10-Q 1 mon-20130228x10q.htm 10-Q MON-2013.02.28-10Q
MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q

 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Feb. 28, 2013
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     
Commission file number 001-16167
MONSANTO COMPANY
(Exact name of registrant as specified in its charter)
 
Delaware
43-1878297
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
800 North Lindbergh Blvd.,
63167
St. Louis, MO
(Zip Code)
(Address of principal executive offices)
 
(314) 694-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
  
Accelerated filer
o
Non-accelerated filer
o  (Do not check if a smaller reporting company)
  
Smaller reporting company
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 x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 533,840,789 shares of Common Stock, $0.01 par value, outstanding as of April 1, 2013.
 


MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q

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 company’s future performance. These forward-looking statements include statements about our business plans; the potential development, regulatory approval, and public acceptance of our products; our expected financial performance, including sales performance, and the anticipated effect of our strategic actions; the anticipated benefits of recent acquisitions; the outcome of contingencies, such as litigation and the previously announced SEC investigation; domestic or international economic, political and market conditions; and other factors that could affect our future results of operations or financial position, including, without limitation, statements under the captions “Overview — Executive Summary — Outlook,” “Seeds and Genomics Segment,” “Agricultural Productivity Segment,” “Financial Condition, Liquidity, and Capital Resources,” “Outlook,” “Critical Accounting Policies and Estimates” and “Legal Proceedings.” Any statements we make that are not matters of current reportage or historical fact should be considered forward-looking. Such statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “will,” and similar expressions. By their nature, these types of statements are uncertain and are not guarantees of our future performance.
Since these statements are based on factors that involve risks and uncertainties, our company’s actual performance and results may differ materially from those described or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, among others: continued competition in seeds, traits and agricultural chemicals; the company’s exposure to various contingencies, including those related to intellectual property protection, regulatory compliance and the speed with which approvals are received, and public acceptance of biotechnology products; the success of the company’s research and development activities; the outcomes of major lawsuits; developments related to foreign currencies and economies; successful operation of recent acquisitions; fluctuations in commodity prices; compliance with regulations affecting our manufacturing; the accuracy of the company’s estimates related to distribution inventory levels; the company’s ability to fund its short-term financing needs and to obtain payment for the products that it sells; the effect of weather conditions, natural disasters and accidents on the agriculture business or the company’s facilities; and other risks and factors described or referenced in Part II — Item 1A — Risk Factors — below and Part I — Item 1A of our Report on Form 10-K for the fiscal year ended Aug. 31, 2012.
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

MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q

TABLE OF CONTENTS
Page
Item 1.
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2.
Item 6.



2

MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q

PART I—FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
The Statements of Consolidated Operations of Monsanto Company and its consolidated subsidiaries for the three and six months ended Feb. 28, 2013, and Feb. 29, 2012, the Statements of Consolidated Comprehensive Income (Loss) for the three and six months ended Feb. 28, 2013, and Feb. 29, 2012, the Statements of Consolidated Financial Position as of Feb. 28, 2013, and Aug. 31, 2012, the Statements of Consolidated Cash Flows for the six months ended Feb. 28, 2013, and Feb. 29, 2012, the Statements of Consolidated Shareowners’ Equity for the six months ended Feb. 28, 2013, and year ended Aug. 31, 2012, and related Notes to the 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 per share” and “per share” mean diluted earnings per share. In the notes to the consolidated financial statements, all dollars are expressed in millions, except per share amounts. 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

MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q

Statements of Consolidated Operations
Unaudited
(Dollars in millions)
Three Months Ended
Six Months Ended
Feb. 28, 2013
 
Feb. 29, 2012
Feb. 28, 2013
 
Feb. 29, 2012
Net Sales
$
5,472

 
$
4,748

$
8,411

 
$
7,187

Cost of goods sold
2,402

 
2,043

3,944

 
3,386

Gross Profit
3,070

 
2,705

4,467

 
3,801

Operating Expenses:
 
 
 
 
 
