e10vq
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MONSANTO COMPANY |
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SECOND QUARTER 2007 FORM 10-Q |
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended Feb. 28, 2007
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-16167
MONSANTO COMPANY
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of incorporation or organization)
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43-1878297
(I.R.S. Employer Identification No.) |
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800 North Lindbergh Blvd.,
St. Louis, MO
(Address of principal executive offices)
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63167
(Zip Code) |
(314) 694-1000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date: 544,256,056 shares of Common Stock, $0.01 par value, outstanding as
of Apr. 3, 2007.
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MONSANTO COMPANY |
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SECOND QUARTER 2007 FORM 10-Q |
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CAUTION REGARDING FORWARD-LOOKING STATEMENTS
In the interests of our investors, and in accordance with the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, this section of our report explains some of the
important reasons that actual results may be materially different from those that we anticipate. In
this report, and from time to time throughout the year, we share our expectations for our companys
future performance. These forward-looking statements include statements about our business plans;
the potential development, regulatory approval, and public acceptance of our products; our expected
financial performance, including sales performance, and the anticipated effect of our strategic
actions; the anticipated benefits of recent acquisitions; the outcome of contingencies, such as
litigation; domestic or international economic, political and market conditions; and other factors
that could affect our future results of operations or financial position, including, without
limitation, statements under the captions Overview Executive Summary Outlook, Seeds and
Genomics Segment, Agricultural Productivity Segment, Financial Condition, Liquidity, and
Capital Resources, Outlook, Critical Accounting Policies and Estimates and Legal
Proceedings. Any statements we make that are not matters of current reportage or historical fact
should be considered forward-looking. Such statements often include words such as believe,
expect, anticipate, intend, plan, estimate, will, and similar expressions. By their
nature, these types of statements are uncertain and are not guarantees of our future performance.
Since these statements are based on factors that involve risks and uncertainties, our companys
actual performance and results may differ materially from those described or implied by such
forward-looking statements. Factors that could cause or contribute to such differences include,
among others: continued competition in seeds, traits and agricultural chemicals; the companys
exposure to various contingencies, including those related to intellectual property protection,
regulatory compliance and the speed with which approvals are received, and public acceptance of
biotechnology products; the success of the companys research and development activities; the
outcomes of major lawsuits, including proceedings related to Solutia Inc.; developments related to
foreign currencies and economies; successful completion and operation of recent and proposed
acquisitions, including Delta and Pine Land Company; fluctuations in commodity prices; compliance
with regulations affecting our manufacturing; the accuracy of the companys estimates related to
distribution inventory levels; the companys ability to fund its short-term financing needs and to
obtain payment for the products that it sells; the effect of weather conditions, natural disasters
and accidents on the agriculture business or the companys facilities; and other risks and factors
described or referenced in Part II Item 1A Risk Factors below.
Our forward-looking statements represent our estimates and expectations and are based on currently
available information at the time that we make those statements. However, circumstances change
constantly, often unpredictably, and many events beyond our control will determine whether the
expectations encompassed in our forward-looking statements will be realized. As a result, investors
should not place undue reliance on these forward-looking statements. We disclaim any current
intention or obligation to revise or update any forward-looking statements, or the factors that may
affect their realization, whether in light of new information, future events or otherwise, and
investors should not rely on us to do so.
1
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MONSANTO COMPANY |
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SECOND QUARTER 2007 FORM 10-Q |
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TABLE OF CONTENTS
2
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MONSANTO COMPANY |
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SECOND QUARTER 2007 FORM 10-Q |
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PART IFINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The Statements of Consolidated Operations of Monsanto Company and its consolidated subsidiaries for
the three months and six months ended Feb. 28, 2007, and Feb. 28, 2006, the Condensed Statements of
Consolidated Financial Position as of Feb. 28, 2007, and Aug. 31, 2006, the Statements of
Consolidated Cash Flows for the six months ended Feb. 28, 2007, and Feb. 28, 2006, and related
Notes to Consolidated Financial Statements follow. Unless otherwise indicated, Monsanto and the
company are used interchangeably to refer to Monsanto Company or to Monsanto Company and its
consolidated subsidiaries, as appropriate to the context. Unless otherwise indicated, earnings
(loss) per share and per share mean diluted earnings (loss) per share. In the notes to the
consolidated financial statements, all dollars are expressed in millions, except per share amounts.
Unless otherwise indicated, trademarks owned or licensed by Monsanto or its subsidiaries are shown
in all capital letters. Unless otherwise indicated, references to ROUNDUP herbicides mean ROUNDUP
branded herbicides, excluding all lawn-and-garden herbicides, and references to ROUNDUP and other
glyphosate-based herbicides exclude all lawn-and-garden herbicides.
3
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MONSANTO COMPANY |
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SECOND QUARTER 2007 FORM 10-Q |
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Statements of Consolidated Operations
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Unaudited |
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Three Months Ended Feb. 28, |
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Six Months Ended Feb. 28, |
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(Dollars in millions, except per share amounts) |
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2007 |
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2006 |
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2007 |
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2006 |
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Net Sales |
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$ |
2,616 |
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$ |
2,200 |
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$ |
4,155 |
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$ |
3,605 |
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Cost of goods sold |
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1,166 |
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960 |
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2,025 |
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1,731 |
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Gross Profit |
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1,450 |
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1,240 |
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2,130 |
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1,874 |
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Operating Expenses: |
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Selling, general and administrative expenses |
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433 |
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393 |
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817 |
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743 |
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Research and development expenses |
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190 |
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173 |
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372 |
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341 |
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Total Operating Expenses |
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623 |
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566 |
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1,189 |
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1,084 |
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Income from Operations |
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827 |
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674 |
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941 |
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790 |
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Interest expense |
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34 |
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33 |
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67 |
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65 |
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Interest income |
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(31 |
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(13 |
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(61 |
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(27 |
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Solutia-related expenses (see Note 14) |
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9 |
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7 |
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19 |
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13 |
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Other expense (income) net |
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(3 |
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11 |
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1 |
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9 |
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Income Before Income Taxes and Minority
Interest |
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818 |
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636 |
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915 |
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730 |
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Income tax provision |
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275 |
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195 |
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285 |
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230 |
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Minority interest expense (income) |
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1 |
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(3 |
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1 |
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Net Income |
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$ |
543 |
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$ |
440 |
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$ |
633 |
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$ |
499 |
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Basic Earnings per Share |
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$ |
1.00 |
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$ |
0.82 |
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$ |
1.16 |
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$ |
0.93 |
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Diluted Earnings per Share |
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$ |
0.98 |
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$ |
0.80 |
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$ |
1.14 |
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$ |
0.91 |
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Weighted Average Shares Outstanding: |
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Basic |
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543.6 |
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539.1 |
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543.4 |
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538.0 |
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Diluted |
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554.3 |
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550.5 |
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554.0 |
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549.5 |
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Dividends Declared per Share |
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$ |
0.25 |
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$ |
0.20 |
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$ |
0.25 |
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$ |
0.20 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
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MONSANTO COMPANY |
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SECOND QUARTER 2007 FORM 10-Q |
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Condensed Statements of Consolidated Financial Position
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Unaudited |
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As of Feb. 28, |
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As of Aug. 31, |
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(Dollars in millions, except share amounts) |
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2007 |
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2006 |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
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$ |
1,565 |
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$ |
1,460 |
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Short-term investments |
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22 |
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Trade receivables net of allowances of $310 and $298, respectively |
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2,007 |
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1,455 |
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Miscellaneous receivables |
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391 |
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344 |
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Deferred tax assets |
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385 |
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390 |
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Inventories (see Note 5) |
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1,888 |
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1,688 |
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Assets of discontinued operations (see Note 16) |
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6 |
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6 |
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Other current assets |
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54 |
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96 |
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Total Current Assets |
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6,296 |
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5,461 |
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Property, Plant and Equipment Net |
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2,410 |
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2,418 |
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Goodwill (see Note 6) |
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1,564 |
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1,522 |
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Other Intangible Assets Net (see Note 6) |
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1,194 |
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1,229 |
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Noncurrent Deferred Tax Assets |
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617 |
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625 |
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Other Assets |
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452 |
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473 |
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Total Assets |
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$ |
12,533 |
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$ |
11,728 |
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Liabilities and Shareowners Equity |
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Current Liabilities: |
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Short-term debt, including current portion of long-term debt |
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$ |
55 |
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$ |
28 |
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Accounts payable |
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547 |
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514 |
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Income taxes payable |
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370 |
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234 |
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Accrued compensation and benefits |
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202 |
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295 |
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Accrued marketing programs |
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250 |
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494 |
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Deferred revenues |
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418 |
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120 |
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Grower accruals |
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80 |
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26 |
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Liabilities of discontinued operations (see Note 16) |
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2 |
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2 |
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Miscellaneous short-term accruals |
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635 |
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566 |
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Total Current Liabilities |
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2,559 |
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2,279 |
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Long-Term Debt |
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1,581 |
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1,639 |
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Postretirement Liabilities |
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563 |
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600 |
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Long-Term Portion of Solutia-Related Reserve (see Note 14) |
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143 |
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155 |
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Other Liabilities |
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518 |
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530 |
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Commitments and Contingencies (see Note 14)
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Shareowners Equity:
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Common stock (authorized: 1,500,000,000 shares, par value $0.01)
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Issued 574,107,172 and 571,377,639 shares, respectively; |
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Outstanding 544,460,879 and 543,177,133 shares, respectively |
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6 |
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6 |
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Treasury stock, 29,646,293 and 28,200,506 shares, respectively, at cost |
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(689 |
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(623 |
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Additional contributed capital |
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8,988 |
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8,879 |
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Retained deficit |
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(602 |
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(1,099 |
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Accumulated other comprehensive loss |
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(523 |
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(623 |
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Reserve for ESOP debt retirement |
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(11 |
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(15 |
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Total Shareowners Equity |
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7,169 |
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6,525 |
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Total Liabilities and Shareowners Equity |
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$ |
12,533 |
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$ |
11,728 |
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The accompanying notes are an integral part of these consolidated financial statements.
5
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MONSANTO COMPANY |
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SECOND QUARTER 2007 FORM 10-Q |
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Statements of Consolidated Cash Flows
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Unaudited |
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Six Months Ended Feb. 28, |
(Dollars in millions) |
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2007 |
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2006 |
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Operating Activities: |
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Net Income |
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$ |
633 |
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$ |
499 |
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Adjustments to reconcile cash provided by operating activities: |
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Items that did not require (provide) cash: |
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Depreciation and amortization expense |
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257 |
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259 |
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Bad-debt expense |
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23 |
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22 |
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Stock-based compensation expense |
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35 |
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35 |
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Excess tax benefits from stock-based compensation |
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(34 |
) |
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(38 |
) |
Deferred income taxes |
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7 |
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173 |
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Equity affiliate expense net |
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21 |
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15 |
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Other items |
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5 |
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(5 |
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Changes in assets and liabilities, net of the effects of
acquisitions: |
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Trade receivables |
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(585 |
) |
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(397 |
) |
Inventories |
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(170 |
) |
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(207 |
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Deferred revenues |
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|
291 |
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|
270 |
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Accounts payable and other accrued liabilities |
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110 |
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(290 |
) |
PCB litigation settlement proceeds (see Note 14) |
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16 |
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16 |
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Solutia-related payments (see Note 14) |
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(17 |
) |
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(15 |
) |
Other items |
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(72 |
) |
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(6 |
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Net Cash Provided by Operating Activities |
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|
520 |
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|
331 |
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Cash Flows Provided (Required) by Investing Activities: |
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Purchases of short-term investments |
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(21 |
) |
Maturities of short-term investments |
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22 |
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Capital expenditures |
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(182 |
) |
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|
(157 |
) |
Acquisitions of businesses, net of cash acquired |
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(62 |
) |
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|
(179 |
) |
Technology and other investments |
|
|
(24 |
) |
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|
(118 |
) |
Other investments and property disposal proceeds |
|
|
16 |
|
|
|
9 |
|
|
Net Cash Required by Investing Activities |
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(230 |
) |
|
|
(466 |
) |
|
Cash Flows Provided (Required) by Financing Activities: |
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|
|
|
|
|
|
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Net change in financing with less than 90-day maturities |
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|
(5 |
) |
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|
241 |
|
Short-term debt proceeds |
|
|
|
|
|
|
6 |
|
Short-term debt reductions |
|
|
(8 |
) |
|
|
(13 |
) |
Long-term debt proceeds |
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|
4 |
|
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|
4 |
|
Long-term debt reductions |
|
|
(71 |
) |
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|
(45 |
) |
Payments on other financing |
|
|
(3 |
) |
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(4 |
) |
Treasury stock purchases |
|
|
(71 |
) |
|
|
|
|
Stock option exercises |
|
|
42 |
|
|
|
64 |
|
Excess tax benefits from stock-based compensation |
|
|
34 |
|
|
|
38 |
|
Dividend payments |
|
|
(122 |
) |
|
|
(100 |
) |
|
Net Cash Provided (Required) by Financing Activities |
|
|
(200 |
) |
|
|
191 |
|
|
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
|
|
15 |
|
|
|
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|
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Net Increase in Cash and Cash Equivalents |
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|
105 |
|
|
|
56 |
|
Cash and Cash Equivalents at Beginning of Period |
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|
1,460 |
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|
|
525 |
|
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Cash and Cash Equivalents at End of Period |
|
$ |
1,565 |
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$ |
581 |
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|
See Note 13 Supplemental Cash Flow Information for further details.
The accompanying notes are an integral part of these consolidated financial statements.
6
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MONSANTO COMPANY |
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SECOND QUARTER 2007 FORM 10-Q |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
Monsanto Company, along with its subsidiaries, is a leading global provider of agricultural
products for farmers. Monsantos 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 15 Segment Information for further details.
On June 27, 2006, the board of directors approved a two-for-one split of the companys common
shares. The additional shares resulting from the stock split were paid on July 28, 2006, to
shareowners of record on July 7, 2006. All share and per share information herein reflect this
stock split.
The accompanying consolidated financial statements have not been audited but have been prepared in
conformity with accounting principles generally accepted in the United States for interim financial
information and with instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, these unaudited consolidated financial statements contain all adjustments necessary to
present fairly the financial position, results of operations and cash flows for the interim periods
reported. This Report on Form 10-Q should be read in conjunction with Monsantos Report on Form
10-K for the fiscal year ended Aug. 31, 2006, and Monsantos Report on Form 10-Q for the quarterly
period ended Nov. 30, 2006. Financial information for the first six months of fiscal year 2007
should not be annualized because of the seasonality of the companys business.
NOTE 2. NEW ACCOUNTING STANDARDS
In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities using different measurement techniques. SFAS 159 requires additional
disclosures related to the fair value measurements included in the entitys financial statements.
This statement is effective for financial statements issued for fiscal years beginning after Nov.
15, 2007. Accordingly, Monsanto will adopt SFAS 159 in fiscal year 2009. The company is currently
evaluating the impact of SFAS 159 on the consolidated financial statements.
In September 2006, FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Benefit Plans an amendment of FASB Statements No. 87, 88, and
132(R) (SFAS 158). SFAS 158 requires companies to recognize the overfunded or underfunded status of
a defined benefit postretirement plan as an asset or liability in its statement of financial
position and to recognize changes in that funded status through comprehensive income. Based upon
the most recent actuarial estimate for the fiscal year ended Aug. 31, 2007, the adoption of SFAS
158 is expected to result in an increase in liabilities and pre-tax comprehensive loss of $70
million to $90 million. The actual impact of the adoption of SFAS 158 may differ from these
estimates due to changes to actual plan assets and liabilities and final assumptions as of Aug. 31,
2007. This statement also requires the measurement date for plan assets and liabilities to coincide
with the sponsors year end. The standard provides two transition alternatives related to the
change in measurement date provisions. The recognition of an asset and liability related to the
funded status provision is effective for fiscal years ending after Dec. 15, 2006. Accordingly,
Monsanto will adopt SFAS 158 in the fourth quarter of fiscal year 2007. The change in measurement
date provisions is effective for fiscal years ending after Dec. 15, 2008.
