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2006 FORM 10-K |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Aug. 31, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission file number 001-16167
MONSANTO COMPANY
Exact name of registrant as specified in its charter
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| Delaware
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43-1878297 |
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(I.R.S. Employer Identification No.) |
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800 North Lindbergh Blvd.,
St. Louis, Missouri
(Address of principal executive offices)
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63167
(Zip Code) |
Registrant’s telephone number including area code:
(314) 694-1000
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class
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Name of each exchange on which registered |
| Common Stock $0.01 par value
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New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes [X] No [ ]
Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 of
Section 15(d) of the Act. Yes [ ] No [X]
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
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
Rue 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]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates
computed by reference to the price at which the common stock was last sold, or the average bid and
asked price of such common equity, as of the last business day of the registrant’s most recently
completed second fiscal quarter (Feb. 28, 2006): approximately $22.9 billion.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as
of the latest practicable date: 543,300,591 shares of common stock, $0.01 par value, outstanding at
Oct. 30, 2006.
Documents Incorporated by Reference
Portions of Monsanto Company’s definitive proxy statement, which is expected to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A on or about Dec. 6, 2006, are
incorporated herein by reference into Part III of this Annual Report on Form 10-K.
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2006 FORM 10-K |
INTRODUCTION
We have combined the Monsanto Annual Report to Shareowners with our Form 10-K, which is a document
that U.S. public companies file with the Securities and Exchange Commission every year. Part II of
the Form 10-K contains the business information and financial statements that many companies
include in the financial sections of their annual reports. The other sections of the Form 10-K also
include information about our business that we believe will be of interest to investors. We hope
investors will find it useful to have all of this information available in a single document.
The SEC allows us to report information in the Form 10-K by “incorporating by reference” from
another part of the Form 10-K or from the proxy statement. You will see that information is
“incorporated by reference” in various parts of our Form 10-K. The proxy statement will be
available on our Web site after it is filed with the SEC in December 2006.
Monsanto was incorporated in Delaware on Feb. 9, 2000, as a subsidiary of Pharmacia Corporation. It
includes the operations, assets and liabilities that were previously the agricultural business of
Pharmacia, which is now a subsidiary of Pfizer Inc. For more information on our history as a
company, please see “Relationships Among Monsanto Company, Pharmacia Corporation, Pfizer Inc. and
Solutia Inc.,” in Part I — Item I — Business.
“Monsanto,” the “company,” “we,” “our” and “us” are used interchangeably to refer to Monsanto
Company or to Monsanto Company and its subsidiaries, as appropriate to the context. With respect to
the time period prior to Sept. 1, 2000, these defined terms also refer to the agricultural business
of Pharmacia.
Unless otherwise indicated, trademarks owned or licensed by Monsanto or its subsidiaries are shown
in special type. 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.
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.
Information in this Form 10-K is current as of Oct. 31, 2006, unless otherwise specified.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
In this report, and from time to time throughout the year, we share our expectations for our
company’s future performance. These forward-looking statements include statements about: our
business plans; the potential development, regulatory approval, and public acceptance of our
products; our expected financial performance, including sales performance, and the anticipated
effect of our strategic actions; the anticipated benefits of recent acquisitions; the outcome of
contingencies, such as litigation; domestic or international economic, political and market
conditions; and other factors that could affect our future results of operations or financial
position, including, without limitation, statements under the captions “Overview — Executive
Summary — Outlook,” “Seeds and Genomics Segment,” “Agricultural Productivity Segment,” “Financial
Condition, Liquidity, and Capital Resources,” “Outlook,” and “Legal Proceedings.” Any statements we
make that are not matters of current reportage or historical fact should be considered
forward-looking. Such statements often include words such as “believe,” “expect,” “anticipate,”
“intend,” “plan,” “estimate,” “will,” and similar expressions. By their nature, these types of
statements are uncertain and are not guarantees of our future performance.
Our forward-looking statements represent our estimates and expectations at the time that we make
those statements. However, circumstances change constantly, often unpredictably, and investors
should not place undue reliance on these statements. Many events beyond our control will determine
whether our expectations will be realized. We disclaim any current intention or obligation to
revise or update any forward-looking statements, or the factors that may affect their realization,
whether in light of new information, future events or otherwise, and investors should not rely on
us to do so. In the interests of our investors, and in accordance with the “safe harbor” provisions
of the Private Securities Litigation Reform Act of 1995, this section of our report explains some
of the important reasons that actual results may be materially different from those that we
anticipate.
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2006 FORM 10-K |
TABLE OF CONTENTS FOR FORM 10-K
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2006 FORM 10-K |
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2006 FORM 10-K |
PART I
ITEM 1. BUSINESS
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
our 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 our 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.
The following information, which appears in other parts of this Form 10-K, is incorporated herein
by reference:
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Item 7 — Management’s Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) — Seeds and Genomics Segment — the tabular information
regarding net sales of our seeds and traits, and Agricultural Productivity Segment —
the tabular information regarding net sales of Roundup and other glyphosate-based
herbicides and other agricultural productivity products |
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Item 8 — Financial Statements and Supplementary Data — Note 23 — Segment
and Geographic Data |
PRINCIPAL PRODUCTS
Monsanto’s principal products in our two segments include the following:
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SEEDS AND GENOMICS SEGMENT |
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Major Products
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End-Use Products and Applications |
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Roundup Ready traits in soybeans, corn, canola and cotton(1)
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Weed-control system for crops
tolerant of Roundup and other
glyphosate-based herbicides |
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Bollgard and Bollgard II traits in cotton;(1)
YieldGard Corn Borer and YieldGard Rootworm traits in
corn(1)
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Traits that enable crops to
protect themselves from certain
insects, reducing the need for
applications of insecticides |
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Agroceres, Asgrow, DEKALB, Stoneville, and Vistive branded seeds;
Holden’s Foundation Seeds; Monsoy foundation seed; American Seeds,
Inc. branded seed
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Corn hybrids and foundation
seed; soybean varieties and
foundation seed; cotton
varieties, hybrids and
foundation seed; sunflower
hybrids; sorghum grain and
forage hybrids; and oilseed
rape and canola varieties |
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Seminis, Royal Sluis, Asgrow, and Petoseed branded seeds
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Vegetable and fruit seeds,
including tomato, pepper,
eggplant, melon, cucumber,
pumpkin, squash, beans,
broccoli, onions and lettuce |
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Monsanto also offers farmers stacked-trait products, in which two or more traits are
combined in a single seed product. |
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AGRICULTURAL PRODUCTIVITY SEGMENT |
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Major Products
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End-Use Products and Applications |
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Roundup and other glyphosate-based herbicides
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Nonselective agricultural, industrial, ornamental and
turf applications for weed control |
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Harness, Degree, Machete and other
acetanilide-based
herbicides; other selective herbicides, such as
Maverick, Certainty, Outrider, and Monitor
sulfosulfuron herbicides
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Control of pre-emergent annual grass and small seeded
broadleaf weeds in corn and soybeans; control of
specific weeds in rice, wheat, turf, cotton, and barley
and on roadsides |
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Lawn-and-garden herbicides
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Residential lawn-and-garden applications for weed
control |
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Posilac bovine somatotropin
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Increase efficiency of milk production in dairy cows |
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Monsanto Choice Genetics genetics lines
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Increase productivity and meat quality of swine |
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The above products may be sold under different brand names outside the United States.
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2006 FORM 10-K |
COMPETITION
The global markets for our products are competitive. With continued development and
commercialization of new technologies and products, including biotechnology traits, we expect
competition to intensify.
In our Seeds and Genomics segment, we compete with numerous multinational companies globally and
with hundreds of smaller companies regionally. With the exception of competitors in our vegetable
and fruit seed business, most of our seed competitors are also licensees of our germplasm or
biotechnology traits. In certain countries, we also compete with government-owned seed companies.
Farmers who save seed from one year to the next, in violation of license terms, also affect
competitive conditions. Product performance (in particular, crop vigor and crop yield), customer
support and service, intellectual property protection, and price are important elements of our
market success. In addition, distributor, retailer and farmer relationships are important in the
United States and many other countries.
Our biotechnology traits compete as a system with other practices, including application of
agricultural chemicals, and to a lesser degree, traits developed by other companies. Other
agrichemical and seed marketers produce chemical and seed products that compete with our Roundup
Ready and insect-control systems. Our consumer traits compete with other methods of managing and
improving food quality. Competition for the discovery of new traits based on biotechnology or
genomics is likely to come from major global agrichemical companies, smaller biotechnology research
companies and institutions, state-funded programs, and academic institutions. Enabling technologies
to enhance biotechnology trait development may also come from academic researchers and
biotechnology research companies. The primary factors underlying the competitive success of traits
are performance and commercial viability; timeliness of introduction; value compared with other
practices and products; market coverage; service provided to distributors, retailers and farmers;
governmental approvals; public acceptance; and environmental characteristics.
Competitive success in crop protection products depends on price, product performance, the scope of
solutions offered to farmers, market coverage, and the service provided to distributors, retailers
and farmers. Our agricultural herbicide products have numerous major global competitors.
Competition from local or regional companies may also be significant. For additional information on
competition for our agricultural herbicides, see Item 7 — MD&A — Outlook — Agricultural
Productivity, which is incorporated by reference herein.
Our lawn-and-garden herbicides compete on product performance and the brand value associated with
our trademark Roundup. This business has fewer than five significant national competitors and a
larger number of regional competitors in the United States. We are the only supplier of bovine
somatotropin in the United States. The largest market for our lawn-and-garden herbicides and
our bovine somatotropin products is the United States.
DISTRIBUTION OF PRODUCTS; CUSTOMERS
We have a worldwide distribution and sales and marketing organization for our seeds and traits and
crop protection operations. We market our DEKALB, Asgrow and Stoneville branded germplasm (both the
conventional and biotech varieties) and our vegetable and fruit seeds to farmers through
distributors, independent retailers and dealers, agricultural cooperatives, plant raisers and
agents. We also market our vegetable and fruit seeds direct to farmers. Our American Seeds, Inc.
(ASI) family of branded seeds is marketed to farmers primarily directly as well as through dealers,
agricultural cooperatives and agents. We also license a broad package of our germplasm and trait
technologies to seed companies that do business in the United States and certain international
markets, which then market these products to farmers. In Brazil and Paraguay, we have implemented a
point-of-delivery, grain-based payment system through which grain handlers contract with us to
collect applicable biotech trait fees when farmers deliver their grain.
We sell our crop protection products through distributors, independent retailers and dealers,
agricultural cooperatives, and, in some cases outside the United States, directly to farmers. We
also sell certain of the chemical intermediates of our crop protection products to other major
agricultural chemical producers, who then market their own branded products to farmers.
We sell and ship our Posilac bovine somatotropin directly to U.S. dairy farmers. Outside the United
States, we rely on a single exclusive distributor of this product. We deliver our swine genetics
products directly to swine producers, who pay for the use of the genetics in upfront fees and/or
royalties. We market our lawn-and-garden herbicide products through The Scotts Miracle-Gro Company.
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While no single customer (including affiliates) represented more than 10 percent of our
consolidated worldwide net sales in 2006, our three largest U.S. agricultural distributors and
their affiliates represented, in the aggregate, 14 percent of our worldwide net sales and 27
percent of our U.S. net sales. During 2006, one major U.S. distributor and its affiliates
represented about 6 percent of the worldwide net sales for our Agricultural Productivity segment,
and about 9 percent of the worldwide net sales for our Seeds and Genomics segment.
EMPLOYEE RELATIONS
As of Aug. 31, 2006, we employed approximately 17,500 regular employees worldwide and more than
4,300 temporary employees in various world areas. However, the number of temporary employees varies
greatly during the year because of the seasonal nature of our business. We believe that relations
between Monsanto and its employees are satisfactory.
ENVIRONMENTAL MATTERS
Our operations are subject to environmental laws and regulations in the jurisdictions in which we
operate. Some of these laws restrict the amount and type of emissions that can be released from our
operations into the environment. Other laws, such as the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. 9601 et seq. (Superfund), can impose liability for the
entire cost of cleanup on any former or current site owners or operators or parties who sent waste
to these sites, without regard to fault or to the lawfulness of the original disposal. These laws
and regulations may be amended from time to time; they may become more stringent. We are committed
to long-term environmental protection and compliance programs that reduce and monitor emissions of
hazardous materials into the environment, and to the remediation of identified existing
environmental concerns. In accord with a consent order with the state of Idaho, we have embarked on
a multiyear project to design and install state-of-the-art air emission control equipment at the P4
Production, LLC facility at Soda Springs, Idaho. P4 Production is 99 percent owned by, and is
operated by, Monsanto. Although the costs of our compliance with environmental laws and regulations
cannot be predicted with certainty, such costs are not expected to have a material adverse effect
on our earnings or competitive position, except as noted below. Because of our investment in the
Soda Springs project, our capital expenditures for environmental control facilities should be
higher than normal in the next few years. Current estimates indicate that total companywide capital
expenditures for environmental compliance will be about $11 million in fiscal year 2007 and $22
million in fiscal year 2008.
In addition to potential liability for our own manufacturing locations and off-site disposal and
formulation facilities, under the terms of our Sept. 1, 2000, Separation Agreement with Pharmacia
(Separation Agreement), we are required to indemnify Pharmacia for any liability it may have for
environmental remediation or other environmental responsibilities primarily related to Pharmacia’s
former agricultural and chemicals businesses. This includes, but is not limited to, environmental
liabilities that Solutia Inc., the former chemicals business of Pharmacia, assumed from Pharmacia
in connection with its spinoff on Sept. 1, 1997, to the extent that Solutia fails to pay, perform
or discharge those liabilities. Both immediately prior to and since its filing for bankruptcy
protection, Solutia has taken the position that the bankruptcy proceeding prevents it from
continuing to perform its environmental obligations, except within the boundaries of its current
operations. On an interim basis, we assumed the management and defense of certain of Solutia’s
environmental matters. In the process of managing such environmental liabilities, we determined
that it was probable that we would incur some expenses related to such environmental liabilities
and that the amount of such expenses could be reasonably estimated. Accordingly, in fiscal year
2005, we recorded a reserve including, but not limited to, environmental liabilities, based on the
best estimates by our management with input from our legal and other outside advisors. As of Aug.
31, 2006, $210 million was recorded as a reserve related to such matters.
For information regarding certain environmental proceedings, see Item 3 — Legal Proceedings. See
also information regarding remediation of waste disposal sites and reserves for remediation,
appearing in Note 22 — Commitments and Contingencies, which is incorporated herein by reference.
For additional information relating to Solutia and the charge recorded with respect to Solutia, see
“Relationships Among Monsanto Company, Pharmacia Corporation, Pfizer, Inc., and Solutia Inc.” in
this section and Note 22.
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2006 FORM 10-K |
INTERNATIONAL OPERATIONS
See Item 1A under the heading “Our operations outside the United States are subject to special
risks and restrictions, which could negatively affect our results of operations and profitability”
and Note 23 — Segment and Geographic Data, which are incorporated herein by reference.
Approximately 43 percent of Monsanto’s sales, including 37 percent of our Seeds and Genomics
segment’s sales and 50 percent of our Agricultural Productivity segment’s sales, originated from
our legal entities outside the United States during fiscal year 2006.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND CONCESSIONS
In the United States and many foreign countries, Monsanto holds a broad portfolio of patents that
provide intellectual property protection for its products and processes. Some of Monsanto’s patents
and licenses are currently the subject of litigation; see Item 3 — Legal Proceedings.
We routinely obtain patents and/or plant variety protection for our breeding technology, germplasm,
commercial varietal seed products, and for the parents of our commercial hybrid seed products. We
also routinely obtain registration for our germplasm and commercial seed products in registration
countries, such as Plant Variety Protection Act Certificates in the United States and equivalent
plant breeders’ rights in other countries. Our insect-protection traits (including YieldGard Corn
Borer and YieldGard Corn Rootworm traits in corn seed and Bollgard trait in cotton seed) are
protected by patents that extend until at least 2011. Having filed patent applications in 2002 and
2001, we anticipate that the Bollgard II insect-protection trait will be patent-protected in the
United States, and in other areas in which patent protection is sought, through 2022. Our herbicide
tolerant products (Roundup Ready traits in soybean, corn, canola and cotton seeds) are protected by
U.S. patents that extend until at least 2014; and our second-generation trait for cotton, Roundup
Ready Flex, is protected by U.S. patents through 2025.
Patents protecting glyphosate, the active ingredient in Roundup herbicides, expired in the United
States in 2000 and have expired in all other countries. We have several patents on our glyphosate
formulations and manufacturing processes in the United States and other countries, some of which
extend beyond 2015. Posilac bovine somatotropin is protected by a U.S. patent that expires in 2008
but is no longer fully protected by patents in other countries in which this product is sold. Other
patents protect various aspects of bovine somatotropin manufacture in the United States and expire
at varying dates ending March 2012; corresponding patents in other countries have varying terms.
Monsanto also holds licenses from other parties relating to certain products and processes. We have
obtained licenses to protect certain technologies used in the production of Roundup Ready seeds and
certain technologies relating to pipeline products from claims that we are infringing the patents
of others. These licenses last for the lifetimes of the applicable patents, after which no licenses
will be required to use the respective patented technologies. We hold numerous licenses in
connection with our genomics program. For example, we hold a perpetual license to certain genomics
technologies for use in plant and animal agriculture, perpetual licenses to patents expiring from
2018 to 2023 for classes of proprietary genes for the development of commercial traits in crops,
perpetual licenses to functional characterizations of our proprietary genes, and perpetual licenses
to certain genomics sequences and certain genomics technologies. We have also obtained perpetual
licenses to chemicals used to make Harness herbicides and to manufacturing technology for Posilac
bovine somatotropin.
We own a considerable number of established trademarks under which we market our products in many
countries. Monsanto owns trademark registrations and files trademark applications for the names and
many of the designs used on its branded products. Important company trademarks include Roundup for
herbicide products; Roundup Ready, Bollgard, Bollgard II, YieldGard and YieldGard VT for traits;
DEKALB, Asgrow, and Stoneville for agricultural seeds; Seminis, Royal Sluis, Asgrow and Petoseed
for fruit and vegetable seeds; and Posilac for dairy productivity products. We have also recently
filed numerous trademark applications for Vistive for low-linolenic soybeans and soybean oil, and
Roundup RReady2Yield for soybeans.
P4 Production holds (directly or by assignment) numerous phosphate leases issued on behalf of or
granted by the United States, the state of Idaho, and private parties. None of these leases is
material individually, although the leases are significant in the aggregate because elemental
phosphorus is a key raw material for the production of glyphosate-based herbicides. The phosphate
leases have varying terms. The leases obtained from the United States
are of indefinite duration,
subject to the modification of lease terms at 20-year intervals.
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PRINCIPAL EQUITY AFFILIATES
Renessen LLC, our joint venture with Cargill, Incorporated, combines Monsanto’s seed assets and
technology capabilities with Cargill’s global grain processing, marketing, and risk management
infrastructure to develop and commercialize enhanced grain products in the processing and animal
feed markets, and to increase returns on those products by greater participation in the value
chain. Monsanto owns 50 percent of Renessen; we have equal governance and funding rights and
responsibilities with Cargill. Cargill and Monsanto have granted Renessen a nonexclusive right and
license to Cargill’s and Monsanto’s respective intellectual property needed for Renessen to pursue
the approved business plan; receive rights to use intellectual property developed by Renessen in
other specified areas; and have the opportunity to provide specified services to Renessen for a
fee. Monsanto performs most of Renessen’s upstream research and development (R&D); we charge
Renessen for our services. Renessen products under development include grains designed to enhance
processing efficiency and grains designed to deliver better nutrition in animal feed. See
information regarding Renessen in Note 25 — Equity Affiliate.
RAW MATERIALS AND ENERGY RESOURCES
We are a significant purchaser of basic and intermediate raw materials. We typically purchase our
major raw materials and our energy requirements through long-term contracts. We do not depend on
any single outside supplier for a significant amount of any raw materials, but a few major
suppliers provide us with certain important raw materials, as
described below. The markets for our raw materials are balanced and
forecast to remain so. Although some additional capacity does exist, pricing is substantially higher today than under
existing contracts.
We produce directly or
contract with third-party growers for corn seed, soybean seed, canola seed,
vegetable seeds, fruit seeds, cotton seed, sunflower seed and sorghum seed in growing locations
throughout the world. The availability and cost of seed depends primarily on seed yields, weather
conditions, farmer contract terms, commodity prices, and global supply and demand. We manage
commodity price fluctuations through the use of futures contracts and other hedging mechanisms.
Where practicable, we attempt to minimize the weather risks by producing seed at multiple growing
locations and under irrigated conditions.
Energy is available as required, but pricing is subject to market fluctuations. Hurricanes
seriously disrupted supply of petrochemical feedstocks and natural gas in the Gulf Coast region of
the United States during our 2006 fiscal year. By fiscal year end 2006, the supply of key raw
materials and energy returned to normal and pricing moderated.
Different catalysts are used in various intermediate steps in the production of glyphosate. These
are produced by two major catalyst manufacturers who use our proprietary technology at various
sites globally. These suppliers have additional capacity at other manufacturing locations. We
manufacture and purchase disodium iminodiacetic acid, a key ingredient in the production of
glyphosate. Our P4 Production subsidiary manufactures most of our global supply of elemental
phosphorus, a key raw material for the production of Roundup herbicides, and we purchase the
remainder through a third-party supplier.
RESEARCH AND DEVELOPMENT
Monsanto’s expenses for research and development were $725 million in 2006, $588 million in 2005,
and $509 million in 2004. In addition, we incurred charges of $266 million to write off acquired
in-process research and development (IPR&D) related to acquisitions during 2005. See Note 4 —
Business Combinations — for additional information regarding these acquisitions.
SEASONALITY AND WORKING CAPITAL; BACKLOG
For information on seasonality and working capital and backlog practices, see information in Item 7
— MD&A — Financial Condition, Liquidity, and Capital Resources, incorporated herein by reference.
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RELATIONSHIPS AMONG MONSANTO COMPANY, PHARMACIA CORPORATION, PFIZER, INC., AND SOLUTIA INC.
Prior to Sept. 1, 1997, a corporation that was then known as Monsanto Company (Former Monsanto)
operated an agricultural products business (the Ag Business), a pharmaceuticals and nutrition
business (the Pharmaceuticals Business) and a chemical products business (the Chemicals Business).
Former Monsanto is today known as Pharmacia. Pharmacia is now a wholly owned subsidiary of Pfizer
Inc., which together with its subsidiaries operates the Pharmaceuticals Business. Today’s Monsanto
includes the operations, assets and liabilities that were previously the Ag Business. Today’s
Solutia comprises the operations, assets and liabilities that were previously the Chemicals
Business. The following table sets forth a chronology of events that resulted in the formation of
Monsanto, Pharmacia and Solutia as three separate and distinct corporations, and it provides a
brief background on the relationships among these corporations.
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Description of Event |
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Sept. 1, 1997
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Pharmacia (then known as Monsanto Company) entered into a Distribution Agreement
(Distribution Agreement) with Solutia related to the transfer of the operations, assets and
liabilities of the Chemicals Business from Pharmacia (then known as Monsanto Company) to Solutia. |
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Pursuant to the Distribution Agreement, Solutia assumed and agreed to indemnify Pharmacia
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Dec. 19, 1999
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Pharmacia (then known as Monsanto Company) entered into an agreement with Pharmacia &
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Feb. 9, 2000
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We were incorporated in Delaware as a wholly owned subsidiary of Pharmacia (then known as
Monsanto Company) under the name “Monsanto Ag Company.” |
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March 31, 2000
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Effective date of the Merger. |
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In connection with the Merger, (1) PNU became a wholly owned subsidiary of Pharmacia (then
known as Monsanto Company); (2) Pharmacia (then known as Monsanto Company) changed its name from
“Monsanto Company” to “Pharmacia Corporation;” and (3) we changed our name from “Monsanto Ag
Company” to “Monsanto Company.” |
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Sept. 1, 2000
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We entered into a Separation Agreement (Separation Agreement) with Pharmacia related to the
transfer of the operations, assets and liabilities of the Ag Business from Pharmacia to us. |
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Pursuant to the Separation Agreement, we were required to indemnify Pharmacia for any
liabilities primarily related to the Ag Business or the Chemicals Business, and for liabilities
assumed by Solutia pursuant to the Distribution Agreement, to the extent that Solutia fails to pay,
perform or discharge those liabilities. |
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Oct. 23, 2000
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We completed an initial public offering in which we sold approximately 15 percent of the
shares of our common stock to the public. Pharmacia continued to own 440 million shares of our
common stock. |
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July 1, 2002
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Pharmacia, Solutia and we amended the Distribution Agreement to provide that Solutia will
indemnify us for the same liabilities for which it had agreed to indemnify Pharmacia and to clarify
the parties’ rights and obligations. |
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Pharmacia and we amended the Separation Agreement to clarify our respective rights and
obligations relating to our indemnification obligations. |
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Aug. 13, 2002
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Pharmacia distributed the 440 million shares of our common stock that it owned to its
shareowners via a tax-free stock dividend (the Monsanto Spinoff). |
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As a result of the Monsanto Spinoff, Pharmacia no longer owns any equity interest in
Monsanto. |
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April 16, 2003
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Pursuant to a merger transaction, Pharmacia became a wholly owned subsidiary of Pfizer. |
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Dec. 17, 2003
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Solutia and 14 of its U.S. subsidiaries filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. |
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See Item 3 — Legal Proceedings for information concerning litigation matters that Monsanto is
managing pursuant to its obligation under the Separation Agreement to indemnify Pharmacia. See Note
22 for further information regarding litigation and environmental matters that we are managing
pursuant to our obligation under the Separation Agreement to indemnify Pharmacia; Solutia’s
bankruptcy; the related charge we recorded associated with certain of Solutia’s litigation and
environmental obligations; and other arrangements between Solutia and us.
AVAILABLE INFORMATION
Our Internet address is www.monsanto.com. We make available free of charge through our Web site our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments to those reports, as soon as reasonably practicable after they have been filed with or
furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
Forms 3, 4 and 5 filed with respect to our equity securities under Section 16(a) of the Exchange
Act are also available on our site by the end of the business day after filing. All of these
materials are located in the “Investor Information” area.
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Our Web site also includes the following corporate governance materials, under the tab “Who We Are
— Corporate Governance”: our Code of Business Conduct, our Code of Ethics for Chief Executive and
Senior Financial Officers, our Board of Directors’ Charter and Corporate Governance Guidelines, and
charters of our Board committees. These materials are also available on paper. Any shareowner may
request them by contacting the Office of the General Counsel, Monsanto Company, 800 N. Lindbergh
Blvd., St. Louis, Missouri, 63167. Information on our Web site does not constitute part of this
report.
ITEM 1A. RISK FACTORS
Competition in seeds and traits and agricultural chemicals has significantly affected, and will
continue to affect, our sales.
Many companies engage in plant biotechnology and breeding research, and speed in getting a new
product to market can be a significant competitive advantage. Our competitors’ success could
render our existing products less competitive, resulting in reduced sales compared to our
expectations or past results. We expect to see increasing competition from agricultural
biotechnology firms and from major agrichemical, seed and food companies. In addition, we expect
to face continued competition for our Roundup and selective chemistries agricultural herbicide
product lines. The extent to which we can realize cash and gross profit from these products will
depend on our ability to: control manufacturing and marketing costs without adversely affecting
sales; predict and respond effectively to competitor pricing; provide marketing programs meeting
the needs of our customers and of the farmers who are our end users; maintain an efficient
distribution system; and develop new products with features attractive to our end users.
Efforts to protect our intellectual property rights and to defend against claims against us can
increase our costs and will not always succeed; any failures could adversely affect sales and
profitability or restrict our ability to do business.
Intellectual property rights are crucial to our business, particularly our Seeds and Genomics
segment. We endeavor to obtain and protect our intellectual property rights in jurisdictions in
which our products are produced or used and in jurisdictions into which our products are
imported. However, we may be unable to obtain protection for our intellectual property in key
jurisdictions. Even if protection is obtained, competitors, farmers, or others in the chain of
commerce may raise legal challenges to our rights or illegally infringe on our rights, including
through means that may be difficult to prevent or detect. For example, the practice of saving
seeds from non-hybrid crops (such as soybeans, canola and cotton) containing our biotechnology
traits has prevented and may continue to prevent us from realizing the full value of our
intellectual property, particularly outside the United States. In addition, because of the rapid
pace of technological change, and the confidentiality of patent applications in some
jurisdictions, competitors may be issued patents from applications that were unknown to us prior
to issuance. These patents could reduce the value of our commercial or pipeline products or, to
the extent they cover key technologies on which we have unknowingly relied, require that we seek
to obtain licenses or cease using the technology, no matter how valuable to our business. We
cannot assure we would be able to obtain such a license on acceptable terms. The extent to which
we succeed or fail in our efforts to protect our intellectual property will affect our costs,
sales and other results of operations.
We are subject to extensive regulation affecting our seed biotechnology and agricultural products
and our research and manufacturing processes, which affects our sales and profitability.
Regulatory and legislative requirements affect the development, manufacture and distribution of
our products, including the testing and planting of seeds containing our biotechnology traits and
the import of crops grown from those seeds, and non-compliance can harm our sales and
profitability. Obtaining testing, planting and import approvals can be lengthy and costly, with
no guarantee of success. Planting approvals may also include significant regulatory requirements
that can limit our sales. Lack of approval to import crops containing biotechnology traits into
key markets can affect sales of our traits, even in jurisdictions where planting has been
approved. Concern about unintended but unavoidable trace amounts (sometimes called “adventitious
presence”) of commercial biotechnology traits in conventional (non-biotechnology) seed, or in the
grain or products produced from conventional or organic crops, among other things, could lead to
increased regulation or legislation, which may include: liability transfer mechanisms that may
include financial protection insurance; possible restrictions or moratoria on testing, planting
or use of biotechnology traits; and requirements for labeling and traceability, which
requirements may cause food processors and food companies to avoid biotechnology and select
non-biotechnology crop sources and can affect farmer seed purchase decisions and the sale of our
products. Further, the detection of adventitious presence of traits not approved in the importing
country may result in the withdrawal of seed
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lots from sale or in compliance actions, such as crop destruction or product recalls. Legislation
encouraging or discouraging the planting of specific crops can also harm our sales. In addition,
claims that increased use of glyphosate-based herbicides or biotechnology traits increases the
potential for the development of glyphosate-resistant weeds or pests resistant to our traits
could result in restrictions on the use of glyphosate-based herbicides or seeds containing our
traits or otherwise reduce our sales.
The degree of public acceptance or perceived public acceptance of our biotechnology products can
affect our sales and results of operations by affecting planting approvals, regulatory requirements
and customer purchase decisions.
Although all of our products go through rigorous testing, some opponents of our technology
actively raise public concern about the potential for adverse effects of our products on human or
animal health, other plants and the environment. The potential for adventitious presence of
commercial biotechnology traits in conventional seed, or in the grain or products produced from
conventional or organic crops, is another factor that can affect general public acceptance of
these traits. Public concern can affect the timing of, and whether we are able to obtain,
government approvals. Even after approvals are granted, public concern may lead to increased
regulation or legislation, which could affect our sales and profitability, and may adversely
affect sales of our products to farmers, due to their concerns about available markets for the
sale of crops or other products derived from biotechnology. In addition, opponents of
agricultural biotechnology have attacked facilities used by agricultural biotechnology companies,
and may launch future attacks against our field testing sites, and research, production, or other
facilities.
The successful development and commercialization of our pipeline products will be necessary for our
growth.
Commercializing new biotechnology products entails considerable time (as much as 10 years) and
investment (as much as $100 million per product). Commercializing new germplasm products using
traditional breeding approaches does not require as much time and investment. A considerable
percentage of our new product concepts are abandoned and never commercialized. There are a number
of reasons why a new product concept may be abandoned, including greater than anticipated
development costs, regulatory obstacles, competition, inability to prove the original concept,
lack of demand, and the need to divert focus, from time to time, to other initiatives with
perceived opportunities for better returns. Many of our competitors are also making considerable
investments in similar new biotechnology or improved germplasm products. Commercial success
frequently depends on being the first company to the market. Consequently, if we are not able to
fund extensive research and development activities and deliver new products to the markets we
serve on a timely basis, our growth and operations will be harmed.
Adverse outcomes in legal proceedings could subject us to substantial damages and adversely affect
our results of operations and profitability.
We are involved in major lawsuits concerning intellectual property, biotechnology, torts,
contracts, antitrust allegations, employee benefits, and other matters, as well as governmental
inquiries and investigations, the outcomes of which may be significant to results of operations
in the period recognized or limit our ability to engage in our business activities. While we have
insurance related to our business operations, it may not apply to or fully cover any liabilities
we incur as a result of these lawsuits. In addition, pursuant to the Separation Agreement, we are
required to indemnify Pharmacia for Solutia’s Assumed Liabilities, to the extent that Solutia
fails to pay, perform or discharge those liabilities. We have recorded a reserve for certain
estimated payments or costs related to third-party tort litigation and environmental matters that
we are managing following Solutia’s refusal to manage such matters, for which the amount recorded
in our Statement of Consolidated Financial Position as of Aug. 31, 2006, was $210 million. We
believe that the recorded amount represents the estimated discounted cost that we would incur in
the future in connection with these litigation and environmental matters. However, our actual
costs may be materially different from this estimate. The degree to which we may ultimately be
responsible for the particular matters reflected in the reserve is uncertain. Further, additional
litigation or environmental matters that are not reflected in the reserve may arise in the
future, and we may also assume the management of, settle, or pay judgments or damages with
respect to litigation or environmental matters in order to mitigate contingent potential
liability and protect Pharmacia and us, if Solutia refuses to do so. Additional information about
Solutia and other litigation matters and the related risks to our business may be found in Note
22 and in other sections of this report.
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Our operations outside the United States are subject to special risks and restrictions, which could
negatively affect our results of operations and profitability.
We engage in manufacturing, seed production, research and development or sales in many parts of
the world. Although we have operations in virtually every region, our sales outside the United
States in fiscal year 2006 were principally through our businesses in Argentina, Brazil, Canada,
Mexico and Switzerland. Accordingly, developments in those parts of the world generally have a
more significant effect on our operations than developments in other places. Our operations
outside the United States are subject to special risks and restrictions, including: fluctuations
in currency values and foreign-currency exchange rates; exchange control regulations; changes in
local political or economic conditions, such as the recently imposed state governmental pricing
directives in India; import and trade restrictions; import or export licensing requirements and
trade policy; restrictions on the ability to repatriate funds; and other potentially detrimental
domestic and foreign governmental practices or policies affecting U.S. companies doing business
abroad. Acts of terror or war may impair our ability to operate in particular countries or
regions, and may impede the flow of goods and services between countries. Customers in weakened
economies, such as Brazil, may be unable to purchase our products, or it could become more
expensive for them to purchase imported products in their local currency, and we may be unable to
collect receivables from such customers. Further, changes in exchange rates may affect our net
income, the book value of our assets outside the United States, and our shareowners’ equity.
In the event of any diversion of management’s attention to matters related to acquisitions, a
failure to receive antitrust clearance to close the Delta and Pine Land Company acquisition, or any
delays or difficulties encountered in connection with integrating acquired operations, our
business, and in particular our results of operations and financial condition, may be harmed.
We have recently completed several acquisitions involving seed companies and have entered into an
agreement to acquire Delta and Pine Land, and we expect to make additional acquisitions. We must
fit such acquisitions into our long-term growth strategies to generate sufficient value to
justify their cost. If the Delta and Pine Land acquisition does not close, we may be obligated to
make a $600 million payment to Delta and Pine Land, which would materially affect our business,
results of operations and financial condition. For more information, please see Item 7 — MD&A —
Financial Condition, Liquidity, and Capital Resources — Pending Acquisition which is
incorporated by reference herein. Acquisitions also present other challenges, including
geographical coordination, personnel integration and retention of key management personnel,
systems integration and the reconciliation of corporate cultures. Those operations could divert
management’s attention from our business or cause a temporary interruption of or loss of momentum
in our business and the loss of key personnel from the acquired companies.
Fluctuations in commodity prices can increase our costs and decrease our sales.
We purchase our seed inventories from production growers at market prices and retain the seed in
inventory until it is sold. These purchases constitute a significant portion of the manufacturing
costs for our seeds. We use hedging strategies to mitigate the risk of short-term changes in
these prices but are unable to avoid the risk of medium- and long-term changes. Accordingly,
increases in commodity prices may negatively affect our cost of goods sold or cause us to
increase seed prices, which could adversely affect our sales. Farmers’ incomes are also affected
by commodity prices; as a result, commodity prices could have a negative effect on their ability
to purchase our products.
Compliance with quality controls and regulations affecting our manufacturing may be costly, and
failure to comply may result in decreased sales, penalties and remediation obligations.
Because we use hazardous and other regulated materials in our chemical manufacturing processes
and engage in mining operations, we are subject to risks of accidental environmental
contamination, and therefore to potential personal injury claims, remediation expenses and
penalties. We have entered into agreements with various regulatory agencies for the management of
many of our sites, and if we fail to comply with such agreements, we could be subject to
penalties and facility shutdowns. Should a catastrophic event occur at any of our facilities, we
could face significant reconstruction or remediation costs, penalties, and loss of production
capacity, which could affect our sales. In addition, lapses in quality or other manufacturing
controls could affect our sales and result in claims for defective products.
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Our ability to estimate farmers’ future needs, and match our production and the level of product at
our distributors to those needs, has a significant effect on our sales.
Farmers’ decisions are affected by market, economic and weather conditions that are not known in
advance. Failure to provide distributors with enough inventory of our products will reduce our
current sales. However, product inventory levels at our distributors may reduce sales in future
periods, as those distributor inventories are worked down. In addition, inadequate distributor
liquidity could affect distributors’ ability to pay for our products and, therefore, affect our
sales or our ability to collect on our receivables.
Our ability to issue short-term debt to fund our cash flow requirements and the cost of such debt
may affect our financial condition.
We regularly extend credit to our customers in certain areas of the world so that they can buy
agricultural products at the beginning of their growing seasons. Because of these credit
practices and the seasonality of our sales, we may need to issue short-term debt at certain times
of the year to fund our cash flow requirements. The amount of short-term debt will be greater to
the extent that we are unable to collect customer receivables when due, to repatriate funds from
operations outside the United States, and to manage our costs and expenses. Any downgrade in our
credit rating, or other limitation on our access to short-term financing or refinancing, would
increase our interest cost and adversely affect our profitability.
Weather, natural disasters and accidents may significantly affect our results of operations and
financial condition.
Weather conditions and natural disasters can affect the timing of planting and the acreage
planted, as well as yields and commodity prices. In turn, the quality, cost and volumes of the
seed that we are able to produce and sell will be affected, which will affect our sales and
profitability. Natural disasters or industrial accidents could also affect our manufacturing
facilities, or those of our major suppliers or major customers, which could affect our costs. One
of our major U.S. glyphosate manufacturing facilities is located in Luling, Louisiana, which is
an area subject to hurricanes.
ITEM 1B. UNRESOLVED STAFF COMMENTS
At Aug. 31, 2006, there were no unresolved comments from the staff of the SEC related to our
periodic or current reports under the Exchange Act.
ITEM 2. PROPERTIES
We and our subsidiaries own or lease manufacturing facilities, laboratories, seed production and
other agricultural facilities, office space, warehouses and other land parcels in North America,
South America, Europe, Asia, Australia, and Africa. Our general offices, which we own, are located
in St. Louis County, Missouri. We lease additional research facilities from Pfizer at Chesterfield
Village in St. Louis County. These office and research facilities are principal properties.
Additional principal properties used by the Seeds and Genomics segment include seed conditioning
plants at Constantine, Michigan; Grinnell, Iowa; Kearney, Nebraska; Oxnard, California; Peyehorade,
France; Rojas, Argentina; Trèbes, France; and Uberlândia, Brazil; and research laboratories at
Woodland, California, and Ankeny, Iowa. We own all of these properties. The Seeds and Genomics
segment also uses seed foundation and production facilities, breeding facilities, and genomics and
other research laboratories at various locations worldwide.
The Agricultural Productivity segment has principal chemicals manufacturing facilities at Alvin,
Texas; Antwerp, Belgium; Augusta, Georgia; Camaçari, Brazil; Luling, Louisiana; Muscatine, Iowa;
São José dos Campos, Brazil; Soda Springs, Idaho; and Zárate, Argentina. We lease the land
underlying the facilities that we own in Alvin, Texas, and in Antwerp, Belgium. We also lease the
manufacturing facility and land underlying the facility at Augusta, Georgia, with an option to buy
it, pursuant to an industrial revenue bond financing. We own the other properties.
We believe that our principal properties are suitable and adequate for their use. Use of these
facilities may vary with seasonal, economic and other business conditions, but none of the
principal properties is substantially idle. The facilities generally have
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sufficient capacity for existing needs and expected near-term growth. Expansion projects are
undertaken as necessary to meet future needs. In certain instances, we have leased to third parties
portions of sites not required for current operations.
ITEM 3. 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 22). 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 22 under the
subheading “Litigation and Indemnification” and is incorporated by reference herein. Following is
information regarding other material proceedings for which we are responsible.
Patent and Commercial Proceedings
On Dec. 4, 2000, we filed suit in the U.S. District Court for the Eastern District of Missouri for
a declaratory judgment against Bayer CropScience AG, a subsidiary of Bayer AG, and its affiliates
that four patents that involve claims to truncated Bt technology were invalid and not infringed by
the MON810 corn product contained in YieldGard corn. Bayer CropScience counterclaimed to request
royalties for prior sales of YieldGard corn and injunctive relief but later dismissed with
prejudice its claims on three of the four patents in dispute and agreed not to sue us, our
affiliates or our sublicensees under those patents for any of our current commercial products. On
Nov. 22, 2005, a jury returned a verdict in our favor and determined that MON810 did not infringe
the remaining patent at issue and that the patent was invalid. On Aug. 28, 2006, the Court entered
an order also invalidating the patents on the basis of inequitable conduct. Bayer CropScience filed
a notice of appeal of the results of the jury trial and the Court’s decision on Oct. 24, 2006.
The following proceedings involve Syngenta AG (Syngenta) and its affiliates:
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On July 25, 2002, Syngenta Seeds, Inc. filed a suit against our wholly owned subsidiary
DEKALB Genetics Corporation (DEKALB), Monsanto, Pioneer Hi-Bred International, Inc., Dow
AgroSciences LLC, and Mycogen Plant Science, Inc. and Agrigenetics, Inc., collectively
Mycogen Seeds, in the U.S. District Court for the District of Delaware, alleging
infringement of three patents issued between June 2000 and June 2002. The patents allegedly
pertain to insect-protected transgenic corn, including our insect-protected corn traits.
Syngenta Seeds seeks injunctive relief and monetary damages. During the course of the
trial, the Court ruled in our favor on two of the patents. On Dec. 14, 2004, the jury
returned a verdict in our favor, determining that the third patent was invalid. Post-trial
motions filed by the parties were denied. On Jan. 13, 2006, Syngenta Seeds has appealed the
verdict and Court decisions to the U.S. Court of Appeals for the Federal Circuit. |
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On May 10, 2004, we filed suit against Syngenta Seeds in the Circuit Court of St. Louis
County, Missouri, for a declaratory judgment seeking a determination that, under its
license from us, Syngenta Seeds is limited to commercializing its Roundup Ready soybeans
under one product brand. On Feb. 8, 2006, after a bench trial, the Court ruled in our favor
and permanently enjoined Syngenta from using any brand other than the NK® brand in the
production, marketing, advertising, or sale of our Roundup Ready soybean technology.
Syngenta Seeds has appealed the Court’s decision to the Missouri Court of Appeals. Oral argument on Syngenta’s appeal is scheduled for Nov. 21, 2006. |
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On May 12, 2004, we filed suit against Syngenta Seeds and Syngenta Biotechnology, Inc.
in the U.S. District Court for the District of Delaware (the Shah case). On July 27, 2004,
DEKALB filed suit against Syngenta Seeds and Syngenta Biotechnology in the U.S. District
Court for the Northern District of Illinois (the Lundquist case). The suits allege
infringement of our patents involving glyphosate-tolerant crops and fertile transgenic corn
and seek injunctions against the sale of GA21 corn by Syngenta and its affiliates and
damages for willful infringement of our patents. On May 19, 2005, the U.S. District Court
for the Northern District of Illinois transferred the Lundquist case to the U.S. District
Court for the District of Delaware. It was then consolidated for discovery and trial with
the Shah case. The District Court granted summary judgment in favor of Syngenta on May 11,
2006, ruling that the Shah patent was invalid and Syngenta did not infringe the Lundquist
patents. On June 8, 2006, we appealed the Court’s decision to the U.S. Court of Appeals for
the Federal Circuit. |
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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. Trial has been set for Jan. 7, 2007. |
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On Aug. 25, 2005, Syngenta filed suit against us in the Circuit Court of Hennepin
County, Minnesota, seeking access to our new patented next generation glyphosate-tolerant
soybean technology under a license for our current soybean technology that we previously
entered into with Ciba Seeds, which is now owned by Syngenta. This case has been set for
trial starting Jan. 15, 2007. |
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On Aug. 7, 2006, acting on a long pending jury advisory verdict, the U.S. District
Court for the Middle District of North Carolina ruled that scientists of Rhône Poulenc
Agrochimie S.A. (RPA) were entitled to be named as co-inventors of U.S. Patent No.
6,040,497 but were not entitled to be named as co-inventors of U.S. Patent No. 5,554,798
(the ‘798 Patent). The ‘798 Patent covers glyphosate-tolerant crops and fertile transgenic
corn and was assigned to DEKALB. On Aug. 9, 2006, DEKALB filed suit against Syngenta Seeds
and Syngenta Biotechnology in the U.S. District Court for the Eastern District of Missouri.
The suit alleges infringement of the ‘798 Patent by the making and selling of GA21 corn. We
are seeking an injunction against the sale of GA21 corn by Syngenta and its affiliates and
damages for willful infringement of DEKALB’s patent. |
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. Opposition to class
certification was heard on Oct. 2, 2006. This case has been set for trial on Oct. 15, 2007.
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 has not
requested anything from us or initiated a formal proceeding against us.
Farmer Lawsuits
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. 22, 2003, the District Court granted Monsanto’s motion for
summary judgment on all tort claims and denied plaintiffs’ motion to allow the tort claims to
proceed as a class action. On Sept. 30, 2003, the District Court denied plaintiffs’ motion to allow
their antitrust claims to proceed as a class action. On March 7, 2005, the U.S. Court of Appeals
for the Eighth Circuit
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2006 FORM 10-K |
affirmed the District Court’s denial of class certification for plaintiffs’ antitrust claims.
Monsanto is the sole remaining defendant, and trial of the two individual plaintiffs’ claims is
scheduled to start on Jan. 8, 2007.
Starting the week of March 7, 2004, a series of purported class action cases were filed in 14
different state courts against Pioneer and us. The suits allege that we conspired with Pioneer to
violate various state competition and consumer protection laws by allegedly fixing and artificially
inflating the prices and fees for Monsanto’s various biotechnology traits and seeds containing
those traits and imposing certain use restrictions. All of these cases have been transferred to the
U.S. District Court for the Eastern District of Missouri and consolidated, except for one case
pending in state court in Tennessee. No trial dates have been set for these matters.
On Sept. 26, 2006, Pullen Seeds and Soils and Wade Farms filed separate purported class action
suits against us in the U.S. District Court for the District of Delaware, supposedly on behalf of
all persons who purchased our Roundup herbicides in the United States for commercial agricultural
purposes since Sept. 26, 2002. Plaintiffs essentially allege that we have monopolized the market
for glyphosate for commercial agricultural purposes. Plaintiffs seek an unspecified amount of
damages and injunctive relief.
Proceedings Related to Delta and Pine Land Company
We are a party to litigation and several arbitrations with Delta and Pine Land. On Aug. 15, 2006,
we announced the signing of a definitive agreement to purchase all of the outstanding stock of
Delta and Pine Land. In the event the transaction is closed, all of the litigation and arbitrations
will terminate. See Item 7 — MD&A — Financial Condition, Liquidity, and Capital Resources —
Pending Acquisition, which is incorporated by reference herein, for more information about the
agreement and the consequences if the transaction does not close. Following is a description of the
current status of these proceedings:
| |
• |
|
On Jan. 18, 2000, Delta and Pine Land Company reinstituted a suit against the former
Monsanto Company in the Circuit Court of the First Judicial District of Bolivar County,
Mississippi, seeking unspecified compensatory damages for lost stock market value of not
less than $1 billion, as well as punitive damages. Delta and Pine Land alleges that the
former Monsanto Company failed to exercise reasonable efforts to complete a merger between
the two companies and tortiously interfered with its prospective business relations by
feigning interest in the merger so as to keep it from pursuing transactions with other
entities. We filed a counterclaim seeking to set aside the merger agreement on the basis of
Delta and Pine Land’s fraudulent nondisclosure of material information and substantial
damages including the $83 million breakup fee paid to Delta and Pine Land. On Oct. 8, 2004,
the Court granted our motion for partial summary judgment, which eliminated a significant
element of Delta and Pine Land’s damages claim, but the Mississippi Supreme Court granted
review of that decision and the admissibility and use of certain documents at trial. On
Aug. 31, 2006, the Mississippi Supreme Court ordered a stay in proceedings until at least
Feb. 27, 2007, pending closure of the transaction. |
| |
| |
• |
|
The following arbitrations are or were before the American Arbitration Association (AAA): |
| |
• |
|
On May 20, 2004, we filed a request for arbitration and a determination that we
have the right to terminate licensing agreements that provided Delta and Pine Land with
access to Bollgard and Roundup Ready technologies for cotton. In connection with the
execution of the agreement described above, both parties dismissed their claims in this
matter. |
| |
| |
• |
|
On May 3, 2006, Delta and Pine Land initiated proceedings seeking a
determination that its affiliates’ license agreements with us preclude us from
implementing the indemnity collection system that we announced for Brazil in an attempt
to protect and enforce our intellectual property rights on insect-resistant cotton in
Brazil. In July 2006, Delta and Pine Land’s motion for a temporary injunction was
denied. In connection with the execution of the agreement described above, all
proceedings in this matter have been stayed pending closure of that transaction. |
| |
| |
• |
|
On June 19, 2006, Delta and Pine Land initiated a proceeding seeking a
determination that we had not provided it with license terms equal to those extended to
Stoneville, which we acquired in 2005. Delta and Pine Land also seeks an injunction
against our introduction of Bollgard II cotton in Egypt and Burkina Faso, unless
commercial arrangements are reached with Delta and Pine Land, notwithstanding those
countries’ prohibition of such |
17
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
| |
|
|
arrangements. In connection with the execution of the merger agreement described above,
Delta and Pine Land’s claims regarding license terms equal to those extended to
Stoneville have been dismissed with prejudice. Otherwise, all proceedings in this matter
have been stayed pending closure of the merger. |
Agent Orange Proceedings
Various manufacturers of herbicides used by the U.S. armed services during the Vietnam War,
including the former Monsanto Company, have been parties to lawsuits filed on behalf of veterans
and others alleging injury from exposure to the herbicides. In re Agent Orange Product Liability
Litigation, MDL 381 (MDL), a multidistrict litigation proceeding established in 1977 to coordinate
Agent Orange-related litigation in the United States, was settled in 1984, concluding all class
action litigation filed on behalf of U.S. and certain other groups of plaintiffs. After the U.S.
Supreme Court allowed new claims to proceed notwithstanding the settlement, this litigation was
sent back to Judge Weinstein of the U.S. District Court for the Eastern District of New York, who
originally proceeded over the MDL. After a hearing during the week of Feb. 28, 2005, the District
Court granted the motions for summary judgment filed by Monsanto and other defendants in all
pending cases arising out of claims from U.S. veterans on the basis of the government contractor
defense. Plaintiffs have appealed the District Court’s judgment to the U.S. Court of Appeals for
the Second Circuit.
A purported class action suit, styled VAVAO, et al. v. The Dow Chemical Company, et al., was filed
in the U.S. District Court for the Eastern District of New York by the Vietnam Association of
Victims of Agent Orange (VAVAO) alleging that the manufacturers of Agent Orange conspired with the
U.S. government to commit war crimes and crimes against humanity in connection with the spraying of
Agent Orange. This case was also assigned to Judge Weinstein. On March 10, 2005, the District Court
granted the motions to dismiss and for summary judgment filed by Monsanto and other defendants in
this case. Plaintiffs have appealed the District Court’s judgment to the U.S. Court of Appeals for
the Second Circuit.
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
On Oct. 20, 2004, the EPA issued a Notice of Violation to P4 Production, LLC alleging violations of
federal and state hazardous waste management regulations at P4 Production’s phosphorus
manufacturing plant in Soda Springs, Idaho. The EPA has asserted that the alleged violations may
subject P4 Production to civil penalties. We are currently working with the EPA to reach a resolution of this
matter.