 
Selling, general and administrative expenses
598

 
543

1,140

 
1,043

Research and development expenses
360

 
353

706

 
704

Total Operating Expenses
958

 
896

1,846

 
1,747

Income from Operations
2,112

 
1,809

2,621

 
2,054

Interest expense
35

 
47

86

 
100

Interest income
(27
)
 
(20
)
(50
)
 
(38
)
Other expense, net
22

 
37

39

 
43

Income from Continuing Operations Before Income Taxes
2,082

 
1,745

2,546

 
1,949

Income tax provision
603

 
540

725

 
610

Income from Continuing Operations Including Portion Attributable to Noncontrolling Interest
$
1,479

 
$
1,205

$
1,821

 
$
1,339

Discontinued Operations:
 
 
 
 
 
 
Income from operations of discontinued businesses
6

 
11

17

 
11

Income tax provision
2

 
4

6

 
4

Income on Discontinued Operations
4

 
7

11

 
7

Net Income
$
1,483

 
$
1,212

$
1,832

 
$
1,346

Less: Net income attributable to noncontrolling interest

 
1

10

 
9

Net Income Attributable to Monsanto Company
$
1,483

 
$
1,211

$
1,822

 
$
1,337

Amounts Attributable to Monsanto Company:
 
 
 
 
 
 
Income from continuing operations
$
1,479

 
$
1,204

$
1,811

 
$
1,330

Income on discontinued operations
4

 
7

11

 
7

Net Income Attributable to Monsanto Company
$
1,483

 
$
1,211

$
1,822

 
$
1,337

Basic Earnings per Share Attributable to Monsanto Company:
 
 
 
 
 
 
Income from continuing operations
$
2.77

 
$
2.25

$
3.39

 
$
2.49

Income on discontinued operations
0.01

 
0.02

0.02

 
0.01

Net Income Attributable to Monsanto Company
$
2.78

 
$
2.27

$
3.41

 
$
2.50

Diluted Earnings per Share Attributable to Monsanto Company:
 
 
 
 
 
 
Income from continuing operations
$
2.73

 
$
2.23

$
3.35

 
$
2.46

Income on discontinued operations
0.01

 
0.01

0.02

 
0.01

Net Income Attributable to Monsanto Company
$
2.74

 
$
2.24

$
3.37

 
$
2.47

Weighted Average Shares Outstanding:
 
 
 
 
 
 
Basic
534.8

 
534.4

534.8

 
534.9

Diluted
540.9

 
540.5

540.9

 
540.9

Dividends Declared per Share
$
0.75

 
$
0.60

$
0.75

 
$
0.60

The accompanying notes are an integral part of these consolidated financial statements.




4

MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q


Statements of Consolidated Comprehensive Income (Loss)
Unaudited
(Dollars in millions)
Three Months Ended
Six Months Ended
Feb. 28, 2013
 
Feb. 29, 2012
Feb. 28, 2013
 
Feb. 29, 2012
Comprehensive Income Attributable to Monsanto Company
 
 
 
 
 
 
Net Income Attributable to Monsanto Company
$
1,483

 
$
1,211

$
1,822

 
$
1,337

Other Comprehensive Income (Loss), Net of Tax:
 
 
 
 
 
 
Foreign currency translation
114

 
231

166

 
(341
)
Postretirement benefit plan activity, net of tax of $7, $5, $14 and $13, respectively
12

 
9

23

 
22

Unrealized net gains on investment holdings, net of tax of $0, $3, $3 and $2, respectively

 
7

6

 
4

Realized net gains on investment holdings, net of tax of $(4), $0, $(3) and $0, respectively
(7
)
 

(6
)
 

Unrealized net derivative (losses) gains, net of tax of $(31), $5, $(37) and $(48), respectively
(51
)
 
10

(63
)
 
(70
)
Realized net derivative gains, net of tax of $(15), $(15), $(20) and $(16), respectively
(24
)
 
(30
)
(34
)
 
(32
)
Total Other Comprehensive Income (Loss), Net of Tax
44

 
227

92

 
(417
)
Comprehensive Income Attributable to Monsanto Company
$
1,527

 
$
1,438

$
1,914

 
$
920

Comprehensive Income Attributable to Monsanto Company
 
 
 