7
|
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MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
(continued)
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. This statement is
effective for financial statements issued for fiscal years beginning after Nov. 15, 2007.
Accordingly, Monsanto will adopt SFAS 157 in fiscal year 2009. The company is currently evaluating
the impact of SFAS 157 on the consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108
(SAB 108). SAB 108 considers the effects of prior year misstatements when quantifying misstatements
in current year financial statements. It is effective for fiscal years ending after Nov. 15, 2006.
Accordingly, Monsanto will adopt SAB 108 in the fourth quarter of fiscal year 2007. The company
does not believe the adoption of SAB 108 will have a material impact on the consolidated financial
statements.
In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in
Income Taxes an Interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting
for uncertainty in tax positions. FIN 48 requires financial statement recognition of the impact of
a tax position, if that position is more likely than not to be sustained on examination, based on
the technical merits of the position. This interpretation is effective for fiscal years beginning
after Dec. 15, 2006, with the cumulative effect of the change in accounting principle recorded as
an adjustment to retained earnings as of the beginning of the period of adoption. Accordingly,
Monsanto will adopt FIN 48 in first quarter of fiscal year 2008. The company is currently
evaluating the impact of FIN 48 on the consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets an
amendment of FASB Statement No. 140 (SFAS 156). SFAS 156 requires recognition of a servicing asset
or liability at fair value each time an obligation is undertaken to service a financial asset by
entering into a servicing contract. SFAS 156 also provides guidance on subsequent measurement
methods for each class of servicing assets and liabilities and specifies financial statement
presentation and disclosure requirements. This statement is effective for fiscal years beginning
after Sept. 15, 2006. Accordingly, Monsanto will adopt SFAS 156 in fiscal year 2008. The company is
currently evaluating the impact of SFAS 156 on the consolidated financial statements.
NOTE 3. BUSINESS COMBINATIONS
2007 Acquisitions: In December 2006, Monsantos American Seeds, Inc. (ASI) subsidiary acquired
Fielders Choice Direct, a U.S. seed company, for $50 million (net of cash acquired), inclusive of
transaction costs of $1 million, with a potential additional earn-out amount of up to $5 million.
In conjunction with this acquisition, Monsanto entered into a five-year global technology license
agreement. See Note 6 Goodwill and Other Intangible Assets for further discussion of the
agreement. Also in second quarter 2007, ASI acquired three regional U.S. seed companies in separate
transactions for an aggregate purchase price of $5 million, inclusive of transaction costs of $1
million. In January 2007, Monsanto acquired a European fruit seed company for $7 million, inclusive
of transaction costs of $1 million. Pro forma information related to these acquisitions is not presented because the impact of these
acquisitions, either individually or in the aggregate, on the companys consolidated results of
operations is not considered to be significant. The aggregate purchase price for all
fiscal 2007 acquisitions was primarily allocated to goodwill, inventory, intangible assets and
fixed assets. The primary items that generated the goodwill were the premiums paid by the company
for the right to control the businesses acquired, including the direct-to-farmer and farmer-dealer
distribution models, and the value of the acquired assembled workforces.
2006 Acquisitions: In September 2005, ASI acquired five regional U.S. seed companies for an
aggregate purchase price of $54 million (net of cash acquired). In March 2006, ASI acquired two
additional U.S. seed companies for an aggregate
8
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MONSANTO COMPANY |
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SECOND QUARTER 2007 FORM 10-Q |
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
(continued)
purchase price of $6 million (net of cash acquired). In June and July 2006, ASI acquired five
additional U.S. seed companies for an aggregate purchase price of $73 million (net of cash
acquired).
For all
fiscal year 2007 and 2006 acquisitions described above, the financial
results of the acquired
entities were included in the companys consolidated financial
statements within the Seeds and Genomics segment from their
respective dates of acquisition. The assets and liabilities of the
acquired entities were recorded at their estimated fair values as of the dates of the acquisitions.
The purchase price allocations for the fiscal 2007 and June and July 2006 acquisitions are preliminary and are
subject to adjustment pending further assessments, including the
valuation of intangible assets. In addition, other assets and liabilities may be identified to which a portion of the purchase price
could be allocated.
NOTE 4. 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 Monsantos credit and other
underwriting guidelines approved by the lender. Under the program as amended in August 2006,
Monsanto services the loans and provides a first-loss guarantee of up to $130 million. Following
origination, the lender transfers the loans to multi-seller commercial paper conduits through a
nonconsolidated qualifying special purpose entity (QSPE). Monsanto accounts for this transaction as
a sale, in accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities (SFAS 140).
Monsanto has no ownership interest in the lender, the QSPE, or the loans. However, because Monsanto
substantively originates the loans through the SPE (which it consolidates) and partially guarantees
and services the loans, Monsanto accounts for the program as if it were the originator of the loans
and the transferor selling the loans to the QSPE. Because QSPEs are excluded from the scope of FIN
No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN 46R), and Monsanto
does not have the unilateral right to liquidate the QSPE, FIN 46R does not have an effect on
Monsantos accounting for the U.S. customer financing program.
Monsanto accounts for the guarantee in accordance with FIN No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others,
an interpretation of SFAS No. 5, 57 and 107, and rescission of FIN No. 34 (FIN 45), which requires
that a guarantor recognize, at the inception of the guarantee, a liability for the fair value of
the guarantee obligation undertaken. Monsanto records its guarantee liability at a value that
approximates fair value (except that it does not discount credit losses because of the short-term
nature of the loans), primarily driven by expected future credit losses. Monsanto does not
recognize any servicing asset or liability because the servicing fee is considered adequate
compensation for the servicing activities. Discounts on the sale of customer loans and servicing
expenses were less than $1 million during the six months ended Feb. 28, 2007, and Feb. 28, 2006.
Proceeds from customer loans sold through the financing program totaled $4 million and $18 million
for the first six months of fiscal years 2007 and 2006, respectively. These proceeds are included
in net cash provided by operating activities in the Statements of Consolidated Cash Flows. As of
Feb. 28, 2007, there were no loans outstanding. The loan balance outstanding as of Aug. 31, 2006,
was $268 million. 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 Feb. 28, 2007, and Aug. 31, 2006, less than $1 million of loans sold
through this financing program were delinquent, and Monsanto recorded its guarantee liability at
less than $1 million, based on the companys historical collection experience with these customers
and a current assessment of credit exposure. Adverse changes in the actual loss rate would increase
the liability. If Monsanto is called upon to make payments under the first-loss guarantee, it would
have the benefit under the financing program of any amounts subsequently collected from the
customer.
In November 2004, Monsanto entered into an agreement with a lender to establish a program to
provide financing of up to $40 million for selected customers in Brazil. The agreement, as amended
in May 2005, qualifies for sales treatment under SFAS 140. Proceeds from the transfer of
receivables subsequent to the May 2005 amendment are included in net cash provided by operating
activities in the Statements of Consolidated Cash Flows. Total funds available under the program
have increased to $140 million under subsequent amendments. Proceeds from the transfer of
receivables through the program totaled $75 million and $22 million for the first six months of
fiscal years 2007 and 2006, respectively. Monsanto provides a
9
|
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MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
(continued)
guarantee of the loans in the event of customer default. The term of the guarantee is equivalent to
the term of the bank loans. The liability for the guarantees is recorded at an amount that
approximates fair value and is based on the companys historical collection experience with
customers that participate in the program and a current assessment of credit exposure. The
guarantee liability recorded by Monsanto was $2 million as of Feb. 28, 2007, and Aug. 31, 2006. If
performance is required under the guarantee, Monsanto may retain amounts that are subsequently
collected from customers. The maximum potential amount of future payments under the guarantee was
$118 million as of Feb. 28, 2007. The loan balance outstanding for these programs was $118 million
and $64 million as of Feb. 28, 2007, and Aug. 31, 2006, respectively.
Monsanto also has similar agreements with banks that provide financing to its customers in Brazil
through credit programs that are subsidized by the Brazilian government. In addition, there are
similar financing programs in Europe and Argentina. All of these programs qualify for sales
treatment under SFAS 140. Accordingly, proceeds from the transfer of receivables are included in
net cash provided by operating activities in the Statements of Consolidated Cash Flows and totaled
$66 million and $49 million for the first six months of fiscal years 2007 and 2006, respectively.
Under most of these programs, Monsanto provides a guarantee of the loans in the event of customer
default. The terms of the guarantees are equivalent to the terms of the bank loans. The liability
for the guarantees is recorded at an amount that approximates fair value and is based on the
companys historical collection experience with customers that participate in the program and a
current assessment of credit exposure. The guarantee liability recorded by Monsanto was $1 million
as of Feb. 28, 2007, and Aug. 31, 2006. If performance is required under the guarantee, Monsanto
may retain amounts that are subsequently collected from customers. The maximum potential amount of
future payments under the guarantees was $91 million as of Feb. 28, 2007. The loan balance
outstanding for these programs was $91 million and $47 million as of Feb. 28, 2007, and Aug. 31,
2006, respectively.
Monsanto also sells accounts receivable, both with and without recourse. These sales qualify for
sales treatment under SFAS 140 and accordingly, the proceeds are included in net cash provided by
operating activities in the Statements of Consolidated Cash Flows. The gross amounts of receivables
sold totaled $4 million and $17 million for first six months of fiscal years 2007 and 2006,
respectively. The liability for the guarantees for sales with recourse is recorded at an amount
that approximates fair value and is based on the companys 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 Feb. 28, 2007, and Aug. 31, 2006.
The maximum potential amount of future payments under the recourse provisions of the agreements was
$2 million as of Feb. 28, 2007. The outstanding balance of the receivables sold was $2 million and
$41 million as of Feb. 28, 2007, and Aug. 31, 2006, respectively.
NOTE 5. INVENTORIES
Components of inventories were:
|
|
|
|
|
|
|
|
|
|
|
|
As of Feb. 28, |
|
As of Aug. 31, |
(Dollars in millions) |
|
2007 |
|
2006 |
|
|
|
Finished Goods |
|
$ |
845 |
|
|
$ |
719 |
|
Goods In Process |
|
|
882 |
|
|
|
836 |
|
Raw Materials and Supplies |
|
|
244 |
|
|
|
216 |
|
|
|
|
Inventories at FIFO Cost |
|
|
1,971 |
|
|
|
1,771 |
|
Excess of FIFO over LIFO
Cost |
|
|
(83 |
) |
|
|
(83 |
) |
|
|
|
Total |
|
$ |
1,888 |
|
|
$ |
1,688 |
|
|
|
|
10
|
|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
(continued)
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the net carrying amount of goodwill for the first half of fiscal year 2007, by segment,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seeds and |
|
Agricultural |
|
|
(Dollars in millions) |
|
Genomics |
|
Productivity |
|
Total |
|
Balance as of Aug. 31, 2006 |
|
$ |
1,457 |
|
|
$ |
65 |
|
|
$ |
1,522 |
|
Acquisition Activity (See Note 3) |
|
|
35 |
|
|
|
|
|
|
|
35 |
|
Effect of Foreign Currency Translation
Adjustments |
|
|
6 |
|
|
|
1 |
|
|
|
7 |
|
|
Balance as of Feb. 28, 2007 |
|
$ |
1,498 |
|
|
$ |
66 |
|
|
$ |
1,564 |
|
|
In second quarter 2007, an $18 million reduction in goodwill was recorded relating to the
completion of Internal Revenue Service audits for pre-acquisition date periods for Seminis, Inc.
Information regarding the companys other intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of Feb. 28, 2007 |
|
As of Aug. 31, 2006 |
|
|
Carrying |
|
Accumulated |
|
|
|
|
|
Carrying |
|
Accumulated |
|
|
(Dollars in millions) |
|
Amount |
|
Amortization |
|
Net |
|
Amount |
|
Amortization |
|
Net |
|
|
|
Acquired Germplasm |
|
$ |
932 |
|
|
$ |
(528 |
) |
|
$ |
404 |
|
|
$ |
932 |
|
|
$ |
(518 |
) |
|
$ |
414 |
|
Acquired Biotechnology Intellectual
Property |
|
|
833 |
|
|
|
(424 |
) |
|
|
409 |
|
|
|
823 |
|
|
|
(376 |
) |
|
|
447 |
|
Trademarks |
|
|
217 |
|
|
|
(53 |
) |
|
|
164 |
|
|
|
211 |
|
|
|
(48 |
) |
|
|
163 |
|
Customer Relationships |
|
|
217 |
|
|
|
(32 |
) |
|
|
185 |
|
|
|
208 |
|
|
|
(21 |
) |
|
|
187 |
|
Other |
|
|
48 |
|
|
|
(16 |
) |
|
|
32 |
|
|
|
32 |
|
|
|
(14 |
) |
|
|
18 |
|
|
|
|
Total |
|
$ |
2,247 |
|
|
$ |
(1,053 |
) |
|
$ |
1,194 |
|
|
$ |
2,206 |
|
|
$ |
(977 |
) |
|
$ |
1,229 |
|
|
|
|
In December 2006, Monsanto entered into a five-year global technology license for certain seed
coating technology. Monsanto also received an option to purchase technology. In second quarter
2007, Monsanto recorded intangible assets and a corresponding liability in the amount of $15
million for discounted minimum future payments under the agreement, of which $2.5 million was paid
in January 2007. The increases in other intangible assets during the first half of 2007 resulted
from the acquisitions described in Note 3 Business Combinations.
Total amortization expense of other intangible assets was $38 million in second quarter of fiscal
year 2007 and $35 million in second quarter of fiscal year 2006. Total amortization expense of
other intangible assets for the six months ended Feb. 28, 2007, and Feb. 28, 2006, was $74 million
and $77 million, respectively. Estimated intangible asset amortization expense for each of the five
succeeding fiscal years has not changed significantly from the amounts disclosed in Monsantos
Report on Form 10-K for the fiscal year ended Aug. 31, 2006.
NOTE 7. INCOME TAXES
Management regularly assesses the tax risk of the companys tax return filing positions for all
open tax years and establishes tax reserves accordingly. During first quarter 2007, an audit was
completed in an ex-U.S. jurisdiction and various state income tax issues were resolved favorably by
Monsanto. On Dec. 20, 2006, the retroactive extension of the research and development tax credit
was enacted as part of the Tax Relief and Health Care Act of 2006. Monsanto recorded an income tax
benefit of $30 million in the first six months of 2007 primarily as a result of these items.
During second quarter 2006, the Internal Revenue Service completed an audit of Pharmacia
Corporation for tax years 2000 to 2002 (for which period Monsanto was a member of Pharmacias
consolidated group). As a result of the conclusion of this audit, and to a lesser extent, the
resolution of various state income tax matters, Monsanto recorded an income tax benefit of $31
million in second quarter 2006.
11
|
|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
(continued)
NOTE 8. DEBT AND OTHER CREDIT ARRANGEMENTS
Effective Feb. 28, 2007, Monsanto finalized a new $2 billion credit facility agreement with a group
of banks. This agreement provides a five-year senior unsecured revolving credit facility, which
replaces the existing $1 billion credit facility established in 2004. Covenants under the $2
billion revolving credit facility are substantially similar to those in the facility replaced. As
of Feb. 28, 2007, there were no outstanding borrowings under this credit facility.
