income (Loss) from Continuing Operations Before Income Taxes 2 -- 2 (8)
Income Tax Benefit (Provision)(3) (1) -- (1) 21
- ---------------------------------------------------------------------------------------------- ---------------------------
Income from Continuing Operations 1 -- 1 13
- ---------------------------------------------------------------------------------------------- ---------------------------
Net Income $ 1 $ -- $ 1 $ 13
- -------------------------------------------------------------------=========================== ===========================
(1) The $2 million of restructuring reversals for the three months and nine
months ended May 31, 2006, was split by segment as follows: $1 million in
the Seeds and Genomics segment and $1 million in the Agricultural
Productivity segment.
(2) The $8 million of restructuring charges for the nine months ended May 31,
2005, was split by segment as follows: $7 million in the Seeds and Genomics
segment and $1 million in the Agricultural Productivity segment.
(3) The $21 million of income tax benefit for the nine months ended May 31,
2005, includes $20 million related to tax losses incurred on the sale of
the European wheat and barley business. See below for further discussion.
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. 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. Additionally, the approved plan included
a $69 million impairment of goodwill in the global wheat business.
In third quarter 2006, pre-tax restructuring reversals of $2 million were
recorded in the United States, primarily because severance and relocation costs
were lower than originally estimated.
In the second quarter 2005, pre-tax restructuring charges of $7 million were
related to the Seeds and Genomics segment and included impairments incurred as a
result of office closures and asset sales in South Africa and the United States.
The office closure actions began in fiscal year 2004, and additional write-downs
were required in fiscal year 2005 based on revised estimates of losses on
dispositions of certain facilities in these countries. Pre-tax restructuring
charges of $8 million for the first nine months of 2005 also included $1 million
pretax related to the Agricultural Productivity segment related to workforce
reductions. 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. These actions have partially offset the increases in our
costs, primarily SG&A, as a percent of sales.
33
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
- ------------------------------------------------------------------------------------------------------------------------------------
Working Capital and Financial Condition
- ------------------------------------------------------------------------------------------------------------------------------------
As of
As of May 31, Aug. 31,
--------------------------- ------------
2006 2005 2005
- ----------------------------------------------------------------------------------------------------------- ------------
Cash and cash equivalents $ 595 $ 467 $ 525
Short-term investments 22 -- 150
Trade receivables -- net 2,899 2,776 1,473
Inventories 1,700 1,683 1,664
Other current assets(1) 775 936 832
- ----------------------------------------------------------------------------------------------------------- ------------
Total Current Assets $ 5,991 $ 5,862 $ 4,644
- ----------------------------------------------------------------------------------------------------------- ------------
Short-term debt $ 666 $ 1,390 $ 126
Accounts payable 454 414 525
Accrued liabilities(2) 1,635 1,740 1,508
- ----------------------------------------------------------------------------------------------------------- ------------
Total Current Liabilities $ 2,755 $ 3,544 $ 2,159
- ----------------------------------------------------------------------------------------------------------- ------------
Working Capital(3) $ 3,236 $ 2,318 $ 2,485
Current Ratio(3) 2.17:1 1.65:1 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, 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.
May 31, 2006, compared with Aug. 31, 2005: Working capital increased $751
million primarily because of the following factors:
o Trade receivables -- net increased $1,426 million in the first nine months
of 2006, primarily because of the seasonality of our sales and collections.
This increase to working capital was offset by these factors:
o We decreased our position in short-term investments by $128 million as of
May 31, 2006, to $22 million.
o Short-term debt increased $540 million because of the commercial paper
borrowings to fund the seasonality of our business.
May 31, 2006, compared with May 31, 2005: Working capital increased $918 million
primarily because of the following factors:
o Cash and cash equivalents increased $128 million primarily because we did
not reinvest the short-term securities that matured in the third quarter
of 2006, which attributed to a higher cash balance.
o Trade receivables -- net increased $123 million primarily because our net
sales more than offset collections. The effect of foreign currency
translation also contributed to this increase.
o Short-term debt decreased $724 million to $666 million because of the
amount of commercial paper that was repaid. During the third quarter of
2005, we issued commercial paper to fund the Seminis acquisition.
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 $88 million
in the first nine months of 2006 and $169 million in the first nine months of
2005 from the proceeds of loans made to our customers through this financing
program. These proceeds are included in the net cash provided by operating
activities in the Statements 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
34
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
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 (SFAS 140).