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 alleges that on 34
occasions certain Monsanto registered pesticide products were sold without up-to-date labeling, in
violation of EPA guidance under FIFRA. The proposed penalty amount is
$164,000. We are currently reviewing
this matter.
SEC/DOJ Undertakings
In January 2005, we consented to an SEC Order and entered into a Deferred Prosecution Agreement
(DPA) with the Department of Justice concerning their investigations of improper payments and
related financial irregularities in connection with our Indonesian affiliates. We paid penalties of
$1.5 million, agreed to continue our compliance program, and are required to cease and desist from
any further violations of the Foreign Corrupt Practices Act (FCPA) and to retain for a period of
three years an independent consultant to review and evaluate our policies and procedures to ensure
compliance with the FCPA. If we comply with the terms of the DPA for three years, the charges
deferred under the DPA will be permanently dismissed. The independent consultant began his review
in March 2005. We are cooperating with the independent consultant’s review and continuing to
execute and implement improvements to our FCPA compliance program.
18
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
Illinois Attorney General Subpoena
On April 18, 2005, we received a subpoena from the Illinois Attorney General for the production of
documents relating to the prices and terms upon which we license technology for genetically
modified seeds, and upon which we sell or license genetically modified seeds to farmers. We are
cooperating with the production of the requested materials.
Proceedings Regarding Tax Matters
On Dec. 2, 2005, the Federal Revenue Service of the Ministry of Finance of Brazil issued a tax
assessment against our wholly owned subsidiary, Monsanto do Brasil Ltda., challenging the tax
treatment of $464 million of notes issued in 1998 on the basis that the transactions involving the
notes represented contributions to the capital of Monsanto do Brasil rather than funding through
issuance of notes. The assessment denies tax deductions for approximately $738 million (subject to
currency exchange rates) of interest expense and currency exchange losses that were claimed by
Monsanto do Brasil under the notes. The assessment seeks payment of approximately $34 million of
tax, excluding penalties and interest, related to the notes (subject to currency exchange rates),
and would preclude Monsanto do Brasil from using a net operating loss carryforward of approximately
$645 million (subject to currency exchange rates). The issuance of the notes was properly
registered with the Central Bank of Brazil and we believe that there is no basis in law for this
tax assessment. On Dec. 29, 2005, Monsanto do Brasil filed an appeal of this assessment with the
Federal Revenue Service. Under the terms of a tax sharing agreement concluded with Pharmacia at the
time of our separation from Pharmacia, Pharmacia would be responsible for a portion of any
liability incurred by virtue of the tax assessment. All dollar amounts have been calculated based
on an exchange rate of 2.737 Brazilian reais per U.S. dollar, and will fluctuate with exchange
rates in the future.
Proceedings Related to Activities in India
Mahyco Monsanto Biotech Ltd. (MMB), a joint venture of our subsidiary Monsanto Holdings Private
Limited and MAHYCO Seeds Limited, is currently defending complaints before the Monopoly and
Restrictive Trade Practice Commission in India (MRTP), relating to the fees it charges on Bollgard
technology. Additionally, approximately seven individual states in India have issued letters/orders
prospectively setting a maximum amount at which seed companies may sell cotton seed packets
containing Bt cotton, including Bollgard cotton. On May 11, 2006, the MRTP concluded that MMB was
in violation of law by engaging in restrictive trade practices by charging unreasonable trait fees,
granted a temporary injunction and directed MMB not to charge Rupees 900 as a trait fee and to set
a reasonable trait fee. Appeal was taken to India’s Supreme Court. Pending determination of any
appeal, MMB has complied with the directions of the order. MMB has also filed writs with the India
Supreme Court challenging the state government orders.
Proceedings Related to Solutia’s Assumed Liabilities
On June 5, 2003, in an action styled Solutia Inc. and Pharmacia Corporation v. McWane, Inc. et al.,
Solutia and Pharmacia filed suit in the U.S. District Court for the Northern District of Alabama
against 19 parties to force them to pay a share of past and future investigation and cleanup costs
in Anniston, Alabama, under the Comprehensive Environmental Response Compensation and Liability Act
(CERCLA). The defendants are owners and operators of manufacturing facilities that
Solutia/Pharmacia believed were responsible for a major share of the PCB contamination found
throughout Anniston. EPA has entered into agreements with certain of the defendants to this suit,
purporting to grant contribution protection under CERCLA for both lead and PCB related cleanup
costs in Anniston. On Jan. 27, 2006, those defendants filed a motion for summary judgment in our
contribution suit on the basis of the EPA agreement, to which we responded. We have reached de
minimis settlements with two of the defendants who did not sign the agreement with the EPA.
On Dec. 6, 2005, a products liability lawsuit, styled Abbatiello et al. v. Pharmacia Corporation et
al., was filed against Pharmacia, Solutia, and us in the Supreme Court of New York County, New
York. The suit claims that all defendants manufactured and sold PCB products to General Electric
Company and is brought by 590 current employees of General Electric who allege exposure to
chemicals used by General Electric in and around its plant in Schenectady, New York, from the 1970s
to the present. The suit seeks actual and punitive damages for alleged personal injuries and fear
of future disease. On March 15, 2006, a similar lawsuit styled Abele v. Monsanto Company, et al.
was filed by 486 former employees of General Electric against the same defendants in the same
court. Defendants have removed the cases to the U.S. District Court for the Southern District of
New York, in response to which the plaintiffs have filed a motion to remand to state court.
See Note 22 for additional information regarding legal proceedings related to Solutia’s Assumed
Liabilities.
19
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Executive Officers
See Part III — Item 10 of this Report on Form 10-K for information about our Executive Officers.
20
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
PART II
| ITEM 5. |
|
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
Monsanto’s common stock is traded principally on the New York Stock Exchange, under the symbol MON.
The number of shareowners of record as of Oct. 30, 2006, was 49,080.
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 original dividend rate adopted by the board of directors following the initial public offering
(IPO) in October 2000 was $0.06. The board of directors increased the company’s quarterly dividend
rate in April 2003 to $0.065, in May 2004 to $0.0725, in December 2004 to $0.085, and in December
2005 to $0.10.
The following table sets forth dividend declarations, as well as the high and low sales prices for
Monsanto’s common stock, for the fiscal year 2006 and 2005 quarters indicated.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
1st |
|
2nd |
|
3rd |
|
4th |
|
Fiscal |
| Dividends per Share |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Year |
|
2006 |
|
$ |
— |
|
|
$ |
0.20 |
(1) |
|
$ |
— |
|
|
$ |
0.20 |
(1) |
|
$ |
0.40 |
|
|
2005 |
|
$ |
— |
|
|
$ |
0.085 |
|
|
$ |
0.085 |
|
|
$ |
0.17 |
(2) |
|
$ |
0.34 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
1st |
|
2nd |
|
3rd |
|
4th |
|
Fiscal |
| Common Stock Price |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Year |
|
2006 |
|
High |
|
$ |
37.48 |
|
|
$ |
43.98 |
|
|
$ |
44.88 |
|
|
$ |
47.58 |
|
|
$ |
47.58 |
|
|
|
Low |
|
|
27.80 |
|
|
|
36.80 |
|
|
|
39.63 |
|
|
|
37.91 |
|
|
|
27.80 |
|
|
2005 |
|
High |
|
$ |
23.33 |
|
|
$ |
29.82 |
|
|
$ |
32.80 |
|
|
$ |
34.62 |
|
|
$ |
34.62 |
|
|
|
Low |
|
|
17.08 |
|
|
|
22.88 |
|
|
|
27.76 |
|
|
|
28.66 |
|
|
|
17.08 |
|
|
|
|
|
| (1) |
|
During the period from Dec. 1, 2005, through Feb. 28, 2006, Monsanto declared two
dividends, $0.10 per share on Dec. 12, 2005, and $0.10 per share on Jan. 17, 2006. During the
period from June 1, 2006, through Aug. 31, 2006, Monsanto declared two dividends, $0.10 per
share on June 27, 2006, and $0.10 per share on Aug. 9, 2006. |
| |
| (2) |
|
During the period from June 1, 2005, through Aug. 31, 2005, Monsanto declared two
dividends, $0.085 per share on June 21, 2005, and $0.085 per share on Aug. 2, 2005. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuer Purchases of Equity Securities
|
| The following table is a summary of any purchases of equity securities during the fourth quarter of
fiscal year 2006 by Monsanto and any affiliated purchasers, pursuant to SEC rules.
|
|
| |
|
|
|
|
|
|
|
|
|
(c) Total Number of Shares |
|
(d) Approximate Dollar |
| |
|
|
|
|
|
|
|
|
|
Purchased as Part of |
|
Value of Shares that May |
| |
|
(a) Total Number of |
|
(b) Average Price Paid |
|
Publicly Announced Plans |
|
Yet Be Purchased Under |
| Period |
|
Shares Purchased |
|
per Share(1) |
|
or Programs |
|
the Plans or Programs |
|
June 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 1, 2006, through June 30, 2006 |
|
|
12,760 |
(2) |
|
$ |
39.12 |
|
|
|
— |
|
|
$ |
710,517,926 |
|
July 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006, through July 31, 2006 |
|
|
9,268 |
(3) |
|
$ |
14.47 |
|
|
|
— |
|
|
$ |
710,517,926 |
|
August 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aug. 1, 2006, through Aug. 31, 2006 |
|
|
645,000 |
(4) |
|
$ |
46.48 |
|
|
|
645,000 |
|
|
$ |
680,541,256 |
|
|
Total |
|
|
667,028 |
|
|
$ |
45.89 |
|
|
|
645,000 |
|
|
$ |
680,541,256 |
|
|
|
|
|
| (1) |
|
The average price paid per share is calculated on a settlement basis and excludes commission. |
| |
| (2) |
|
12,760 shares withheld to cover the withholding taxes upon the vesting of restricted stock. |
| |
| (3) |
|
9,268 shares purchased by an affiliated purchaser through the exercise of stock
options with an average exercise price of $14.47. |
| |
| (4) |
|
Includes 125,500 shares that were purchased in August 2006 and settled in
September 2006. |
On Oct. 25, 2005, the board of directors authorized the purchase of up to $800 million of the
company’s common stock over a four-year period. The plan expires on Oct. 25, 2009. There were no
other publicly announced plans outstanding as of Aug. 31, 2006.
21
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Months |
|
|
| |
|
12 Months Ended Aug. 31,
|
|
Ended Aug. 31
|
|
Year Ended Dec. 31,
|
| (Dollars in millions, except per share amounts) |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2003 |
|
2002 |
|
2002 |
|
2001 |
|
|
|
|
|
Operating Results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales(1) |
|
$ |
7,344 |
|
|
$ |
6,294 |
|
|
$ |
5,423 |
|
|
$ |
4,924 |
|
|
$ |
3,378 |
|
|
$ |
3,129 |
|
|
$ |
4,674 |
|
|
$ |
5,450 |
|
Income from operations |
|
|
1,177 |
|
|
|
742 |
|
|
|
603 |
|
|
|
676 |
|
|
|
483 |
|
|
|
151 |
|
|
|
344 |
|
|
|
672 |
|
Income from continuing operations |
|
|
698 |
|
|
|
157 |
|
|
|
266 |
|
|
|
98 |
|
|
|
— |
|
|
|
48 |
|
|
|
146 |
|
|
|
318 |
|
Income (loss) on discontinued operations(2) |
|
|
(3 |
) |
|
|
98 |
|
|
|
1 |
|
|
|
(18 |
) |
|
|
(11 |
) |
|
|
(11 |
) |
|
|
(17 |
) |
|
|
(23 |
) |
Cumulative effect of a change in accounting
principle, net of tax benefit (3,4,5) |
|
|
(6 |
) |
|
|
— |
|
|
|
— |
|
|
|
(12 |
) |
|
|
(12 |
) |
|
|
(1,822 |
) |
|
|
(1,822 |
) |
|
|
— |
|
Net income (loss) |
|
|
689 |
|
|
|
255 |
|
|
|
267 |
|
|
|
68 |
|
|
|
(23 |
) |
|
|
(1,785 |
) |
|
|
(1,693 |
) |
|
|
295 |
|
Basic Earnings (Loss) per Share(6): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.30 |
|
|
$ |
0.30 |
|
|
$ |
0.50 |
|
|
$ |
0.19 |
|
|
$ |
— |
|
|
$ |
0.09 |
|
|
$ |
0.28 |
|
|
$ |
0.62 |
|
Income (loss) on discontinued operations(2) |
|
|
(0.01 |
) |
|
|
0.18 |
|
|
|
— |
|
|
|
(0.04 |
) |
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
(0.03 |
) |
|
|
(0.05 |
) |
Cumulative effect of accounting
change(3,4,5) |
|
|
(0.01 |
) |
|
|
— |
|
|
|
— |
|
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
(3.50 |
) |
|
|
(3.50 |
) |
|
|
— |
|
Net income (loss) |
|
|
1.28 |
|
|
|
0.48 |
|
|
|
0.50 |
|
|
|
0.13 |
|
|
|
(0.04 |
) |
|
|
(3.43 |
) |
|
|
(3.25 |
) |
|
|
0.57 |
|
Diluted Earnings (Loss) per Share(6): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.27 |
|
|
$ |
0.29 |
|
|
$ |
0.50 |
|
|
$ |
0.19 |
|
|
$ |
— |
|
|
$ |
0.09 |
|
|
$ |
0.28 |
|
|
$ |
0.60 |
|
Income (loss) on discontinued operations(2) |
|
|
(0.01 |
) |
|
|
0.18 |
|
|
|
— |
|
|
|
(0.04 |
) |
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
(0.03 |
) |
|
|
(0.04 |
) |
Cumulative effect of accounting
change(3,4,5) |
|
|
(0.01 |
) |
|
|
— |
|
|
|
— |
|
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
(3.46 |
) |
|
|
(3.47 |
) |
|
|
— |
|
Net income (loss) |
|
|
1.25 |
|
|
|
0.47 |
|
|
|
0.50 |
|
|
|
0.13 |
|
|
|
(0.04 |
) |
|
|
(3.39 |
) |
|
|
(3.22 |
) |
|
|
0.56 |
|
Financial Position at end of Period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets(7) |
|
$ |
11,728 |
|
|
$ |
10,579 |
|
|
$ |
9,164 |
|
|
$ |
9,536 |
|
|
$ |
9,536 |
|
|
$ |
9,175 |
|
|
$ |
8,949 |
|
|
$ |
11,454 |
|
Working capital(7,8) |
|
|
3,182 |
|
|
|
2,485 |
|
|
|
3,037 |
|
|
|
2,920 |
|
|
|
2,920 |
|
|
|
2,804 |
|
|
|
2,537 |
|
|
|
2,373 |
|
Current ratio(7,8) |
|
|
2.40:1 |
|
|
|
2.15:1 |
|
|
|
2.60:1 |
|
|
|
2.45:1 |
|
|
|
2.45:1 |
|
|
|
2.62:1 |
|
|
|
2.36:1 |
|
|
|
1.99:1 |
|
Long-term debt |
|
|
1,639 |
|
|
|
1,458 |
|
|
|
1,075 |
|
|
|
1,258 |
|
|
|
1,258 |
|
|
|
1,148 |
|
|
|
851 |
|
|
|
893 |
|
Debt-to-capital(7,9) |
|
|
20 |
% |
|
|
22 |
% |
|
|
21 |
% |
|
|
22 |
% |
|
|
22 |
% |
|
|
26 |
% |
|
|
19 |
% |
|
|
18 |
% |
Other
Data(6): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
0.40 |
|
|
$ |
0.34 |
|
|
$ |
0.34 |
|
|
$ |
0.25 |
|
|
$ |
0.13 |
|
|
$ |
0.12 |
|
|
$ |
0.24 |
|
|
$ |
0.24 |
|
Stock price per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
47.58 |
|
|
$ |
34.62 |
|
|
$ |
19.25 |
|
|
$ |
13.18 |
|
|
$ |
13.18 |
|
|
$ |
16.65 |
|
|
$ |
16.65 |
|
|
$ |
19.40 |
|
Low |
|
$ |
27.80 |
|
|
$ |
17.08 |
|
|
$ |
11.54 |
|
|
$ |
6.78 |
|
|
$ |
6.78 |
|
|
$ |
6.51 |
|
|
$ |
6.51 |
|
|
$ |
13.44 |
|
End of period |
|
$ |
47.44 |
|
|
$ |
31.92 |
|
|
$ |
18.30 |
|
|
$ |
12.86 |
|
|
$ |
12.86 |
|
|
$ |
9.19 |
|
|
$ |
9.57 |
|
|
$ |
16.90 |
|
Basic shares outstanding |
|
|
540.0 |
|
|
|
533.6 |
|
|
|
528.8 |
|
|
|
523.2 |
|
|
|
523.3 |
|
|
|
520.6 |
|
|
|
521.3 |
|
|
|
516.2 |
|
Diluted shares outstanding |
|
|
551.6 |
|
|
|
545.3 |
|
|
|
538.4 |
|
|
|
523.7 |
|
|
|
524.3 |
|
|
|
526.4 |
|
|
|
525.2 |
|
|
|
527.1 |
|
|
|
|
|
|
See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of
Operations — for information regarding the factors that have affected or may affect the
comparability of our business results. In July 2003, Monsanto’s board of directors approved a
change in the company’s fiscal year end from December 31 to August 31. Accordingly, data presented
in this report for the period from Jan. 1, 2003, through Aug. 31, 2003, is otherwise known as the
transition period. For all periods except the 12 months ended Aug. 31, 2003, and the eight months
ended Aug. 31, 2002, the operating results data, earnings (loss) per share data, and financial
position data set forth above are derived from Monsanto Company’s audited consolidated financial
statements. For the 12-month period ended Aug. 31, 2003, and the eight-month period ended Aug. 31,
2002, this data is derived from unaudited consolidated financial statements.
22
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
|
|
|
| (1) |
|
In first quarter 2005, Monsanto acquired Channel Bio Corp., and the North
American canola seed businesses of Advanta Seeds. In third quarter 2005, Monsanto completed
three acquisitions: Seminis, Inc., Stoneville, and NC+ Hybrids Inc. In 2006, ASI acquired
several regional seed companies. See Part II — Item 8 — Note 4 — Business Combinations for
further details of these acquisitions. |
| |
| (2) |
|
In second quarter 2005, Monsanto committed to a plan to sell the environmental
technologies businesses, and in fourth quarter 2005, the company sold substantially all of
these businesses. As part of the fiscal year 2004 restructuring plan, Monsanto announced plans
to exit the European breeding and seed business for wheat and barley, and to discontinue the
plant-made pharmaceuticals program. In the fourth quarter of fiscal year 2004, Monsanto
finalized the sale of assets associated with the company’s European wheat and barley business.
Accordingly, these businesses have been presented as discontinued operations in the Statements
of Consolidated Operations for all periods presented above. In the fourth quarter of fiscal
year 2006, Monsanto recorded an additional write-down of
$3 million aftertax related to the remaining
assets associated with the environmental technologies businesses. As of Aug. 31, 2006, the
remaining assets and liabilities of the environmental technologies businesses were recorded as
assets and liabilities of discontinued operations in the Statements of Consolidated Financial
Position. See Note 27 — Discontinued Operations for further details of these dispositions. |
| |
| (3) |
|
In 2002, Monsanto adopted Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets. In connection with the adoption of this new
accounting standard, Monsanto recognized a transitional goodwill impairment charge of $1.8
billion aftertax effective Jan. 1, 2002. |
| |
| (4) |
|
In 2003, Monsanto adopted SFAS No. 143, Accounting for Asset Retirement Obligations.
In connection with the adoption of this new accounting standard, Monsanto recorded a
cumulative effect of accounting change of $12 million aftertax effective Jan. 1, 2003. |
| |
| (5) |
|
In the fourth quarter of 2006, Monsanto adopted Financial Accounting Standards Board
(FASB) Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations. In
connection with the adoption of this new accounting guidance, Monsanto recorded a cumulative
effect of accounting change of $6 million aftertax. |
| |
| (6) |
|
For all periods presented, the share and per share amounts (including stock price)
reflect the effect of the two-for-one stock split (in the form of a 100 percent stock
dividend) that was completed on July 28, 2006. |
| |
| (7) |
|
Certain prior-year amounts have been reclassified to conform with the current-year presentation. |
| |
| (8) |
|
Working capital is total current assets less total current liabilities; current
ratio represents total current assets divided by total current liabilities. |
| |
| (9) |
|
Debt-to-capital is the sum of short-term and long-term debt, divided by the sum of
short-term and long-term debt and shareowners’ equity. Fluctuations in our debt-to-capital
ratio from December 31 to August 31 were affected by the seasonality of our business.
Overdrafts were reclassified from short-term debt to accounts payable to better reflect the
nature of the liabilities as book overdrafts. |
23
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
ITEM 7. 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
our 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 our 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. Approximately 43 percent of our total company sales, 37 percent of our Seeds and Genomics
segment sales, and 50 percent of our Agricultural Productivity segment sales originated from our
legal entities outside the United States during fiscal year 2006.
In second quarter 2005, we committed to a plan to sell the environmental technologies businesses,
and in fourth quarter 2005, we sold substantially all of these businesses. In 2004, we sold our
European breeding and seed business for wheat and barley. We also discontinued the plant-made
pharmaceuticals program. As a result, financial data for these businesses have
been presented as discontinued operations as outlined below. See Item 8 — Note 27 — Discontinued
Operations — for further details. The financial statements have been recast and prepared in
compliance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). Accordingly, for 2006,
2005, and 2004, the Statements of Consolidated Operations have been conformed to this presentation.
Also, under the guidance of SFAS 144, the remaining assets and liabilities of the environmental
technologies businesses have been separately presented on the Statements of Consolidated Financial
Position as of Aug. 31, 2006, and Aug. 31, 2005. The European wheat and barley business and the
plant-made pharmaceuticals program were previously reported as part of the Seeds and Genomics
segment, and the environmental technologies businesses were previously reported as part of the
Agricultural Productivity segment.
MD&A should be read in conjunction with Monsanto’s consolidated financial statements and the
accompanying notes. The notes to the consolidated financial statements referred to throughout this
MD&A are included in Part II — Item 8 — Financial Statements and Supplementary Data — of this
Report on Form 10-K. Unless otherwise indicated,
“earnings (loss) per share” and “per share” mean
diluted earnings (loss) per share.
Unless otherwise noted, all amounts and analyses
are based on continuing operations.
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 (loss),
cash flows, financial position, or comprehensive income (loss), as determined in accordance with
U.S. GAAP.
EBIT is defined as earnings (loss) before interest and taxes. Earnings (loss) is intended to mean
net income (loss) as presented in the 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
24
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
a consolidated basis. EBIT is also one of the measures used by Monsanto management to determine
resource allocations within the company. See Note 23 — Segment and Geographic Data — for a
reconciliation of EBIT to net income (loss) for fiscal years 2006, 2005, and 2004.
We also provide information regarding free cash flow, an important liquidity measure for Monsanto.
We define free cash flow as the total of net cash provided or required by operating activities and
provided or required by investing activities. We believe that free cash flow is useful to investors
and management as a measure of the ability of our business to generate cash. This cash can be used
to meet business needs and obligations, to reinvest in the company for future growth, or to return
to our shareowners through dividend payments or share repurchases. Free cash flow is also used by
management as one of the performance measures in determining incentive compensation. See the
“Financial Condition, Liquidity, and Capital Resources — Cash Flow” section of MD&A for a
reconciliation of free cash flow to net cash provided by operating activities and net cash required
by investing activities on the Statements of Consolidated Cash Flows.
Executive Summary
Consolidated Operating Results — Net sales in 2006 increased $1 billion in the 12-month
comparison. This improvement was a result of incremental sales from the Seminis Inc. vegetable and
fruit seed business (Seminis) that we acquired in March 2005, increased sales of U.S. corn seed and
traits, and increased sales of U.S. Roundup and other glyphosate-based herbicides. Net income in
2006 was $1.25 per share, compared with $0.47 per share in 2005.
The following factors affected the 12-month comparison:
2006:
| |
• |
|
We adopted SFAS No. 123 (revised 2004), Share-Based Payments (SFAS 123R) on Sept. 1,
2005. As a result, the 2006 results included incremental after-tax stock-based compensation
expense of $32 million, or $0.06 per share. See Note 17 — Stock-Based Compensation Plans
— for additional discussion. |
| |
| |
• |
|
We recorded a tax charge of $21 million, or $0.04 per share, in the fourth quarter of
2006, in conjunction with our repatriation of $437 million of foreign earnings under the
American Jobs Creation Act of 2004. |
| |
| |
• |
|
We recorded a charge of $3 million aftertax, or $0.01 per share, in 2006 associated with
a write-down to fair value on assets of discontinued businesses held for sale. |
| |
| |
• |
|
We recorded a charge of $6 million aftertax, or $0.01 per share, in 2006 for the
cumulative effect of a change in accounting principle as a result of adopting FASB
Interpretation (FIN) No. 47, Accounting for Conditional Asset
Retirement Obligations (FIN 47). |
2005:
| |
• |
|
In 2005, we wrote off acquired in-process research and development (IPR&D) of
$266 million related to acquisitions. |
| |
| |
• |
|
We recorded an after-tax charge of $175 million ($284 million pretax), or
$0.32 per share, in 2005 associated with certain liabilities in connection with the
Solutia bankruptcy (see Note 22 — Commitments and Contingencies). |
| |
| |
• |
|
We recorded a deferred tax benefit of $106 million, or $0.20 per share, in
2005 as a result of the loss incurred on the European wheat and barley business (see Note
11 — Income Taxes). Of this tax benefit, $20 million was recorded in continuing
operations, and $86 million was recorded in discontinued operations. |
Financial Condition, Liquidity, and Capital Resources — In both fiscal years 2006 and 2005, net
cash provided by operating activities was $1.7 billion. Net cash required by investing activities
was $625 million in 2006, compared with $1.7 billion in 2005. As a result, our free cash flow, as
defined in the “Overview — Non-GAAP Financial Measures” section of MD&A, was $1 billion in 2006,
compared with $70 million in 2005. We used cash for acquisitions of businesses of $258 million in
2006, compared with $1.5 billion in 2005. For a more detailed discussion of the factors affecting
the free cash flow comparison, see the “Cash Flow” section of the “Financial Condition, Liquidity, and Capital
Resources” section in this MD&A.
25
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
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 purchase of the Delta
and Pine Land Company, which is subject to antitrust clearance, Delta and Pine Land shareholder
approval, and customary closing conditions, could accelerate our strategic cotton germplasm and
traits platform modeled on our branded and licensing strategies for corn and soybeans. 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 optimizing the supply chain and
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 22), to
the extent that Solutia fails to pay, perform or discharge those liabilities. Prior to and
following its filing for bankruptcy protection, Solutia has disclaimed responsibility for some of
Solutia’s Assumed Liabilities. See Note 22 for further details. Accordingly, in first quarter 2005,
we recorded a pre-tax charge of $284 million for estimated litigation and environmental costs we
expect to incur in connection with Solutia’s bankruptcy. As of Aug. 31, 2006, the remaining
Solutia-related reserve was $210 million. We believe that this reserve represents the
estimated discounted cost that we would incur in the future in connection with these litigation and
environmental matters. However, our actual costs may be materially different from this estimate.
The degree to which we may ultimately be responsible for the particular matters reflected in the
reserve is uncertain. Further, additional litigation or environmental matters that are not
reflected in the reserve may arise in the future, and we may also assume the management of, settle,
or pay judgments or damages with respect to litigation or environmental matters in order to
mitigate contingent potential liability and protect Pharmacia and us, if Solutia refuses to do so.
Additional information about Solutia and other litigation matters and the related risks to our
business may be found in Note 22. The reserve may not reflect all potential liabilities that we may
incur in connection with Solutia’s bankruptcy and does not reflect any insurance reimbursement or
any recoveries we might receive through the bankruptcy process. We also continue to incur legal and
other expenses associated with the bankruptcy proceedings.
26
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
RESULTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 vs. |
|
2005 vs. |
| (Dollars in millions, except per share amounts) |
|
2006 |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Net Sales |
|
$ |
7,344 |
|
|
$ |
6,294 |
|
|
$ |
5,423 |
|
|
|
17 |
% |
|
|
16 |
% |
Gross Profit |
|
|
3,548 |
|
|
|
3,004 |
|
|
|
2,527 |
|
|
|
18 |
% |
|
|
19 |
% |
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
1,601 |
|
|
|
1,334 |
|
|
|
1,128 |
|
|
|
20 |
% |
|
|
18 |
% |
Bad-debt expense |
|
|
47 |
|
|
|
67 |
|
|
|
106 |
|
|
|
(30 |
)% |
|
|
(37 |
)% |
Research and development expenses |
|
|
725 |
|
|
|
588 |
|
|
|
509 |
|
|
|
23 |
% |
|
|
16 |
% |
Acquired in-process research and development (see Note 4) |
|
|
— |
|
|
|
266 |
|
|
|
— |
|
|
NM |
|
NM |
Impairment of goodwill (see Note 9) |
|
|
— |
|
|
|
— |
|
|
|
69 |
|
|
|
— |
|
|
NM |
Restructuring charges (reversals) — net |
|
|
(2 |
) |
|
|
7 |
|
|
|
112 |
|
|
|
(129 |
)% |
|
|
(94 |
)% |
|
Total Operating Expenses |
|
|
2,371 |
|
|
|
2,262 |
|
|
|
1,924 |
|
|
|
5 |
% |
|
|
18 |
% |
|
Income from Operations |
|
|
1,177 |
|
|
|
742 |
|
|
|
603 |
|
|
|
59 |
% |
|
|
23 |
% |
Interest expense |
|
|
134 |
|
|
|
115 |
|
|
|
91 |
|
|
|
17 |
% |
|
|
26 |
% |
Interest income |
|
|
(55 |
) |
|
|
(40 |
) |
|
|
(34 |
) |
|
|
38 |
% |
|
|
18 |
% |
Solutia-related expenses (see Note 22) |
|
|
29 |
|
|
|
309 |
|
|
|
58 |
|
|
NM |
|
NM |
Other expense — net |
|
|
14 |
|
|
|
79 |
|
|
|
85 |
|
|
|
(82 |
)% |
|
|
(7 |
)% |
|
Income from Continuing Operations Before Income Taxes and Minority Interest |
|
|
1,055 |
|
|
|
279 |
|
|
|
403 |
|
|
|
278 |
% |
|
|
(31 |
)% |
Income tax provision |
|
|
340 |
|
|
|
104 |
|
|
|
128 |
|
|
|
227 |
% |
|
|
(19 |
)% |
Minority interest expense |
|
|
17 |
|
|
|
18 |
|
|
|
9 |
|
|
|
(6 |
)% |
|
|
100 |
% |
|
Income from Continuing Operations |
|
|
698 |
|
|
|
157 |
|
|
|
266 |
|
|
|
345 |
% |
|
|
(41 |
)% |
Discontinued Operations (see Note 27): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations of discontinued businesses |
|
|
(5 |
) |
|
|
11 |
|
|
|
(6 |
) |
|
NM |
|
NM |
Income tax benefit |
|
|
(2 |
) |
|
|
(87 |
) |
|
|
(7 |
) |
|
NM |
|
NM |
|
Income (Loss) on Discontinued Operations |
|
|
(3 |
) |
|
|
98 |
|
|
|
1 |
|
|
NM |
|
NM |
|
Income Before Cumulative Effect of Accounting Change |
|
|
695 |
|
|
|
255 |
|
|
|
267 |
|
|
|
173 |
% |
|
|
(4 |
)% |
Cumulative Effect of a Change in Accounting Principle, Net of Tax Benefit (see Note
2) |
|
|
(6 |
) |
|
|
— |
|
|
|
— |
|
|
NM |
|
|
— |
|
|
Net Income |
|
$ |
689 |
|
|
$ |
255 |
|
|
$ |
267 |
|
|
|
170 |
% |
|
|
(4 |
)% |
|
Diluted Earnings (Loss) per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.27 |
|
|
$ |
0.29 |
|
|
$ |
0.50 |
|
|
|
338 |
% |
|
|
(42 |
)% |
Income (loss) on discontinued operations |
|
|
(0.01 |
) |
|
|
0.18 |
|
|
|
— |
|
|
NM |
|
NM |
Cumulative effect of accounting change |
|
|
(0.01 |
) |
|
|
— |
|
|
|
— |
|
|
NM |
|
|
— |
|
|
Net Income |
|
$ |
1.25 |
|
|
$ |
0.47 |
|
|
$ |
0.50 |
|
|
|
166 |
% |
|
|
(6 |
)% |
|
NM = Not Meaningful |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate (continuing operations) |
|
|
32 |
% |
|
|
37 |
% |
|
|
32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison as a Percent of Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
48 |
% |
|
|
48 |
% |
|
|
47 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses (excluding bad-debt expense) |
|
|
22 |
% |
|
|
21 |
% |
|
|
21 |
% |
|
|
|
|
|
|
|
|
Research and development expenses (excluding acquired IPR&D) |
|
|
10 |
% |
|
|
9 |
% |
|
|
9 |
% |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
32 |
% |
|
|
36 |
% |
|
|
35 |
% |
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes and minority interest expense |
|
|
14 |
% |
|
|
4 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
Net income |
|
|
9 |
% |
|
|
4 |
% |
|
|
5 |
% |
|
|
|
|
|
|
|
|
Overview of Financial Performance (2006 compared with 2005)
The following section discusses the significant components of our results of operations that
affected the comparison of fiscal year 2006 with fiscal year 2005.
27
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
Net sales increased 17 percent in 2006 from 2005. Our Seeds and Genomics segment net sales improved
24 percent, and our Agricultural Productivity segment net sales improved 9 percent. The following
table presents the percentage changes in 2006 worldwide net sales by segment compared with net
sales in 2005, including the effect that volume, price, currency and acquisitions had on these
percentage changes:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 Percentage Change in Net Sales vs. 2005 |
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of |
|
|
| |
|
Volume |
|
Price |
|
Currency |
|
Subtotal |
|
Acquisitions(1) |
|
Net Change |
| |
|
|
Seeds and Genomics
Segment |
|
|
11 |
% |
|
|
— |
|
|
|
— |
|
|
|
11 |
% |
|
|
13 |
% |
|
|
24 |
% |
Agricultural
Productivity Segment |
|
|
5 |
% |
|
|
3 |
% |
|
|
1 |
% |
|
|
9 |
% |
|
|
— |
|
|
|
9 |
% |
Total Monsanto Company |
|
|
7 |
% |
|
|
2 |
% |
|
|
1 |
% |
|
|
10 |
% |
|
|
7 |
% |
|
|
17 |
% |
|
|
|
|
| (1) |
|
See Note 4 — Business Combinations — and “Financial Condition, Liquidity, and
Capital Resources” in MD&A for details of our acquisitions in fiscal years 2006 and 2005.
Acquisitions are segregated in this presentation for one year from the acquisition date. |
For a more detailed discussion of the factors affecting the net sales comparison, see the
“Seeds and Genomics Segment” and the “Agricultural Productivity Segment” sections.
Gross profit increased 18 percent, or $544 million. Total company gross profit as a percent of net
sales increased less than 1 percentage point to 48.3 percent in 2006, driven by the increase in
sales and gross profit from the Seeds and Genomics segment. Gross profit as a percent of sales for
the Seeds and Genomics Segment remained at 61 percent. Gross profit as a percent of sales for the
Agriculture Productivity segment declined 1 percentage point to 33 percent in the 12-month
comparison. See the “Seeds and Genomics Segment” and “Agricultural Productivity Segment” sections
of MD&A for details.
Operating expenses increased 5 percent, or $109 million, in 2006 from 2005 because our increases
more than offset the $266 million IPR&D write-off in 2005. Selling, general and administrative
(SG&A) expenses increased 20 percent, and R&D expenses increased 23 percent, primarily because of
expenses of the businesses we acquired in 2005, higher staffing levels, and stock-based
compensation. In accordance with SFAS 123R, we recorded an incremental $34 million in SG&A expenses
and an incremental $12 million in R&D expenses for stock-based compensation (see Note 17 —
Stock-Based Compensation Plans). As a percent of net sales, SG&A expenses increased 1 percentage
point to 22 percent, and R&D expenses increased 1 percentage point to 10 percent in 2006.
Interest expense increased 17 percent, or $19 million in fiscal year 2006 from 2005. The increased
expense was primarily from the July 2005 $400 million long-term debt issuance. There was a full
year of interest expense in 2006 on the July 2005 debt issuance compared with less than two months
in 2005. We also incurred additional interest expense for a $251 million three-year term bank loan
completed in July 2006 (see the “Capital Resources and Liquidity” section of MD&A for a discussion
of this 2006 debt transaction).
Interest income increased 38 percent, or $15 million, in 2006 because of interest earned on higher
cash balances in Brazil and Europe.
We recorded Solutia-related expenses of $29 million in 2006 and $309 million in 2005. In the first
quarter 2005, we recorded a Solutia-related charge of $284 million pretax in anticipation of
certain litigation and environmental liabilities reverting to Pharmacia, and by extension, to
Monsanto. This charge was based on the best estimates by our management with input from our legal
and other outside advisors. We believe that this charge represented the estimated discounted cost
that we would expect to incur in connection with these litigation and environmental matters.
However, actual costs to the company may be materially different from this estimate. See Note 22 —
Commitments and Contingencies — for further details.
Other expense — net decreased $65 million to $14 million in 2006. In first quarter 2005, we
established a $15 million reserve for litigation related to our
lawn-and-garden business, which was
paid out in second quarter 2005. Net foreign-currency transaction losses decreased $15 million to
$9 million. The remaining decrease is primarily related to gains on disposals of various assets.
28
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
Income tax provision for fiscal year 2006 increased to $340 million. The effective tax rate was 32
percent, a decrease of 5 percentage points from fiscal year 2005. This difference was primarily the
result of the following items:
| |
• |
|
A tax charge of $21 million recorded in 2006, in conjunction with the repatriation of
$437 million of foreign earnings under the American Jobs Creation Act of 2004 (see
discussion in Note 11 — Income Taxes). |
| |
| |
• |
|
A tax benefit of $32 million was recorded in 2006 as a result of the conclusion of an
audit of Pharmacia for tax years 2000 to 2002 (when we were a member of Pharmacia’s
consolidated group) by the IRS and, to a lesser extent, favorable adjustments related to
various state income tax issues. |
| |
| |
• |
|
The effective tax rate for 2005 was affected by the $284 million Solutia-related charge ($175 million aftertax) . |
| |
| |
• |
|
Nondeductible acquired IPR&D charges of $266 million were recorded in 2005. |
| |
| |
• |
|
A tax benefit of $20 million was recorded in continuing operations in 2005 as a result
of the loss incurred on the European wheat and barley business (see the discontinued
operations discussion in this section and Note 11 — Income Taxes). |
| |
| |
• |
|
A favorable adjustment was recorded in 2005 resulting from the conclusion of an audit of
Monsanto’s export subsidiary by the IRS for tax years 2000-2001. |
Without these items, our effective tax rate for 2006 would have been higher than the 2005 rate,
primarily driven by a shift in our earnings mix to higher tax-rate jurisdictions.
Minority interest expense decreased $1 million to $17 million in 2006. Minority interest expense
was previously reported within Other Expense — Net in the Statements of Consolidated Operations.
It is now reported separately.
The factors noted above explain the change in income from continuing operations. In 2005, we recorded
income on discontinued operations of $98 million. As discussed in Note 11, the sale of the European
wheat and barley business in fiscal year 2004 generated a tax loss deductible in either the United
Kingdom or the United States. As of Aug. 31, 2004, a deferred tax asset had not been recorded for
the tax loss incurred in the United States because of the existence of a number of uncertainties.
These uncertainties diminished with the enactment of the American Jobs Creation Act of 2004 (AJCA)
on Oct. 22, 2004. As a result, Monsanto recorded a deferred tax benefit of $106 million, or $0.20
per share, in 2005. Of this tax benefit, $20 million was recorded in continuing operations, and the
remaining $86 million was recorded in discontinued operations. The tax benefit of $20 million
recorded in continuing operations was related to the $69 million goodwill impairment related to our
global wheat business recorded in continuing operations in 2004. Since the goodwill impairment was
recorded in continuing operations, the related tax benefit was also recorded in continuing
operations. The tax benefit of $86 million recorded in discontinued operations was primarily
related to the wheat reporting unit goodwill impairment loss at the date of adoption of SFAS 142 on
Jan. 1, 2002, which was recorded as a cumulative effect of a change in accounting principle. The
recognition of this tax benefit in the United States effectively precludes us from claiming any
U.K. benefit for the U.K. tax loss. Accordingly, the U.K. deferred tax asset of $71 million, which
had a full valuation allowance against it, was written off during first quarter 2005. Also, in
August 2006, we recorded an after-tax charge of $3 million to adjust the carrying amount of a
miscellaneous receivable of the environmental technologies businesses that we expect to collect in
fiscal year 2007.
Overview of Financial Performance (2005 compared with 2004)
The following section discusses the significant components of our results of operations that
affected the comparison of 2005 with 2004.
29
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
Net sales increased 16 percent, or $871 million, in the 12-month comparison, with 7 percent of that
growth coming from our acquisitions and 9 percent from organic growth in our core business. The net
sales improvement by our Seeds and Genomics segment of 40 percent, or $932 million, more than
offset the decline in net sales of our Agricultural Productivity segment of 2 percent, or $61
million. In 2005, net sales for the Seeds and Genomics segment represented more than half of total
company sales for the first time. The following table presents the percentage changes in 2005
worldwide net sales by segment compared with the prior year, including the effect volume, price,
foreign exchange and acquisitions had on these percentage changes:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 Percentage Change in Net Sales vs. 2004 |
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of |
|
|
| |
|
Volume |
|
Price |
|
Currency |
|
Subtotal |
|
Acquisitions |
|
Net Change |
| |
|
|
Seeds and Genomics
Segment |
|
|
11 |
% |
|
|
11 |
% |
|
|
2 |
% |
|
|
24 |
% |
|
|
16 |
% |
|
|
40 |
% |
Agricultural
Productivity Segment |
|
|
0 |
% |
|
|
(5 |
)% |
|
|
3 |
% |
|
|
(2 |
)% |
|
|
— |
|
|
|
(2 |
)% |
Total Monsanto Company |
|
|
5 |
% |
|
|
1 |
% |
|
|
3 |
% |
|
|
9 |
% |
|
|
7 |
% |
|
|
16 |
% |
|
For a more detailed discussion of the factors affecting the net sales comparison,
see the
“Seeds and Genomics Segment” and the “Agricultural Productivity Segment” sections of MD&A.
Gross profit increased 19 percent in the 12-month comparison. Total company gross profit as a
percent of sales improved 1 percentage point to 48 percent, which was attributable to the Seeds and
Genomics segment. In fiscal year 2005, the Seeds and Genomics segment represented 52 percent of
total company net sales and 66 percent of total company gross profit. Gross profit as a percent of
sales for the Agricultural Productivity segment declined 3 percentage points to 34 percent in the
12-month comparison. See the “Seeds and Genomics Segment” and “Agricultural Productivity Segment”
sections of MD&A for details.
Operating expenses increased 18 percent, or $338 million, in fiscal year 2005 from the prior-year
comparable period, primarily because of the $266 million IPR&D write-off and higher SG&A expenses
associated with the acquired businesses. Somewhat offsetting these increases were higher
restructuring charges, the $69 million pretax global wheat goodwill impairment and higher bad-debt
expense in 2004.
SG&A expenses increased 18 percent, or $206 million, in the 12-month comparison. The largest
component was SG&A expenses for the acquired businesses. Also, we recorded higher incentive
compensation expense, which was commensurate with our improved operational results this year. The
European cost savings related to prior-year restructuring actions were more than offset by the
effect of exchange rates on European SG&A expenses in 2005. As a percent of net sales, SG&A
expenses were flat at 21 percent in both fiscal years 2005 and 2004.
Bad-debt expense decreased $39 million, or 37 percent, in the 12-month comparison. In fiscal year
2004, we continued to restructure our Argentine business model and to monitor unfavorable economic
and business conditions, which led to increased credit exposure. As a result, in 2004 after
performing a thorough review of our past-due trade receivables, we recorded higher bad-debt expense
for exposures related to estimated uncollectible Argentine trade receivables. In 2005, bad-debt
expense continued to be concentrated in our Latin American business
(see the “Capital Resources and Liquidity” section of
MD&A for a discussion of our credit exposure in Brazil as a result of current economic conditions).
R&D expenses increased 16 percent, or $79 million, in fiscal year 2005 from the comparable period a
year ago. R&D expenses increased because of spending incurred by the acquired businesses and higher
amortization expense related to the acquired businesses. Also, we incurred higher employee-related
costs in 2005. As a percent of net sales, R&D expenses were 9 percent in both fiscal years 2005 and
2004.
In first quarter 2005, we recorded charges of $12 million for the write-off of acquired IPR&D from
the Advanta and Channel Bio acquisitions. We wrote off acquired IPR&D of $254 million in third
quarter 2005 for the Seminis, Stoneville and NC+ Hybrids acquisitions.
Restructuring charges — net were recorded in both 12-month periods. We recorded $7 million of
restructuring charges in 2005 to complete the restructuring actions under our fiscal year 2004
restructuring plan. In 2004, we began recording charges
30
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
related to our fiscal year 2004 restructuring plan. We recorded $118 million under this plan,
offset by $6 million of restructuring reversals related to prior-year plans. For further
discussion, see the “Restructuring” section of MD&A.
Interest expense increased 26 percent, or $24 million, in the 12-month comparison, primarily
because of interest incurred on commercial paper borrowings to fund the Seminis and Stoneville
acquisitions. We incurred additional interest expense for the July 2005 $400 million long-term debt
issuance, and we incurred transaction expenses for a debt exchange in August 2005 that were
recorded to interest expense (see the “Capital Resources and Liquidity” section of MD&A for a
discussion of these 2005 debt transactions). In 2005, interest expense of $4 million was recognized
for the accretion of the discount on the Solutia-related reserve established in first quarter 2005.
Interest incurred on liabilities unrelated to debt was somewhat offset by lower interest expense on
Brazilian debt, which matured in December 2004.
Interest income increased by $6 million in 2005 because of interest earned on larger overnight cash
deposits and short-term investments and higher interest rates on overnight deposits. Interest
income increased $2 million in 2005 from the accretion of the discount related to a PCB insurance
receivable.
We recorded Solutia-related expenses of $309 million in 2005 and $58 million in the comparable
prior year. In first quarter 2005, we recorded a Solutia-related charge of $284 million pretax as
discussed in the 2006 overview above. Also, in 2005, we recorded $25 million of legal and other
expenses related to the Solutia bankruptcy. In 2004, we recorded $58 million for the advancement of
funds to pay for Solutia’s Assumed Liabilities in light of Solutia’s refusal to pay for those
liabilities and for legal and other expenses related to the Solutia bankruptcy. See Note 22 —
Commitments and Contingencies — for further details and for information regarding Solutia’s
proposed plan of reorganization.
Other expense — net decreased by $6 million in 2005. In first quarter 2005, we established a $15
million reserve for litigation, which was paid out in 2005. Net foreign-currency transaction losses
decreased by $5 million, to $24 million. Our equity affiliate expense, primarily related to our
Renessen LLC joint venture, decreased by $5 million, to $31 million, in 2005 because of lower
payroll costs as a result of a prior-year reorganization and improved cost management. We also had
lower hedging losses of $2 million. See Note 24 for further details of the fluctuation in other
expense — net.
Income tax provision for 2005 decreased 19 percent, to $104 million. The effective tax rate for
2005 was 37 percent, an increase of 5 percentage points
from 2004. This difference was the result of the following items:
| |
• |
|
Nondeductible IPR&D charges of $266 million for acquisitions were recorded in 2005. |
| |
| |
• |
|
The effective tax rate for 2005 was affected by the $284 million Solutia-related charge ($175 million aftertax). |
| |
| |
• |
|
A tax benefit of $20 million was recorded in continuing operations in 2005 as a result of
the loss incurred on the European wheat and barley business (see the discontinued operations
discussion in this section and Note 11). |
| |
| |
• |
|
2005 included a favorable adjustment resulting from the conclusion of an audit of
Monsanto’s export subsidiary by the IRS for tax years 2000-2001. |
| |
| |
• |
|
The majority of the goodwill impairment of $64 million aftertax in fiscal year 2004 was
not deductible for tax purposes. |
| |
| |
• |
|
Fiscal year 2004 included two adjustments for valuation allowances against our deferred
tax assets. We established a valuation allowance of $107 million in Argentina, and we
reversed the previously existing valuation allowance of $90 million in Brazil. |
| |
| |
• |
|
Fiscal year 2004 included a favorable adjustment resulting from a settlement with the IRS
on a number of issues. |
Without these items, our 2005 effective tax rate would have been slightly higher than the 2004
rate.
Minority interest expense increased by $9 million in the 12-month comparison because certain of our
subsidiaries in India had increased sales of cotton traits. Minority interest expense was
previously reported within other expense — net in the Statements
of Consolidated Operations. It is
now reported separately.
The factors above explain the change in income from continuing operations. In 2005, we recorded
income on discontinued operations of $98 million as discussed in the 2006 overview above.
31
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
SEEDS AND GENOMICS SEGMENT
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
|
% Change
|
| (Dollars in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 vs. 2005 |
|
2005 vs. 2004 |
|
|
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn seed and traits |
|
$ |
1,793 |
|
|
$ |
1,494 |
|
|
$ |
1,145 |
|
|
|
20 |
% |
|
|
30 |
% |
Soybean seed and traits |
|
|
960 |
|
|
|
889 |
|
|
|
699 |
|
|
|
8 |
% |
|
|
27 |
% |
Vegetable and fruit seed |
|
|
569 |
|
|
|
226 |
|
|
|
— |
|
|
NM |
|
NM |
All other crops seeds and traits |
|
|
706 |
|
|
|
643 |
|
|
|
476 |
|
|
|
10 |
% |
|
|
35 |
% |
|
|
|
Total Net Sales |
|
$ |
4,028 |
|
|
$ |
3,252 |
|
|
$ |
2,320 |
|
|
|
24 |
% |
|
|
40 |
% |
|
|
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn seed and traits |
|
$ |
1,019 |
|
|
$ |
825 |
|
|
$ |
638 |
|
|
|
24 |
% |
|
|
29 |
% |
Soybean seed and traits |
|
|
667 |
|
|
|
613 |
|
|
|
429 |
|
|
|
9 |
% |
|
|
43 |
% |
Vegetable and fruit seed |
|
|
296 |
|
|
|
113 |
|
|
|
— |
|
|
NM |
|
NM |
All other crops seeds and traits |
|
|
480 |
|
|
|
431 |
|
|
|
302 |
|
|
|
11 |
% |
|
|
43 |
% |
|
|
|
Total Gross Profit(1) |
|
$ |
2,462 |
|
|
$ |
1,982 |
|
|
$ |
1,369 |
|
|
|
24 |
% |
|
|
45 |
% |
|
|
|
EBIT(2) |
|
$ |
794 |
|
|
$ |
374 |
|
|
$ |
196 |
|
|
|
112 |
% |
|
|
91 |
% |
|
|
|
|
|
|
| |
|
NM = Not Meaningful |
| |
| (1) |
|
Includes any net restructuring charges for the segment that were recorded within
cost of goods sold. See Note 5 — Restructuring and “Restructuring” in MD&A for further
details. |
| |
| (2) |
|
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
23 — Segment and Geographic Data and the “Overview — Non-GAAP Financial Measures” section of
MD&A for further details. |
Seeds and Genomics Financial Performance for Fiscal Year 2006
Net sales of corn seed and traits increased 20 percent, or $299 million, in 2006, primarily because
of an increase in sales of U.S. corn seed and traits. In 2006, our U.S. branded corn seed and
traits sales volume and sales mix improved because of stronger customer demand. Our U.S. national
branded corn business increased to 19 share points in 2006, a 3 percentage point improvement
compared with 2005 results. Increased trait penetration and growth in stacked traits also favorably
affected our licensed and ASI channels in the United States. Net sales of U.S. corn seed and traits
increased because of revenues from recently-acquired ASI subsidiaries, which were not part of the
company’s operations in 2005.
Soybean seed and traits net sales increased 8 percent, or $71 million, in 2006. This sales increase
was driven by an increase in the average net selling price of Roundup Ready soybean traits in the
United States stemming from lower sales discounts. Net sales of U.S. soybean seed and traits
improved because of revenues from recently-acquired ASI subsidiaries, which were not part of the
company’s operations in 2005. Further, net sales of soybean traits increased in Brazil because of
an increase in the volume of the grain-based payment system related to saved and replanted Roundup
Ready soybeans.