NOTE 9. POSTRETIREMENT BENEFITS PENSIONS, HEALTH CARE AND OTHER
The majority of Monsantos employees are covered by noncontributory pension plans sponsored by the
company. The company also provides certain postretirement health care and life insurance benefits
for retired employees through insurance contracts. The companys net periodic benefit cost for
pension benefits, and health care and other postretirement benefits include the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Feb. 28, 2007 |
|
Three Months Ended Feb. 28, 2006 |
Pension Benefits |
|
|
|
|
|
Outside the |
|
|
|
|
|
|
|
|
|
Outside the |
|
|
(Dollars in millions) |
|
U.S. |
|
U.S. |
|
Total |
|
U.S. |
|
U.S. |
|
Total |
|
|
|
Service Cost for Benefits Earned During the
Period |
|
$ |
10 |
|
|
$ |
1 |
|
|
$ |
11 |
|
|
$ |
9 |
|
|
$ |
1 |
|
|
$ |
10 |
|
Interest Cost on Benefit Obligation |
|
|
27 |
|
|
|
3 |
|
|
|
30 |
|
|
|
21 |
|
|
|
1 |
|
|
|
22 |
|
Assumed Return on Plan Assets |
|
|
(32 |
) |
|
|
(3 |
) |
|
|
(35 |
) |
|
|
(27 |
) |
|
|
(1 |
) |
|
|
(28 |
) |
Amortization of Unrecognized Net Loss |
|
|
12 |
|
|
|
|
|
|
|
12 |
|
|
|
13 |
|
|
|
|
|
|
|
13 |
|
|
|
|
Total Net Periodic Benefit Cost |
|
$ |
17 |
|
|
$ |
1 |
|
|
$ |
18 |
|
|
$ |
16 |
|
|
$ |
1 |
|
|
$ |
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended Feb. 28, 2007 |
|
Six Months Ended Feb. 28, 2006 |
Pension Benefits |
|
|
|
|
|
Outside the |
|
|
|
|
|
|
|
|
|
Outside the |
|
|
(Dollars in millions) |
|
U.S. |
|
U.S. |
|
Total |
|
U.S. |
|
U.S. |
|
Total |
|
|
|
Service Cost for Benefits Earned During the
Period |
|
$ |
20 |
|
|
$ |
2 |
|
|
$ |
22 |
|
|
$ |
19 |
|
|
$ |
2 |
|
|
$ |
21 |
|
Interest Cost on Benefit Obligation |
|
|
53 |
|
|
|
6 |
|
|
|
59 |
|
|
|
46 |
|
|
|
2 |
|
|
|
48 |
|
Assumed Return on Plan Assets |
|
|
(62 |
) |
|
|
(7 |
) |
|
|
(69 |
) |
|
|
(58 |
) |
|
|
(2 |
) |
|
|
(60 |
) |
Amortization of Unrecognized Net Loss |
|
|
23 |
|
|
|
1 |
|
|
|
24 |
|
|
|
28 |
|
|
|
|
|
|
|
28 |
|
|
|
|
Total Net Periodic Benefit Cost |
|
$ |
34 |
|
|
$ |
2 |
|
|
$ |
36 |
|
|
$ |
35 |
|
|
$ |
2 |
|
|
$ |
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care and Other Postretirement Benefits |
|
Three Months Ended Feb. 28, |
|
Six Months Ended Feb. 28, |
(Dollars in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
Service Cost for Benefits Earned During the
Period |
|
$ |
3 |
|
|
$ |
3 |
|
|
$ |
6 |
|
|
$ |
7 |
|
Interest Cost on Benefit Obligation |
|
|
5 |
|
|
|
5 |
|
|
|
10 |
|
|
|
9 |
|
Amortization of Unrecognized Net Loss (Gain) |
|
|
(3 |
) |
|
|
2 |
|
|
|
(6 |
) |
|
|
3 |
|
|
|
|
Total Net Periodic Benefit Cost |
|
$ |
5 |
|
|
$ |
10 |
|
|
$ |
10 |
|
|
$ |
19 |
|
|
|
|
Monsanto contributed $60 million to its U.S. qualified plan and $1 million to plans outside
the United States in both the first half of 2007 and 2006. As of Feb. 28, 2007, management expects
to make additional contributions of approximately $2 million to the companys pension plans outside
the United States in fiscal year 2007.
12
|
|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
(continued)
NOTE
10. STOCK-BASED COMPENSATION PLANS
On Sept. 1, 2005, Monsanto adopted SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R),
which requires the measurement and recognition of compensation expense for all share-based payment
awards made to employees and directors based on estimated fair values. The following table shows
total stock-based compensation expense included in the Statements of Consolidated Operations for
the three and six months ended Feb. 28, 2007, and Feb. 28, 2006. Stock-based compensation cost
capitalized in inventories was $3 million as of Feb. 28, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Feb. 28, |
|
Six Months Ended Feb. 28, |
(Dollars in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
Cost of Goods Sold |
|
$ |
2 |
|
|
$ |
1 |
|
|
$ |
4 |
|
|
$ |
2 |
|
Selling, General and Administrative
Expenses |
|
|
12 |
|
|
|
16 |
|
|
|
25 |
|
|
|
26 |
|
Research and Development Expenses |
|
|
3 |
|
|
|
4 |
|
|
|
6 |
|
|
|
6 |
|
|
|
|
Pre-Tax Stock-Based Compensation Expense |
|
|
17 |
|
|
|
21 |
|
|
|
35 |
|
|
|
34 |
|
Income Tax Benefit |
|
|
(6 |
) |
|
|
(7 |
) |
|
|
(12 |
) |
|
|
(12 |
) |
|
|
|
Net Stock-Based Compensation Expense |
|
$ |
11 |
|
|
$ |
14 |
|
|
$ |
23 |
|
|
$ |
22 |
|
|
|
|
Upon adoption of SFAS 123R, Monsanto began estimating the value of employee stock options on
the date of grant using a lattice-binomial model. Prior to adoption of SFAS 123R, the value of
employee stock options was estimated on the date of grant using the Black-Scholes model, for the
disclosures of pro forma financial information required under SFAS No. 123, Accounting for
Stock-Based Compensation.
During the six months ended Feb. 28, 2007, Monsanto granted 4,288,800 stock options, 83,500 shares
of restricted stock and 170,260 restricted stock units to employees under the Monsanto Company
Long-Term Incentive Plan, as amended. In addition, 19,471 shares of deferred stock and 1,557 shares
of restricted stock were granted to directors under the Monsanto Non-Employee Director Equity
Incentive Compensation Plan (Director Plan).
Pre-tax unrecognized compensation expense for stock options, net of estimated forfeitures, was $66
million as of Feb. 28, 2007, and will be recognized as expense over a weighted-average period of
2.1 years. The weighted-average grant-date fair value of non-qualified stock options granted during
the six months ended Feb. 28, 2007, was $13.59 per share.
The weighted-average grant-date fair value of restricted stock and restricted stock units granted
during the six months ended Feb. 28, 2007, was $50.02 and $47.11, respectively, per share. Pre-tax
unrecognized compensation expense, net of estimated forfeitures, for nonvested restricted stock and
restricted stock units was $5 million and $12 million, respectively, as of Feb. 28, 2007, which
will be recognized as expense over the weighted-average remaining requisite service periods. The
weighted-average remaining requisite service periods for nonvested restricted stock and restricted
stock units were 2.5 years and 2.3 years, respectively, as of Feb. 28, 2007. The weighted-average
grant-date fair value of directors deferred stock granted during the six months ended Feb. 28,
2007, was $46.92 per share. Pre-tax unrecognized compensation expense for awards granted under the
Director Plan was less than $1 million as of Feb. 28, 2007, and will be recognized as expense over
a weighted-average period of 1 year.
13
|
|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
(continued)
NOTE 11. COMPREHENSIVE INCOME
Comprehensive income includes all nonshareowner changes in equity and consists of net income,
foreign currency translation adjustments, gains and losses on the foreign currency hedge of the
companys net investment in a foreign subsidiary, net unrealized gains and losses on
available-for-sale securities, additional minimum pension liability adjustments, and net
accumulated derivative gains or losses on cash flow hedges not yet realized. Information regarding
comprehensive income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Feb. 28, |
|
Six Months Ended Feb. 28, |
(Dollars in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
Comprehensive Income |
|
$ |
591 |
|
|
$ |
513 |
|
|
$ |
733 |
|
|
$ |
601 |
|
|
|
|
The components of accumulated other comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of Feb. 28, |
|
As of Aug. 31, |
(Dollars in millions) |
|
2007 |
|
|
2006 |
|
|
|
|
Accumulated Foreign Currency Translations |
|
$ |
(342 |
) |
|
$ |
(402 |
) |
Net Unrealized Gains on Investments, Net of Taxes |
|
|
14 |
|
|
|
18 |
|
Net Accumulated Derivative Gain (Loss), Net of
Taxes |
|
|
14 |
|
|
|
(28 |
) |
Minimum Pension Liability, Net of Taxes |
|
|
(209 |
) |
|
|
(211 |
) |
|
|
|
Accumulated Other Comprehensive Loss |
|
$ |
(523 |
) |
|
$ |
(623 |
) |
|
|
|
In February 2007, Monsanto made a donation of long-term equity securities which resulted in a
realized gain of $17 million in the second quarter.
NOTE 12. EARNINGS PER SHARE
Basic earnings per share (EPS) was computed using the weighted-average number of common shares
outstanding during the period shown in the table below. Diluted EPS was computed taking into
account the effect of dilutive potential common shares, as shown in the table below. Potential
common shares consist primarily of stock options using the treasury stock method and are excluded
if their effect is antidilutive. Approximately 4.2 million stock options were excluded from the
computations of dilutive potential common shares for the three months and six months ended Feb. 28,
2007, and 0.2 million stock options were excluded from the computations for the three months and
six months ended Feb. 28, 2006. Of those antidilutive options, less than 0.1 million stock options
were excluded from the computations of dilutive potential common shares for the three months and
six months ended Feb. 28, 2007, and Feb. 28, 2006, as their exercise prices were greater than the
average market price of common shares for the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Feb. 28, |
|
Six Months Ended Feb. 28, |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
Weighted-Average Number of Common
Shares |
|
|
543.6 |
|
|
|
539.1 |
|
|
|
543.4 |
|
|
|
538.0 |
|
Dilutive Potential Common Shares |
|
|
10.7 |
|
|
|
11.4 |
|
|
|
10.6 |
|
|
|
11.5 |
|
|
|
|
14
|
|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
(continued)
NOTE
13. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended Feb. 28, |
(Dollars in millions) |
|
2007 |
|
|
2006 |
|
|
Interest |
|
$ |
54 |
|
|
$ |
59 |
|
Taxes |
|
|
91 |
|
|
|
73 |
|
|
During the first half of fiscal 2007 and 2006, the company recorded the following noncash
investing and financing transactions:
|
|
|
In second quarter 2007, intangible assets and a liability in the amount of $15 million
was recorded as a result of minimum payment provisions under a license agreement. See Note
6 Goodwill and Other Intangible Assets for further discussion of the agreement. |
|
|
|
|
In October 2005, the board of directors authorized the purchase of up to $800 million of
the companys common stock over a four-year period. In the first half of fiscal 2007, the
company paid $6 million for shares accrued at Aug. 31, 2006, and acquired an additional 1.4 million shares for $65 million. In the first half of fiscal 2006, the company acquired 0.4
million shares for $30 million, which was included in accrued liabilities as of Feb. 28,
2006. Through Feb. 28, 2007, the company had acquired 4.2 million shares for $185 million. |
|
|
|
|
In the first half of fiscal 2007 and 2006, the company recognized noncash transactions
related to acquisitions. See Note 6 Goodwill and Other Intangible Assets for details of
fiscal 2007 adjustments to goodwill. |
|
|
|
|
In second quarter 2007 and 2006, the board of directors declared a dividend which was
payable in third quarter 2007 and 2006, respectively. As of Feb. 28, 2007, and 2006, a
dividend payable of $69 million and $54 million, respectively, was recorded. |
|
|
|
|
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 under a license agreement
with the Regents of the University of California. |
NOTE 14. COMMITMENTS AND CONTINGENCIES
Litigation and Indemnification: Monsanto is involved in various legal proceedings that arise in the
ordinary course of its business, as well as proceedings that management has considered to be
material under SEC regulations. These include proceedings to which Monsanto is a party in its own
name, proceedings to which Pharmacia is a party but that Monsanto manages and for which Monsanto is
responsible, and proceedings that Monsanto is managing related to Solutias Assumed Liabilities
(defined below). Some of the lawsuits seek damages in very large amounts, or seek to restrict the
companys business activities. Information with respect to these lawsuits appears in Part II Item
8 Note 22 Commitments and Contingencies and Part I Item 3 Legal Proceedings in
Monsantos Report on Form 10-K for the fiscal year ended Aug. 31, 2006, in Part I Item 1 Note
13 Commitments and Contingencies and Part II Item 1 Legal Proceedings in Monsantos
Report on Form 10-Q for the quarterly period ended Nov. 30, 2006, and in this report. Monsanto
believes that it has meritorious legal arguments and will continue to represent its interests
vigorously in all of the proceedings that it is defending or prosecuting. While the ultimate
liabilities resulting from such proceedings may be significant to profitability in the period
recognized, management does not anticipate they will have a material adverse effect on Monsantos
consolidated financial position or liquidity, excluding liabilities relating to Solutia.
As described in Monsantos Report on Form 10-K for the fiscal year ended Aug. 31, 2006, and in
Monsantos Report on Form 10-Q for the quarterly period ended Nov. 30, 2006, on June 23, 2004, two
former employees of Monsanto and Pharmacia filed a purported class action lawsuit in the U.S.
District Court for the Southern District of Illinois against
15
|
|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
(continued)
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. A class certification hearing is
scheduled for July 12, 2007. There is no trial setting for this matter.
Solutia Inc.: The following discussion provides new and updated information regarding proceedings
related to Solutia Inc. Pursuant to the Sept. 1, 2000, Separation Agreement between Monsanto and
Pharmacia, as amended (Separation Agreement), Monsanto was required to indemnify Pharmacia for
liabilities that Solutia assumed from Pharmacia under a Distribution Agreement entered into between
those companies in connection with the spinoff of Solutia on Sept. 1, 1997, as amended
(Distribution Agreement), to the extent that Solutia fails to pay, perform or discharge those
liabilities. Those liabilities are referred to as Solutias Assumed Liabilities. Solutias
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.
Following is an update and description of certain of the proceedings related to Solutias
bankruptcy:
|
|
|
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 June 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 Solutias spinoff, and Solutias indemnity
obligations to Pharmacia and Monsanto are unduly burdensome. The Complaint and Objection to
Claim seeks, among other things, to: (i) recharacterize Monsantos and Pharmacias 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 Pharmacias and Monsantos 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 Solutias 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. The Equity Committee, Monsanto and
Pharmacia have agreed to stay this litigation, which stay remains in force and effect,
subject to any partys right to issue a termination notice. |
|
|
|
|
On Feb. 14, 2006, Solutia filed its Plan of Reorganization (Plan) and accompanying
Disclosure Statement (Disclosure Statement) with the Bankruptcy Court. Monsantos
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 Pharmacias chemical business that occurred prior to
Sept. 1, 1997; (iii) accept financial responsibility for environmental remediation
obligations at sites relating to Pharmacias chemical business which Solutia never owned or
operated; and (iv) share |
16
|
|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
(continued)
|
|
|
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 Solutias Chapter 11 case, and Solutia would pay the next $325 million, if
needed, after which Monsanto and Solutia would share responsibility for costs equally.
However, because of the length of Solutias bankruptcy proceeding, Monsanto has already
spent $63 million for offsite environmental remediation and related legal costs in Anniston,
Alabama, and Sauget, Illinois, as of Feb. 28, 2007. Monsanto plans to either assert claims
against Solutia for these amounts, receive reimbursements for remediation costs in excess of
$50 million from Solutia consistent with the Plan, or otherwise resolve these claims through
the reorganization process. The Plan provides for a comprehensive retiree settlement and
includes a release for Monsanto and Pharmacia from certain legacy liabilities associated
with Pharmacias 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 Monsantos
contributions described in the Plan, the resolution of Monsantos claims in Solutias
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, Monsantos equity interest in Reorganized Solutia could range
from approximately 45 percent to 49 percent, based upon an estimated range of unsecured
claims against Solutia. |
A charge in the amount of $284 million (the Solutia-related charge or the charge) was recorded
in Monsantos first quarter fiscal 2005 results. As of Feb. 28, 2007, $195 million was recorded in
the Statement of Consolidated Financial Position ($52 million in current liabilities and $143
million in the long-term portion of the Solutia-related reserve).