As of May 31, 2006, and Aug. 31, 2005, the customer loans held by the QSPE and
the QSPE's liability to the conduits were $71 million and $171 million,
respectively. The lender or the conduits may restrict or discontinue the
facility at any time. If the facility were to terminate, existing loans would be
collected by the QSPE over their remaining terms (generally 12 months or less),
and we would revert to our past practice of providing these customers with
direct credit purchase terms. Our servicing fee revenues from the program were
not significant. As of May 31, 2006, 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 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 qualified for sales treatment under
SFAS 140. Accordingly, the customer receivables and the related liabilities that
had been recorded since the program was established in November 2004 were
removed from the company's consolidated balance sheet in May 2005 as a noncash
transaction. Proceeds from the transfer of the receivables subsequent to the May
2005 amendment are included in net cash provided by operating activities in the
Statements of Consolidated Cash Flows. We received $38 million in the first nine
months of 2006 from the proceeds of loans made to our customers through this
financing program. The amount of loans outstanding was $39 million and $22
million as of May 31, 2006, 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
May 31, 2006, 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.
We also have agreements with banks that provide financing to our customers in
Brazil through credit programs that are subsidized by the Brazilian government.
Proceeds from the transfer of receivables through these programs are included in
net cash provided by operating activities in the Statements of Consolidated Cash
Flows and totaled $42 million and $32 million for the first nine months of
fiscal years 2006 and 2005, respectively. The loan balances outstanding as of
May 31, 2006, and Aug. 31, 2005, were $73 million and $53 million, 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 was
$1 million as of May 31, 2006, and Aug. 31, 2005. If performance is required
under the guarantee, we may retain amounts that are subsequently collected from
customers.
Cash Flow
- ----------------------------------------------------------------------------------------------------------------------------
Nine Months Ended May 31,
--------------------------
2006 2005
- ----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities $ 184 $ 533
Net Cash Required by Investing Activities (408) (1,371)
- ----------------------------------------------------------------------------------------------------------------------------
Free Cash Flow(1) (224) (838)
Net Cash Provided by Financing Activities 294 268
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 70 (570)
Cash and Cash Equivalents at Beginning of Period 525 1,037
- ----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 595 $ 467
- --------------------------------------------------------------------------------------------------==========================
(1) Free cash flow represents the total of net cash provided or required by
operating activities and provided or required by investing activities (see
the "Overview -- Financial Measures" section of MD&A for further
discussion).
Cash provided by operating activities decreased $349 million in the nine-month
comparison. Trade receivables were a significant contributor to this decrease as
the sales increase from our core business was more significant than the
collections improvement.
Cash required by investing activities was $408 million in the first nine months
of 2006 compared with $1.4 billion in the first nine months of 2005. In the
first nine months of 2006, we used cash for acquisitions of businesses of $185
million compared to $1.5 billion in the prior year period. The timing of our
35
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
purchases and maturities of short-term investments resulted in a source of cash
of $150 million in the first nine months of 2006 compared with $300 million in
the same period a year ago. Our capital expenditures increased $90 million in
the nine-month comparison, to $234 million primarily for the expansion of seed
production and research facilities for corn and cotton. Cash required for
technology and other investments increased $84 million to $128 million primarily
because of a $100 million animal agriculture upfront royalty payment that was
paid in the second quarter of 2006.
Cash provided by financing activities was $294 million in the first nine months
of 2006 compared with $268 million in the first nine months of 2005. The net
change in short-term financing provided cash of $448 million in the first nine
months of 2006 compared with a source of cash of $1.2 billion in the prior-year
nine months. Cash required for long-term debt reductions was $78 million in the
first nine months of 2006 compared with $783 million in the first nine months of
2005. We purchased shares in 2006 under our four-year $800 million share
purchase program authorized by our board of directors in October 2005. Our
purchases under this plan required cash of $87 million in the first nine months
of 2006. In the first nine months of 2005, treasury stock purchases required
cash of $149 million under the $500 million share repurchase program, which was
completed in July 2005. Dividend payments increased 19 percent, or $25 million,
because we paid dividends of 48.5 cents per share in the first nine months of
2005 compared with 57 cents per share in the first nine months of 2006.