In 2006, vegetable and fruit seed net sales increased $343 million because of our March 2005
acquisition of Seminis. The full-year results of Seminis are included in 2006. We owned Seminis for
approximately five months in 2005.
All other crops seeds and traits net sales increased 10 percent, or $63 million, in 2006, primarily
because of higher cotton trait volume in the United States, stemming from improved mix consisting
of more stacked traits and an increase in total cotton acres. Net sales of cotton seed and traits
also improved because of revenues from the acquisition of Stoneville on April 5, 2005. The results
of Stoneville are included for the full 12 months ended Aug. 31, 2006, compared with a partial year
in 2005. Somewhat offsetting these increases in the United States was an increase in sales
discounts stemming from the drought in Texas. Other contributing factors to the other crops seeds
and traits net sales increase were higher cotton seed and traits sales in Australia because of
increased cotton trait penetration and an improvement in our cotton sales mix to a higher
percentage of the Bollgard II with Roundup Ready cotton stacked offering.
Gross profit as a percent of sales for this segment increased slightly, to more than 61 percent.
This improvement was driven primarily by increased penetration of higher margin traits,
particularly in U.S. corn. This positive factor was partially offset by the effect on cost of goods
sold associated with the inventory step-up for the Seminis acquisition, which was $50 million in
2006 and $19 million in 2005. EBIT for the Seeds and Genomics segment increased $420 million to
$794 million in 2006. The IPR&D write offs that resulted from the Seminis, Stoneville, NC+ Hybrid,
Channel Bio and Advanta acquisitions negatively affected EBIT by $266 million in 2005. In the
12-month comparison, incremental SG&A and R&D expenses related to the 2005 and 2006 acquisitions
partially offset the gross profit improvement.
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
Seeds and Genomics Financial Performance for Fiscal Year 2005
Net sales in the 12-month comparison increased 40 percent, with 16 percent of that growth coming
from our acquisitions and 24 percent from organic growth in our core business. In fiscal year 2005,
we formed ASI, which acquired Channel Bio and NC+ Hybrids, and we acquired Advanta, Seminis and
Stoneville, all of which were added to the results of the Seeds and Genomics segment. See the
“Capital Resources and Liquidity” section of MD&A for more details on our acquisitions. In the 12-month comparison, 10 percent of
the 16 percent sales growth from acquisitions was contributed by our Seminis vegetable and fruit
seed business.
Net sales of corn seed and traits increased 30 percent, or $349 million, in the 12-month
comparison. This sales improvement was fueled by growth in our corn seed business globally, a price
increase in our Roundup Ready corn traits and a greater percentage of stacked traits in the United
States, and the creation of a third channel to the U.S. corn market through ASI. Sales volume and,
to a lesser extent, average net selling prices increased for our U.S. branded corn seed. Our U.S.
branded corn business increased to 16 share points in 2005, a 2 percentage point improvement
compared with 2004 results. The average net selling price for our U.S. branded corn seed increased
because of an improved product mix, and because a higher percentage of sales had seed treatments,
which command higher selling prices. To a lesser extent, we experienced corn seed sales
improvements in other world areas such as the Europe-Africa region, Brazil and Mexico in the
12-month comparison. Additionally, both branded and licensed corn traits in the United States
increased because of a 2005 increase in Roundup Ready corn trait pricing and a favorable product
mix as a result of new trait combinations and growth in stacked traits. Sales volume improvements
in our U.S. corn traits were driven by increased penetration and the market share gain in our
branded corn seed business.
Soybean seed and trait net sales increased 27 percent, or $190 million, in 2005 compared with 2004.
The primary drivers of the sales increase were the U.S. 2005 price increase for Roundup Ready
soybean traits, which resulted in both higher trait royalties from licensees and higher branded
trait revenues and, to a lesser extent, ASI’s acquisitions of Channel Bio and NC+ Hybrids. Gross
profit as a percent of sales for soybean seed and traits improved 8 percentage points to 69 percent
in the 12-month comparison, primarily because of the U.S. Roundup Ready soybean trait price
increase.
All other crops seeds and traits net sales increased 35 percent, or $167 million, in 2005 compared
with 2004, primarily because of growth in our cotton traits in Australia, India and the United
States and, to a lesser extent, the Stoneville and Advanta acquisitions. In the 12-month Australian
comparison, the market penetration of our cotton traits doubled, 2005 cotton hectares planted
increased substantially compared with 2004 when drought and the related lack of available water
lowered hectares planted, and we increased the price of our Bollgard II cotton traits in 2005.
Prior to Bollgard II cotton approval, the Australian government had restricted cotton plantings
with a single Bt gene trait to a maximum 30 percent of the country’s total cotton plantings. The
combination of removing this cap on biotechnology cotton plantings, increased farmer experience and
acceptance of our Bollgard II cotton traits, an increased number of hectares planted, and a larger
product supply in 2005 resulted in the increased cotton trait penetration. Sales of Bollgard traits
in India improved in 2005 because of a significant increase in planted trait acres, increased
penetration and new cotton hybrids. Increased acreage and penetration resulted from continued
farmer experience and acceptance of our cotton traits. Sales of U.S. cotton traits increased
because of a 2005 price increase for Roundup Ready cotton traits and an improved mix consisting of
more stacked traits.
EBIT for the Seeds and Genomics segment increased 91 percent in the 12-month comparison. The sales
increases and associated gross profit improvements discussed in this section resulted in $613
million higher gross profit in 2005, which contributed significantly toward the EBIT improvement.
Gross profit as a percent of sales improved 2 percentage points, to 61 percent, in the 12-month
comparison. This improvement was primarily driven by the 2005 price increases for our Roundup Ready
traits in the United States and increased trait penetration and growth of stacked traits,
particularly in U.S. corn. The effect on cost of goods sold associated with inventory step-up was
$35 million for our 2005 acquisitions, which negatively affected gross profit as a percent of
sales. Total operating expenses increased by $443 million, primarily because of the $266 million
write-off of acquired IPR&D and, to a lesser extent, higher SG&A and R&D expenses related to the
acquired businesses, and higher employee-related expenses in our R&D organization. Operating
expenses were lower in 2005 because of the $69 million goodwill impairment and higher restructuring
expenses recorded in 2004.
33
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
AGRICULTURAL PRODUCTIVITY SEGMENT
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
|
% Change
|
| (Dollars in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 vs. 2005 |
|
2005 vs. 2004 |
|
|
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roundup and other glyphosate-based herbicides |
|
$ |
2,262 |
|
|
$ |
2,049 |
|
|
$ |
2,005 |
|
|
|
10 |
% |
|
|
2 |
% |
All other agricultural productivity products |
|
|
1,054 |
|
|
|
993 |
|
|
|
1,098 |
|
|
|
6 |
% |
|
|
(10 |
)% |
|
|
|
Total Net Sales |
|
$ |
3,316 |
|
|
$ |
3,042 |
|
|
$ |
3,103 |
|
|
|
9 |
% |
|
|
(2 |
)% |
|
|
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roundup and other glyphosate-based herbicides |
|
$ |
648 |
|
|
$ |
637 |
|
|
$ |
703 |
|
|
|
2 |
% |
|
|
(9 |
)% |
All other agricultural productivity products |
|
|
438 |
|
|
|
385 |
|
|
|
455 |
|
|
|
14 |
% |
|
|
(15 |
)% |
|
|
|
Total Gross Profit(1) |
|
$ |
1,086 |
|
|
$ |
1,022 |
|
|
$ |
1,158 |
|
|
|
6 |
% |
|
|
(12 |
)% |
|
|
|
EBIT(2) |
|
$ |
301 |
|
|
$ |
(27 |
) |
|
$ |
249 |
|
|
NM |
|
|
(111 |
)% |
|
|
|
|
|
|
| NM |
= |
Not Meaningful |
| |
| (1) |
|
Includes any net restructuring charges for the segment that were recorded within
cost of goods sold. See Note 5 — Restructuring and “Restructuring” in MD&A for further
details. |
| |
| (2) |
|
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
23 — Segment and Geographic Data and the “Overview — Non-GAAP Financial Measures” section of
MD&A for further details. |
Agricultural Productivity Financial Performance for Fiscal Year 2006
Net sales of Roundup and other glyphosate-based herbicides increased 10 percent, or $213 million,
in 2006. In the 12-month comparison, sales volumes of Roundup herbicides increased in the United
States and Argentina, but were partially offset by declines in Brazil.
In 2005, we made logistical changes that aligned inventory levels of Roundup herbicides in the
United States closer to market demand, which resulted in lower sales volumes in 2005. We continue
to refine the supply chain to improve our working capital. As a result of these 2005 actions, the
sales volume of U.S. Roundup herbicides increased in 2006. In addition, the sales volume of Roundup
and other glyphosate-based herbicides increased in the United States because of the increase in Roundup Ready corn
acres.
In the 12-month comparison, the Argentine sales volume of Roundup herbicides increased primarily
because of a successful October 2005 launch of the Roundup Ultramax brand and greater acceptance of
lower-tiered brands. A change in distribution strategy also contributed to the increase. In
Argentina, we previously sold our crop protection products primarily through distributors. In
fiscal year 2004, we changed our Argentine distribution strategy to sell directly to growers. Our
sales were lower in 2005 than in 2006, primarily because Argentine distributors still had some
of our products on hand for sale in 2005.
Sales of Roundup herbicides in Brazil decreased in the 12-month comparison. The average net selling
price was lower in 2006 because of price decreases in response to competitive conditions. These
decreases were partially offset by the positive effect from the strengthening of the Brazilian real
compared with the U.S. dollar. Sales volume of Roundup and other glyphosate-based herbicides in
Brazil decreased because of competitive conditions and because lower commodity prices and the
strength of the Brazilian real had an adverse effect on customer liquidity.
Sales of all other agricultural productivity products increased 6 percent, or $61 million, in the
12-month comparison. In 2005, we made logistical changes that aligned inventory levels of
acetanilide-based herbicides in the United States closer to market demand, which resulted in lower
sales volumes in 2005. We continue to refine the supply chain to improve our working capital. As a
result of these 2005 actions, the sales volume of U.S. acetanilide-based herbicides increased in
2006. In the 12-month comparison, the average net selling price of our U.S. acetanilide-based
herbicides increased as a result of lower sales discounts. Sales of our Posilac product increased
because we were able to increase the number of finished doses allocated among our customers. See
the “Outlook — Agricultural Productivity” section in MD&A for our Posilac outlook.
Gross profit as a percent of sales declined 1 percentage point for the Agricultural Productivity
segment to 33 percent in 2006. A key contributor to this decline was higher cost of goods sold for
herbicides because of price increases for certain raw materials and energy required for herbicide
production. During 2006, we established a reserve for certain value-added tax credits in Brazil
because the probability of realization of these assets was determined to be unlikely. Also, as a
percent of net sales, Posilac gross profit declined in the 12-month comparison because of increased
cost of goods sold primarily driven by
34
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
actions implemented to further reduce bulk powder production to better manage working capital. A
favorable mix and a price increase for our U.S. acetanilide-based herbicides, coupled with a 2005
portfolio rationalization of other selective herbicides in Argentina, offset these factors. EBIT
for the Agricultural Productivity segment was $301 million in 2006 compared to a loss of $27
million in the prior year. In 2005, the largest driver of the EBIT loss was the $284 million
Solutia-related charge. Other key contributors to the EBIT change were higher sales and gross
profit.
Agricultural Productivity Financial Performance for Fiscal Year 2005
Net sales of Roundup and other glyphosate-based herbicides increased 2 percent, or $44 million, in
the 12-month comparison. Our sales volume of Roundup and other glyphosate-based herbicides
increased 3 percent. The average net selling price was favorable in most world areas outside the
United States. In fiscal year 2005, the supply of generic glyphosate from China continued to grow
somewhat, but because of major energy and raw material shortages, it was generally supplied at
higher prices. The tight supply and higher Chinese prices provided greater pricing flexibility
outside of the United States to everyone in the industry.
We experienced the largest sales increases of Roundup and other glyphosate-based herbicides in
Europe and Brazil, and to global supply customers. In the 12-month comparison, sales of Roundup and
other glyphosate-based herbicides improved throughout most of the European region in which we
operate. The most significant drivers were favorable foreign exchange rates, favorable weather
conditions most notably in France in first quarter 2005, and higher volumes of our non-branded
glyphosate-based herbicides. The favorable effect of the exchange rate for the Brazilian real was
the largest contributor to the Roundup herbicide sales increase in Brazil. To a lesser extent, in
the 12-month Brazilian net sales comparison, an increase in Roundup herbicides sales volume because
of overall market growth in the glyphosate market driven by increased soybean acreage and increased
soybean pre-harvest application was somewhat offset by a price reduction to our Roundup herbicides.
Sales to our global supply customers also increased in the 12-month comparison because of higher
volume and higher average net selling prices attributable to several supply customers.
A sales decline in the United States somewhat offset the sales increases noted above. In fourth
quarter 2005, we introduced new marketing programs to U.S. customers, which resulted in increased
sales discounts in the 12-month comparison. Also, in fourth quarter 2005, we had an opportunity for
additional working capital reductions by decreasing distribution channel inventories related to our
U.S. branded glyphosate herbicides to optimize our working capital and adjust to current market
conditions. These working capital reductions resulted in lower year-over-year sales and lower trade
receivables. As of Aug. 31, 2005, branded glyphosate herbicide inventories in the U.S. distribution
channel were down significantly compared with those as of Aug. 31, 2004, and they included a
similar mix of glyphosate products compared with Aug. 31, 2004. Further, the average net selling
price of our U.S. branded glyphosate herbicides decreased as a result of a shift of sales volume to
our lower-priced branded and non-branded products and, to a lesser extent, a price decrease taken
in August 2004 for certain mid-tier branded products. The U.S. market for Roundup herbicides
continued to move from our high-tier Roundup WeatherMAX product to our mid-tier Roundup Original
MAX product.
Sales of all other agricultural productivity products decreased 10 percent, or $105 million, which
was primarily attributable to lower sales of acetanilide-based herbicides and other selective
herbicides. Sales of our U.S. acetanilide-based herbicides decreased because of reductions in
working capital and changes to our marketing approach (changes similar to those discussed for U.S.
branded glyphosate herbicides in this section), a decline in the total market size and market share
loss. Other selective herbicide sales also declined, primarily because of portfolio rationalization
in Argentina.
These declines were somewhat mitigated by growth in our lawn-and-garden herbicide products. Sales
of our lawn-and-garden herbicides in the United States improved in the 12-month comparison,
primarily because of the introduction of the Roundup Extended Control formulation and overall
market growth. Lawn-and-garden herbicide sales also improved in Europe because of the favorable
effect of foreign exchange rates.
Gross profit as a percent of sales declined 3 percentage points, to 34 percent, in 2005, because of
new marketing programs, and because of working capital changes in our U.S. branded glyphosate
herbicide and U.S. acetanilide-based herbicide businesses. To a lesser extent, the mix shift and price decrease for certain mid-tier products in our
U.S. branded glyphosate business negatively affected gross profit as a percent of sales. As a
percent of sales, Posilac gross profit declined from 65 percent in 2004 to 38 percent in 2005
because of increased cost of goods sold, primarily driven by actions implemented to reduce bulk
powder production to better manage working capital. In 2005, we also recorded an impairment charge
of $23 million in cost of goods sold stemming from the closure of the Sterling Chemical
35
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
Inc. acrylonitrile (AN) facility, from which we had previously used a by-product for the production
of a raw material for Roundup herbicides.
EBIT for this segment decreased $276 million in the 12-month comparison. The largest drivers were
the $284 million Solutia-related charge recorded in 2005 and unfavorable gross profit as a percent
of sales (described above). The decrease was somewhat offset by lower operating expenses of $105
million, primarily because of lower restructuring expenses and Argentine bad-debt expense in 2005.
RESTRUCTURING
Our results include restructuring activities. See Note 5 — Restructuring — for further details.
Restructuring activity was recorded in the Statements of Consolidated Operations as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Year Ended Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2004 |
|
Cost of Goods Sold(1,2) |
|
$ |
— |
|
|
$ |
(1 |
) |
|
$ |
35 |
|
Impairment of Goodwill |
|
|
— |
|
|
|
— |
|
|
|
69 |
|
Restructuring Charges (Reversals) — Net(1,2) |
|
|
(2 |
) |
|
|
7 |
|
|
|
112 |
|
|
Income (Loss) from Continuing Operations Before Income Taxes |
|
|
2 |
|
|
|
(6 |
) |
|
|
(216 |
) |
Income Tax Provision (Benefit)(3) |
|
|
1 |
|
|
|
(20 |
) |
|
|
(54 |
) |
|
Income (Loss) from Continuing Operations |
|
|
1 |
|
|
|
14 |
|
|
|
(162 |
) |
Loss from Operations of Discontinued Businesses
(4) |
|
|
— |
|
|
|
— |
|
|
|
(11 |
) |
Income Tax Benefit |
|
|
— |
|
|
|
— |
|
|
|
(9 |
) |
|
Loss on Discontinued Operations |
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
Net Income (Loss) |
|
$ |
1 |
|
|
$ |
14 |
|
|
$ |
(164 |
) |
|
|
|
|
| (1) |
|
The $2 million of restructuring reversals in fiscal year 2006 included $1 million in
the Seeds and Genomics segment and $1 million in the Agricultural Productivity segment. The $6
million of restructuring charges in fiscal year 2005 included $7 million in Seeds and Genomics
offset by reversals of $1 million in Agricultural Productivity. In fiscal year 2004, the $35
million of restructuring charges recorded in cost of goods sold was split $9 million in Seeds
and Genomics and $26 million in Agricultural Productivity, and the $112 million recorded in
restructuring charges — net was split $40 million in Seeds and Genomics and $72 million in
Agricultural Productivity. |
| |
| (2) |
|
In fiscal year 2004, restructuring activity included reversals related to prior
plans of $7 million, of which $1 million was recorded in cost of goods sold and $6 million was
recorded in restructuring charges — net. |
| |
| (3) |
|
The $20 million income tax benefit in fiscal year 2005 was related to tax losses
incurred on the sale of the European wheat and barley business. See below for further
discussion. |
| |
| (4) |
|
Fiscal year 2004 contained restructuring charges related to discontinued businesses
(see Note 27 — Discontinued Operations). The fiscal year 2004 restructuring charges recorded
in discontinued operations were related to the European wheat and barley business (see the
next table in this section for more details). |
Fiscal Year 2004 Restructuring Plan
In October 2003, we announced plans to continue to reduce costs primarily associated with our
agricultural chemistry business as that segment matures globally. Total restructuring actions
approved under the fiscal year 2004 restructuring plan were estimated to be $289 million pretax.
These plans included: (1) reducing costs associated with the company’s Roundup herbicide business;
(2) exiting the European breeding and seed business for wheat and barley; and (3) discontinuing the
plant-made pharmaceuticals program. In fiscal year 2004, total restructuring charges related to
these actions were $165 million pretax ($105 million aftertax). Additionally, the approved plan
included the impairment of goodwill in the global wheat business of $69 million pretax ($64 million
aftertax; see Note 9 — Goodwill and Other Intangible Assets). In fiscal year 2005, we incurred
charges of $6 million pretax to complete the restructuring actions under this plan, and in fiscal
year 2006, restructuring reversals of $2 million pretax were recorded.
In first quarter 2005, we recorded a deferred tax benefit of $106 million, of which $20 million was
recorded in continuing operations and the remaining $86 million was recorded in discontinued
operations. The $20 million tax benefit recorded in continuing operations was related to the
impairment of goodwill in the global wheat business as part of the fiscal year 2004 restructuring
plan. As such, the benefit amount recorded in continuing operations is included in the table above.
See Note 11 — Income Taxes — and Note 27 — Discontinued Operations — for further discussion of
the $86 million tax benefit recorded in discontinued operations.
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
The following table displays the cumulative pre-tax charges incurred by segment under the fiscal
year 2004 restructuring plan (before restructuring reversals related to prior year plans of $7
million). Work force reduction and facility closure charges were cash charges. Asset impairments
were non-cash charges.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Work
Force |
|
Facility |
|
Asset |
|
|
| (Dollars in millions) |
|
Reductions |
|
Closures |
|
Impairments |
|
Total |
|
|
|
|
|
|
|
Continuing Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seeds and Genomics |
|
$ |
26 |
|
|
$ |
— |
|
|
$ |
30 |
|
|
$ |
56 |
|
Agricultural Productivity |
|
|
70 |
|
|
|
5 |
|
|
|
27 |
|
|
|
102 |
|
|
Total Continuing Operations |
|
|
96 |
|
|
|
5 |
|
|
|
57 |
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seeds and Genomics |
|
|
6 |
|
|
|
3 |
|
|
|
2 |
|
|
|
11 |
|
Agricultural Productivity |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total Discontinued Operations |
|
|
6 |
|
|
|
3 |
|
|
|
2 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seeds and Genomics |
|
|
32 |
|
|
|
3 |
|
|
|
32 |
|
|
|
67 |
|
Agricultural Productivity |
|
|
70 |
|
|
|
5 |
|
|
|
27 |
|
|
|
102 |
|
|
Total |
|
$ |
102 |
|
|
$ |
8 |
|
|
$ |
59 |
|
|
$ |
169 |
|
|
Pre-tax restructuring charges of $102 million were recorded related to work force reductions.
Work force reductions in continuing operations of $96 million were primarily in the areas of
downsizing the regional structure in Europe, and in sales and
marketing, manufacturing, R&D and information technology in the United States. Work force reduction
charges of $6 million included in discontinued operations were related to employees of the
plant-made pharmaceuticals program, as well as incremental benefit plan costs for employees of the
European wheat and barley business.
Facility closure charges of $5 million in continuing operations related to the closure of an office
building in Europe, and the shutdown of production lines and disposal of discontinued agricultural
chemical products in the United States. Facility closure charges of $3 million were also recorded
in discontinued operations related to shutdown expenses from the exit of the plant-made
pharmaceuticals site.
Asset impairments in continuing operations of $57 million included $33 million recorded in cost of
goods sold and the remainder in restructuring charges — net. Property, plant and equipment
impairments of $20 million were recorded in the United States, Canada and Asia for the shutdown of
production lines and disposal of equipment, and in Brazil for impairment of computer systems to be
consolidated with a global system. Inventory impairments of $13 million were also recorded related
to discontinued agricultural chemical products and seed hybrids in Argentina, Brazil and Latin
America; discontinued agricultural chemical products in the United States and Asia; and disposal of
inventory at closed production sites in Canada. Asset impairments in restructuring charges — net
of $24 million included $18 million related to office closures and asset sales in the United States
and South Africa, $2 million for the closure of a technology facility in Canada, and $2 million for
the disposal of assets in Asia. Discontinued operations asset impairments of $2 million consisted
primarily of property, plant and equipment impairments associated with the plant-made
pharmaceuticals program.
As of Aug. 31, 2005, the remaining restructuring liability was $4 million, which was related to
work force reductions. During fiscal year 2006, liabilities of $2 million were reversed, primarily
because severance and relocation costs in the United States were lower than originally estimated,
and the remaining liability was substantially depleted.
The company’s written human resource policies are indicative of an ongoing benefit arrangement in
respect to severance packages and are therefore accounted for in accordance with SFAS No. 88,
Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, which addresses the accounting for other employee benefits.
The actions relating to this restructuring plan resulted in after-tax savings of approximately $85
million in both 2006 and 2005 and $40 million in 2004, and are expected to produce continuing
savings thereafter.
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Working Capital and
Financial Condition
| |
|
|
|
|
|
|
|
|
|
| |
|
As of Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
Cash and Cash Equivalents |
|
$ |
1,460 |
|
|
$ |
525 |
|
Short-Term Investments |
|
|
22 |
|
|
|
150 |
|
Trade Receivables — Net |
|
|
1,455 |
|
|
|
1,473 |
|
Inventories |
|
|
1,688 |
|
|
|
1,664 |
|
Other Current
Assets(1) |
|
|
836 |
|
|
|
832 |
|
|
Total Current Assets |
|
$ |
5,461 |
|
|
$ |
4,644 |
|
|
Short-Term Debt |
|
$ |
28 |
|
|
$ |
126 |
|
Accounts Payable |
|
|
514 |
|
|
|
525 |
|
Accrued Liabilities(2) |
|
|
1,737 |
|
|
|
1,508 |
|
|
Total Current Liabilities |
|
$ |
2,279 |
|
|
$ |
2,159 |
|
|
Working Capital(3) |
|
$ |
3,182 |
|
|
$ |
2,485 |
|
Current Ratio(3) |
|
|
2.40:1 |
|
|
|
2.15:1 |
|
|
|
|
|
| (1) |
|
Includes miscellaneous receivables, current deferred tax assets, assets of
discontinued operations and other current assets. |
| |
| (2) |
|
Includes income taxes payable, accrued compensation and benefits, accrued marketing
programs, 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. |
Working capital increased $697 million between Aug. 31, 2005, and Aug. 31, 2006, primarily
because cash and cash equivalents increased $935 million. The $1.7 billion of cash provided by
operating activities was somewhat offset by the cash required by investing and financing
activities. For a more detailed discussion of the factors affecting the cash flow comparison, see
the “Cash Flow” section in this section of MD&A.
This working capital increase was partially offset primarily because of the following factors:
| |
• |
|
We decreased our position in short-term investments by $128 million as of Aug. 31, 2006, to $22 million. |
| |
| |
• |
|
Accrued liabilities increased $229 million primarily due to higher activity
levels in 2006 stemming from the increase in sales. In addition, deferred revenue
increased related to certain customer prepayments. Our accrued marketing program
liabilities increased because of increased sales and the drought in Texas. These
increases were somewhat offset by the timing of payments which occurred earlier in 2006
than in 2005. |
Backlog: Inventories of finished goods, goods in process, and raw materials and supplies are
maintained to meet customer requirements and our scheduled production. Consistent with the nature
of the seed industry, we generally produce in one growing season the seed inventories we expect to
sell in the following season. In general, we do not manufacture our products against a backlog of
firm orders; production is geared primarily to projections of expected demand.
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 $286 million in 2006, $236 million in 2005 and
$255 million in 2004 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 Aug. 31, 2006, and Aug. 31, 2005, the customer loans held by the QSPE and the QSPE’s
liability to the conduits were $268 million and $171 million, respectively. The lender or the
conduits may restrict or discontinue the facility at any time. If the facility were to terminate,
existing loans would be collected by the QSPE over their remaining terms (generally 12
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
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 Aug.
31, 2006, and Aug. 31, 2005, our recorded guarantee liability was less than $1 million, primarily
based on our historical collection experience with these customers and a current assessment of
credit exposure. Adverse changes in the actual loss rate would increase the liability.
In November 2004, we entered into an agreement with a lender to establish a program to provide
financing of up to $40 million for selected customers in Brazil. The agreement as amended in May
2005 qualified for sales treatment under SFAS 140. Accordingly, the customer receivables and the
related liabilities that had been recorded since the program was established in November 2004 were
removed from the company’s consolidated balance sheet in May 2005 as a noncash transaction.
Proceeds from the transfer of the receivables subsequent to the May 2005 amendment are included in
net cash provided by operating activities in the Statements of Consolidated Cash Flows. The program
was amended in August 2006 to increase the total funds available under the program to $90 million.
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 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 $138
million, $95 million and $72 million of proceeds through these customer financing programs in 2006,
2005 and 2004, respectively. The amount of loans outstanding was $111 million and $77 million as of
Aug. 31, 2006, and Aug. 31, 2005, respectively. For most programs, we provide a full guarantee of
the loans in the event of customer default. The maximum potential amount of future payments under
the guarantees was $110 million as of Aug. 31, 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 as of Aug. 31, 2006, and Aug. 31, 2005. If performance is required under
the guarantee, we may retain amounts that are subsequently collected from customers.
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 $48 million, $33 million, and $13 million for 2006, 2005, and 2004,
respectively. 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 Aug. 31, 2006 and 2005. The
maximum potential amount of future payments under the recourse provisions of the agreements was $37
million as of Aug. 31, 2006. The outstanding balance of the receivables sold was $41 million and
$27 million as of Aug. 31, 2006, and Aug. 31, 2005, respectively.
Cash Flow
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2004 |
|
Net Cash Provided by Operating Activities |
|
$ |
1,674 |
|
|
$ |
1,737 |
|
|
$ |
1,261 |
|
Net Cash Required by Investing Activities |
|
|
(625 |
) |
|
|
(1,667 |
) |
|
|
(262 |
) |
|
Free Cash Flow(1) |
|
|
1,049 |
|
|
|
70 |
|
|
|
999 |
|
|
Net Cash Required by Financing Activities |
|
|
(117 |
) |
|
|
(582 |
) |
|
|
(243 |
) |
Effect of Exchange Rate Changes on Cash and Cash
Equivalents |
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
Net Increase (Decrease) in Cash and Cash Equivalents |
|
|
935 |
|
|
|
(512 |
) |
|
|
756 |
|
|
Cash and Cash Equivalents at Beginning of Period |
|
|
525 |
|
|
|
1,037 |
|
|
|
281 |
|
Cash and Cash Equivalents at End of Period |
|
$ |
1,460 |
|
|
$ |
525 |
|
|
$ |
1,037 |
|
|
|
|
|
| (1) |
|
Free cash flow represents the total of net cash provided or required by operating
activities and provided or required by investing activities (see the “Overview — Non-GAAP
Financial Measures” section of MD&A for a further discussion). |
2006 compared with 2005: In 2006, our free cash flow was $1.0 billion, compared with $70
million in 2005. Cash provided by operating activities decreased 4 percent from $1,737 million in
2005 to $1,674 million in 2006. Trade receivables were a contributor to this decrease because of
the significant collections improvement in 2005 and the increase in sales activity in 2006. This
decrease in cash provided from receivables was offset by an increase in cash provided from the
change in accrued liabilities. For the discussion of the factors affecting the increase in accrued
liabilities, see the “Working Capital and Financial Condition” section in this section of MD&A.
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
Cash required by investing activities was $625 million in 2006 compared with $1.7 billion in 2005.
In 2006, we used cash for acquisitions of businesses of $258 million compared with $1.5 billion in
2005. In 2006, we used cash of $125 million for a contingent payment related to the Seminis
acquisition. Our capital expenditures increased $89 million in the 12-month comparison, to $370
million primarily for the expansion of seed production and research facilities for corn and cotton.
Cash required for technology and other investments increased $82 million primarily because of a
$100 million animal agriculture upfront royalty payment in the second quarter of 2006.
Cash required by financing activities was $117 million in 2006, compared with $582 million in 2005.
The net change in short-term financing required cash of $139 million in 2006 compared with a source
of cash of $44 million in 2005. Cash required for long-term debt reductions was $118 million in
2006, compared with $794 million in 2005. The 2005 amount included $495 million to fund the tender
offer of the Seminis Senior Subordinated Notes and to retire other Seminis debt after the
acquisition closed. Cash proceeds from long-term debt decreased $219 million in 2006 compared with
2005, primarily because a $251 million three-year term bank loan was secured in July 2006 and $400
million of 51/2% Senior Notes due 2035 were issued in July 2005. We purchased shares in 2006 under
our four-year $800 million share repurchase program that was authorized by our board of directors
in October 2005. Our purchases under this plan required cash of $114 million in 2006. In 2005,
treasury stock purchases required cash of $234 million under the $500 million share repurchase
program, which was completed in July 2005.
2005 compared with 2004: In 2005, our free cash flow was $70 million, compared with $999 million
in 2004. Cash provided by operating activities improved $476 million in the 12-month comparison. In
2004, we used cash of $400 million to fund a PCB litigation settlement from 2003, and we received
net insurance proceeds of $72 million, which resulted in a net use of cash of $328 million. In 2005
and 2004, we made voluntary pension contributions of $60 million and $215 million, respectively.
Cash required by investing activities increased by $1.4 billion in 2005 over 2004, primarily
because of our 2005 acquisitions. Capital expenditures increased $71 million, to $281 million, in
2005 compared with 2004. The timing of our purchases and maturities of short-term investments
resulted in a source of cash of $150 million in 2005 compared with a use of cash of $70 million in
2004.
Cash required by financing activities was $582 million in 2005, compared with $243 million in 2004.
Commercial paper borrowings to fund the Seminis and Stoneville acquisitions and the tender offer to
purchase the Seminis Senior Subordinated Notes were the primary driver of the increase. We used
cash of $495 million to fund the tender offer of the Seminis Senior Subordinated Notes and to
retire other Seminis debt after the acquisition closed. Cash proceeds from long-term debt increased
$358 million in 2005 over 2004, primarily because $400 million of 51/2% Senior Notes due 2035 were
issued in July 2005 (51/2% 2035 Senior Notes). Cash required for long-term debt reductions increased
by $131 million in 2005. We repurchased shares of $234 million in 2005 and $266 million in 2004.
Capital Resources and Liquidity
| |
|
|
|
|
|
|
|
|
|
| |
|
As of Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
Short-Term Debt |
|
$ |
28 |
|
|
$ |
126 |
|
Long-Term Debt |
|
|
1,639 |
|
|
|
1,458 |
|
Total Shareowners’
Equity |
|
|
6,525 |
|
|
|
5,613 |
|
Debt-to-Capital Ratio |
|
|
20 |
% |
|
|
22 |
% |
|
A major source of our liquidity is operating cash flows, which are derived from net income.
This cash-generating capability provides us with the financial flexibility we need to meet
operating, investing and financing needs. To the extent that cash provided by operating activities
is not sufficient to fund our cash needs, which generally occurs during the second and third
quarters of the fiscal year because of the seasonality of our business, short-term commercial paper
borrowings are used to finance these requirements.
Total debt outstanding increased by $83 million between Aug. 31, 2005, and Aug. 31, 2006. In June
2006, our chief executive officer and our board of directors approved a domestic reinvestment plan
of up to $500 million in repatriated foreign earnings pursuant to the temporary repatriation
incentive under the American Jobs Creation Act of 2004, described in Note 11 — Income Taxes.
Accordingly, we repatriated foreign earnings totaling $437 million and recorded a related tax
charge of $21 million in the fourth quarter of 2006. The repatriated funds were used for domestic
expenditures relating to
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
R&D, capital expenditures, and other permitted activities.
A portion of the dividends were paid
from excess cash. We secured a $251 million three-year term bank loan in Europe through a private
placement to finance a portion of the dividends. We provided a guarantee of the foreign subsidiary
facility to reduce financing costs. The interest rate is a variable rate based on the Euro Interbank Offered Rate (Euribor). During October 2006, we repaid $63 million of this three-year
term bank loan in Europe. See Note 12 — Debt and Other Credit Arrangements — for additional
information on this debt.
In 2005, we borrowed $1.3 billion in short-term commercial paper to fund the Seminis and Stoneville
acquisitions and a tender offer for outstanding Seminis debt. During fourth quarter 2005, this
commercial paper was repaid with cash from operating activities and the issuance of $400 million of
Senior Notes. Also, certain medium-term notes matured and were repaid in 2005. The Statements of
Consolidated Cash Flows present these maturities as long-term debt reductions because the
medium-term notes had maturities longer than one year at inception. Our August 2006 debt-to-capital
ratio was 2 percentage points lower than the August 2005 ratio, primarily because of the increase
in shareowners’ equity partially offset by the increase in total debt outstanding.
In May 2002, we filed a shelf registration with the SEC for the issuance of up to $2.0 billion of
registered debt (2002 shelf registration). On Aug. 14, 2002, we issued $600 million in 73/8% Senior
Notes under the 2002 shelf registration, and on Aug. 23, 2002, the aggregate principal amount of
the outstanding notes was increased to $800 million (73/8% Senior Notes). As of Aug. 31, 2006, $486
million of the 73/8% Senior Notes are due on Aug. 15, 2012 (see the discussion later in this section
regarding a debt exchange for $314 million of the 73/8% Senior Notes). In May 2003, we issued $250
million of 4% Senior Notes (4% Senior Notes) under the 2002 shelf registration. During 2006, we
bought back $12 million of these 4% Senior Notes. The 4% Senior Notes are due on May 15, 2008.
In May 2005, we filed a new shelf registration with the SEC (2005 shelf registration) that allowed
us to issue up to $2.0 billion of debt, equity and hybrid offerings (including debt securities of
$950 million that remained available under the 2002 shelf registration). In July 2005, we issued
51/2% 2035 Senior Notes of $400 million under the 2005 shelf registration. The net proceeds from the
sale of the 51/2% 2035 Senior Notes were used to reduce commercial paper borrowings. As of Aug. 31,
2006, $1.6 billion remained available under the 2005 shelf registration.
In August 2005, we exchanged $314 million of new 51/2% Senior Notes due 2025 (51/2% 2025 Senior Notes)
for $314 million of its outstanding 73/8% Senior Notes due 2012, which were issued in 2002. The
exchange was conducted as a private transaction with holders of the outstanding 73/8% Senior Notes
who certified to the company that they were “qualified institutional buyers” within the meaning of
Rule 144A under the Securities Act of 1933. Under the terms of the exchange, the company paid a
premium of $53 million to holders participating in the exchange. The $53 million premium is
included in the cash flows required by financing activities in the Statement of Consolidated Cash
Flows. The transaction has been accounted for as an exchange of debt under Emerging Issues Task
Force (EITF) 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments, and the
$53 million premium will be amortized over the life of the new 51/2% 2025 Senior Notes. As a result
of the debt premium, the effective interest rate on the 51/2% 2025 Senior Notes will be 7.035% over
the life of the debt. The exchange of debt allowed the company to adjust its debt-maturity schedule
while also allowing it to take advantage of market conditions which the company considered to be
favorable. In October 2005, the company filed a registration statement with the SEC on Form S-4
with the intention to commence a registered exchange offer during fiscal year 2006 to provide
holders of the newly issued privately placed notes with the opportunity to exchange such notes for
substantially identical notes registered under the Securities Act of 1933. In February 2006, we
issued $314 million aggregate principal amount of our 51/2% Senior Notes due 2025, in exchange for
the same principal amount of our 51/2% Senior Notes due 2025 which had been issued in the private
placement transaction in August 2005. The offering of the notes issued in February was registered
under the Securities Act of 1933.
During February 2006, we elected not to renew a $1.0 billion 364-day facility, and it expired on
March 10, 2006. This reduced our committed external borrowing facilities to $1.0 billion, which was
unused and expires in June 2009. This five-year facility will be used for general corporate
purposes, which may include working capital, acquisitions, capital expenditures, refinancing and
support for commercial paper borrowings. This remaining facility gives us the financial flexibility
to satisfy short- and medium-term funding requirements.
Capital Expenditures: Our capital expenditures increased by 32 percent, or $89 million, to $370
million in 2006 compared with 2005. This increase was primarily for the expansion of seed
production and research facilities for corn and cotton. We expect 2007 capital expenditures to be
in the range of $400 million. The largest drivers of this increase compared with 2006 are expected
to be projects to expand corn seed production facilities and information technology infrastructure.
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
Pension Contributions: In addition to contributing amounts to our pension plans if required by
pension plan regulations, we continue to also make discretionary contributions if we believe they
are merited. Although contributions to the U.S. qualified plan were not required, we contributed
$60 million in both 2006 and 2005, and $215 million in 2004. In September 2006, we voluntarily
contributed $60 million to the U.S. qualified pension plan in order to maintain the future contribution
flexibility allowed by regulations. No additional contributions are planned for fiscal year 2007
for the U.S. qualified pension plan. While the level of required future contributions is
unpredictable and depends heavily on plan asset experience and interest rates, we expect to
continue to contribute to the plan on a regular basis in the near term.
Share Repurchases: In July 2003, the Executive Committee of the board of directors authorized the
purchase of up to $500 million of our common stock over a three-year period. In 2005 and 2004, we
purchased $234 million and $266 million, respectively, of our common stock under the $500 million
authorization. A total of 25.3 million shares were repurchased under this program. In July 2005,
the $500 million repurchase program was completed a year ahead of the authorized expiration period.
In October 2005, the board of directors authorized the purchase of up to $800 million of our common
stock over a four-year period. In 2006, we purchased $120 million of our common stock under the
$800 million authorization. A total of 2.8 million shares were repurchased under this program.
Dividends: We paid dividends totaling $207 million in 2006, $174 million in 2005, and $141 million
in 2004. 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. We continue to review our options for returning additional
value to shareowners, including the possibility of a dividend increase.
2006 Acquisitions: In 2006, ASI acquired 12 regional U.S. seed companies for an aggregate purchase
price of $133 million (net of cash acquired), inclusive of transaction costs of $4 million. The
financial results of these acquisitions were included in the company’s consolidated financial
statements from their respective dates of acquisition. These acquisitions are expected to further
bolster ASI’s ability to directly serve its farmer-customers with a technology-rich, locally-oriented
business model. Also, in 2006, we used cash of $125 million for a contingent payment related to the
Seminis acquisition. For all fiscal year 2006 acquisitions, the business operations of the acquired
entities were included in the Seeds and Genomics segment. See Note 4 — Business Combinations —
for the preliminary purchase price allocations as of Aug. 31, 2006.
2005 Acquisitions: In first quarter 2005, we acquired the canola seed businesses of Advanta Seeds
for $52 million in cash (net of cash acquired), and ASI acquired Channel Bio Corp. for $104 million
in cash (net of cash acquired) and $15 million in liabilities paid in second quarter 2005. In third
quarter 2005, ASI, through Channel Bio Corp., acquired NC+ Hybrids, Inc. for $40 million in cash
(net of cash acquired).
In third quarter 2005, we acquired Seminis for $1.0 billion in cash (net of cash acquired), and we
paid $495 million for repayment of its outstanding debt. The cash portion of the acquisition was
funded with cash on hand plus commercial paper borrowings of $600 million issued in March 2005.
Prior to the closing of the transaction, Seminis initiated a tender offer to redeem all of its
outstanding 101/4% Senior Subordinated Notes. Commercial paper borrowings were also issued in April
2005 to fund the payments pursuant to the tender offer, which totaled approximately $390 million.
The acquisition also included a contingent payment of $125 million which was paid during second
quarter 2006.
In third quarter 2005, we acquired Stoneville for $305 million (net of cash acquired). We also
assumed debt of $16 million in the transaction. The cash portion of the acquisition was funded with
$284 million of commercial paper borrowings issued in April 2005.
For all fiscal year 2005 acquisitions described above, the business operations of the acquired
entities were included in the Seeds and Genomics segment. As of the acquisition dates, we began to
assess and formulate plans to integrate or restructure the acquired entities. These activities are
accounted for in accordance with EITF Issue No. 95-3, Recognition of Liabilities in Connection with
a Purchase Business Combination, and primarily include the potential closure of facilities, the
abandonment or redeployment of equipment, and employee terminations or relocations. In first
quarter 2006, we finalized plans to integrate or restructure certain activities of Seminis and our
acquired India cotton business. As a result, asset fair values were reduced by $2 million, and
additional liabilities of $14 million were recorded, resulting in additional goodwill of $16
million. The plans for Seminis and our acquired India cotton business include employee terminations
and relocations, exiting certain product lines and facility closures. As of Aug. 31, 2006,
estimated restructuring costs of $18 million have been recognized as current liabilities in the
purchase price allocations, and $17 million has been charged against the liabilities, primarily
related to payments for employee terminations and relocations.
42
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
Accounts Receivable: Our India cotton business is currently operating under state governmental
pricing directives which have increased our collection risk. We will continue to carefully monitor
our Indian trade receivables in 2007.
The combination of poor growing conditions, the strong Brazilian real, and lower commodity prices
had a negative effect on the Brazilian agricultural economy and farmer liquidity in 2006. To
mitigate the associated credit risks we have further tightened our credit policy, implemented a
grain-based collection system, and increased cash sales. We recently idled one seed processing unit
and realigned our support teams to leverage operations for greater efficiencies. Our net
receivables as a percent of the trailing 12 months sales improved from 49 percent in 2005 to 36
percent in 2006.
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 Company 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 is subject to Delta and Pine Land Company shareowner approval,
review and approval by appropriate regulatory authorities including the U.S. Department of Justice,
and other customary closing conditions. 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 interest in another acquisition transaction or failure to perform certain covenants
generally related to another acquisition offer and assistance with antitrust clearance, in which
case all litigation would terminate without payment by either party; or (3) withdrawal of the
recommendation of Delta and Pine Land’s board of directors or any other reason, in which case
litigation may recommence and Delta and Pine Land may be obligated to pay us $15 million or its
licenses with us may be amended in its favor, depending on the reason for the termination. See Part
I — Item 3 — Legal Proceedings for more information regarding litigation between and Delta and
Pine Land and us.
We may be required to divest the U.S. assets of our Stoneville cottonseed business, as a condition
of obtaining regulatory approval of our proposed acquisition of Delta and Pine Land Company. As
such, we commenced activities to identify potential buyers. However, consummation of the Delta and
Pine Land Company acquisition, which would be a pre-condition to any sale of Stoneville assets, is
dependent on approval by Delta and Pine Land shareholders and regulatory agencies, and as such, 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 the rights offering has not been established.
Subject to approval of the Bankruptcy Court and confirmation of the Plan, we have agreed to
backstop the rights offering, meaning we have agreed to purchase any amount of the rights offering
left unsubscribed by the unsecured creditors, up to the entire $250 million of stock. No assurance
can be given that the Plan will be approved. See Note 22 for further details.
Contractual Obligations
See the “Pending Acquisition” and “Solutia Contingency” discussions in the preceding section of
MD&A. These potential obligations are not included in the table below as they are contingent upon
the approval requirements described therein.
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2006 FORM 10-K |
We have certain obligations and commitments to make future payments under contracts. The following
table sets forth our estimates of future payments under contracts as of Aug. 31, 2006. See Note 22
of the consolidated financial statements for a further description of our contractual obligations.
| |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due in Fiscal Year Ending Aug. 31,
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 and |
| (Dollars in millions) |
|
Total |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
beyond |
|
Long-Term Debt(1) |
|
$ |
1,639 |
|
|
$ |
— |
|
|
$ |
238 |
|
|
$ |
257 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
1,142 |
|
Interest Payments Relating to Long-Term
Debt(2) |
|
|
1,250 |
|
|
|
107 |
|
|
|
106 |
|
|
|
76 |
|
|
|
76 |
|
|
|
76 |
|
|
|
809 |
|
Operating Lease Obligations |
|
|
113 |
|
|
|
34 |
|
|
|
26 |
|
|
|
18 |
|
|
|
10 |
|
|
|
8 |
|
|
|
17 |
|
Purchase Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uncompleted additions to property |
|
|
67 |
|
|
|
52 |
|
|
|
15 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Commitments to purchase inventories |
|
|
448 |
|
|
|
377 |
|
|
|
26 |
|
|
|
14 |
|
|
|
11 |
|
|
|
10 |
|
|
|
10 |
|
Commitment to purchase breeding research |
|
|
982 |
|
|
|
45 |
|
|
|
45 |
|
|
|
45 |
|
|
|
45 |
|
|
|
45 |
|
|
|
757 |
|
R&D alliances and joint venture obligations |
|
|
149 |
|
|
|
55 |
|
|
|
44 |
|
|
|
26 |
|
|
|
13 |
|
|
|
8 |
|
|
|
3 |
|
Other purchase obligations |
|
|
133 |
|
|
|
51 |
|
|
|
46 |
|
|
|
29 |
|
|
|
2 |
|
|
|
1 |
|
|
|
4 |
|
Other Liabilities Reflected on the Balance Sheet |
|
|
88 |
|
|
|
10 |
|
|
|
7 |
|
|
|
6 |
|
|
|
5 |
|
|
|
5 |
|
|
|
55 |
|
|
Total Contractual Obligations |
|
$ |
4,869 |
|
|
$ |
731 |
|
|
$ |
553 |
|
|
$ |
471 |
|
|
$ |
163 |
|
|
$ |
154 |
|
|
$ |
2,797 |
|
|
|
|
|
| (1) |
|
During October 2006, we repaid $63 million of this three-year term bank loan in
Europe. See Note 12 — Debt and Other Credit Arrangements — for additional information on this
debt. |
| |
| (2) |
|
For variable rate debt, interest is calculated using the applicable rates as of Aug. 31, 2006. |
Contingent Liabilities Relating to Solutia Inc. (Off-Balance Sheet Arrangement)
Under the Separation Agreement, we were required to indemnify Pharmacia for Solutia’s Assumed
Liabilities, to the extent that Solutia fails to pay, perform or discharge those liabilities.
Solutia and 14 of its U.S. subsidiaries filed a voluntary petition for reorganization under Chapter
11 of the U.S. Bankruptcy Code and have sought relief from paying certain liabilities, including
Solutia’s Assumed Liabilities. Solutia disclaimed its obligations to defend pending or future
litigation relating to Solutia’s Assumed Liabilities and has taken the position that the bankruptcy
proceeding prevents it from continuing to perform its environmental obligations, except within the
boundaries of its current operations. On an interim basis, we assumed the management and defense of
certain of Solutia’s third-party tort litigation and environmental matters. In the process of
managing such litigation and environmental liabilities, we determined that it was probable that we
would incur some expenses related to such litigation and environmental liabilities and that the
amount of such expenses could be reasonably estimated. Accordingly, in first quarter 2005, we
recorded a charge in the amount of $284 million based on the best estimates by our management with
input from our legal and other outside advisors.
We believe that the charge represents the discounted cost that we would expect to incur in
connection with these litigation and environmental matters. However, the charge may not reflect all
potential liabilities and expenses that we may incur in connection with Solutia’s bankruptcy and
does not reflect any insurance reimbursements or any recoveries we might receive through the
bankruptcy process. Accordingly, our actual costs may be materially different from this estimate.
Under the rules of the SEC, these contingent liabilities are considered to be an off-balance sheet
arrangement. See Note 22 under the subheading “Solutia Inc.” for further information regarding
Solutia’s Assumed Liabilities, the charge discussed above, and the plan of reorganization filed by
Solutia in its bankruptcy proceeding. Also see Part I — Item 3 — Legal Proceedings and Item 1 —
Relationships Among Monsanto Company, Pharmacia Corporation, Pfizer Inc. and Solutia Inc. for
further information.
Seasonality
Our fiscal year end of August 31 synchronizes our quarterly and annual results with the natural
flow of the agricultural cycle in our major markets. It provides a more complete picture of the
North American and South American growing seasons in the same fiscal year. Sales by our Seeds and
Genomics segment, and to a lesser extent, by our Agricultural Productivity segment, are seasonal.
In fiscal year 2006, approximately 71 percent of our Seeds and Genomics segment sales occurred in
the second and third quarters. This segment’s seasonality is primarily a function of the purchasing
and growing patterns in North America. The Agricultural Productivity segment sales were more evenly
spread across our fiscal year quarters in 2006, with approximately 56 percent of these sales
occurring in the second half of the year. Seasonality varies by the world areas where our
Agricultural Productivity businesses operate. For example, the United States, Europe and Brazil
were the largest
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2006 FORM 10-K |
contributors to Agricultural Productivity sales in 2006. The United States and Europe experienced
most of their sales in the second half of 2006. Brazil had a higher concentration of sales in the
first and fourth quarters of 2006.
Net income in 2006 was the highest in second and third quarters, which correlated with the sales of
the Seeds and Genomics segment and its gross profit contribution. Sales and income may shift
somewhat between quarters, depending on planting and growing conditions. Our inventory is at its
lowest level at the end of our fiscal year, which is consistent with the agricultural cycles in our
major markets. Additionally, our trade accounts receivable are at their lowest levels in November,
primarily because of prepayments received on behalf of both segments in the United States, and the
seasonality of our sales.
As is the practice in our industry, we regularly extend credit to enable our customers to acquire
crop protection products and seeds at the beginning of the growing season. Because of the
seasonality of our business and the need to extend credit to customers, we use short-term
borrowings to finance working capital requirements. Our need for such financing is generally higher
in the second and third quarters of the fiscal year and lower in the first and fourth quarters of
the fiscal year. Our customer financing programs are expected to continue to reduce our reliance on
commercial paper borrowings.
OUTLOOK
We have achieved an industry-leading position in the areas in which we compete in both of our
business segments. However, the outlook for 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 have 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.
45
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2006 FORM 10-K |
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 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. 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. 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 should 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 continue to monitor prices for petroleum-based products and natural gas, which are raw materials
for glyphosate and selective chemistry herbicide production. Although pricing conditions are not
expected to materially affect our long-term results of operations, they have increased our
near-term production costs.
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 low milk
prices and some processor requests for “r-BST-free” milk are limiting our future sales.
46
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2006 FORM 10-K |
Other Information
As discussed in Note 22 — Commitments and Contingencies and Part I — Item 3 — Legal Proceedings,
Monsanto is involved in a number of lawsuits and claims relating to a variety of issues. Many of
these lawsuits relate to intellectual property disputes. We expect that such disputes will continue
to occur as the agricultural biotechnology industry evolves.