 
 
 
Net Income Attributable to Noncontrolling Interests

 
1

10

 
9

Other Comprehensive Income (Loss)
 
 
 
 
 
 
Foreign currency translation
12

 
4

8

 
(8
)
Total Other Comprehensive Income (Loss)
12

 
4

8

 
(8
)
Comprehensive Income Attributable to Noncontrolling Interests
$
12

 
$
5

$
18

 
$
1

Total Comprehensive Income
$
1,539

 
$
1,443

$
1,932

 
$
921

The accompanying notes are an integral part of these consolidated financial statements.



5

MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q

Statements of Consolidated Financial Position
Unaudited
(Dollars in millions)
As of Feb. 28,
 
As of Aug. 31,
2013
 
2012
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents (variable interest entity restricted - 2013: $58 and 2012: $120)
$
4,443

 
$
3,283

Short-term investments
310

 
302

Trade receivables, net (variable interest entity restricted - 2013: $132 and 2012: $52)
2,219

 
1,897

Miscellaneous receivables
638

 
620

Deferred tax assets
658

 
534

Inventory, net
3,095

 
2,839

Other current assets
171

 
183

Total Current Assets
11,534

 
9,658

Total property, plant and equipment
9,129

 
8,835

Less accumulated depreciation
4,729

 
4,470

Property, Plant and Equipment, Net
4,400

 
4,365

Goodwill
3,519

 
3,435

Other Intangible Assets, Net
1,220

 
1,237

Noncurrent Deferred Tax Assets
542

 
551

Long-Term Receivables, Net
255

 
376

Other Assets
609

 
602

Total Assets
$
22,079

 
$
20,224

Liabilities and Shareowners’ Equity
 
 
 
Current Liabilities:
 
 
 
Short-term debt, including current portion of long-term debt
$
152

 
$
36

Accounts payable
751

 
794

Income taxes payable
430

 
75

Accrued compensation and benefits
372

 
546

Accrued marketing programs
1,020

 
1,281

Deferred revenues
756

 
396

Grower production accruals
239

 
194

Dividends payable
201

 
200

Customer payable
7

 
14

Miscellaneous short-term accruals
781

 
685

Total Current Liabilities
4,709

 
4,221

Long-Term Debt
2,054

 
2,038

Postretirement Liabilities
526

 
543

Long-Term Deferred Revenue
187

 
245

Noncurrent Deferred Tax Liabilities
410

 
313

Long-Term Portion of Environmental and Litigation Liabilities
217

 
213

Other Liabilities
518

 
615

Shareowners’ Equity:
 
 
 
Common stock (authorized: 1,500,000,000 shares, par value $0.01)
 
 
 
Issued 599,280,061 and 596,136,929 shares, respectively
 
 
 
Outstanding 534,257,178 and 534,373,880 shares, respectively
6

 
6

Treasury stock 65,022,883 and 61,763,049 shares, respectively, at cost
(3,372
)
 
(3,045
)
Additional contributed capital
10,594

 
10,371

Retained earnings
6,956

 
5,537

Accumulated other comprehensive loss
(944
)
 
(1,036
)
Total Monsanto Company Shareowners’ Equity
13,240

 
11,833

Noncontrolling Interest
218

 
203

Total Shareowners’ Equity
13,458

 
12,036

Total Liabilities and Shareowners’ Equity
$
22,079

 
$
20,224

The accompanying notes are an integral part of these consolidated financial statements.