Capital Resources and Liquidity
- ---------------------------------------------------------------------------------------------------------------------------
As of May 31, As of Aug. 31,
-------------------------------- ---------------
2006 2005 2005
- ------------------------------------------------------------------------------------------------------- ---------------
Short-Term Debt $ 666 $ 1,390 $ 126
Long-Term Debt 1,376 1,062 1,458
Total Shareowners' Equity 6,576 5,845 5,613
Debt-to-Capital Ratio 24% 30% 22%
- ------------------------------------------------------------------------------------------------------- ---------------
Total debt outstanding increased $458 million between May 31, 2006, and Aug. 31,
2005, primarily because of increased commercial paper outstanding used to
finance customer receivables.
As of May 31, 2006, Monsanto had a committed borrowing facility of $1.0 billion,
which was unused and expires in June 2009. During February 2006, Monsanto
elected to not renew a $1.0 billion 364-day facility, and it expired on March
10, 2006.
We expect fiscal year 2006 capital expenditures to be in the range of $350
million compared with fiscal year 2005 capital spending of $281 million.
In June 2006, after approval by the company's chief executive officer, the board
of directors approved a domestic reinvestment plan of up to $500 million in
repatriated ex-U.S. earnings pursuant to the temporary repatriation incentive
under the American Jobs Creation Act of 2004 described in Note 8 - Income Taxes.
Accordingly, we expect to repatriate ex-U.S. earnings totaling between $425
million and $500 million and record a related tax charge of $20 million to $25
million in the fourth quarter of 2006. Planned uses of the repatriated funds
include domestic expenditures relating to R&D, capital expenditures, and other
permitted activities. The majority of dividends will be paid from excess cash.
An ex-U.S. subsidiary expects to enter into a three-year term facility of
approximately $250 million to finance a portion of the dividends. We expect to
provide a guarantee to reduce financing costs.
2006 Acquisitions: In September 2005, ASI acquired five regional U.S. seed
companies for an aggregate purchase price of $54 million (net of cash acquired),
inclusive of transaction costs of $2 million. In March 2006, ASI acquired two
additional U.S. seed companies for an aggregate purchase price of $6 million
(net of cash acquired), inclusive of transaction costs of less than $1 million.
The financial results of these acquisitions were included in the company's
consolidated financial statements from their respective dates of acquisition.
These acquisitions are expected to further bolster ASI's ability to directly
serve farmer-customers with a technology-rich, locally-oriented business model.
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 May 31,
2006.
In June 2006, ASI entered into agreements to acquire five additional U.S. seed
companies for an aggregate purchase price of $77 million.
36
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
2005 Acquisitions: In first quarter 2005, we acquired the canola seed businesses
of Advanta Seeds for $52 million in cash (net of cash acquired), and 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 Channel Bio Corp., acquired NC+ Hybrids, Inc. for $40 million in
cash (net of cash acquired).
In third quarter 2005, we acquired Seminis for $1.0 billion in cash (net of cash
acquired), and we paid $495 million for repayment of its outstanding debt. The
acquisition also included a contingent payment of up to $125 million based on
certain factors. In conjunction with the integration of certain support services
of Seminis with our other businesses, 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 was accelerated. A $125 million liability was
recorded as of Nov. 30, 2005, resulting in additional purchase price and
goodwill. This liability was paid during second quarter 2006.
In third quarter 2005, we acquired Stoneville for $305 million (net of cash
acquired). We also assumed debt of $16 million 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. 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
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 acquired India
cotton 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 acquired India cotton
business include employee terminations and relocations, exiting certain product
lines and facility closures. As of May 31, 2006, estimated integration costs of
$19 million have been recognized as current liabilities in the purchase price
allocations, and $5 million has been charged against the liabilities, primarily
related to payments for employee terminations and relocations.
On Feb. 14, 2006, Solutia filed its Plan of Reorganization (Plan) and
accompanying Disclosure Statement with the Bankruptcy Court. Among other things,
the Plan provides for $250 million of new investment in a reorganized Solutia in
the form of a rights offering to certain unsecured creditors, who will be given
the opportunity to purchase 22.7 percent of the common stock in the reorganized
Solutia. The date for the rights offering has not been established. Subject to
approval of the Bankruptcy Court and confirmation of the Plan, we have agreed to
backstop the rights offering, meaning we have agreed to purchase any amount of
the rights offering left unsubscribed by the unsecured creditors, up to the
entire $250 million of stock. No assurance can be given that the Plan will be
approved. See Note 15 for further details.
