MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Nov. 30, 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
800 North Lindbergh Blvd., 63167
St. Louis, MO (Zip Code)
(Address of principal executive offices)
(314) 694-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is 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: 543,506,587 shares of Common
Stock, $0.01 par value, outstanding as of Jan. 3, 2007.
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MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
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TABLE OF CONTENTS
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PART I--FINANCIAL INFORMATION Page
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Item 1. Financial Statements 2
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 18
Overview 18
Results of Operations -- First Quarter Fiscal Year 2007 20
Seeds and Genomics Segment 21
Agricultural Productivity Segment 22
Financial Condition, Liquidity, and Capital Resources 23
Outlook 27
Critical Accounting Policies and Estimates 29
New Accounting Standards 29
Caution Regarding Forward-Looking Statements 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Item 4. Controls and Procedures 31
PART II--OTHER INFORMATION
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Item 1. Legal Proceedings 32
Item 1A. Risk Factors 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
Item 6. Exhibits 34
SIGNATURE 35
EXHIBIT INDEX 36
1
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
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PART I--FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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The Statements of Consolidated Operations of Monsanto Company and its
consolidated subsidiaries for the three months ended Nov. 30, 2006, and Nov. 30,
2005, the Condensed Statements of Consolidated Financial Position as of Nov. 30,
2006, and Aug. 31, 2006, the Statements of Consolidated Cash Flows for the three
months ended Nov. 30, 2006, and Nov. 30, 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. Unless
otherwise indicated, "earnings (loss) per share" and "per share" mean diluted
earnings (loss) per share. In the notes to the consolidated financial
statements, all dollars are expressed in millions, except per share amounts.
Unless otherwise indicated, trademarks owned or licensed by Monsanto or its
subsidiaries are shown in all capital letters. Unless otherwise indicated,
references to "ROUNDUP herbicides" mean ROUNDUP branded herbicides, excluding
all lawn-and-garden herbicides, and references to "ROUNDUP and other
glyphosate-based herbicides" exclude all lawn-and-garden herbicides.
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MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
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Statements of Consolidated Operations
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Unaudited Three Months Ended Nov. 30,
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(Dollars in millions, except per share amounts) 2006 2005
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Net Sales $ 1,539 $ 1,405
Cost of goods sold 859 771
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Gross Profit 680 634
Operating Expenses:
Selling, general and administrative expenses 384 350
Research and development expenses 182 168
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Total Operating Expenses 566 518
Income from Operations 114 116
Interest expense 33 32
Interest income (30) (14)
Solutia-related expenses (see Note 13) 10 6
Other expense (income) -- net 4 (2)
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Income Before Income Taxes and Minority Interest 97 94
Income tax provision 10 35
Minority interest income (3) --
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Net Income $ 90 $ 59
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Basic Earnings per Share $ 0.17 $ 0.11
Diluted Earnings per Share $ 0.16 $ 0.11
Weighted Average Shares Outstanding:
Basic 543.1 536.8
Diluted 553.6 547.3
Dividends Declared per Share $ -- $ --
The accompanying notes are an integral part of these consolidated financial
statements.
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MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
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Condensed Statements of Consolidated Financial Position
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Unaudited As of Nov.30, As of Aug. 31,
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(Dollars in millions, except share amounts) 2006 2006
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Assets
Current Assets:
Cash and cash equivalents $ 1,842 $ 1,460
Short-term investments -- 22
Trade receivables -- net of allowances of $305 and $298, respectively 1,306 1,455
Miscellaneous receivables 383 344
Deferred tax assets 395 390
Inventories (see Note 5) 1,954 1,688
Assets of discontinued operations (see Note 15) 6 6
Other current assets 67 96
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Total Current Assets 5,953 5,461
Property, Plant and Equipment -- Net 2,397 2,418
Goodwill (see Note 6) 1,527 1,522
Other Intangible Assets -- Net (see Note 6) 1,195 1,229
Noncurrent Deferred Tax Assets 606 625
Other Assets 462 473
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Total Assets $ 12,140 $ 11,728
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Liabilities and Shareowners' Equity
Current Liabilities:
Short-term debt, including current portion of long-term debt $ 42 $ 28
Accounts payable 477 514
Income taxes payable 188 234
Accrued compensation and benefits 178 295
Accrued marketing programs 343 494
Deferred revenues 709 120
Grower accruals 185 26
Liabilities of discontinued operations (see Note 15) 2 2
Miscellaneous short-term accruals 557 566
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Total Current Liabilities 2,681 2,279
Long-Term Debt 1,580 1,639
Postretirement Liabilities 555 600
Long-Term Portion of Solutia-Related Reserve (see Note 13) 150 155
Other Liabilities 513 530
Commitments and Contingencies (see Note 13)
Shareowners' Equity:
Common stock (authorized: 1,500,000,000 shares, par value $0.01)
Issued 572,460,058 and 571,377,639 shares, respectively;
Outstanding 543,143,215 and 543,177,133 shares, respectively 6 6
Treasury stock, 29,316,843 and 28,200,506 shares, respectively, at cost (673) (623)
Additional contributed capital 8,923 8,879
Retained deficit (1,009) (1,099)
Accumulated other comprehensive loss (571) (623)
Reserve for ESOP debt retirement (15) (15)
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Total Shareowners' Equity 6,661 6,525
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Total Liabilities and Shareowners' Equity $ 12,140 $ 11,728
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The accompanying notes are an integral part of these consolidated financial
statements.
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MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
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Statements of Consolidated Cash Flows
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Unaudited Three Months Ended Nov. 30,
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(Dollars in millions) 2006 2005
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Operating Activities:
Net Income $ 90 $ 59
Adjustments to reconcile cash provided by operating activities:
Items that did not require (provide) cash:
Depreciation and amortization expense 128 133
Bad-debt expense 9 14
Stock-based compensation expense 18 13
Excess tax benefits from stock-based compensation (12) (10)
Deferred income taxes (4) 38
Equity affiliate expense -- net 10 7
Other items 3 (7)
Changes in assets and liabilities that provided (required) cash, net of acquisitions:
Trade receivables 251 215
Inventories (256) (221)
Deferred revenues 592 610
Accounts payable and other accrued liabilities (158) (127)
PCB litigation settlement proceeds 5 5
Solutia-related payments (see Note 13) (6) (9)
Other items (70) 53
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Net Cash Provided by Operating Activities 600 773
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Cash Flows Provided (Required) by Investing Activities:
Purchases of short-term investments -- (18)
Maturities of short-term investments 22 --
Capital expenditures (92) (56)
Acquisition of businesses, net of cash acquired -- (53)
Technology and other investments (10) (10)
Other investments and property disposal proceeds 13 2
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Net Cash Required by Investing Activities (67) (135)
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Cash Flows Provided (Required) by Financing Activities:
Net change in financing with less than 90-day maturities (1) (122)
Short-term debt proceeds 2 4
Short-term debt reductions (8) (6)
Long-term debt proceeds 3 3
Long-term debt reductions (69) (26)
Payments on other financing (2) (1)
Treasury stock purchases (56) --
Stock option exercises 17 27
Excess tax benefits from stock-based compensation 12 10
Dividend payments (54) (46)
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Net Cash Required by Financing Activities (156) (157)
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Effect of Exchange Rate Changes on Cash and Cash Equivalents 5 --
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Net Increase in Cash and Cash Equivalents 382 481
Cash and Cash Equivalents at Beginning of Period 1,460 525
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Cash and Cash Equivalents at End of Period $ 1,842 $ 1,006
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See Note 12 -- Supplemental Cash Flow Information -- for further details.
The accompanying notes are an integral part of these consolidated financial
statements.
5
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
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NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
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Monsanto Company, along with its subsidiaries, is a leading global provider of
agricultural products for farmers. Monsanto's seeds, biotechnology trait
products, and herbicides provide farmers with solutions that improve
productivity, reduce the costs of farming, and produce better foods for
consumers and better feed for animals.
Monsanto manages its business in two segments: Seeds and Genomics, and
Agricultural Productivity. Through the Seeds and Genomics segment, Monsanto
produces leading seed brands, including DEKALB, ASGROW, SEMINIS and STONEVILLE,
and Monsanto develops biotechnology traits that assist farmers in controlling
insects and weeds. Monsanto also provides other seed companies with genetic
material and biotechnology traits for their seed brands. Through the
Agricultural Productivity segment, the company manufactures ROUNDUP brand
herbicides and other herbicides and provides lawn-and-garden herbicide products
for the residential market and animal agricultural products focused on improving
dairy cow productivity and swine genetics. See Note 14 -- Segment Information --
for further details.
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
were paid on July 28, 2006, to shareowners of record on July 7, 2006. All share
and per share information herein reflect this stock split.
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, 2006. Financial information for the first three months of fiscal year 2007
should not be annualized because of the seasonality of the company's business.
NOTE 2. NEW ACCOUNTING STANDARDS
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In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Benefit Plans an amendment of FASB Statements No. 87, 88, and
132(R) (SFAS 158). SFAS 158 requires companies to recognize the overfunded or
underfunded status of a defined benefit postretirement plan as an asset or
liability in its statement of financial position and to recognize changes in
that funded status through comprehensive income. This statement also requires
the measurement date for plan assets and liabilities to coincide with the
sponsor's year end. The standard provides two transition alternatives related to
the change in measurement date provisions. The recognition of an asset and
liability related to the funded status provision is effective for fiscal years
ending after Dec. 15, 2006. Accordingly, Monsanto will adopt SFAS 158 in the
fourth quarter of fiscal year 2007. The change in measurement date provisions is
effective for fiscal years ending after Dec. 15, 2008. The company is currently
evaluating the impact of SFAS 158 on the consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
157). SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements. This statement is effective for financial statements
issued for fiscal years beginning after Nov. 15, 2007. Accordingly, Monsanto
will adopt SFAS 157 in fiscal year 2009. The company is currently evaluating the
impact of SFAS 157 on the consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108 (SAB 108). SAB 108 considers the effects of prior
year misstatements when quantifying misstatements in current year financial
statements. It is effective for fiscal years ending after Nov. 15, 2006.
Accordingly, Monsanto will adopt SAB 108 in the fourth quarter of fiscal year
2007. The company does not believe the adoption of SAB 108 will have a material
impact on the consolidated financial statements.
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MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 (FIN
48), which clarifies the accounting for uncertainty in tax positions. FIN 48
requires financial statement recognition of the impact of a tax position, if
that position is more likely than not to be sustained on examination, based on
the technical merits of the position. This interpretation is effective for
fiscal years beginning after Dec. 15, 2006, with the cumulative effect of the
change in accounting principle recorded as an adjustment to retained earnings as
of the beginning of the period of adoption. Accordingly, Monsanto will adopt FIN
48 in first quarter of fiscal year 2008. The company is currently evaluating the
impact of FIN 48 on the consolidated financial statements.
In March 2006, the 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. Accordingly, Monsanto
will adopt SFAS 156 in fiscal year 2008. The company is currently evaluating the
impact of SFAS 156 on the consolidated financial statements.
NOTE 3. BUSINESS COMBINATIONS
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2006 Acquisitions: In September 2005, Monsanto's American Seeds, Inc. (ASI)
subsidiary acquired five regional U.S. seed companies for an aggregate purchase
price of $54 million (net of cash acquired). In March 2006, ASI acquired two
additional U.S. seed companies for an aggregate purchase price of $6 million
(net of cash acquired). In June and July 2006, ASI acquired five additional U.S.
seed companies for an aggregate purchase price of $73 million (net of cash
acquired). The financial results of these acquisitions were included in the
company's consolidated financial statements from their respective dates of
acquisition.