6

MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q

Statements of Consolidated Cash Flows
Unaudited
(Dollars in millions)
Six Months Ended
Feb. 28, 2013
 
Feb. 29, 2012
Operating Activities:
 
 
 
Net Income
$
1,832

 
1,346

Adjustments to reconcile cash provided by operating activities:
 
 
 
Items that did not require (provide) cash:
 
 
 
Depreciation and amortization
305

 
311

Bad-debt expense
10

 
(8
)
Stock-based compensation expense
49

 
72

Excess tax benefits from stock-based compensation
(47
)
 
(26
)
Deferred income taxes
52

 
(33
)
Equity affiliate income, net
(2
)
 
(3
)
Net gain on sales of a business or other assets
(14
)
 
(2
)
Other items
48

 
65

Changes in assets and liabilities that (required) provided cash, net of acquisitions:
 
 
 
Trade receivables, net
(196
)
 
(265
)
Inventory, net
(261
)
 
(356
)
Deferred revenues
293

 
445

Accounts payable and other accrued liabilities
(204
)
 
142

Restructuring cash payments

 
(7
)
Pension contributions
(24
)
 
(33
)
Other items
16

 
24

Net Cash Provided by Operating Activities
1,857

 
1,672

Cash Flows (Required) Provided by Investing Activities:
 
 
 
Purchases of short-term investments
(320
)
 
(429
)
Maturities of short-term investments
312

 
429

Capital expenditures
(261
)
 
(239
)
Acquisition of businesses, net of cash acquired
(79
)
 
(113
)
Technology and other investments
(48
)
 
(56
)
Other proceeds
95

 
6

Net Cash Required by Investing Activities
(301
)
 
(402
)
Cash Flows Provided (Required) by Financing Activities:
 
 
 
Net change in financing with less than 90-day maturities
142

 
(8
)
Short-term debt proceeds
1

 
9

Short-term debt reductions
(29
)
 
(17
)
Long-term debt proceeds
16

 

Long-term debt reductions
(2
)
 
(142
)
Treasury stock purchases
(327
)
 
(299
)
Stock option exercises
136

 
52

Excess tax benefits from stock-based compensation
47

 
26

Tax withholding on restricted stock and restricted stock units
(3
)
 
(1
)
Dividend payments
(402
)
 
(322
)
Dividend payments to noncontrolling interests
(1
)
 
(71
)
Proceeds from noncontrolling interest

 
101

Net Cash Required by Financing Activities
(422
)
 
(672
)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
26

 
(47
)
Net Increase in Cash and Cash Equivalents
1,160

 
551

Cash and Cash Equivalents at Beginning of Period
3,283

 
2,572

Cash and Cash Equivalents at End of Period
$
4,443

 
$
3,123

See Note 20 — Supplemental Cash Flow Information — for further details.
The accompanying notes are an integral part of these consolidated financial statements.



7

MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q

Statements of Consolidated Shareowners’ Equity
  
Monsanto Shareowners
 
  
 
  
Unaudited
(Dollars in millions, except per share data)
Common
Stock
 
Treasury
Stock
 
Additional
Contributed
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss)(1)
 
Reserve for
ESOP Debt
 
Non-Controlling
Interest
 
Total
Balance as of Aug. 31, 2011
$
6

 
$
(2,613
)
 
$
10,096

 
$
4,174

 
$
(116
)
 
$
(2
)
 
$
171

 
$
11,716

Net income

 

 

 
2,045

 

 

 
48

 
2,093

Other comprehensive loss for 2012

 

 

 

 
(920
)
 

 
(40
)
 
(960
)
Treasury stock purchases

 
(432
)
 

 

 

 

 

 
(432
)
Restricted stock withholding

 

 
(19
)
 

 

 

 

 
(19
)
Issuance of shares under employee stock plans

 

 
117

 

 

 

 

 
117

Net excess tax benefits from stock-based compensation

 

 
50

 

 

 

 

 
50

Stock-based compensation expense

 

 
127

 

 

 

 

 
127

Cash dividends of $1.28 per common share

 

 

 
(682
)
 

 

 

 
(682
)
Dividend payments to noncontrolling interest

 

 

 

 

 

 
(77
)
 
(77
)
Allocation of ESOP shares, net of dividends received

 

 

 

 

 
2

 

 
2

Proceeds from noncontrolling interest

 

 

 

 

 

 
101

 
101

Balance as of Aug. 31, 2012
$
6

 
$
(3,045
)
 
$
10,371

 
$
5,537

 
$
(1,036
)
 
$

 
$
203

 
$
12,036

Net income

 

 

 
1,822

 

 

 
10

 
1,832

Other comprehensive income for 2013

 