Monsanto believes that the Solutia-related charge represents the discounted cost that Monsanto
would expect to incur in connection with these litigation and environmental matters. However,
actual costs to Monsanto may differ materially from this estimate. Monsanto expects to pay for
these potential liabilities over time as the various legal proceedings are resolved and remediation
is performed at the various environmental sites. In addition, the charge may not reflect all
potential liabilities that Monsanto may incur in connection with Solutias bankruptcy. Litigation
or environmental matters that are not reflected in the charge may arise in the future, and Monsanto
may also manage, settle, or pay judgments or damages with respect to such matters in order to
mitigate contingent potential liability and protect Pharmacia and Monsanto, if Solutia refuses to
do so.
The charge does not reflect any insurance reimbursements, any recoveries Monsanto might receive
through the bankruptcy process, or any recoveries Monsanto might receive through contribution
actions that it is pursuing on Pharmacias behalf with regard to the Anniston, Alabama, and Sauget,
Illinois, sites. Receivables of $30 million were recorded as of Feb. 28, 2007 ($27 million was
recorded in miscellaneous receivables and $3 million was recorded in other assets), for the
anticipated insurance reimbursement of a portion of Monsantos settlement payments for certain
litigation related to Anniston, Alabama. Monsanto expects these receivables to be paid over three
years, in quarterly installments, which began in March 2005. Monsanto has received net insurance
proceeds of $129 million.
In addition to the Solutia-related charge, Monsanto has incurred legal and other costs related to
the Chapter 11 proceeding and its Solutia-related indemnification obligations to Pharmacia. These
costs, along with excess amounts for the Sauget and Anniston remediation described above, 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 Solutias Assumed Liabilities or Solutia-related expenses is uncertain until
the outcome of all matters in the Chapter 11 proceeding are resolved.
Solutia Litigation Obligations: Included in the Solutia-related charge are amounts related to
certain of Solutias 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.
17
|
|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
(continued)
As described in Monsantos Report on Form 10-K for the fiscal year ended Aug. 31, 2006, 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. On Dec. 15, 2006, a companion class action case, Tyson et al. v. Monsanto Company,
et al., was filed in the Kanawha County, West Virginia, state court alleging personal injury from
dioxin exposure. As indicated above, the previously filed cases seek relief for medical monitoring
and property damage. Monsanto has also accepted the tender of this case from Akzo Nobel and the
Flexsys group of defendants.
Solutia Environmental Obligations: Included in the Solutia-related charge are amounts related to
certain of Solutias environmental liabilities, particularly expenses for environmental remediation
of sites Solutia never owned or operated and sites beyond the property lines of Solutias current
or former operations. Monsantos Report on Form 10-K for the fiscal year ended Aug. 31, 2006,
describes the significant environmental matters reflected in the Solutia-related charge.
Guarantees: Disclosure regarding the guarantees Monsanto provides for certain customer loans in the
United States, Brazil, Europe and Argentina can be found in Note 4 Customer Financing Programs
of this Form 10-Q. Except as described in that note, there have been no significant changes to
guarantees made by Monsanto since Aug. 31, 2006. Disclosures regarding these guarantees made by
Monsanto can be found in Note 22 Commitments and Contingencies of the notes to the consolidated
financial statements contained in Monsantos Report on Form 10-K for the fiscal year ended Aug. 31,
2006. Information regarding Monsantos indemnification obligations to Pharmacia under the
Separation Agreement relating to Solutias Assumed Liabilities can be found above.
18
|
|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
(continued)
NOTE 15. SEGMENT INFORMATION
Operating segments are organized primarily by similarity of products and aggregated into two
reportable segments: Seeds and Genomics, and Agricultural Productivity. The Seeds and Genomics
segment consists of the global seeds and related traits businesses and biotechnology platforms. The
Agricultural Productivity segment consists of the crop protection products, animal agriculture
businesses and lawn-and-garden herbicide products. EBIT is defined as earnings (loss) before
interest and taxes and is the primary operating performance measure for the two business segments.
EBIT is useful to management in demonstrating the operational profitability of the segments by
excluding interest and taxes, which are generally accounted for across the entire company on a
consolidated basis. Sales between segments were not significant. Certain selling, general and
administrative expenses are allocated between segments primarily by the ratio of segment sales to
total Monsanto sales, consistent with the companys historical practice. Based on the Seeds and
Genomics segments increasing contribution to total Monsanto operations, the allocation percentages
were changed at the beginning of fiscal year 2007. Data for the Seeds and Genomics and Agricultural
Productivity reportable segments, as well as for Monsantos significant operating segments is
presented in the table that follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Feb. 28, |
|
Six Months Ended Feb. 28, |
(Dollars in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn seed and traits |
|
$ |
1,192 |
|
|
$ |
811 |
|
|
$ |
1,552 |
|
|
$ |
1,078 |
|
Soybean seed and traits |
|
|
373 |
|
|
|
449 |
|
|
|
543 |
|
|
|
622 |
|
Vegetable and fruit seed |
|
|
174 |
|
|
|
148 |
|
|
|
274 |
|
|
|
273 |
|
All other crops seeds and traits |
|
|
98 |
|
|
|
97 |
|
|
|
148 |
|
|
|
188 |
|
|
|
|
Total Seeds and Genomics |
|
$ |
1,837 |
|
|
$ |
1,505 |
|
|
$ |
2,517 |
|
|
$ |
2,161 |
|
|
|
|
ROUNDUP and other glyphosate-based herbicides |
|
$ |
530 |
|
|
$ |
427 |
|
|
$ |
1,179 |
|
|
$ |
976 |
|
All other agricultural productivity products |
|
|
249 |
|
|
|
268 |
|
|
|
459 |
|
|
|
468 |
|
|
|
|
Total Agricultural Productivity |
|
$ |
779 |
|
|
$ |
695 |
|
|
$ |
1,638 |
|
|
$ |
1,444 |
|
|
|
|
Total |
|
$ |
2,616 |
|
|
$ |
2,200 |
|
|
$ |
4,155 |
|
|
$ |
3,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seeds and Genomics |
|
$ |
744 |
|
|
$ |
615 |
|
|
$ |
745 |
|
|
$ |
634 |
|
Agricultural Productivity |
|
|
78 |
|
|
|
40 |
|
|
|
181 |
|
|
|
133 |
|
|
|
|
Total |
|
$ |
822 |
|
|
$ |
655 |
|
|
$ |
926 |
|
|
$ |
767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seeds and Genomics |
|
$ |
90 |
|
|
$ |
80 |
|
|
$ |
176 |
|
|
$ |
169 |
|
Agricultural Productivity |
|
|
39 |
|
|
|
46 |
|
|
|
81 |
|
|
|
90 |
|
|
|
|
Total |
|
$ |
129 |
|
|
$ |
126 |
|
|
$ |
257 |
|
|
$ |
259 |
|
|
|
|
(1) |
|
EBIT is defined as earnings (loss) before interest and taxes; see the following
table for reconciliation. Earnings (loss) is intended to mean net income (loss) as presented
in the Statements of Consolidated Operations under generally accepted accounting principles.
EBIT is the primary operating performance measure for the two business segments. |
A reconciliation of EBIT to net income for each period follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Feb. 28, |
|
Six Months Ended Feb. 28, |
(Dollars in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
EBIT(1) |
|
$ |
822 |
|
|
$ |
655 |
|
|
$ |
926 |
|
|
$ |
767 |
|
Interest Expense Net |
|
|
3 |
|
|
|
20 |
|
|
|
6 |
|
|
|
38 |
|
Income Tax
Provision(2) |
|
|
276 |
|
|
|
195 |
|
|
|
287 |
|
|
|
230 |
|
|
|
|
Net Income |
|
$ |
543 |
|
|
$ |
440 |
|
|
$ |
633 |
|
|
$ |
499 |
|
|
|
|
|
|
|
(1) |
|
Includes pre-tax minority interest expense (income). |
|
(2) |
|
Includes the income tax provision from minority interest expense (income). |
19
|
|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
(continued)
NOTE 16. DISCONTINUED OPERATIONS
Environmental technologies businesses: In 2005, Monsanto committed to a plan to sell Enviro-Chem
Systems, Inc. (Enviro-Chem or the environmental technologies businesses) that met the held for
sale criteria under SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144). The environmental technologies businesses provided engineering, procurement and construction
management services, and sold proprietary equipment and process technologies. The environmental
technologies businesses were previously reported as part of the Agricultural Productivity segment.
The company determined that these businesses were no longer consistent with its strategic business
goals. In August 2005, the company completed the sale of substantially all of Enviro-Chem to a new
company formed by the management of the businesses and an outside investor. As a result, the
financial data for these businesses have been presented as discontinued operations. The financial
statements have been prepared in compliance with the provisions of SFAS 144. During the three
months and six months ended Feb. 28, 2007, and Feb. 28, 2006, the income statement results of these
businesses were less than $1 million, and thus there was no impact on the Statements of
Consolidated Operations.
In April 2001, Enviro-Chem entered into an agreement with a third party related to the engineering,
design and construction of a power generation plant in Oregon. As of the date of the divestiture,
the receivable related to this power plant and related fixed assets had not been collected. The
title to the receivable was transferred to the buyer of Enviro-Chem, and the buyer entered into an
agreement with Monsanto in August 2005 to remit the proceeds of this receivable to Monsanto upon
repayment by the third party. As such, the receivable that the third party owed to Enviro-Chem has
been recorded as an asset of discontinued operations as of Feb. 28, 2007, and Aug. 31, 2006. As of
Feb. 28, 2007, and Aug. 31, 2006, the miscellaneous receivable of $6 million was recorded as an
asset of discontinued operations and $2 million of deferred taxes on the miscellaneous receivable
was recorded in liabilities of discontinued operations. Monsanto expects that it will collect the
outstanding receivable balance in fiscal year 2007.
NOTE 17. SUBSEQUENT EVENTS
In March 2007, Monsanto acquired 0.6 million shares for $30 million under the share repurchase plan
authorized by the board of directors in October 2005.
20
|
|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Background
Monsanto Company, along with its subsidiaries, is a leading global provider of agricultural
products for farmers. Our seeds, biotechnology trait products, and herbicides provide farmers with
solutions that improve productivity, reduce the costs of farming, and produce better foods for
consumers and better feed for animals.
We manage our business in two segments: Seeds and Genomics, and Agricultural Productivity. Through
the Seeds and Genomics segment, we produce leading seed brands, including DEKALB, ASGROW, SEMINIS
and STONEVILLE, and we develop biotechnology traits that assist farmers in controlling insects and
weeds. We also provide other seed companies with genetic material and biotechnology traits for
their seed brands. Through the Agricultural Productivity segment, we manufacture ROUNDUP brand
herbicides and other herbicides and provide lawn-and-garden herbicide products for the residential
market and animal agricultural products focused on improving dairy cow productivity and swine
genetics.
On June 27, 2006, the board of directors approved a two-for-one split of our common shares. The
additional shares resulting from the stock split were paid on July 28, 2006, to shareowners of
record on July 7, 2006. All share and per share information herein reflect this stock split.
Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should
be read in conjunction with Monsantos consolidated financial statements and the accompanying
notes. This Report on Form 10-Q should also be read in conjunction with Monsantos Report on Form
10-K for the fiscal year ended Aug. 31, 2006, and Monsantos Report on Form 10-Q for the quarterly
period ended Nov. 30, 2006. Financial information for the first six months of fiscal year 2007
should not be annualized because of the seasonality of our business. The notes to the consolidated
financial statements referred to throughout this MD&A are included in Part I Item 1 Financial
Statements of this Report on Form 10-Q. Unless otherwise indicated, Monsanto, the company,
we, our and us are used interchangeably to refer to Monsanto Company or to Monsanto Company
and its consolidated subsidiaries, as appropriate to the context. Unless otherwise indicated,
earnings per share and per share mean diluted earnings per share. Unless otherwise noted, all
amounts and analyses are based on continuing operations. Unless otherwise indicated, trademarks
owned or licensed by Monsanto or its subsidiaries are shown in all capital letters. Unless
otherwise indicated, references to ROUNDUP herbicides mean ROUNDUP branded herbicides, excluding
all lawn-and-garden herbicides, and references to ROUNDUP and other glyphosate-based herbicides
exclude all lawn-and-garden herbicides.
Non-GAAP Financial Measures
MD&A includes financial information prepared in accordance with U.S. generally accepted accounting
principles (GAAP), as well as two other financial measures, EBIT and free cash flow, that are
considered non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical
measure of a companys financial performance, financial position or cash flows that exclude (or
include) amounts that are included in (or excluded from) the most directly comparable measure
calculated and presented in accordance with GAAP. The presentation of EBIT and free cash flow
information is intended to supplement investors understanding of our operating performance and
liquidity. Our EBIT and free cash flow measures may not be comparable to other companies EBIT and
free cash flow measures. Furthermore, these measures are not intended to replace net income, cash
flows, financial position, or comprehensive income, as determined in accordance with U.S. GAAP.
EBIT is defined as earnings (loss) before interest and taxes. Earnings is intended to mean net
income as presented in the Statements of Consolidated Operations under GAAP. EBIT is the primary
operating performance measure for our two business segments. We believe that EBIT is useful to
investors and management to demonstrate the operational profitability of our segments by excluding
interest and taxes, which are generally accounted for across the entire company on a consolidated
basis. EBIT is also one of the measures used by Monsanto management to determine resource
allocations within the company. See Note 15 Segment Information for a reconciliation of EBIT to
net income for the three and six months ended Feb. 28, 2007, and Feb. 28, 2006.
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
21
|
|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
believe that free cash flow is useful to investors and management as a measure of the ability of
our business to generate cash. This cash can be used to meet business needs and obligations, to
reinvest in the company for future growth, or to return to our shareowners through dividend
payments or share repurchases. Free cash flow is also used by management as one of the performance
measures in determining incentive compensation. See the Financial Condition, Liquidity, and
Capital Resources Cash Flow section of MD&A for a reconciliation of free cash flow to net cash
provided by operating activities and net cash required by investing activities on the Statements of
Consolidated Cash Flows.
Executive Summary
Consolidated Operating Results Net sales increased $416 million in the three-month comparison and
$550 million in the six-month comparison. In second quarter 2007, net sales improved as a result of
increased sales of U.S. corn seed and traits and sales of ROUNDUP and other glyphosate-based
herbicides in Brazil and Europe, which more than offset lower sales of U.S. soybean seed and
traits. In first half 2007, net sales increased as a result of increased sales of U.S. corn seed
and traits and ROUNDUP sales in Brazil, the United States and Argentina, which were partially
offset by a decline in soybean seed and trait sales in the United States and cotton trait sales in
Australia. Net income in second quarter 2007 was $0.98 per share, compared with $0.80 per share in
second quarter 2006. Net income in the first half of 2007 was $1.14 per share, compared with $0.91
per share in the prior-year comparable period.
Financial Condition, Liquidity, and Capital Resources In first half 2007, net cash provided by
operations was $520 million, compared with $331 million in the prior-year first half. This increase
was primarily due to improved earnings and a favorable change in accounts payable and other accrued
liabilities. Net cash required by investing activities was $230 million in first half 2007,
compared with $466 million in first half 2006, primarily because of lower investments in technology
and business acquisitions. As a result, free cash flow improved to $290 million in the first half
of 2007, compared with a use of $135 million in the first half of 2006. For a more detailed
discussion of the factors affecting the free cash flow comparison, see the Cash Flow section of
the Financial Condition, Liquidity, and Capital Resources section in this MD&A.
Outlook We aim to continue to improve our products in order to maintain market leadership and to
support near-term performance. We are focused on applying innovation and technology to make our
farmer customers more productive and profitable by protecting yields and improving the ways they
can produce food, fiber and feed. We use the tools of modern biology to make seeds easier to grow,
to allow farmers to do more with fewer resources, and to produce healthier foods for consumers. Our
current research-and-development (R&D) strategy and commercial priorities are focused on bringing
our farmer customers second-generation traits, on delivering multiple solutions in one seed
(stacking), and on developing new pipeline products. Our capabilities in biotechnology and
breeding research are generating a rich product pipeline that is expected to drive long-term
growth. The viability of our product pipeline depends in part on the speed of regulatory approvals
globally, and on continued patent and legal rights to offer our products.