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 enhance ASI's ability to directly serve farmer-customers
with a technology-rich, locally-oriented business model. The assets and
liabilities of the acquired entities were recorded at their estimated fair
values as of the dates of the acquisitions. The purchase price allocations for
the March, June and July 2006 acquisitions are preliminary and are subject to
adjustment pending further assessments, including the valuation of intangible
assets.
NOTE 4. CUSTOMER FINANCING PROGRAMS
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In April 2002, Monsanto established a revolving financing program to provide
financing of up to $500 million for selected customers in the United States
through a third-party specialty lender. Under the financing program, Monsanto
originates customer loans on behalf of the lender, which is a special purpose
entity (SPE) that Monsanto consolidates, pursuant to Monsanto's credit and other
underwriting guidelines approved by the lender. Under the program as amended in
August 2006, Monsanto services the loans and provides a first-loss guarantee of
up to $130 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 FIN 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.
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MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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Monsanto accounts for the guarantee in accordance with FIN No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees and Indebtedness of Others, an interpretation of SFAS No. 5, 57 and
107, and rescission of FIN No. 34 (FIN 45), which requires that a guarantor
recognize, at the inception of the guarantee, a liability for the fair value of
the guarantee obligation undertaken. 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 three
months ended Nov. 30, 2006, and Nov. 30, 2005.
Proceeds from customer loans sold through the financing program totaled $4
million for first quarter 2007 and $18 million for first quarter 2006. These
proceeds are included in net cash provided by operating activities in the
Statements of Consolidated Cash Flows. The loan balance outstanding as of Nov.
30, 2006 and Aug. 31, 2006, was $154 million and $268 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 Nov. 30, 2006, and Aug. 31,
2006, 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. 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. Total funds available under the program
have increased to $110 million under subsequent amendments. Proceeds from the
transfer of receivables through the program totaled $51 million and $18 million
for first quarter 2007 and 2006, respectively. Monsanto provides a guarantee of
the loans in the event of customer default. The term of the guarantee is
equivalent to the term of the bank loans. The liability for the guarantees is
recorded at an amount that approximates fair value and is based on the company's
historical collection experience with customers that participate in the program
and a current assessment of credit exposure. The guarantee liability recorded by
Monsanto was $3 million and $2 million as of Nov. 30, 2006, and Aug. 31, 2006,
respectively. If performance is required under the guarantee, Monsanto may
retain amounts that are subsequently collected from customers. The maximum
potential amount of future payments under the guarantee was $100 million as of
Nov. 30, 2006. The loan balance outstanding for these programs was $100 million
and $64 million as of Nov. 30, 2006, and Aug. 31, 2006, respectively.
Monsanto also has similar agreements with banks that provide financing to its
customers in Brazil through credit programs that are subsidized by the Brazilian
government and in similar programs in Europe and Argentina. These programs also
qualify for sales treatment under SFAS 140. Accordingly, proceeds from the
transfer of receivables are included in net cash provided by operating
activities in the Statements of Consolidated Cash Flows and totaled $38 million
and $32 million for first quarter 2007 and 2006, respectively. Under most of
these programs, Monsanto provides a guarantee of the loans in the event of
customer default. The terms of the guarantees are equivalent to the terms of the
bank loans. The liability for the guarantees is recorded at an amount that
approximates fair value and is based on the company's historical collection
experience with customers that participate in the program and a current
assessment of credit exposure. The guarantee liability recorded by Monsanto was
$1 million as of Nov. 30, 2006, and Aug. 31, 2006. If performance is required
under the guarantee, Monsanto may retain amounts that are subsequently collected
from customers. The maximum potential amount of future payments under the
guarantees was $66 million as of Nov. 30, 2006. The loan balance outstanding for
these programs was $66 million and $47 million as of Nov. 30, 2006, and Aug. 31,
2006, respectively.
Monsanto also sells accounts receivable, both with and without recourse. These
sales qualify for sales treatment under SFAS 140 and accordingly, the proceeds
are included in net cash provided by operating activities in the Statements of
Consolidated Cash Flows. The gross amounts of receivables sold totaled $4
million for first quarter 2007 and 2006. The liability for the guarantees for
sales with recourse is recorded at an amount that approximates fair value and is
based on the company's historical collection experience for the customers
associated with the sale of the receivables and a current assessment of credit
8
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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exposure. The liability recorded by Monsanto was less than $1 million as of Nov.
30, 2006, and Aug. 31, 2006. The maximum potential amount of future payments
under the recourse provisions of the agreements was $31 million as of Nov. 30,
2006. The outstanding balance of the receivables sold was $31 million and $41
million as of Nov. 30, 2006, and Aug. 31, 2006, respectively.
NOTE 5. INVENTORIES
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Components of inventories were:
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As of Nov. 30, As of Aug. 31,
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(Dollars in millions) 2006 2006
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Finished Goods $ 863 $ 719
Goods In Process 943 836
Raw Materials and Supplies 230 216
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Inventories at FIFO Cost 2,036 1,771
Excess of FIFO over LIFO Cost (82) (83)
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Total $ 1,954 $ 1,688
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NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
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Changes in the net carrying amount of goodwill for the first quarter of fiscal
year 2007, by segment, are as follows:
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Seeds and Agricultural
(Dollars in millions) Genomics Productivity Total
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Balance as of Aug. 31, 2006 $ 1,457 $ 65 $ 1,522
Effect of Foreign Currency Translation Adjustments 4 1 5
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Balance as of Nov. 30, 2006 $ 1,461 $ 66 $ 1,527
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Information regarding the company's other intangible assets is as follows:
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As of Nov. 30, 2006 As of Aug. 31, 2006
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Carrying Accumulated Carrying Accumulated
(Dollars in millions) Amount Amortization Net Amount Amortization Net
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Acquired Germplasm $ 932 $ (522) $ 410 $ 932 $ (518) $ 414
Acquired Biotechnology
Intellectual Property 823 (399) 424 823 (376) 447
Trademarks 211 (50) 161 211 (48) 163
Customer Relationships 208 (26) 182 208 (21) 187
Other 33 (15) 18 32 (14) 18
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Total $ 2,207 $ (1,012) $ 1,195 $ 2,206 $ (977) $ 1,229
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Total amortization expense of other intangible assets was $36 million in first
quarter of fiscal year 2007 and $42 million in first quarter of fiscal year
2006. Estimated intangible asset amortization expense for each of the five
succeeding fiscal years has not changed significantly from the amounts disclosed
in Monsanto's Report on Form 10-K for the fiscal year ended Aug. 31, 2006.
NOTE 7. INCOME TAXES
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Management regularly assesses the tax risk of the company's tax return filing
positions for all open tax years and establishes tax reserves accordingly.
During first quarter 2007, an audit was completed in an ex-U.S. jurisdiction.
Primarily as a result of the conclusion of this audit and the resolution of
various state income tax issues, Monsanto recorded an income tax benefit of $23
million in first quarter 2007.
9
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
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NOTE 8. POSTRETIREMENT BENEFITS -- PENSIONS, HEALTH CARE AND OTHER
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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:
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Three Months Ended Nov. 30, Three Months Ended Nov. 30,
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2006 2005
--------------------------------- ---------------------------------
Pension Benefits Outside the Outside
(Dollars in millions) U.S. U.S. Total U.S. the U.S. Total
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Service Cost for Benefits Earned During the Period $ 10 $ 1 $ 11 $ 10 $ 1 $ 11
Interest Cost on Benefit Obligation 26 3 29 25 1 26
Assumed Return on Plan Assets (30) (4) (34) (31) (1) (32)
Amortization of Unrecognized Net Loss 11 1 12 15 -- 15
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Total Net Periodic Benefit Cost $ 17 $ 1 $ 18 $ 19 $ 1 $ 20
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Health Care and Other Postretirement Benefits Three Months Ended Nov. 30,
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(Dollars in millions) 2006 2005
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Service Cost for Benefits Earned During the Period $ 3 $ 4
Interest Cost on Benefit Obligation 5 4
Amortization of Unrecognized Net Loss (Gain) (3) 1
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Total Net Periodic Benefit Cost $ 5 $ 9
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Monsanto contributed $60 million to its U.S. qualified plan and $1 million to
plans outside the United States in first quarter 2007 and 2006. The remaining
portion of expected contributions for 2007 relates to the non-qualified U.S.
plan and plans outside the United States. As of Nov. 30, 2006, management
expects to make additional contributions of approximately $2 million to the
company's pension plans in fiscal year 2007.
NOTE 9. STOCK-BASED COMPENSATION PLANS
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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. The following table shows total
stock-based compensation expense included in the Statements of Consolidated
Operations for the three months ended Nov. 30, 2006, and Nov. 30, 2005.
Stock-based compensation cost capitalized in inventories was $3 million as of
Nov. 30, 2006, and Aug. 31, 2006.
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Three Months Ended Nov. 30,
--------------------------
(Dollars in millions) 2006 2005
- ----------------------------------------------------------------------------------------------------------------------------
Cost of Goods Sold $ 2 $ 1
Selling, General and Administrative Expenses 13 10
Research and Development Expenses 3 2
- ----------------------------------------------------------------------------------------------------------------------------
Pre-Tax Stock-Based Compensation Expense 18 13
Income Tax Benefit (6) (5)
- ----------------------------------------------------------------------------------------------------------------------------
Net Stock-Based Compensation Expense $ 12 $ 8
- -------------------------------------------------------------------------------------------------===========================
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.
10
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
During the three months ended Nov. 30, 2006, Monsanto granted 4,239,010 stock
options, 31,800 shares of restricted stock and 118,460 restricted stock units to
employees under the Monsanto Company Long-Term Incentive Plan, as amended. In
addition, 19,471 shares of deferred stock and 1,557 shares of restricted stock
were granted to directors under the Monsanto Non-Employee Director Equity
Incentive Compensation Plan (Director Plan). The weighted-average grant-date
fair value of non-qualified stock options granted during the three months ended
Nov. 30, 2006 was $13.56 per share. Pre-tax unrecognized compensation expense
for stock options, net of estimated forfeitures, was $79 million as of Nov. 30,
2006, and will be recognized as expense over a weighted-average period of 2.4
years.
The weighted-average grant-date fair value of restricted stock and restricted
stock units granted during the first quarter of fiscal year 2007 was $45.13 and
$44.08, respectively, per share. Pre-tax unrecognized compensation expense, net
of estimated forfeitures, for nonvested restricted stock and restricted stock
units was $3 million and $11 million, respectively, as of Nov. 30, 2006, which
will be recognized as expense over the weighted-average remaining requisite
service periods. The weighted-average remaining requisite service periods for
nonvested restricted stock and restricted stock units were 3.0 years and 1.9
years, respectively, as of Nov. 30, 2006. The weighted-average grant-date fair
value of directors' deferred stock granted during the three months ended Nov.
30, 2006 was $46.92 per share. Pre-tax unrecognized compensation expense for
awards granted under the Director Plan was $1 million as of Nov. 30, 2006, and
will be recognized as expense over a weighted-average period of 1 year.