As mentioned in the “Overview — Executive Summary — Outlook” section of MD&A, we are required to
indemnify Pharmacia for Solutia’s Assumed Liabilities. Our obligation to indemnify Pharmacia for
Solutia’s Assumed Liabilities is discussed in Note 22.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our financial statements, we must select and apply various accounting policies. Our
most significant policies are described in Note 2 — Significant Accounting Policies. In order to
apply our accounting policies, we often need to make estimates based on judgments about future
events. In making such estimates, we rely on historical experience, market and other conditions,
and on assumptions that we believe to be reasonable. However, the estimation process is by its
nature uncertain given that estimates depend on events over which we may not have control. If
market and other conditions change from those that we anticipate, our results of operations,
financial condition and changes in financial condition may be materially affected. In addition, if
our assumptions change, we may need to revise our estimates, or to take other corrective actions,
either of which may also have a material effect on our results of operations, financial condition
or changes in financial condition. Members of our senior management have discussed the development
and selection of our critical accounting estimates, and our disclosure regarding them, with the
audit and finance committee of our board of directors, and do so on a regular basis.
We believe that the following estimates have a higher degree of inherent uncertainty and require
our most significant judgments. In addition, had we used estimates different from any of these, our
results of operations, financial condition or changes in financial condition for the current period
could have been materially different from those presented.
Goodwill: A majority of our goodwill relates to our seed company acquisitions. We are required to
assess whether any of our goodwill is impaired. In order to do this, we apply judgment in
determining our reporting units, which represent distinct parts of our business. The definition of
our reporting units affects the results of our goodwill impairment analysis. Our annual goodwill
impairment assessment involves estimating the fair value of a reporting unit and comparing it with
its carrying amount. If the carrying value of the reporting unit exceeds its fair value, additional
steps are required to calculate a potential impairment loss. Calculating the fair value of the
reporting units requires significant estimates and long-term assumptions. Any changes in key
assumptions about the business and its prospects, or any changes in market conditions, interest
rates or other externalities, could result in an impairment charge. We estimate the fair value of
our reporting units by applying discounted cash flow methodologies. The company’s decision in
October 2003 to exit the European wheat and barley business required a reevaluation for potential
impairment of goodwill and other intangible assets related to the company’s global wheat business,
and resulted in a $69 million pretax impairment charge in fiscal year 2004. The $69 million pretax
impairment to goodwill was recorded as an operating expense, which reduced net income and
shareowners’ equity. The annual goodwill impairment tests were performed as of March 1, 2006, and
March 1, 2005. No indications of goodwill impairment existed as of either date. In 2006, we
recorded goodwill related to our acquisitions (see Note 4 — Business Combinations). Future changes
in the fair value of our reporting units could affect our goodwill and operating expenses and
reduce shareowners’ equity.
Litigation and Other Contingencies: We are involved in various intellectual property,
biotechnology, tort, contract, antitrust, employee benefit, environmental and other litigation,
claims and legal proceedings; environmental remediation; and government investigations. We
routinely assess the likelihood of adverse judgments or outcomes to those matters, as well as
ranges of probable losses, to the extent losses are reasonably estimable. We record accruals for
such contingencies to the extent that we conclude their occurrence is probable and the financial
impact, should an adverse outcome occur, is reasonably estimable. Disclosure for specific legal
contingencies is provided if the likelihood of occurrence is at least reasonably possible and the
exposure is considered material to the consolidated financial statements. In making determinations
of likely outcomes of litigation matters, management considers many factors. These factors include,
but are not limited to, past history, scientific and other evidence, and the specifics and status
of each matter. If our assessment of the various factors changes, we may change our estimates. That
may result in the recording of an accrual or a change in a previously recorded accrual.
47
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2006 FORM 10-K |
Predicting the outcome of claims and litigation, and estimating related costs and exposure involves
substantial uncertainties that could cause actual costs to vary materially from estimates and
accruals.
In the process of managing certain litigation and environmental liabilities related to Solutia, and
through our involvement in Solutia’s bankruptcy process, we determined that it was probable that we
would incur some expenses related to Solutia’s third-party tort litigation and environmental
liabilities and that the amount of certain of these expenses could be reasonably estimated. In
December 2004, we determined that it was appropriate to establish a reserve for such expenses based
on the best estimates by our management with input from our legal and other outside advisors.
Accordingly, a charge in the amount of $284 million was recorded in first quarter fiscal 2005. As
of Aug. 31, 2006, the remaining Solutia-related reserve is $210 million. We believe that this
reserve represents the discounted cost that we would expect to incur in connection with these
litigation and environmental matters. We expect to pay for these potential liabilities over time as
the various legal proceedings are resolved and remediation is performed at the various
environmental sites. Actual costs to us may differ materially from this estimate. Further,
additional litigation or environmental matters that are not reflected in this reserve may arise or
become probable and reasonably estimable in the future, and we may also manage, settle, or pay
judgments or damages with respect to litigation or environmental matters in order to mitigate
contingent potential liability and protect Pharmacia and us, if Solutia refuses to do so. This
reserve may not reflect all potential liabilities that we may incur in connection with Solutia’s
bankruptcy and does not reflect any insurance reimbursements, any recoveries we might receive
through the bankruptcy process, or any recoveries we might receive through the contribution actions
that we are pursuing on Pharmacia’s behalf. See Note 22 — Commitments and Contingencies and the
section captioned Financial Condition, Liquidity, and Capital Resources —“Contingent Liabilities
Relating to Solutia Inc. (Off-Balance Sheet Arrangement)” of MD&A for additional information on
Solutia’s Assumed Liabilities and the Solutia-related reserve.
Pensions and Other Postretirement Benefits: The actuarial valuations of our pension and other
postretirement benefit costs, assets and obligations affects our financial position, results of
operations and cash flows. These valuations require the use of assumptions and long-range
estimates. These assumptions include, among others: assumptions regarding interest and discount
rates, assumed long-term rates of return on pension plan assets, health care cost trends, and
projected rates of salary increases. We regularly evaluate these assumptions and estimates as new
information becomes available. Changes in assumptions (caused by conditions in the debt and equity
markets, changes in asset mix, and plan experience, for example) could have a material effect on
our pension obligations and expenses, and can affect our net income (loss), intangible assets,
liabilities, and shareowners’ equity. In addition, changes in assumptions such as rates of return,
fixed income rates used to value liabilities or declines in the fair value of plan assets, may
result in voluntary decisions or mandatory requirements to make additional contributions to our
qualified pension plan. Because of the design of our postretirement health care plans, our
liabilities associated with these plans are not highly sensitive to assumptions regarding health
care cost trends.
In fiscal years 2006, 2005
and 2004, we recorded a $148 million decrease, a $20 million increase,
and a $21 million increase, respectively, to adjust the additional minimum pension liability in our
financial statements. These adjustments were necessary to keep the recorded pension liability at
least equal to the unfunded accumulated benefit obligation for the plan. These noncash adjustments
to adjust the additional minimum pension liability affected shareowners’ equity, but did not affect
our results of operations.
Fiscal year 2007 pension expense, which will be determined using assumptions as of Aug. 31, 2006,
is expected to decrease compared with fiscal year 2006 because we increased our discount rate
assumption as of Aug. 31, 2006, to reflect current economic conditions. The discount rate
assumption as of Aug. 31, 2006, was increased from 5 percent to 5.9 percent. The expected return on
additional cash contributions made in September 2004, September 2005, and September 2006 to the
plan will also affect any decrease in expense because of the higher discount rate. In determining
the discount rate, we use yields on high-quality fixed-income investments (including among other
things, Moody’s Aa corporate bond yields) that match the duration of the pension obligations. To
the extent the discount rate increases or decreases, our pension obligation is decreased or
increased accordingly. Holding all other assumptions constant, we estimate that a half-percent
decrease in the discount rate will decrease our fiscal year 2007 pretax income by approximately $4
million. Our salary rate assumption as of Aug. 31, 2006, was approximately 4 percent for all plans.
Holding all other assumptions constant, we estimate that a half-percent decrease in the salary rate
assumption would increase our fiscal year 2007 pretax income $1 million.
Expected rate of return on pension assets is also an important element of plan expense. This
assumption was 8.75 percent in 2006, 2005, and 2004. To determine the rate of return, we consider
the historical experience and expected future performance of the plan assets, as well as the
current and expected allocation of the plan assets. The U.S. qualified pension plan’s asset
allocation as of Aug. 31, 2006, was approximately 67 percent equity securities, 28 percent debt
securities and 5 percent other
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2006 FORM 10-K |
investments, in line with policy ranges. We periodically evaluate the allocation of plan assets
among the different investment classes to ensure that they are within policy guidelines and ranges.
The assumed rate of return will be 8.50 percent in 2007. While we do not currently expect to
further reduce the assumed rate of return in the near term, holding all other assumptions constant,
we estimate that a half-percent decrease in the expected return on plan assets would lower our
fiscal year 2007 pretax income by approximately $6 million.
Deferred Income Tax Assets: Management regularly assesses the likelihood that deferred tax assets
will be recovered from future taxable income. To the extent management believes that it is more
likely than not that a deferred tax asset will not be realized, a valuation allowance is
established. When a valuation allowance is established or increased, an income tax charge is
included in the consolidated financial statements and net deferred tax assets are adjusted
accordingly. Changes in tax laws, statutory tax rates, and estimates of the company’s future
taxable income levels could result in actual realization of the deferred tax assets being
materially different from the amounts provided for in the consolidated financial statements. If the
actual recovery amount of the deferred tax asset is less than anticipated, we would be required to
write off the remaining deferred tax asset and increase the tax provision, resulting in a reduction
of net income and shareowners’ equity.
In 2004, we assessed the realizability of our deferred tax assets in Argentina and Brazil following
completion of the crop season in these countries and the preparation of updated long-range
financial projections for these countries. We concluded that it was more likely than not that the
deferred tax assets related to net tax operating loss carryforwards (NOLs) in Argentina will not be
realizable prior to their expiration. As of Aug. 31, 2005, we had established a valuation allowance
of $103 million. We are projecting taxable income for the current tax year (calendar 2006) and,
accordingly, reversed $15 million of the valuation allowance as a favorable adjustment to our 2006
tax provision. Also, during 2006, the valuation allowance decreased slightly because of the foreign
currency fluctuation. As of Aug. 31, 2006, we have a valuation allowance of $82 million on the
remaining NOLs which expire from 2007 to 2010. A valuation allowance is still necessary based on
the recent history of losses through 2005, the continued uncertain economic conditions, and also
the limited tax carryforward period of five years. We are taking actions to attempt to realize such
deferred tax assets; however, such actions are dependent, in part, on conditions that are not
entirely in our control. We also concluded that it is more likely than not that we will realize our
deferred tax assets in Argentina that are not related to the NOLs noted above through future
projected taxable income.
At the beginning of fiscal year 2004, we had a valuation allowance of $90 million in Brazil for
deferred tax assets related to NOLs because we believed it was more likely than not that such
deferred tax assets would not be realized. However, based on improvements in our Brazilian
operations related to business changes that we had begun implementing two crop seasons previously,
and improvements during that period in Brazil’s overall economy, and in particular the agricultural
sector, in fiscal year 2004 we then believed it was more likely than not that such deferred tax
assets would be realized. Accordingly, the previously recorded $90 million valuation allowance,
related to NOLs which have an indefinite life, was reversed in the second quarter of fiscal year
2004. We also concluded that it is more likely than not that we will realize our deferred tax
assets in Brazil that are not related to the NOLs noted above through future projected taxable
income. As of Aug. 31, 2006, we continue to believe it is more likely than not that we will realize
our deferred tax assets in Brazil.
Allowance for Doubtful Trade Receivables: We maintain an allowance for doubtful trade receivables.
This allowance represents our estimate of accounts receivable that, subsequent to the time of sale,
we have estimated to be of doubtful collectibility because our customers may not be able to pay. In
determining the adequacy of the allowance for doubtful accounts, we consider historical bad-debt
experience, customer creditworthiness, market conditions, and economic conditions. We perform
ongoing evaluations of our allowance for doubtful accounts, and we increase the allowance as
required. Increases in this allowance will reduce the recorded amount of our net trade receivables,
net income and shareowners’ equity, and increase our bad-debt expense. In 2006, the combination of
lower commodity prices and the strength of the Brazilian real affected some of our customers’
liquidity in Brazil and resulted in increases in past-due trade receivables and the related
allowance for doubtful trade receivables when compared with 2005. Our tightened credit policies
have resulted in a decrease in net trade receivables as of Aug. 31, 2006, compared with those as of
Aug. 31, 2005. In 2004, we increased our allowance for estimated uncollectible trade receivables in
Argentina by approximately $45 million primarily because of changes to the Argentine business model
and continued economic difficulty.
Allowances for Returns and Inventory Obsolescence: Where the right of return exists in our seed
business, sales revenues are reduced at the time of sale to reflect expected returns. In order to
estimate the expected returns, management analyzes historical returns, economic trends, market
conditions, and changes in customer demand. In addition, we establish allowances for obsolescence
of inventory equal to the difference between the cost of inventory and the estimated market value,
based on assumptions about future demand and market conditions. We regularly evaluate the adequacy
of our return allowances and
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inventory obsolescence reserves. If economic and market conditions are different from those we
anticipated, actual returns and inventory obsolescence could be materially different from the
amounts provided for in our consolidated financial statements. If seed returns are higher than
anticipated, our net sales, net trade receivables, net income and shareowners’ equity for future
periods will be reduced. If inventory obsolescence is higher than expected, our cost of goods sold
will be increased, and our inventory valuations, net income, and shareowners’ equity will be
reduced.
Stock-Based Compensation: On Sept. 1, 2005, we adopted SFAS 123R, which requires the measurement
and recognition of compensation expense for all share-based payment awards made to employees and
directors based on estimated fair values. We adopted SFAS 123R using the modified prospective
transition method. Under this method, our consolidated financial statements as of and for the year
ended Aug. 31, 2006, reflect the impact of SFAS 123R, while the consolidated financial statements
for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R.
Pre-tax stock-based compensation expense recognized under SFAS 123R was $63 million in 2006
(including $13 million related to share-based awards for which compensation expense was being
recognized prior to the adoption of SFAS 123R).
Upon adoption of SFAS 123R, we began estimating the value of employee stock options on the date of
grant using a lattice-binomial model. Prior to adoption of SFAS 123R, the value of employee stock
options was estimated on the date of grant using the Black-Scholes model, for the disclosures of
pro forma financial information required under SFAS 123. Pre-tax unrecognized compensation expense,
net of estimated forfeitures, for stock options, nonvested restricted stock and nonvested
restricted stock units was $50 million as of Aug. 31, 2006, which will be recognized over
weighted-average periods of two to three years. The determination of fair value of share-based
payment awards on the date of grant using an option-pricing model is affected by our stock price as
well as assumptions regarding a number of highly complex and subjective variables. These variables
include, but are not limited to, the expected stock price volatility over the term of the awards,
and actual and projected employee stock option exercise behaviors. The use of a lattice-binomial
model requires extensive actual employee exercise behavior data and a number of complex assumptions
including expected volatility, risk-free interest rate, and expected dividends. The
weighted-average estimated value of employee stock options granted during 2006 was $9.59 per share,
using the lattice-binomial model. We based our estimate of future volatility on a combination of
historical volatility on our stock and implied volatility on publicly traded options on our stock.
The risk-free interest rate assumption is based on observed interest rates appropriate for the term
of our employee stock options. The dividend yield assumption is based on the history and
expectation of dividend payouts. If factors change and we employ different assumptions in the
application of SFAS 123R in future periods, the compensation expense that we record under SFAS 123R
may differ significantly from what we have recorded in the current period. See Note 17 —
Stock-Based Compensation Plans— for pro forma disclosure of stock-based compensation expense for
2005 and 2004.
NEW ACCOUNTING STANDARDS
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Benefit Plans (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. This statement is effective for financial statements as of
the end of the fiscal year ending after Dec. 15, 2006. 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 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. 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. 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 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. This Interpretation 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. The provisions of FIN 48 will be effective for
fiscal years
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beginning after Dec. 15, 2006, with the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of
adopting 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. We are currently evaluating the impact of SFAS 156 on the consolidated
financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS 154).
SFAS 154 requires retrospective application to prior-period financial statements of changes in
accounting principle, unless it is impracticable to determine either the period-specific effects or
the cumulative effect of the change. SFAS 154 also redefines “restatement” as the revising of
previously issued financial statements to reflect the correction of an error. This statement is
effective for accounting changes and corrections of errors made in fiscal years beginning after
Dec. 15, 2005. We do not currently believe that the adoption of SFAS 154 will have a material
impact on the consolidated financial statements.
Significant Accounting Guidance Adopted in 2006:
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R).
SFAS 123R replaced SFAS No. 123, Accounting for Stock-Based Compensation, and superseded APB
Opinion No. 25, Accounting for Stock Issued to Employees. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107, which expresses the views of the SEC staff regarding the interaction
between SFAS 123R and certain SEC rules and regulations, and provides the staff’s views regarding
the valuation of share-based payment arrangements for public companies. On Sept. 1, 2005, we
adopted SFAS 123R, which requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors based on estimated fair values. We
adopted SFAS 123R using the modified prospective transition method. Under this method, our
consolidated financial statements as of and for the year ended Aug. 31, 2006, reflect the impact of
SFAS 123R, while the consolidated financial statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123R. Pre-tax stock-based compensation expense
recognized under SFAS 123R was $63 million in 2006 (including $13 million related to share-based
awards for which compensation expense was being recognized prior to the adoption of SFAS 123R).
Upon adoption of SFAS 123R, we began estimating the value of employee stock options on the date of
grant using a lattice-binomial model. Prior to adoption of SFAS 123R, the value of employee stock
options was estimated on the date of grant using the Black-Scholes model, for the disclosures of
pro forma financial information required under SFAS 123. Pre-tax unrecognized compensation expense,
net of estimated forfeitures, for stock options, nonvested restricted stock and nonvested
restricted stock units was $50 million as of Aug. 31, 2006, which will be recognized over
weighted-average periods of two to three years. See Note 17 — Stock-Based Compensation Plans— for
pro forma disclosure of stock-based compensation expense for 2005.
As of Aug. 31, 2006, we
adopted the provisions of FIN 47. FIN 47 clarifies that conditional obligations
meet the definition of an asset retirement obligation in SFAS No. 143, Accounting for Asset
Retirement Obligations, and therefore should be recognized if their fair value is reasonably
estimable. As a result of adopting FIN 47, we recorded a noncash pre-tax charge of $9 million ($6
million aftertax). This charge is reported as a cumulative effect of a change in accounting
principle in the fourth quarter of 2006. If FIN 47 would have been effective for all periods
presented, net income would have been reduced by less than $1 million for fiscal years 2005 and
2004, or less than $0.01 per diluted share, and the aggregate carrying amount of the obligation
would have been $10 million and $9 million as of Aug. 31, 2005 and Aug. 31, 2004, respectively.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the effect of interest rate changes, foreign currency fluctuations, and changes
in commodity and equity prices. Market risk represents the risk of a change in the value of a
financial instrument, derivative or nonderivative, caused by fluctuations in interest rates,
currency exchange rates, and commodity and equity prices. Monsanto handles market risk in
accordance with established policies by engaging in various derivative transactions. Such
transactions are not entered into for trading purposes.
See Notes 2 and 13 to the consolidated financial statements for further details regarding the
accounting and disclosure of our derivative instruments and hedging activities.
The sensitivity analysis discussed below presents the hypothetical change in fair value of those
financial instruments held by the company as of Aug. 31, 2006, that are sensitive to changes in
interest rates, currency exchange rates, and commodity and equity prices. Actual changes may prove
to be greater or less than those hypothesized.
Changes in Interest Rates: Because the company’s short- and long-term debt exceeds cash and
investments, Monsanto’s interest-rate risk exposure pertains primarily to the debt portfolio. To
the extent that we have cash available for investment to ensure liquidity, we will invest that cash
only in short-term instruments. The majority of our debt as of Aug. 31, 2006, consisted of
fixed-rate long-term obligations.
Market risk with respect to interest rates is estimated as the potential change in fair value
resulting from an immediate hypothetical 1 percentage point parallel shift in the yield curve. The
fair values of the company’s investments and loans are based on quoted market prices or discounted
future cash flows. We currently hold debt and investments that mature in less than 360 days, and
variable rate medium-term notes. As the carrying amounts on short-term loans and investments
maturing in less than 360 days and the carrying amounts of variable-rate medium-term notes
approximate their respective fair values, a 1 percentage point change in the interest rates would
not result in a material change in the fair value of our debt and investments portfolio.
On Aug. 14, 2002, Monsanto
issued $600 million of 73/8% Senior Notes, and on Aug. 23, 2002, the
aggregate principal amount of the outstanding notes was increased to $800 million. In August 2005,
the company exchanged $314 million of new 51/2% Senior Notes due 2025 for $314 million of the
company’s outstanding 73/8% Senior Notes. As of Aug. 31, 2006, the fair value of the 73/8% Senior Notes
was $530 million, and the fair value of the 51/2% 2025 Senior Notes was $296 million. A 1 percentage
point change in the interest rates would change the fair value of the remaining 73/8% Senior Notes by
approximately $26 million, and the fair value of the 51/2% 2025 Senior Notes by $37 million.
In May 2003, Monsanto issued $250 million of 4% Senior Notes. The interest rate on the 4% Senior
Notes was subsequently swapped to six-month London Interbank Offered Rate (LIBOR), plus a spread of
39 basis points. During 2006, we bought back $12 million of these 4% Senior Notes. As of Aug. 31,
2006, the fair value of the 4% Senior Notes (including the effect of the swap) was $232 million. A
1 percentage point change in the interest rates would change the fair value of the 4% Senior Notes
by $4 million.
In July 2005, Monsanto issued $400 million of 51/2% Senior Notes due 2035. As of Aug. 31, 2006, the
fair value of the 51/2% 2035 Senior Notes was $367 million. A 1 percentage point change in the
interest rates would change the fair value of the 51/2% 2035 Senior Notes by $56 million.
Foreign Currency Fluctuations: In managing foreign currency risk, Monsanto focuses on reducing the
volatility in consolidated cash flow and earnings caused by fluctuations in exchange rates. We use
foreign-currency forward exchange contracts and foreign-currency options to manage the net currency
exposure, in accordance with established hedging policies. Monsanto hedges recorded commercial
transaction exposures, intercompany loans, net investments in foreign subsidiaries, and forecasted
transactions. The company’s significant hedged positions included the euro, the Canadian dollar,
the Brazilian real, the Australian dollar, and the Mexican peso. Unfavorable currency movements of
10 percent would negatively affect the fair market values of the derivatives held to hedge currency
exposures by $110 million.
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Changes in Commodity Prices: Monsanto uses futures contracts to protect itself against commodity
price increases and uses options contracts to limit the unfavorable effect that price changes could
have on these purchases. The company’s futures and options contracts are accounted for as cash flow
hedges and are mainly in the Seeds and Genomics segment. The majority of these contracts hedge the
committed or future purchases of, and the carrying value of payables to growers for, soybean and
corn inventories. A 10 percent decrease in the prices would have a negative effect on the fair
value of those futures of $10 million for soybeans and $5 million for corn, and of those options of
less than $1 million for soybeans and corn. We also use natural gas swaps to manage energy input
costs. A 10 percent decrease in price of gas would have a negative effect on the fair value of the
swaps of $7 million.
Changes in Equity Prices: The company also has investments in equity securities. All such
investments are classified as long-term available-for-sale investments. The fair market value of
these investments is $50 million. These securities are listed on a stock exchange or quoted in an
over-the-counter market. If the market price of the traded securities should decrease by 10
percent, the fair value of the equities would decrease by $5 million. See Note 10 — Investments —
for further details.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management Report
Monsanto Company’s management is responsible for the fair presentation and consistency, in
accordance with accounting principles generally accepted in the United States of America, of all
the financial information included in this Form 10-K. Where necessary, the information reflects
management’s best estimates and judgments.
Management is also responsible for establishing and maintaining an effective system of internal
control over financial reporting. The purpose of this system is to provide reasonable assurance
that Monsanto’s assets are safeguarded against material loss from unauthorized acquisition, use or
disposition, that authorized transactions are properly recorded to permit the preparation of
accurate financial information in accordance with generally accepted accounting principles, that
records are maintained which accurately and fairly reflect the transactions and dispositions of the
company, and that receipts and expenditures are being made only in accordance with authorizations
of management and directors of the company. This system of internal control over financial
reporting is supported by formal policies and procedures, including a Business Conduct program
designed to encourage and assist employees in living up to high standards of integrity, as well as
a Code of Ethics for Chief Executive and Senior Financial Officers. Management seeks to maintain
the effectiveness of internal control over financial reporting by careful personnel selection and
training, division of responsibilities, establishment and communication of policies, and ongoing
internal reviews and audits. See Management’s Annual Report on Internal Control over Financial
Reporting for Management’s conclusion of the effectiveness of Monsanto’s internal control over
financial reporting as of Aug. 31, 2006.
Monsanto’s consolidated financial statements have been audited by Deloitte & Touche LLP,
independent registered public accounting firm. Their audits were conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), and included a test of
financial controls, tests of accounting records, and such other procedures as they considered
necessary in the circumstances.
The Audit and Finance Committee, composed entirely of outside directors, meets regularly with
management, with the internal auditors and with the independent registered public accounting firm
to review accounting, financial reporting, auditing and internal control matters. The committee has
direct and private access to the registered public accounting firm and internal auditors.
/s/ Hugh Grant
Hugh Grant
Chairman, President and Chief Executive Officer
/s/ Terrell K. Crews
Terrell K. Crews
Executive Vice President and Chief Financial Officer
Nov. 1, 2006
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Management’s Annual Report on Internal Control over Financial Reporting
Management of Monsanto Company is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act. Under the supervision and with the participation of our management, including the Chief
Executive Officer and the Chief Financial Officer, we conducted an evaluation of the effectiveness
of our internal control over financial reporting based on the framework and criteria established in
Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).
Based on our evaluation under the COSO framework, management concluded that the company maintained
effective internal control over financial reporting as of Aug. 31, 2006.
The company’s independent registered public accounting firm, Deloitte & Touche LLP, was appointed
by the Audit and Finance Committee of the company’s Board of Directors, and ratified by the
company’s shareowners. Deloitte & Touche LLP has audited and reported on the Consolidated Financial
Statements of Monsanto Company and subsidiaries, management’s assessment of the effectiveness of
the company’s internal control over financial reporting and the effectiveness of the company’s
internal control over financial reporting. The reports of the independent registered public
accounting firm are contained in Item 8 of this Annual Report.
/s/ Hugh Grant
Hugh Grant
Chairman, President and Chief Executive Officer
/s/ Terrell K. Crews
Terrell K. Crews
Executive Vice President and Chief Financial Officer
Nov. 1, 2006
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Report of Independent Registered Public Accounting Firm
To the Shareowners of Monsanto Company:
We have audited management’s assessment, included in the accompanying Management’s Annual Report on
Internal Control over Financial Reporting, that Monsanto Company and subsidiaries (the “Company”)
maintained effective internal control over financial reporting as of August 31, 2006, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over
financial reporting as of
August 31, 2006, is fairly stated, in all material respects, based on the
criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of August 31,
2006, based on the criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the statement of consolidated financial position as of August 31, 2006 and
the related statements of consolidated operations, cash flows, shareowners’ equity, and
comprehensive income for the year ended August 31, 2006, of the Company and our report dated
November 1, 2006 expressed an unqualified opinion on those financial statements and included an
explanatory paragraph regarding the Company’s adoption of Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment, and Financial Accounting Standards Board Interpretation
No. 47, Accounting for Conditional Asset Retirement Obligations, effective September 1, 2005 and
August 31, 2006, respectively.
/s/ DELOITTE & TOUCHE LLP
St. Louis, Missouri
November 1, 2006
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Report of Independent Registered Public Accounting Firm
To the Shareowners of Monsanto Company:
We have audited the accompanying statements of consolidated financial position of Monsanto Company
and subsidiaries (the “Company”) as of August 31, 2006 and 2005, and the related consolidated
statements of operations, cash flows, shareowners’ equity, and comprehensive income for each of the
three years in the period ended August 31, 2006. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Monsanto Company and subsidiaries as of August 31, 2006 and 2005, and the
results of their operations and their cash flows for each of the three years in the period ended
August 31, 2006, in conformity with accounting principles generally accepted in the United States
of America.
As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of
Financial Accounting Standards No. 123(R), Share-Based Payment, and Financial Accounting Standards
Board Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, effective
September 1, 2005 and August 31, 2006, respectively.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Company’s internal control over financial reporting
as of August 31, 2006, based on the criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
November 1, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness
of the Company’s internal control over financial reporting and an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
St. Louis, Missouri
November 1, 2006
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|
Statements of Consolidated Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| (Dollars in millions, except per share amounts) |
|
2006 |
|
2005 |
|
2004 |
|
Net Sales |
|
$ |
7,344 |
|
|
$ |
6,294 |
|
|
$ |
5,423 |
|
Cost of goods sold |
|
|
3,796 |
|
|
|
3,290 |
|
|
|
2,896 |
|
|
Gross Profit |
|
|
3,548 |
|
|
|
3,004 |
|
|
|
2,527 |
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
1,601 |
|
|
|
1,334 |
|
|
|
1,128 |
|
Bad-debt expense |
|
|
47 |
|
|
|
67 |
|
|
|
106 |
|
Research and development expenses |
|
|
725 |
|
|
|
588 |
|
|
|
509 |
|
Acquired in-process research and development (see Note 4) |
|
|
— |
|
|
|
266 |
|
|
|
— |
|
Impairment of goodwill (see Note 9) |
|
|
— |
|
|
|
— |
|
|
|
69 |
|
Restructuring charges (reversals) — net |
|
|
(2 |
) |
|
|
7 |
|
|
|
112 |
|
|
Total Operating Expenses |
|
|
2,371 |
|
|
|
2,262 |
|
|
|
1,924 |
|
Income from Operations |
|
|
1,177 |
|
|
|
742 |
|
|
|
603 |
|
Interest expense |
|
|
134 |
|
|
|
115 |
|
|
|
91 |
|
Interest income |
|
|
(55 |
) |
|
|
(40 |
) |
|
|
(34 |
) |
Solutia-related expenses (see Note 22) |
|
|
29 |
|
|
|
309 |
|
|
|
58 |
|
Other expense — net |
|
|
14 |
|
|
|
79 |
|
|
|
85 |
|
|
Income from Continuing Operations Before Income Taxes and Minority
Interest |
|
|
1,055 |
|
|
|
279 |
|
|
|
403 |
|
Income tax provision |
|
|
340 |
|
|
|
104 |
|
|
|
128 |
|
Minority interest expense |
|
|
17 |
|
|
|
18 |
|
|
|
9 |
|
|
Income from Continuing Operations |
|
|
698 |
|
|
|
157 |
|
|
|
266 |
|
|
Discontinued Operations (see Note 27): |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations of discontinued businesses |
|
|
(5 |
) |
|
|
11 |
|
|
|
(6 |
) |
Income tax benefit |
|
|
(2 |
) |
|
|
(87 |
) |
|
|
(7 |
) |
|
Income (Loss) on Discontinued Operations |
|
|
(3 |
) |
|
|
98 |
|
|
|
1 |
|
|
Income Before Cumulative Effect of Accounting Change |
|
|
695 |
|
|
|
255 |
|
|
|
267 |
|
Cumulative Effect of a Change in Accounting Principle, Net of Tax Benefit
(see Note 2) |
|
|
(6 |
) |
|
|
— |
|
|
|
— |
|
|
Net Income |
|
$ |
689 |
|
|
$ |
255 |
|
|
$ |
267 |
|
|
Basic Earnings (Loss) per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.30 |
|
|
$ |
0.30 |
|
|
$ |
0.50 |
|
Income (loss) on discontinued operations |
|
|
(0.01 |
) |
|
|
0.18 |
|
|
|
— |
|
Cumulative effect of accounting change |
|
|
(0.01 |
) |
|
|
— |
|
|
|
— |
|
|
Net Income |
|
$ |
1.28 |
|
|
$ |
0.48 |
|
|
$ |
0.50 |
|
|
Diluted Earnings (Loss) per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.27 |
|
|
$ |
0.29 |
|
|
$ |
0.50 |
|
Income (loss) on discontinued operations |
|
|
(0.01 |
) |
|
|
0.18 |
|
|
|
— |
|
Cumulative effect of accounting change |
|
|
(0.01 |
) |
|
|
— |
|
|
|
— |
|
|
Net Income |
|
$ |
1.25 |
|
|
$ |
0.47 |
|
|
$ |
0.50 |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
58
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
|
Statements of Consolidated Financial Position
| |
|
|
|
|
|
|
|
|
| |
|
As of Aug. 31,
|
| (Dollars in millions, except share amounts) |
|
2006 |
|
2005 |
|
Assets |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,460 |
|
|
$ |
525 |
|
Short-term investments |
|
|
22 |
|
|
|
150 |
|
Trade receivables — net (see Note 6) |
|
|
1,455 |
|
|
|
1,473 |
|
Miscellaneous receivables |
|
|
344 |
|
|
|
370 |
|
Deferred tax assets |
|
|
390 |
|
|
|
374 |
|
Inventories (see Note 8) |
|
|
1,688 |
|
|
|
1,664 |
|
Assets of discontinued operations (see Note 27) |
|
|
6 |
|
|
|
15 |
|
Other current assets |
|
|
96 |
|
|
|
73 |
|
|
Total Current Assets |
|
|
5,461 |
|
|
|
4,644 |
|
Property, Plant and Equipment: |
|
|
|
|
|
|
|
|
Land and improvements |
|
|
221 |
|
|
|
206 |
|
Buildings and improvements |
|
|
1,114 |
|
|
|
1,080 |
|
Machinery and equipment |
|
|
3,337 |
|
|
|
3,192 |
|
Computer software |
|
|
347 |
|
|
|
310 |
|
Construction in progress and other |
|
|
398 |
|
|
|
302 |
|
|
Total Property, Plant and Equipment |
|
|
5,417 |
|
|
|
5,090 |
|
Less Accumulated Depreciation |
|
|
2,999 |
|
|
|
2,712 |
|
|
Net Property, Plant and Equipment |
|
|
2,418 |
|
|
|
2,378 |
|
Goodwill (see Note 9) |
|
|
1,522 |
|
|
|
1,248 |
|
Other Intangible Assets — Net (see Note 9) |
|
|
1,229 |
|
|
|
1,153 |
|
Noncurrent Deferred Tax Assets |
|
|
625 |
|
|
|
680 |
|
Other Assets |
|
|
473 |
|
|
|
476 |
|
|
Total Assets |
|
$ |
11,728 |
|
|
$ |
10,579 |
|
|
Liabilities and Shareowners’ Equity |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Short-term debt, including current portion of long-term debt |
|
$ |
28 |
|
|
$ |
126 |
|
Accounts payable |
|
|
514 |
|
|
|
525 |
|
Income taxes payable |
|
|
234 |
|
|
|
208 |
|
Accrued compensation and benefits |
|
|
295 |
|
|
|
273 |
|
Accrued marketing programs |
|
|
494 |
|
|
|
457 |
|
Liabilities of discontinued operations (see Note 27) |
|
|
2 |
|
|
|
11 |
|
Miscellaneous short-term accruals |
|
|
712 |
|
|
|
559 |
|
|
Total Current Liabilities |
|
|
2,279 |
|
|
|
2,159 |
|
Long-Term Debt |
|
|
1,639 |
|
|
|
1,458 |
|
Postretirement Liabilities |
|
|
600 |
|
|
|
732 |
|
Long-Term Portion of Solutia-Related Reserve (see Note 22) |
|
|
155 |
|
|
|
184 |
|
Other Liabilities |
|
|
530 |
|
|
|
433 |
|
Commitments and Contingencies (see Note 22) |
|
|
|
|
|
|
|
|
Shareowners’ Equity: |
|
|
|
|
|
|
|
|
Common stock
(authorized: 1,500,000,000 shares, par value $0.01)
Issued 571,377,639 and 561,702,698 shares, respectively;
Outstanding 543,177,133 and 536,382,514 shares, respectively |
|
|
6 |
|
|
|
3 |
|
Treasury stock, 28,200,506 and 25,320,184 shares, respectively, at cost |
|
|
(623 |
) |
|
|
(500 |
) |
Additional contributed capital |
|
|
8,879 |
|
|
|
8,588 |
|
Retained deficit |
|
|
(1,099 |
) |
|
|
(1,572 |
) |
Accumulated other comprehensive loss |
|
|
(623 |
) |
|
|
(889 |
) |
Reserve for ESOP debt retirement |
|
|
(15 |
) |
|
|
(17 |
) |
|
Total Shareowners’ Equity |
|
|
6,525 |
|
|
|
5,613 |
|
|
Total Liabilities and Shareowners’ Equity |
|
$ |
11,728 |
|
|
$ |
10,579 |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
59
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
|
Statements of Consolidated Cash Flows
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2004 |
|
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
689 |
|
|
$ |
255 |
|
|
$ |
267 |
|
Adjustments to reconcile cash provided by operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Items that did not require (provide) cash: |
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax cumulative effect of change in accounting principle (see Note 2) |
|
|
9 |
|
|
|
— |
|
|
|
— |
|
Depreciation and amortization expense |
|
|
519 |
|
|
|
488 |
|
|
|
452 |
|
Impairment of goodwill (see Note 9) |
|
|
— |
|
|
|
— |
|
|
|
69 |
|
Bad-debt expense |
|
|
47 |
|
|
|
67 |
|
|
|
109 |
|
Stock-based compensation expense |
|
|
63 |
|
|
|
— |
|
|
|
— |
|
Excess tax benefits from stock-based compensation |
|
|
(98 |
) |
|
|
— |
|
|
|
— |
|
Tax benefit on employee stock options |
|
|
— |
|
|
|
94 |
|
|
|
37 |
|
Noncash restructuring |
|
|
— |
|
|
|
7 |
|
|
|
51 |
|
Deferred income taxes |
|
|
39 |
|
|
|
(86 |
) |
|
|
88 |
|
Equity affiliate expense — net |
|
|
31 |
|
|
|
31 |
|
|
|
36 |
|
Acquired in-process research and development (see Note 4) |
|
|
— |
|
|
|
266 |
|
|
|
— |
|
Solutia-related charge (see Note 22) |
|
|
— |
|
|
|
284 |
|
|
|
— |
|
Other items that did not provide (require) cash |
|
|
26 |
|
|
|
63 |
|
|
|
(6 |
) |
Changes in assets and liabilities that provided (required) cash, net of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables |
|
|
218 |
|
|
|
394 |
|
|
|
486 |
|
Inventories |
|
|
(25 |
) |
|
|
6 |
|
|
|
70 |
|
Accounts payable and accrued liabilities |
|
|
135 |
|
|
|
(46 |
) |
|
|
110 |
|
Solutia-related payments (see Note 22) |
|
|
(34 |
) |
|
|
(49 |
) |
|
|
— |
|
PCB litigation settlement proceeds (payments) — net |
|
|
27 |
|
|
|
14 |
|
|
|
(328 |
) |
Net investment hedge loss |
|
|
(1 |
) |
|
|
(48 |
) |
|
|
(17 |
) |
Other items |
|
|
29 |
|
|
|
(3 |
) |
|
|
(163 |
) |
|
Net Cash Provided by Operating Activities |
|
|
1,674 |
|
|
|
1,737 |
|
|
|
1,261 |
|
|
Cash Flows Provided (Required) by Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments |
|
|
(171 |
) |
|
|
(150 |
) |
|
|
(550 |
) |
Maturities of short-term investments |
|
|
300 |
|
|
|
300 |
|
|
|
480 |
|
Capital expenditures |
|
|
(370 |
) |
|
|
(281 |
) |
|
|
(210 |
) |
Acquisitions of businesses, net of cash acquired, including contingent consideration |
|
|
(258 |
) |
|
|
(1,541 |
) |
|
|
— |
|
Technology and other investments |
|
|
(147 |
) |
|
|
(65 |
) |
|
|
(58 |
) |
Other investments and property disposal proceeds |
|
|
21 |
|
|
|
70 |
|
|
|
76 |
|
|
Net Cash Required by Investing Activities |
|
|
(625 |
) |
|
|
(1,667 |
) |
|
|
(262 |
) |
|
Cash Flows Provided (Required) by Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net change in financing with less than 90-day maturities |
|
|
(106 |
) |
|
|
28 |
|
|
|
23 |
|
Short-term debt proceeds |
|
|
6 |
|
|
|
68 |
|
|
|
24 |
|
Short-term debt reductions |
|
|
(39 |
) |
|
|
(52 |
) |
|
|
(20 |
) |
Long-term debt proceeds |
|
|
256 |
|
|
|
475 |
|
|
|
117 |
|
Long-term debt reductions |
|
|
(118 |
) |
|
|
(299 |
) |
|
|
(168 |
) |
Payments on debt assumed in Seminis acquisition |
|
|
— |
|
|
|
(495 |
) |
|
|
— |
|
Payments on other financing |
|
|
(9 |
) |
|
|
(15 |
) |
|
|
(12 |
) |
Payment of premium to exchange notes payable |
|
|
— |
|
|
|
(53 |
) |
|
|
— |
|
Debt issuance costs |
|
|
— |
|
|
|
(4 |
) |
|
|
— |
|
Treasury stock purchases |
|
|
(114 |
) |
|
|
(234 |
) |
|
|
(266 |
) |
Stock option exercises |
|
|
116 |
|
|
|
173 |
|
|
|
200 |
|
Excess tax benefits from stock-based compensation |
|
|
98 |
|
|
|
— |
|
|
|
— |
|
Dividend payments |
|
|
(207 |
) |
|
|
(174 |
) |
|
|
(141 |
) |
|
Net Cash Required by Financing Activities |
|
|
(117 |
) |
|
|
(582 |
) |
|
|
(243 |
) |
|
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
Net Increase (Decrease) in Cash and Cash Equivalents |
|
|
935 |
|
|
|
(512 |
) |
|
|
756 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
525 |
|
|
|
1,037 |
|
|
|
281 |
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
1,460 |
|
|
$ |
525 |
|
|
$ |
1,037 |
|
|
See Note 21 — Supplemental Cash Flow Information — for further details.
The accompanying notes are an integral part of these consolidated financial statements.
60
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
|
Statements of Consolidated Shareowners’ Equity
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Additional |
|
Retained |
|
Accumulated Other |
|
|
|
|
| |
|
Common |
|
Treasury |
|
Contributed |
|
Earnings |
|
Comprehensive |
|
Reserve for |
|
|
| (Dollars in millions, except per share amounts) |
|
Stock |
|
Stock |
|
Capital |
|
(Deficit) |
|
Income (Loss)(1) |
|
ESOP Debt |
|
Total |
|
Balance as
of Sept. 1, 2003 |
|
$ |
3 |
|
|
$ |
— |
|
|
$ |
8,077 |
|
|
$ |
(1,733 |
) |
|
$ |
(1,168 |
) |
|
$ |
(23 |
) |
|
$ |
5,156 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
267 |
|
|
|
— |
|
|
|
— |
|
|
|
267 |
|
Treasury stock purchases |
|
|
— |
|
|
|
(266 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(266 |
) |
Grants of restricted stock (63,000 shares) |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Issuance of shares under employee stock plans |
|
|
— |
|
|
|
— |
|
|
|
200 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
200 |
|
Tax benefit on employee stock options |
|
|
— |
|
|
|
— |
|
|
|
37 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
37 |
|
Cash dividends of $0.34 per common share |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(179 |
) |
|
|
— |
|
|
|
— |
|
|
|
(179 |
) |
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
58 |
|
|
|
— |
|
|
|
58 |
|
Minimum pension liability |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(17 |
) |
|
|
— |
|
|
|
(17 |
) |
Net unrealized loss on investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
Accumulated derivative loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4 |
) |
|
|
— |
|
|
|
(4 |
) |
Allocation of ESOP shares, net of dividends
received |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6 |
|
|
|
6 |
|
|
Balance as of Aug. 31, 2004 |
|
$ |
3 |
|
|
$ |
(266 |
) |
|
$ |
8,315 |
|
|
$ |
(1,645 |
) |
|
$ |
(1,132 |
) |
|
$ |
(17 |
) |
|
$ |
5,258 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
255 |
|
|
|
— |
|
|
|
— |
|
|
|
255 |
|
Treasury stock purchases |
|
|
— |
|
|
|
(234 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(234 |
) |
Grants of restricted stock (49,400 shares) |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Issuance of shares under employee stock plans |
|
|
— |
|
|
|
— |
|
|
|
173 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
173 |
|
Tax benefit on employee stock options |
|
|
— |
|
|
|
— |
|
|
|
94 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
94 |
|
Cash dividends of $0.34 per common share |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(182 |
) |
|
|
— |
|
|
|
— |
|
|
|
(182 |
) |
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
231 |
|
|
|
— |
|
|
|
231 |
|
Minimum pension liability |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
|
|
(2 |
) |
Net unrealized loss on investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
|
|
(2 |
) |
Accumulated derivative gain |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16 |
|
|
|
— |
|
|
|
16 |
|
Allocation of ESOP shares, net of dividends
received |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other adjustments(2) |
|
|
— |
|
|
|
— |
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5 |
|
|
Balance as of Aug. 31, 2005 |
|
$ |
3 |
|
|
$ |
(500 |
) |
|
$ |
8,588 |
|
|
$ |
(1,572 |
) |
|
$ |
(889 |
) |
|
$ |
(17 |
) |
|
$ |
5,613 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
689 |
|
|
|
— |
|
|
|
— |
|
|
|
689 |
|
Treasury stock purchases |
|
|
— |
|
|
|
(120 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(120 |
) |
Restricted stock withheld to treasury |
|
|
— |
|
|
|
(3 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
Grants of restricted stock (48,200 shares) |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Issuance of shares under employee stock plans |
|
|
— |
|
|
|
— |
|
|
|
116 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
116 |
|
Excess tax benefits from stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
98 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
98 |
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
64 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
64 |
|
Cash dividends of $0.40 per common share |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(216 |
) |
|
|
— |
|
|
|
— |
|
|
|
(216 |
) |
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
191 |
|
|
|
— |
|
|
|
191 |
|
Minimum pension liability |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
90 |
|
|
|
— |
|
|
|
90 |
|
Net unrealized gain on investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11 |
|
|
|
— |
|
|
|
11 |
|
Accumulated derivative loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(26 |
) |
|
|
— |
|
|
|
(26 |
) |
Allocation of ESOP shares, net of dividends
received |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
2 |
|
Two-for-one
stock split (see Note 1) |
|
|
3 |
|
|
|
— |
|
|
|
(3 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other adjustments(3) |
|
|
— |
|
|
|
— |
|
|
|
15 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15 |
|
|
Balance as of Aug. 31, 2006 |
|
$ |
6 |
|
|
$ |
(623 |
) |
|
$ |
8,879 |
|
|
$ |
(1,099 |
) |
|
$ |
(623 |
) |
|
$ |
(15 |
) |
|
$ |
6,525 |
|
|
|
|
|
| (1) |
|
See Note 19 — Comprehensive Income (Loss) — for further details of the components
of accumulated other comprehensive income (loss). |
| |
| (2) |
|
Includes adjustments to deferred tax liabilities and other assets associated with
the separation from Pharmacia in 2000. |
| |
| (3) |
|
Includes prior year balance reclassifications upon adoption of SFAS 123(R). Also,
includes adjustments to deferred tax assets associated with the spin off from Pharmacia in
2002. |
The accompanying notes are an integral part of these consolidated financial statements.
61
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
|
Statements of Consolidated Comprehensive Income
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2004 |
|
Net Income |
|
$ |
689 |
|
|
$ |
255 |
|
|
$ |
267 |
|
Other Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
191 |
|
|
|
231 |
|
|
|
58 |
|
Unrealized net holding gains (net of tax of $7 in 2006, $3 in
2005, and $2 in 2004) |
|
|
11 |
|
|
|
4 |
|
|
|
5 |
|
Reclassification adjustment for holding gains included in income
(net of tax of $(4) in 2005, and $(3) in 2004) |
|
|
— |
|
|
|
(6 |
) |
|
|
(6 |
) |
Accumulated derivative losses on cash-flow hedges not yet
realized (net of tax of $(17) in 2006, $(1) in 2005, and $(11) in 2004) |
|
|
(28 |
) |
|
|
(2 |
) |
|
|
(18 |
) |
Reclassification adjustment for derivative losses included in income
(net of tax of $1 in 2006, $11 in 2005, and $9 in 2004) |
|
|
2 |
|
|
|
18 |
|
|
|
14 |
|
Additional minimum pension liability adjustment (net of
tax of $56 in 2006, $(21) in 2005(1), and $(7) in 2004) |
|
|
90 |
|
|
|
(2 |
) |
|
|
(17 |
) |
|
Total Other Comprehensive Income |
|
|
266 |
|
|
|
243 |
|
|
|
36 |
|
|
Total Comprehensive Income |
|
$ |
955 |
|
|
$ |
498 |
|
|
$ |
303 |
|
|
|
|
|
| (1) |
|
Includes adjustment to record deferred state income tax benefit on the minimum
pension liability. |
The accompanying notes are an integral part of these consolidated financial statements.
62
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
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 23 — Segment and Geographic Data — for
further details.
In second quarter 2005, the company committed to a plan to sell the environmental technologies
businesses, and in fourth quarter 2005, substantially all of these
businesses were sold. In 2004, the company sold its European breeding and seed business for wheat
and barley. The company also discontinued the plant-made
pharmaceuticals program. As a result, financial data for these businesses have been presented as discontinued operations as outlined
below. The financial statements have been recast and prepared in compliance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144). Accordingly, for all periods presented herein, the
Statements of Consolidated Operations have been conformed to this presentation. Also under the
guidance of SFAS 144, the remaining assets and liabilities of the environmental technologies
businesses have been separately presented on the Statements of Consolidated Financial Position as
of Aug. 31, 2006, and Aug. 31, 2005. The European wheat and barley business and plant-made
pharmaceuticals program were previously reported as part of the Seeds and Genomics segment, and the
environmental technologies businesses were previously reported as part of the Agricultural
Productivity segment. See Note 27 — Discontinued Operations — for further details.
Monsanto includes the operations, assets and liabilities that were previously the agricultural
business of Pharmacia Corporation, which is now a subsidiary of Pfizer Inc. Monsanto was
incorporated as a subsidiary of Pharmacia in February 2000. On Sept. 1, 2000, the assets and
liabilities of the agricultural business were transferred from Pharmacia to Monsanto, pursuant to
the terms of a separation agreement dated as of that date (the Separation Agreement), from which
time the consolidated financial statements reflect the results of operations, financial position,
and cash flows of the company as a separate entity responsible for procuring or providing the
services and financing previously provided by Pharmacia. In October 2000, Monsanto sold
approximately 15 percent of its common stock at $10 per share in an initial public offering (IPO).
On Aug. 13, 2002, Pharmacia completed a spinoff of Monsanto by distributing its entire ownership
interest via a tax-free dividend to Pharmacia’s shareowners.
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.
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.
63
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements are presented in accordance with accounting principles
generally accepted in the United States. These statements pertain to Monsanto and its controlled
subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Investments in other companies in which Monsanto has the ability to exercise significant influence
(generally through an ownership interest greater than 20 percent) are included in the other assets
item in the Statements of Consolidated Financial Position. The company records minority interest
expense in the Statements of Consolidated Operations for any non-owned portion of consolidated
subsidiaries.
Arrangements with other business enterprises are also evaluated, and those in which Monsanto is
determined to have controlling financial interest are consolidated. In January 2003, the Financial
Accounting Standards Board (FASB) issued FASB Interpretation
(FIN) No. 46, Consolidation of Variable
Interest Entities (FIN 46), and amended it by issuing FIN 46R in December 2003. FIN 46R addresses
the consolidation of business enterprises to which the usual condition of consolidation (ownership
of a majority voting interest) does not apply. This interpretation focuses on controlling financial
interests that may be achieved through arrangements that do not involve voting interests. It
concludes that, in the absence of clear control through voting interests, a company’s exposure
(variable interest) to the economic risks and potential rewards from the variable interest entity’s
assets and activities are the best evidence of control. If an enterprise holds a majority of the
variable interests of an entity, it would be considered the primary beneficiary. The primary
beneficiary is required to consolidate the assets, liabilities and results of operations of the
variable interest entity in its financial statements.
Monsanto has an arrangement with a special-purpose entity to provide a financing program for
selected Monsanto customers. See Note 7 — Customer Financing Programs — for a description of this
arrangement. This special-purpose entity is consolidated in accordance with FIN 46R. For other
types of variable interest entities, the company has evaluated its relationships with two entities
and has determined that, although the entities are variable interest entities and Monsanto holds
variable interests in the entities, these entities are not required to be consolidated in the
company’s financial statements pursuant to FIN 46R because Monsanto is not the primary beneficiary.
One entity is a biotechnology company focused on plant gene research, development and
commercialization, in which the company had a 9 percent equity investment as of Aug. 31, 2006.