 

 

 
92

 

 
8

 
100

Treasury stock purchases

 
(327
)
 

 

 

 

 

 
(327
)
Restricted stock withholding

 

 
(3
)
 

 

 

 

 
(3
)
Issuance of shares under employee stock plans

 

 
135

 

 

 

 

 
135

Net excess tax benefits from stock-based compensation

 

 
46

 

 

 

 

 
46

Stock-based compensation expense

 

 
46

 

 

 

 

 
46

Cash dividends of $0.75 per common share

 

 

 
(403
)
 

 

 

 
(403
)
Dividend payments to noncontrolling interest

 

 

 

 

 

 
(1
)
 
(1
)
Acquisition of noncontrolling interest

 

 
(1
)
 

 

 

 
(2
)
 
(3
)
Balance as of Feb. 28, 2013
$
6

 
$
(3,372
)
 
$
10,594

 
$
6,956

 
$
(944
)
 
$

 
$
218

 
$
13,458

(1)
See Note 18 — Accumulated Other Comprehensive Loss — for further details of the components of accumulated other comprehensive loss.
The accompanying notes are an integral part of these consolidated financial statements.


8


MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q
NOTES TO THE 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. Monsanto’s seeds, biotechnology trait products, and herbicides provide farmers with solutions that improve productivity, reduce the costs of farming, and produce better foods for consumers and better feed for animals.
Monsanto manages its business in two segments: Seeds and Genomics and Agricultural Productivity. Through the Seeds and Genomics segment, Monsanto produces leading seed brands, including DEKALB, Asgrow, Deltapine, Seminis and De Ruiter, 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 and Harness brand herbicides and other herbicides. See Note 22 — Segment Information — for further details.
In the fourth quarter of 2008, the company announced plans to divest its animal agricultural products business, which focused on dairy cow productivity (the Dairy business) and was previously reported as part of the Agricultural Productivity segment. This transaction was consummated on Oct. 1, 2008. As a result, financial data for this business has been presented as discontinued operations.
The accompanying consolidated financial statements have not been audited but have been prepared in conformity with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported. This Report on Form 10-Q should be read in conjunction with Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2012. Financial information for the first six months of fiscal year 2013 should not be annualized because of the seasonality of the company’s business.
NOTE 2.
NEW ACCOUNTING STANDARDS
In February 2013, the Financial Accounting Standards Board ("FASB") issued "Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," which requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount is required under U.S. Generally Accepted Accounting Principles ("U.S. GAAP") to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, entities are required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail on these amounts. This standard is effective prospectively for reporting periods beginning after Dec. 15, 2012. Monsanto will adopt this standard in the third quarter of fiscal year 2013. The Company is currently evaluating the impact of adopting this guidance.
In December 2011 and February 2013, the FASB issued an amendment to the Balance Sheet topic of the Accounting Standards Codification ("ASC"), which requires entities to disclose both gross and net information about both derivatives and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting agreement. The objective of the disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of International Financial Reporting Standards. This standard is effective for fiscal years, and interim periods within those years, beginning on or after Jan. 1, 2013. Retrospective presentation for all comparative periods presented is required. Accordingly, Monsanto will adopt this amendment in the first quarter of fiscal year 2014. The company is currently evaluating the impact of adoption on the consolidated financial statements.