NOTE 10. COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
Comprehensive income includes all nonshareowner changes in equity and consists
of net income, foreign currency translation adjustments, gains and losses on the
foreign currency hedge of the company's net investment in a foreign subsidiary,
net unrealized gains and losses on available-for-sale securities, additional
minimum pension liability adjustments, and net accumulated derivative gains or
losses on cash flow hedges not yet realized. Comprehensive income for the three
months ended Nov. 30, 2006, and Nov. 30, 2005, was $142 million and $88 million,
respectively.
The components of accumulated other comprehensive loss are as follows:
- ------------------------------------------------------------------------------------------------------------------------------
As of Nov.30, As of Aug. 31,
------------ ------------
(Dollars in millions) 2006 2006
- ----------------------------------------------------------------------------------------------------------- ------------
Accumulated Foreign Currency Translations $ (386) $ (402)
Net Unrealized Gains on Investments, Net of Taxes 22 18
Net Accumulated Derivative Gain (Loss), Net of Taxes 4 (28)
Minimum Pension Liability, Net of Taxes (211) (211)
- ----------------------------------------------------------------------------------------------------------- ------------
Accumulated Other Comprehensive Loss $ (571) $ (623)
- -----------------------------------------------------------------------------------------------============ ============
NOTE 11. 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. For first
quarter 2007 and 2006, diluted EPS was computed taking into account the effect
of dilutive potential common shares, as shown in the table below. Potential
common shares consist primarily of stock options using the treasury stock method
and are excluded if their effect is antidilutive. Approximately 4.3 million and
0.3 million stock options were excluded from the computations of dilutive
potential common shares as they were antidilutive as of Nov. 30, 2006 and Nov.
30, 2005, respectively. Of those antidilutive options, less than 0.1 million
stock options were excluded from the computations of dilutive potential common
shares as of Nov. 30, 2006 and Nov. 30, 2005, as their exercise prices were
greater than the average market price of common shares for the period.
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
--------------------------
2006 2005
- ----------------------------------------------------------------------------------------------------------------------------
Weighted-Average Number of Common Shares 543.1 536.8
Dilutive Potential Common Shares 10.5 10.5
- ----------------------------------------------------------------------------------------------------------------------------
11
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
NOTE 12. SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------------------------------------------
Cash payments for interest and taxes were as follows:
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
--------------------------
(Dollars in millions) 2006 2005
- ----------------------------------------------------------------------------------------------------------------------------
Interest $ 10 $ 15
Taxes 54 26
- ----------------------------------------------------------------------------------------------------------------------------
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. In first quarter
fiscal year 2007, the company paid $6 million for shares accrued at Aug. 31,
2006 and acquired an additional 1.1 million shares for $50 million. Through Nov.
30, 2006, the company had acquired 3.9 million shares for $170 million. In first
quarter fiscal year 2006, the company accrued a contingent payment of $125
million relating to the acquisition of Seminis, Inc., which was subsequently
paid in second quarter fiscal year 2006.
NOTE 13. COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
Litigation and Indemnification: Monsanto is involved in various legal
proceedings that arise in the ordinary course of its business, as well as
proceedings that management has considered to be material under SEC regulations.
These include proceedings to which Monsanto is a party in its own name,
proceedings to which Pharmacia is a party but that Monsanto manages and for
which Monsanto is responsible, and proceedings that Monsanto is managing related
to Solutia's Assumed Liabilities (defined below). Some of the lawsuits seek
damages in very large amounts, or seek to restrict the company's business
activities. Information with respect to these lawsuits appears in Part II --
Item 8 -- Note 22 -- 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,
2006, and in this report. Monsanto believes that it has meritorious legal
arguments and will continue to represent its interests vigorously in all of the
proceedings that it is defending or prosecuting. While the ultimate liabilities
resulting from such proceedings may be significant to profitability in the
period recognized, management does not anticipate they will have a material
adverse effect on Monsanto's consolidated financial position or liquidity,
excluding liabilities relating to Solutia.
On 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 Monsanto and the Monsanto Company Pension Plan,
which is referred to as the "Pension Plan." The suit claims that the Pension
Plan has violated the age discrimination and other 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. In January 2006, a separate group of former employees of Pharmacia
filed a similar purported class action lawsuit in the U.S. District Court for
the Southern District of Illinois against Pharmacia, the Pharmacia Cash Balance
Plan, and other defendants. On July 7, 2006, the plaintiffs amended their
lawsuit to add Monsanto and the Pension Plan as additional defendants. On Sept.
1, 2006, the Court consolidated these lawsuits with two purported class action
lawsuits also pending in the same Court against the Solutia Company Pension
Plan, under Walker v. Monsanto, the first filed case. There is no trial setting
for this matter.
Solutia Inc.: The following discussion provides new and updated information
regarding proceedings related to Solutia Inc. Pursuant to the Sept. 1, 2000,
Separation Agreement between Monsanto and Pharmacia, as amended (Separation
Agreement), Monsanto was required to indemnify Pharmacia for liabilities that
Solutia 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.
12
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
Following is an update and description of certain of the proceedings related to
Solutia's bankruptcy:
o On March 7, 2005, the Official Committee of Equity Security Holders (Equity
Committee) 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. On
Sept. 14, 2006, the Bankruptcy Court determined that the Equity Committee
lacks standing to pursue Solutia's claims against Pharmacia and Monsanto
but that the Equity Committee has standing to pursue its own objections to
the claims of Pharmacia and Monsanto. Pharmacia and Monsanto intend to
challenge any pursuit of claims by the Equity Committee allowed under the
April 11 and Sept. 14, 2006, rulings. Trial on the Equity Committee
objections to the claims of Pharmacia and Monsanto is scheduled for
February 2007.
o On Dec. 16, 2005, Solutia filed a complaint against Pharmacia and Monsanto
to recover alleged preferential transfers from Monsanto and avoid the
transfers of certain liabilities allegedly fraudulently transferred to
Solutia by Pharmacia and Monsanto. This complaint was filed by Solutia
prior to a two-year statutory deadline from Solutia's Chapter 11 petition
date (Dec. 17, 2003) to preserve rights, if any, of Solutia's bankruptcy
estate. Concurrent with this filing, Solutia announced that: (i) it filed
this action to preserve the legal rights of Solutia's bankruptcy estate;
(ii) Solutia has made no decision to pursue this action; and (iii) Solutia
remains committed to the agreement in principle described below. The
complaint is redundant in many respects to other pending actions filed
against Monsanto and Pharmacia by other constituents in the case (including
the Equity Committee and the Retirees' Committee). This litigation is
currently stayed.
o On Feb. 14, 2006, Solutia filed its Plan of Reorganization (Plan) and
accompanying Disclosure Statement (Disclosure Statement) with the
Bankruptcy Court. Monsanto's contribution commitment to Solutia under the
Plan is substantially similar to that described in the
agreement-in-principle Monsanto reached on June 7, 2005, with Solutia and
the Creditors' Committee, namely, Monsanto would: (i) backstop a $250
million rights offering to certain unsecured creditors who will be given
the opportunity to purchase 22.7 percent of the common stock of Reorganized
Solutia; (ii) accept financial responsibility for toxic tort litigation
relating to Pharmacia's chemical business that occurred prior to Sept. 1,
1997; (iii) accept financial responsibility for environmental remediation
obligations at sites relating to Pharmacia's chemical business which
Solutia never owned or operated; and (iv) share financial responsibility
for off-site environmental remediation costs in Anniston, Alabama, and
Sauget, Illinois, provided that Solutia would pay the first $50 million out
of the rights offering (described above), Monsanto would pay the next $50
million minus amounts Monsanto paid toward these sites during Solutia's
Chapter 11 case, and Solutia would pay the next $325 million, if needed,
after which Monsanto and Solutia would share responsibility for costs
equally. The Plan provides for a comprehensive retiree settlement and
includes a release for Monsanto and Pharmacia from certain legacy
liabilities associated with Pharmacia's chemical business that arose prior
to Sept. 1, 1997, including liabilities related to retiree medical, retiree
life insurance and disability benefits for individuals who retired or
became disabled prior to Sept. 1, 1997. In consideration for Monsanto's
contributions described in the Plan, the resolution of Monsanto's claims in
Solutia's Chapter 11 case, and settlement of ongoing and potential
litigation in the case, among other things, Monsanto would receive common
stock in Reorganized Solutia. If the Plan was approved and Monsanto was
required to make the full investment contemplated by the rights offering
13
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
under its backstop commitment, Monsanto's equity interest in Reorganized
Solutia could range from approximately 45 percent to 49 percent, based upon
an estimated range of unsecured claims against Solutia.
o On Dec. 28, 2006, Solutia filed a Form 8-K with the SEC describing (i) its
proposal for an amended plan of reorganization, which was designed to act
as a framework for negotiations among Solutia, certain noteholders and
other major stakeholders; and (ii) a summary update of Solutia's efforts to
obtain proposals for a possible sale of the equity of reorganized Solutia.
Solutia's description of the framework for an amended plan of
reorganization is unacceptable to Monsanto. No amended Plan has been filed
and it is unknown whether an amended Plan will be filed, and if an amended
Plan is filed, what terms an amended Plan might include. However, Monsanto
remains supportive of efforts for a negotiated resolution of unresolved
issues in Solutia's Chapter 11 proceeding, and continues to support
Solutia's efforts to reorganize as a viable company.
o Various parties participating in Solutia's bankruptcy proceeding, including
the Equity Committee, 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 Equity Committee and a lawsuit filed against
Solutia by JPMorgan Chase Bank, as indenture trustee for two classes of
Solutia's unsecured noteholders aggregating $450 million, seeking a court
order declaring the notes to be secured. The trial of JPMorgan Chase Bank's
claim has completed and awaits the Bankruptcy Court's decision. Various
parties have asserted that a determination of this claim is an essential
component of the Disclosure Statement. In addition, if the Plan is amended,
the Disclosure Statement must also be amended. 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, or
an amended Plan. If the Court confirms the Plan, or an amended 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. As of
Nov. 30, 2006, $205 million was recorded in the Statement of Consolidated
Financial Position ($55 million in current liabilities and $150 million in the
long-term portion of the Solutia-related reserve).
Monsanto believes that the Solutia-related charge represents the discounted cost
that Monsanto would expect to incur in connection with these litigation and
environmental matters. However, actual costs to Monsanto may differ materially
from this estimate. Monsanto expects to pay for these potential liabilities over
time as the various legal proceedings are resolved and remediation is performed
at the various environmental sites. In addition, the charge may not reflect all
potential liabilities that Monsanto may incur in connection with Solutia's
bankruptcy. Litigation or environmental matters that are not reflected in the
charge may arise in the future, and Monsanto may also manage, settle, or pay
judgments or damages with respect to such matters in order to mitigate
contingent potential liability and protect Pharmacia and Monsanto, if Solutia
refuses to do so.
The charge does not reflect any insurance reimbursements, any recoveries
Monsanto might receive through the bankruptcy process, or any recoveries
Monsanto might receive through the contribution actions that it is pursuing on
Pharmacia's behalf with regard to the Anniston, Alabama, and Sauget, Illinois,
sites. Receivables of $40 million were recorded as of Nov. 30, 2006 ($27 million
was recorded in miscellaneous receivables and $13 million was recorded in other
assets), for the anticipated insurance reimbursement of a portion of Monsanto's
settlement payments for certain litigation related to Anniston, Alabama.
Monsanto expects these receivables to be paid over three years, in quarterly
installments, which began in March 2005. Monsanto has received net insurance
proceeds of $119 million.