Contingent Liabilities Relating to Solutia Inc. (Off-Balance Sheet Arrangement)
Under the Separation Agreement, we were required to indemnify Pharmacia for
Solutia's Assumed Liabilities, to the extent that Solutia fails to pay, perform
or discharge those liabilities. Solutia and 14 of its U.S. subsidiaries filed a
voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy
Code and have sought relief from paying certain liabilities, including Solutia's
Assumed Liabilities. Solutia disclaimed its obligations to defend pending or
future litigation relating to Solutia's Assumed Liabilities and has taken the
position that the bankruptcy proceeding prevents it from continuing to perform
its environmental obligations, except within the boundaries of its current
operations. On an interim basis, we assumed the management and defense of
certain of Solutia's third-party tort litigation and environmental matters. In
the process of managing such litigation and environmental liabilities, we
determined that it was probable that we would incur some expenses related to
such litigation and environmental liabilities and that the amount of such
expenses could be reasonably estimated. Accordingly, in first quarter 2005, we
recorded a charge in the amount of $284 million based on the best estimates by
our management with input from our legal and other outside advisors.
We believe that the charge represents the discounted cost that we would expect
to incur in connection with these litigation and environmental matters. However,
the charge may not reflect all potential liabilities and expenses that we may
incur in connection with Solutia's bankruptcy and does not reflect any insurance
reimbursements or any recoveries we might receive through the bankruptcy
process. Accordingly, our actual costs may be materially different from this
estimate. Under the rules of the SEC, these contingent liabilities are
37
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
considered to be an off-balance sheet arrangement. See Note 15 under the
subheading "Solutia Inc." for further information regarding Solutia's Assumed
Liabilities, the charge discussed above, and the plan of reorganization filed by
Solutia in its 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 recent 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.
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. The combination of poor growing conditions, the appreciation of the
Brazilian Real, and lower commodity prices continue to negatively impact the
Brazilian agriculture economy and farmer liquidity in 2006. We took actions to
mitigate the associated credit risks during the last two years. These steps
included further tightening of our credit policy, implementing a grain-based
collection system, and increasing cash sales. Our Brazil organization recently
announced the alignment of support teams which included the idling of two seed
processing units to leverage operations to drive greater efficiencies.
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.
38
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
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 has broadened 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 that
our growth in gross profit will be derived from seeds and traits. 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 Growth in 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
acquisitions of Channel Bio in first quarter 2005, NC+ Hybrids in third quarter
2005, and several regional U.S. seed companies in 2006.
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 are
continuing 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 Stoneville, a cotton seed
business, which we have integrated into our cotton traits business. Through the
Stoneville brands, we have a branded presence in cotton as we do in corn and
soybeans. Stoneville has joined a foundation cotton seed company called Cotton
States that we created in the last three years. We are using the same model that
we adopted in corn and soybeans, and we are broadly licensing both our biotech
traits and our germplasm to other companies. The decision to purchase Stoneville
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
39
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
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 December 2005, the U.S. Department of Agriculture and U.S. EPA 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 FDA had previously completed its
review 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 enable Brazil to be a greater contributor to revenue in seeds and
traits in the near term. Companies representing more than 90 percent of the
grain origination volume in Brazil have enrolled in this grain-based payment
system for the 2006 harvest. Compliance with the system from the 2006 harvest
was very high in all parts of the country. It is likely that court rulings on
our Brazilian patents from cases of non-compliance 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 for the 2006 harvest , in addition to continuing with the grain-based
payment system on saved and replanted seed. This same system is expected to be
operated for the 2007 harvest.
A similar grain-based system has been established for Paraguay; it was
successfully operated for the 2005 and 2006 harvests. As Paraguay has only five
million acres of soybean production, it is a modest contributor to earnings in
2006. This system is expected to continue to operate in the 2007 harvest.
Efforts continue to develop systems in Argentina and Uruguay. It is likely that
a ruling from patent infringement court cases in Europe will be required to
determine the applicability of patent rights for ROUNDUP READY soybeans produced
in Argentina and Uruguay and imported into Europe. The first two of these cases
were filed in June and July 2005 (in Denmark and the Netherlands, respectively),
against the importers of soybean meal containing the ROUNDUP READY gene. The
government of Argentina has petitioned the court to be allowed to intervene in
both cases. These cases may take two or more years to reach a decision. More
recently, ships arriving in Europe with soybeans or soybean meal from Argentina
have been sampled to determine whether the products contained the ROUNDUP READY
gene, and additional cases were filed against importers in 2006, in Spain, the
40
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
Netherlands, and the United Kingdom, seeking damages for patent infringement.