We aim to improve and to grow the Seminis business by applying our molecular breeding and marker
capabilities to its library of vegetable and fruit germplasm. Further, our pending purchase of the
Delta and Pine Land Company, which is subject to antitrust clearance and customary closing
conditions, could expand our cotton breeding operation. In fiscal year 2007, we will continue to
focus on accelerating the potential growth of these new businesses and executing our business plan.
ROUNDUP herbicides remain the market leader. We are focused on managing the costs associated with
our agricultural chemistry business as that sector matures globally.
We are required to indemnify Pharmacia for Solutias Assumed Liabilities (defined in Note 14), 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
Solutias Assumed Liabilities. In 2005, we recorded a pre-tax charge of $284 million for estimated
litigation and environmental costs we expect to incur in connection with Solutias bankruptcy. As
of Feb. 28, 2007, the remaining Solutia-related reserve was $195 million. We believe that the
reserve represents the discounted cost that we expect to incur in connection with these litigation
and environmental matters. However, our actual costs may differ materially from this estimate. In
addition, the reserve may not reflect all potential liabilities that we may incur in connection
with Solutias bankruptcy and does not reflect any insurance reimbursements or other recoveries
that we might receive. We also continue to incur legal and other expenses associated with the
bankruptcy proceedings. The degree to which we may ultimately be responsible for the particular
matters reflected in the reserve or other of Solutias Assumed Liabilities or Solutia-related
expenses is uncertain until the outcome of all matters in the Chapter 11 proceeding are resolved.
Additional information about Solutia and other litigation matters and the related risks to our
business may be found in Note 14. See the Outlook section of MD&A for a more detailed discussion
of some of the opportunities and risks we have identified for our
22
|
|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
business. For additional information related to the outlook for Monsanto, see Caution Regarding
Forward-Looking Statements below and Part II Item 1A Risk Factors of this Form 10-Q.
RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Feb. 28, |
|
|
Six Months Ended Feb. 28, |
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
|
|
|
Net Sales |
|
$ |
2,616 |
|
|
$ |
2,200 |
|
|
|
19 |
% |
|
$ |
4,155 |
|
|
$ |
3,605 |
|
|
|
15 |
% |
Gross Profit |
|
|
1,450 |
|
|
|
1,240 |
|
|
|
17 |
% |
|
|
2,130 |
|
|
|
1,874 |
|
|
|
14 |
% |
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
433 |
|
|
|
393 |
|
|
|
10 |
% |
|
|
817 |
|
|
|
743 |
|
|
|
10 |
% |
Research and development expenses |
|
|
190 |
|
|
|
173 |
|
|
|
10 |
% |
|
|
372 |
|
|
|
341 |
|
|
|
9 |
% |
|
|
|
Total Operating Expenses |
|
|
623 |
|
|
|
566 |
|
|
|
10 |
% |
|
|
1,189 |
|
|
|
1,084 |
|
|
|
10 |
% |
|
|
|
|
Income from Operations |
|
|
827 |
|
|
|
674 |
|
|
|
23 |
% |
|
|
941 |
|
|
|
790 |
|
|
|
19 |
% |
Interest expense |
|
|
34 |
|
|
|
33 |
|
|
|
3 |
% |
|
|
67 |
|
|
|
65 |
|
|
|
3 |
% |
Interest income |
|
|
(31 |
) |
|
|
(13 |
) |
|
|
138 |
% |
|
|
(61 |
) |
|
|
(27 |
) |
|
|
126 |
% |
Solutia-related
expenses (see Note 14) |
|
|
9 |
|
|
|
7 |
|
|
|
29 |
% |
|
|
19 |
|
|
|
13 |
|
|
|
46 |
% |
Other expense (income) net |
|
|
(3 |
) |
|
|
11 |
|
|
|
(127 |
)% |
|
|
1 |
|
|
|
9 |
|
|
|
(89 |
)% |
|
|
|
|
Income Before Income Taxes and Minority Interest |
|
|
818 |
|
|
|
636 |
|
|
|
29 |
% |
|
|
915 |
|
|
|
730 |
|
|
|
25 |
% |
Income tax provision |
|
|
275 |
|
|
|
195 |
|
|
|
41 |
% |
|
|
285 |
|
|
|
230 |
|
|
|
24 |
% |
Minority interest expense (income) |
|
|
|
|
|
|
1 |
|
|
|
(100 |
)% |
|
|
(3 |
) |
|
|
1 |
|
|
|
(400 |
)% |
|
|
|
|
Net Income |
|
$ |
543 |
|
|
$ |
440 |
|
|
|
23 |
% |
|
$ |
633 |
|
|
$ |
499 |
|
|
|
27 |
% |
|
|
|
|
Diluted Earnings per Share |
|
$ |
0.98 |
|
|
$ |
0.80 |
|
|
|
23 |
% |
|
$ |
1.14 |
|
|
$ |
0.91 |
|
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate |
|
|
34 |
% |
|
|
31 |
% |
|
|
|
|
|
|
31 |
% |
|
|
32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison as a Percent of Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
55 |
% |
|
|
56 |
% |
|
|
|
|
|
|
51 |
% |
|
|
52 |
% |
|
|
|
|
Selling, general and administrative expenses |
|
|
17 |
% |
|
|
18 |
% |
|
|
|
|
|
|
20 |
% |
|
|
21 |
% |
|
|
|
|
Research and development expenses |
|
|
7 |
% |
|
|
8 |
% |
|
|
|
|
|
|
9 |
% |
|
|
9 |
% |
|
|
|
|
Total operating expenses |
|
|
24 |
% |
|
|
26 |
% |
|
|
|
|
|
|
29 |
% |
|
|
30 |
% |
|
|
|
|
Income before income taxes and minority interest |
|
|
31 |
% |
|
|
29 |
% |
|
|
|
|
|
|
22 |
% |
|
|
20 |
% |
|
|
|
|
Net income |
|
|
21 |
% |
|
|
20 |
% |
|
|
|
|
|
|
15 |
% |
|
|
14 |
% |
|
|
|
|
Second Quarter Fiscal Year 2007
The following explanations discuss the significant components of our results of operations that
affected the quarter-to-quarter comparison of our second quarter income:
Net sales increased 19 percent in second quarter 2007 from the same quarter a year ago. Our Seeds
and Genomics segment net sales improved 22 percent and our Agricultural Productivity segment net
sales increased 12 percent. The following table presents the percentage changes in second quarter
2007 worldwide net sales by segment compared with the prior-year quarter, including the effect
volume, price, currency and acquisitions had on these percentage changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2007 Percentage Change in Net Sales vs. Second Quarter 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of |
|
|
|
|
Volume |
|
Price |
|
Currency |
|
Subtotal |
|
Acquisitions(1) |
|
Net Change |
|
|
|
Seeds and Genomics Segment |
|
|
10 |
% |
|
|
8 |
% |
|
|
1 |
% |
|
|
19 |
% |
|
|
3 |
% |
|
|
22 |
% |
Agricultural Productivity
Segment |
|
|
7 |
% |
|
|
2 |
% |
|
|
3 |
% |
|
|
12 |
% |
|
|
|
|
|
|
12 |
% |
Total Monsanto Company |
|
|
9 |
% |
|
|
6 |
% |
|
|
2 |
% |
|
|
17 |
% |
|
|
2 |
% |
|
|
19 |
% |
|
|
|
|
(1) |
|
See Note 3 Business Combinations and Financial Condition, Liquidity, and
Capital Resources in MD&A for details of our acquisitions in fiscal years 2007 and 2006.
Acquisitions are segregated in this presentation for one year from the acquisition date. |
For a more detailed discussion of the factors affecting the net sales comparison, see the
Seeds and Genomics Segment and the Agricultural Productivity Segment sections.
Gross profit increased 17 percent in the three-month comparison. Gross profit as a percent of net
sales (gross profit percentage) for the total company decreased 1 percentage point to 55 percent in
second quarter 2007 driven by the decline in
23
|
|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
gross profit percentage in the Seeds and Genomics
segment, which decreased 2 percentage points in the quarter-over-quarter comparison to 65 percent.
See the Seeds and Genomics Segment section of MD&A for details. Gross profit percentage for the
Agricultural Productivity segment was 33 percent for both three-month periods. See the
Agricultural Productivity
Segment section of the MD&A for a more detailed discussion of the factors affecting the
Agricultural Productivity gross profit.
Operating expenses increased 10 percent, or $57 million, in second quarter 2007 from the prior-year
comparable quarter. In the three-month comparison, selling, general and administrative (SG&A)
expenses increased 10 percent primarily because of the Seeds and Genomics business growth and
acquisitions in the United States, and research and development (R&D) expenses increased 10 percent
related to the increase in our investment in our product pipeline. Also, SG&A expenses increased
because of higher charitable contribution expense in the second quarter 2007 related to the
donation of $18 million of equity securities. As a percent of net sales, SG&A expenses decreased 1
percentage point to 17 percent, and R&D expenses decreased 1 percentage point to 7 percent in
second quarter 2007 compared to second quarter 2006.
Interest expense increased $1 million in the three-month comparison because of the addition of a
three-year term bank loan completed in July 2006.
Interest income increased $18 million in the quarter-over-quarter comparison because of interest
earned on higher average cash balances in the United States and Brazil in the second quarter 2007.
Solutia-related expenses were $9 million in second quarter 2007 compared with $7 million in second
quarter 2006. This increase was a result of an increase in the legal and other expenses associated
with the bankruptcy proceedings.
Other expense (income) net was income of $3 million in second quarter 2007, compared with expense
of $11 million in second quarter 2006. During second quarter 2007, we recorded $17 million of other
income related to the realized gain on equity securities that were donated. See discussion of this
donation in the operating expenses explanation above.
Income tax provision was $275 million in second quarter 2007, compared with $195 million in the
prior-year quarter. The effective tax rate increased to 34 percent from 31 percent in second
quarter 2006. Second quarter 2006 included a favorable adjustment of $31 million resulting from a
settlement with the Internal Revenue Service (IRS) and, to a lesser extent, favorable adjustments
related to various state income tax matters. Second quarter 2007 included a tax benefit related to
the retroactive extension of the R&D tax credit. Without these adjustments, our effective rate for
second quarter 2007 would have been lower than the 2006 rate, primarily driven by a full-year
projected benefit of the R&D tax credit in 2007.
First Half of Fiscal Year 2007
The following explanations discuss the significant components of our results of operations that
affected the six-month comparison of our first half of fiscal years 2007 and 2006 income from
continuing operations:
Net sales increased 15 percent in first half 2007 from the same period a year ago. Our Seeds and
Genomics segment net sales improved 16 percent and our Agricultural Productivity segment net sales
improved 13 percent. The following table presents the percentage changes in first half 2007
worldwide net sales by segment compared with the prior-year first half, including the effect
volume, price, currency and acquisitions had on these percentage changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Half 2007 Percentage Change in Net Sales vs. First Half 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of |
|
|
|
|
Volume |
|
Price |
|
Currency |
|
Subtotal |
|
Acquisitions(1) |
|
Net Change |
|
|
|
Seeds and Genomics Segment |
|
|
7 |
% |
|
|
7 |
% |
|
|
|
|
|
|
14 |
% |
|
|
2 |
% |
|
|
16 |
% |
Agricultural Productivity
Segment |
|
|
9 |
% |
|
|
2 |
% |
|
|
2 |
% |
|
|
13 |
% |
|
|
|
|
|
|
13 |
% |
Total Monsanto Company |
|
|
7 |
% |
|
|
5 |
% |
|
|
2 |
% |
|
|
14 |
% |
|
|
1 |
% |
|
|
15 |
% |
|
|
|
|
(1) |
|
See Note 3 Business Combinations and Financial Condition, Liquidity, and
Capital Resources in MD&A for details of our acquisitions in fiscal years 2007 and 2006.
Acquisitions are segregated in this presentation for one year from the acquisition date. |
For a more detailed discussion of the factors affecting the net sales comparison, see the
Seeds and Genomics Segment and the Agricultural Productivity Segment sections.
24
|
|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
Gross profit increased 14 percent in the six-month comparison. Gross profit percentage for the
total company decreased 1 percentage point to 51 percent in the first half of 2007 from the same
period a year ago. Gross profit percentage for the Seeds and Genomics segment decreased
1
percentage point to 64 percent in the first half comparison. See the Seeds and Genomics Segment
section of MD&A for details. Gross profit percentage declined 1 percentage point for the
Agricultural Productivity segment to 32 percent in first half 2007. See the Agricultural
Productivity Segment section of MD&A for details.
Operating expenses increased 10 percent, or $105 million, in first half 2007 from the prior-year
comparable half. In the six-month comparison, SG&A expenses increased 10 percent and R&D expenses
increased 9 percent primarily because of the Seeds and Genomics business growth and acquisitions in
the United States and the increase in our investment in our product pipeline. Also, SG&A expenses
increased because of higher charitable contribution expense in the first half of 2007 related to
the donation of $18 million of equity securities. As a percent of net sales, SG&A expenses
decreased 1 percentage point to 20 percent, and R&D expenses were 9 percent in both six-month
periods.
Interest expense increased $2 million in the six-month comparison because of the addition of a
three-year term bank loan completed in July 2006.
Interest income increased $34 million in the six-month comparison because of interest earned on
higher average cash balances in the United States and Brazil in the first half of 2007.
Solutia-related expenses were $19 million in first half 2007 compared with $13 million in first
half 2006. This increase was a result of an increase in the legal and other expenses associated
with the bankruptcy proceedings.
Other expense (income) net was $1 million in first half 2007, compared with $9 million in first
half 2006. The expense decrease was primarily related to $17 million of other income related to the
realized gain on equity securities that were donated. See discussion of this donation in the
operating expenses explanation above.
Income tax provision increased from $230 million in first half 2006 to $285 million in first half
2007, and the effective tax rate decreased from 32 percent to 31 percent, respectively, primarily
the result of the following items:
|
|
|
First half 2007 includes several discrete tax adjustments resulting in a tax benefit of
$30 million. The majority of this benefit is the result of audit settlements, including the
conclusion of an ex-U.S. audit and the resolution of various state income tax matters, and,
to a lesser extent, a benefit related to the retroactive extension of the R&D tax credit
that was enacted as part of the Tax Relief and Health Care Act of 2006 on Dec. 20, 2006. |
|
|
|
|
A tax benefit of $31 million was recorded in February 2006 as a result of the conclusion
of an audit of Pharmacia Corporation for tax years 2000 to 2002 (for which period Monsanto
was a member of Pharmacias consolidated group) by the IRS and, to a lesser extent,
favorable adjustments related to various state income tax matters. |
Without these items, our effective tax rate for the first half of 2007 would have been lower than
the 2006 rate, primarily driven by a full-year projected benefit of the R&D tax credit in 2007.