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, are reflected in the Statements of Consolidated
Operations as Solutia-related expenses.
14
MONSANTO COMPANY FIRST QUARTER 2007 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.
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), dioxins and other chemical
and premises liability litigation. Monsanto's Report on Form 10-K for the fiscal
year ended Aug. 31, 2006, describes the significant litigation matters reflected
in the Solutia-related charge.
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.
Monsanto's Report on Form 10-K for the fiscal year ended Aug. 31, 2006,
describes the significant environmental matters reflected in the Solutia-related
charge.
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 Nov. 30, 2006, the full amount of Monsanto's
prepayment had been applied and no amount remained outstanding.
Guarantees: Disclosure regarding the guarantees Monsanto provides for certain
customer loans in the United States, Brazil, Europe and Argentina can be found
in Note 4 -- Customer Financing Programs -- of this Form 10-Q. Except as
described in that note, there have been no significant changes to guarantees
made by Monsanto since Aug. 31, 2006. Disclosures regarding these guarantees
made by Monsanto can be found in Note 22 -- 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, 2006. Information
regarding Monsanto's indemnification obligations to Pharmacia under the
Separation Agreement relating to Solutia's Assumed Liabilities can be found
above.
15
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
NOTE 14. 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
related traits businesses and biotechnology platforms. The Agricultural
Productivity segment consists of the crop protection products, animal
agriculture businesses and lawn-and-garden herbicide products. EBIT is defined
as earnings (loss) before interest and taxes and is the primary operating
performance measure for the two business segments. EBIT is useful to management
in demonstrating the operational profitability of the segments by excluding
interest and taxes, which are generally accounted for across the entire company
on a consolidated basis. 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 2007. Data for the Seeds and
Genomics and Agricultural Productivity reportable segments, as well as for
Monsanto's significant operating segments is presented in the table that
follows.
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
--------------------------
(Dollars in millions) 2006 2005
- ----------------------------------------------------------------------------------------------------------------------------
Net Sales
Corn seed and traits $ 360 $ 267
Soybean seed and traits 170 173
Vegetable and fruit seed 100 125
All other crops seeds and traits 50 91
- ----------------------------------------------------------------------------------------------------------------------------
Total Seeds and Genomics $ 680 $ 656
- ----------------------------------------------------------------------------------------------------------------------------
ROUNDUP and other glyphosate-based herbicides $ 649 $ 549
All other agricultural productivity products 210 200
- ----------------------------------------------------------------------------------------------------------------------------
Total Agricultural Productivity $ 859 $ 749
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 1,539 $ 1,405
- ----------------------------------------------------------------------------------------------------------------------------
EBIT(1)
Seeds and Genomics $ 1 $ 19
Agricultural Productivity 103 93
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 104 $ 112
- ----------------------------------------------------------------------------------------------------------------------------
Depreciation and Amortization Expense
Seeds and Genomics $ 86 $ 89
Agricultural Productivity 42 44
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 128 $ 133
- ----------------------------------------------------------------------------------------------------------------------------
(1) EBIT is defined as earnings (loss) before interest and taxes; see the
following table for reconciliation. Earnings (loss) is intended to mean net
income (loss) as presented in the 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 quarter follows:
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
--------------------------
(Dollars in millions) 2006 2005
- ----------------------------------------------------------------------------------------------------------------------------
EBIT(1) $ 104 $ 112
Interest Expense -- Net 3 18
Income Tax Provision(2) 11 35
- ----------------------------------------------------------------------------------------------------------------------------
Net Income $ 90 $ 59
- --------------------------------------------------------------------------------------------------==========================
(1) Includes pre-tax minority interest income.
(2) Includes the income tax provision from minority interest income.
16
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
- --------------------------------------------------------------------------------
NOTE 15. DISCONTINUED OPERATIONS
- --------------------------------------------------------------------------------
Environmental technologies businesses: In 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, Accounting
for the Impairment or Disposal of Long-Lived Assets (SFAS 144). The
environmental technologies businesses provided engineering, procurement and
construction management services, and sold proprietary equipment and process
technologies. The environmental technologies businesses were previously reported
as part of the Agricultural Productivity segment. The company determined that
these businesses were no longer consistent with its strategic business goals. In
August 2005, the company completed the sale of substantially all of Enviro-Chem
to a new company formed by the management of the businesses and an outside
investor. As a result, the financial data for these businesses have been
presented as discontinued operations. The financial statements have been recast
and prepared in compliance with the provisions of SFAS 144. During the three
months ended Nov. 30, 2006 and Nov. 30, 2005, the income statement results of
these businesses were less than $1 million, and thus there was no impact on the
Statements of Consolidated Operations.
In April 2001, Enviro-Chem entered into an agreement with a third party related
to the engineering, design and construction of a power generation plant in
Oregon. As of the date of the divestiture, the receivable related to this power
plant and related fixed assets had not been collected. The title to the
receivable was transferred to the buyer of Enviro-Chem, and the buyer entered
into an agreement with Monsanto in August 2005 to remit the proceeds of this
receivable to Monsanto upon repayment by the third party. As such, the
receivable that the third party owed to Enviro-Chem has been recorded as an
asset of discontinued operations as of Nov. 30, 2006, and Aug. 31, 2006. As of
Nov. 30, 2006, and Aug. 31, 2006, the miscellaneous receivable of $6 million was
recorded as an asset of discontinued operations and $2 million of deferred taxes
on the miscellaneous receivable was recorded in liabilities of discontinued
operations. Monsanto expects that it will collect the outstanding receivable
balance in fiscal year 2007.
NOTE 16. SUBSEQUENT EVENTS
- -------------------------------------------------------------------------------
In December 2006, Monsanto entered into two agreements with Landec Corporation.
In the first agreement, ASI acquired Landec's direct marketing and seed sales
company, Fielder's Choice Direct, for a purchase price of $50 million, with a
potential additional earn-out amount of up to $5 million. In the second
agreement, Monsanto entered into a five-year global technology license with
Landec for certain seed coating technology. Monsanto also received an option to
purchase technology. Future payments over the five year period related to this
agreement could range from $17 million to $21 million.
On Dec. 12, 2006, the board of directors declared an increase in the quarterly
dividend on the company's common shares from 10 cents per share to 12.5 cents
per share. The dividend is payable on Jan. 26, 2007, to shareowners of record on
Jan. 5, 2007.
17
MONSANTO COMPANY FIRST QUARTER 2007 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 leading global provider of
agricultural products for farmers. Our seeds, biotechnology trait products, and
herbicides provide farmers with solutions that improve productivity, reduce the
costs of farming, and produce better foods for consumers and better feed for
animals.
We manage our business in two segments: Seeds and Genomics, and Agricultural
Productivity. Through the Seeds and Genomics segment, 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
also provide other seed companies with genetic material and biotechnology traits
for their seed brands. Through the Agricultural Productivity segment, we
manufacture ROUNDUP brand herbicides and other herbicides and provide
lawn-and-garden herbicide products for the residential market and animal
agricultural products focused on improving dairy cow productivity and swine
genetics.
On June 27, 2006, the board of directors approved a two-for-one split of our
common shares. The additional shares resulting from the stock split were paid on
July 28, 2006, to shareowners of record on July 7, 2006. All share and per share
information herein reflect this stock split.
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, 2006. Financial information for the first three months of
fiscal year 2007 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. Unless otherwise indicated, "earnings per share" and "per share"
mean diluted earnings per share. Unless otherwise noted, all amounts and
analyses are based on continuing operations. Unless otherwise indicated,
trademarks owned or licensed by Monsanto or its subsidiaries are shown in all
capital letters. Unless otherwise indicated, references to "ROUNDUP herbicides"
mean ROUNDUP branded herbicides, excluding all lawn-and-garden herbicides, and
references to "ROUNDUP and other glyphosate-based herbicides" exclude all
lawn-and-garden herbicides.
Non-GAAP Financial Measures
MD&A includes financial information prepared in accordance with U.S. generally
accepted accounting principles (GAAP), as well as two other financial measures,
EBIT and free cash flow, that are considered "non-GAAP financial measures."
Generally, a non-GAAP financial measure is a numerical measure of a company's
financial performance, financial position or cash flows that exclude (or
include) amounts that are included in (or excluded from) the most directly
comparable measure calculated and presented in accordance with GAAP. The
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 is
intended to mean net income 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 14 -- Segment Information -- for a reconciliation of EBIT to net income for
the three months ended Nov. 30, 2006, and Nov. 30, 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
18
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
- --------------------------------------------------------------------------------
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 $134 million, or 10
percent, in the three-month comparison. This improvement was a result of
increased sales of U.S. corn seed and traits and increased sales of ROUNDUP
herbicides in the United States and Brazil, which were partially offset by a
decline in cotton trait sales in Australia. The effective tax rate for the first
quarter 2007 was 10 percent, compared with 37 percent in the first quarter 2006.
The decrease in the effective tax rate was primarily because of a tax benefit
resulting from the conclusion of an ex-U.S. audit. Net income in first quarter
2007 was $0.16 per share, compared with $0.11 per share in first quarter 2006.
Financial Condition, Liquidity, and Capital Resources -- In first quarter 2007,
net cash provided by operating activities was $600 million, compared with $773
million in the prior-year quarter. Net cash required by investing activities was
$67 million in first quarter 2007, compared with $135 million in first quarter
2006. Free cash flow was $533 million in first quarter 2007 compared with $638
million in the prior-year quarter. This decrease is primarily because of the
increased operating working capital needs, particularly related to inventory and
market funding payments, due to higher business levels in 2007.
Outlook -- We aim to continue to 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 protecting yields and improving the ways they can produce
food, fiber and feed. We use the tools of modern biology to make seeds easier to
grow, to allow farmers to do more with fewer resources, and to produce healthier
foods for consumers. 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. Our capabilities in
biotechnology and breeding research are generating a rich product pipeline that
is expected to drive long-term growth. The viability of our product pipeline
depends in part on the speed of regulatory approvals globally, and on continued
patent and legal rights to offer our products.
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, our pending purchase of the Delta and Pine Land Company,
which is subject to antitrust clearance and customary closing conditions, could
expand our cotton breeding operation. In fiscal year 2007, 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 managing the
costs associated with our agricultural chemistry business as that sector matures
globally.
We are required to indemnify Pharmacia for Solutia's Assumed Liabilities
(defined in Note 13), 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. In 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. As of Nov. 30, 2006, the remaining Solutia-related reserve
was $205 million. We believe that the reserve represents the discounted cost
that we would expect to incur in connection with these litigation and
environmental matters. However, our actual costs may differ materially from this
estimate. In addition, the reserve may not reflect all potential liabilities
that we may incur in connection with Solutia's bankruptcy and does not reflect
any insurance reimbursements or other recoveries that we might receive. We also
continue to incur legal and other expenses associated with the bankruptcy
proceedings. The degree to which we may ultimately be responsible for the
particular matters reflected in the reserve 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. Additional information about
Solutia and other litigation matters and the related risks to our business may
be found in Note 13. See the "Outlook" section of MD&A for a more detailed
discussion of some of the opportunities and risks we have identified for our
business. For additional information related to the outlook for Monsanto, see
"Caution Regarding Forward-Looking Statements" below and Part II -- Item 1A --
Risk Factors of this Form 10-Q.