Discussions are ongoing at several levels to find an arrangement satisfactory to
all stakeholders; however, there is no indication at this stage that any of
these discussions will lead to a conclusive outcome in the short term.
Lack of crop import approvals in some key markets, most notably the European
Union, affect the expansion of production of current and future biotechnology
crops in the United States and other markets where they are approved. We
continue to advance dossiers for current products through the European Union and
other emerging regulatory systems. We are also pursuing approvals in the
European Union for new products, including the second generation corn rootworm
product, Lysine maize, and several stacked products.
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. These natural disasters and the global
energy cost escalations have contributed to price escalations for certain raw
materials and energy required for glyphosate and selective chemistry herbicide
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 have
increased our herbicide production costs in our results of operations.
We have several patents on our glyphosate formulations and manufacturing
processes in the United States and in other countries. We continue to
differentiate ROUNDUP herbicides with innovations using proprietary technology.
We also provide more concentrated formulations that provide greater convenience
for farmers while reducing production and logistics costs. We offer a variety of
products to meet farmers' needs.
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
41
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
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. In second quarter 2005, we
applied for U.S. FDA approval for finished dose formulation at our Augusta,
Georgia facility. In February 2006, the FDA inspected the Augusta facility, and
in March 2006, we received the letter from the FDA approving the site for
finished formulation and packaging of POSILAC. The active ingredient and the
finished dose formulation for POSILAC are now manufactured at our plant in
Augusta, Georgia, and in Austria by Sandoz GmbH. 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 was
re-inspected by the FDA in April 2006 and is currently awaiting a response from
the FDA. In second quarter 2004, we had notified our customers that supplies of
POSILAC would be limited. This allocation has officially ended, and we have
begun selling to new customers as well as supplying the needs of our previous
customers. We continue to reduce production of bulk powder while converting
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 in our Reports on Form 10-Q
for the quarterly periods ended Nov. 30, 2005, and Feb. 28, 2006, and Part II --
Item 1A -- Risk Factors of this 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,
42
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
profitability, or liquidity for the current period could have been materially
different from those presented.
NEW ACCOUNTING STANDARDS
- --------------------------------------------------------------------------------
In March 2006, the Financial Accounting Standards Board (FASB) issued SFAS No.
156, Accounting for Servicing of Financial Assets -- an amendment of FASB
Statement No. 140 (SFAS 156). SFAS 156 requires recognition of a servicing asset
or liability at fair value each time an obligation is undertaken to service a
financial asset by entering into a servicing contract. SFAS 156 also provides
guidance on subsequent measurement methods for each class of servicing assets
and liabilities and specifies financial statement presentation and disclosure
requirements. This statement is effective for fiscal years beginning after Sept.
15, 2006. We are currently evaluating the impact of SFAS 156 on the consolidated
financial statements.
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 and, as of the date of this report, did not have a
material impact 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 currently
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 in the fourth quarter of fiscal
year 2006. We do not currently 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. Pursuant to the AJCA, the deduction for qualified
production activities is effective for our 2006 tax year. The effect of the
estimated deduction to be taken in the 2006 consolidated federal income tax
return is not material. 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, provided certain criteria are
met. As of May 31, 2006, we had not yet finalized our plans for repatriation of
foreign earnings. Accordingly, as provided for in FSP 109-2, we have not
adjusted our income taxes payable and income tax provision as of and for the
period ended May 31, 2006, to reflect the effect of the repatriation provision.
In late June, our chief executive officer and board of directors approved our
domestic reinvestment plan of up to $500 million in repatriated ex-U.S. earnings
under the AJCA. See Note 18 -- Subsequent Events -- for further discussion.
43
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
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 and nine
months ended May 31, 2006, 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. Pre-tax stock-based
compensation expense recognized under SFAS 123R was $13 million and $47 million
for the three and nine months ended May 31, 2006, respectively (including $1
million and $10 million, respectively, 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 $66 million as of May 31, 2006, 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 the first nine months of 2005.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
- --------------------------------------------------------------------------------
Certain statements contained in this Form 10-Q are "forward-looking statements,"
such as statements concerning our 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, our 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; our 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 our 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 our
estimates related to distribution inventory levels; our ability to fund
short-term financing needs and to obtain payment for the products that we sell;
the effect of weather conditions, natural disasters and accidents on the
agriculture business or our facilities; and other risks and factors detailed in
our 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. We disclaim 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 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.