Monsanto currently has an agreement in place under which Monsanto makes payments for research
services and receives rights to intellectual property developed within funded research. The entity
reported total assets of $35 million and total liabilities of $8 million as of Aug. 31, 2006, and
revenues of $29 million for the 12 months ended Aug. 31, 2006. The second entity is a joint venture
in which the company has a 49 percent equity investment. This joint venture packages and sells
seeds, with a focus on corn and sunflower seeds, and also sells and distributes agricultural
chemical products. The joint venture reported total assets of $28 million and total liabilities of
$18 million as of Aug. 31, 2006, and revenues of $11 million for the 12 months ended Aug. 31, 2006.
As of Aug. 31, 2006, Monsanto’s total estimate of maximum exposure to loss as a result of its
relationships with these entities was approximately $22 million, which represents Monsanto’s equity
investments in these entities.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make certain estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying notes. Estimates are
adjusted to reflect actual experience when necessary. Significant estimates and assumptions affect
many items in the financial statements, for example: allowance for doubtful trade receivables,
sales returns and allowances, inventory obsolescence, income tax liabilities and assets and related
valuation allowances, asset impairments, valuations of goodwill and other intangible assets,
employee benefit plan liabilities, value of equity-based awards, marketing program liabilities,
grower accruals (an estimate of amounts payable to farmers who grow seed for Monsanto),
restructuring reserves, self-insurance reserves, environmental reserves, deferred revenue,
contingencies, litigation, incentives, and the allocation of corporate costs to segments.
Significant estimates and assumptions are also used to establish the useful lives of depreciable
tangible and certain intangible assets. Actual results may differ from those estimates and
assumptions, and such results may affect income, financial position, or cash flows.
64
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenue Recognition
The company derives most of its revenue from three main sources: sales of branded conventional seed
and branded seed with biotechnology traits; royalties and license revenues from licensed
biotechnology traits and genetic material; and sales of agricultural chemical products.
Revenues from all branded seed sales are recognized when the title to the products is transferred.
When the right of return exists in the company’s seed business, sales revenues are reduced at the
time of sale to reflect expected returns. In order to estimate the expected returns, management
analyzes historical returns, economic trends, market conditions, and changes in customer demand.
Revenues for agricultural chemical products are recognized when title to the products is
transferred. The company recognizes revenue on products it sells to distributors when, according to
the terms of the sales agreements, delivery has occurred, performance is complete, no right of
return exists, and pricing is fixed or determinable at the time of sale.
There are several additional conditions for recognition of revenue: that the collection of sales
proceeds be reasonably assured based on historical experience and current market conditions, that
pricing be fixed or determinable, and that there be no further performance obligations under the
sale or the royalty or license agreement.
Monsanto follows Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, the SEC
interpretation of accounting guidelines on revenue recognition. SAB 104 primarily affects
Monsanto’s recognition of license revenues from biotechnology traits sold through third-party seed
companies. Trait royalties and license revenues are recorded when earned, usually when the
third-party seed companies sell their seeds containing Monsanto traits to growers.
To reduce credit exposure in Latin America, Monsanto collects payments on certain customer accounts
in grain. Monsanto does not take ownership of the grain or the associated inventory risk and
therefore does not record revenue or the related cost of sales for the grain. Such payments in
grain are negotiated at the time Monsanto’s products are sold to the customers and are valued at
the prevailing grain commodity prices on that day. By entering into forward sales contracts with
grain merchants, Monsanto mitigates the commodity price exposure from the time a contract is signed
with a customer until the time the grain is collected from the customer by a grain merchant on
Monsanto’s behalf.
Shipping and Handling Costs
Following the guidance of Emerging Issues Task Force (EITF) Issue No. 00-10, Accounting for
Shipping and Handling Fees and Costs, Monsanto records outward freight, purchasing and receiving
costs, inspection costs, warehousing costs, internal transfer costs, and other costs of the
company’s distribution network in cost of goods sold.
Marketing and Advertising Costs
Promotional and advertising costs are expensed as incurred and are included in selling, general and
administrative expenses in the Statements of Consolidated Operations. Accrued marketing programs
are recorded in accordance with EITF Issue No. 01-9, Accounting for Consideration Given by a Vendor
to a Customer, based on specific performance criteria met by distributors, dealers and farmers,
such as purchase volumes, promptness of payment, and market share increases. The associated cost of
marketing programs is recognized as a reduction of gross sales in the Statements of Consolidated
Operations. In addition, product performance, certain marketing programs, and variations in weather
can result in free product to customers. The associated cost of free product is recognized as cost
of goods sold in the Statements of Consolidated Operations.
Research and Development Costs
The company accounts for research and development costs in accordance with SFAS No. 2, Accounting
for Research and Development Costs (SFAS 2). Under SFAS 2, all research and development costs must
be charged to expense as incurred. Accordingly, internal research and development costs are
expensed as incurred. Third-party research and development costs are expensed when the contracted
work has been performed or as milestone results have been achieved. Acquired in-process research
and development costs with no alternative future uses are expensed in the period acquired. The
costs of purchased in-process research and development that have alternative future uses are
capitalized and amortized over the estimated useful
65
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
life of the asset. The costs associated with equipment or facilities acquired or constructed for
research and development activities that have alternative future uses are capitalized and
depreciated on a straight-line basis over the estimated useful life of the asset. The amortization
and depreciation for such capitalized assets are charged to research and development expenses.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary
differences between the tax bases of assets and liabilities and their reported amounts. Management
regularly assesses the likelihood that deferred tax assets will be recovered from future taxable
income, and to the extent management believes that it is more likely than not that a deferred tax
asset will not be realized, a valuation allowance is established. When a valuation allowance is
established, increased or decreased, an income tax charge or benefit is included in the
consolidated financial statements and net deferred tax assets are adjusted accordingly. The net
deferred tax assets as of Aug. 31, 2006, represent the estimated future tax benefits to be received
from taxing authorities or future reductions of taxes payable.
Cash and Cash Equivalents
All highly liquid investments (defined as investments with a maturity of three months or less when
purchased) are considered cash equivalents.
Short-Term Investments
Short-term investments consist primarily of U.S. Treasury bills, other government securities, and
commercial paper. These investments are designated as available-for-sale and are stated at market
value. For purposes of the Statements of Consolidated Financial Position and Consolidated Cash
Flows, these short-term investments are not considered cash equivalents, because their maturities
are more than three months when purchased.
Accounts Receivable
The company provides an allowance for doubtful trade receivables equal to the estimated
uncollectible amounts. That estimate is based on historical collection experience, current economic
and market conditions, and a review of the current status of each customer’s trade accounts
receivable.
Long-Term Investments
Monsanto has long-term investments in equity securities, all of which are considered to be
available-for-sale. They are classified as other assets in the Statements of Consolidated Financial
Position, and they are carried at fair value, with unrealized gains and losses reported in the
Statements of Consolidated Shareowners’ Equity in accumulated other comprehensive income (loss).
Each security is reviewed regularly to evaluate whether it has experienced an other-than-temporary
decline in fair value. If Monsanto believes that an other-than-temporary decline exists, the
investment in question is written down to market value in accordance with EITF Issue No. 03-01, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-01).
The write-down is recorded in the Statements of Consolidated Operations as an impairment of
securities.
Fair Values of Financial Instruments
The recorded amounts of cash, trade receivables, investments in securities, miscellaneous
receivables, third-party guarantees, commodity futures contracts, accounts payable, grower
accruals, accrued marketing programs, miscellaneous short-term accruals, and short-term debt
approximate their fair values. Fair values are based on quoted market prices, estimates from
brokers, and other appropriate valuation techniques. The fair value estimates do not necessarily
reflect the values that could be realized in the current market on any one day. See Note 13 —
Financial Instruments — for further details.
Inventory Valuation
Inventories are stated at the lower of cost or market. Inventories are valued as follows:
| |
• |
|
Seeds and Genomics: Actual cost is used to value raw materials such as
treatment chemicals and packaging, as well as goods in process. Costs for substantially
all finished goods, which include the cost of carry-over crops from the |
66
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| |
|
|
previous year, are valued at weighted-average actual cost. Weighted-average actual cost
includes field growing and harvesting costs, plant conditioning and packaging costs, and
manufacturing overhead costs. |
| |
| |
• |
|
Agricultural Productivity: Actual cost is used to value raw materials and
supplies. Standard cost, which approximates actual cost, is used to value finished goods
and goods in process. Variances, exclusive of volume and unusual operating performance,
are capitalized into inventory. Standard cost includes direct labor and raw materials,
and manufacturing overhead based on normal capacity. The cost of the Agricultural
Productivity segment inventories in the United States, excluding supplies (approximately
one-fourth of total inventories as of Aug. 31, 2006, and Aug. 31, 2005) is determined by
using the last-in, first-out (LIFO) method, which generally reflects the effects of
inflation or deflation on cost of goods sold sooner than other inventory cost methods.
The cost of inventories outside of the United States, as well as supplies inventories in
the United States, is determined by using the first-in, first-out (FIFO) method; FIFO is
used outside of the United States because the requirements in the countries where
Monsanto maintains inventories generally do not allow the use of the LIFO method.
Inventories at FIFO approximate current cost. |
Goodwill
Monsanto follows the guidance of SFAS No. 141, Business Combinations (SFAS 141), in recording the
goodwill arising from a business combination as the excess of purchase price and related costs over
the fair value of identifiable assets acquired and liabilities assumed.
Under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), goodwill is not amortized and
is subject to annual impairment tests. A fair-value-based test is applied at the reporting unit
level, which is generally at or one level below the operating segment level. The test compares the
fair value of the company’s reporting units to the carrying value of those reporting units. This
test requires various judgments and estimates. The fair value of goodwill is determined using an
estimate of future cash flows of the reporting unit and a risk-adjusted discount rate to compute a
net present value of future cash flows. An adjustment to goodwill will be recorded for any goodwill
that is determined to be impaired. Impairment of goodwill is measured as the excess of the carrying
amount of goodwill over the fair values of recognized and unrecognized assets and liabilities of
the reporting unit. Goodwill is tested for impairment at least annually, or more frequently if
events or circumstances indicate it might be impaired. Goodwill was last tested for impairment as
of March 1, 2006. See Note 9 — Goodwill and Other Intangible Assets — for further discussion of
the annual impairment test.
Other Intangible Assets
Other intangible assets consist primarily of acquired seed germplasm, acquired biotechnology
intellectual property, trademarks and customer relationships. Seed germplasm is the genetic
material used in new seed varieties. Germplasm is amortized on a straight-line basis over useful
lives ranging from seven years for completed technology germplasm to a maximum of 30 years for
certain core technology germplasm. Completed technology germplasm consists of seed hybrids and
varieties that are commercially available. Core technology germplasm is the collective germplasm of
inbred and hybrid seeds and has a longer useful life as it is used to develop new seed hybrids and
varieties. Acquired biotechnology intellectual property includes intangible assets related to
acquisitions and licenses through which Monsanto has acquired the rights to various research and
discovery technologies. These encompass intangible assets such as enabling processes and data
libraries necessary to support the integrated genomics and biotechnology platforms. These
intangible assets have alternative future uses and are amortized over useful lives ranging from
three to 11 years. The useful lives of acquired germplasm and acquired biotechnology intellectual
property are determined based on consideration of several factors including the nature of the
asset, its expected use, length of licensing agreement or patent and the period over which benefits
are expected to be received from the use of the asset.
Monsanto has a broad portfolio of trademarks and patents including trademarks for Roundup (for
herbicide products), Roundup Ready, Bollgard, and YieldGard (for traits), DEKALB, Asgrow, Seminis
and Stoneville (for agricultural seeds), Posilac (for dairy productivity products), and patents for
our insect-protection traits, formulations used to make our herbicides and various manufacturing
processes. The amortization period for trademarks and patents ranges from three to 30 years.
Trademarks are amortized on a straight-line basis over their useful lives. The useful life of a
trademark is determined based on the estimated market-life of the associated company, brand or
product. Patents are amortized on a straight-line basis
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
over the period in which the patent is legally protected, the period over which benefits are
expected to be received, or the estimated market-life of the product with which the patent is
associated, whichever is less.
In conjunction with acquisitions completed during fiscal years 2006 and 2005, Monsanto has access
to the distribution channels and customer relationships of the acquired companies. These
relationships are expected to provide economic benefits to Monsanto. The amortization period for
customer relationships ranges from five to 13 years, and amortization is recognized on a
straight-line basis over these periods. The amortization period of customer relationships
represents management’s best estimate of the expected usage or consumption of the economic benefits
of the acquired assets, which is based on the company’s historical experience of customer attrition
rates.
In accordance with SFAS 144, all amortizable intangible assets are assessed for impairment whenever
events indicate a possible loss. Such an assessment involves estimating undiscounted cash flows
over the remaining useful life of the intangible. If the review indicates that undiscounted cash
flows are less than the recorded value of the intangible asset, the carrying amount of the
intangible is reduced by the estimated cash-flow shortfall on a discounted basis, and a
corresponding loss is charged to the Statement of Consolidated Operations. See Note 9 — Goodwill
and Other Intangible Assets — for further discussion of Monsanto’s intangible assets.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Additions and improvements are capitalized;
these include all material, labor, and engineering costs to design, install or improve the asset
and interest costs on construction projects. Such costs are not depreciated until they are placed
in service. Routine repairs and maintenance are expensed as incurred. The cost of plant and
equipment is depreciated using the straight-line method over the estimated useful life of the asset
— weighted-average periods of 25 years for buildings, and 10 years for machinery and equipment. In
compliance with SFAS 144, long-lived assets are reviewed for impairment whenever in management’s
judgment conditions indicate a possible loss. Such impairment tests compare estimated undiscounted
cash flows to the recorded value of the asset. If an impairment is indicated, the asset is written
down to its fair market value or, if fair market value is not readily determinable, to an estimated
fair value based on discounted cash flows.
Monsanto follows SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS 143), which
addresses financial accounting for and reporting of costs and obligations associated with the
retirement of tangible long-lived assets. Monsanto has asset retirement obligations with carrying
amounts totaling $49 million and $34 million as of Aug. 31, 2006, and Aug. 31, 2005, respectively,
primarily relating to its manufacturing facilities. The change in carrying value as of Aug. 31,
2006, consisted of $10 million for the adoption of FIN No. 47, Accounting for
Conditional Asset Retirement Obligations (FIN 47), $4 million for accretion expense, and $1 million
related to property additions and increased costs.
As of Aug. 31, 2006, Monsanto adopted the provisions of FIN 47. FIN 47 clarifies that conditional
obligations meet the definition of an asset retirement obligation in SFAS 143, and therefore should
be recognized if their fair value is reasonably estimable. As a result of adopting FIN 47, Monsanto
recorded a noncash pre-tax charge of $9 million ($6 million aftertax). This charge is reported as a
cumulative effect of a change in accounting principle in the fourth quarter of 2006. If FIN 47
would have been effective for all periods presented, net income would have been reduced by less
than $1 million for fiscal years 2005 and 2004, or less than $0.01 per diluted share, and the
aggregate carrying amount of the obligation would have been $10 million and $9 million as of Aug.
31, 2005 and Aug. 31, 2004, respectively.
Environmental Remediation Liabilities
Monsanto follows Statement of Position 96-1, Environmental Remediation Liabilities, which provides
guidance for recognizing, measuring and disclosing environmental remediation liabilities. Monsanto
accrues these costs in the period when responsibility is established and when such costs are
probable and reasonably estimable based on current law and existing technology. Postclosure and
remediation costs for hazardous waste sites and other waste facilities at operating locations are
accrued over the estimated life of the facility, as part of its anticipated closure cost.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Litigation and Other Contingencies
Monsanto is involved in various intellectual property, biotechnology, tort, contract, antitrust,
employee benefit, environmental and other litigation, claims and legal proceedings, such as,
proceedings relating to Solutia’s bankruptcy filing (see Note 22 — Commitments and Contingencies);
environmental remediation; and government investigations. Management routinely assesses the
likelihood of adverse judgments or outcomes to those matters, as well as ranges of probable losses,
to the extent losses are reasonably estimable. In accordance with SFAS No. 5, Accounting for
Contingencies, accruals for such contingencies are recorded to the extent that management concludes
their occurrence is probable and the financial impact, should an adverse outcome occur, is
reasonably estimable. Disclosure for specific legal contingencies is provided if the likelihood of
occurrence is at least reasonably possible and the exposure is considered material to the
consolidated financial statements. In making determinations of likely outcomes of litigation
matters, management considers many factors. These factors include, but are not limited to, past
experience, scientific and other evidence, interpretation of relevant laws or regulations, and the
specifics and status of each matter. If the assessment of the various factors changes, the
estimates may change. That may result in the recording of an accrual or a change in a previously
recorded accrual. Predicting the outcome of claims and litigation, and estimating related costs and
exposure involves substantial uncertainties that could cause actual costs to vary materially from
estimates and accruals.
Guarantees
Monsanto is subject to various commitments under contractual and other commercial obligations. The
company recognizes liabilities for contingencies and commitments under 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). For additional information on the company’s commitments and other contractual and
commercial obligations, see Note 22 — Commitments and Contingencies.
Foreign Currency Translation
The financial statements for most of Monsanto’s ex-U.S. operations are translated to U.S. dollars
at current exchange rates. For assets and liabilities, the year-end rate is used. For revenues,
expenses, gains and losses, the average rate for the period is used. Unrealized currency
adjustments in the Statements of Consolidated Financial Position are accumulated in equity as a
component of accumulated other comprehensive income (loss). The financial statements of ex-U.S.
operations in highly inflationary economies are translated at either current or historical exchange
rates, in accordance with SFAS No. 52, Foreign Currency Translation. These currency adjustments are
included in net income. As of Sept. 1, 2005, the company has no significant entities designated as
highly inflationary.
Significant translation exposures include the euro, the Canadian dollar, the Brazilian real, the
Australian dollar, and the Mexican peso. Currency restrictions are not expected to have a
significant effect on Monsanto’s cash flow, liquidity, or capital resources.
Derivatives and Other Financial Instruments
Monsanto uses financial derivative instruments to limit its exposure to changes in foreign currency
exchange rates, commodity prices, and interest rates. Monsanto does not use financial derivative
instruments for the purpose of speculating in foreign currencies, commodities or interest rates.
Monsanto continually monitors its underlying market risk exposures and believes that it can modify
or adapt its hedging strategies as needed.
In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS
133), and SFAS No. 149, Amendment of Statement 133 Derivative Instruments and Hedging Activities
(SFAS 149), all derivatives, whether designated for hedging relationships or not, are recognized in
the Statements of Consolidated Financial Position at their fair value. At the time a derivative
contract is entered into, Monsanto designates each derivative as: (1) a hedge of the fair value of
a recognized asset or liability (a fair-value hedge), (2) a hedge of a forecasted transaction or of
the variability of cash flows that are to be received or paid in connection with a recognized asset
or liability (a cash-flow hedge), (3) a foreign-currency fair-value or cash-flow hedge (a
foreign-currency hedge), (4) a foreign-currency hedge of the net investment in a foreign
subsidiary, or (5) a derivative that does not qualify for hedge accounting treatment.
69
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2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Changes in the fair value of a derivative that is highly effective as, and that is designated as
and qualifies as a fair-value hedge, along with changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk, are recorded currently in net income. Changes
in the fair value of a derivative that is highly effective as, and that is designated as and
qualifies as a cash-flow hedge, to the extent that the hedge is effective, are recorded in
accumulated other comprehensive income (loss), until net income is affected by the variability from
cash flows of the hedged item. Any hedge ineffectiveness is included in current-period net income.
Changes in the fair value of a derivative that is highly effective as, and that is designated as
and qualifies as a foreign-currency hedge, are recorded either in current-period earnings or in
accumulated other comprehensive income (loss), depending on whether the hedging relationship
satisfies the criteria for a fair-value or cash-flow hedge. Changes in the fair value of a
derivative that is highly effective as, and that is designated as a foreign-currency hedge of the
net investment in a foreign subsidiary, are recorded in the accumulated foreign currency
translation. Changes in the fair value of derivative instruments not designated as hedges are
reported currently in earnings.
Monsanto formally documents all relationships between hedging instruments and hedged items, as well
as its risk-management objective and its strategy for undertaking various hedge transactions. This
includes linking all derivatives that are designated as fair-value, cash-flow, or foreign-currency
hedges either to specific assets and liabilities on the Statements of Consolidated Financial
Position, or to firm commitments or forecasted transactions. Monsanto formally assesses a hedge at
its inception and on an ongoing basis thereafter to determine whether the hedging relationship
between the derivative and the hedged item is still highly effective, and whether it is expected to
remain highly effective in future periods, in offsetting changes in fair value or cash flows. When
derivatives cease to be highly effective hedges, Monsanto discontinues hedge accounting
prospectively.
Monsanto uses interest rate derivatives to reduce interest rate risk and to manage the interest
rate sensitivity of its debt. By entering into these agreements, Monsanto changes the interest rate
mix (fixed/variable) of its debt portfolio. During fiscal years 2006, 2005 and 2004, the company
also used natural gas swaps to manage risk associated with energy input costs.
Pension and Postretirement Plans
Monsanto has various defined benefit and postretirement plans. Monsanto generally amortizes
unrecognized actuarial gains and losses on a straight-line basis over the remaining estimated
service life of participants. The measurement date for most plans is August 31. See Note 14 —
Postretirement Benefits — Pensions and Note 15 — Postretirement Benefits — Health Care and Other
— for a full description of these plans and the accounting and funding policies.
Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R).
SFAS 123R replaced SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), and superseded
APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). In March 2005, the SEC
issued Staff Accounting Bulletin No. 107 (SAB 107), which expresses views of the SEC staff
regarding the interaction between SFAS 123R and certain SEC rules and regulations, and provides the
staff’s views regarding the valuation of share-based payment arrangements for public companies. On
Sept. 1, 2005, Monsanto adopted SFAS 123R, which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and directors based on
estimated fair values. Monsanto adopted SFAS 123R using the modified prospective transition method.
Under this method, the consolidated financial statements as of and for the year ended Aug. 31,
2006, reflect the impact of SFAS 123R, while the consolidated financial statements for prior
periods have not been restated to reflect, and do not include, the impact of SFAS 123R. See Note 17
— Stock-Based Compensation Plans — for pro forma disclosure of stock-based compensation expense
for 2005 and 2004.
Compensation expense for restricted stock is based on the fair value of Monsanto’s restricted stock
at the grant date and is recognized throughout the vesting period as calculated in accordance with
SFAS 123R.
Reclassifications
Certain prior-period amounts have been reclassified to conform with the current-year presentation.
Overdrafts were previously reported within short-term debt in the Statements of Consolidated
Financial Position but are now included in accounts payable to better reflect the nature of the
liabilities as book overdrafts. As of Aug. 31, 2005, overdrafts were $156
70
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2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
million. Minority interest expense was previously reported within other expense — net in the
Statements of Consolidated Operations but is now included in its own line item.
NOTE 3. NEW ACCOUNTING STANDARDS
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Benefit Plans (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. This statement is effective for financial statements as of
the end of fiscal years ending after Dec. 15, 2006. 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. 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. The company does not believe the adoption of SAB 108 will have a material impact on the
consolidated financial statements.
In June 2006, the FASB
issued 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. The provisions of FIN 48 will be effective for financial
statements issued for fiscal years beginning after Dec. 15, 2006, with the cumulative effect of the
change in accounting principle recorded as an adjustment to opening retained earnings. 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. The company is currently evaluating the impact of SFAS 156 on the
consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS 154).
SFAS 154 requires retrospective application to prior-period financial statements of changes in
accounting principle, unless it is impracticable to determine either the period-specific effects or
the cumulative effect of the change. SFAS 154 also redefines “restatement” as the revising of
previously issued financial statements to reflect the correction of an error. This statement is
effective for accounting changes and corrections of errors made in fiscal years beginning after
Dec. 15, 2005. The company does not currently believe that the adoption of SFAS 154 will have a
material impact on the consolidated financial statements.
NOTE 4. BUSINESS COMBINATIONS
2006 Acquisitions: In September 2005, Monsanto’s American Seeds, Inc. (ASI) subsidiary acquired
five regional U.S. seed companies for an aggregate purchase price of $54 million (net of cash
acquired), inclusive of transaction costs of $2 million. In March 2006, ASI acquired two additional
U.S. seed companies for an aggregate purchase price of $6 million (net of cash acquired), inclusive
of transaction costs of less than $1 million. 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),
inclusive of transaction costs of $1 million. The financial results of these acquisitions were
included in the company’s consolidated financial statements from their respective dates of
acquisition.
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2006 FORM 10-K |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
For all fiscal year 2006 acquisitions described above, the business operations of the acquired
entities were included in the Seeds and Genomics segment and are expected to further bolster ASI’s
ability to directly serve farmer-customers with a technology-rich, locally-oriented business model.
These acquisitions were accounted for as purchase transactions. Accordingly, the assets and
liabilities of the acquired entities were recorded at their estimated fair values as of the dates
of the acquisitions. The preliminary purchase price allocations for all fiscal year 2006
acquisitions as of Aug. 31, 2006, are summarized in the aggregate in the following table. These
allocations are subject to adjustment pending further assessments, including the valuation of
intangible assets. Pro forma information related to these acquisitions is not presented because the
impact of these acquisitions, either individually or in the aggregate, on the company’s
consolidated results of operations is not considered to be significant.
| |
|
|
|
|
|
| |
|
Aggregate |
| (Dollars in millions) |
|
Acquisitions |
|
Tangible Assets |
|
$ |
17 |
|
Goodwill |
|
|
101 |
|
Other Intangible Assets |
|
|
52 |
|
|
Total Assets Acquired |
|
|
170 |
|
|
Total Liabilities Assumed |
|
|
34 |
|
|
Net Assets Acquired |
|
|
136 |
|
Cash Acquired |
|
|
3 |
|
|
Purchase Price |
|
$ |
133 |
|
|
The primary items that generated the goodwill were the premiums paid by the company for the
right to control the businesses acquired, including the direct-to-farmer and farmer-dealer
distribution models, and the value of the acquired assembled work forces. The majority of the
goodwill is not deductible for tax purposes.
The acquired identifiable intangible assets of $52 million have a weighted-average useful life of
approximately seven years. Intangible assets are comprised of acquired customer relationships of
$32 million to be amortized on a straight-line basis over seven years, trademarks and trade names
of $16 million to be amortized on a straight-line basis over lives ranging from seven to 10 years,
and covenants not-to-compete of $4 million to be amortized on a straight-line basis over five
years.
2005 Acquisitions: In first quarter fiscal year 2005, Monsanto acquired the canola seed businesses
of Advanta Seeds (Advanta) for $52 million in cash (net of cash acquired), and ASI acquired Channel
Bio Corp. for $104 million in cash (net of cash acquired) and $15 million in liabilities paid in
second quarter 2005. In third quarter 2005, ASI, through Channel Bio Corp., acquired NC+ Hybrids,
Inc. for $40 million in cash (net of cash acquired).
In third quarter fiscal year 2005, Monsanto acquired Seminis, Inc. for $1.0 billion in cash (net of
cash acquired) and paid $495 million for the repayment of its outstanding debt. The acquisition
also included a contingent payment of $125 million, which was paid during second quarter 2006,
resulting in additional purchase price and goodwill.
In third quarter fiscal year 2005, Monsanto acquired Stoneville Pedigreed Seed Co. (formerly known
as Emergent Genetics, Inc.) and Emergent Genetics India Ltd. (collectively, “Stoneville”) for $305
million (net of cash acquired). Debt of $16 million was also assumed in the transaction.
In fiscal year 2005, charges of $266 million were recorded in research and development (R&D)
expenses for the write-off of acquired in-process R&D (IPR&D). Management believed that the
technological feasibility of the IPR&D was not established and that the research had no alternative
future uses. Accordingly, the amounts allocated to IPR&D were required to be expensed immediately
under generally accepted accounting principles.
As of the acquisition dates, management began to assess and formulate plans to integrate or
restructure the acquired entities. These activities are accounted for in accordance with EITF Issue
No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination (EITF
95-3), and primarily include the potential closure of facilities, the abandonment or redeployment
of equipment, and employee terminations or relocations. In first quarter 2006, management finalized
plans to integrate or restructure certain activities of Seminis and the acquired India cotton
business. As a result, asset fair values were reduced by $2 million, and additional liabilities of
$14 million were recorded, resulting in additional goodwill of $16 million. The plans for Seminis
and the acquired India cotton business include employee terminations and relocations, exiting
certain
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2006 FORM 10-K |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
product lines and facility closures. As of Aug. 31, 2006, estimated restructuring costs of $18
million have been recognized as current liabilities in the purchase price allocations, and $17
million has been charged against these liabilities, primarily related to payments for employee
terminations and relocations.
All fiscal year 2005 acquisitions described above were accounted for as purchase transactions.
Accordingly, the assets and liabilities of the acquired entities were recorded at their estimated
fair values at the dates of the acquisitions. These estimated fair
values, including the EITF 95-3
liabilities discussed above, were adjusted during fiscal year 2006, resulting in additional
goodwill of $36 million.
The following unaudited pro forma financial information presents the combined results of operations
of the company and the company’s significant acquisitions (Seminis and Stoneville) as if these
acquisitions had occurred at the beginning of the periods presented. The pro forma results are not
necessarily indicative of what actually would have occurred had the acquisitions been in effect for
the periods presented and should not be taken as representative of Monsanto’s future consolidated
results of operations. Pro forma results were as follows for fiscal years 2005 and 2004:
| |
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| (Dollars in millions, except per share amounts) |
|
2005 |
|
2004 |
|
Net Sales |
|
$ |
6,672 |
|
|
$ |
6,021 |
|
Net Income |
|
|
524 |
|
|
|
206 |
|
|
Net Income per Basic Share |
|
$ |
0.98 |
|
|
$ |
0.39 |
|
Net Income per Diluted Share |
|
|
0.96 |
|
|
|
0.38 |
|
|
The pro forma information contains the actual combined operating results of Monsanto, Seminis
and Stoneville, with the results prior to the acquisition date adjusted to include the amortization
of the acquired intangible assets. The pro forma results exclude the write-off of acquired IPR&D
and the increase in cost of goods sold due to the revaluation of inventory related to the Seminis
and Stoneville acquisitions.
The historical financial information for Seminis includes charges of $32 million in the 12 months
ended Aug. 31, 2004, related to one-time legal and professional fees and other costs directly
attributable to a prior acquisition transaction. The historical financial information for Seminis
also includes nonrecurring costs under the previous ownership structure of $8 million and $11
million for fiscal years 2005 and 2004, respectively. In addition, interest costs related to
Seminis debt have not been removed from the historical Seminis results. However, as discussed
above, Seminis debt of $495 million, with a weighted average interest rate of approximately 10%,
was repaid subsequent to the acquisition date, while interest expense on commercial paper issued to
fund repayments of the debt was at an interest rate of approximately 3%. In July 2005, Monsanto
issued $400 million of 51/2% Senior Notes, which allowed the company to pay down the commercial paper
borrowings. See Note 12 — Debt and Other Credit Arrangements — for further discussion of the 51/2%
Senior Notes due July 15, 2035.
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2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5. RESTRUCTURING
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Restructuring activity was recorded in the Statements of Consolidated Operations as follows:
|
|
| |
|
Year Ended Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2004 |
|
Cost of Goods Sold(1,2) |
|
$ |
— |
|
|
$ |
(1 |
) |
|
$ |
35 |
|
Impairment of Goodwill |
|
|
— |
|
|
|
— |
|
|
|
69 |
|
Restructuring Charges (Reversals) — Net(1,2) |
|
|
(2 |
) |
|
|
7 |
|
|
|
112 |
|
|
Income (Loss) from Continuing Operations Before Income Taxes |
|
|
2 |
|
|
|
(6 |
) |
|
|
(216 |
) |
Income Tax Provision (Benefit)(3) |
|
|
1 |
|
|
|
(20 |
) |
|
|
(54 |
) |
|
Income (Loss) from Continuing Operations |
|
|
1 |
|
|
|
14 |
|
|
|
(162 |
) |
Loss from Operations of Discontinued Businesses
(4) |
|
|
— |
|
|
|
— |
|
|
|
(11 |
) |
Income Tax Benefit |
|
|
— |
|
|
|
— |
|
|
|
(9 |
) |
|
Loss on Discontinued Operations |
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
Net Income (Loss) |
|
$ |
1 |
|
|
$ |
14 |
|
|
$ |
(164 |
) |
|
|
|
|
| (1) |
|
The $2 million of restructuring reversals in fiscal year 2006 included $1 million in
the Seeds and Genomics segment and $1 million in the Agricultural Productivity segment. The $6
million of restructuring charges in fiscal year 2005 included $7 million in Seeds and Genomics
offset by reversals of $1 million in Agricultural Productivity. In fiscal year 2004, the $35
million of restructuring charges recorded in cost of goods sold was split $9 million in Seeds
and Genomics and $26 million in Agricultural Productivity, and the $112 million recorded in
restructuring charges — net was split $40 million in Seeds and Genomics and $72 million in
Agricultural Productivity. |
| |
| (2) |
|
In fiscal year 2004, restructuring activity included reversals related to prior
plans of $7 million, of which $1 million was recorded in cost of goods sold and $6 million was
recorded in restructuring charges — net. |
| |
| (3) |
|
The $20 million income tax benefit in fiscal year 2005 was related to tax losses
incurred on the sale of the European wheat and barley business. See below for further
discussion. |
| |
| (4) |
|
Fiscal year 2004 contained restructuring charges related to discontinued businesses
(see Note 27 —Discontinued Operations). The fiscal year 2004 restructuring charges recorded
in discontinued operations were related to the European wheat and barley business (see the
next table in this section for more details). |
Fiscal Year 2004 Restructuring Plan
In October 2003, Monsanto announced plans to continue to reduce costs primarily associated with its
agricultural chemistry business as that segment matures globally. Total restructuring actions
approved under the fiscal year 2004 restructuring plan were estimated to be $289 million pretax.
These plans included: (1) reducing costs associated with the company’s Roundup herbicide business;
(2) exiting the European breeding and seed business for wheat and barley; and (3) discontinuing the
plant-made pharmaceuticals program. In fiscal year 2004, total restructuring charges related to
these actions were $165 million pretax ($105 million aftertax). Additionally, the approved plan
included the impairment of goodwill in the global wheat business of $69 million pretax ($64 million
aftertax; see Note 9 — Goodwill and Other Intangible Assets). In fiscal year 2005, the company
incurred charges of $6 million pretax to complete the restructuring actions under this plan, and in
fiscal year 2006, restructuring reversals of $2 million pretax were recorded.
In first quarter 2005, Monsanto recorded a deferred tax benefit of $106 million, of which $20
million was recorded in continuing operations and the remaining $86 million was recorded in
discontinued operations. The $20 million tax benefit recorded in continuing operations was related
to the impairment of goodwill in the global wheat business as part of the fiscal year 2004
restructuring plan. As such, the benefit amount recorded in continuing operations is included in
the table above. See Note 11 — Income Taxes — and Note 27— Discontinued Operations — for
further discussion of the $86 million tax benefit recorded in discontinued operations.
The following table displays the cumulative pre-tax charges incurred by segment under the fiscal
year 2004 restructuring plan (before restructuring reversals related to prior year plans of $7
million). Work force reduction and facility closure charges were cash charges. Asset impairments
were non-cash charges.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Work Force |
|
Facility |
|
Asset |
|
|
| (Dollars in millions) |
|
Reductions |
|
Closures |
|
Impairments |
|
Total |
|
Continuing Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seeds and Genomics |
|
$ |
26 |
|
|
$ |
— |
|
|
$ |
30 |
|
|
$ |
56 |
|
Agricultural Productivity |
|
|
70 |
|
|
|
5 |
|
|
|
27 |
|
|
|
102 |
|
|
Total Continuing Operations |
|
|
96 |
|
|
|
5 |
|
|
|
57 |
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seeds and Genomics |
|
|
6 |
|
|
|
3 |
|
|
|
2 |
|
|
|
11 |
|
Agricultural Productivity |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total Discontinued Operations |
|
|
6 |
|
|
|
3 |
|
|
|
2 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seeds and Genomics |
|
|
32 |
|
|
|
3 |
|
|
|
32 |
|
|
|
67 |
|
Agricultural Productivity |
|
|
70 |
|
|
|
5 |
|
|
|
27 |
|
|
|
102 |
|
|
Total |
|
$ |
102 |
|
|
$ |
8 |
|
|
$ |
59 |
|
|
$ |
169 |
|
|
Pre-tax restructuring charges of $102 million were recorded related to work force reductions.
Work force reductions in continuing operations of $96 million were primarily in the areas of
downsizing the regional structure in Europe, and in sales and marketing, manufacturing, R&D, and information technology in the United States. Work force reduction
charges of $6 million included in discontinued operations were related to employees of the
plant-made pharmaceuticals program, as well as incremental benefit plan costs for employees of the
European wheat and barley business.
Facility closure charges of $5 million in continuing operations related to the closure of an office
building in Europe, and the shutdown of production lines and disposal of discontinued agricultural
chemical products in the United States. Facility
74
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
closure charges of $3 million were also recorded in discontinued operations related to shutdown
expenses from the exit of the plant-made pharmaceuticals site.
Asset impairments in continuing operations of $57 million included $33 million recorded in cost of
goods sold and the remainder in restructuring charges — net. Property, plant and equipment
impairments of $20 million were recorded in the United States, Canada and Asia for the shutdown of
production lines and disposal of equipment, and in Brazil for impairment of computer systems to be
consolidated with a global system. Inventory impairments of $13 million were also recorded related
to discontinued agricultural chemical products and seed hybrids in Argentina, Brazil and Latin
America; discontinued agricultural chemical products in the United States and Asia; and disposal of
inventory at closed production sites in Canada. Asset impairments in restructuring charges — net
of $24 million included $18 million related to office closures and asset sales in the United States
and South Africa, $2 million for the closure of a technology facility in Canada, and $2 million for
the disposal of assets in Asia. Discontinued operations asset impairments of $2 million consisted
primarily of property, plant and equipment impairments associated with the plant-made
pharmaceuticals program.
As of Aug. 31, 2005, the remaining restructuring liability was $4 million, which was related to
work force reductions. During fiscal year 2006, liabilities of $2 million were reversed, primarily
because severance and relocation costs in the United States were lower than originally estimated,
and the remaining liability was substantially depleted.
The company’s written human resource policies are indicative of an ongoing benefit arrangement in
respect to severance packages and are accounted for in accordance with SFAS No. 88, Employers’
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits, which addresses the accounting for other employee benefits.
NOTE 6. TRADE RECEIVABLES
| |
|
|
|
|
| The following table displays a roll forward of the allowance for doubtful trade receivables for
fiscal years 2006, 2005, and 2004. |
|
| (Dollars in millions) |
|
|
|
|
|
Balance Sept. 1, 2003 |
|
$ |
254 |
|
Additions — charged to expense |
|
|
106 |
|
Deductions
and other |
|
|
(110 |
) |
|
Balance Aug. 31, 2004 |
|
$ |
250 |
|
Additions — charged to expense |
|
|
67 |
|
Deductions
and other |
|
|
(42 |
) |
|
Balance Aug. 31, 2005 |
|
$ |
275 |
|
Additions — charged to expense |
|
|
47 |
|
Deductions
and other |
|
|
(24 |
) |
|
Balance Aug. 31, 2006 |
|
$ |
298 |
|
|
In fiscal year 2004, Monsanto increased its allowance for doubtful trade receivables by
approximately $45 million for exposures related to potentially uncollectible Argentine accounts
receivable. The increase in deductions for fiscal 2004 is also primarily attributable to Argentine
trade receivables. See Note 22 — Commitments and Contingencies — for further discussion of trade
receivables.
NOTE 7. CUSTOMER FINANCING PROGRAMS
In April 2002, Monsanto established a revolving financing program to provide financing of up to
$500 million for selected customers in the United States through a third-party specialty lender.
Under the financing program, Monsanto originates customer loans on behalf of the lender, which is a
special purpose entity (SPE) that Monsanto consolidates, pursuant to Monsanto’s credit and other
underwriting guidelines approved by the lender. 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
75
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
(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
46R, and Monsanto does not have the unilateral right to liquidate the QSPE, FIN 46R does not have
an effect on Monsanto’s accounting for the U.S. customer financing program.
Monsanto accounts for the guarantee in accordance with 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 fiscal years 2006, 2005 and 2004.
Proceeds from customer loans sold through the financing program totaled $286 million for fiscal
year 2006, $236 million for fiscal year 2005, and $255 million for fiscal year 2004. These proceeds
are included in net cash provided by operating activities in the Statements of Consolidated Cash
Flows. The loan balance outstanding as of Aug. 31, 2006, and Aug. 31, 2005, was $268 million and
$171 million, respectively. Loans are considered delinquent when payments are 31 days past due. If
a customer fails to pay an obligation when due, Monsanto would incur a liability to perform under
the first-loss guarantee. As of Aug. 31, 2006, and Aug. 31, 2005, less than $1 million of loans
sold through this financing program were delinquent, and Monsanto recorded its guarantee liability
at less than $1 million, based on the company’s historical collection experience with these
customers and a current assessment of credit exposure. Adverse changes in the actual loss rate
would increase the liability. If Monsanto is called upon to make payments under the first-loss
guarantee, it would have the benefit under the financing program of any amounts subsequently
collected from the customer.
In November 2004, Monsanto entered into an agreement with a lender to establish a program to
provide financing of up to $40 million for selected customers in Brazil. The agreement, as amended
in May 2005, qualifies for sales treatment under SFAS 140. Accordingly, the customer receivables
and the related liabilities that had been recorded since the program was established in November
2004 were removed from the company’s consolidated balance sheet in May 2005 as a noncash
transaction. Proceeds from the transfer of receivables subsequent to the May 2005 amendment are
included in net cash provided by operating activities in the Statements of Consolidated Cash Flows.
The program was amended in August 2006 to increase the total funds available under the program to
$90 million. 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
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 and totaled $138
million, $95 million and $72 million for fiscal years 2006, 2005 and 2004, 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 $3 million as of
Aug. 31, 2006, and Aug. 31, 2005. 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 $110 million as of Aug. 31, 2006. The loan balance
outstanding for these programs was $111 million and $77 million as of Aug. 31, 2006, and Aug. 31,
2005, 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 $48 million, $33 million and $13 million for fiscal years 2006, 2005 and 2004,
respectively. 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 exposure.
The liability recorded by Monsanto was less than $1 million as of Aug. 31, 2006, and Aug. 31, 2005.
The maximum potential amount of future payments under the recourse
76
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
provisions of the agreements was $37 million as of Aug. 31, 2006. The outstanding balance of the
receivables sold was $41 million and $27 million as of Aug. 31, 2006, and Aug. 31, 2005,
respectively.
NOTE 8. INVENTORIES
| |
|
|
|
|
|
|
|
|
| Components of
inventories were: |
|
| |
|
As of Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
Finished Goods |
|
$ |
719 |
|
|
$ |
639 |
|
Goods In Process |
|
|
836 |
|
|
|
884 |
|
Raw Materials and Supplies |
|
|
216 |
|
|
|
167 |
|
|
Inventories at FIFO Cost |
|
|
1,771 |
|
|
|
1,690 |
|
Excess of FIFO over LIFO
Cost |
|
|
(83 |
) |
|
|
(26 |
) |
|
Total |
|
$ |
1,688 |
|
|
$ |
1,664 |
|
|
Monsanto uses commodity futures and options contracts to hedge the price volatility of certain
commodities, primarily soybeans and corn. This hedging activity is intended to manage the price
paid to production growers for corn and soybean seeds.
The increase in the excess of FIFO over LIFO cost is primarily the result of cost increases in
certain raw materials and energy required for glyphosate and selective chemistry herbicide
production. Hurricanes in August and September 2005 disrupted the supply of petrochemical
feedstocks and natural gas in the Gulf Coast region of the United States. These natural disasters
and the global energy cost escalations have contributed to price escalations for certain raw
materials and energy.
In conjunction with the purchase price allocation and alignment of Seminis inventory classification
to Monsanto accounting policies, certain Seminis inventory was reclassified from finished goods to
goods in process in second quarter 2006. Such amounts have been reclassified as of Aug. 31, 2005,
to conform with the current-year presentation.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs — an amendment of ARB No. 43,
Chapter 4 (SFAS 151), to clarify that abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage) should be recognized as current period charges and to require
the allocation of fixed production overhead to the costs of conversion based on the normal capacity
of the production facilities. SFAS 151 was effective for Monsanto for inventory costs incurred
after Sept. 1, 2005. The adoption of SFAS 151 did not have a material impact on the company’s
consolidated financial statements.
The following table displays a roll forward of the inventory reserves for fiscal years 2004, 2005
and 2006.
| |
|
|
|
|
|
| (Dollars in millions) |
|
|
|
|
|
Balance Sept. 1, 2003 |
|
$ |
50 |
|
Additions — charged to expense |
|
|
95 |
|
Deductions
and other |
|
|
(72 |
) |
|
Balance Aug. 31, 2004 |
|
$ |
73 |
|
Additions — charged to expense |
|
|
103 |
|
Deductions
and other |
|
|
(85 |
) |
|
Balance Aug. 31, 2005 |
|
$ |
91 |
|
Additions — charged to expense |
|
|
107 |
|
Deductions
and other |
|
|
(81 |
) |
|
Balance Aug. 31, 2006 |
|
$ |
117 |
|
|
NOTE 9. GOODWILL AND OTHER INTANGIBLE ASSETS
As discussed earlier in Note 5 — Restructuring, the company decided in October 2003 to exit the
European wheat and barley business. This decision required a re-evaluation for potential impairment
of goodwill and other intangible assets related to the
77
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
company’s global wheat business. The goodwill impairment test was completed during first quarter
2004 using a discounted cash flow methodology and resulted in a $69 million pre-tax impairment of
goodwill in the global wheat business ($64 million aftertax). The resulting impairment charge was
specific to the wheat reporting unit.
The fiscal year 2006 and 2005 annual goodwill impairment tests were performed as of March 1, 2006
and 2005, and no indications of goodwill impairment existed as of either date. There were no events
or changes in circumstances indicating that goodwill might be impaired as of Aug. 31, 2006.
Changes in the net carrying amount of goodwill for fiscal years 2005 and 2006, by segment, are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Seeds and |
|
Agricultural |
|
|
| (Dollars in millions) |
|
Genomics |
|
Productivity |
|
Total |
|
Balance as of Sept. 1, 2004 |
|
$ |
659 |
|
|
$ |
61 |
|
|
$ |
720 |
|
Acquisition Activity |
|
|
517 |
|
|
|
— |
|
|
|
517 |
|
Foreign Currency Translation and Other
Adjustments |
|
|
7 |
|
|
|
4 |
|
|
|
11 |
|
|
Balance as of Aug. 31, 2005 |
|
$ |
1,183 |
|
|
$ |
65 |
|
|
$ |
1,248 |
|
Acquisition Activity (see Note 4) |
|
|
262 |
|
|
|
— |
|
|
|
262 |
|
Foreign Currency Translation and Other
Adjustments |
|
|
12 |
|
|
|
— |
|
|
|
12 |
|
|
Balance as of Aug. 31, 2006 |
|
$ |
1,457 |
|
|
$ |
65 |
|
|
$ |
1,522 |
|
|
Information regarding the company’s other intangible assets is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of Aug. 31, 2006
|
|
As of Aug. 31, 2005
|
| |
|
Carrying |
|
Accumulated |
|
|
|
|
|
Carrying |
|
Accumulated |
|
|
| (Dollars in millions) |
|
Amount |
|
Amortization |
|
Net |
|
Amount |
|
Amortization |
|
Net |
|
|
|
Acquired Germplasm |
|
$ |
932 |
|
|
$ |
(518 |
) |
|
$ |
414 |
|
|
$ |
926 |
|
|
$ |
(483 |
) |
|
$ |
443 |
|
Acquired Biotechnology Intellectual
Property |
|
|
823 |
|
|
|
(376 |
) |
|
|
447 |
|
|
|
648 |
|
|
|
(285 |
) |
|
|
363 |
|
Trademarks |
|
|
211 |
|
|
|
(48 |
) |
|
|
163 |
|
|
|
193 |
|
|
|
(34 |
) |
|
|
159 |
|
Customer Relationships |
|
|
208 |
|
|
|
(21 |
) |
|
|
187 |
|
|
|
176 |
|
|
|
(6 |
) |
|
|
170 |
|
Other |
|
|
32 |
|
|
|
(14 |
) |
|
|
18 |
|
|
|
32 |
|
|
|
(14 |
) |
|
|
18 |
|
|
|
|
Total |
|
$ |
2,206 |
|
|
$ |
(977 |
) |
|
$ |
1,229 |
|
|
$ |
1,975 |
|
|
$ |
(822 |
) |
|
$ |
1,153 |
|
|
|
|
The increase in acquired biotechnology intellectual property during fiscal year 2006 primarily
resulted from a license agreement with the Regents of the University of California (UC), under
which Monsanto is granted an exclusive commercial license for the manufacture of bovine
somatotropin in exchange for an upfront payment plus future royalties. Monsanto sells bovine
somatotropin under the brand name Posilac, which is used to improve dairy cow productivity. In
second quarter 2006, Monsanto paid a $100 million upfront royalty and recorded an additional asset
and corresponding liability of $61 million for discounted minimum royalty obligations of $5 million
annually through the 2023 expiration of UC’s patent estate.
The increases in other intangible assets as of Aug. 31, 2006, primarily resulted from the
acquisitions described in Note 4 — Business Combinations.
Other intangible assets include the company’s only nonamortizing intangible asset of $13 million
associated with minimum pension liabilities. The minimum pension liability adjustment is discussed
in Note 14 — Postretirement Benefits — Pensions. During fiscal years 2006 and 2005, there were no
fully amortized intangible asset write-offs. During fiscal year 2004, Monsanto wrote off other
intangible assets with a carrying value of less than $1 million.
Total amortization expense of other intangible assets was $149 million in fiscal year 2006, $135
million in fiscal year 2005 and $124 million in fiscal year 2004. Fiscal year 2004 includes
amortization expense related to discontinued operations of $3 million.
78
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
The estimated intangible asset amortization expense for each of the five succeeding fiscal years is
as follows:
| |
|
|
|
|
|
| Year Ending Aug. 31, |
|
Amount |
|
2007 |
|
$ |
145 |
|
2008 |
|
|
125 |
|
2009 |
|
|
105 |
|
2010 |
|
|
90 |
|
2011 |
|
|
65 |
|
|
NOTE 10. INVESTMENTS
Short-term investments as of Aug. 31, 2006, and Aug. 31, 2005, included $22 million and $150
million, respectively, of debt securities with original maturities of one year or less, designated
as held-to-maturity and stated at fair value.
Long-Term Investments
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Equity Securities Available-for-Sale
|
|
| |
|
|
|
|
|
Unrealized |
|
Unrealized |
|
Fair |
| (Dollars in millions) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
As of Aug. 31, 2006 |
|
$ |
21 |
|
|
$ |
29 |
|
|
$ |
— |
|
|
$ |
50 |
|
As of Aug. 31, 2005 |
|
|
21 |
|
|
|
11 |
|
|
|
— |
|
|
|
32 |
|
|
Long-term equity securities available-for-sale relates primarily to an investment in Delta and
Pine Land Company. In August 2006, Monsanto signed a definitive agreement to purchase all of the
outstanding stock of Delta and Pine Land Company. See Note 22 — Commitments and Contingencies —
for further discussion of the pending acquisition.
Net unrealized gains on long-term investments (net of deferred taxes) included in shareowners’
equity amounted to $18 million as of Aug. 31, 2006, and $7 million as of Aug. 31, 2005. There were
no sales of equity securities in fiscal year 2006. Proceeds from sales of equity securities were
$16 million in 2005 and $14 million in 2004. Realized gains of $6 million net of $4 million tax
expense in 2005, and $6 million net of $3 million tax expense in 2004, were determined using the
specific identification method, and were included in net income. In fiscal year 2005, an impairment
loss of $2 million was recognized in the Statement of Consolidated Operations in accordance with
EITF 03-01.