19
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
- -----------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS -- FIRST QUARTER FISCAL YEAR 2007
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
---------------------------
(Dollars in millions, except per share amounts) 2006 2005 % Change
- ---------------------------------------------------------------------------------------------------------- -------- ---------
Net Sales $ 1,539 $ 1,405 10%
Gross Profit 680 634 7%
Operating Expenses:
Selling, general and administrative expenses 384 350 10%
Research and development expenses 182 168 8%
- -----------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 566 518 9%
- -----------------------------------------------------------------------------------------------------------------------------
Income from Operations 114 116 (2)%
Interest expense 33 32 3%
Interest income (30) (14) 114%
Solutia-related expenses (see Note 13) 10 6 67%
Other expense (income) -- net 4 (2) (300)%
- -----------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes and Minority Interest 97 94 3%
Income tax provision 10 35 (71)%
Minority interest income (3) -- 100%
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $ 90 $ 59 53%
- --------------------------------------------------------------------------------------------------===========================
Diluted Earnings per Share $ 0.16 $ 0.11
- --------------------------------------------------------------------------------------------------===========================
Effective Tax Rate 10% 37%
Comparison as a Percent of Net Sales:
Gross profit 44% 45%
Selling, general and administrative expenses 25% 25%
Research and development expenses 12% 12%
Total operating expenses 37% 37%
Income before income taxes and minority interest 6% 7%
Net income 6% 4%
The following explanations discuss the significant components of our results of
operations that affected the quarter-to-quarter comparison of our first quarter
income from continuing operations:
Net sales increased 10 percent in first quarter 2007 from the same quarter a
year ago. Our Seeds and Genomics segment net sales improved 4 percent, and our
Agricultural Productivity segment net sales improved 15 percent. The following
table presents the percentage changes in first quarter 2007 worldwide net sales
by segment compared with the prior-year quarter, including the effect volume,
price, currency and acquisitions had on these percentage changes:
- ----------------------------------------------------------------------------------------------------------------------------
First Quarter 2007 Percentage Change in Net Sales vs. First Quarter 2006
----------------------------------------------------------------------------------------------
Impact of
Volume Price Currency Subtotal Acquisitions(1) Net Change
----------------------------------------------------------------------------------------------
Seeds and Genomics Segment 1% 3% -- 4% -- 4%
Agricultural Productivity 11% 2% 2% 15% -- 15%
Segment
Total Monsanto Company 6% 3% 1% 10% -- 10%
- ----------------------------------------------------------------------------------------------------------------------------
(1) See Note 3 -- Business Combinations -- and "Financial Condition, Liquidity,
and Capital Resources" in MD&A for details of our acquisitions in fiscal
year 2006. 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 7 percent in the three-month comparison. Total company
gross profit as a percent of net sales decreased 1 percentage point to 44
percent in first quarter 2007. As a percent of total net sales, the Agricultural
Productivity Segment increased from 53 percent of total net sales in 2006 to 56
percent of total net sales in 2007. This increase in the percent of total net
sales decreased the total company gross profit as a percent of net sales because
this segment delivers lower gross profit as a percent of net sales when compared
with the Seeds and Genomics segment. Gross profit as a percent of sales for the
Seeds and Genomics segment reached 61 percent, a 2 percentage point increase in
the quarter-over-quarter comparison. Gross profit as a percent of sales declined
2 percentage points for the Agricultural Productivity segment to 31 percent in
the three-month comparison. See the "Seeds and Genomics Segment" and
"Agricultural Productivity Segment" sections of MD&A for details.
20
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
- --------------------------------------------------------------------------------
Operating expenses increased 9 percent, or $48 million, in first quarter 2007
from the prior-year comparable quarter. In the three-month comparison, selling,
general and administrative (SG&A) expenses increased 10 percent primarily
because of the Seeds and Genomics business growth in the United States, and
research and development (R&D) expenses increased 8 percent related to the
increase in our investment in our product pipeline. As a percent of net sales,
SG&A expenses were 25 percent, and R&D expenses were 12 percent in both
three-month periods.
Interest expense increased $1 million in the three-month comparison because of
the addition of a three-year term bank loan completed in July 2006.
Interest income increased $16 million in the quarter-over-quarter comparison
because of interest earned on higher average cash balances in the United States
and Brazil and interest earned on past-due trade receivables in Brazil in first
quarter 2007.
Solutia-related expenses were $10 million in first quarter 2007 compared with $6
million in first quarter 2006. This increase was a result of an increase in the
legal and other expenses associated with the bankruptcy proceedings.
Other expense -- net was $4 million in first quarter 2007, compared with other
income -- net of $2 million in first quarter 2006. In first quarter 2007, we
recorded foreign-currency transaction losses of $3 million compared with
foreign-currency transaction gains of $7 million in first quarter 2006. The
remaining difference is primarily related to gains on disposals of various
assets in the first quarter 2007.
Income tax provision was $10 million in first quarter 2007, compared with $35
million in the prior-year quarter. The effective tax rate decreased to 10
percent from 37 percent in first quarter 2006. First quarter 2007 includes
several discrete tax adjustments resulting in a tax benefit of $23 million. The
majority of this benefit is the result of audit settlements, including the
conclusion of an ex-U.S. audit and the resolution of various state income tax
matters. First quarter 2006 includes a charge to establish a reserve for tax
exposures in Brazil. Without these items, our effective tax rate would have been
comparable in both three-month periods.
SEEDS AND GENOMICS SEGMENT
- ---------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
---------------------------------
(Dollars in millions) 2006 2005 % Change
- ----------------------------------------------------------------------------------------------------------------------------
Net Sales
Corn seed and traits $ 360 $ 267 35%
Soybean seed and traits 170 173 (2)%
Vegetable and fruit seed 100 125 (20)%
All other crops seeds and traits 50 91 (45)%
- ----------------------------------------------------------------------------------------------------------------------------
Total Net Sales $ 680 $ 656 4%
- -------------------------------------------------------------------------------------------=================================
Gross Profit
Corn seed and traits $ 223 $ 153 46%
Soybean seed and traits 122 114 7%
Vegetable and fruit seed 51 63 (19)%
All other crops seeds and traits 18 56 (68)%
- ----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit $ 414 $ 386 7%
- -------------------------------------------------------------------------------------------=================================
EBIT(1) $ 1 $ 19 (95)%
- ----------------------------------------------------------------------------------------------------------------------------
(1) EBIT is defined as earnings (loss) before interest and taxes. Interest and
taxes are recorded on a total company basis. We do not record these items
at the segment level. See Note 14 -- Segment Information and the "Overview
-- Non-GAAP Financial Measures" section of MD&A for further details.
Seeds and Genomics Financial Performance -- First Quarter Fiscal Year 2007
Net sales of corn seed and traits increased 35 percent, or $93 million, in the
three-month comparison, primarily because of an increase in sales of U.S. corn
seed and traits. In first quarter 2007, our U.S. corn seed and traits sales
volume increased because of stronger customer demand. Increased trait
penetration and growth in our triple-stack product, YIELDGARD Plus with ROUNDUP
READY Corn 2 also favorably affected our corn seed and traits revenue in the
United States.
In first quarter 2007, vegetable and fruit seed net sales decreased 20 percent,
or $25 million, in the three-month comparison primarily because we made
logistical changes that aligned distributor inventory levels closer to market
demand.
21
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
- --------------------------------------------------------------------------------
All other crops seeds and traits net sales decreased 45 percent, or $41 million,
in first quarter 2007 primarily because of lower cotton trait sales volumes in
Australia resulting from a decline in cotton acres. Planted cotton acres in
Australia declined approximately 54 percent in first quarter 2007 compared with
first quarter 2006 because of a severe drought in certain parts of Australia in
first quarter 2007.
Gross profit as a percent of sales for this segment increased 2 percentage
points in the quarter-over-quarter comparison to 61 percent. This improvement
was driven primarily by increased penetration of higher margin traits,
particularly in U.S. corn. EBIT for the Seeds and Genomics segment decreased $18
million to $1 million in first quarter 2007. The sales increases discussed
throughout this section resulted in $24 million higher gross profit in first
quarter 2007. In the three-month comparison, increased SG&A expenses related to
the growth in the business and the increase in the investment in R&D offset the
gross profit improvement.
AGRICULTURAL PRODUCTIVITY SEGMENT
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
----------------------------------
(Dollars in millions) 2006 2005 % Change
- -----------------------------------------------------------------------------------------------------------------------------
Net Sales
ROUNDUP and other glyphosate-based herbicides $ 649 $ 549 18%
All other agricultural productivity products 210 200 5%
- -----------------------------------------------------------------------------------------------------------------------------
Total Net Sales $ 859 $ 749 15%
- -------------------------------------------------------------------------------------------==================================
Gross Profit
ROUNDUP and other glyphosate-based herbicides $ 194 $ 182 7%
All other agricultural productivity products 72 66 9%
- -----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit $ 266 $ 248 7%
- -------------------------------------------------------------------------------------------==================================
EBIT(1) $ 103 $ 93 11%
- -----------------------------------------------------------------------------------------------------------------------------
(1) EBIT is defined as earnings (loss) before interest and taxes. Interest and
taxes are recorded on a total company basis. We do not record these items
at the segment level. See Note 14 -- Segment Information and the "Overview
-- Non-GAAP Financial Measures" section of MD&A for further details.
Agricultural Productivity Financial Performance -- First Quarter Fiscal Year
2007
Net sales of ROUNDUP and other glyphosate-based herbicides increased 18 percent,
or $100 million, in the quarter-to-quarter comparison. In the three-month
comparison, sales volumes of ROUNDUP herbicides increased in the United States
and Brazil.
Sales volumes of ROUNDUP and other glyphosate-based herbicides increased in the
United States because of an increase in customer demand resulting from an
increase in ROUNDUP READY corn acres.
ROUNDUP herbicides net sales increased in Brazil because of an improvement in
farmer liquidity which increased the demand for our branded chemistry products.
Farmer liquidity improved in the quarter-over-quarter comparison primarily
because of the increase in the soybean commodity prices.
The sales increases discussed throughout this section resulted in $18 million
higher gross profit in first quarter 2007. Gross profit as a percent of sales
for the Agricultural Productivity segment declined 2 percentage points to 31
percent in first quarter 2007. 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 and the unfavorable
effect of the exchange rate for the Brazilian real. EBIT for the Agricultural
Productivity segment increased $10 million to $103 million in first quarter
2007.
22
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
- --------------------------------------------------------------------------------
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Working Capital and Financial Condition
- ----------------------------------------------------------------------------------------------------------------------------
As of
As of Nov. 30, Aug. 31,
--------------------------- ------------
(Dollars in millions, except current ratio) 2006 2005 2006
- --------------------------------------------------------------------------------------------- ------------- ------------
Cash and cash equivalents $ 1,842 $ 1,006 $ 1,460
Short-term investments -- 168 22
Trade receivables -- net 1,306 1,413 1,455
Inventories 1,954 1,890 1,688
Other current assets(1) 851 963 836
- ----------------------------------------------------------------------------------------------------------- ------------
Total Current Assets $ 5,953 $ 5,440 $ 5,461
- ----------------------------------------------------------------------------------------------------------- ------------
Short-term debt $ 42 $ 78 $ 28
Accounts payable 477 447 514
Accrued liabilities(2) 2,162 2,301 1,737
- ----------------------------------------------------------------------------------------------------------- ------------
Total Current Liabilities $ 2,681 $ 2,826 $ 2,279
- ----------------------------------------------------------------------------------------------------------- ------------
Working Capital(3) $ 3,272 $ 2,614 $ 3,182
Current Ratio(3) 2.22:1 1.92:1 2.40:1
- --------------------------------------------------------------------------------=========================== ============
(1) Includes miscellaneous receivables, current deferred tax assets, assets of
discontinued operations and other current assets.