44
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 May 31, 2006 (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 one 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. In
March 2006, we implemented various process and information system enhancements
in Brazil in conjunction with our global enterprise strategy, related to the
implementation and conversion of SAP software, and associated business process
improvements. These process and information system enhancements have resulted in
modifications to the internal controls principally supporting sales, customer
service, inventory management, accounts receivable and accounts payable
processes. We believe we have taken the necessary steps to establish and
maintain effective internal controls over financial reporting during the period
of change.
45
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
PART II--OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
This section of the report 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 proceedings 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, and in our Reports
on Form 10-Q for the quarterly periods ended Nov. 30, 2005, and Feb. 28, 2006.
Patent and Commercial Proceedings
The following proceedings involve Syngenta AG (Syngenta) and its affiliates:
o As described in our Report on Form 10-K for the fiscal year ended Aug. 31,
2005, on May 12, 2004, we filed suit against Syngenta's affiliates Syngenta
Seeds and Syngenta Biotechnology, Inc. in the U.S. District Court for the
District of Delaware (the Shah case). On July 27, 2004, our subsidiary
DEKALB Genetics Corporation (DEKALB) filed suit against Syngenta Seeds and
Syngenta Biotechnology in the U.S. District Court for the Northern District
of Illinois (the Lundquist case). The suits allege infringement of our
patents involving glyphosate-tolerant crops and fertile transgenic corn and
seek injunctions against the sale of GA21 corn by Syngenta and its
affiliates and damages for willful infringement of our patents. On May 19,
2005, the U.S. District Court for the Northern District of Illinois
transferred the Lundquist case to the U.S. District Court for the District
of Delaware. It was then consolidated for discovery and trial with the Shah
case. The District Court granted summary judgment in favor of Syngenta on
May 11, 2006, ruling that the Shah patent was invalid and Syngenta did not
infringe the Lundquist patents. On June 8, 2006, we filed our Notice of
Appeal with the U.S. Court of Appeals for the Federal Circuit.
As described in our Report on Form 10-Q for the quarterly period ended Feb. 28,
2006, efforts continue to develop a seed or grain payment system for the
importation of Argentine or Uruguayan soybean products containing our patented
ROUNDUP READY technologies. However, discussions to date have failed to resolve
the outstanding issues. Tests conducted by European country customs officials on
soy on some ships from Argentina have determined that the soybeans contained our
glyphosate tolerant technology, for which we hold patent rights in the
respective European country, but for which no license had been granted. As a
result, we have initiated patent infringement actions against the importers of
the infringing material. In June 2005, we filed cases against Cefetra, in The
Hague, the Netherlands, and Den Lokale Andel, A.m.d.A., et al., in the Danish
High Court, Eastern Division; and in February and March 2006, we filed cases
against Bunge Iberica SA, Ceralto SL and Sesostris SAE in Spain, and Cargill
International SA and Cargill plc in England. Further cases were filed in May and
June 2006 against Alfred C. Toepfer International GmbH and Glencore Grain BV and
Glencore Grain Rotterdam BV, in the courts of The Hague. No imminent decision is
expected in any of the cases. In response to our actions, the Argentine
Secretary of Agriculture has requested that the national competition commission
in Argentina (CNDC) proceed with a civil administrative action against us, but
to date, other than a market investigation initiated by the CNDC, nothing has
been requested from us and no formal proceeding has been initiated against us.
In addition, the Argentine government has been admitted as an observer to the
proceedings in the Netherlands and Denmark.
Proceedings Related to Delta and Pine Land Company
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2005,
on Jan. 18, 2000, Delta and Pine Land Company reinstituted a suit against the
former Monsanto Company in the Circuit Court of the First Judicial District of
Bolivar County, Mississippi, seeking unspecified compensatory damages for lost
46
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
stock market value of not less than $1 billion, as well as punitive damages,
resulting from an alleged failure to exercise reasonable efforts to complete a
merger between the two companies. Delta and Pine Land alleges that the former
Monsanto Company tortiously interfered with its prospective business relations
by feigning interest in the merger so as to keep it from pursuing transactions
with other entities. On Sept. 9, 2003, the Court granted our motion to file a
counterclaim seeking to set aside the merger agreement on the basis of Delta and
Pine Land's fraudulent nondisclosure of material information and substantial
damages including recoupment of the $83 million breakup fee previously paid to
Delta and Pine Land. On Oct. 8, 2004, the Court granted our motion for partial
summary judgment, which eliminated a significant element of Delta and Pine
Land's damages claim against us. On Feb. 15, 2005, the Mississippi Supreme Court
granted review of the trial court's decision on partial summary judgment and on
the admissibility and use of certain documents at trial. On Aug. 15, 2006, the
Mississippi Supreme Court is scheduled to hear oral argument on that appeal. In
the meantime, it has ordered a stay of all proceedings at the trial court level.