NOTE 11. INCOME TAXES
| |
|
|
|
|
|
|
|
|
|
|
|
|
| The components of income from continuing operations before income taxes and minority interest were:
|
|
| |
|
Year Ended Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2004 |
|
United States |
|
$ |
695 |
|
|
$ |
(123 |
) |
|
$ |
301 |
|
Outside United
States |
|
|
360 |
|
|
|
402 |
|
|
|
102 |
|
|
Total |
|
$ |
1,055 |
|
|
$ |
279 |
|
|
$ |
403 |
|
|
79
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The components of income tax provision were:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2004 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
$ |
166 |
|
|
$ |
135 |
|
|
$ |
(15 |
) |
U.S. state |
|
|
7 |
|
|
|
1 |
|
|
|
(7 |
) |
Outside United States |
|
|
84 |
|
|
|
101 |
|
|
|
57 |
|
|
Total Current |
|
|
257 |
|
|
|
237 |
|
|
|
35 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
|
65 |
|
|
|
(109 |
) |
|
|
107 |
|
U.S. state |
|
|
14 |
|
|
|
(24 |
) |
|
|
15 |
|
Outside United States |
|
|
4 |
|
|
|
— |
|
|
|
(29 |
) |
|
Total Deferred |
|
|
83 |
|
|
|
(133 |
) |
|
|
93 |
|
|
Total |
|
$ |
340 |
|
|
$ |
104 |
|
|
$ |
128 |
|
|
Factors causing Monsanto’s income taxes to differ from the U.S. federal statutory rate were:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2004 |
|
U.S. Federal Statutory Rate |
|
$ |
369 |
|
|
$ |
98 |
|
|
$ |
141 |
|
U.S. Export Earnings |
|
|
(6 |
) |
|
|
(9 |
) |
|
|
(12 |
) |
U.S. R&D Tax Credit |
|
|
(2 |
) |
|
|
(5 |
) |
|
|
(4 |
) |
Lower Ex-U.S. Rates |
|
|
(18 |
) |
|
|
(24 |
) |
|
|
(21 |
) |
One-Time Dividend Repatriation |
|
|
21 |
|
|
|
— |
|
|
|
— |
|
European Wheat and Barley Tax
Benefit |
|
|
— |
|
|
|
(20 |
) |
|
|
— |
|
State Income Taxes |
|
|
21 |
|
|
|
2 |
|
|
|
5 |
|
Valuation Allowances |
|
|
(14 |
) |
|
|
(13 |
) |
|
|
17 |
|
Effect of U.S. State Tax Rate Change |
|
|
— |
|
|
|
(6 |
) |
|
|
— |
|
Nondeductible Goodwill |
|
|
— |
|
|
|
— |
|
|
|
20 |
|
Acquired in-process R&D |
|
|
— |
|
|
|
93 |
|
|
|
— |
|
Tax Reserve |
|
|
(25 |
) |
|
|
(11 |
) |
|
|
(15 |
) |
Other |
|
|
(6 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
|
Income Taxes |
|
$ |
340 |
|
|
$ |
104 |
|
|
$ |
128 |
|
|
Deferred income tax balances are related to:
| |
|
|
|
|
|
|
|
|
|
| |
|
As of Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
Net Operating Loss and Other
Carryforwards |
|
$ |
746 |
|
|
$ |
821 |
|
Employee Fringe Benefits |
|
|
304 |
|
|
|
303 |
|
Intangible Assets |
|
|
101 |
|
|
|
128 |
|
Allowance for Doubtful Accounts |
|
|
111 |
|
|
|
93 |
|
Inventories |
|
|
101 |
|
|
|
57 |
|
Litigation Reserves |
|
|
129 |
|
|
|
117 |
|
Other |
|
|
226 |
|
|
|
199 |
|
Valuation Allowance |
|
|
(131 |
) |
|
|
(140 |
) |
|
Total Deferred Tax Assets |
|
$ |
1,587 |
|
|
$ |
1,578 |
|
|
Property, Plant and Equipment |
|
$ |
275 |
|
|
$ |
278 |
|
Intangibles |
|
|
336 |
|
|
|
306 |
|
Other |
|
|
40 |
|
|
|
44 |
|
|
Total Deferred Tax Liabilities |
|
$ |
651 |
|
|
$ |
628 |
|
|
Net Deferred Tax Assets |
|
$ |
936 |
|
|
$ |
950 |
|
|
As of Aug. 31, 2006, Monsanto had available approximately $1.4 billion in net operating loss
carryforwards (NOLs), most of which related to Brazilian and Argentine operations. Management
regularly assesses the likelihood that deferred tax assets will be recovered from future taxable
income. To the extent management believes that it is more likely than not that a deferred tax asset
will not be realized, a valuation allowance is established. In fiscal year 2004, the company
assessed the realizability of its deferred tax assets in Argentina and Brazil following completion
of the crop season in these countries and the preparation of updated long-range financial
projections for these countries. The company concluded that it was more likely than not that the
deferred tax assets related to NOLs in Argentina will not be realizable prior to their expiration.
As of
80
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
Aug. 31, 2005, management had established a valuation allowance of $103 million. Management is
projecting taxable income for the current tax year (calendar 2006) and, accordingly, reversed $15
million of the valuation allowance as a favorable adjustment to its 2006 tax provision. Also,
during 2006, the valuation allowance decreased slightly because of foreign currency
fluctuations. As of Aug. 31, 2006, management has established a valuation allowance of $82 million
on the projected remaining NOLs which expire from 2007 to 2010. This conclusion was based on the
recent history of losses through 2005, the continued uncertain economic conditions, and also the
limited tax carryforward period of five years. Management is taking actions to attempt to realize
such deferred tax assets; however, such actions are dependent, in part, on conditions that are not
entirely in management’s control. The company also concluded that it is more likely than not that
it will realize its deferred tax assets in Argentina that are not related to the NOLs noted above
through future projected taxable income.
At the beginning of fiscal year 2004, Monsanto Brazil had a valuation allowance of $90 million for
deferred tax assets related to NOLs because management believed it was more likely than not that
such deferred tax assets would not be realized. However, based on improvements in Monsanto Brazil’s
operations related to business changes that the company had begun implementing two crop seasons
previously, and improvements during that period in Brazil’s overall economy, and in particular the
agricultural sector, in fiscal year 2004 management then believed it was more likely than not that
such deferred tax assets would be realized. Accordingly, the previously recorded $90 million
valuation allowance, related to NOLs which have an indefinite life, was reversed in the second
quarter of fiscal year 2004. The company also concluded that it is more likely than not that it
will realize its deferred tax assets in Brazil that are not related to the NOLs noted above through
future projected taxable income. As of Aug. 31, 2006, management continues to believe it is more
likely than not that it will realize its deferred tax assets in Brazil.
Monsanto generated a taxable loss in the United States in fiscal year 2004. The company has not
recorded a valuation allowance on the federal NOL, which expires in 2024, because management
believes it is more likely than not that this deferred tax asset will be realized. For state
purposes the NOL expires between 2009 and 2024. As of Aug. 31, 2004, a valuation allowance of $15
million was recorded for the portion of the state NOL that management believed would not be
realized. During fiscal 2005, management realigned its domestic operations and, as a result of this
realignment, management has concluded it is more likely than not that it will realize its deferred
tax assets on the state NOL. Accordingly, the $15 million valuation allowance was reversed in
fiscal year 2005.
The sale of the European wheat and barley business in fiscal year 2004 generated a tax loss that
was deductible in either the United Kingdom or the United States. As of Aug. 31, 2004, a deferred
tax asset had not been recorded for the tax loss incurred in the United States because of the
existence of a number of uncertainties. These uncertainties diminished with the enactment of the
American Jobs Creation Act of 2004 (AJCA) on Oct. 22, 2004. As a result, Monsanto recorded a
deferred tax benefit of $106 million in first quarter 2005. Of this tax benefit, $20 million was
recorded in continuing operations related to the impairment of goodwill in the global wheat
business recorded in first quarter 2004. The remaining $86 million recorded in discontinued
operations was primarily related to the goodwill impairment loss at the date of adoption of SFAS
142 on Jan. 1, 2002, which was recorded as a cumulative effect of a change in accounting principle.
The recognition of this tax benefit in the United States effectively precludes Monsanto from
claiming any U.K. benefit for the U.K. tax loss. Accordingly, the U.K. deferred tax asset of $71
million, which had a full valuation allowance against it, was written off during first quarter
2005.
The AJCA created a temporary incentive for U.S. multinationals to repatriate accumulated earnings
outside the United States by providing an 85 percent dividends received deduction for certain
dividends from controlled foreign corporations. In order to benefit from this incentive, the
company must reinvest the qualifying dividends in the United States under a domestic reinvestment
plan approved by the chief executive officer and board of directors. In the fourth quarter 2006,
after the company’s chief executive officer and board of directors approved the company’s domestic
reinvestment plan, the company repatriated $437 million of foreign earnings under the AJCA.
Accordingly, the company recorded income tax expense of $21 million associated with this
repatriation. The repatriated funds were used for research and development, capital expenditures,
and other permitted activities.
Income taxes and remittance taxes have not been recorded on approximately $1.0 billion of
undistributed earnings of foreign operations of Monsanto, either because any taxes on dividends
would be substantially offset by foreign tax credits, or because
81
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
Monsanto intends to reinvest those earnings indefinitely. It is not practicable to estimate the
income tax liability that might be incurred if such earnings were remitted to the United States.
Tax authorities regularly examine the company’s returns in the jurisdictions in which Monsanto does
business. Due to the nature of the examinations, it may take several years before they are
completed. Management regularly assesses the tax risk of the company’s return filing positions for
all open years. During fiscal year 2006, the IRS completed an audit of Pharmacia Corporation for
tax years 2000 to 2002 (for which period Monsanto was a member of Pharmacia’s consolidated group).
As a result of the conclusion of this audit, and to a lesser extent, the resolution of various
state income tax issues, Monsanto has recorded a favorable adjustment to the income tax reserve in
fiscal year 2006. During fiscal year 2005, the IRS completed their audit of the company’s export
subsidiary for 2000 and 2001 and issued a no-change report for these periods. As a result of the
conclusion of this audit, Monsanto has recorded a favorable adjustment to the income tax reserve in
fiscal year 2005. During fiscal year 2004, a settlement was reached
with the IRS on a number of issues. As a result, Monsanto recorded a favorable adjustment to the income
tax reserve in fiscal year 2004. As of Aug. 31, 2006, management believes that its accruals for
income tax liabilities are adequate.
NOTE 12. DEBT AND OTHER CREDIT ARRANGEMENTS
Monsanto has a committed borrowing facility of $1.0 billion, which was unused as of Aug. 31, 2006.
This five-year facility expires in June 2009 and was initiated to be used for general corporate
purposes, which may include working capital, acquisitions, capital
expenditures, refinancing and support of commercial paper borrowings. Covenants under this credit facility restrict maximum
borrowings. There are no related compensating balances, but the facility is subject to various
fees, which are based on the company’s credit rating.
Effective March 11, 2005, Monsanto finalized a 364-day $1.0 billion revolving credit facility.
During February 2006, Monsanto elected to not renew this facility, and it expired on March 10,
2006.
| |
|
|
|
|
|
|
|
|
| Short-Term
Debt |
|
| |
|
As of Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
Commercial Paper |
|
$ |
— |
|
|
$ |
43 |
|
Current Maturities of Long-Term
Debt |
|
|
4 |
|
|
|
29 |
|
Notes Payable to Banks |
|
|
24 |
|
|
|
54 |
|
|
Total Short-Term Debt |
|
$ |
28 |
|
|
$ |
126 |
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
As of Aug. 31,
|
| |
|
2006 |
|
2005 |
|
Weighted-Average Interest Rate on Short-Term Borrowings at End of
Period |
|
|
8.8 |
% |
|
|
5.1 |
% |
|
As of Aug. 31, 2006, the company did not have any outstanding commercial paper, but it had
several short-term borrowings to support ex-U.S. operations, which had weighted-average interest
rates as indicated above. Certain of these bank loans also act to limit exposure to changes in
foreign-currency exchange rates.
Overdrafts were previously reported within short-term debt in the Statements of Consolidated
Financial Position but are now included in accounts payable to better reflect the nature of the
liabilities as book overdrafts. As of Aug. 31, 2005, overdrafts were $156 million and have been
reclassified to accounts payable.
82
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
| |
|
|
|
|
|
|
|
|
|
Long-Term Debt
|
|
| |
|
As of Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
73/8% Senior Notes, Due 2012(1) |
|
$ |
484 |
|
|
$ |
483 |
|
4% Senior Notes, Due 2008(1, 2) |
|
|
232 |
|
|
|
245 |
|
51/2% Senior Notes, Due 2035(1) |
|
|
394 |
|
|
|
394 |
|
51/2% Senior Notes, Due 2025(1) |
|
|
263 |
|
|
|
260 |
|
Euro Bank Facility, Due 2009(3) |
|
|
257 |
|
|
|
— |
|
Variable Rate Medium-Term Notes, Due
2007(4) |
|
|
— |
|
|
|
63 |
|
Other |
|
|
9 |
|
|
|
13 |
|
|
Total Long-Term Debt |
|
$ |
1,639 |
|
|
$ |
1,458 |
|
|
|
|
|
| (1) |
|
Amounts are net of unamortized discounts. For the 51/2% Senior Notes due 2025, amount
is also net of the unamortized premium of $50 million and $53 million as of Aug. 31, 2006, and
Aug. 31, 2005, respectively. |
| |
| (2) |
|
In connection with this debt, the company entered into certain interest rate hedging
contracts, which effectively exchange the fixed interest rate to variable interest at the
six-month London Interbank Offered Rate (LIBOR), plus a weighted-average spread of 0.39
percentage points. |
| |
| (3) |
|
The interest rate is a floating rate based on the Euro Interbank Offered Rate (Euribor). |
| |
| (4) |
|
The interest rate for borrowings under these agreements is the Brazil Development
Bank funding interest rate, as adjusted quarterly, plus a spread of 4 percentage points, and
the long-term interest rate, as set quarterly by the Central Bank of Brazil, plus a spread of
3 percentage points. |
In May 2002, Monsanto filed a shelf registration with the SEC for the issuance of up to $2.0
billion of registered debt (2002 shelf registration). On Aug. 14, 2002, Monsanto issued $600
million in 73/8% Senior Notes under the 2002 shelf registration, and on Aug. 23, 2002, the aggregate
principal amount of the outstanding notes was increased to $800 million (73/8% Senior Notes). As of
Aug. 31, 2006, $486 million of the 73/8% Senior Notes are due on Aug. 15, 2012 (see discussion below
regarding a debt exchange for $314 million of the 73/8% Senior Notes). The net proceeds from the sale
of the 73/8% Senior Notes were used to reduce commercial paper borrowings and to repay short-term
debt owed to Pharmacia. In May 2003, Monsanto issued $250 million of 4% Senior Notes under the 2002
shelf registration (4% Senior Notes). The 4% Senior Notes are due on May 15, 2008. The net proceeds
from the sale of the 4% Senior Notes were used to reduce commercial paper borrowings.
In May 2005, Monsanto filed a new shelf registration with the SEC (2005 shelf registration) that
allowed the company to issue up to $2.0 billion of debt, equity and hybrid offerings (including
debt securities of $950 million remaining available under the May 2002 shelf registration
statement). In July 2005, Monsanto issued $400 million of 51/2% Senior Notes under the 2005 shelf
registration, which are due on July 15, 2035 (51/2% 2035 Senior Notes). The net proceeds from the
sale of the 51/2% 2035 Senior Notes were used to reduce commercial paper borrowings. As of Aug. 31,
2006, $1.6 billion remained available under the 2005 shelf registration.
In August 2005, Monsanto exchanged $314 million of new 51/2% Senior Notes due 2025 (51/2% 2025 Senior
Notes) for $314 million of its outstanding 73/8% Senior Notes due 2012, which were issued in 2002.
The exchange was conducted as a private transaction with holders of the outstanding 73/8% Senior
Notes who certified to the company that they were “qualified institutional buyers” within the
meaning of Rule 144A under the Securities Act of 1933. Under the terms of the exchange, the company
paid a premium of $53 million to holders participating in the exchange. The $53 million premium is
included in the cash flows required by financing activities in the Statement of Consolidated Cash
Flows. The transaction has been accounted for as an exchange of debt under EITF Issue No. 96-19,
Debtor’s Accounting for a Modification or Exchange of Debt Instruments, and the $53 million premium
will be amortized over the life of the new 51/2% 2025 Senior Notes. As a result of the debt premium,
the effective interest rate on the 51/2% 2025 Senior Notes will be 7.035% over the life of the debt.
The exchange of debt allowed the company to adjust its debt-maturity schedule while also allowing
it to take advantage of market conditions which the company considered to be favorable. In October
2005, the company filed a registration statement with the SEC on Form S-4 with the intention to
commence a registered exchange offer during fiscal year 2006 to provide holders of the newly issued
privately placed notes with the opportunity to exchange such notes for substantially identical
notes registered under the Securities Act of 1933. In February 2006, Monsanto issued $314 million
aggregate principal amount of its 51/2% Senior Notes due 2025, in exchange for the same principal
amount of its 51/2% Senior Notes due 2025 which had been issued in the private placement transaction
in August 2005. The offering of the notes issued in February was registered under the Securities
Act of 1933.
83
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
In July 2006, Monsanto issued $251 million of additional debt in Europe through a
private placement
in order to fund repatriated foreign earnings. See Note 11 — Income Taxes — for additional
discussion of the repatriated earnings. The interest rate is a variable rate based on the Euro Interbank Offered Rate (Euribor).
During fiscal year 2004, Monsanto issued approximately $100 million of additional debt, primarily
medium-term debt in Brazil with floating interest. These loans were eliminated throughout 2005.
During fiscal year 2005, $60 million in debt was issued in Brazil to finance fiscal year 2006
working capital needs at a term of 18 months. All of this debt was retired except $2 million, which
remained outstanding as of Aug. 31, 2006.
Interest rate swap agreements are used to reduce interest rate risk and to manage the interest rate
sensitivity of the company’s debt. For a more complete discussion of interest rate management, see
Note 13 — Financial Instruments.
The information regarding interest expense below reflects Monsanto’s interest expense, interest
expense on debt, or interest amounts specifically attributable to Monsanto:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2004 |
|
Interest Cost Incurred |
|
$ |
143 |
|
|
$ |
121 |
|
|
$ |
98 |
|
Less: Capitalized on
Construction |
|
|
(9 |
) |
|
|
(6 |
) |
|
|
(7 |
) |
|
Interest Expense |
|
$ |
134 |
|
|
$ |
115 |
|
|
$ |
91 |
|
|
NOTE 13. FINANCIAL INSTRUMENTS
The notional amounts, carrying amounts, and estimated fair values of the company’s financial
instruments were as follows as of Aug. 31, 2006, and Aug. 31, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of Aug. 31,
|
| |
|
2006
|
|
2005
|
| |
|
Notional |
|
Carrying |
|
Fair |
|
Notional |
|
Carrying |
|
Fair |
| (Dollars in millions) |
|
Amount |
|
Amount |
|
Value |
|
Amount |
|
Amount |
|
Value |
|
|
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign-currency contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward purchases |
|
$ |
691 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
585 |
|
|
$ |
(2 |
) |
|
$ |
(2 |
) |
Forward sales |
|
|
939 |
|
|
|
(14 |
) |
|
|
(14 |
) |
|
|
695 |
|
|
|
7 |
|
|
|
7 |
|
Options |
|
|
216 |
|
|
|
(7 |
) |
|
|
(7 |
) |
|
|
96 |
|
|
|
— |
|
|
|
— |
|
Commodity futures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures purchased — net |
|
|
153 |
|
|
|
(5 |
) |
|
|
(5 |
) |
|
|
57 |
|
|
|
(2 |
) |
|
|
(2 |
) |
Options purchased |
|
|
32 |
|
|
|
— |
|
|
|
— |
|
|
|
88 |
|
|
|
— |
|
|
|
— |
|
Swaps |
|
|
74 |
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
12 |
|
|
|
7 |
|
|
|
7 |
|
Other derivative contracts |
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives |
|
|
250 |
|
|
|
6 |
|
|
|
6 |
|
|
|
250 |
|
|
|
4 |
|
|
|
4 |
|
Short-term debt |
|
|
— |
|
|
|
28 |
|
|
|
28 |
|
|
|
— |
|
|
|
282 |
|
|
|
282 |
|
Long-term debt |
|
|
— |
|
|
|
1,639 |
|
|
|
1,627 |
|
|
|
— |
|
|
|
1,458 |
|
|
|
1,545 |
|
|
|
|
Monsanto’s business and activities expose it to a variety of market risks, including risks
related to changes in commodity prices, foreign-currency exchange rates, interest rates and, to a
lesser degree, security prices. These financial exposures are monitored and managed by the company
as an integral part of its market risk management program. This program recognizes the
unpredictability of financial markets and seeks to reduce the potentially adverse effects that
market volatility could have on operating results.
As part of its market risk management strategy, Monsanto uses derivative instruments to protect
fair values and cash flows from fluctuations caused by volatility in currency exchange rates,
interest rates, and commodity prices. This volatility affects cross-border transactions that
involve sales and inventory purchases denominated in foreign currencies. Monsanto is exposed to
this risk both on an intercompany basis and on a third-party basis. Additionally, the company is
exposed to foreign-currency exchange risks for recognized assets and liabilities, royalties, and
net investments in subsidiaries that are denominated in currencies other than its functional
currency, the U.S. dollar. Monsanto uses forward-currency exchange contracts, swaps, and options to
manage these risks.
84
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
The foreign-currency contracts generally have maturities of less than 12 months, and they require
Monsanto to exchange currencies at agreed-upon rates at maturity. The company does not expect any
losses from credit exposure related to these instruments because these are with large financial
institutions.
Monsanto’s commodity price risk management strategy is to use derivative instruments to minimize
significant unanticipated earnings fluctuations that may arise from volatility in commodity prices.
Price fluctuations in commodities, mainly in corn and soybeans, can cause the actual prices paid to
production growers for corn and soybean seeds to differ from anticipated cash outlays. Monsanto
uses commodity futures and options contracts to manage these risks. The company also uses commodity
futures and options contracts to manage the value of its corn and soybean inventories.
Monsanto’s energy risk management strategy is to use derivative instruments to minimize significant
unanticipated earnings fluctuations that may arise from volatility in natural gas prices and diesel
prices.
Monsanto’s interest rate risk management strategy is to use derivative instruments to minimize
significant unanticipated earnings fluctuations that may arise from volatility in interest rates of
the company’s borrowings and to manage the interest rate sensitivity of its debt.
By using derivative financial instruments to manage exposures to changes in exchange rates,
commodity prices, and interest rates, Monsanto exposes itself to the risk that the counterparty
might fail to perform its obligations under the terms of the derivative contract. Monsanto
minimizes this risk in derivative instruments by entering into transactions with high-quality
counterparties and by limiting the amount of exposure in each instrument. Such financial
instruments are neither held nor issued by the company for trading purposes.
Foreign-Currency Hedges
The company sometimes uses foreign-currency options and foreign-currency forward contracts as
hedges against anticipated sales and/or purchases denominated in foreign currencies. The company
enters into these contracts to protect itself against the risk that the eventual dollar-net-cash
flows will be adversely affected by changes in exchange rates. The company also uses
foreign-currency contracts to hedge the effects of fluctuations in exchange rates on
foreign-currency-denominated third-party and intercompany receivables and payables.
The company hedges a portion of its net investment in Brazilian subsidiaries and recorded an
after-tax loss of $5 million in fiscal year 2006, an after-tax loss of $23 million in fiscal year
2005, and an after-tax loss of $15 million in fiscal year 2004, all of which are included in
accumulated foreign currency translation.
Foreign currencies in which Monsanto has significant hedged exposures are the euro, the Canadian
dollar, the Brazilian real, the Australian dollar, and the Mexican peso. The aggregate net
transaction loss, net of related hedging gains and losses, included in net earnings for fiscal
years 2006, 2005, and 2004, was $9 million, $24 million, and $29 million, respectively.
As of Aug. 31, 2006,
$9 million has been recorded in accumulated other comprehensive loss to reflect the
after-tax change in the fair value of foreign currency derivatives that have been designated as
hedges of foreign currency cash flows. These derivatives all expire or mature within the next 22
months, and any realized gain or loss will be reclassified to earnings.
Fair-Value Hedges
Monsanto uses futures and options contracts to manage the value of the corn and soybean seed
inventories that it buys from growers. Generally, the company hedges from 70 percent to 100 percent
of the corn and soybean inventory value, depending on the crop and grower pricing.
Interest rate swap agreements are used to reduce interest rate risk and to manage the interest rate
sensitivity of its debt. Monsanto may use interest rate swaps to convert its fixed-rate debt to
variable-rate debt. The resulting cost of funds may be lower or higher than it would have been if
variable-rate debt had been issued directly. Under the interest rate swap contracts, the company
agrees with other parties to exchange, at specified intervals, the difference between fixed-rate
and floating-rate interest amounts, which is calculated based on an agreed-upon notional amount. In
connection with the 4% Senior Notes, Monsanto entered into a $250 million notional amount interest
rate swap maturing in May 2008. The fair value of
85
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
Monsanto’s interest rate swap agreement was a liability of $6 million as of Aug. 31, 2006, and a
liability of $4 million as of Aug. 31, 2005. The company estimates the fair value of its interest
rate management derivative based on quoted market prices.
The difference between the carrying value and the fair value of hedged items classified as
fair-value hedges was offset by the change in fair value of the related derivatives. Accordingly,
hedge ineffectiveness for fair-value hedges, determined in accordance with SFAS 133 and SFAS 149,
had an immaterial effect on earnings in fiscal years 2006, 2005, and 2004. No fair-value hedges
were discontinued during fiscal years 2006, 2005, or 2004.
Cash-Flow Hedges
The company enters into contracts with a number of its seed growers to purchase their output at the
market prices in effect when the individual growers elect to fix their contract prices. As a hedge
against possible commodity price fluctuations, Monsanto purchases futures and options contracts for
corn and soybeans. The futures contracts hedge the commodity prices paid, while the options
contracts limit the unfavorable effect that price changes could have on these purchases.
Monsanto recognized a net gain of less than $1 million in fiscal year 2006, and net losses of $2
million and $4 million for fiscal years 2005 and 2004, respectively, in cost of goods sold, which
represented the ineffectiveness of all cash-flow hedges. These amounts represent the portion of the
derivatives’ fair value that was excluded from the assessment of hedge effectiveness. No cash-flow
hedges were discontinued during fiscal years 2006, 2005, or 2004.
As of Aug. 31, 2006, $3 million of after-tax deferred net gains on derivative instruments was
recorded in accumulated other comprehensive loss and is expected to be reclassified into earnings in fiscal
year 2007. The actual sales of the inventory, which are expected to occur during the next 12
months, will necessitate the reclassification of the derivative gains into earnings. As of Aug. 31,
2005, after-tax deferred net gains on derivative instruments accumulated in other comprehensive
loss were $11 million. As of Aug. 31, 2004, after-tax deferred net losses on derivative instruments
accumulated in other comprehensive loss were $5 million. The maximum term over which the company is
hedging exposures to the variability of cash flow (for all forecasted transactions, excluding
interest payments on variable-rate debt) is 60 months.
In May 2005, the company entered into treasury rate lock agreements with several banks to hedge
against changes in long-term interest rates in anticipation of a long-term debt issuance. The
closing of these agreements in July 2005 resulted in a pre-tax loss of $10 million because of a
decrease in interest rates. Monsanto designated these rate lock agreements as cash-flow hedges. The
net loss on the rate locks is recognized in other comprehensive loss until the hedged interest
costs are recognized in earnings. As of Aug. 31, 2006, $6 million of after-tax deferred net losses
on the interest rate lock accumulated in other comprehensive loss is expected to be reclassified
into earnings during the next 29 years, which is the remaining term of the underlying debt.
Credit Risk Management
Monsanto invests its excess cash in deposits with major banks throughout the world and in
high-quality short-term debt instruments. Such investments are made only in instruments issued or
enhanced by high-quality institutions. As of Aug. 31, 2006, the company had no financial
instruments that represented a significant concentration of credit risk. Limited amounts are
invested in any single institution to minimize risk. The company has not incurred any credit risk
losses related to those investments.
The company sells a broad range of agricultural products to a diverse group of customers throughout
the world. In the United States, the company makes substantial sales to a relatively few large
wholesale customers. The company’s agricultural products business is highly seasonal, and it is
subject to weather conditions that affect commodity prices and seed yields. Credit limits, ongoing
credit evaluation, and account monitoring procedures are used to minimize the risk of loss.
Collateral is secured when it is deemed appropriate by the company. For example, in Latin America,
the company collects payments on certain customer accounts in grain.
Monsanto regularly evaluates its business practices to minimize its credit risk. During fiscal
years 2006 and 2005, the company engaged multiple banks in Argentina and Brazil in the development
of new customer financing options that involve
86
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (continued)
direct bank financing of customer purchases. For further information on these programs, see Note 7
— Customer Financing Programs.
NOTE 14. POSTRETIREMENT BENEFITS — PENSIONS
Most of Monsanto’s U.S. employees are covered by noncontributory pension plans sponsored by the
company. Pension benefits are based on an employee’s years of service and compensation level.
Pension plans were funded in accordance with Monsanto’s long-range projections of the plans’
financial condition. These projections took into account benefits earned and expected to be earned,
anticipated returns on pension plan assets, and income tax and other regulations.
Components of Net Periodic Benefit Cost
Total pension cost for Monsanto employees included in the Statements of Consolidated Operations was
$73 million, $57 million and $50 million in fiscal years 2006, 2005 and 2004, respectively. The
information that follows relates to all of the pension plans in which Monsanto employees
participated. The components of pension cost for these plans were:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
|
Year Ended Aug. 31,
|
|
Year Ended Aug. 31,
|
| |
|
2006
|
|
2005
|
|
2004
|
| |
|
|
|
|
|
Outside |
|
|
|
|
|
|
|
|
|
Outside |
|
|
|
|
|
|
|
|
|
Outside |
|
|
| (Dollars in millions) |
|
U.S. |
|
the U.S. |
|
Total |
|
U.S. |
|
the U.S. |
|
Total |
|
U.S. |
|
the U.S. |
|
Total |
|
|
|
|
|
Service Cost for Benefits Earned
During the Year |
|
$ |
36 |
|
|
$ |
7 |
|
|
$ |
43 |
|
|
$ |
32 |
|
|
$ |
4 |
|
|
$ |
36 |
|
|
$ |
29 |
|
|
$ |
4 |
|
|
$ |
33 |
|
Interest Cost on Benefit Obligation |
|
|
83 |
|
|
|
10 |
|
|
|
93 |
|
|
|
87 |
|
|
|
9 |
|
|
|
96 |
|
|
|
90 |
|
|
|
8 |
|
|
|
98 |
|
Assumed Return on Plan Assets |
|
|
(104 |
) |
|
|
(15 |
) |
|
|
(119 |
) |
|
|
(104 |
) |
|
|
(12 |
) |
|
|
(116 |
) |
|
|
(99 |
) |
|
|
(12 |
) |
|
|
(111 |
) |
Amortization of Unrecognized
Amounts |
|
|
50 |
|
|
|
5 |
|
|
|
55 |
|
|
|
36 |
|
|
|
3 |
|
|
|
39 |
|
|
|
26 |
|
|
|
2 |
|
|
|
28 |
|
SFAS 88 Settlement Charge |
|
|
— |
|
|
|
1 |
|
|
|
1 |
|
|
|
— |
|
|
|
2 |
|
|
|
2 |
|
|
|
— |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
Total |
|
$ |
65 |
|
|
$ |
8 |
|
|
$ |
73 |
|
|
$ |
51 |
|
|
$ |
6 |
|
|
$ |
57 |
|
|
$ |
46 |
|
|
$ |
4 |
|
|
$ |
50 |
|
|
|
|
|
|
The following assumptions, calculated on a weighted-average basis, were used to determine
pension costs for the principal plans in which Monsanto employees participated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
|
Year Ended Aug. 31,
|
|
Year Ended Aug. 31,
|
| |
|
2006
|
|
2005
|
|
2004
|
| |
|
|
|
|
|
Outside |
|
|
|
|
|
Outside |
|
|
|
|
|
Outside |
| |
|
U.S. |
|
the U.S. |
|
U.S. |
|
the U.S. |
|
U.S. |
|
the U.S. |
|
|
|
|
|
Discount Rate |
|
|
5.00 |
% |
|
|
4.29 |
% |
|
|
5.80 |
% |
|
|
5.56 |
% |
|
|
6.25 |
% |
|
|
5.68 |
% |
Assumed Long-Term Rate of Return on
Assets |
|
|
8.75 |
% |
|
|
7.43 |
% |
|
|
8.75 |
% |
|
|
8.34 |
% |
|
|
8.75 |
% |
|
|
8.16 |
% |
Annual Rates of Salary Increase (for
plans that base benefits on final
compensation level) |
|
|
4.00 |
% |
|
|
3.60 |
% |
|
|
3.25 |
% |
|
|
4.52 |
% |
|
|
3.25 |
% |
|
|
4.58 |
% |
|
|
|
|
|
87
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Obligations and Funded Status
Monsanto uses a measurement date of August 31 for most of its pension plans. The funded status of
the pension plans as of Aug. 31, 2006, and Aug. 31, 2005, was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
U.S.
|
|
Outside the U.S.
|
|
Total
|
| |
|
Year Ended Aug. 31,
|
|
Year Ended Aug. 31,
|
|
Year Ended Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
Change in Benefit Obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period |
|
$ |
1,671 |
|
|
$ |
1,515 |
|
|
$ |
270 |
|
|
$ |
171 |
|
|
$ |
1,941 |
|
|
$ |
1,686 |
|
Service cost |
|
|
36 |
|
|
|
32 |
|
|
|
7 |
|
|
|
4 |
|
|
|
43 |
|
|
|
36 |
|
Interest cost |
|
|
83 |
|
|
|
87 |
|
|
|
10 |
|
|
|
9 |
|
|
|
93 |
|
|
|
96 |
|
Plan participants’ contributions |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Actuarial loss (gain) |
|
|
(126 |
) |
|
|
140 |
|
|
|
(16 |
) |
|
|
20 |
|
|
|
(142 |
) |
|
|
160 |
|
Acquisitions |
|
|
— |
|
|
|
15 |
|
|
|
— |
|
|
|
79 |
|
|
|
— |
|
|
|
94 |
|
Benefits paid |
|
|
(129 |
) |
|
|
(118 |
) |
|
|
(18 |
) |
|
|
(14 |
) |
|
|
(147 |
) |
|
|
(132 |
) |
Plan Amendments |
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
|
|
|
|
|
Benefit Obligation at End of Period |
|
$ |
1,535 |
|
|
$ |
1,671 |
|
|
$ |
252 |
|
|
$ |
270 |
|
|
$ |
1,787 |
|
|
$ |
1,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning
of period |
|
$ |
1,232 |
|
|
$ |
1,103 |
|
|
$ |
189 |
|
|
$ |
116 |
|
|
$ |
1,421 |
|
|
$ |
1,219 |
|
Actual return on plan assets |
|
|
105 |
|
|
|
172 |
|
|
|
23 |
|
|
|
17 |
|
|
|
128 |
|
|
|
189 |
|
Employer contribution |
|
|
63 |
|
|
|
64 |
|
|
|
9 |
|
|
|
3 |
|
|
|
72 |
|
|
|
67 |
|
Plan participants’ contributions |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Acquisitions |
|
|
— |
|
|
|
12 |
|
|
|
— |
|
|
|
66 |
|
|
|
— |
|
|
|
78 |
|
Fair value of benefits paid(1) |
|
|
(129 |
) |
|
|
(119 |
) |
|
|
(18 |
) |
|
|
(14 |
) |
|
|
(147 |
) |
|
|
(133 |
) |
|
|
|
|
|
Plan Assets at End of Period |
|
$ |
1,271 |
|
|
$ |
1,232 |
|
|
$ |
204 |
|
|
$ |
189 |
|
|
$ |
1,475 |
|
|
$ |
1,421 |
|
|
|
|
|
|
Unfunded Status |
|
|
264 |
|
|
|
439 |
|
|
|
48 |
|
|
|
81 |
|
|
|
312 |
|
|
|
520 |
|
Unrecognized Prior Service Cost |
|
|
(12 |
) |
|
|
(15 |
) |
|
|
1 |
|
|
|
(1 |
) |
|
|
(11 |
) |
|
|
(16 |
) |
Unrecognized Subsequent Loss |
|
|
(391 |
) |
|
|
(566 |
) |
|
|
(23 |
) |
|
|
(49 |
) |
|
|
(414 |
) |
|
|
(615 |
) |
|
|
|
|
|
Net Pension (Asset) Liability |
|
$ |
(139 |
) |
|
$ |
(142 |
) |
|
$ |
26 |
|
|
$ |
31 |
|
|
$ |
(113 |
) |
|
$ |
(111 |
) |
|
|
|
|
|
| (1) |
|
Employer contributions and benefits paid under the pension plans include $4 million
paid from employer assets in each of fiscal years 2006 and 2005. |
Weighted-average assumptions used to determine benefit obligations as of Aug. 31, 2006, and
Aug. 31, 2005, were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
U.S.
|
|
Outside the U.S.
|
| |
|
Year Ended Aug. 31,
|
|
Year Ended Aug. 31,
|
| |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
Discount Rate |
|
|
5.90 |
% |
|
|
5.00 |
% |
|
|
4.96 |
% |
|
|
4.29 |
% |
Rate of Compensation
Increase |
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
3.54 |
% |
|
|
3.60 |
% |
|
|
|
In fiscal year 2007, pension expense, which will be determined using assumptions as of Aug.
31, 2006, is expected to decrease compared with fiscal year 2006 expense. The company increased its
discount rate assumption as of Aug. 31, 2006, to reflect current economic conditions of market
interest rates.
The U.S. accumulated benefit obligation (ABO) as of Aug. 31, 2006, and Aug. 31, 2005, was $1.5
billion and $1.6 billion, respectively. The ABO for plans outside of the United States was $195
million and $209 million as of Aug. 31, 2006, and Aug. 31, 2005, respectively.
The projected benefit obligation (PBO), ABO, and the fair value of the plan assets for pension
plans with PBOs in excess of plan assets as of Aug. 31, 2006, and Aug. 31, 2005, were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
U.S.
|
|
Outside the U.S.
|
|
Total
|
| |
|
As of Aug. 31,
|
|
As of Aug. 31,
|
|
As of Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
PBO |
|
$ |
1,535 |
|
|
$ |
1,671 |
|
|
$ |
107 |
|
|
$ |
229 |
|
|
$ |
1,642 |
|
|
$ |
1,900 |
|
ABO |
|
|
1,478 |
|
|
|
1,585 |
|
|
|
98 |
|
|
|
204 |
|
|
|
1,576 |
|
|
|
1,789 |
|
Fair Value of Plan
Assets with PBOs in
Excess of Plan
Assets |
|
|
1,271 |
|
|
|
1,232 |
|
|
|
80 |
|
|
|
179 |
|
|
|
1,351 |
|
|
|
1,411 |
|
|
|
|
|
|
88
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The PBO, ABO, and the fair value of the plan assets for pension plans with ABOs in excess of
plan assets as of Aug. 31, 2006, and Aug. 31, 2005, were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
U.S.
|
|
Outside the U.S.
|
|
Total
|
| |
|
As of Aug. 31,
|
|
As of Aug. 31,
|
|
As of Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
PBO |
|
$ |
1,535 |
|
|
$ |
1,671 |
|
|
$ |
107 |
|
|
$ |
112 |
|
|
$ |
1,642 |
|
|
$ |
1,783 |
|
ABO |
|
|
1,478 |
|
|
|
1,585 |
|
|
|
98 |
|
|
|
102 |
|
|
|
1,576 |
|
|
|
1,687 |
|
Fair Value of Plan
Assets with ABOs in
Excess of Plan
Assets |
|
|
1,271 |
|
|
|
1,232 |
|
|
|
80 |
|
|
|
74 |
|
|
|
1,351 |
|
|
|
1,306 |
|
|
|
|
|
|
As of Aug. 31, 2006, and Aug. 31, 2005, amounts recognized in the Statements of Consolidated
Financial Position were included in the following balance sheet accounts:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Pension (Asset)
Liability |
|
| |
|
U.S.
|
|
Outside the U.S.
|
|
Total
|
| |
|
As of Aug. 31,
|
|
As of Aug. 31,
|
|
As of Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
Miscellaneous Accruals |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4 |
|
|
$ |
5 |
|
|
$ |
4 |
|
|
$ |
5 |
|
Accrued Pension Liability |
|
|
25 |
|
|
|
20 |
|
|
|
54 |
|
|
|
56 |
|
|
|
79 |
|
|
|
76 |
|
Additional Minimum Liability |
|
|
183 |
|
|
|
332 |
|
|
|
4 |
|
|
|
3 |
|
|
|
187 |
|
|
|
335 |
|
Pre-tax Accumulated Other Comprehensive Loss |
|
|
(335 |
) |
|
|
(480 |
) |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
(338 |
) |
|
|
(484 |
) |
Prepaid Benefit Cost |
|
|
— |
|
|
|
— |
|
|
|
(32 |
) |
|
|
(28 |
) |
|
|
(32 |
) |
|
|
(28 |
) |
Intangible Assets |
|
|
(12 |
) |
|
|
(14 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(13 |
) |
|
|
(15 |
) |
|
|
|
|
|
Net Pension (Asset) Liability |
|
$ |
(139 |
) |
|
$ |
(142 |
) |
|
$ |
26 |
|
|
$ |
31 |
|
|
$ |
(113 |
) |
|
$ |
(111 |
) |
|
|
|
|
|
In accordance with SFAS No. 87, Employers’ Accounting for Pensions, Monsanto recorded an
additional minimum pension liability adjustment during fiscal years 2006 and 2005. The noncash
adjustment recorded in fiscal year 2006 decreased postretirement
liabilities by approximately $148
million, increased shareowners’ equity by approximately $90 million aftertax, decreased deferred
income tax assets by approximately $56 million, and decreased intangible assets for prior service
costs by approximately $2 million. The noncash adjustment recorded in fiscal year 2005 increased
postretirement liabilities by approximately $20 million, increased deferred income tax assets by
approximately $21 million, decreased intangible assets for prior service costs by approximately $3
million, and decreased shareowners’ equity by approximately $2 million aftertax. These adjustments
were necessary to keep the recorded pension liability at least equal to the unfunded accumulated
benefit obligation for the plans. The noncash charges to shareowners’ equity for these adjustments
did not affect Monsanto’s results of operations, but they are reflected in other comprehensive
income (loss).
Plan Assets
U.S. Plans: The asset allocations for Monsanto’s U.S. pension plans as of Aug. 31, 2006, and Aug.
31, 2005, and the target allocation range for fiscal year 2007, by asset category, follow. The fair
value of assets for these plans was $1.3 billion and $1.2 billion as of Aug. 31, 2006, and Aug. 31,
2005, respectively.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Target |
|
Percentage of Plan Assets
|
| |
|
Allocation
|
|
As of Aug. 31,
|
| Asset Category |
|
2007 |
|
2006 |
|
2005 |
|
|
|
Equity
Securities |
|
|
60 - 70 |
% |
|
|
66.5 |
% |
|
|
65.2 |
% |
Debt Securities |
|
|
25 - 35 |
% |
|
|
28.1 |
% |
|
|
30.6 |
% |
Real Estate |
|
|
2 - 8 |
% |
|
|
4.0 |
% |
|
|
3.9 |
% |
Other |
|
|
0 - 3 |
% |
|
|
1.4 |
% |
|
|
0.3 |
% |
| |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
The expected long-term rate of return on these plan assets was 8.75 percent in fiscal years
2006, 2005 and 2004. The expected long-term rate of return on plan assets is based on historical
and projected rates of return for current and planned asset classes in the plan’s investment
portfolio. Assumed projected rates of return for each asset class were selected after analyzing
historical experience and future expectations of the returns and volatility of the various asset
classes. The overall expected rate of return for the portfolio is based on the target asset
allocation for each asset class and is adjusted for historical and expected experience of active
portfolio management results compared to benchmark returns and the effect of expenses paid for plan
assets.
89
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The general principles guiding investment of U.S. pension plan assets are embodied in the Employee
Retirement Income Security Act of 1974 (ERISA). These principles include discharging the company’s
investment responsibilities for the exclusive benefit of plan participants and in accordance with
the “prudent expert” standards and other ERISA rules and regulations. Investment objectives for the
company’s U.S. pension plan assets are to optimize the long-term return on plan assets while
maintaining an acceptable level of risk, to diversify assets among asset classes and investment
styles, and to maintain a long-term focus.
In 2003, the company conducted an asset/liability study to determine the optimal strategic asset
allocation to meet the plan’s projected long-term benefit obligations and desired funding status.
The target asset allocation resulting from the asset/liability study is outlined in the previous
table.
The plan’s investment fiduciaries are responsible for selecting investment managers, commissioning
periodic asset/liability studies, setting asset allocation targets, and monitoring asset allocation
and investment performance. The company’s pension investment professionals have discretion to
manage assets within established asset allocation ranges approved by the plan fiduciaries.
Plans Outside the United States: The weighted-average asset allocation for Monsanto’s pension plans
outside of the United States as of Aug. 31, 2006, and Aug. 31, 2005, and the weighted-average
target allocation range for fiscal year 2007, by asset category, follows. The fair value of plan
assets for these plans was $204 million and $189 million as of Aug. 31, 2006, and Aug. 31, 2005,
respectively.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Target |
|
Percentage of Plan Assets
|
| |
|
Allocation
|
|
As of Aug. 31,
|
| Asset Category |
|
2007 |
|
2006 |
|
2005 |
|
|
|
Equity
Securities |
|
|
57 - 77 |
% |
|
|
50.4% |
(1) |
|
|
53.0 |
% |
Debt Securities |
|
|
22 - 38 |
% |
|
|
48.3% |
(1) |
|
|
45.7 |
% |
Other |
|
|
0 - 5 |
% |
|
|
1.3% |
|
|
|
1.3 |
% |
| |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
100.0% |
|
|
|
100.0 |
% |
|
|
|
| (1) |
|
The fair value of plan assets of $204 million for fiscal year 2006 includes $70
million for a Seminis defined benefit plan. The plan assets for the Seminis plan are invested
20 percent in equity securities and 80 percent in debt securities. The difference in the
Seminis and Monsanto plan assets causes the percentage of plan assets for equity and debt
securities in 2006 to be outside of the 2007 target allocation range for debt securities.
Excluding the Seminis plan, 68 percent of plan assets were invested in equity securities and
29 percent of plan assets were invested in debt securities as of Aug. 31, 2006. |
The weighted-average expected long-term rate of return on the plans’ assets was 7.4 percent in
fiscal year 2006, 8.3 percent in fiscal year 2005 and 8.2 percent in fiscal year 2004. See the
discussion in the U.S. Plans section of this note related to the determination of the expected
long-term rate of return on plan assets.
Expected Cash Flows
Information about the expected cash flows for the pension benefit plans follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Outside |
| (Dollars in millions) |
|
U.S. |
|
the U.S. |
|
Employer Contributions 2007 |
|
$ |
64 |
|
|
$ |
6 |
|
Benefit Payments |
|
|
|
|
|
|
|
|
2007 |
|
|
130 |
|
|
|
17 |
|
2008 |
|
|
129 |
|
|
|
13 |
|
2009 |
|
|
129 |
|
|
|
15 |
|
2010 |
|
|
129 |
|
|
|
15 |
|
2011 |
|
|
131 |
|
|
|
13 |
|
2012-2016 |
|
|
685 |
|
|
|
72 |
|
|
In September 2006, Monsanto voluntarily contributed $60 million to the U.S. qualified plan. No
additional contributions to the U.S. qualified plan are currently
planned for fiscal year 2007. The company may
contribute additional amounts to the plan depending on the level of future contributions required.
The remaining portion of expected contributions for 2007 relates to the non-qualified U.S. plan and
plans outside of the United States. Total benefits expected to be paid include both the company’s
share of the benefit cost and the participants’ share of the cost, which is funded by participant
contributions to the plans.
90
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15. POSTRETIREMENT BENEFITS — HEALTH CARE AND OTHER POST EMPLOYMENT BENEFITS
Monsanto-Sponsored Plans
Substantially all regular full-time U.S. employees hired prior to May 1, 2002, and certain
employees in other countries become eligible for company-subsidized postretirement health care benefits if they reach
retirement age while employed by Monsanto and have the requisite service history. Employees who
retired from Monsanto prior to Jan. 1, 2003, were eligible for retiree life insurance benefits.
These postretirement benefits are unfunded and are generally based on the employees’ years of
service or compensation levels, or both. The costs of postretirement benefits are accrued by the
date the employees become eligible for the benefits. Total postretirement benefit costs for
Monsanto employees and the former employees included in Monsanto’s Statements of Consolidated
Operations in fiscal years 2006, 2005, and 2004 were $33 million, $34 million, and $36 million,
respectively.
In May 2004, the FASB issued FASB Staff Position No. 106-2, Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP 106-2).
FSP 106-2 provides authoritative guidance on the accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Act), which was signed into law
on Dec. 8, 2003. The Act introduced a prescription drug benefit under Medicare, as well as a
federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at
least actuarially equivalent to Medicare. FSP 106-2 was effective for Monsanto’s first quarter of
fiscal year 2005. Final regulations necessary to implement the Act were released in January 2005,
which resulted in a remeasurement of postretirement obligations. Accordingly, Monsanto estimated a
reduction of the postretirement benefit obligation of approximately $46 million as of Aug. 31,
2005. The reduction in annual benefit cost recorded in fiscal years 2006 and 2005 was $5 million
and $4 million, respectively.
The following information pertains to the postretirement benefit plans in which Monsanto employees
and certain former employees of Pharmacia allocated to Monsanto participated, principally health
care plans and life insurance plans. The cost components of these plans were:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2004 |
|
Service Cost for Benefits Earned During the
Year |
|
$ |
13 |
|
|
$ |
12 |
|
|
$ |
11 |
|
Interest Cost on Benefit Obligation |
|
|
16 |
|
|
|
18 |
|
|
|
21 |
|
Amortization of Unrecognized Net Loss |
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
|
Total |
|
$ |
33 |
|
|
$ |
34 |
|
|
$ |
36 |
|
|
The following assumptions, calculated on a weighted-average basis, were used to determine the
postretirement costs for the principal plans in which Monsanto employees participated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| |
|
2006 |
|
2005 |
|
2004 |
|
Discount Rate |
|
|
5.00% |
|
|
|
5.80% |
|
|
|
6.25% |
|
Initial Trend Rate for Health Care Costs |
|
|
7.00% |
|
|
|
8.00% |
|
|
|
9.00% |
|
Ultimate Trend Rate for Health Care
Costs |
|
|
5.00% |
|
|
|
5.00% |
|
|
|
5.00% |
|
|
A 7 percent annual rate of increase in the per capita cost of covered health care benefits was
assumed for 2006. This assumption is consistent with the plans’ recent experience and expectations
of future growth. The rate is assumed to decrease gradually to 5 percent for 2008 and remain at
that level thereafter. Assumed health care cost trend rates have an effect on the amounts reported
for the health care plans. A 1 percentage-point change in assumed health care cost trend rates
would have the following effects:
| |
|
|
|
|
|
|
|
|
|
| (Dollars in millions) |
|
1 Percentage-Point Increase |
|
1 Percentage-Point Decrease |
|
Effect on Total of Service and Interest Cost |
|
|
$1 |
|
|
|
$(1) |
|
|
Effect on Postretirement Benefit Obligation |
|
|
$6 |
|
|
|
$(6) |
|
|
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Monsanto uses a measurement date of August 31 for most of its other postretirement benefit
plans. The status of the postretirement health care, life insurance, and employee disability
benefit plans in which Monsanto employees participated was as follows for the periods indicated:
| |
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
Change in Benefit Obligation: |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period |
|
$ |
319 |
|
|
$ |
353 |
|
Service cost |
|
|
13 |
|
|
|
12 |
|
Interest cost |
|
|
16 |
|
|
|
18 |
|
Divestitures |
|
|
— |
|
|
|
(2 |
) |
Actuarial (gain) loss |
|
|
(34 |
) |
|
|
(35 |
) |
Plan participant contributions |
|
|
1 |
|
|
|
1 |
|
Medicare Part D Subsidy Receipts |
|
|
1 |
|
|
|
— |
|
Benefits paid(1) |
|
|
(29 |
) |
|
|
(28 |
) |
|
Benefit Obligation at End of Period |
|
$ |
287 |
|
|
$ |
319 |
|
|
Unfunded Status |
|
$ |
287 |
|
|
$ |
319 |
|
Unrecognized Prior Service Credit |
|
|
8 |
|
|
|
9 |
|
Unrecognized Subsequent Gain (Loss) |
|
|
4 |
|
|
|
(36 |
) |
|
Accrued Postretirement Liability |
|
$ |
299 |
|
|
$ |
292 |
|
|
| (1) |
|
Employer contributions and benefits paid under the other postretirement benefit
plans include $29 million and $28 million from employer assets in fiscal years 2006 and 2005,
respectively. |
Weighted-average assumptions used to determine benefit obligations as of Aug. 31, 2006, and
Aug. 31, 2005, were as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| |
|
2006 |
|
2005 |
|
Discount Rate |
|
|
5.90 |
% |
|
|
5.00 |
% |
Initial Trend Rate for Health Care
Costs(1) |
|
|
7.00 |
% |
|
|
7.00 |
% |
Ultimate Trend Rate for Health Care Costs |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
| (1) |
|
As of Aug. 31, 2006, this rate is assumed to decrease gradually to 5 percent for
2011 and remain at that level thereafter. Previously, the rate was assumed to decrease
gradually to 5 percent for 2008. |
As of Aug. 31, 2006, and Aug. 31, 2005, amounts recognized in the Statements of Consolidated
Financial Position were as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
As of Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
Miscellaneous Accruals |
|
$ |
24 |
|
|
$ |
29 |
|
Postretirement Liabilities |
|
|
275 |
|
|
|
263 |
|
|
Asset allocation is not applicable to the company’s other postretirement benefit plans because
these plans are unfunded.