(2) Includes income taxes payable, accrued compensation and benefits, accrued
marketing programs, deferred revenues, grower accruals, contingent purchase
price -- Seminis (only as of Nov. 30, 2005), liabilities of discontinued
operations and miscellaneous short-term accruals.
(3) Working capital is total current assets less total current liabilities;
current ratio represents total current assets divided by total current
liabilities.
Nov. 30, 2006, compared with Aug. 31, 2006: Working capital increased $90
million between Aug. 31, 2006, and Nov. 30, 2006, because of the following
factors:
o Cash and cash equivalents increased $382 million between the
respective periods. See the "Cash Flow" section in this section of
MD&A for further details of this increase.
o Inventories increased $266 million between the respective periods
primarily because of the seasonality of our U.S. corn and soybean seed
business in which the fall harvest of seed products occurs in first
quarter of the fiscal year resulting in a higher inventory balance as
of Nov. 30, 2006.
These increases to working capital between Aug. 31, 2006, and Nov. 30, 2006,
were offset primarily by the following factors:
o Accrued liabilities increased $425 million primarily because our
deferred revenue balance increased due to U.S. customer prepayments in
first quarter 2007.
o Trade receivables -- net decreased $149 million due to the seasonality
of our business.
Nov. 30, 2006, compared with Nov. 30, 2005: Working capital increased $658
million between Nov. 30, 2006, and Nov. 30, 2005. The following factors
increased working capital as of Nov. 30, 2006, compared with Nov. 30, 2005:
o Cash and cash equivalents increased $836 million between the
respective periods. As presented on the Statements of Consolidated
Cash Flows, the net increase in cash and cash equivalents was $382
million in first quarter 2007 compared with $481 million in first
quarter 2006. The cash and cash equivalents balance was higher as of
Aug. 31, 2006, compared with Aug. 31, 2005, by $935 million primarily
because of payments for acquisitions in 2005.
o Accrued liabilities decreased $139 million primarily because of the
$125 million liability related to the Seminis acquisition as of Nov.
30, 2005. We paid this liability during the second quarter of 2006.
These working capital increases were offset primarily by the following factors:
o We decreased our position in short-term investments by $168 million as
of Nov. 30, 2006, to less than $1 million.
o Trade receivables -- net decreased $107 million primarily because of
the tightening of our credit policies in South America.
23
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
- --------------------------------------------------------------------------------
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 $4 million in
first quarter 2007 and $18 million in first quarter 2006 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 guidelines approved by the
lender. We service the loans and provide a first-loss guarantee of up to $130
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 Nov. 30, 2006, and Aug. 31, 2006, the customer loans held by the QSPE and
the QSPE's liability to the conduits were $154 million and $268 million,
respectively. The lender or the conduits may restrict or discontinue the
facility at any time. If the facility were to terminate, existing loans would be
collected by the QSPE over their remaining terms (generally 12 months or less),
and we would revert to our past practice of providing these customers with
direct credit purchase terms. Our servicing fee revenues from the program were
not significant. As of Nov.30, 2006, and Aug. 31, 2006, 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. The program was amended to
increase the total funds available under the program to $110 million. We
received $51 million and $18 million of proceeds through these customer
financing programs in first quarter 2007 and first quarter 2006, respectively.
The amount of loans outstanding was $100 million and $64 million as of Nov. 30,
2006, and Aug. 31, 2006, respectively. The maximum potential amount of future
payments under the guarantees was $100 million as of Nov. 30, 2006. 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 and a current assessment of credit
exposure. Our guarantee liability was $3 million and $2 million as of Nov. 30,
2006, and Aug. 31, 2006, respectively. If performance is required under the
guarantee, we may retain amounts that are subsequently collected from customers.
We also have similar agreements with banks that provide financing to our
customers in Brazil through credit programs that are subsidized by the Brazilian
government, and in similar programs in Europe and Argentina. These programs also
qualify for sales treatment under SFAS 140. Accordingly, proceeds from the
transfer of receivables through the programs described above are included in net
cash provided by operating activities in the Statements of Consolidated Cash
Flows. We received $38 million and $32 million of proceeds through these
customer financing programs in first quarter 2007 and first quarter 2006,
respectively. The amount of loans outstanding was $66 million and $47 million as
of Nov. 30, 2006, and Aug. 31, 2006, respectively. For most programs, we provide
a full guarantee of the loans in the event of customer default. The terms of the
guarantees are equivalent to the terms of the bank loans. The maximum potential
amount of future payments under the guarantees was $66 million as of Nov. 30,
2006. 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 and a current assessment of credit
exposure. Our guarantee liability was $1 million as of Nov. 30, 2006, and Aug.
31, 2006. If performance is required under the guarantee, we may retain amounts
that are subsequently collected from customers.
24
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
- --------------------------------------------------------------------------------
We also sell accounts receivable, both with and without recourse. These sales
qualify for sales treatment under SFAS 140 and accordingly, the proceeds are
included in net cash provided by operating activities in the Statements of
Consolidated Cash Flows. The gross amounts of accounts receivable sold totaled
$4 million for first quarter 2007 and first quarter 2006. The liability for the
guarantees for sales with recourse is recorded at an amount that approximates
fair value and is based on the company's historical collection experience for
the customers associated with the sale of the accounts receivable and a current
assessment of credit exposure. Our guarantee liability was less than $1 million
as of Nov. 30, 2006 and Aug. 31, 2006. The maximum potential amount of future
payments under the recourse provisions of the agreements was $31 million as of
Nov. 30, 2006. The outstanding balance of the receivables sold was $31 million
and $41 million as of Nov. 30, 2006, and Aug. 31, 2006, respectively.
Cash Flow
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nov. 30,
--------------------------
(Dollars in millions) 2006 2005
- ----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities $ 600 $ 773
Net Cash Required by Investing Activities (67) (135)
- ----------------------------------------------------------------------------------------------------------------------------
Free Cash Flow(1) 533 638
- ----------------------------------------------------------------------------------------------------------------------------
Net Cash Required by Financing Activities (156) (157)
Effect of Exchange Rate Changes on Cash and Cash Equivalents 5 --
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 382 481
Cash and Cash Equivalents at Beginning of Period 1,460 525
- ----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 1,842 $ 1,006
- --------------------------------------------------------------------------------------------------==========================
(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 "Non-GAAP Financial Measures" section in MD&A for a further
discussion).
Cash provided by operating activities was $600 million in first quarter 2007
compared with $773 million in first quarter 2006. In first quarter 2007, other
items were a use of cash of $70 million and in first quarter 2006, other items
were a source of cash of $53 million. The two largest contributors to this
decline were the non-recurring $43 million payment we received in first quarter
2006 from our distributor of lawn-and-garden products and the timing of
collections of value-added tax credits outside of the United States. Cash
required for inventory increased $35 million to $256 million in first quarter
2007 primarily because of increased activity levels in our U.S. corn business.
The change in accounts payable and accrued liabilities was a use of cash of $158
million in first quarter 2007 compared with $127 million in the prior-year
quarter. This increase in the use of cash resulted from higher market funding
payments in the quarter-over-quarter comparison resulting from the increase in
sales in fiscal year 2006 when compared with fiscal year 2005 and an increase in
the timing of market funding payments. These declines were partially offset by
an increase in cash provided by the change in trade receivables driven by an
increase in collections in the quarter-over-quarter comparison.
Cash required by investing activities decreased $68 million in the
quarter-over-quarter comparison. This decrease is primarily because of the
businesses we acquired in 2006.
The amount of cash required by financing activities was $156 million in first
quarter 2007 compared with $157 million in first quarter 2006. The net change in
short-term financing required cash of $7 million in first quarter 2007 compared
with $124 million in the prior-year quarter. Cash required for long-term debt
reductions was $69 million in first quarter 2007 compared with $26 million in
first quarter 2006. In first quarter 2007, treasury stock purchases required
cash of $56 million under the four-year $800 million share repurchase program,
which was authorized by our board of directors on Oct. 25, 2005. No shares were
repurchased under this plan in first quarter 2006.
Capital Resources and Liquidity
- ---------------------------------------------------------------------------------------------------------------------------
As of Nov. 30, As of Aug. 31,
-------------------------------- ---------------
(Dollars in millions, except debt-to-capital ratio) 2006 2005 2006
- ------------------------------------------------------------------------------------------------------- ---------------
Short-Term Debt $ 42 $ 78 $ 28
Long-Term Debt 1,580 1,445 1,639
Total Shareowners' Equity 6,661 5,754 6,525
Debt-to-Capital Ratio 20% 21% 20%
- ------------------------------------------------------------------------------------------------------- ---------------
Total debt outstanding decreased $45 million between Aug. 31, 2006, and Nov. 30,
2006, primarily because we repaid $63 million of our three-year term bank loan
in Europe in October 2006.
25
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
- --------------------------------------------------------------------------------
Dividend: In December 2006, we declared a quarterly dividend of 12.5 cents
payable on Jan. 26, 2007, to shareowners of record as of Jan. 5, 2007.
Capital Expenditures: We expect 2007 capital expenditures to be in the range of
$400 million compared with $370 million in 2006. The largest drivers of this
increase are expected to be projects to expand corn seed production and
information technology facilities.
2007 Acquisition: In December 2006, Monsanto entered into two agreements with
Landec Corporation. In the first agreement, ASI acquired Landec's direct
marketing and seed sales company, Fielder's Choice Direct, for a purchase price
of $50 million, with a potential additional earn-out amount of up to $5 million.
In the second agreement, Monsanto entered into a five-year global technology
license with Landec for certain seed coating technology. Monsanto also received
an option to buy-out the technology. Future payments over the five year period
related to this agreement could range from $17 million to $21 million.
2006 Acquisitions: In 2006, ASI acquired 12 regional U.S. seed companies for an
aggregate purchase price of $133 million (net of cash acquired). For all 2006
acquisitions, the business operations of the acquired entities were included in
the Seeds and Genomics segment. See Note 3 -- Business Combinations -- for
further discussion of these acquisitions.
Pending Acquisition: On Aug. 15, 2006, we announced the signing of a definitive
agreement to purchase all of the outstanding stock of Delta and Pine Land
Company (NYSE: DLP) for a cash purchase price of $42 per share, or approximately
$1.5 billion (net of cash acquired and debt assumed). Delta and Pine Land is a
leader in the cotton seed industry and currently operates the largest and
longest running private cotton seed breeding program in the world. The
transaction was unanimously approved by the boards of directors of both
companies, and on Dec. 21, 2006, was approved by the shareholders of Delta and
Pine Land. Appropriate filings were made under the Hart-Scott-Rodino Act, and
the transaction is being reviewed by federal and state authorities including the
U.S. Department of Justice (DOJ) and is subject to other customary closing
conditions. The transaction has received clearance from ex-U.S. regulatory
authorities that required pre-merger notification. The initial deadline for
closing prescribed in the merger agreement is Feb. 14, 2007, subject to an
automatic extension of up to six months to complete regulatory reviews. We
anticipate that the regulatory process may extend beyond Feb. 14, 2007, and that
therefore the automatic extension period will be invoked per the merger
agreement. The agreement provides several potential consequences for litigation
between Delta and Pine Land and us in the event the transaction is not closed
because of: (1) certain circumstances generally related to antitrust issues, in
which case we would be obligated to pay Delta and Pine Land $600 million and all
litigation would terminate; (2) Delta and Pine Land's failure to perform certain
covenants, in which case all litigation would terminate without payment by
either party; or (3) any other reason, in which case litigation may recommence
and certain of Delta and Pine Land's licenses with us may be amended in its
favor, depending on the reason for the termination.