No trial date has been set for this matter.
The following arbitrations are before the American Arbitration Association
(AAA):
o As described in our Report on Form 10-K for the fiscal year ended Aug. 31,
2005, on May 20, 2004, we filed a request for arbitration and a
determination that we have the right to terminate licensing agreements that
provided Delta and Pine Land with access to BOLLGARD and ROUNDUP READY
technologies for cotton. We believe Delta and Pine Land has failed to
ensure payment of royalties owed to us and to properly collect and allocate
the income of our joint venture D&M Partners, and has misused our
intellectual property. A hearing is scheduled on Aug. 14, 2006.
o On May 3, 2006, Delta and Pine Land initiated proceedings seeking a
determination that its affiliates' license agreements with us preclude us
from implementing the indemnity collection system that we announced for
Brazil in an attempt to protect and enforce our intellectual property
rights on insect resistant cotton in Brazil. A hearing on Delta and Pine
Land's motion for a temporary injunction is scheduled to commence July 18,
2006.
o On June 19, 2006, Delta and Pine Land initiated another proceeding seeking
a determination that we had not provided it with license terms equal to
those extended to Stoneville, which we acquired in 2005. Delta and Pine
Land also seeks an injunction against our introduction of BOLLGARD II
cotton in Egypt and Burkino Faso, unless commercial arrangements are
reached with Delta and Pine Land, notwithstanding those countries'
prohibition of such arrangements.
Agent Orange Proceedings
As described in our Report on Form 10-Q for the quarterly period ended Feb. 28,
2006, in a purported class action suit styled Dobbie, et al v. The Attorney
General of Canada, pending in the Federal Court of Canada in Ottawa, Canada,
individuals who either served at or live by a Canadian Forces Base in Gagetown,
New Brunswick, brought an action against the Canadian government for injuries
supposedly suffered as the result of exposure to a variety of chemicals used by
it during the course of a 30-year program to control weeds and vegetation at the
facility. On March 13, 2006, the government of Canada filed a motion to stay
proceedings, stating that it intends to file a third party action in this
litigation against The Dow Chemical Company and us, as manufacturers of Agent
Orange. On May 3, 2006, the Federal Court granted the government's motion to
stay.
Proceedings Related to Pension Plan
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2005,
and in our Report on Form 10-Q for the quarterly period ended Feb. 28, 2006, on
June 23, 2004, two former employees of Monsanto and Pharmacia filed a purported
class action lawsuit in the U.S. District Court for the Southern District of
Illinois against the Monsanto Company Pension Plan, which we refer to as the
"Pension Plan," and us. The suit claims that the Pension Plan has violated the
age discrimination and benefit accrual rules under the Employee Retirement
Income Security Act of 1974 from Jan. 1, 1997 (when the Pension Plan was
sponsored by Pharmacia, then known as Monsanto Company) and continuing to the
present, and has failed to pay required interest on delayed or deferred lump sum
distributions. On July 13, 2004, we tendered defense of its portion of this suit
to Pharmacia pursuant to the terms of the Separation Agreement and demanded that
Pharmacia (a) defend us or pay our costs of defense for Pharmacia's liabilities,
and (b) indemnify us for any of Pharmacia's liabilities that we incur as a
result of the lawsuit. Pharmacia has rejected our tender. The court stayed the
proceedings while plaintiffs exhausted their administrative remedies before the
Monsanto Employee Benefits Plan Committee (EBPC). The EBPC denied the
plaintiffs' claims, and the litigation resumed. Trial is now set for June 2007.
47
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
On June 6, 2006, Federal Insurance Company filed suit in the U.S. District Court
for the Eastern District of Missouri, seeking a declaratory judgment that its
insurance policy with us does not apply to this litigation, because there are no
alleged fiduciary issues.
Proceedings Related to Activities in India
Mahyco Monsanto Biotech Ltd. (MMB), a joint venture of our subsidiary Monsanto
Holdings Private Limited and MAHYCO Seeds Limited, is currently defending
complaints before the Monopoly and Restrictive Trade Practice Commission in
India (MRTP), relating to the fees it charges on BOLLGARD technology.