9


MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

In September 2011 and July 2012, the FASB issued amendments to the Intangibles-Goodwill and Other topic of the ASC. Prior to these amendments the company performs a two-step test as outlined by the ASC. Step one of the two-step goodwill and indefinite-lived intangible asset impairment tests is performed by calculating the fair value of the reporting unit or indefinite-lived intangible asset and comparing the fair value with the carrying amount. If the carrying amount of a reporting unit or indefinite-lived intangible asset exceeds its fair value, then the company is required to perform the second step of the impairment test to measure the amount of the impairment loss, if any. Under the amendments, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. An entity can choose to perform the qualitative assessment on none, some or all of its reporting units and indefinite-lived intangible assets. Moreover, an entity can bypass the qualitative assessment for any reporting unit or indefinite-lived intangible asset in any period and proceed directly to step one of the impairment test, and then resume performing the qualitative assessment in any subsequent period. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after Dec. 15, 2011. Accordingly, Monsanto will adopt this amendment when the company performs the annual impairment test during fiscal year 2013. The amendment is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after Sept. 15, 2012. Accordingly, Monsanto will adopt this amendment in fiscal year 2014. The company is currently evaluating the impact of adoption on the consolidated financial statements for both the annual impairment test of goodwill and indefinite-lived intangibles.
NOTE 3.
BUSINESS COMBINATIONS
2013 Acquisitions: In January 2013, Monsanto acquired select assets of Agradis, Inc., a business focused on developing sustainable agricultural solutions. The acquisition, which qualifies as a business under the Business Combinations topic of the ASC, will support Monsanto's efforts to provide farmers with sustainable biological products to improve crop health and productivity. Acquisition costs incurred were less than $1 million and were classified as selling, general and administrative expenses. The total fair value of the acquisition was $85 million, of which $79 million in cash was paid at the time of acquisition. The remaining $6 million of cash consideration will be paid upon the satisfaction of general representations and warranties made by the seller at the time of acquisition, which will be no later than three months after the date of the acquisition. This deferred payment is included in miscellaneous short-term accruals within the Statements of Consolidated Financial Position as of Feb. 28, 2013. The fair value of the acquisition was primarily allocated to goodwill and intangibles. The primary item that generated goodwill was the premium paid by the company for the right to control the acquired business and technology. The goodwill is deductible for tax purposes.
The business operations and employees of the acquired entity described above were included in the Seeds and Genomics segment results upon acquisition. The estimated fair value of the assets, summarized in the table below, represents the preliminary purchase price allocation. No cash was acquired and no liabilities were assumed as part of this acquisition. This allocation will be finalized as soon as the information becomes available, however, not to exceed one year from the acquisition date.
(Dollars in millions)


Property, Plant & Equipment
1

Goodwill
60

Acquired In-process Research and Development
24

Total Assets Acquired
85

Net Assets Acquired
85

Pro forma information related to the acquisition is not presented because the impact on the company's consolidated results of operations is not significant.
In March 2013, Monsanto acquired substantially all of the assets of Rosetta Green Ltd., a business based in Israel which specializes in the identification and use of unique genes to guide key processes in major crops including corn, soybeans and cotton. The acquisition of the company, which qualifies as a business under the Business Combinations topic of the ASC, will complement Monsanto's existing research platforms. Acquisition costs were less than $1 million and were classified as selling, general and administrative expenses. The total fair value and cash paid for the acquisition was $35 million. Goodwill and intangible assets are expected to be recorded on the Statements of Consolidated Financial Position from the acquisition of

10


MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

Rosetta Green. As of April 4, 2013, the initial accounting for the business combination has not been completed, including the measurement of certain intangible assets and goodwill. The business operations and employees of the acquired entity are expected to be included in the Seeds and Genomics segment results upon acquisition.
2012 Acquisitions: In June 2012, Monsanto acquired 100 percent of the outstanding stock of Precision Planting, Inc., a planting technology developer based in Tremont, Illinois. Precision Planting develops technology to improve yields through on-farm planting performance. The acquisition of the company is part of Monsanto’s Integrated Farming Systems unit, which utilizes advanced agronomic practices, seed genetics and innovative on-farm technology to deliver optimal yield to farmers while using fewer resources. Acquisition costs incurred in fiscal year 2012 were less than $1 million and were classified as selling, general and administrative expenses. The acquisition of Precision Planting qualifies as a business under the Business Combinations topic of the ASC. The total fair value of the acquisition was $255 million, including contingent consideration of $39 million, and the total cash paid for the acquisition was $209 million (net of cash acquired). The fair value was primarily allocated to goodwill and intangibles. The primary item that generated goodwill was the premium paid by the company for the right to control the acquired business and technology. The goodwill is deductible for tax purposes. The contingent consideration is to be paid in cash if certain operational and financial milestones are met on or before Aug. 31, 2020, up to a maximum target of $40 million. The estimated acquisition date fair value of the long-term other liability for the contingent consideration reflects a discount at a credit adjusted risk-free interest rate for the expected timing of each payment. See Note 14 — Fair Value Measurements — for further information.
In September 2011, Monsanto acquired 100 percent of the outstanding stock of Beeologics, a technology start-up business based in Israel, which researches and develops biological tools to provide targeted control of pests and diseases. The acquisition of the company, which qualifies as a business under the Business Combinations topic of the ASC, allows Monsanto to further explore the use of biologicals broadly in agriculture to provide farmers with innovative approaches to the challenges they face. Monsanto intends to use the base technology from Beeologics as a part of its continuing discovery and development pipeline. Acquisition costs were approximately $1 million and were classified as selling, general and administrative expenses. The total cash paid and the fair value of the acquisition was $113 million (net of cash acquired), and it was primarily allocated to goodwill and intangibles. The primary item that generated goodwill was the premium paid by the company for the right to control the acquired business and technology. The goodwill is deductible for tax purposes.
For the acquisitions described above, the business operations and employees of the acquired entity were included in the Seeds and Genomics reportable segment results upon acquisition.
NOTE 4.
CUSTOMER FINANCING PROGRAMS
Monsanto participates in customer financing programs as follows:
 