25
|
|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
SEEDS AND GENOMICS SEGMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Feb. 28, |
|
Six Months Ended Feb. 28, |
(Dollars in millions) |
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
|
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn seed and traits |
|
$ |
1,192 |
|
|
$ |
811 |
|
|
|
47 |
% |
|
$ |
1,552 |
|
|
$ |
1,078 |
|
|
|
44 |
% |
Soybean seed and traits |
|
|
373 |
|
|
|
449 |
|
|
|
(17 |
)% |
|
|
543 |
|
|
|
622 |
|
|
|
(13 |
)% |
Vegetable and fruit seed |
|
|
174 |
|
|
|
148 |
|
|
|
18 |
% |
|
|
274 |
|
|
|
273 |
|
|
|
|
|
All other crops seeds and
traits |
|
|
98 |
|
|
|
97 |
|
|
|
1 |
% |
|
|
148 |
|
|
|
188 |
|
|
|
(21 |
)% |
|
|
|
Total Net Sales |
|
$ |
1,837 |
|
|
$ |
1,505 |
|
|
|
22 |
% |
|
$ |
2,517 |
|
|
$ |
2,161 |
|
|
|
16 |
% |
|
|
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn seed and traits |
|
$ |
790 |
|
|
$ |
538 |
|
|
|
47 |
% |
|
$ |
1,013 |
|
|
$ |
691 |
|
|
|
47 |
% |
Soybean seed and traits |
|
|
256 |
|
|
|
338 |
|
|
|
(24 |
)% |
|
|
378 |
|
|
|
452 |
|
|
|
(16 |
)% |
Vegetable and fruit seed |
|
|
87 |
|
|
|
86 |
|
|
|
1 |
% |
|
|
138 |
|
|
|
149 |
|
|
|
(7 |
)% |
All other crops seeds and
traits |
|
|
62 |
|
|
|
47 |
|
|
|
32 |
% |
|
|
80 |
|
|
|
103 |
|
|
|
(22 |
)% |
|
|
|
Total Gross Profit |
|
$ |
1,195 |
|
|
$ |
1,009 |
|
|
|
18 |
% |
|
$ |
1,609 |
|
|
$ |
1,395 |
|
|
|
15 |
% |
|
|
|
EBIT(1) |
|
$ |
744 |
|
|
$ |
615 |
|
|
|
21 |
% |
|
$ |
745 |
|
|
$ |
634 |
|
|
|
18 |
% |
|
|
|
|
|
|
(1) |
|
EBIT is defined as earnings before interest and taxes. Interest and taxes are
recorded on a total company basis. We do not record these items at the segment level. See Note
15 Segment Information and the Overview Non-GAAP Financial Measures section of MD&A for
further details. |
Seeds and Genomics Financial Performance Second Quarter Fiscal Year 2007
Net sales of corn seed and traits increased 47 percent, or $381 million, in the three-month
comparison primarily because of an increase in sales of U.S. corn seed and traits. In second
quarter 2007, our corn seed and traits sales volume and sales mix improved because of higher sales
volume of branded seed and traits resulting from stronger customer demand in the United States.
Increased trait penetration and growth in stacked traits also favorably impacted our licensed and
our American Seeds, Inc. (ASI) channels in the United States. Further, net sales of ASI improved
because of revenues from recently acquired ASI subsidiaries which were not part of the companys
operations during this period last year.
Net sales of soybean seed and traits decreased 17 percent, or $76 million, in the second quarter of
2007, when compared to the second quarter of 2006 because of a decrease in sales volumes of U.S.
soybean seed and traits driven by an anticipated decrease in soybean acres in the United States.
This decline is partially offset by an improvement of ASI soybean seed and trait net sales because
of revenues from recently acquired ASI subsidiaries which were not part of the companys operations
during this period last year.
In second quarter 2007, vegetable and fruit seed net sales increased 18 percent, or $26 million, in
the quarter-over-quarter comparison because of an increase in sales volumes related to stronger
customer demand.
Gross profit percentage for this segment decreased 2 percentage points in the quarter-over-quarter
comparison to 65 percent. This decline was primarily driven by declines in the gross profit
percentage in soybean seed and traits and vegetable and fruit seed. Soybean seed and trait gross
profit percentage decreased in the second quarter 2007 primarily because of the negative impact of
lower soybean volumes on our cost of production. In addition, our soybean seed sales, which carry
lower margins than our soybean trait sales, increased as a percentage of soybean seed and trait
sales compared with the second quarter 2006. Vegetable and fruit seed gross profit percentage
decreased in second quarter 2007 primarily because of certain non-recurring items related to the
integration of Seminis in addition to inventory disposition of excess or obsolete inventory. The
decrease in vegetable and fruit seed gross profit percentage was partially offset by the effect on
cost of goods sold associated with the inventory step-up for the Seminis acquisition, which was $12
million in second quarter 2006. There was no effect from the step-up in second quarter 2007.
EBIT for the Seeds and Genomics segment increased $129 million to $744 million in second quarter
2007. The sales increases discussed in this section resulted in $186 million higher gross profit in
second quarter 2007. In the three-month comparison, increased SG&A and R&D expenses related to the
growth in the business and the increase in the investment in R&D partially offset the gross profit
improvement.
26
|
|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
Seeds and Genomics Financial Performance First Half of Fiscal Year 2007
The sales explanations provided in the Seeds and Genomics Financial Performance Second Quarter
Fiscal Year 2007 section of MD&A are also applicable for this comparison. Net sales of corn seed
and traits increased 44 percent, or $474 million, in the six-month comparison. Soybean seed and
trait net sales decreased 13 percent, or $79 million in the first half of 2007, when compared to
the first half of 2006.
All other crops seeds and traits net sales decreased 21 percent, or $40 million, in the first half
of 2007 primarily because of lower cotton trait sales volumes in Australia resulting from a decline
in cotton acres. Planted cotton acres in Australia declined approximately 54 percent in first half
2007 compared with first half 2006 because of a severe drought in certain parts of Australia in
first quarter 2007.
Gross profit percentage for this segment decreased 1 percentage point in the
period-over-period comparison to 64 percent. This decline was primarily driven by declines in the
gross profit percentage in soybean seed and traits and vegetable and fruit seeds, which were offset
by an improvement in the corn seed and trait gross profit percentage driven by increased
penetration of higher margin traits, particularly in U.S. corn. Soybean seed and trait gross profit
percentage decreased in the first half of 2007 primarily because of the impact of lower soybean
sales volumes on our cost of production. Vegetable and fruit seed gross profit percentage decreased
in the first half of 2007 primarily because of certain non-recurring items related to the
integration of Seminis in addition to inventory disposition of excess or obsolete inventory. The
decrease in vegetable and fruit seeds gross profit as a percent of sales was partially offset by
the effect on cost of goods sold associated with the inventory step-up for the Seminis acquisition,
which was $5 million in the first half of 2007 and $23 million in the first half of 2006.
EBIT for the Seeds and Genomics segment increased $111 million to $745 million in the first half of
2007. The sales increases discussed in this section resulted in $214 million higher gross profit in
the first half of 2007. In the six-month comparison, increased SG&A and R&D expenses related to the
growth in the business and the increase in the investment in R&D partially offset the gross profit
improvement.
AGRICULTURAL
PRODUCTIVITY SEGMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Feb. 28, |
|
Six Months Ended Feb. 28, |
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
|
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROUNDUP and other glyphosate-based
herbicides |
|
$ |
530 |
|
|
$ |
427 |
|
|
|
24 |
% |
|
$ |
1,179 |
|
|
$ |
976 |
|
|
|
21 |
% |
All other agricultural productivity products |
|
|
249 |
|
|
|
268 |
|
|
|
(7 |
)% |
|
|
459 |
|
|
|
468 |
|
|
|
(2 |
)% |
|
|
|
Total Net Sales |
|
$ |
779 |
|
|
$ |
695 |
|
|
|
12 |
% |
|
$ |
1,638 |
|
|
$ |
1,444 |
|
|
|
13 |
% |
|
|
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROUNDUP and other glyphosate-based
herbicides |
|
$ |
155 |
|
|
$ |
104 |
|
|
|
49 |
% |
|
$ |
349 |
|
|
$ |
286 |
|
|
|
22 |
% |
All other agricultural productivity products |
|
|
100 |
|
|
|
127 |
|
|
|
(21 |
)% |
|
|
172 |
|
|
|
193 |
|
|
|
(11 |
)% |
|
|
|
Total Gross Profit |
|
$ |
255 |
|
|
$ |
231 |
|
|
|
10 |
% |
|
$ |
521 |
|
|
$ |
479 |
|
|
|
9 |
% |
|
|
|
EBIT(1) |
|
$ |
78 |
|
|
$ |
40 |
|
|
|
95 |
% |
|
$ |
181 |
|
|
$ |
133 |
|
|
|
36 |
% |
|
|
|
|
|
|
(1) |
|
EBIT is defined as earnings before interest and taxes. Interest and taxes are
recorded on a total company basis. We do not record these items at the segment level. See Note
15 Segment Information and the Overview Non-GAAP Financial Measures section of MD&A for
further details. |
Agricultural Productivity Financial Performance Second Quarter Fiscal Year 2007
Net sales of ROUNDUP and other glyphosate-based herbicides increased 24 percent, or $103 million,
in the quarter-over-quarter comparison. Sales volumes of ROUNDUP and other glyphosate-based
herbicides increased 16 percent. We experienced net sales increases in Brazil and Europe.
ROUNDUP herbicides net sales volumes increased in Brazil because of an improvement in farmer
liquidity which increased the demand for our branded chemistry products. Farmer liquidity improved
in the quarter-over-quarter comparison primarily because of the increase in the soybean commodity
prices.
27
|
|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
Sales of ROUNDUP and other glyphosate-based herbicides increased in Europe because of the favorable
effect of the exchange rate of the European euro. Sales volumes of ROUNDUP and other
glyphosate-based herbicides increased in Europe, primarily because of a timing shift between first
and second quarters of 2006 compared with the timing of sales in 2007. In 2006, sales occurred
earlier in France because certain customers purchased ROUNDUP herbicides prior to the
implementation of an ecology tax on herbicide sales in November 2005.
Gross profit percentage for the Agricultural Productivity segment was flat at 33 percent in both
second-quarter periods. The increase in gross profit as a percent of sales for ROUNDUP and other
glyphosate-based herbicides was offset by the decline in gross profit as a percent of sales for
POSILAC and the acetanilide-based herbicides.
EBIT for the Agricultural Productivity segment increased $38 million in second quarter 2007. Gross
profit increased $24 million because of higher sales of ROUNDUP and other glyphosate-based
herbicides in the current-year quarter.
Agricultural
Productivity Financial Performance First Half of Fiscal Year
2007
Net sales of ROUNDUP and other glyphosate-based herbicides increased 21 percent, or $203 million,
in the first half of 2007. In the six-month comparison, sales volumes of ROUNDUP herbicides
increased 15 percent. ROUNDUP and other glyphosate-based herbicides net sales improved in Brazil,
the United States and Argentina.
ROUNDUP herbicides net sales volumes increased in Brazil because of an improvement in farmer
liquidity which increased the demand for our branded chemistry products. Farmer liquidity improved
in the period-over-period comparison primarily because of the increase in the soybean commodity
prices.
Sales volumes of ROUNDUP and other glyphosate-based herbicides improved in the United States
because of an increase in customer demand resulting from an expected increase in ROUNDUP READY corn
acres.
In the six-month comparison, Argentine sales volumes of ROUNDUP and other glyphosate-based
herbicides increased because of an increase in the ROUNDUP and other glyphosate-based herbicides
market driven by additional corn and soy acres and more favorable weather in the first half of
2007, when compared to the first half of 2006.
Gross profit percentage for the Agricultural Productivity segment declined 1 percentage point to 32
percent in the first half of 2007. This decline was primarily because of a decline in the net sales
price in our U.S. acetanilide-based herbicides business in the first half of 2007, when compared to
2006. Another key contributor of this decline in gross profit percentage occurred in the
lawn-and-garden business which experienced a shift in sales to lower margin private label products
in the first half of 2007, when compared to the first half of 2006.
EBIT for the Agricultural Productivity segment increased $48 million to $181 million in the first
half of 2007. Gross profit increased $42 million because of higher sales of ROUNDUP and other
glyphosate-based herbicides in first half 2007.
28
|
|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
FINANCIAL
CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Working Capital and Financial Condition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
As of Feb. 28, |
|
Aug. 31, |
(Dollars in millions, except current ratio) |
|
2007 |
|
|
2006 |
|
|
2006 |
|
|
|
Cash and cash equivalents |
|
$ |
1,565 |
|
|
$ |
581 |
|
|
$ |
1,460 |
|
Short-term investments |
|
|
|
|
|
|
171 |
|
|
|
22 |
|
Trade receivables net |
|
|
2,007 |
|
|
|
2,010 |
|
|
|
1,455 |
|
Inventories |
|
|
1,888 |
|
|
|
1,856 |
|
|
|
1,688 |
|
Other current assets(1) |
|
|
836 |
|
|
|
846 |
|
|
|
836 |
|
|
|
|
Total Current Assets |
|
$ |
6,296 |
|
|
$ |
5,464 |
|
|
$ |
5,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt |
|
$ |
55 |
|
|
$ |
486 |
|
|
$ |
28 |
|
Accounts payable |
|
|
547 |
|
|
|
459 |
|
|
|
514 |
|
Accrued liabilities(2) |
|
|
1,957 |
|
|
|
1,706 |
|
|
|
1,737 |
|
|
|
|
Total Current Liabilities |
|
$ |
2,559 |
|
|
$ |
2,651 |
|
|
$ |
2,279 |
|
|
|
|
Working Capital(3) |
|
$ |
3,737 |
|
|
$ |
2,813 |
|
|
$ |
3,182 |
|
Current Ratio(3) |
|
|
2.46:1 |
|
|
|
2.06:1 |
|
|
|
2.40:1 |
|
|
|
|
|
|
|
(1) |
|
Includes miscellaneous receivables, current deferred tax assets, assets of
discontinued operations and other current assets. |
|
(2) |
|
Includes income taxes payable, accrued compensation and benefits, accrued marketing
programs, deferred revenues, grower accruals, 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. |
Feb. 28, 2007, compared with Aug. 31, 2006: Working capital increased $555 million between
Aug. 31, 2006, and Feb. 28, 2007, because of the following factors:
|
|
|
Trade receivables net increased $552 million in the first half of 2007
primarily because of the seasonality of our sales and collections excluding customer
prepayments, which were classified as accrued liabilities as of Feb. 28, 2007. The effect
of foreign currency translation also contributed to this increase. |
|
|
|
|
Inventories increased $200 million between the respective periods primarily
because of the seasonality of our U.S. corn and soybean seed business in which the
harvest of seed products occurs in the first half of the fiscal year resulting in a
higher inventory balance as of Feb. 28, 2007. |
|
|
|
|
Accrued marketing programs decreased $244 million in the six months ended
February 28, 2007 because of the market funding payments to U.S. customers related to
2006 sales. This decrease was partially offset by an increase in market funding accruals
related to current year sales. |
These increases to working capital between Aug. 31, 2006, and Feb. 28, 2007, were offset primarily
by the following factors:
|
|
|
Deferred revenue increased $298 million due to U.S. customer prepayments in
first half 2007, which is consistent with the seasonality of our business. |
|
|
|
|
Income taxes payable increased $136 million because of higher net income in
the period and the timing of U.S. tax payments. |
|
|
|
|
Grower accruals increased $54 million representing amounts payable to farmers
who grow seed for us. This increase is also consistent with the seasonality of our
business. |
Feb. 28, 2007, compared with Feb. 28, 2006: Working capital increased $924 million between Feb. 28,
2007, and Feb. 28, 2006. The following factors increased working capital as of Feb. 28, 2007,
compared with Feb. 28, 2006:
|
|
|
Cash and cash equivalents increased $984 million between the respective
periods. As presented on the Statements of Consolidated Cash Flows, the net increase in
cash and cash equivalents was $105 million in first half 2007 compared with $56 million
in first half 2006. The cash and cash equivalents balance was higher as of Aug. 31, 2006,
compared with Aug. 31, 2005, by $935 million primarily because of less payments for
acquisitions in 2006, when compared with 2005. |
29
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MONSANTO COMPANY |
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SECOND QUARTER 2007 FORM 10-Q |
|
|
|
|
|
Short-term debt decreased $431 million. We had more commercial paper
outstanding as of Feb. 28, 2006, because of the increase in cash on hand during the first
half of 2007, when compared with the first half of 2006. |
|
These working capital increases were offset
primarily by the following factors: |
|
|
|
We decreased our position in short-term investments by $171 million as of Feb. 28, 2007, to less than $1 million. |
|
|
|
|
Income taxes payable increased $207 million because of higher net income in
the current year, the timing of U.S. tax payments and the utilization of net operating
losses during 2006. |
|
|
|
|
Accounts payable increased $88 million primarily because of the Seeds and
Genomics business growth in the United States. |
Customer Financing Programs: We refer certain of our interested U.S. customers to a third-party
specialty lender that makes loans directly to our customers. In April 2002, we established this
revolving financing program of up to $500 million, which allows certain U.S. customers to finance
their product purchases, royalties and licensing fee obligations. The funding availability may be
less than $500 million if certain program requirements are not met. It also allows us to reduce our
reliance on commercial paper borrowings. We received $4 million in first half 2007 and $18 million
in first half 2006 from the proceeds of loans made to our customers through this financing program.