Expected Cash Flows
Information about the expected cash flows for the other postretirement benefit plans follows:
| |
|
|
|
|
|
| (Dollars in millions) |
|
U.S. |
|
Employer Contributions 2007 |
|
$ |
23 |
|
Benefit Payments(1) |
|
|
|
|
2007 |
|
|
23 |
|
2008 |
|
|
24 |
|
2009 |
|
|
24 |
|
2010 |
|
|
25 |
|
2011 |
|
|
26 |
|
2012-2016 |
|
|
124 |
|
|
| (1) |
|
Benefit payments are net of expected federal subsidy receipts related to
prescription drug benefits granted under the Act (as discussed above), which are estimated to
be $2 million to $3 million annually from 2007 through 2011, and $14 million for the period
2012 through 2016. |
92
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Expected contributions include other postretirement benefits of $23 million to be paid from
employer assets in 2007. Total benefits expected to be paid include both the company’s share of the
benefit cost and the participants’ share of the cost, which is funded by participant contributions
to the plan.
Other Sponsored Plans
Other plans are offered to certain eligible employees. There is an accrual of $42 million and $41
million as of Aug. 31, 2006, and Aug. 31, 2005, respectively, in the Statements of Consolidated
Financial Position for anticipated payments to be made to employees who have retired or terminated
employment.
In accordance with local statutory requirements, Seminis sponsors retirement and severance plans at
several of its foreign locations. The plans are administered based on the legislative and tax
requirements in the country in which they are established. The
related accrual for anticipated payments to
be made to foreign employees upon retirement or termination recognized in the Statements of
Consolidated Financial Position was $17 million as of Aug. 31, 2006, and Aug. 31, 2005.
NOTE 16. EMPLOYEE SAVINGS PLANS
Monsanto-Sponsored Plans
The U.S. tax-qualified Monsanto Savings and Investment Plan (Monsanto SIP) was established in June
2001 as a successor to a portion of the Pharmacia Corporation Savings and Investment Plan. The
Monsanto SIP is a defined contribution profit-sharing plan with an individual account for each
participant. Employees who are 18 years of age or older are generally eligible to participate in
the plan. The Monsanto SIP provides for voluntary contributions, generally ranging from 1 percent
to 25 percent of an employee’s eligible pay. Monsanto matches employee contributions to the plan
with shares released from the leveraged employee stock ownership plan (Monsanto ESOP). The Monsanto
ESOP is leveraged by debt due to Monsanto. The debt, which was $15 million as of Aug. 31, 2006, is
repaid primarily through company contributions and dividends paid on Monsanto common stock held in
the ESOP. The Monsanto ESOP debt was restructured in December 2004 to level out the future
allocation of stock thereunder in an impartial manner intended to ensure equitable treatment for
and generally to be in the best interests of current and future plan participants consistent with
the level of benefits that Monsanto intended for the plan to provide to participants. To that end,
the terms of the restructuring were determined pursuant to an arm’s length negotiation between
Monsanto and an independent trust company as fiduciary for the plan. In this role, the independent
fiduciary determined that the restructuring, including certain financial commitments and
enhancements that were or will be made in the future by Monsanto to benefit participants and
beneficiaries of the plan, including the increased diversification rights that were provided to
certain participants, was completed in accordance with the best interests of plan participants. As
a result of these enhancements related to the restructuring, a liability of $40 million was
recorded as of Aug. 31, 2006, to reflect the ESOP enhancement.
As of Aug. 31, 2006, the Monsanto ESOP held 10.9 million shares of Monsanto common stock (allocated
and unallocated). The unallocated shares of Monsanto common stock held by the ESOP are allocated
each year to employee savings accounts as matching contributions in accordance with the terms of
the Monsanto SIP. During fiscal year 2006, 1.1 million Monsanto shares were allocated specifically
to Monsanto participants, leaving 4.5 million shares of Monsanto common stock remaining in the
Monsanto ESOP and unallocated as of Aug. 31, 2006.
Contributions to the plan, representing compensation expense, are made annually in amounts
sufficient to fund ESOP debt repayment. Dividends on unallocated shares are used to reduce expense.
In fiscal years 2006 and 2005, the dividends paid on the shares held by the Monsanto ESOP were
greater than the cost of the shares allocated to the participants. The following information
relates to the Monsanto ESOP:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2004 |
|
Total ESOP Expense |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3 |
|
Interest Portion of Total ESOP
Expense |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Net Cash Contribution |
|
|
— |
|
|
|
1 |
|
|
|
5 |
|
Dividends Paid on ESOP Shares Held |
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
|
93
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Seminis-Sponsored Plans
Seminis maintains a qualified company-sponsored defined contribution savings plan covering eligible
employees. Effective Jan. 1, 2006, this plan was frozen. Company contributions are based on a
percentage of employee contributions and on employee salaries. Company contributions were $1
million for fiscal year 2006 and less than $1 million for the period from the date of acquisition
through Aug. 31, 2005. The defined contribution savings plan also contains a profit-sharing
provision. Annual contributions are based on employee age and salaries and totaled $1 million for
fiscal year 2006 and $2 million for the period from the date of acquisition through Aug. 31, 2005.
Effective Jan. 1, 2006, Seminis employees became eligible to participate in the Monsanto SIP. The
Company has not yet determined when the assets of the Seminis Vegetable Seeds Retirement Plan that
were allocated to the participants will be transferred to the Monsanto SIP.
NOTE 17. STOCK-BASED COMPENSATION PLANS
On Sept. 1, 2005, Monsanto adopted SFAS 123R, which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and directors based on
estimated fair values. SFAS 123R supersedes Monsanto’s previous accounting under APB 25 for periods
beginning in fiscal 2006. In March 2005, the SEC issued SAB 107 relating to SFAS 123R. Monsanto has
applied the provisions of SAB 107 in its adoption of SFAS 123R.
Stock-based compensation expense recognized under SFAS 123R was $63 million for 2006, which
consisted of: (1) compensation expense for all unvested share-based awards outstanding as of Aug.
31, 2005, based on the grant date fair value estimated in accordance with the pro forma provisions
of SFAS 123 and (2) compensation expense for share-based awards granted subsequent to adoption
based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.
Stock-based compensation expense recognized during the period is based on the value of the portion
of share-based payment awards that are ultimately expected to vest. Compensation cost capitalized
as part of inventory was $3 million as of Aug. 31, 2006. No compensation cost was capitalized
during fiscal years 2005 or 2004. SFAS 123R amends SFAS No. 95, Statements of Cash Flows, to
require that excess tax benefits be reported as a financing cash inflow rather than as a reduction
of taxes paid, which is included within operating cash flows. The following table shows the impact
of the adoption of SFAS 123R on the Statement of Consolidated Operations and Statement of
Consolidated Cash Flows.
| |
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| (Dollars in millions, except per share amounts) |
|
2006 |
|
Cost of Goods Sold |
|
$ |
(4 |
) |
Selling, General and Administrative Expenses (1) |
|
|
(47 |
) |
Research and Development Expenses |
|
|
(12 |
) |
|
Total stock-based compensation expense included in
operating expenses |
|
|
(63 |
) |
Income From Continuing Operations Before Income Taxes |
|
|
(63 |
) |
Income Tax Benefit |
|
|
(23 |
) |
|
Net Loss |
|
$ |
(40 |
) |
|
Basic and Diluted Loss per Share |
|
$ |
(0.07 |
) |
|
Net Cash Required by Operating Activities |
|
$ |
(98 |
) |
Net Cash Provided by Financing Activities |
|
$ |
98 |
|
|
|
|
|
| (1) |
|
Includes $13 million related to share-based awards for which compensation expense was
being recognized prior to the adoption of SFAS 123R. |
Plan Descriptions: Share-based awards are designed to reward employees for their long-term
contributions to the company and provide incentives for them to remain with the company. Monsanto
issues stock option awards, restricted stock, and restricted stock units with performance
conditions under three stock plans. Under the Monsanto Company Long-Term Incentive Plan, as amended
(LTIP), formerly known as the Monsanto 2000 Management Incentive Plan, the company may grant awards
to key officers, directors and employees of Monsanto, including stock options, of up to 78.5
million shares of Monsanto common stock. Other employees may be granted options under the Monsanto
Company Broad-Based Stock Option Plan (Broad-Based Plan), which permits the granting of a maximum
of 5.4 million shares of Monsanto common stock to employees other than officers and other employees
subject to special reporting requirements. In January 2005, shareowners approved the Monsanto
Company 2005 Long-Term Incentive Plan (2005 LTIP), under which the company may grant awards to key
officers, directors and employees of Monsanto, including stock options, of up to 24.0 million
shares of Monsanto
94
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
common stock. Under the LTIP,
the option exercise price equals the fair market value of the common
stock on the date of grant. As of Aug. 31, 2006, no awards have been
granted under the 2005 LTIP. Additionally, 217,998 shares of directors’ deferred stock granted in
prior years were vested and outstanding at Aug. 31, 2006.
The plans provide that the term of any
option granted may not exceed 10 years and that each option may be exercised for such period as may
be specified in the terms and conditions of the grant, as approved by the People and Compensation
Committee of the board of directors. Generally, the options vest over three years, with one-third
of the total award vesting each year. Grants of restricted stock generally vest at the end of a
three-year or five-year service period as specified in the terms and conditions of the grant, as
approved by the Restricted Stock Grant Committee of the board of directors. Restricted stock units
represent the right to receive a number of shares of stock dependent upon vesting requirements.
Vesting is subject to the employees’ continued employment during the designated service period and
may also be subject to Monsanto’s attainment of specified performance criteria during the
designated performance period. Shares related to restricted stock and restricted stock units are
released to employees upon satisfaction of all vesting requirements. Compensation expense for stock
options, restricted stock and restricted stock units is measured at fair value on the date of
grant, net of estimated forfeitures, and recognized over the vesting period of the award.
Certain Monsanto employees outside the United States may receive stock appreciation rights as part
of Monsanto’s stock compensation plans. In addition, certain employees on international assignment
may receive phantom stock awards. Both awards entitle those employees to receive a cash amount
determined by the appreciation in the fair market value of the company’s common stock between the
date of the award and the date of exercise. As of Aug. 31, 2006, the fair value of stock
appreciation rights and phantom stock was $1 million and $2 million, respectively. The fair value
is remeasured at the end of each reporting period until exercised, and compensation expense is
recognized over the requisite service period in accordance with SFAS 123R. Share-based liabilities
paid related to stock appreciation rights was $2 million, $1 million and less than $1 million
during fiscal years 2006, 2005 and 2004, respectively. Additionally, less than $1 million per year
was paid related to phantom stock awards in fiscal years 2006 and 2005. No phantom share awards
were paid in fiscal year 2004.
Monsanto also issues share-based awards under the Monsanto Non-Employee Director Equity Incentive
Compensation Plan (Director Plan) for directors who are not employees of Monsanto or its
affiliates. Under the Director Plan, half of the annual retainer for each nonemployee director is
paid in the form of deferred stock — shares of common stock to be delivered at a specified future
time. The remainder is payable, at the election of each director, in the form of restricted common
stock, deferred common stock, current cash and/or deferred cash. The Director Plan also provides
that a nonemployee director will receive a grant of 3,000 shares of restricted stock upon
commencement of service as a member of Monsanto’s board of
directors which vest on the third anniversary of the grant date.
Awards of deferred stock and restricted stock under the Director Plan are automatically granted
under the LTIP as provided for in the Director Plan. The fair value of awards granted under the
Director Plan was $8 million as of Aug. 31, 2006. Compensation expense for most awards under the
Director Plan is measured at fair value at the date of grant, net of estimated forfeitures, and
recognized over the vesting period of the award. There were no share-based liabilities paid under
the Director Plan in 2006, 2005 or 2004.
95
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of the status of the Monsanto plans for the periods from Sept. 1, 2003, through Aug. 31,
2006, follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Outstanding |
| |
|
|
|
|
|
Weighted-Average |
| |
|
Shares |
|
Exercise Price |
|
Balance Outstanding Sept. 1,
2003 |
|
|
52,786,922 |
|
|
$ |
9.90 |
|
Granted |
|
|
7,528,980 |
|
|
|
16.68 |
|
Exercised |
|
|
(19,839,256 |
) |
|
|
9.95 |
|
Forfeited |
|
|
(1,656,036 |
) |
|
|
10.02 |
|
|
Balance Outstanding Aug. 31,
2004 |
|
|
38,820,610 |
|
|
|
11.16 |
|
Granted |
|
|
7,717,948 |
|
|
|
21.15 |
|
Exercised |
|
|
(16,231,368 |
) |
|
|
10.69 |
|
Forfeited |
|
|
(941,598 |
) |
|
|
17.34 |
|
|
Balance Outstanding Aug. 31,
2005 |
|
|
29,365,592 |
|
|
|
13.86 |
|
Granted |
|
|
5,994,560 |
|
|
|
29.60 |
|
Exercised |
|
|
(9,468,690 |
) |
|
|
12.15 |
|
Forfeited |
|
|
(448,686 |
) |
|
|
24.83 |
|
|
Balance Outstanding Aug. 31,
2006 |
|
|
25,442,776 |
|
|
$ |
18.01 |
|
|
Monsanto stock options outstanding as of Aug. 31, 2006, are summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding
|
|
Options Exercisable
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
| |
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
Intrinsic |
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
Intrinsic |
| |
|
|
|
|
|
Remaining |
|
Weighted-Average |
|
Value(1) |
|
|
|
|
|
Remaining |
|
Weighted-Average |
|
Value(1) |
| Range of |
|
|
|
|
|
Contractual Life |
|
Exercise Price |
|
(dollars in |
|
|
|
|
|
Contractual Life |
|
Exercise Price |
|
(dollars in |
| Exercise Price |
|
Shares |
|
(Years) |
|
per Share |
|
millions) |
|
Shares |
|
(Years) |
|
per Share |
|
millions) |
|
|
|
$ 7.32 - $10.00 |
|
|
8,018,002 |
|
|
|
5.35 |
|
|
$ |
8.87 |
|
|
$ |
309 |
|
|
|
8,018,002 |
|
|
|
5.35 |
|
|
$ |
8.87 |
|
|
$ |
309 |
|
$10.01 - $20.00 |
|
|
5,450,372 |
|
|
|
6.81 |
|
|
$ |
15.64 |
|
|
$ |
173 |
|
|
|
3,989,212 |
|
|
|
6.57 |
|
|
$ |
15.41 |
|
|
$ |
128 |
|
$20.01 - $30.00 |
|
|
11,666,040 |
|
|
|
8.57 |
|
|
$ |
24.90 |
|
|
$ |
263 |
|
|
|
1,575,378 |
|
|
|
7.88 |
|
|
$ |
21.14 |
|
|
$ |
41 |
|
$30.01 - $46.00 |
|
|
308,362 |
|
|
|
9.18 |
|
|
$ |
36.80 |
|
|
$ |
3 |
|
|
|
13,376 |
|
|
|
8.62 |
|
|
$ |
31.00 |
|
|
|
— |
|
|
|
|
|
|
|
25,442,776 |
|
|
|
|
|
|
|
|
|
|
$ |
748 |
|
|
|
13,595,968 |
|
|
|
|
|
|
|
|
|
|
$ |
478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
The aggregate intrinsic value represents the total pre-tax intrinsic value, based
on Monsanto’s closing stock price of $47.44 as of Aug. 31, 2006, which would have been
received by the option holders had all option holders exercised their options as of that
date. |
The weighted-average grant-date fair value of non-qualified stock options granted during
fiscal 2006, 2005 and 2004 was $9.59, $5.08 and $4.64, respectively, per share. The total pre-tax
intrinsic value of options exercised during the fiscal years ended 2006, 2005 and 2004 was $270
million, $268 million and $117 million, respectively. Pre-tax unrecognized compensation expense for
stock options, net of estimated forfeitures, was $40 million as of Aug. 31, 2006, and will be
recognized as expense over a weighted-average period of 1.7 years.
A summary of the status of Monsanto’s restricted stock, restricted stock units, and directors’
deferred stock compensation plans for fiscal year 2006 follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
Weighted-Average |
| |
|
Restricted |
|
Grant Date |
|
Restricted |
|
Grant Date |
|
Directors’ |
|
Grant Date |
| |
|
Stock |
|
Fair Values |
|
Stock Units |
|
Fair Value |
|
Deferred Stock |
|
Fair Value |
|
Nonvested as of Aug. 31,
2005 |
|
|
386,400 |
|
|
$ |
12.47 |
|
|
|
545,640 |
|
|
$ |
31.92 |
|
|
|
— |
|
|
|
— |
|
Granted |
|
|
48,200 |
|
|
$ |
30.09 |
|
|
|
242,880 |
|
|
$ |
29.44 |
|
|
|
26,208 |
|
|
$ |
31.46 |
|
Vested |
|
|
278,000 |
|
|
$ |
9.34 |
|
|
|
218,920 |
|
|
$ |
31.92 |
|
|
|
26,208 |
|
|
$ |
31.46 |
|
Forfeitures |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Nonvested as of Aug. 31,
2006 |
|
|
156,600 |
|
|
$ |
23.46 |
|
|
|
569,600 |
|
|
$ |
30.86 |
|
|
|
— |
|
|
|
— |
|
|
The weighted-average grant-date fair value of restricted stock granted during fiscal years
2006, 2005 and 2004 was $30.09, $27.23 and $15.90, respectively, per share. The weighted average
fair value for restricted stock units was $29.44 on the grant date for those granted during fiscal
year 2006 and $31.92 upon adoption of SFAS 123R for those granted during fiscal years 2005 and 2004.
The weighted-average grant-date fair value of directors’ deferred stock granted during fiscal 2006,
2005 and 2004 was $31.46, $18.27 and $12.76, respectively, per share. The total fair value of
restricted stock that vested during fiscal
96
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
years 2006, 2005, and 2004 was $3 million, less than $1 million and $1 million, respectively. The
total fair value of restricted stock units that vested during fiscal year 2006 was $7 million. No
restricted stock units vested during fiscal years 2005 or 2004. The total fair value of directors’
deferred stock vested during fiscal years 2006, 2005 and 2004 was $1 million per year.
Pre-tax unrecognized compensation expense, net of estimated forfeitures, for nonvested restricted
stock and restricted stock units was $2 million and $8 million, respectively, as of Aug. 31, 2006,
which will be recognized as expense over the weighted-average remaining requisite service periods.
At Aug. 31, 2006, there was no unrecognized compensation expense related to directors’ deferred
stock. The weighted-average remaining requisite service periods for nonvested restricted stock and
restricted stock units were 2.5 years and 1.6 years, respectively, as of Aug. 31, 2006.
Valuation and Expense Information under SFAS 123R: Upon adoption of SFAS 123R, Monsanto began
estimating the value of employee stock options on the date of grant using a lattice-binomial model.
Prior to adoption of SFAS 123R, the value of employee stock options was estimated on the date of
grant using the Black-Scholes model, for the disclosures of pro forma financial information
required under SFAS 123. A lattice-binomial model requires the use of extensive actual employee
exercise behavior data and a number of complex assumptions including volatility, risk-free interest
rate and expected dividends. Expected volatilities used in the model are based on implied
volatilities from traded options on Monsanto’s stock and historical volatility of Monsanto’s stock
price. The expected life represents the weighted-average period the stock options are expected to
remain outstanding and is a derived output of the model. The lattice-binomial model incorporates
exercise and post-vesting forfeiture assumptions based on an analysis of historical data. The
following assumptions were used to calculate the estimated value of employee stock options:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006
|
|
2005
|
|
2004
|
| Assumptions |
|
Lattice-binomial |
|
Black-Scholes |
|
Black-Scholes |
|
Expected Dividend Yield |
|
|
1.1 |
% |
|
|
1.44 |
% |
|
|
1.76 |
% |
Expected Volatility |
|
|
32%-36 |
% |
|
|
32.81 |
% |
|
|
31.45 |
% |
Weighted-Average Volatility |
|
|
33.2 |
% |
|
|
N/A |
|
|
|
N/A |
|
Risk-Free Interest Rates |
|
|
4.22%-5.02 |
% |
|
|
2.62 |
% |
|
|
2.50 |
% |
Weighted-Average Risk-Free Interest
Rate |
|
|
4.4 |
% |
|
|
N/A |
|
|
|
N/A |
|
Expected Option Life (in years) |
|
|
5.9 |
|
|
|
4.0 |
|
|
|
4.0 |
|
|
In accordance with the modified prospective transition method, Monsanto’s consolidated
financial statements for prior periods have not been restated and do not include the impact of SFAS
123R. Accordingly, no compensation expense related to stock option awards was recognized in 2005 or
2004, as all stock options granted had an exercise price equal to the fair market value of the
underlying common stock on the date of grant. The following table shows the effect on net income
and income per share as if the fair-value-based method of accounting had been applied to all
outstanding and unvested stock option awards prior to adoption for SFAS 123R. Stock-based
compensation expense of $15 million and $5 million included in net income for 2005 and 2004 was
related to expense for awards of restricted stock, restricted stock units, stock appreciation
rights and awards granted under the Director Plan. For purposes of this pro forma disclosure, the
estimated fair value of the award is assumed to be expensed over the award’s vesting periods using
the Black-Scholes model.
| |
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| (Dollars in millions, except per share amounts) |
|
2005 |
|
2004 |
|
Net Income: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
255 |
|
|
$ |
267 |
|
Add: Stock-based compensation expense included in reported Net Income, net of tax |
|
|
9 |
|
|
|
3 |
|
Less: Total stock-based compensation expense determined under the
fair-value-based method for all awards, net of tax |
|
|
(33 |
) |
|
|
(16 |
) |
|
Pro forma |
|
$ |
231 |
|
|
$ |
254 |
|
|
Basic Income per Share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.48 |
|
|
$ |
0.50 |
|
Pro forma |
|
$ |
0.43 |
|
|
$ |
0.48 |
|
Diluted Income per Share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.47 |
|
|
$ |
0.49 |
|
Pro forma |
|
$ |
0.42 |
|
|
$ |
0.47 |
|
|
For stock option awards with accelerated vesting provisions that are granted to
retirement-eligible employees and to employees that become eligible for retirement subsequent to
the grant date, Monsanto previously followed the guidance of
97
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
APB 25 and SFAS 123, which allowed compensation costs to be recognized ratably over the vesting
period of the award. SFAS 123R requires compensation costs to be recognized over the requisite
service period of the award instead of ratably over the vesting period stated in the grant. For
awards granted prior to adoption, the SEC clarified that companies should continue to follow the
vesting method they had previously been using. As a result, for awards granted prior to adoption,
Monsanto will continue to recognize compensation costs ratably over the vesting period with
accelerated recognition of the unvested portion upon actual retirement. The impact of accelerated
vesting on the pro forma disclosure shown above is immaterial. Monsanto has followed the guidance
of SFAS 123R for awards granted subsequent to the adoption date.
Monsanto’s income taxes currently payable have been reduced by the tax benefits from employee stock
option exercises. These benefits totaled $98 million, $94 million and $37 million for the fiscal
years ended 2006, 2005 and 2004, respectively, and were recorded as an increase to additional
paid-in capital.
NOTE 18. CAPITAL STOCK
Monsanto is authorized to issue 1.5 billion shares of common stock, $0.01 par value, and 20 million
shares of undesignated preferred stock, $0.01 par value. The board of directors has the authority,
without action by the shareowners, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may be greater than the
rights of the company’s common stock. It is not possible to state the actual effect of the issuance
of any shares of preferred stock upon the rights of holders of common stock until the board of
directors determines the specific rights of the holders of preferred stock.
The authorization of undesignated preferred stock makes it possible for Monsanto’s board of
directors to issue preferred stock with voting or other rights or preferences that could impede the
success of any attempt to change control of the company. These and other provisions may deter
hostile takeovers or delay attempts to change management control.
There were no shares of preferred stock outstanding as of Aug. 31, 2006, or Aug. 31, 2005. As of
Aug. 31, 2006, and Aug. 31, 2005, 543.2 and 536.4 million shares of common stock were outstanding,
respectively, and 108 million shares of common stock were reserved for employee and director stock
options.
On July 31, 2003, the Executive Committee of the board of directors authorized the purchase of up
to $500 million of the company’s common stock over a three-year period. As of Aug. 31, 2005, the
company purchased 25.3 million shares for $500 million. In July 2005, the company announced that it
had completed its $500 million share repurchase program a year ahead of the authorized expiration
period. In October 2005, the board of directors authorized the purchase of up to $800 million of
our common stock over a four-year period. In 2006, the company purchased $120 million of our common
stock, excluding commissions, under the $800 million authorization, $6 million of which was
included in accrued liabilities at Aug. 31, 2006. A total of 2.8 million shares were repurchased
under this program.
NOTE 19. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes all nonshareowner changes in equity and consists of net income
(loss), foreign currency translation adjustments, net unrealized gains and losses on
available-for-sale securities, additional minimum pension liability adjustments, and net
accumulated derivative gains or losses on cash flow hedges not yet realized. Information regarding
accumulated other comprehensive income (loss) is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2004 |
|
Accumulated Foreign Currency Translation
Adjustments |
|
$ |
(402 |
) |
|
$ |
(593 |
) |
|
$ |
(824 |
) |
Net Unrealized Gains on Investments, Net of Taxes |
|
|
18 |
|
|
|
7 |
|
|
|
9 |
|
Net Accumulated Derivative Loss, Net of Taxes |
|
|
(28 |
) |
|
|
(2 |
) |
|
|
(18 |
) |
Minimum Pension Liability, Net of Taxes |
|
|
(211 |
) |
|
|
(301 |
) |
|
|
(299 |
) |
|
Accumulated Other Comprehensive Loss |
|
$ |
(623 |
) |
|
$ |
(889 |
) |
|
$ |
(1,132 |
) |
|
98
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 20. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share (EPS) was computed using the weighted-average number of common
shares outstanding during the period shown in the table below. Diluted EPS was computed taking into
account the effect of dilutive potential common shares, as shown in the table below. Potential
common shares consist of stock options, restricted stock, restricted stock units and directors’
deferred shares calculated using the treasury stock method and are excluded if their effect is
antidilutive. These dilutive potential common shares consisted of 12 million, 12 million and 10
million, in fiscal years 2006, 2005 and 2004, respectively. In fiscal years 2006 and 2005, less
than 0.1 million stock options were excluded from the computation because the options’ exercise
prices were greater than the average market price of the common shares and, therefore, the effect
would be antidilutive. Similarly, in fiscal year 2004, 6 million outstanding stock options were
excluded from the computation.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| (Shares in millions) |
|
2006 |
|
2005 |
|
2004 |
|
Weighted-Average Number of Common
Shares |
|
|
540.0 |
|
|
|
533.6 |
|
|
|
528.8 |
|
Dilutive Potential Common Shares |
|
|
11.6 |
|
|
|
11.7 |
|
|
|
9.6 |
|
|
NOTE 21. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and taxes during fiscal years 2006, 2005 and 2004 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2004 |
|
Interest |
|
$ |
118 |
|
|
$ |
128 |
|
|
$ |
107 |
|
Taxes |
|
|
180 |
|
|
|
83 |
|
|
|
65 |
|
|
During fiscal years 2006, 2005 and 2004, the company recorded the following noncash investing
and financing transactions:
| |
• |
|
In October 2005, the board of directors authorized the purchase of up to $800 million of
the company’s common stock over a four-year period. Through Aug. 31, 2006, the company had
acquired 2.8 million shares for $120 million, $6 million of which was included in accrued
liabilities as of Aug. 31, 2006. |
| |
| |
• |
|
In second quarter 2006, an intangible asset and a liability in the amount of $61 million
was recorded as a result of minimum annual royalty provisions in the UC license agreement
described in Note 9 — Goodwill and Other Intangible Assets. |
| |
| |
• |
|
During fiscal years 2006 and 2005, the company recognized noncash transactions related
to acquisitions. See Note 4 — Business Combinations — for details of assets acquired and
liabilities assumed in 2006 acquisitions. |
| |
| |
• |
|
In fourth quarter 2006, 2005 and 2004, the board of directors declared a dividend
payable in first quarter 2007, 2006 and 2005, respectively. As of Aug. 31, 2006, 2005 and
2004, a dividend payable of $55 million, $46 million and $39 million, respectively, was
recorded. |
| |
| |
• |
|
During fiscal year 2005, the company recognized a noncash transaction related to a
customer financing program in Brazil. See Note 7 — Customer Financing Programs — for
further discussion of the program and the related noncash transaction. |
99
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 22. COMMITMENTS AND CONTINGENCIES
Contractual obligations: The following table sets forth the company’s estimates of future payments
under contracts as of Aug. 31, 2006.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Fiscal Year Ending Aug. 31,
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 and |
| (Dollars in millions) |
|
Total |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
beyond |
|
Long-Term Debt(1) |
|
$ |
1,639 |
|
|
$ |
— |
|
|
$ |
238 |
|
|
$ |
257 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
1,142 |
|
Interest Payments Relating to Long-Term
Debt(2) |
|
|
1,250 |
|
|
|
107 |
|
|
|
106 |
|
|
|
76 |
|
|
|
76 |
|
|
|
76 |
|
|
|
809 |
|
Operating Lease Obligations |
|
|
113 |
|
|
|
34 |
|
|
|
26 |
|
|
|
18 |
|
|
|
10 |
|
|
|
8 |
|
|
|
17 |
|
Purchase Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uncompleted additions to property |
|
|
67 |
|
|
|
52 |
|
|
|
15 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Commitments to purchase inventories |
|
|
448 |
|
|
|
377 |
|
|
|
26 |
|
|
|
14 |
|
|
|
11 |
|
|
|
10 |
|
|
|
10 |
|
Commitments to purchase breeding research |
|
|
982 |
|
|
|
45 |
|
|
|
45 |
|
|
|
45 |
|
|
|
45 |
|
|
|
45 |
|
|
|
757 |
|
R&D alliances and joint venture obligations |
|
|
149 |
|
|
|
55 |
|
|
|
44 |
|
|
|
26 |
|
|
|
13 |
|
|
|
8 |
|
|
|
3 |
|
Other purchase obligations |
|
|
133 |
|
|
|
51 |
|
|
|
46 |
|
|
|
29 |
|
|
|
2 |
|
|
|
1 |
|
|
|
4 |
|
Other Liabilities Reflected on the Balance Sheet |
|
|
88 |
|
|
|
10 |
|
|
|
7 |
|
|
|
6 |
|
|
|
5 |
|
|
|
5 |
|
|
|
55 |
|
|
Total Contractual Obligations |
|
$ |
4,869 |
|
|
$ |
731 |
|
|
$ |
553 |
|
|
$ |
471 |
|
|
$ |
163 |
|
|
$ |
154 |
|
|
$ |
2,797 |
|
|
|
|
|
| (1) |
|
In October 2006, approximately $63 million of long-term debt related to the Euro
Bank Facility, due 2009 was paid down. See Note 12 — Debt and Other Credit Arrangements —
for additional information on this debt. |
| |
| (2) |
|
For variable rate debt, interest is calculated using the applicable rates as of Aug. 31, 2006. |
Rent expense was $99 million for fiscal year 2006, $83 million for fiscal year 2005, and $76
million for fiscal year 2004.
Pending Acquisition: On Aug. 15, 2006, Monsanto 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 Company 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 is subject to Delta and Pine Land Company shareowner approval,
review and approval by appropriate regulatory authorities including the U.S. Department of Justice,
and other customary closing conditions. The agreement provides several potential consequences for
litigation between Delta and Pine Land and Monsanto in the event the transaction is not closed
because of: (1) certain circumstances generally related to antitrust issues, in which case the
company would be obligated to pay Delta and Pine Land $600 million and all litigation would
terminate; (2) Delta and Pine Land’s interest in another acquisition transaction or failure to
perform certain covenants generally related to another acquisition offer and assistance with
antitrust clearance, in which case all litigation would terminate without payment by either party;
or (3) withdrawal of the recommendation of Delta and Pine Land’s board of directors or any other
reason, in which case litigation may recommence and Delta and Pine Land may be obligated to pay
Monsanto $15 million or its licenses with Monsanto may be amended in its favor, depending on the
reason for the termination. The purchase price is not included in the above table as it is
contingent upon the approval requirements also described above.
Monsanto may be required to divest the U.S. assets of its Stoneville cottonseed business as a
condition of obtaining regulatory approval of its proposed acquisition of Delta and Pine Land
Company. As such, Monsanto commenced activities to identify potential buyers. However, consummation
of the Delta and Pine Land Company acquisition, which would be a pre-condition to any sale of
Stoneville assets, is dependent on approval by Delta and Pine Land shareholders and regulatory
agencies, and as such, the financial results of the Stoneville business are included in income from
continuing operations for all years presented. Monsanto intends to finance a portion of the
acquisition with cash reserves at the time of close and is considering a number of alternatives to
finance the remaining balance, including current debt facilities already in place. If Monsanto
decides to change its capital structure to finance the acquisition, some initial alternatives under
consideration are an increased credit line, commercial paper financing, or an incremental debt
offering.
Guarantees: Monsanto provides guarantees on behalf of certain suppliers. As of Aug. 31, 2006, a
guarantee is outstanding to a bank that financed construction of a supplier’s plant. This plant
supplies certain raw materials to a Monsanto facility in Brazil. The term of this guarantee is
equivalent to the term of the financing agreements, which are to be paid during calendar
100
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
year 2008. If the supplier fails to pay the obligations when due, Monsanto would incur a liability
to make these payments. As of Aug. 31, 2006, the maximum potential amount of future payments under
this guarantee was $6 million with respect to principal, plus additional amounts with respect to
interest and related expenses. Monsanto believes that it is not likely to incur a loss under this
guarantee, and it has therefore not recorded any liability related to its obligation under this
guarantee. If Monsanto were to incur a loss under this guarantee, Monsanto would have recourse
against the supplier and the shareowners of the supplier’s parent company pursuant to an agreement
entered into by the parties.
Monsanto may provide and has provided guarantees on behalf of its consolidated subsidiaries for
obligations incurred in the normal course of business. Because these are guarantees of obligations
of consolidated subsidiaries, Monsanto’s consolidated financial position is not affected by the
issuance of these guarantees.
In fiscal year 2005, Monsanto established a wholly-owned finance subsidiary in Canada. The new
subsidiary issued debt securities of $150 million, which are outstanding as of Aug. 31, 2006, and
which are fully and unconditionally guaranteed by Monsanto. There are no significant restrictions
on Monsanto’s ability to obtain funds from the finance subsidiary by dividend or loan.
Monsanto warrants the performance of certain products through standard product warranties. In
addition, Monsanto provides extensive marketing programs to increase sales and enhance customer
satisfaction. These programs may include performance warranty features and indemnification for
risks not related to performance, both of which are provided to qualifying customers on a
contractual basis. The cost of payments for claims based on performance warranties has been, and is
expected to continue to be, insignificant. It is not possible to predict the maximum potential
amount of future payments for indemnification for losses not related to the performance of our
products (for example, replanting due to extreme weather conditions), because it is not possible to
predict whether the specified contingencies will occur and if so, to what extent.
In various circumstances, Monsanto has agreed to indemnify or reimburse other parties for various
losses or expenses. For example, like many other companies, Monsanto has agreed to indemnify its
officers and directors for liabilities incurred by reason of their position with Monsanto.
Contracts for the sale or purchase of a business or line of business may require indemnification
for various events, including certain events that arose before the sale, or tax liabilities that
arise before, after or in connection with the sale. Certain seed licensee arrangements indemnify
the licensee against liability and damages, including legal defense costs, arising from any claims
of patent, copyright, trademark, or trade secret infringement related to Monsanto’s trait
technology. Germplasm licenses generally indemnify the licensee against claims related to the
source or ownership of the licensed germplasm. Litigation settlement agreements may contain
indemnification provisions covering future issues associated with the settled matter. Credit
agreements and other financial agreements frequently require reimbursement for certain
unanticipated costs resulting from changes in legal or regulatory requirements or guidelines. These
agreements may also require reimbursement of withheld taxes, and additional payments that provide
recipients amounts equal to the sums they would have received had no such withholding been made.
Indemnities like those in this paragraph may be found in many types of agreements, including, for
example, operating agreements, leases, purchase or sale agreements, and other licenses. Leases may
require indemnification for liabilities Monsanto’s operations may potentially create for the lessor
or lessee. It is not possible to predict the maximum future payments possible under these or
similar provisions because it is not possible to predict whether any of these contingencies will
come to pass and if so, to what extent. Historically, these types of provisions did not have a
material effect on Monsanto’s financial position, profitability or liquidity. Monsanto believes
that if it were to incur a loss in any of these matters, it would not have a material effect on its
financial position, profitability or liquidity. Based on the company’s current assessment of
exposure, Monsanto has recorded a liability of $3 million as of
fiscal years 2006 and 2005, related
to these indemnifications.
Monsanto provides guarantees for certain customer loans in the United States, Brazil, Europe and
Argentina. See Note 7 — Customer Financing Programs — for additional information.
Information regarding Monsanto’s indemnification obligations to Pharmacia under the Separation
Agreement can be found below in the “Litigation and Indemnification” section of this note.
101
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Customer Concentrations in Gross Trade Receivables: The following table sets forth Monsanto’s gross
trade receivables as of Aug. 31, 2006, and Aug. 31, 2005, by significant customer concentrations:
| |
|
|
|
|
|
|
|
|
|
| |
|
As of Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
U.S. Agricultural Product Distributors |
|
$ |
504 |
|
|
$ |
483 |
|
European Agricultural Product
Distributors |
|
|
413 |
|
|
|
357 |
|
Argentina(1) |
|
|
126 |
|
|
|
149 |
|
Brazil(1) |
|
|
315 |
|
|
|
364 |
|
Mexico(1) |
|
|
63 |
|
|
|
77 |
|
Asia-Pacific(1) |
|
|
125 |
|
|
|
103 |
|
Canada(1) |
|
|
80 |
|
|
|
95 |
|
Other |
|
|
127 |
|
|
|
120 |
|
|
Gross Trade Receivables |
|
|
1,753 |
|
|
|
1,748 |
|
Less: Allowance for Doubtful Accounts |
|
|
(298 |
) |
|
|
(275 |
) |
|
Net Trade Receivables |
|
$ |
1,455 |
|
|
$ |
1,473 |
|
|
|
|
|
| (1) |
|
Represents customer receivables within the specified geography. |
In fiscal year 2006, trade receivables related to European agricultural product distributors
increased primarily because of higher fourth quarter sales and lower customer collections and
prepayments. For further details on the allowance for doubtful trade receivables, see Note 6 —
Trade Receivables. The company’s receivables focus continues to be on the key agricultural markets
of Argentina and Brazil. Net trade receivables in Argentina and Brazil were as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
As of Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
Argentina |
|
$ |
77 |
|
|
$ |
92 |
|
Brazil |
|
|
198 |
|
|
|
271 |
|
|
In fiscal year 2005, the allowance for doubtful trade receivables in Argentina was increased
by $45 million for potential uncollectible Argentine accounts receivable as the redesign of the
Argentine business model, coupled with the continued economic and business challenges, led to
increased credit exposure. The company continues to pursue customer collections aggressively to
minimize exposure. Management’s current assessment of the situation is that the allowance balance
for Argentine receivables is adequate.
The combination of poor growing conditions, the appreciation of the Brazilian real, and lower
commodity prices continued to negatively impact the Brazilian agricultural economy and farmer
liquidity in 2006 which resulted in increases in past-due trade receivables and the related
allowance for doubtful trade receivables as of Aug. 31, 2006, compared with Aug. 31, 2005. To
mitigate the associated credit risks, Monsanto has further tightened its credit policy, implemented
a grain-based collection system, and increased cash sales. Our net receivables as a percent of
sales have improved from 49% in 2005 to 36% in 2006.
Remediation Obligations: Monsanto’s Statements of Consolidated Financial Position include accrued
liabilities of $26 million as of Aug. 31, 2006, and $17 million as of Aug. 31, 2005, for the
remediation of Monsanto’s existing and Pharmacia’s former agricultural manufacturing facilities and
certain off-site disposal and formulation facilities. There is currently no material range of loss
in excess of the amount recorded for these sites. It is possible that new information about these
sites for which the accrual has been established, such as results of investigations by regulatory
agencies, Monsanto, or other parties, could require Monsanto to reassess its potential exposure
related to environmental matters. Monsanto’s future remediation expenses at these sites may be
affected by a number of uncertainties. These uncertainties include, but are not limited to, the
method and extent of remediation, the percentage of material attributable to Monsanto at the sites
relative to that attributable to other parties, and the financial capabilities of the other
potentially responsible parties. Monsanto does not expect the resolution of such uncertainties to
have a material adverse effect on its financial position, profitability, or liquidity. The amounts
described above do not include Solutia environmental liabilities that Monsanto expects to fund on
behalf of Pharmacia. See “Litigation and Indemnification” below for a discussion of amounts accrued
in connection with Solutia’s environmental liabilities.
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
102
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. 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. Specific information with respect to these
proceedings appears below and in Part I — Item 3 — Legal Proceedings of this report.
Certain Korean veterans of the Vietnam War have filed suit in Seoul, South Korea, against The Dow
Chemical Company and the former Monsanto Company. Three complaints filed in October 1999 are being
handled collectively and involve approximately 16,800 plaintiffs. The plaintiffs allege that they
were exposed to Agent Orange and that as a result they suffered injuries or their children suffered
birth defects. In 2002, the Seoul District Court ruled in favor of the defendants and dismissed all
claims on the basis of lack of causation and statutes of limitations. On Jan. 26, 2006, the Seoul
High Court affirmed the denial of any recovery for approximately 10,000 plaintiffs, stating they
had failed to show that any injuries they claimed were caused by exposure to the Agent Orange. In
addition, for approximately 6,800 plaintiffs, the Seoul High Court reversed the decision of the
Seoul District Court and awarded damages jointly against Dow Chemical and the former Monsanto
Company in the amount of $62 million, plus pre-judgment interest in the amount of approximately $30
million and post-judgment interest at the rate of 20 percent per annum. On Feb. 17, 2006, Dow
Chemical and the former Monsanto Company filed a notice of appeal with the Korean Supreme Court, as
did the plaintiffs. Management does not believe it is probable that Monsanto will incur this
liability, and accordingly, has not recorded a charge for the judgment.
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. Trial is set for June 2007. On June
6, 2006, in a related matter, Federal Insurance Company filed suit in the U.S. District Court for
the Eastern District of Missouri, seeking a declaratory judgment that its insurance policy with
Monsanto does not apply to this litigation, because there are no alleged fiduciary issues. In
September 2006, the parties settled this matter. Federal Insurance agreed to dismiss the
declaratory judgment case, without prejudice, and pay one half of Monsanto’s defense costs in the
Walker litigation.
Solutia Inc.: The following discussion provides 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.
On Dec. 17, 2003, Solutia and 14 of its U.S. subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the
Southern District of New York. In the Chapter 11 proceeding, Solutia is seeking relief from paying
certain liabilities, including some or all of Solutia’s Assumed Liabilities. Solutia may retain
responsibility for all or a portion of Solutia’s Assumed Liabilities. However, if Solutia is
discharged from all or a portion of Solutia’s Assumed Liabilities, Monsanto may be required to
indemnify Pharmacia for all or a portion of them. Monsanto is participating in the Chapter 11
proceeding as a creditor of Solutia and will act as appropriate to protect Monsanto’s interests and
the interests of its shareowners. Pharmacia or Monsanto may have defenses to payment obligations
for some or all of Solutia’s Assumed Liabilities, and Monsanto has legal claims against Solutia.
However, it is unclear what
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
effect the Chapter 11 proceeding will have on Monsanto’s ability to recover on those claims.
Following is a description of certain of the proceedings related to Solutia’s bankruptcy:
| |
• |
|
On April 20, 2004, Solutia filed a complaint for declaratory judgment against Pharmacia
and Monsanto that, among other things: (a) any and all rights that Pharmacia and Monsanto
have against Solutia for indemnification pursuant to the Distribution Agreement are
“claims” that arose before Solutia filed its bankruptcy petition and may be discharged in
the Chapter 11 proceeding; and (b) the Distribution Agreement has been fully performed. On
May 7, 2004, the Official Committee of Retirees (Retirees’ Committee) filed a complaint for
declaratory judgment against Solutia, Pharmacia and Monsanto that Pharmacia and Monsanto
share responsibility for providing certain benefits to certain retirees and must pay
certain benefits to certain retirees if Solutia reduces or terminates retiree benefits. The
Retirees’ Committee also seeks to have the Bankruptcy Court declare all claims held by
Pharmacia and Monsanto subordinate to the retiree claims. Monsanto believes it has
meritorious defenses to assert in each of these matters; however, it has not filed any
response or asserted counterclaims because all parties have agreed to a limited stay of all
litigation. Given the uncertain nature of litigation, Monsanto cannot reasonably predict
the outcome of either proceeding. |
| |
| |
• |
|
Solutia, the Official Committee of Unsecured Creditors (Creditors’ Committee), the
Retirees’ Committee, Monsanto and Pharmacia have agreed to a stay of all litigation in the
bankruptcy proceedings, which remains in force and effect, subject to any party’s right to
issue a termination notice. |
| |
| |
• |
|
Monsanto filed its proof of claim on Nov. 29, 2004, and it remains effective. Solutia,
the Creditors’ Committee, Monsanto and Pharmacia have agreed that Monsanto and Pharmacia
may amend their initial proofs of claim and file additional claims through Feb. 1, 2007,
which date may be extended by further agreement of the parties. |
| |
| |
• |
|
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 Dec. 2006. |
| |
| |
• |
|
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). Monsanto remains committed to the
agreement-in-principle, which forms
the basis for Solutia’s Plan of Reorganization (Plan), which would render this complaint
moot if the Plan becomes effective and binding. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| |
• |
|
On Feb. 14, 2006, Solutia filed its Plan and accompanying Disclosure Statement
(Disclosure Statement) with the Bankruptcy Court. The Plan is supported by the Creditors’
Committee, the Retirees’ Committee, Pharmacia and Monsanto. 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 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. |
| |
| |
• |
|
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. If and when the Court resolves all
objections and determines that the Disclosure Statement provides sufficient information for
creditors and other parties to vote on the Plan, the Plan and Disclosure Statement will be
distributed to all parties for voting purposes. Following the voting process, the Court
will hold a hearing to consider court approval or “confirmation” of the Plan. If the Court
confirms the Plan, Solutia would emerge from Chapter 11 thereafter. |
Both immediately prior to and since its Chapter 11 filing, Solutia has failed to perform its
obligations relating to some of Solutia’s Assumed Liabilities. Monsanto believes Solutia is
required to meet its obligations unless and until those obligations are discharged by the
Bankruptcy Court. However, in order to protect Pharmacia’s and Monsanto’s interests until that
issue is resolved, pursuant to Monsanto’s obligation to indemnify Pharmacia and on an interim
basis, Monsanto has assumed the management and defense of certain third-party tort litigation and
funded some of Solutia’s environmental obligations. In the process of managing such litigation and
environmental liabilities, and through Monsanto’s involvement in the bankruptcy process, Monsanto
determined that it was probable that Monsanto would incur some expenses related to third-party tort
litigation and environmental liabilities and that the amount of certain of these expenses could be
reasonably estimated. In December 2004, Monsanto determined that it was appropriate to establish a
reserve for such expenses based on the best estimates by Monsanto’s management with input from its
legal and other outside advisors. Accordingly, a charge in the amount of $284 million (the
“Solutia-related charge” or the “charge”) was recorded in Monsanto’s first quarter fiscal 2005
results. As of Aug. 31, 2006, $210 million was recorded in the Statement of Consolidated Financial
Position ($55 million in current liabilities and $155 million in other liabilities).
105
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2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A portion of the charge was discounted, using a risk-free discount rate of 3.5 percent. The
remaining portion of the charge was not subject to discounting because of uncertainties in the
timing of cash outlay or was paid during first quarter fiscal year 2005. In fiscal year 2006,
interest expense of $5 million was recognized for the accretion of the discounted amount. The
following table provides a detailed summary of the discounted and undiscounted amounts included in
the charge.
| |
|
|
|
|
|
| (Dollars in millions) |
|
|
|
|
|
Undiscounted Portion: |
|
|
|
|
Amount accrued in first quarter fiscal year 2005 |
|
$ |
86 |
|
Amount
accrued and paid during first quarter fiscal year 2005 |
|
|
21 |
|
|
Aggregate Undiscounted Amount |
|
|
107 |
|
|
Discounted
Portion: |
|
|
|
|
Expected payment (undiscounted) for: 2005 |
|
|
29 |
|
2006 |
|
|
26 |
|
2007 |
|
|
18 |
|
2008 |
|
|
7 |
|
2009 |
|
|
5 |
|
Undiscounted aggregate expected payments after 2009 |
|
|
137 |
|
|
Aggregate Amount to be Discounted as of Nov. 30, 2004 |
|
|
222 |
|
Discount,
as of Nov. 30, 2004 |
|
|
(45 |
) |
|
Aggregate Discounted Amount Accrued in First Quarter Fiscal Year
2005 |
|
|
177 |
|
|
Total
Charge Recognized in First Quarter Fiscal Year 2005 |
|
$ |
284 |
|
|
Payments |
|
|
(49 |
) |
Accretion |
|
|
4 |
|
|
Balance Aug. 31, 2005 |
|
$ |
239 |
|
Payments |
|
|
(34 |
) |
Accretion |
|
|
5 |
|
|
Balance Aug. 31, 2006 |
|
$ |
210 |
|
|
Monsanto believes that the Solutia-related charge represents the discounted cost that Monsanto
would expect to incur in connection with these litigation and environmental matters. Monsanto
expects to pay for these potential liabilities over time as the various legal proceedings are
resolved and remediation is performed at the various environmental sites. Actual costs to Monsanto
may differ materially from this estimate. Further, additional litigation or environmental matters
that are not reflected in the charge may arise in the future, and Monsanto may also manage, settle,
or pay judgments or damages with respect to litigation or environmental matters in order to
mitigate contingent potential liability and protect Pharmacia and Monsanto, if Solutia refuses to
do so.
The charge may not reflect all potential liabilities that Monsanto may incur in connection with
Solutia’s bankruptcy and does not reflect any insurance reimbursements, 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. In September 2003, the state and federal courts approved a
global settlement of certain PCB litigation: Sabrina Abernathy et al. v. Monsanto Company et al. (a
group of consolidated cases in the Circuit Court of Etowah County, Alabama); and Antonia Tolbert et
al. v. Monsanto Company et al. (in the U.S. District Court for the Northern District of Alabama).
Monsanto, Solutia and Pharmacia are each responsible for paying the full amount of the settlement.
However, they agreed among themselves that Solutia would pay $50 million of the settlement amount
over the next 11 years or more. If Solutia is discharged from this obligation in the Chapter 11
proceeding, Monsanto may be required to pay, or to indemnify Pharmacia for, this amount. Monsanto
paid $150 million of its share of the $550 million cash settlement in August 2003, and the
remaining $400 million was paid in September 2003.
Receivables of $45 million were recorded as of Aug. 31, 2006 ($27 million was recorded in
miscellaneous receivables and $18 million was recorded in other assets) for the anticipated
insurance reimbursement of a portion of Monsanto’s settlement payments. 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 $113 million.
Also in connection with that settlement, Solutia agreed to issue warrants to Monsanto for the
purchase of up to 10 million shares of Solutia common stock, at an exercise price of $1.104 per
share. Solutia did not execute a final warrant agreement or issue or deliver the warrants and,
therefore, Monsanto has not recorded the warrants in its financial statements. Monsanto has made a
claim for its unreimbursed settlement contribution in the course of the Chapter 11 proceeding.
Solutia’s obligation to
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| MONSANTO COMPANY
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2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
issue the warrants may be resolved if the agreement in principle related to Solutia’s
reorganization (as described above) becomes effective and binding.
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.
The degree to which Monsanto may ultimately be responsible for the particular matters reflected in
the charge or other of Solutia’s Assumed Liabilities or Solutia-related expenses is uncertain until
the outcome of all matters in the Chapter 11 proceeding are resolved. The Plan is supported by the
Creditors’ Committee, the Retirees’ Committee, Pharmacia and Monsanto; however, no assurance can be
given that the Plan will be approved. The Plan must be voted upon by Solutia’s creditors and other
interested parties and must be approved by the Bankruptcy Court.