As  of
Feb. 28,
 
As of
Aug.  31,
(Dollars in millions)
2013
 
2012
Transactions that Qualify for Sales Treatment
 
 
 
U.S. agreement to sell customer receivables(1)
 
 
 
Outstanding balance
$
5

 
$
291

Maximum future payout under recourse provisions
1

 
17

Other U.S. and European agreements to sell accounts receivables(2)
 
 
 
Outstanding balance
$
2

 
$
34

Maximum future payout under recourse provisions
2

 
21

Agreements with Lenders(3)
 
 
 
Outstanding balance
$
135

 
$
85

Maximum future payout under the guarantee
98

 
56


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MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

The gross amount of receivables sold under transactions that qualify for sales treatment were: 
  
Gross Amount of Receivables Sold
 
Three Months Ended
Six Months Ended
(Dollars in millions)
Feb. 28, 2013
 
Feb. 29, 2012
Feb. 28, 2013
 
Feb. 29, 2012
Transactions that Qualify for Sales Treatment
 
 
 
 
 
 
U.S. agreement to sell customer receivables(1)
$

 
$

$
2

 
$
216

Other U.S. and European agreement to sell accounts receivables(2)
3

 

3

 
3

(1)
Monsanto has an agreement in the United States to sell customer receivables up to a maximum outstanding balance of $500 million and to service such accounts. These receivables qualify for sales treatment under the Transfers and Servicing topic of the ASC and, accordingly, the proceeds are included in net cash provided by operating activities in the Statements of Consolidated Cash Flows. The agreement includes recourse provisions and thus a liability is established at the time of sale that approximates fair value based upon the company’s historical collection experience and a current assessment of credit exposure.
(2)
Monsanto also sells account receivables in the United States and European regions, both with and without recourse. The sales within these programs qualify for sales treatment under the Transfers and Servicing topic of the ASC and, accordingly, the proceeds are included in net cash provided by operating activities in the Statements of Consolidated Cash Flows. The liability for the guarantees for sales with recourse is recorded at an amount that approximates fair value, based on the company’s historical collection experience for the customers associated with the sale of the receivables and a current assessment of credit exposure.
(3)
Monsanto has additional agreements with lenders to establish programs that provide financing for select customers in the United States, Brazil, Latin America and Europe. Monsanto provides various levels of recourse through guarantees of the accounts in the event of customer default. The term of the guarantee is equivalent to the term of the customer loans. The liability for the guarantees is recorded at an amount that approximates fair value, based on the company’s historical collection experience with customers that participate in the program and a current assessment of credit exposure. If performance is required under the guarantee, Monsanto may retain amounts that are subsequently collected from customers.
In addition to the arrangements in the above table, Monsanto also participates in a financing program in Brazil that allows Monsanto to transfer up to 1 billion Brazilian reais (approximately $500 million) for select customers in Brazil to a special purpose entity (SPE). Under the arrangement, a recourse provision requires Monsanto to cover the first credit losses within the program up to the amount of our investment. The company evaluated its relationship with the entity under the guidance within the Consolidation topic of the ASC and, as a result, the entity has been consolidated. For further information on this topic, see Note 5 — Variable Interest Entities.
There were no significant recourse or non-recourse liabilities for all programs as of Feb. 28, 2013, and Aug. 31, 2012. There were no significant delinquent loans for all programs as of Feb. 28, 2013, and Aug. 31, 2012.
NOTE 5.
VARIABLE INTEREST ENTITIES