These proceeds are included in the net cash provided by operating activities in the Statements of
Consolidated Cash Flows. We originate these customer loans on behalf of the third-party specialty
lender, a special purpose entity (SPE) that we consolidate, using our credit and other underwriting
guidelines approved by the lender. We service the loans and provide a first-loss guarantee of up to
$130 million. Following origination, the lender transfers the loans to multi-seller commercial
paper conduits through a nonconsolidated qualifying special purpose entity (QSPE). We have no
ownership interest in the lender, in the QSPE, or in the loans. We account for this transaction as
a sale, in accordance with Statement of Financial Accounting Standards (SFAS) No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (SFAS 140).
As of Feb. 28, 2007, there were no outstanding customer loans held by the QSPE. As of Aug. 31, 2006, the customer loans held by the QSPE and the QSPEs
liability to the conduits was $268 million. The lender or the conduits may restrict or discontinue
the facility at any time. If the facility were to terminate, existing loans would be collected by
the QSPE over their remaining terms (generally 12 months or less), and we would revert to our past
practice of providing these customers with direct credit purchase terms. Our servicing fee revenues
from the program were not significant. As of Feb. 28, 2007, and Aug. 31, 2006, our recorded
guarantee liability was less than $1 million, primarily based on our historical collection
experience with these customers and a current assessment of credit exposure. Adverse changes in the
actual loss rate would increase the liability.
In November 2004, we entered into an agreement with a lender to establish a program to provide
financing of up to $40 million for selected customers in Brazil. The agreement, as amended in May
2005, qualified for sales treatment under SFAS 140. Accordingly, the customer receivables and the
related liabilities that had been recorded since the program was established in November 2004 were
removed from the companys consolidated balance sheet in May 2005 as a noncash transaction.
Proceeds from the transfer of the receivables subsequent to the May 2005 amendment are included in
net cash provided by operating activities in the Statements of Consolidated Cash Flows. The program
was amended to increase the total funds available under the program to $140 million. We received
$75 million and $22 million of proceeds through these customer financing programs in first half
2007 and first half 2006, respectively. The amount of loans outstanding was $118 million and $64
million as of Feb. 28, 2007, and Aug. 31, 2006, respectively. The maximum potential amount of
future payments under the guarantees was $118 million as of Feb. 28, 2007. 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 $2 million as of Feb. 28, 2007, and Aug.
31, 2006. If performance is required under the guarantee, we may retain amounts that are
subsequently collected from customers.
We also have similar agreements with banks that provide financing to our customers in Brazil
through credit programs that are subsidized by the Brazilian government. In addition, there are
similar financing programs in Europe and Argentina. All of these programs 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 $66 million and $49 million of proceeds through
these customer financing programs in the first six months of 2007 and 2006, respectively. The
amount of loans outstanding was $91 million and $47 million as of
30
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MONSANTO COMPANY |
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SECOND QUARTER 2007 FORM 10-Q |
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|
Feb. 28, 2007, and Aug. 31, 2006, respectively. For most programs, we provide a full guarantee of the loans
in the event of customer default. The terms of the guarantees are equivalent to the terms of the
bank loans. The maximum potential amount of future payments under the guarantees was $91 million as
of Feb. 28, 2007. The liability for the guarantee is recorded at an amount that approximates fair
value and is primarily based on our historical collection experience with customers that
participate in the program and a current assessment of credit exposure. Our guarantee liability was
$1 million as of Feb. 28, 2007, and Aug. 31, 2006. 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 $4 million for first half 2007 and $17 million for first half 2006. The
liability for the guarantees for sales with recourse is recorded at an amount that approximates
fair value and is based on the companys 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 Feb. 28, 2007, and Aug. 31, 2006. The
maximum potential amount of future payments under the recourse provisions of the agreements was $2
million as of Feb. 28, 2007. The outstanding balance of the receivables sold was $2 million and $41
million as of Feb. 28, 2007, and Aug. 31, 2006, respectively.
Cash Flow
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended Feb. 28, |
(Dollars in millions) |
|
2007 |
|
|
2006 |
|
|
Net Cash Provided by Operating Activities |
|
$ |
520 |
|
|
$ |
331 |
|
Net Cash Required by Investing Activities |
|
|
(230 |
) |
|
|
(466 |
) |
|
Free Cash Flow(1) |
|
|
290 |
|
|
|
(135 |
) |
|
Net Cash
Provided (Required) by Financing Activities |
|
|
(200 |
) |
|
|
191 |
|
Effect of Exchange Rate Changes on Cash and Cash
Equivalents |
|
|
15 |
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents |
|
|
105 |
|
|
|
56 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
1,460 |
|
|
|
525 |
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
1,565 |
|
|
$ |
581 |
|
|
|
|
|
(1) |
|
Free cash flow represents the total of net cash provided or required by operating
activities and provided or required by investing activities (see the Non-GAAP Financial
Measures section in MD&A for a further discussion). |
Cash provided by operating activities increased $189 million in the six-month comparison
primarily because of improved earnings and a favorable change in accounts payable and other accrued
liabilities partially offset by a lower utilization of deferred income taxes and the change in
trade receivables. Accounts payable and other accrued liabilities was impacted favorably by the
timing of tax accruals and the growth of the U.S. business. The change in trade receivables was
unfavorable when compared to the first half of 2006 because of the increase in sales in the
period-over-period comparison despite improved cash collections. In first half 2007, other items
were a use of cash of $72 million, compared with $6 million in first half 2006. The two largest
contributors to this decline were the non-recurring $43 million payment we received in first
quarter 2006 from our distributor of lawn-and-garden products and the timing of collections of
value-added tax credits outside of the United States.
Cash required by investing activities decreased $236 million in the period-over-period comparison.
This decrease is primarily because the first half of 2006 included cash payments of $125 million
for contingent consideration related to the Seminis acquisition and $100 million for an animal
agriculture upfront royalty payment.
The amount of cash required by financing activities was $200 million in first half 2007 compared
with a source of cash of $191 million in first half 2006. The net change in short-term financing
required cash of $5 million in first half 2007 compared with a source of cash of $241 million in
the prior-year half. In the first six months of 2007, treasury stock purchases required cash of $71
million under the four-year $800 million share repurchase program, which was authorized by our
board of directors on Oct. 25, 2005. No shares were repurchased under this plan in the six months
ended Feb. 28, 2006. Cash required for long-term debt reductions was $71 million in first half
2007, compared with $45 million in first half 2006. Dividend payments increased 22 percent, or $22
million, because we paid dividends of 18.5 cents per share in the first half of 2006 compared with
22.5 cents per share in the first half of 2007.
31
|
|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
Capital
Resources and Liquidity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of Feb. 28, |
|
As of Aug. 31, |
(Dollars in millions, except debt-to-capital ratio) |
|
2007 |
|
|
2006 |
|
|
2006 |
|
|
|
|
Short-Term Debt |
|
$ |
55 |
|
|
$ |
486 |
|
|
$ |
28 |
|
Long-Term Debt |
|
|
1,581 |
|
|
|
1,378 |
|
|
|
1,639 |
|
Total Shareowners Equity |
|
|
7,169 |
|
|
|
6,219 |
|
|
|
6,525 |
|
|
|
|
Debt-to-Capital Ratio |
|
|
19% |
|
|
|
23% |
|
|
|
20% |
|
|
|
|
Total debt outstanding decreased $31 million between Aug. 31, 2006, and Feb. 28, 2007,
primarily because we repaid $63 million of our three-year term bank loan in Europe in October 2006,
which was partially offset by increased commercial paper outstanding.
Credit Facility: Effective Feb. 28, 2007, we finalized a new $2 billion credit facility agreement
with a group of banks. This agreement provides a five-year senior unsecured revolving credit
facility, which replaces the existing $1 billion credit facility established in 2004. Covenants
under the $2 billion revolving credit facility are substantially similar to those in the facility
replaced.
Dividend: In January 2007, we declared a quarterly dividend of 12.5 cents payable on Apr. 27,
2007, to shareowners of record as of Apr. 6, 2007.
Capital Expenditures: We expect 2007 capital expenditures to be in the range of $450 million to
$500 million compared with $370 million in 2006. The largest drivers of this increase are expected
to be projects to expand corn seed production and information technology facilities.
Share Repurchases: In March 2007, we acquired 0.6 million shares for $30 million under the share
repurchase plan authorized by the board of directors in October 2005.
2007 Acquisitions: In December 2006, ASI acquired Fielders Choice Direct, a U.S. seed company,
for $50 million (net of cash acquired), inclusive of transaction costs of $1 million, with a
potential additional earn-out amount of up to $5 million. In conjunction with this acquisition, we
entered into a five-year global technology license agreement. Also in second quarter 2007, ASI
acquired three regional U.S. seed companies in separate transactions. In January 2007, Monsanto
acquired a European fruit seed company for $7 million, inclusive of transaction costs of $1 million. The financial results of these acquisitions were included in the companys consolidated
financial statements from their respective dates of acquisition. See Note 3 Business Combinations
for further discussion of these acquisitions.
2006 Acquisitions: In 2006, ASI acquired 12 regional U.S. seed companies for an aggregate purchase
price of $133 million (net of cash acquired). For all 2006 acquisitions, the business operations of
the acquired entities were included in the Seeds and Genomics segment. See Note 3 Business
Combinations for further discussion of these acquisitions.
Pending Acquisition: On Aug. 15, 2006, we announced the signing of a definitive agreement to
purchase all of the outstanding stock of Delta and Pine Land Company (NYSE: DLP) for a cash
purchase price of $42 per share, or approximately $1.5 billion (net of cash acquired and debt
assumed). Delta and Pine Land is a leader in the cotton seed industry and currently operates the
largest and longest running private cotton seed breeding program in the world. The transaction was
unanimously approved by the boards of directors of both companies, and on Dec. 21, 2006, was
approved by the shareholders of Delta and Pine Land. Appropriate filings were made under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the transaction is being reviewed by federal and state authorities
including the U.S. Department of Justice (DOJ) and is subject to other customary closing
conditions. The transaction has received clearance from ex-U.S. regulatory authorities that
required pre-merger notification. As prescribed in the merger agreement, as of Feb. 14, 2007, the
deadline for closing was automatically extended to Aug. 14, 2007, to complete regulatory reviews.
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 or the failure of Monsanto to perform in
all material respects certain covenants, in which case we would be obligated to pay Delta and Pine Land $600
million and all litigation would terminate; (2) Delta and Pine
Lands failure to perform in all material respects certain
covenants, in which case all litigation would terminate without payment by either party; or (3) any
other reason, in which case litigation may recommence and certain of Delta and Pine Lands licenses
with us may be amended in its favor, depending on the reason for the termination.
32
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|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
We expect to be required to divest the U.S. assets of our Stoneville cottonseed business, as a
condition of obtaining regulatory clearance of our proposed acquisition of Delta and Pine Land.
Therefore, we have engaged in negotiations with potential buyers for this business. However, any
sale of Stoneville assets would be conditioned upon consummation of the Delta and Pine Land
acquisition, which is being reviewed by regulatory agencies. Accordingly, the financial results of
the Stoneville business are included in income from continuing operations for all periods
presented.
We intend to finance a portion of the Delta and Pine Land acquisition with available cash reserves
at the time of close and are likely to finance the remaining balance with a combination of
short-term loans and commercial paper borrowings.
Contingent Liabilities Relating to Solutia Inc. (Off-Balance Sheet Arrangement)
There are no material changes related to our off-balance sheet arrangement relating to Solutia from
the disclosure in our Report on Form 10-K for the fiscal year ended Aug. 31, 2006. See Note 14
under the subheading Solutia Inc. for further information regarding Solutias Assumed
Liabilities, the charge taken in connection with Solutias Assumed Liabilities, and the plan of
reorganization filed by Solutia in its bankruptcy. Also see Part II Item 1 Legal Proceedings
for further information.
OUTLOOK
We have achieved an industry-leading position in the areas in which we compete in both of our
business segments. However, the outlook for each of these two parts of our business is quite
different. In the Agricultural Productivity segment, our glyphosate business is stable, and our
selective chemistry business is expected to decline. In the Seeds and Genomics segment, our seeds
and traits business is expected to expand. As a result, we are focused on maintaining our position
in our chemistry business, and we are striving to grow our seeds and traits business.
We believe that our company is positioned to sustain earnings growth and strong cash flow, and we
remain committed to returning value to shareowners through vehicles such as investments that grow
and expand the business, dividends and share repurchases. We will remain focused on cost and cash
management for each segment, both to support the progress we have made in managing our investment
in working capital and to realize the full earnings potential of our businesses. We plan to
continue to seek additional external financing opportunities for our customers as a way to manage
receivables for each of our segments. We also expect to see increased gross profit as our
higher-margin seeds and traits business grows.
We expect to continue to implement locally responsive business strategies for our businesses in
each world area. Outside of the United States, our businesses will continue to face additional
challenges related to the risks inherent in operating in emerging markets. We have taken steps to
reduce our credit exposure in those areas, which has the potential to negatively affect sales in
the near term.
Seeds and Genomics
Our capabilities in plant breeding and biotechnology research are generating a rich and balanced
product pipeline that we expect will drive long-term growth. We plan to continue to invest more
than 85 percent of our R&D in the areas of seeds, genomics and biotechnology and to invest in
technology arrangements that have the potential to increase the efficiency and effectiveness of our
R&D efforts. We believe that our U.S. and international seeds and traits businesses will have
significant near-term growth opportunities through a combination of improved breeding, continued
growth of stacked and second-generation biotech traits, and acquisitions.
We expect advanced breeding techniques combined with improved production practices and capital
investments to continue to contribute to improved germplasm quality and yields for our seed
offerings, leading to increased global demand for both our branded and our licensed germplasm. Our
vegetable and fruit portfolio will focus on 25 crops. We plan to continue to apply our molecular
breeding and marker capabilities to Seminis germplasm and expect that to lead to growth in our
higher-margin, global fruit and vegetable business. We also plan to make strategic acquisitions,
such as acquisitions by ASI or Seminis, to grow our branded seed market share or expand our
germplasm library and strengthen our global breeding programs. We entered into a definitive
agreement to acquire Delta and Pine Land Company, which would provide us a leadership position in
the U.S. cotton market, although we will likely be required by regulatory authorities to
concurrently sell our current branded U.S. cotton business. We expect to see continued competition
in seeds and genomics in the near term but believe we will have a competitive advantage because of
our breeding capabilities and our three-channel sales approach for corn and soybean seeds.
33
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|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
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 have obtained the necessary
regulatory clearances at the state level in the United States and approvals in countries that are
major importers of U.S. corn, e.g., Canada, Mexico, Japan, Korea, and Taiwan, 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.
On March 21, 2007, we and BASF announced a long-term joint research and development and
commercialization collaboration in plant biotechnology that will focus on the development of high
yielding crops and crops that are more tolerant to adverse environmental conditions such as
drought. Over the long-term life of the collaboration, we and BASF will dedicate a joint budget of
potentially $1.5 billion to fund a dedicated pipeline of yield and stress tolerance traits for
corn, soybeans, cotton and canola.
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. The agriculture economy in Brazil is benefiting from
strong global commodity prices, particularly related to soybeans. Although farmer liquidity has
improved from last year, we continue to monitor our credit policy, expand our grain-based
collection system, and increase cash sales, as part of our continuous effort to enhance Brazilian
risk management against possible market and foreign exchange volatility.
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. Pricing of generic formulations of glyphosate herbicides has moved up over
the first half of 2007. The generic pricing can be somewhat unstable over the short-term but we
believe the long-term trend will be favorable. We have experienced increased demand in recent years
and are implementing 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
will continue to actively manage our inventory and other costs and offer product innovations,
superior customer service and logistics and marketing programs to support or allow us to increase
prices. Further expansion of crops with our ROUNDUP READY traits may also incrementally increase
sales of our ROUNDUP products.