Solutia Litigation Obligations: Included in the Solutia-related charge are amounts related to
certain of Solutia’s third-party tort litigation, including lawsuits involving polychlorinated
biphenyls (PCBs), dioxins and other chemical and premises liability litigation. The following
describes the significant litigation matters reflected in the Solutia-related charge.
On Dec. 17, 2004, 15 plaintiffs filed a purported class action lawsuit, styled Virdie Allen, et al.
v. Monsanto, et al., in the Putnam County, West Virginia, state court against Monsanto, Pharmacia
and seven other defendants. Monsanto is named as the successor in interest to the liabilities of
Pharmacia. The alleged class consists of all current and former residents, workers, and students
who, between 1949 and the present, were allegedly exposed to dioxins/furans contamination in
counties surrounding Nitro, West Virginia. The complaint alleges that the source of the
contamination is a chemical plant in Nitro, formerly owned and operated by Pharmacia and later by
Flexsys, a joint venture between Solutia and Akzo Nobel Chemicals, Inc. (Akzo Nobel). Akzo Nobel
and Flexsys are named defendants in the case but Solutia is not, due to its pending bankruptcy
proceeding. The suit seeks damages for property clean up costs, loss of real estate value, funds to
test property for contamination levels, funds to test for human contamination and future medical
monitoring costs. The complaint also seeks an injunction against further contamination and punitive
damages. Akzo Nobel and the Flexsys group of defendants tendered their cases to Monsanto for
indemnification and defense. Monsanto agreed to indemnify and defend Akzo Nobel and the Flexsys
defendant group.
Solutia Environmental Obligations: Included in the Solutia-related charge are amounts related to
certain of Solutia’s environmental liabilities, particularly expenses for environmental remediation
of sites Solutia never owned or operated and sites beyond the property lines of Solutia’s current
or former operations. The following describes the significant environmental matters reflected in
the Solutia-related charge.
On Aug. 4, 2003, the U.S. District Court for the Northern District of Alabama approved a Revised
Partial Consent Decree (RPCD), pursuant to which Pharmacia and Solutia are obligated to perform PCB
residential cleanup work and a remedial investigation/feasibility study of PCB contamination in
Anniston, among other things. Based on Solutia’s failure to perform, on March 25, 2004, Monsanto,
acting on behalf of Pharmacia, entered into an arrangement with the EPA and Solutia to perform
certain environmental obligations at the Anniston, Alabama, and Sauget, Illinois, sites under the
RPCD and other orders where both Solutia and Pharmacia are named parties. As a part of this
arrangement, Monsanto has agreed with the EPA to perform certain remediation in Anniston and Sauget
until Monsanto invokes a 60-day notice of termination provision, which Monsanto has not invoked. In
July 2006, Monsanto, on behalf of itself and Pharmacia, Solutia and the United States entered a
stipulation and agreement resolving outstanding penalty and other issues associated with the RPCD.
In May 2002, the EPA sent Monsanto and Solutia a “notice of potential liability and offer to
negotiate for removal action” regarding dioxin in the Kanawha River in Putnam and Kanawha counties,
West Virginia, which was premised on Pharmacia’s former operations at its Nitro, West Virginia,
manufacturing facility. The EPA, Monsanto and Pharmacia have negotiated a consent order under which
Monsanto is preparing an Engineering Evaluation/Cost Analysis Report, which will contain the
results of Monsanto’s investigation of dioxin contamination in the Kanawha River, the sources of
such contamination, an evaluation of removal options, and a recommended approach to removing or
otherwise addressing the contaminated sediments.
107
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2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Monsanto is performing various remedial activities at the IndustriPlex site in Woburn,
Massachusetts. In January 2006, the EPA published a Record of Decision identifying additional
remedial work it anticipates for the Aberjona River, which is downstream of the IndustriPlex Site.
On Sept. 29, 2006, the EPA issued a letter to two parties, including Pharmacia, requesting that
they perform the additional remedial work. The extent of Monsanto’s liability for this additional
remedial work is still unclear.
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 Aug. 31, 2006, approximately $20 million of the
prepayment amount remains outstanding.
NOTE 23. SEGMENT AND GEOGRAPHIC DATA
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 2006. 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.
108
|
|
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| MONSANTO COMPANY
|
|
2006 FORM 10-K |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2004 |
|
Net Sales(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Corn seed and traits |
|
$ |
1,793 |
|
|
$ |
1,494 |
|
|
$ |
1,145 |
|
Soybean seed and traits |
|
|
960 |
|
|
|
889 |
|
|
|
699 |
|
Vegetable and fruit seed |
|
|
569 |
|
|
|
226 |
|
|
|
— |
|
All other crops seeds and traits |
|
|
706 |
|
|
|
643 |
|
|
|
476 |
|
|
Total Seeds and Genomics |
|
$ |
4,028 |
|
|
$ |
3,252 |
|
|
$ |
2,320 |
|
|
Roundup and other glyphosate-based herbicides |
|
$ |
2,262 |
|
|
$ |
2,049 |
|
|
$ |
2,005 |
|
All other agricultural products |
|
|
1,054 |
|
|
|
993 |
|
|
|
1,098 |
|
|
Total Agricultural Productivity |
|
$ |
3,316 |
|
|
$ |
3,042 |
|
|
|
3,103 |
|
|
Total |
|
$ |
7,344 |
|
|
$ |
6,294 |
|
|
$ |
5,423 |
|
|
EBIT(2) |
|
|
|
|
|
|
|
|
|
|
|
|
Seeds and Genomics |
|
$ |
794 |
|
|
$ |
374 |
|
|
$ |
196 |
|
Agricultural Productivity |
|
|
301 |
|
|
|
(27 |
) |
|
|
249 |
|
|
Total |
|
$ |
1,095 |
|
|
$ |
347 |
|
|
$ |
445 |
|
|
Depreciation and Amortization
Expense(3) |
|
|
|
|
|
|
|
|
|
|
|
|
Seeds and Genomics(4) |
|
$ |
328 |
|
|
$ |
302 |
|
|
$ |
264 |
|
Agricultural Productivity |
|
|
191 |
|
|
|
186 |
|
|
|
188 |
|
|
Total |
|
$ |
519 |
|
|
$ |
488 |
|
|
$ |
452 |
|
|
Restructuring(5) |
|
|
|
|
|
|
|
|
|
|
|
|
Seeds and Genomics |
|
$ |
(1 |
) |
|
$ |
7 |
|
|
$ |
129 |
|
Agricultural Productivity |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
98 |
|
|
Total |
|
$ |
(2 |
) |
|
$ |
6 |
|
|
$ |
227 |
|
|
Equity Affiliate Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Seeds and Genomics |
|
$ |
31 |
|
|
$ |
31 |
|
|
$ |
36 |
|
Agricultural Productivity |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total |
|
$ |
31 |
|
|
$ |
31 |
|
|
$ |
36 |
|
|
Total Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Seeds and Genomics |
|
$ |
7,499 |
|
|
$ |
6,380 |
|
|
$ |
4,121 |
|
Agricultural Productivity |
|
|
4,229 |
|
|
|
4,199 |
|
|
|
5,043 |
|
|
Total |
|
$ |
11,728 |
|
|
$ |
10,579 |
|
|
$ |
9,164 |
|
|
Property, Plant and Equipment Purchases |
|
|
|
|
|
|
|
|
|
|
|
|
Seeds and Genomics |
|
$ |
294 |
|
|
$ |
185 |
|
|
$ |
127 |
|
Agricultural Productivity |
|
|
76 |
|
|
|
96 |
|
|
|
83 |
|
|
Total |
|
$ |
370 |
|
|
$ |
281 |
|
|
$ |
210 |
|
|
Investment in Equity Affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
Seeds and Genomics |
|
$ |
49 |
|
|
$ |
47 |
|
|
$ |
42 |
|
Agricultural Productivity |
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
Total |
|
$ |
49 |
|
|
$ |
47 |
|
|
$ |
45 |
|
|
|
|
|
| (1) |
|
Represents net sales from continuing operations. |
| |
| (2) |
|
EBIT is defined as earnings (loss) before interest and taxes; see the following
table for reconciliation. Earnings (loss) is intended to mean net income as presented in the
Statements of Consolidated Operations under generally accepted accounting principles. |
| |
| (3) |
|
Includes depreciation and amortization expense recorded in continuing operations and
discontinued operations. |
| |
| (4) |
|
Does not include the $69 million impairment of goodwill in fiscal year 2004. |
| |
| (5) |
|
Fiscal year 2004 contains restructuring charges related to discontinued businesses.
Fiscal year 2004 restructuring charges of $11 million recorded in discontinued operations were
related to the European wheat and barley business. |
A reconciliation of EBIT to net income for each year follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2004 |
|
EBIT(1) |
|
$ |
1,095 |
|
|
$ |
347 |
|
|
$ |
445 |
|
Interest Expense — Net |
|
|
79 |
|
|
|
75 |
|
|
|
57 |
|
Income Tax
Provision(2) |
|
|
327 |
|
|
|
17 |
|
|
|
121 |
|
|
Net Income |
|
$ |
689 |
|
|
$ |
255 |
|
|
$ |
267 |
|
|
|
|
|
| (1) |
|
Includes the income (loss) from operations of discontinued businesses, the
pre-tax cumulative effect of accounting change and pre-tax minority interest. |
| |
| (2) |
|
Includes the income tax provision from continuing operations, the income tax
benefit on minority interest, the income tax benefit on discontinued operations, and the
income tax benefit on the cumulative effect of a change in accounting principle. |
109
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net sales and long-lived assets are attributed to the geographic areas of the relevant
Monsanto legal entities. For example, a sale from the United States to a customer in Latin America
is reported as a U.S. export sale.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net Sales to Unaffiliated Customers Excluding Inter-area Sales
|
|
Long-Lived Assets
|
| |
|
Year Ended Aug. 31,
|
|
As of Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2004 |
|
2006 |
|
2005 |
|
|
|
United States |
|
$ |
4,201 |
|
|
$ |
3,313 |
|
|
$ |
2,907 |
|
|
$ |
3,420 |
|
|
$ |
3,231 |
|
Latin America |
|
|
1,281 |
|
|
|
1,239 |
|
|
|
1,098 |
|
|
|
863 |
|
|
|
830 |
|
Europe-Africa |
|
|
1,061 |
|
|
|
973 |
|
|
|
778 |
|
|
|
794 |
|
|
|
681 |
|
Asia-Pacific |
|
|
528 |
|
|
|
497 |
|
|
|
373 |
|
|
|
466 |
|
|
|
417 |
|
Canada |
|
|
273 |
|
|
|
272 |
|
|
|
267 |
|
|
|
98 |
|
|
|
96 |
|
|
|
|
Total |
|
$ |
7,344 |
|
|
$ |
6,294 |
|
|
$ |
5,423 |
|
|
$ |
5,641 |
|
|
$ |
5,255 |
|
|
|
|
NOTE 24. OTHER EXPENSE — NET
The significant components of other expense (income) were:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2004 |
|
Equity Affiliate Expense — Net |
|
$ |
31 |
|
|
$ |
31 |
|
|
$ |
36 |
|
Foreign-Currency Transaction Losses — Net |
|
|
9 |
|
|
|
24 |
|
|
|
29 |
|
Banking and Other Related Fees |
|
|
2 |
|
|
|
12 |
|
|
|
12 |
|
Hedging Losses |
|
|
— |
|
|
|
3 |
|
|
|
5 |
|
Gains Realized Upon Sale of Equity Securities |
|
|
— |
|
|
|
(10 |
) |
|
|
(9 |
) |
Gain on Sale of Businesses and Assets |
|
|
(18 |
) |
|
|
(3 |
) |
|
|
(2 |
) |
Litigation Matters — Net |
|
|
(3 |
) |
|
|
15 |
|
|
|
— |
|
Other Miscellaneous Expense
(Income)(1) |
|
|
(7 |
) |
|
|
7 |
|
|
|
14 |
|
|
Other Expense — Net |
|
$ |
14 |
|
|
$ |
79 |
|
|
$ |
85 |
|
|
|
|
|
| (1) |
|
Other miscellaneous expense (income) for fiscal years 2006, 2005 and 2004
comprises numerous items that are immaterial individually. |
In fiscal year 2005, Monsanto recorded $309 million in other expense listed separately on the
Statements of Consolidated Operations for Solutia’s Assumed Liabilities in connection with the
Solutia bankruptcy proceedings. See Note 22 — Commitments and Contingencies — for further
discussion of Solutia’s Assumed Liabilities. In first quarter 2005, the company established a $15
million reserve for litigation, which was paid out in second quarter 2005.
NOTE 25. EQUITY AFFILIATE
Renessen LLC (Renessen), Monsanto’s joint venture with Cargill, Incorporated (Cargill), combines
Monsanto’s seed assets and technology capabilities with Cargill’s global grain processing,
marketing and risk management infrastructure to develop and commercialize enhanced grain products
in the processing and animal feed markets, and to increase returns on those products by greater
participation in the value chain. Monsanto and Cargill each have a 50 percent interest in Renessen
and have equal governance and funding rights and responsibilities. Renessen has been granted a
worldwide, fully paid-up, non-exclusive, non-royalty-bearing right and license to Monsanto’s and
Cargill’s respective patents and other intellectual property needed for Renessen to pursue the
approved business plan. Monsanto and Cargill receive rights to use intellectual property developed
by Renessen in other specified areas. Monsanto performs the majority of Renessen’s upstream
research and development activities. During fiscal years 2006, 2005 and 2004, Monsanto performed
R&D services of $44 million, $42 million, and $45 million, respectively, for Renessen, which was
recovered at cost. The fair value of performing these services approximates the recovered costs.
Monsanto’s investment in Renessen, including outstanding advances, was $6 million and $5 million as
of Aug. 31, 2006, and Aug. 31, 2005, respectively. Equity affiliate expense from Renessen was $34
million in fiscal year 2006, $33 million in fiscal year 2005, and $36 million in fiscal year 2004,
and represented substantially all of equity affiliate expense.
110
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 26. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Advertising Costs: Costs for producing and communicating advertising for the various brands and
products were charged to selling, general and administrative (SG&A) expenses as they were incurred,
or expensed ratably during the year in relation to revenues or certain other performance measures.
Advertising costs were $84 million, $65 million and $65 million in 2006, 2005 and 2004,
respectively.
Agency Fee and Marketing Agreement: In 1998, Pharmacia (f/k/a Monsanto Company) entered into an
agency and marketing agreement with the Scotts Miracle-Gro Company (f/k/a the Scotts Company)
(Scotts) with respect to the lawn-and-garden herbicide business, which was transferred to Monsanto
in connection with its separation from Pharmacia. Scotts acts as Monsanto’s principal agent to
market and distribute its lawn-and-garden herbicide products. The agreement has an indefinite term
except in certain countries in the European Union. The agreement related to those countries
terminates on Sept. 30, 2008, and may be extended for up to 10 years by the mutual agreement of
both parties. Under the agreement, beginning in the fourth quarter 1998, Scotts was obligated to
pay Monsanto a $20 million fixed fee each year for the length of the contract to defray costs
associated with the lawn-and-garden herbicide business (the annual payment). Monsanto records the
annual payment from Scotts as a reduction of SG&A expenses ratably over the year to which the
payment relates. Of the total fixed fee that was owed for the first three years of the agreement,
Scotts deferred $40 million and was contractually required to repay this amount in full, with
interest. Monsanto was accruing interest on the deferred amounts owed by Scotts monthly and
including it in interest income. Beginning in program year 2003 (the program year is defined as
October 1 to September 30), Scotts began paying these deferred amounts ($5 million per year for
both the deferred portion of the fixed fee and interest in monthly installments). In addition, if
certain earnings thresholds were achieved, starting with program year 2001, recovery of the
deferred amount was accelerated through additional payments. As of Aug. 31, 2005, the accelerated
portion of the deferred amount paid by Scotts was $3 million. The total amount owed by Scotts,
including accrued interest, was $44 million as of Aug. 31, 2005. In September 2005, Scotts made an
additional accelerated payment of approximately $1 million, and in October 2005, Scotts elected to
pay Monsanto the entire amount of the deferred payment, including accrued interest, of $43 million.
With these payments, there are no amounts due to Monsanto related to the $40 million deferral of
the annual fixed fee as of Aug. 31, 2006.
Monsanto is obligated to pay Scotts an annual commission based on the earnings of the
lawn-and-garden herbicide business (before interest and income taxes). The amount of the commission
due to Scotts varies depending on whether or not the earnings of the lawn-and-garden herbicide
business exceed certain thresholds that vary by program year. The commission due to Scotts is
accrued monthly and is included in SG&A expenses. The commission expense included in SG&A expenses
was $61 million in fiscal year 2006, $66 million in fiscal year 2005, and $57 million in fiscal
year 2004 (the commission expense presented herein is not netted with any payments received from
Scotts).
NOTE 27. DISCONTINUED OPERATIONS
Environmental technologies businesses: In second quarter 2005, Monsanto committed to a plan to
sell Enviro-Chem Systems, Inc. (“Enviro-Chem” or the “environmental technologies businesses”) that
met the “held for sale” criteria under SFAS 144. The environmental technologies businesses provided
engineering, procurement and construction management services, and sold proprietary equipment and
process technologies. The environmental technologies businesses were previously reported as part of
the Agricultural Productivity segment. The company determined that these businesses were no longer
consistent with its strategic business goals. In August 2005, the company completed the sale of
substantially all of Enviro-Chem to a new company formed by the management of the businesses and an
outside investor. This divestiture resulted in an after-tax gain of $7 million recorded in income
(loss) from operations of discontinued businesses, after accounting for currency translation
adjustments and transactional costs.
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
111
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 Aug. 31, 2006, and Aug. 31, 2005. The
company evaluated the carrying amount of the receivable as of Aug. 31, 2006, and recorded a $4
million pre-tax charge in discontinued operations to adjust the receivable to fair value. As of
Aug. 31, 2006, the miscellaneous receivable of $6 million was recorded as assets of discontinued
operations and $2 million of deferred taxes on the miscellaneous receivable was recorded as
liabilities of discontinued operations. Monsanto expects that it will collect the outstanding
receivable balance in fiscal year 2007.
Also, as of Aug. 31, 2005, liabilities of discontinued operations consisted of $6 million for the
resolution of a purchase price adjustment and an accrual of $5 million for the resolution of a
warranty obligation that was related to the operations of the environmental technologies businesses
prior to its disposal. In first quarter 2006, Monsanto resolved and paid $6 million for the
purchase price adjustment and $5 million for the warranty obligation.
European wheat and barley business and plant-made pharmaceuticals program: As discussed earlier in
Note 5 — Restructuring, in October 2003, Monsanto announced plans to exit the European breeding
and seed business for wheat and barley and to discontinue the plant-made pharmaceuticals program.
The European wheat and barley business and plant-made pharmaceuticals program were previously
reported as part of the Seeds and Genomics segment. In fiscal year 2004, the sale of assets
associated with the European wheat and barley business to RAGT Genetique, S.A. (RAGT) in Rodez,
France, was finalized. This divestiture resulted in a net loss of approximately $3 million before
taxes, recorded in income (loss) from operations of discontinued businesses, after accounting for
currency translation adjustments and transactional costs.
The divestiture also generated a tax loss that was recognized as a tax benefit in the United
States. In fiscal year 2005, Monsanto recorded a deferred tax benefit of $106 million, $20 million
in continuing operations and the remaining $86 million in discontinued operations. The tax benefit
of $86 million recorded in discontinued operations was related primarily to the wheat reporting
unit goodwill impairment loss at the date of adoption of SFAS 142 on Jan. 1, 2002, which was
recorded as a cumulative effect of a change in accounting principle. See Note 5 for discussion of
the $20 million tax benefit recorded in continuing operations and Note 11 — Income Taxes — for
further discussion of the tax benefit.
As a result of the plans to sell the businesses discussed above, certain financial data for these
businesses has been presented as discontinued operations in accordance with SFAS 144. Accordingly,
for fiscal years 2006, 2005, and 2004, the Statements of Consolidated Operations have been
conformed to this presentation. As of Aug. 31, 2006, and Aug. 31, 2005, the Statements of
Consolidated Financial Position have been conformed to this presentation. The remaining assets and
liabilities of the environmental technologies businesses as of Aug. 31, 2006, and Aug. 31, 2005,
follow:
| |
|
|
|
|
|
|
|
|
|
| |
|
As of Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
Assets of Discontinued Businesses Held for Sale: |
|
|
|
|
|
|
|
|
Miscellaneous receivables |
|
$ |
6 |
|
|
$ |
10 |
|
Deferred tax assets |
|
|
— |
|
|
|
5 |
|
|
Total Assets of Discontinued Businesses Held for Sale |
|
$ |
6 |
|
|
$ |
15 |
|
|
Liabilities of Discontinued Businesses Held for Sale: |
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
2 |
|
|
$ |
11 |
|
|
Total Liabilities of Discontinued Businesses Held for
Sale |
|
$ |
2 |
|
|
$ |
11 |
|
|
The following amounts related to the environmental technologies businesses, European wheat and
barley business and the plant-made pharmaceuticals program have been segregated from continuing
operations and reflected as discontinued operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended Aug. 31,
|
| (Dollars in millions) |
|
2006 |
|
2005 |
|
2004 |
|
Net Sales |
|
$ |
— |
|
|
$ |
145 |
|
|
$ |
141 |
|
Income (Loss) from Operations of Discontinued
Businesses |
|
|
(5 |
) |
|
|
11 |
|
|
|
(6 |
) |
Income Tax Benefit |
|
|
(2 |
) |
|
|
(87 |
) |
|
|
(7 |
) |
|
Net Income (Loss) on Discontinued Operations |
|
$ |
(3 |
) |
|
$ |
98 |
|
|
$ |
1 |
|
|
112
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 28. QUARTERLY DATA (UNAUDITED)
The following table includes financial data for the fiscal year quarters in 2006 and 2005.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in millions, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) per Share (1)
|
| |
|
|
|
|
|
|
|
|
|
Income |
|
Income |
|
Cumulative |
|
|
|
|
|
Income |
|
Income |
|
Cumulative |
|
|
| |
|
|
|
|
|
|
|
|
|
(Loss) From |
|
(Loss) on |
|
Effect of |
|
Net |
|
(Loss) From |
|
(Loss) on |
|
Effect of |
|
Net |
| |
|
Net |
|
Gross |
|
Continuing |
|
Discontinued |
|
Accounting |
|
Income |
|
Continuing |
|
Discontinued |
|
Accounting |
|
Income |
| 2006 |
|
Sales |
|
Profit |
|
Operations |
|
Operations |
|
Change |
|
(Loss) |
|
Operations |
|
Operations |
|
Change |
|
(Loss) |
|
1st Quarter |
|
$ |
1,405 |
|
|
$ |
634 |
|
|
$ |
59 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
59 |
|
|
$ |
0.11 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
0.11 |
|
2nd Quarter |
|
|
2,200 |
|
|
|
1,240 |
|
|
|
440 |
|
|
|
— |
|
|
|
— |
|
|
|
440 |
|
|
|
0.80 |
|
|
|
— |
|
|
|
— |
|
|
|
0.80 |
|
3rd Quarter |
|
|
2,348 |
|
|
|
1,194 |
|
|
|
334 |
|
|
|
— |
|
|
|
— |
|
|
|
334 |
|
|
|
0.60 |
|
|
|
— |
|
|
|
— |
|
|
|
0.60 |
|
4th Quarter |
|
|
1,391 |
|
|
|
480 |
|
|
|
(135 |
) |
|
|
(3 |
) |
|
|
(6 |
) |
|
|
(144 |
) |
|
|
(0.25 |
) |
|
|
(0.01 |
) |
|
|
(0.01 |
) |
|
|
(0.27 |
) |
|
Total Fiscal
Year |
|
$ |
7,344 |
|
|
$ |
3,548 |
|
|
$ |
698 |
|
|
$ |
(3 |
) |
|
$ |
(6 |
) |
|
$ |
689 |
|
|
$ |
1.27 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
1.25 |
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter |
|
$ |
1,072 |
|
|
$ |
491 |
|
|
$ |
(126 |
) |
|
$ |
86 |
|
|
$ |
— |
|
|
$ |
(40 |
) |
|
$ |
(0.24 |
) |
|
$ |
0.16 |
|
|
$ |
— |
|
|
$ |
(0.08 |
) |
2nd Quarter |
|
|
1,908 |
|
|
|
1,015 |
|
|
|
371 |
|
|
|
2 |
|
|
|
— |
|
|
|
373 |
|
|
|
0.68 |
|
|
|
— |
|
|
|
— |
|
|
|
0.68 |
|
3rd Quarter |
|
|
2,040 |
|
|
|
1,005 |
|
|
|
41 |
|
|
|
6 |
|
|
|
— |
|
|
|
47 |
|
|
|
0.08 |
|
|
|
0.01 |
|
|
|
— |
|
|
|
0.09 |
|
4th Quarter |
|
|
1,274 |
|
|
|
493 |
|
|
|
(129 |
) |
|
|
4 |
|
|
|
— |
|
|
|
(125 |
) |
|
|
(0.24 |
) |
|
|
0.01 |
|
|
|
— |
|
|
|
(0.23 |
) |
|
Total Fiscal
Year |
|
$ |
6,294 |
|
|
$ |
3,004 |
|
|
$ |
157 |
|
|
$ |
98 |
|
|
$ |
— |
|
|
$ |
255 |
|
|
$ |
0.29 |
|
|
$ |
0.18 |
|
|
$ |
— |
|
|
$ |
0.47 |
|
|
|
|
|
| (1) |
|
Because Monsanto reported a loss from continuing operations in the fourth
quarter of 2006 and the first and fourth quarters of 2005, generally accepted accounting principles
required diluted loss per share to be calculated using weighted-average common shares outstanding,
excluding common stock equivalents. As a result, the quarterly earnings (loss) per share do not
total to the full-year amount. |
113
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain a comprehensive set of disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the 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 Aug. 31, 2006
(the Evaluation Date), an evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures. Based
on 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.
The report called for by Item 308(a) of Regulation S-K is incorporated herein by reference to
Management’s Annual Report on Internal Control over Financial Reporting, included in Part II —
Item 8 of this Form 10-K. The attestation report called for by Item 308(b) of Regulation S-K is
incorporated herein by reference to the attestation report of Deloitte & Touche LLP, the company’s
independent registered public accounting firm, on management’s assessment of internal control over
financial reporting, included in Part II — Item 8 of this Form 10-K.
During the quarter that ended on the Evaluation Date, there was one change in internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting. In June 2006, we expanded the implementation of the Corporate Finance
Management module of SAP. This expanded implementation provided the Treasury organization with
various global cash management system integrated enhancements that resulted in modifications to the
related internal controls. We believe we have taken the necessary steps to establish and maintain
effective internal controls over financial reporting during the period of change.
ITEM 9B. OTHER INFORMATION
None.
114
|
|
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| MONSANTO COMPANY
|
|
2006 FORM 10-K |
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information appearing in Monsanto Company’s definitive proxy statement, which is
expected to be filed with the SEC pursuant to Regulation 14A on or about Dec. 6, 2006 (Proxy
Statement), is incorporated herein by reference:
| |
• |
|
Information appearing under the heading “Information Regarding Board of
Directors and Committees — Composition of Board of Directors,” including biographical
information regarding nominees for election to, and members of, the Board of Directors; |
| |
| |
• |
|
Information appearing under the heading “Section 16(a) Beneficial Ownership
Reporting Compliance;” and, |
| |
| |
• |
|
Information appearing under the heading “Information Regarding Board of
Directors and Committees — Audit and Finance Committee,” regarding the membership and
function of the Audit and Finance Committee, and the financial expertise of its members. |
Monsanto has adopted a Code of Ethics for Chief Executive and Senior Financial Officers (Code),
which applies to its Chief Executive Officer and the senior leadership of its finance department,
including its Chief Financial Officer and Controller. This Code is available on our Web site at
www.monsanto.com, at the tab “Who We Are — Corporate Governance.” Any amendments to, or waivers
from, the provisions of the Code will be posted to that same location within four business days,
and will remain on the Web site for at least a 12-month period.
The following information with respect to the executive officers of the Company on Nov. 1, 2006, is
included pursuant to Instruction 3 of Item 401(b) of Regulation S-K:
| |
|
|
|
|
|
|
|
| |
|
|
|
Year First |
|
|
| |
|
|
|
Became |
|
|
| |
|
Present Position |
|
an Executive |
|
|
| Name — Age |
|
with Registrant |
|
Officer |
|
Other Business Experience since Sept. 1, 2001* |
|
Brett D. Begemann, 45
|
|
Executive Vice President,
International Commercial
|
|
2003
|
|
Vice President, Asia-Pacific — Monsanto
Company, 11/01-6/03; present position, 6/03 |
|
Carl M. Casale, 45
|
|
Executive Vice President, North
America Commercial
|
|
2000
|
|
Vice President, North America — Monsanto
Company, 6/00-6/03; present position, 6/03 |
|
Richard B. Clark, 54
|
|
Vice President and Controller
|
|
2001
|
|
Present position, 2001 |
|
Terrell K. Crews, 51
|
|
Executive Vice President and Chief
Financial Officer
|
|
2000
|
|
Present position, 8/00 |
|
Scarlett Lee Foster, 49
|
|
Vice President, Investor Relations
|
|
2005
|
|
Director, Investor Relations — Monsanto
Company, 1/01-8/05; present position, 8/05 |
|
Robert T. Fraley, 53
|
|
Executive Vice President and Chief
Technology Officer
|
|
2000
|
|
Present position, 8/00 |
|
115
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
|
| |
|
|
|
|
|
|
|
| |
|
|
|
Year First |
|
|
| |
|
|
|
Became |
|
|
| |
|
Present Position |
|
an Executive |
|
|
| Name — Age |
|
with Registrant |
|
Officer |
|
Other Business Experience since Sept. 1, 2001* |
|
Hugh Grant, 48
|
|
Chairman of the Board,
President
and Chief Executive
Officer
|
|
2000
|
|
Executive Vice
President and Chief
Operating Officer
— Monsanto
Company, 8/00-5/03;
Director, President
and Chief Executive
Officer — Monsanto
Company,
5/03-10/03; present
position, 10/03 |
|
Janet M. Holloway, 52
|
|
Vice President and Chief of
Staff
|
|
2000
|
|
Chief Information
Officer — Monsanto
Company, 8/00-6/03;
Vice President and
Chief Information
Officer,
Responsible for
Human Resources —
Monsanto Company,
7/03-4/04; Vice
President and Chief
Information Officer
— Monsanto
Company, 4/04-4/05;
present position,
4/05 |
|
Mark J. Leidy, 50
|
|
Executive Vice President,
Manufacturing
|
|
2001
|
|
Vice President,
Manufacturing —
Monsanto Company,
2/01-6/03; present
position, 6/03 |
|
Steven C. Mizell, 46
|
|
Senior Vice President, Human
Resources
|
|
2004
|
|
Senior Vice
President and Chief
Corporate Resources
Officer — Advance
PCS, 8/01-3/04;
present position,
4/04 |
|
Cheryl P. Morley, 52
|
|
Senior Vice President, Corporate
Strategy
|
|
2000
|
|
President, Animal
Agricultural Group
— Monsanto
Company, 8/00-6/03;
present position,
6/03 |
|
Robert A. Paley, 58
|
|
Vice President and Treasurer
|
|
2002
|
|
Assistant Treasurer
— Monsanto
Company, 2000-2002;
present position,
9/02 |
|
David F. Snively, 52
|
|
Senior Vice President,
Secretary
and General Counsel
|
|
2006
|
|
Associate General
Counsel, Litigation
— Monsanto
Company, 2000-2004;
Deputy General
Counsel, Core
Functions —
Monsanto Company,
2004-9/06; present
position, 9/06 |
|
Gerald A. Steiner, 46
|
|
Executive Vice President,
Commercial Acceptance
|
|
2001
|
|
Vice President,
Strategy —
Monsanto Company,
2001-6/03; present
position, 6/03 |
|
Charles W. Burson retired as Monsanto Company’s Executive Vice President, Secretary and General
Counsel effective Aug. 31, 2006.
|
|
|
| * |
|
Prior to Sept. 1, 2000, the businesses of the current Monsanto Company were the agricultural
division of Pharmacia Corporation. |
116
|
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|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the following headings of the Proxy Statement is incorporated herein by
reference: “Information Regarding Board of Directors and Committees — Compensation of Directors —
Non-Employee Director Equity Compensation Plan;” “Information Regarding Board of Directors and
Committees — Compensation Committee Interlocks and Insider Participation;” “Executive
Compensation;” and “Change of Control Agreements.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information appearing in the Proxy Statement, under the heading “Stock Ownership of Management and
Certain Beneficial Owners” is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding fees paid to Monsanto’s independent registered public accounting firm and
approval of services by our audit and finance committee, appearing in the Proxy Statement under the
heading “Ratification of Independent Registered Public Accounting Firm (Proxy Item No. 2),” is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| (a) |
|
Documents filed as part of this Report: |
| |
(1) |
|
The following financial statements appearing in Item 8: “Statements of
Consolidated Operations;” “Statements of Consolidated Financial Position;” “Statements
of Consolidated Cash Flows;” “Statements of Consolidated Shareowners’ Equity;” and
“Statements of Consolidated Comprehensive Income (Loss).” |
| |
| |
(2) |
|
Exhibits: The list of exhibits in the Exhibit Index to this Report is
incorporated herein by reference. The exhibits will be filed with the SEC but will not
be included in the printed version of the Annual Report to Shareowners. |
117
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
(Principal Accounting Officer) |
|
| |
Date: Nov. 2, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
| |
|
|
|
|
| Signature |
|
Title |
|
Date |
|
|
|
|
|
|
/s/ FRANK V. ATLEE III
|
|
Director
|
|
Nov. 2, 2006 |
|
|
|
|
|
(Frank V. AtLee III) |
|
|
|
|
|
|
|
|
|
/s/ JOHN W. BACHMANN
|
|
Director
|
|
Nov. 2, 2006 |
|
|
|
|
|
(John W. Bachmann) |
|
|
|
|
|
|
|
|
|
/s/ HUGH GRANT
|
|
Chairman of the Board, President and Chief Executive
Officer, Director (Principal Executive Officer)
|
|
Nov. 2, 2006 |
|
|
|
|
(Hugh Grant) |
|
|
|
|
|
|
|
|
|
|
Director |
|
|
|
|
|
|
(Arthur H. Harper) |
|
|
|
|
|
|
|
|
/s/ GWENDOLYN S. KING
|
|
Director
|
|
Nov. 2, 2006 |
|
|
|
|
|
(Gwendolyn S. King) |
|
|
|
|
|
|
|
|
|
/s/ SHARON R. LONG
|
|
Director
|
|
Nov. 2, 2006 |
|
|
|
|
|
(Sharon R. Long) |
|
|
|
|
|
|
|
|
|
/s/ C. STEVEN MCMILLAN
|
|
Director
|
|
Nov. 2, 2006 |
|
|
|
|
|
(C. Steven McMillan) |
|
|
|
|
|
|
|
|
|
WILLIAM U. PARFET
|
|
Director |
|
Nov. 2, 2006 |
|
|
|
|
|
(William U. Parfet) |
|
|
|
|
|
|
|
|
|
/s/ GEORGE POSTE
|
|
Director
|
|
Nov. 2, 2006 |
|
|
|
|
|
(George Poste) |
|
|
|
|
|
|
|
|
|
/s/ ROBERT J. STEVENS
|
|
Director
|
|
Nov. 2, 2006 |
|
|
|
|
|
(Robert J. Stevens) |
|
|
|
|
|
|
|
|
|
/s/ TERRELL K. CREWS
|
|
Executive Vice President, Chief Financial
Officer (Principal Financial Officer)
|
|
Nov. 2, 2006 |
|
|
|
|
(Terrell K. Crews) |
|
|
|
|
|
|
|
|
/s/ RICHARD B. CLARK
|
|
Vice President and Controller
(Principal Accounting Officer)
|
|
Nov. 2, 2006 |
|
|
|
|
(Richard B. Clark) |
|
|
|
118
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K.
| |
|
|
|
|
|
| Exhibit |
|
|
|
|
| No. |
|
Description |
|
|
|
2
|
|
1.
|
|
Separation Agreement, dated as of Sept. 1, 2000, between the company and Pharmacia (incorporated by reference to
Exhibit 2.1 of Amendment No. 2 to Registration Statement on Form S-1, filed Sept. 22, 2000, File No. 333-36956).* |
|
|
|
|
|
|
|
2.
|
|
First Amendment to Separation Agreement, dated July 1, 2002, between Pharmacia and the company (incorporated by
reference to Exhibit 99.2 of Form 8-K, filed July 30, 2002, File No. 1-16167).* |
|
|
|
|
|
|
|
3.
|
|
Agreement and Plan of Merger, dated as of Jan. 22, 2005, by and among the company, Monsanto Sub, Inc. and Seminis,
Inc. (incorporated by reference to Exhibit 2.1 of Form 8-K, filed Jan. 27, 2005, File No. 1-16167).* |
|
|
|
|
|
|
|
4.
|
|
Agreement and Plan of Merger, dated as of Feb. 15, 2005, by and among the company, EG Acquisition Co., Emergent
Genetics, Inc. and International Seed Holdings, L.P. (incorporated by reference to Exhibit 2.1 of Form 8-K, filed
Feb. 22, 2005, File No. 1-16167).* |
|
|
|
|
|
|
|
4.1.
|
|
Amendment to Agreement and Plan of Merger dated as of April 4, 2005, by and among the company, EG Acquisition Co.,
Emergent Genetics, Inc. and International Seed Holdings, L.P. (incorporated by reference to Exhibit 2.4.1 of the
Form 10-Q for the period ended Feb. 28, 2005, File No. 1-16167).* |
|
|
|
|
|
|
|
5.
|
|
Stock Purchase Agreement dated as of Feb. 15, 2005, by and among the company, Emergent Genetics India Ltd. and
International Seed Holdings, L.P. (incorporated by reference to Exhibit 2.2 of Form 8-K, filed Feb. 22, 2005, File
No. 1-16167).* |
|
|
|
|
|
|
|
5.1.
|
|
Amendment to Stock Purchase Agreement dated as of April 4, 2005, by and among the company, Emergent Genetics India
Ltd. and International Seed Holdings, L.P. (incorporated by reference to Exhibit 2.5.1 of the Form 10-Q for the
period ended Feb. 28, 2005, File No. 1-16167).* |
|
|
|
|
|
|
|
6.
|
|
Agreement and Plan of Merger, dated as of Aug. 14, 2006, by and among Monsanto Company, Monsanto Sub, Inc. and
Delta and Pine Land Company (incorporated by reference to Exhibit 2.1 of Form 8-K, filed Aug. 18, 2006, File No.
1-16167).* |
|
|
|
|
|
3
|
|
1.
|
|
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of Amendment No. 1 to
Registration Statement on Form S-1, filed Aug. 30, 2000, File No. 333-36956). |
|
|
|
|
|
|
|
2.
|
|
Monsanto Company Bylaws, as amended effective June 27, 2006 (incorporated by reference to Exhibit 3.2(ii) of Form
8-K filed June 30, 2006, File No. 1-16167). |
|
|
|
|
|
4
|
|
1.
|
|
Indenture, dated as of Aug. 1, 2002, between the company and The Bank of New York Trust Company, N.A., as Trustee
(incorporated by reference to Exhibit 4.2 of Form 8-K, filed Aug. 31, 2005, File No. 1-16167). |
|
|
|
|
|
|
|
2.
|
|
Form of Registration Rights Agreement, dated Aug. 25, 2005, relating to 5 1/2 % Senior Notes due 2025 of the company
(incorporated by reference to Exhibit 4.3 of Form 8-K, filed Aug. 31, 2005, File No. 1-16167). |
|
|
|
|
|
9
|
|
Omitted |
|
|
|
|
|
|
|
10
|
|
1.
|
|
Tax Sharing Agreement, dated July 19, 2002, between the company and Pharmacia (incorporated by reference to
Exhibit 10.4 of Form 10-Q for the period ended June 30, 2002, File No. 1-16167). |
|
|
|
|
|
|
|
2.
|
|
Employee Benefits and Compensation Allocation Agreement between Pharmacia and the company, dated as of Sept. 1,
2000 (incorporated by reference to Exhibit 10.7 of Amendment No. 2 to Registration Statement on Form S-1, filed
Sept. 22, 2000, File No. 333-36956). |
|
|
|
|
|
|
|
2.1.
|
|
Amendment to Employee Benefits and Compensation Allocation Agreement between Pharmacia and the company, dated
Sept. 1, 2000 (incorporated by reference to Exhibit 2.1 of Form 10-K for the period ended Dec. 31, 2001, File No.
1-16167). |
|
|
|
|
|
|
|
3.
|
|
Intellectual Property Transfer Agreement, dated Sept. 1, 2000, between the company and Pharmacia (incorporated by
reference to Exhibit 10.8 of Amendment No. 2 to Registration Statement on Form S-1, filed Sept. 22, 2000, File No.
333-36956). |
|
|
|
|
|
|
|
4.
|
|
Services Agreement, dated Sept. 1, 2000, between the company and Pharmacia (incorporated by reference to Exhibit
10.9 of Amendment No. 2 to Registration Statement on Form S-1, filed Sept. 22, 2000, File No. 333-36956). |
|
|
|
|
|
|
|
5.
|
|
Corporate Agreement, dated Sept. 1, 2000, between the company and Pharmacia (incorporated by reference to Exhibit
10.10 of Amendment No. 2 to Registration Statement on Form S-1, filed Sept. 22, 2000, File No. 333-36956). |
|
|
|
|
|
|
|
6.
|
|
Distribution Agreement between Pharmacia and Solutia, as of Sept. 1, 1997 (incorporated by reference to Exhibit
2.1 of the Form 8-K filed by Pharmacia Corporation (f/k/a Monsanto Company) on Sept. 16, 1997, File No. 1-2516). |
|
|
|
|
|
|
|
6.1.
|
|
Amendment to Distribution Agreement, dated July 1, 2002, among Pharmacia, Solutia and the company (incorporated by
reference to Exhibit 99.1 of Form 8-K, filed July 30, 2002, File No. 1-16167). |
|
|
|
|
|
|
|
7.
|
|
Protocol Agreement, dated July 1, 2002, among Pharmacia, Solutia and the company, relating to litigation in
Alabama (incorporated by reference to Exhibit 99.3 of Form 8-K, filed July 30, 2002, File No. 1-16167). |
|
|
|
|
|
|
|
8.
|
|
Protocol Agreement dated Nov. 15, 2002, among Pharmacia, Solutia and the company (the Pennsylvania Agreement)
(incorporated by reference to Exhibit 99.1 of Form 8-K, filed Nov. 18, 2002, File No. 1-16167). |
|
|
|
|
|
|
|
8.1.
|
|
Amendment to Protocol Agreement, dated March 3, 2003, among Pharmacia, Solutia and the company, amending the
Pennsylvania Agreement (incorporated by reference to Exhibit 10.8.1 of Form 10-K for the period ended Dec. 31,
2002, File No. 1-16167). |
|
|
|
|
|
|
|
8.2.
|
|
Second Amendment to Protocol Agreement, dated Aug. 4, 2003, further amending the Pennsylvania Agreement
(incorporated by reference to Exhibit 10.8.2 of Form 10-Q for the period ended June 30, 2003, File No. 1-16167). |
|
|
|
|
|
|
|
9.
|
|
Agreement among Solutia, Pharmacia and the company, relating to settlement of certain litigation (incorporated by
reference to Exhibit 10.25 of Form 10-K for the transition period ended Aug. 31, 2003, File No. 1-16167). |
|
|
|
|
|
|
|
10.
|
|
Global Settlement Agreement, executed Sept. 9, 2003, in the U.S. District Court for the Northern District of
Alabama, and in the Circuit Court of Etowah County, Alabama (incorporated by reference to Exhibit 10.25 of Form
10-K for the transition period ended Aug. 31, 2003, File No. 1-16167). |
|
|
|
|
|
|
|
11.
|
|
Letter Agreement between the company and Pharmacia, effective Aug. 13, 2002 (incorporated by reference to Exhibit
10.6 of Form 10-Q for the period ended June 30, 2002, File No. 1-16167). |
119
|
|
|
| MONSANTO COMPANY
|
|
2006 FORM 10-K |
| |
|
|
|
|
|
|
12.
|
|
Creve Coeur Campus Lease between the company and Pharmacia, dated Sept. 1, 2000 (incorporated by reference to
Exhibit 10.22 of Form 10-K for the period ended Dec. 31, 2001, File No. 1-16167). |
|
|
|
|
|
|
|
13.
|
|
Chesterfield Village Campus Lease between Pharmacia and the company, dated Sept. 1, 2000 (incorporated by
reference to Exhibit 10.23 of Form 10-K for the period ended Dec. 31, 2001, File No. 1-16167). |
|
|
|
|
|
|
|
14.
|
|
Five-Year Credit Agreement (incorporated by reference to Exhibit 10.14 of Form 10-Q for the period ended May 31,
2004, File No. 1-16167). |
|
|
|
|
|
|
|
15.
|
|
364-Day Credit Agreement, dated as of March 11, 2005 (incorporated by reference to Exhibit 10.15 of Form 8-K,
filed March 17, 2005, File No. 1-16167). |
|
|
|
|
|
|
|
16.
|
|
€200,000,000 Three-Year Credit Agreement, dated as of July 13, 2006 (incorporated by reference to Exhibit 10.15 of
Form 8-K, filed July 19, 2006, File No. 1-16167). |
|
|
|
|
|
|
|
17.
|
|
Monsanto Non-Employee Director Equity Incentive Compensation Plan, as amended and effective May 1, 2005
(incorporated by reference to Exhibit 10.15 of the Form 8-K, filed April 25, 2005, File No. 1-16167). † |
|
|
|
|
|
|
|
18.
|
|
Monsanto Company Long-Term Incentive Plan, as amended and restated, effective April 24, 2003 (formerly known as
Monsanto 2000 Management Incentive Plan) (incorporated by reference to Appendix C to Notice of Annual Meeting and
Proxy Statement dated March 13, 2003, File No. 1-16167).† |
|
|
|
|
|
|
|
18.1.
|
|
First Amendment, effective Jan. 29, 2004, to the Monsanto Company Long-Term Incentive Plan, as amended and
restated (incorporated by reference to Exhibit 10.16.1 of the Form 10-Q for the period ended Feb. 29, 2004, File
No. 1-16167).† |
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18.2.
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Second Amendment, effective Oct. 23, 2006, to the Monsanto Company Long-Term Incentive Plan, as amended and
restated.† |
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18.3.
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Form of Terms and Conditions of Option Grant Under the Monsanto Company Long-Term Incentive Plan, as amended and
restated, as of Oct. 2004 (incorporated by reference to Exhibit 10.16.2 of Form 10-K for the period ended Aug. 31,
2004, File No. 1-16167). † |
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18.4.
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Form of Terms and Conditions of Restricted Stock Grant Under the Monsanto Company Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.17.3 of Form 10-K for the period ended Aug. 31, 2005, File No.
1-16167).† |
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18.5.
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Form of Terms and Conditions of Restricted Stock Unit Grant Under the Monsanto Company Long-Term Incentive Plan,
as of Oct. 2006. † |
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18.6.
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Form of Terms and Conditions of Restricted Stock Unit Grant Under the Monsanto Company Long-Term Incentive Plan,
as of Oct. 2005 (incorporated by reference to Exhibit 10.17.4 of Form 10-K for the period ended Aug. 31, 2005,
File No. 1-16167). † |
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18.7.
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Form of Terms and Conditions of Restricted Stock Unit Grant Under the Monsanto Company Long-Term Incentive Plan,
as amended and restated, as of Oct. 2004 (incorporated by reference to Exhibit 10.16.4 of Form 10-K for the period
ended Aug. 31, 2004, File No. 1-16167).† |
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18.8.
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Form of Terms and Conditions of Restricted Stock Unit Grant Under the Monsanto Company Long-Term Incentive Plan,
as amended and restated, as of Feb. 2004 (incorporated by reference to Exhibit 10.16.5 of Form 10-K for the period
ended Aug. 31, 2004, File No. 1-16167).† |
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18.9.
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Form of Non-Employee Director Restricted Share Grant Terms and Conditions Under the Monsanto Company Long-Term
Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.16.2 of the Form 10-Q for the
period ended May 31, 2004, File No. 1-16167).† |
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19.
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Monsanto Company 2005 Long-Term Incentive Plan, effective Jan. 20, 2005 (incorporated by reference to Exhibit 10.1
of Form 8-K, filed Jan. 26, 2005, File No. 1-16167). † |
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19.1.
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First Amendment effective Oct. 23,
2006 to the Monsanto
Company 2005 Long-Term Incentive Plan. † |
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20.
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Amended and Restated Deferred Payment Plan, effective Jan. 1, 2004 (incorporated by reference to Exhibit 10.17 of
Form 10-K for the period ended Aug. 31, 2004, File No. 1-16167).† |
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21.
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Annual Incentive Program for Certain Executive Officers (incorporated by reference to the description appearing
under the sub-heading “Approval of Performance Goal Under §162(m) of the Internal Revenue Code” on pages 12
through 13 of the Proxy Statement dated Dec. 14, 2005).† |
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22.
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Fiscal Year 2006 Annual Incentive Plan Summary, as approved by the People and Compensation Committee of the Board
of Directors on Aug. 1, 2005 (incorporated by reference to Exhibit 10 of Form 8-K, filed Aug. 5, 2005, File No.
1-16167). † |
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23.
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Fiscal Year 2007 Annual Incentive Plan Summary, as approved by the People and Compensation Committee of the Board
of Directors on Aug. 8, 2006 (incorporated by reference to Exhibit 10 of Form 8-K, filed Aug. 11, 2006, File No.
1-16167).† |
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23.1.
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Amendment to Fiscal Year 2007 Annual Incentive Plan Summary, effective Oct. 24, 2006, as approved by the People
and Compensation Committee of the Board of Directors on Oct. 23, 2006. † |
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24.
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Monsanto Company Recoupment Policy, adopted by the Board of Directors on Oct. 24, 2006. † |
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25.
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Summary sheet regarding June 2005 cash bonus awards (incorporated by reference to Exhibit 10.19.1 of Form 8-K,
filed June 24, 2005, File No. 1-16167). † |
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26.
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Annual Cash Compensation of Named Executive Officers dated Oct. 2006.† |
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27.
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New Form of Change-of-Control Employment Security Agreement, amended effective Dec. 18, 2002 (incorporated by
reference to Exhibit 10.20 of Form 10-K for the period ended Dec. 31, 2002, File No 1-16167).† |
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27.1.
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Form of First Amendment to Change-of-Control Employment Security Agreement, as approved by the Board of Directors
on April 19, 2006 (incorporated by reference to Exhibit 10 of Form 8-K, filed April 25, 2006, File No.
1-16167). † |
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27.2.
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Form of Second Amendment to Change-of-Control Employment Security Agreement, as approved by the Board of Directors on Oct.
24, 2006 (incorporated by reference to Exhibit 10 of
Form 8-K, filed Oct. 30, 2006, File No. 1-16167).
† |
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28.
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Monsanto Company Executive Health Management Program, as amended and restated as of Oct. 23, 2006.† |
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29.
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Supplemental Retirement Plan Letter Agreement for Charles W. Burson, dated April 7, 2001 (incorporated by
reference to Exhibit 10.20 of Form 10-K for the period
ended Dec. 31, 2001, File No. 1-16167).† |
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| 11 |
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Omitted — see
Item 8 — Note 20 — Earnings (Loss) per Share. |
| 12 |
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Computation of Ratio of Earnings to Fixed Charges. |
| 13 |
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Omitted |
| 14 |
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Omitted —
Monsanto’s Code of Ethics for Chief Executive and Senior
Financial Officers is available on our Web site at
www.monsanto.com. |
| 16 |
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Omitted |
| 18 |
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Omitted |
| 21 |
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Subsidiaries of the Registrant. |
| 22 |
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Omitted |
| 23 |
|
Consent of Independent Registered Public Accounting Firm |
| 24 |
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Omitted |
31.
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1.
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Rule 13a-14(a)/15d-14(a) Certification (pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002,
executed by Chief Executive Officer). |
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2.
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Rule 13a-14(a)/15d-14(a) Certification (pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002,
executed by Chief Financial Officer). |
| 32 |
|
Rule 13a-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). |
| |
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| * |
|
Schedules and similar attachments to this Agreement have been omitted pursuant to Item
601(b)(2) of Regulation S-K. The registrant will furnish supplementally a copy of any omitted
schedule or similar attachment to the SEC upon request. |
| |
| † |
|
Represents management contract or compensatory plan or arrangement. |
120