Additionally, approximately seven individual States in India have issued
letters/orders prospectively setting a maximum amount at which seed companies
may sell cotton seed packets containing Bt cotton, including BOLLGARD cotton. On
May 11, 2006, the MRTP concluded that MMB was in violation of law by engaging in
restrictive trade practices by charging unreasonable trait fees, granted a
temporary injunction and directed MMB not to charge Rupees 900 as a trait fee
and to set a reasonable trait fee. Appeal was taken to India's Supreme Court,
and we expect the Supreme Court to address the appeal this summer. Pending
determination of any appeal, MMB has complied with the directions of the order.
MMB is also challenging the state government orders.
Proceedings Related to Solutia's Assumed Liabilities
On March 15, 2006, a lawsuit styled Abele v. Monsanto Company, et al. was filed
against Pharmacia, Solutia, and us in the Supreme Court of New York County, New
York. That suit is brought by 486 former employees of General Electric Company's
Schenectady, New York plant and claims that all defendants manufactured and sold
PCB products to which they were exposed in and around the plant. The suit seeks
actual and punitive damages for alleged personal injuries and fear of future
disease. On May 5, 2006, the defendants removed the case to the U.S. District
Court for the Southern District of New York, in response to which the plaintiffs
have filed a motion to remand the case to state court.
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 Form 10-Q, which is incorporated herein by reference,
and Part II -- Item 7 of our Report on Form 10-K for the fiscal year ended Aug.
31, 2005, 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 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
The following table is a summary of any purchases of equity securities during
the third quarter of fiscal year 2006 by Monsanto and any affiliated purchasers,
pursuant to SEC rules.
- ----------------------------------------------------------------------------------------------------------------------------------
(c) Total Number
of Shares (d) Approximate Dollar
Purchased as Part Value of Shares that
of Publicly May Yet Be Purchased
(a) Total Number of (b) Average Price Announced Plans Under the Plans
Period Shares Purchased Paid per Share(1) or Programs or Programs
-----------------------------------------------------------------------------------------------------------------------------
March 2006: 327,100 $ 84.10 327,100 $ 742,531,075
March 1, 2006, through March 31, 2006
April 2006:
April 1, 2006, through April 30, 2006 29,818(2) $ 86.30 28,500 $ 740,071,314
May 2006:
May 1, 2006, through May 31, 2006 356,700(3) $ 82.85 356,700 $ 710,517,926
-----------------------------------------------------------------------------------------------------------------------------
Total 713,618 $ 83.57 712,300 $ 710,517,926
-----------------------------------------------------------------------------------------------------------------------------
(1) The average price paid per share is calculated on a settlement basis and
excludes commission.
48
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
(2) Includes 1,318 shares withheld to cover the withholding taxes upon the
vesting of restricted stock.
(3) Includes 32,000 shares that were purchased in May 2006 and settled in June
2006.
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
May 31, 2006.
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."
- ---------------------- -----------------------------------------------------------------------------------------------------
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.
49
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
ITEM 6. EXHIBITS
- --------------------------------------------------------------------------------
Exhibits: The list of exhibits in the Exhibit Index to this Report is
incorporated herein by reference.
50
MONSANTO COMPANY THIRD 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: June 30, 2006
51
MONSANTO COMPANY THIRD QUARTER 2006 FORM 10-Q
- --------------------------------------------------------------------------------
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 Form of First Amendment to Change of Control Employment
Security Agreement, as approved by the Board of Directors on
April 19, 2006 (incorporated by reference to Exhibit 10 of
Form 8-K, filed April 25, 2006, Filed No. 1-16167).+
11 Omitted -- see Note 13 of Notes to Consolidated Financial
Statements -- Earnings Per Share
12 Computation of Ratio of Earnings to Fixed Charges.
15 Omitted
18 Omitted
19 Omitted
22 Omitted
23 Omitted
24 Omitted
31.1 Rule 13a-14(a) Certification, executed by the Chief Executive
Officer of Monsanto Company.
31.2 Rule 13a-14(a) Certification, executed by the Chief Financial
Officer of Monsanto Company.
32 Exchange Act Rule 13(a)-14(b) and 18 U.S.C. Section 1350
Certifications, executed by the Chief Executive Officer and
the Chief Financial Officer of Monsanto Company.
- ----------------------------------
+ Represents management contract or compensatory plan or arrangement.
52