We may be required to divest the U.S. assets of our Stoneville cottonseed
business, as a condition of obtaining regulatory clearance of our proposed
acquisition of Delta and Pine Land. As such, we have engaged in activities to
identify potential buyers for this business. However, any sale of Stoneville
assets would be conditioned upon consummation of the Delta and Pine Land
acquisition, which is being reviewed by regulatory agencies. Accordingly, the
financial results of the Stoneville business are included in income from
continuing operations for all years presented. We intend to finance a portion of
the acquisition with cash reserves at the time of close and are considering a
number of alternatives to finance the remaining balance, including current debt
facilities already in place. If we decide to change our capital structure to
finance the acquisition, some initial alternatives under consideration are an
increased credit line, commercial paper financing or an incremental debt
offering.
Solutia Contingency: 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 any 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.
On Dec. 28, 2006, Solutia filed a Form 8-K disclosing, among other things, that
it has developed a proposal for an amended plan of reorganization, which
proposal was designed to act as a framework for negotiations among Solutia and
certain stakeholders. No amended plan has been filed, and we do not know if any
terms, such as the rights offering, would be modified. No assurance can be given
that the Plan will be approved. See Note 13 for further details.
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Contingent Liabilities Relating to Solutia Inc. (Off-Balance Sheet Arrangement)
There are no material changes related to our off-balance sheet arrangement
relating to Solutia from the disclosure in our Report on Form 10-K for the
fiscal year ended Aug. 31, 2006. See Note 13 under the subheading "Solutia Inc."
for further information regarding Solutia's Assumed Liabilities, the charge
taken in connection with Solutia's Assumed Liabilities, and the plan of
reorganization filed by Solutia in its bankruptcy. Also see Part II -- Item 1 --
Legal Proceedings for further information.
OUTLOOK
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We have achieved an industry-leading position in the areas in which we compete
in both of our business segments. However, the outlook for each of these two
parts of our business is quite different. In the Agricultural Productivity
segment, our glyphosate business is stable, and our selective chemistry business
is expected to decline. In the Seeds and Genomics segment, our seeds and traits
business is expected to expand. As a result, we are focused on maintaining our
position in our chemistry business, and we are striving to grow our seeds and
traits business.
We believe that our company is positioned to sustain earnings growth and strong
cash flow, and we remain committed to returning value to shareowners through
vehicles such as investments that grow and expand the business, dividends and
share repurchases. We will remain focused on cost and cash management for each
segment, both to support the progress we have made in managing our investment in
working capital and to realize the full earnings potential of our businesses. We
plan to continue to seek additional external financing opportunities for our
customers as a way to manage receivables for each of our segments. We also
expect to see increased gross profit as our higher-margin seeds and traits
business grows.
We expect to continue to implement locally responsive business strategies for
our businesses in each world area. Outside of the United States, our businesses
will continue to face additional challenges related to the risks inherent in
operating in emerging markets. We have taken steps to reduce our credit exposure
in those areas, which has the potential to negatively affect sales in the near
term.
Seeds and Genomics
Our capabilities in plant breeding and biotechnology research are generating a
rich and balanced product pipeline that we expect will drive long-term growth.
We plan to continue to invest more than 85 percent of our R&D in the areas of
seeds, genomics and biotechnology and to invest in technology arrangements that
have the potential to increase the efficiency and effectiveness of our R&D
efforts. We believe that our U.S. and international seeds and traits businesses
will have significant near-term growth opportunities through a combination of
improved breeding, continued growth of stacked and second-generation biotech
traits, and acquisitions.
We expect advanced breeding techniques combined with improved production
practices and capital investments to continue to contribute to improved
germplasm quality and yields for our seed offerings, leading to increased global
demand for both our branded and our licensed germplasm. Our vegetable and fruit
portfolio will focus on 25 crops. We plan to continue to apply our molecular
breeding and marker capabilities to Seminis' germplasm and expect that to lead
to growth in our higher-margin, global fruit and vegetable business. We also
plan to make strategic acquisitions, such as acquisitions by ASI or Seminis, to
grow our branded seed market share or expand our germplasm library and
strengthen our global breeding programs. We entered into a definitive agreement
to acquire Delta and Pine Land Company, which would provide us a leadership
position in the U.S. cotton market, although we will likely be required by
regulatory authorities to concurrently sell our current branded U.S. cotton
business. We expect to see continued competition in seeds and genomics in the
near term but believe we will have a competitive advantage because of our
breeding capabilities and our three-channel sales approach for corn and soybean
seeds.
Commercialization of second-generation traits and the stacking of multiple
traits in corn and cotton are expected to increase penetration in approved
markets, particularly as we continue to price our traits in line with the value
growers have experienced. We are currently seeking the necessary regulatory
clearances at the state level in the United States and approvals in countries
that are major importers of U.S. corn for single and stacked products with our
next second-generation trait, YIELDGARD VT. In 2007, we expect that
higher-value, stacked-trait products will represent a larger share of our total
U.S. corn seed sales than single-trait products. Acquisitions may also present
near-term opportunities to increase penetration of our traits. In particular, we
expect that our acquisition of Delta and Pine Land Company would enable us to
accelerate penetration of our second-generation cotton traits. We expect the
27
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
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competition in biotechnology to increase, as more competitors launch traits in
the United States and internationally by the end of the decade. However, we
believe we will have a competitive advantage because we will be poised to
deliver second- and third-generation traits, when our competitors are delivering
their first-generation traits.
Our international traits businesses, in particular, will likely continue to face
regulatory environments that may be nascent or highly politicized, as well as
operate in volatile, and often difficult economic environments. While we see
growth potential in our India cotton business with the ongoing conversion to new
hybrids and BOLLGARD II, this business is currently operating under state
governmental pricing directives that we believe have limited near-term earnings
growth and increased our collection risk. We will continue to carefully monitor
our Indian trade receivables throughout 2007.
In Brazil, we expect to continue to need to operate our dual-track business
model of certified seeds and point-of-grain or cotton delivery-based payment
system to ensure that we capture value on all Monsanto ROUNDUP READY soybeans
and BOLLGARD cotton crops grown there. Income is expected to grow as farmers
choose to plant more of these approved traits. However, full operation of the
regulatory system to approve additional traits must be achieved for Brazil to be
a greater contributor to revenue in seeds and traits. The strong Brazilian real
continues to have a negative effect on the Brazilian agricultural economy and
farmer liquidity in 2007. To mitigate the associated credit risks we continue to
monitor our credit policy, expand our grain-based collection system, and
increase cash sales.
It is likely that a ruling of patent infringement from court cases in Europe
will be required before we can expect to capture value from our ROUNDUP READY
soybeans grown in Argentina. We are continuing to discuss alternative
arrangements with various stakeholders; however, we have no certainty that any
of these discussions will lead to a paying outcome in the near term. We do not
plan to seek to commercialize new soybean or cotton traits in Argentina until we
can achieve more certainty that we would be compensated for the technology.
Agricultural Productivity
We believe our ROUNDUP herbicide business will continue to generate a
sustainable source of cash and gross profit for us, even with increased pricing
pressure from generic formulations of glyphosate herbicides. We have experienced
increased demand in recent years and are evaluating strategies to meet the
future demand for our ROUNDUP business, as well as our licensed glyphosate
business. To sustain the cash and income generation of our ROUNDUP business, we
expect to have to continue to actively manage our inventory and other costs,
particularly in our international businesses, and offer product innovations,
superior customer service and logistics and marketing programs to support or
allow us to increase prices. Any further expansion of crops with our ROUNDUP
READY traits may also incrementally increase sales of our ROUNDUP products.
Like most other selective herbicides, our products face increasing competitive
pressures and a declining market, in part because of the rapid penetration of
ROUNDUP READY corn in the United States. We will continue to seek ways to
optimize our selective herbicides business, as we believe it is important to
offer fully integrated crop-protection solutions, particularly in ROUNDUP READY
corn. We anticipate a continued decline in this business in the near term, but
the gross profit from the ROUNDUP READY traits and from the ROUNDUP herbicides
used on these acres are significantly higher than the gross profit on the lost
selective herbicide sales.
We expect that our lawn-and-garden herbicide products will remain a strong cash
generator and that they will support our brand equity in the marketplace.
However, we anticipate that they will face increasing competition from generic
and private-label products and cost pressure from major retailers.
During 2007, our POSILAC business will continue to reduce bulk powder inventory.
Sandoz GmbH, which manufactures the active ingredient and the finished dose
formulation for POSILAC, has notified us of its intention to terminate its
agreement with us, effective Dec. 31, 2008. We do not expect the termination to
have a significant effect on our supplies because in 2006 we received FDA
approval of the Augusta, Georgia facility for finished formulation and packaging
of POSILAC. We believe some processor requests for "r-BST-free" milk, coupled
with rising feed costs, could limit our future sales.
Other Information
As discussed in Note 13 -- 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.
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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 13.
For additional information on the outlook for Monsanto, see "Caution Regarding
Forward-Looking Statements" below, and Part II -- Item 1A -- Risk Factors of
this Form 10-Q.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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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, 2006. 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, by its nature the
estimation process is 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, 2006. Had we used estimates different from
any of those contained in such Report on Form 10-K, our financial condition,
profitability, or liquidity for the current period could have been materially
different from those presented in this Form 10-Q.
NEW ACCOUNTING STANDARDS
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In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Benefit Plans an amendment of
FASB Statements No. 87, 88, and 132(R) (SFAS 158). SFAS 158 requires companies
to recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position and to recognize changes in that funded status through comprehensive
income. This statement also requires the measurement date for plan assets and
liabilities to coincide with the sponsor's year end. The standard provides two
transition alternatives related to the change in measurement date provisions.
The recognition of an asset and liability related to the funded status provision
is effective for fiscal years ending after Dec. 15, 2006. Accordingly, we will
adopt SFAS 158 in the fourth quarter of fiscal year 2007. The change in
measurement date provisions is effective for fiscal years ending after Dec. 15,
2008. We are currently evaluating the impact of adopting SFAS 158 on the
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (SFAS
157). SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements. This statement is effective for financial statements
issued for fiscal years beginning after Nov. 15, 2007. Accordingly, we will
adopt SFAS 157 in fiscal year 2009. We are currently evaluating the impact of
adopting SFAS 157 on the consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, (SAB 108). SAB 108 considers the effects of prior
year misstatements when quantifying misstatements in current year financial
statements. It is effective for fiscal years ending after Nov. 15, 2006.
Accordingly, we will adopt SAB 108 in the fourth quarter of fiscal year 2007. We
do not believe the adoption of SAB 108 will have a material impact on the
consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 (FIN
48), which clarifies the accounting for uncertainty in tax positions. FIN 48
requires financial statement recognition of the impact of a tax position, if
that position is more likely than not to be sustained on examination, based on
the technical merits of the position. This interpretation is effective for
fiscal years beginning after Dec. 15, 2006, with the cumulative effect of the
change in accounting principle recorded as an adjustment to retained earnings as
29
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
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of the beginning of the period of adoption. Accordingly, we will adopt FIN 48 in
first quarter of fiscal year 2008. We are currently evaluating the impact of FIN
48 on the consolidated financial statements.