Like most other selective herbicides, our products face increasing competitive pressures and a
declining market, in part because of the rapid penetration of ROUNDUP READY corn in the United
States. We will continue to seek ways to optimize our selective herbicides business, as we believe
it is important to offer fully integrated crop-protection solutions, particularly in ROUNDUP READY
corn. We anticipate a continued decline in this business in the near term, but the gross profit
from the ROUNDUP READY traits and from the ROUNDUP herbicides used on these acres are significantly
higher than the gross profit on the lost selective herbicide sales.
34
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|
|
MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
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 they will face
increasing competition from generic and private-label products and cost pressure from major
retailers.
During 2007, our POSILAC business will continue to reduce bulk powder inventory. Sandoz GmbH, which
manufactures the active ingredient and the finished dose formulation for POSILAC, has notified us
of its intention to terminate its agreement with us, effective Dec. 31, 2008. We do not expect the
termination to have a significant effect on our supplies because in 2006 we received FDA approval
of the Augusta, Georgia facility for finished formulation and packaging of POSILAC. We believe some
processor requests for r-BST-free milk will limit our future sales.
Other Information
As discussed in Note 14 Commitments and Contingencies and Part II Item 1 Legal Proceedings
Monsanto is involved in a number of lawsuits and claims relating to a variety of issues. Many of
these lawsuits relate to intellectual property disputes. We expect that such disputes will continue
to occur as the agricultural biotechnology industry evolves. We are required to indemnify Pharmacia
for Solutias Assumed Liabilities; this obligation is discussed in Note 14.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our financial statements, we must select and apply various accounting policies. Our
most significant policies are described in Part II Item 8 Note 2 Significant Accounting
Policies to the consolidated financial statements contained in
our Report on Form 10-K for the
fiscal year ended Aug. 31, 2006. In order to apply our accounting policies, we often need to make
estimates based on judgments about future events. In making such estimates, we rely on historical
experience, market and other conditions, and on assumptions that we believe to be reasonable.
However, by its nature the estimation process is uncertain, given that estimates depend on events
over which we may not have control. If market and other conditions change from those that we
anticipate, our financial condition, results of operations, or liquidity may be affected
materially. In addition, if our assumptions change, we may need to revise our estimates or take
other corrective actions, either of which may have a material effect on our financial condition,
results of operations, or liquidity.
The estimates that have a higher degree of inherent uncertainty and require our most significant
judgments are outlined in Managements Discussion and Analysis of Financial Condition and Results
of Operations contained in our Report on Form 10-K for fiscal year
ended Aug. 31, 2006. Had we used
estimates different from any of those contained in such Report on Form 10-K, our financial
condition, profitability, or liquidity for the current period could have been materially different
from those presented in this Form 10-Q.
NEW ACCOUNTING STANDARDS
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits entities
to choose to measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities using different
measurement techniques. SFAS 159 requires additional disclosures related to the fair value
measurements included in the entitys financial statements. This statement is effective for
financial statements issued for fiscal years beginning after Nov. 15, 2007. Accordingly, we will
adopt SFAS 159 in fiscal year 2009. We are currently evaluating the impact of SFAS 159 on the
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Benefit Plans an amendment of FASB Statements No. 87, 88, and 132(R) (SFAS
158). SFAS 158 requires companies to recognize the overfunded or underfunded status of a defined
benefit postretirement plan as an asset or liability in its statement of financial position and to
recognize changes in that funded status through comprehensive income. Based upon the most recent
actuarial estimate for the fiscal year ended Aug. 31, 2007, the adoption of SFAS 158 is expected to
result in an increase in liabilities and pre-tax comprehensive loss of $70 million to $90 million.
The actual impact of the adoption of SFAS 158 may differ from these estimates due to changes to
actual plan assets and liabilities and final assumptions as of Aug. 31, 2007. This statement also
requires the measurement date for plan assets and liabilities to coincide with the sponsors year
end. The standard provides two transition alternatives related to the change in measurement date
35
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MONSANTO COMPANY |
|
SECOND QUARTER 2007 FORM 10-Q |
|
|
provisions. The recognition of an asset and liability related to the funded status provision is
effective for fiscal years ending after Dec. 15, 2006. Accordingly, we will adopt SFAS 158 in the
fourth quarter of fiscal year 2007. The change in measurement date provisions is effective for
fiscal years ending after Dec. 15, 2008.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. This statement is
effective for financial statements issued for fiscal years beginning after Nov. 15, 2007.
Accordingly, we will adopt SFAS 157 in fiscal year 2009. We are currently evaluating the impact of
adopting SFAS 157 on the consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108,
(SAB 108). SAB 108 considers the effects of prior year misstatements when quantifying misstatements
in current year financial statements. It is effective for fiscal years ending after Nov. 15, 2006.
Accordingly, we will adopt SAB 108 in the fourth quarter of fiscal year 2007. We do not believe the
adoption of SAB 108 will have a material impact on the consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in
Income Taxes an Interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting
for uncertainty in tax positions. FIN 48 requires financial statement recognition of the impact of
a tax position, if that position is more likely than not to be sustained on examination, based on
the technical merits of the position. This interpretation is effective for fiscal years beginning
after Dec. 15, 2006, with the cumulative effect of the change in accounting principle recorded as
an adjustment to retained earnings as of the beginning of the period of adoption. Accordingly, we
will adopt FIN 48 in first quarter of fiscal year 2008. We are currently evaluating the impact of
FIN 48 on the consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets an
amendment of FASB Statement No. 140 (SFAS 156). SFAS 156 requires recognition of a servicing asset
or liability at fair value each time an obligation is undertaken to service a financial asset by
entering into a servicing contract. SFAS 156 also provides guidance on subsequent measurement
methods for each class of servicing assets and liabilities and specifies financial statement
presentation and disclosure requirements. This statement is effective for fiscal years beginning
after Sept. 15, 2006. Accordingly, we will adopt SFAS 156 in fiscal year 2008. We are currently
evaluating the impact of SFAS 156 on the consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes related to market risk from the disclosures in Monsantos Report on
Form 10-K for the fiscal year ended Aug. 31, 2006.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a comprehensive set of disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the 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 SECs rules and forms. As of Feb. 28, 2007
(the Evaluation Date), an evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of
the Evaluation Date, the design and operation of these disclosure controls and procedures were
effective to provide reasonable assurance of the achievement of the objectives described above.
During the quarter that ended on the Evaluation Date, there was one change in internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting. In the second quarter 2007, we implemented various process and information
system enhancements in the Asia Pacific region in conjunction with our global strategy related to
the implementation of SAP software, and associated business process improvements. These process and
information system enhancements require modifications to the internal controls principally
supporting sales, customer service, inventory management, accounts receivable and accounts payable
processes. These process and information system enhancements were
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not considered material in any individual country, however they were material collectively. We
believe we have taken the necessary steps to establish and maintain effective internal controls
over financial reporting.
PART IIOTHER INFORMATION
ITEM
1.
LEGAL PROCEEDINGS
We are involved in various legal proceedings that arise in the ordinary course of our business, as
well as proceedings that we have considered to be material under SEC regulations. These include
proceedings to which we are party in our own name, proceedings to which Pharmacia is a party but
that we manage and for which we are responsible, and proceedings that we are managing related to
Solutias Assumed Liabilities (as defined in Note 14). 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 14 under the
subheadings Litigation and Indemnification and Solutia Inc. and is incorporated by reference
herein. Following is information regarding other material proceedings for which we are responsible.
The following discussion provides new and updated information regarding certain proceedings to
which Pharmacia or Monsanto is a party and for which we are responsible. Other information with
respect to legal proceedings appears in our Report on Form 10-K for the fiscal year ended Aug. 31,
2006, and our Report on Form 10-Q for the quarterly period ended Nov. 30, 2006.
Patent and Commercial Proceedings
The following proceedings involve Syngenta AG (Syngenta) and its affiliates:
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As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2006, 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 is set for trial beginning May 21, 2007. |
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As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2006, 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. 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 DEKALBs patent. This case is currently set for trial
beginning May 5, 2008. |
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2006, and our Report on
Form 10-Q for the quarterly period ended Nov. 30, 2006, on July 26, 2005, American Seed Company
(which is unrelated to Monsanto or its ASI subsidiary) filed a purported class action suit against
us in the U.S. District Court for the District of Delaware, supposedly on behalf of direct
purchasers of corn seed containing our transgenic traits. American Seed essentially alleges that we
have monopolized or attempted to monopolize markets for glyphosate-tolerant corn seed, European
corn borer-protected corn seed and foundation corn seed. Plaintiffs seek an unspecified amount of
damages and injunctive relief. On Nov. 13, 2006, the trial court denied plaintiffs motion for
class certification. On Jan. 25, 2007, the U. S. Court of Appeal for the Third Circuit granted
Plaintiffs motion to review the trial courts decision denying class certification. The case has
been stayed pending the decision of the Third Circuit. There currently is no trial setting for this
matter.
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2006, and our Report on
Form 10-Q for the quarterly period ended Nov. 30, 2006, while efforts continue, discussions have
failed to resolve outstanding issues related to the development of a payment system for the use of
our technology to produce soybean products in Argentina or Uruguay containing our patented ROUNDUP
READY technologies. We have initiated patent infringement actions against importers of Argentine
soy products that were found by European customs officials to have contained our unlicensed
glyphosate-tolerant technology, which is patented in the respective European countries. In June
2005, we filed cases against Cefetra, in
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The Hague, the Netherlands, and Den Lokale, 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. Trial is scheduled for The Hague in
October 2007. Trial is set in Spain for July 2007, and in England for June 2007. No trial has been
scheduled in the Danish High Court. 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. 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, under which we were given the opportunity to provide
information to the CNDC before it would consider whether or not to initiate a formal proceeding. We
provided information to the CNDC in February 2007.
Farmer Lawsuits
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2006, 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 Monsantos 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.
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2006, two purported
class action suits were filed against us on Sept. 26, 2006, supposedly on behalf of all persons who
purchased our ROUNDUP brand 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, and seek an unspecified amount of damages and
injunctive relief. In late February 2007, three additional suits were filed, alleging similar
claims. All of these suits were filed in the U.S. District Court for the District of Delaware.
Proceedings Related to Delta and Pine Land Company
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2006, 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 an update of the status of one of these
proceedings; the status of the other proceedings remains unchanged from the status in the Form
10-K:
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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 Lands 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 Lands damages claim, but the Mississippi Supreme Court granted
review of that decision and the admissibility and use of certain documents at trial. The
Mississippi Supreme Court has extended the stay in proceedings until at least Sept. 4,
2007, pending closure of the transaction. |
Agent Orange Proceedings
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2006, and in our Report
on Form 10-Q for the quarterly period ended Nov. 30, 2006, in a purported class action suit styled
Dobbie, et al. v. The Attorney General of Canada, pending in the Federal Court of Canada in Ottawa,
Canada, individuals who either served at or live by a Canadian Forces Base in Gagetown, New
Brunswick, brought an action against the Canadian government for injuries supposedly suffered as
the result of exposure to a variety of chemicals used by it during the course of a 30-year program
to control weeds
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and vegetation at the facility. On May 3, 2006, the Federal Court granted the governments 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 governments motion to stay the proceedings before it. On Jan. 12, 2007, in the New
Brunswick action, the Canadian government filed a third party action against Dow Chemical and us
seeking contribution for any injuries plaintiffs may have suffered as the result of the spraying of
certain chemicals in 1967 and 1968.
Proceedings Related to Solutias Assumed Liabilities
As described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2006, 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, and on
March 5, 2007, the federal judge denied plaintiffs motions to remand to state court in both cases.
See Note 14 for additional information regarding legal proceedings related to Solutias Assumed Liabilities.
ITEM 1A. RISK FACTORS
Please see Caution Regarding Forward-Looking Statements, at the front of this Report on Form 10-Q
and Part I Item 1A Risk Factors of our Report on Form 10-K for the fiscal year ended Aug. 31,
2006, for information regarding risk factors. There have been no material changes from the risk
factors previously disclosed in our Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table is a summary of any purchases of equity securities during the second quarter of
fiscal year 2007 by Monsanto and any affiliated purchasers, pursuant to SEC rules.
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(c) Total Number of Shares |
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(d) Approximate Dollar |
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Purchased as Part of |
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Value of Shares that May |
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(a) Total Number of |
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(b) Average Price Paid |
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Publicly Announced Plans |
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Yet Be Purchased Under |
Period |
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Shares Purchased |
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per Share(1) |
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or Programs |
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the Plans or Programs |
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December 2006: |
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Dec. 1, 2006, through Dec. 31, 2006 |
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312,740 |
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47.96 |
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312,740 |
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$ |
615,541,440 |
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January 2007: |
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Jan. 1, 2007, through Jan. 31, 2007 |
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8,885 |
(2) |
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55.25 |
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$ |
615,541,440 |
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February 2007: |
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Feb. 1, 2007, through Feb. 28, 2007 |
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2,453 |
(2) |
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44.40 |
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$ |
615,541,440 |
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Total |
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324,078 |
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48.14 |
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312,740 |
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$ |
615,541,440 |
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(1) |
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The average price paid per share is calculated on a settlement basis and excludes
commission. |
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(2) |
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Represents total number of restricted shares withheld to cover the withholding
taxes upon the vesting of restricted stock. |
On Oct. 25, 2005, the board of directors authorized the purchase of up to $800 million of the
companys common stock over a four-year period. The plan expires on Oct. 25, 2009. There were no
other publicly announced plans outstanding as of Feb. 28, 2007.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At our Annual Meeting of Shareowners on Jan. 17, 2007, three matters were submitted to a vote of
shareowners.
1. |
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The following individuals were nominated and elected to serve as directors: Frank V. AtLee III,
Arthur H. Harper, Gwendolyn S. King, Sharon R. Long, Ph.D. were elected to serve until the 2010
Annual Meeting or until a successor is elected and has qualified or until his earlier death,
resignation or removal. Votes were cast as follows:
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Name |
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Votes For |
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Votes to Withhold Authority |
Frank V. AtLee III |
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481,393,940 |
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4,323,196 |
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Arthur H. Harper |
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481,501,547 |
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4,215,589 |
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Gwendolyn S. King |
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479,475,410 |
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6,241,726 |
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Sharon R. Long, Ph.D. |
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481,616,223 |
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4,100,913 |
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2. |
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The appointment by the Board of Directors of Deloitte & Touche LLP as independent registered
public accounting firm for the year 2007 was ratified by a vote of the shareowners. The Board
recommended a vote for the proposal. A total of 479,363,745 votes were cast in favor of
ratification, 2,859,349 votes were cast against, and 3,494,041 votes were counted as abstentions. |
3. |
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The shareowner proposal requesting that the Board separate the roles of Chairman and Chief
Executive Officer was not approved by a vote of the shareowners. The Board recommended a vote
against the proposal. A total of 59,564,698 votes were cast in favor of the proposal, 374,940,448
votes were cast against, 5,004,797 votes were counted as abstentions, and 103,594,193 were counted
as broker non-votes. |
ITEM 6. EXHIBITS
Exhibits: The list of exhibits in the Exhibit Index to this Report is incorporated herein by
reference.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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MONSANTO COMPANY |
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(Registrant) |
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By:
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/s/ RICHARD B. CLARK
Richard B. Clark
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Vice President and Controller |
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(On behalf of the Registrant and as Principal Accounting Officer) |
Date: Apr. 6, 2007
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EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K.
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Exhibit |
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No. |
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Description |
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2
|
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Omitted |
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3
|
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Omitted |
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4
|
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Omitted |
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10
|
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Omitted |
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11
|
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Omitted see Note 12 of Notes to Consolidated Financial Statements Earnings Per Share. |
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12
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Computation of Ratio of Earnings to Fixed Charges. |
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15
|
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Omitted |
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18
|
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Omitted |
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19
|
|
Omitted |
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22
|
|
Omitted |
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23
|
|
Omitted |
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24
|
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Omitted |
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31.1
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Rule 13a-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
executed by the Chief Executive Officer). |
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31.2
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Rule 13a-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
executed by the Chief Financial Officer). |
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Rule 13(a)-14(b) Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
executed by the Chief Executive Officer and the Chief Financial Officer). |
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