In March 2006, the 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. Accordingly, we will
adopt SFAS 156 in fiscal year 2008. We are currently evaluating the impact of
SFAS 156 on the consolidated financial statements.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
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In the interests of our investors, and in accordance with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, this section
of our report explains some of the important reasons that actual results may be
materially different from those that we anticipate. In this report, and from
time to time throughout the year, we share our expectations for our company's
future performance. These forward-looking statements include statements about:
our business plans; the potential development, regulatory approval, and public
acceptance of our products; our expected financial performance, including sales
performance, and the anticipated effect of our strategic actions; the
anticipated benefits of recent acquisitions; the outcome of contingencies, such
as litigation; domestic or international economic, political and market
conditions; and other factors that could affect our future results of operations
or financial position, including, without limitation, statements under the
captions "Overview -- Executive Summary -- Outlook," "Seeds and Genomics
Segment," "Agricultural Productivity Segment," "Financial Condition, Liquidity,
and Capital Resources," "Outlook," "Critical Accounting Policies and Estimates"
and "Legal Proceedings." Any statements we make that are not matters of current
reportage or historical fact should be considered forward-looking. Such
statements often include words such as "believe," "expect," "anticipate,"
"intend," "plan," "estimate," "will," and similar expressions. By their nature,
these types of statements are uncertain and are not guarantees of our future
performance.
Since these statements are based on factors that involve risks and
uncertainties, our company's actual performance and results may differ
materially from those described or implied by such forward-looking statements.
Factors that could cause or contribute to such differences include, among
others: continued competition in seeds, traits and agricultural chemicals; the
company's exposure to various contingencies, including those related to
intellectual property protection, regulatory compliance and the speed with which
approvals are received, and public acceptance of biotechnology products; the
success of the company's research and development activities; the outcomes of
major lawsuits, including proceedings related to Solutia Inc.; developments
related to foreign currencies and economies; successful completion and operation
of recent and proposed acquisitions; fluctuations in commodity prices;
compliance with regulations affecting our manufacturing; the accuracy of the
company's estimates related to distribution inventory levels; the company's
ability to fund its short-term financing needs and to obtain payment for the
products that it sells; the effect of weather conditions, natural disasters and
accidents on the agriculture business or the company's facilities; and other
risks and factors described in Part II -- Item 1A -- Risk Factors below.
Our forward-looking statements represent our estimates and expectations and are
based on currently available information at the time that we make those
statements. However, circumstances change constantly, often unpredictably, and
many events beyond our control will determine whether the expectations
encompassed in our forward-looking statements will be realized. As a result,
investors should not place undue reliance on these forward-looking statements.
We disclaim any current intention or obligation to revise or update any
forward-looking statements, or the factors that may affect their realization,
whether in light of new information, future events or otherwise, and investors
should not rely on us to do so.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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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, 2006.
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ITEM 4. CONTROLS AND PROCEDURES
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We maintain a comprehensive set of disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) designed to
ensure that information required to be disclosed in our filings under the
Exchange Act is recorded, processed, summarized and reported accurately and
within the time periods specified in the SEC's rules and forms. As of Nov. 30,
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 no change in
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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PART II--OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
We are involved in various legal proceedings that arise in the ordinary course
of our business, as well as proceedings that we have considered to be material
under SEC regulations. These include proceedings to which we are party in our
own name, 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 (as defined in Note 13). 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.
Information regarding certain material proceedings and the possible effects on
our business of proceedings we are defending is disclosed in Note 13 under the
subheading "Litigation and Indemnification" and is incorporated by reference
herein. Following is information regarding other material proceedings for which
we are responsible.
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, 2006.
Patent and Commercial Proceedings
The following proceeding involves Syngenta AG (Syngenta) and its affiliates:
o As described in our Report on Form 10-K for the fiscal year ended Aug.
31, 2006, on July 28, 2004, Syngenta filed suit against us in the U.S.
District Court for the District of Delaware, alleging that we have
monopolized or attempted to monopolize markets for glyphosate-tolerant
corn seed, European corn borer-protected corn seed and foundation corn
seed (the Antitrust Action). Syngenta seeks $57 million in supposed
actual damages and requested treble damages, attorneys' fees and
injunctive relief. In July 2005, we filed counterclaims against
Syngenta, Syngenta Seeds, and affiliated companies for
misappropriation of property and false advertising. On Nov. 8, 2006,
the Court stayed the trial of this matter. It currently has no trial
setting.
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2006,
on July 26, 2005, American Seed Company (which is unrelated to Monsanto or its
ASI subsidiary) filed a purported class action suit against us in the U.S.
District Court for the District of Delaware, supposedly on behalf of direct
purchasers of corn seed containing our transgenic traits. American Seed
essentially alleges that we have monopolized or attempted to monopolize markets
for glyphosate-tolerant corn seed, European corn borer-protected corn seed and
foundation corn seed. Plaintiffs seek an unspecified amount of damages and
injunctive relief. On Nov. 13, 2006, the trial court denied plaintiffs' motion
for class certification. Plaintiffs have filed a motion with the U. S. Court of
Appeal for the Third Circuit seeking review of the trial court's decision. The
case has been stayed pending the decision of the Third Circuit. There currently
is no trial setting for this matter.
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2006,
while efforts continue, discussions have failed to resolve outstanding issues
related to the development of a payment system for the use of our technology to
produce soybean products in Argentina or Uruguay containing our patented Roundup
Ready technologies. We have initiated patent infringement actions against
importers of Argentine soy products that were found by European customs
officials to have contained our unlicensed glyphosate-tolerant technology, which
is patented in the respective European countries. 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. 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.
The Argentine government has opposed our use of patent infringement actions as a
means of securing payment for the use of our technology in Argentina and has
been admitted as an observer to the proceedings in the Netherlands and Denmark.
No imminent decision is expected in any of the cases. Also 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. The CNDC has initiated a market investigation, but we will
have an opportunity to provide information to the CNDC before it would consider
whether or not to initiate a formal proceeding.
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Farmer Lawsuits
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2006,
two purported class action lawsuits were initially filed against the former
Monsanto Company by two groups of farmers and were transferred to the United
States District Court for the Eastern District of Missouri. The complaints
included both tort and antitrust allegations. The tort claims included alleged
violations of unspecified international laws through patent license agreements,
alleged breaches of an implied warranty of merchantability, and alleged
violations of unspecified consumer fraud and deceptive business practices laws,
all in connection with the sale of genetically modified seed. The antitrust
claims included allegations of violations of various antitrust laws, including
allegations of a conspiracy among Monsanto, Pioneer, Syngenta and Bayer
CropScience to fix seed prices in the United States in violation of federal
antitrust laws. Plaintiffs sought declaratory and injunctive relief in addition
to antitrust, treble, compensatory and punitive damages and attorneys' fees. On
Sept. 30, 2003, the District Court denied plaintiffs' motion to allow their
antitrust claims to proceed as a class action. On March 7, 2005, the U.S. Court
of Appeals for the Eighth Circuit affirmed the District Court's denial of class
certification for plaintiffs' antitrust claims. On Dec. 6, 2006, the parties
resolved this action. All claims have been dismissed with prejudice.
Agent Orange Proceedings
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 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 May 3, 2006, the Federal Court granted the government's motion to
stay proceedings so that it could file a third-party action in this litigation
against The Dow Chemical Company and us, as manufacturers of Agent Orange.
Thereafter, purported class action lawsuits have been filed by plaintiffs
against the Canadian government in at least three provinces, including Manitoba,
New Brunswick, and Ontario. On Sept. 29, 2006, the Manitoba Court denied the
Canadian government's motion to stay the proceedings before it.
Environmental Proceedings
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2006,
on Oct. 18, 2006, we received a proposed Consent Order setting forth allegations
of violations of the Federal Insecticide, Fungicide, and Rodenticide Act
(FIFRA). The EPA alleged that on 34 occasions certain Monsanto registered
pesticide products were sold without up-to-date labeling, in violation of EPA
guidance under FIFRA. The EPA has withdrawn its complaint and closed this matter
following its determination that the labeling provisions did not apply to these
products.
Proceedings Related to Solutia's Assumed Liabilities
See Note 13 for additional information regarding legal proceedings related to
Solutia's Assumed Liabilities.
See "MD&A -- Caution Regarding Forward-Looking Statements," in Part I -- Item 2
of this Report on Form 10-Q and Item 1A below, for information regarding the
risk factors that may affect any forward-looking statements regarding our legal
proceedings.
ITEM 1A. RISK FACTORS
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Please see "MD&A -- Caution Regarding Forward-Looking Statements," in Part I --
Item 2 of this Report on Form 10-Q and Part I -- Item 1A of our Report on Form
10-K for the fiscal year ended Aug. 31, 2006, for information regarding risk
factors. There have been no material changes from the risk factors previously
disclosed in our Report on Form 10-K.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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Issuer Purchases of Equity Securities
The following table is a summary of any purchases of equity securities during
the first quarter of fiscal year 2007 by Monsanto and any affiliated purchasers,
pursuant to SEC rules.
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(c)Total Number of (d)Approximate Dollar
Shares Purchased Value of Shares that
as Part of Publicly May Yet Be Purchased
(a)Total Number of (b)Average Price Announced Plans Under the Plans
Period Shares Purchased per Share(1) or Programs or Programs
- -----------------------------------------------------------------------------------------------------------------------------------
September 2006:
Sept. 1, 2006, through Sept. 30, 2006 -- -- -- $680,541,246
October 2006:
Oct. 1, 2006, through Oct. 31, 2006 342,698(2) 43.93 341,399 $665,544,252
November 2006:
Nov. 1, 2006, through Nov. 30, 2006 772,645 45.30 772,645 $630,541,399
- -----------------------------------------------------------------------------------------------------------------------------------
Total 1,115,343 44.88 1,114,044 $630,541,399
- --------------------------------------------------=================================================================================
(1) The average price paid per share is calculated on a settlement basis and
excludes commission.
(2) Includes 1,299 shares withheld to cover the withholding taxes upon the
vesting of restricted stock.
On Oct. 25, 2005, the board of directors authorized the purchase of up to $800
million of the company's common stock over a four-year period. The plan expires
on Oct. 25, 2009. There were no other publicly announced plans outstanding as of
Nov. 30, 2006.
ITEM 6. EXHIBITS
- --------------------------------------------------------------------------------
Exhibits: The list of exhibits in the Exhibit Index to this Report is
incorporated herein by reference.
34
MONSANTO COMPANY FIRST QUARTER 2007 FORM 10-Q
- --------------------------------------------------------------------------------
SIGNATURE
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONSANTO COMPANY
(Registrant)
By: /s/ RICHARD B. CLARK
--------------------------------------
Richard B. Clark
Vice President and Controller
(On behalf of the Registrant and as Principal
Accounting Officer)
Date: Jan. 8, 2007
35
MONSANTO COMPANY FIRST QUARTER 2007 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 Omitted
11 Omitted -- see Note 11 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 (pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, executed by the
Chief Executive Officer).
31.2 Rule 13a-14(a) Certification (pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, executed by the
Chief Financial Officer).
32 Rule 13(a)-14(b) Certifications (pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, executed by the Chief
Executive Officer and the Chief Financial Officer).
36