Monsanto is involved with a special purpose entity and other entities that are deemed to be variable interest entities (VIEs). Monsanto has determined that the company holds a variable interest in an entity that is established as a revolving financing program. In addition, Monsanto has various variable interests in biotechnology companies that focus on plant gene research, development and commercialization. These variable interests have also been determined to be VIEs.
Consolidated VIE
Monsanto has a financing program in Brazil that is recorded as a consolidated VIE. For the most part, the VIE involving the revolving financing program is funded by investments from the company and other third parties, primarily investment funds, and have been established to service Monsanto’s customer receivables. An 84 percent and 88 percent senior interest in the entity is held by third parties, primarily investment funds, as of Feb. 28, 2013, and Aug. 31, 2012, respectively, and Monsanto holds the remaining 16 percent and 12 percent interest, respectively. Under the arrangement, Monsanto is required to maintain an investment in the VIE of at least 12 percent and could be required to provide addition contributions to the VIE. Monsanto currently has no unfunded commitments to the VIE. See Note 4Customer Financing Programs — for additional information regarding the revolving financing arrangement. Creditors have no recourse against Monsanto in the event of default by the VIE. The company’s financial or other support provided to the VIE is limited to its investment. Even though Monsanto holds a subordinate interest in the VIE, the VIE was established to service transactions involving the company and the company determines the receivables that are included in the revolving financing program. Therefore, the determination is that Monsanto has the power to direct the activities most significant to the economic performance of the VIE. As a result, the company is the primary beneficiary of the VIE and the VIE has been consolidated in Monsanto’s Consolidated Financial Statements. The

12


MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

assets of the VIE may only be used to settle the obligations of the entity. Third-party investors in the VIE do not have recourse to the general assets of Monsanto other than the maximum exposure to loss relating to the VIE. The following table presents the carrying value of assets and liabilities, which are identified as restricted assets and liabilities on the company’s Statements of Consolidated Financial Position, and the maximum exposure to loss relating to the VIE for which Monsanto is the primary beneficiary.
  
Financing Program VIE
 
As of Feb. 28,
 
As of Aug. 31,
(Dollars in millions)
2013
 
2012
Cash and cash equivalents
$
58

 
$
120

Trade receivables, net
132

 
52

Other current assets

 

Total Assets
190

 
172

Total Liabilities

 

Maximum Exposure to Loss
$
31

 
$
23

Non-Consolidated VIEs
Monsanto has variable interests through investments and arrangements with biotechnology companies that focus on plant gene research, development and commercialization. The company has not provided financial or other support with respect to these investments or arrangements other than its original interest. The company also has no implied or unfunded commitments to these VIEs. Monsanto’s maximum exposure to loss on these variable interests is limited to the amount of the company’s investment in the entity. The following table presents the carrying value of assets and liabilities, and the maximum exposure to loss relating to VIEs that the company does not consolidate.
  
Biotechnology VIEs
 
As of Feb. 28,
 
As of Aug. 31,
(Dollars in millions)
2013
 
2012
Property, plant and equipment, net
$
4

 
$
5

Other intangible assets, net
14

 
14

Total Non-Current Assets
18

 
19

Total Liabilities

 

Maximum Exposure to Loss
$

 
$

NOTE 6.
RESTRUCTURING
On June 23, 2009, the company’s Board of Directors approved a restructuring plan (2009 Restructuring Plan) to take future actions to reduce costs in light of the changing market supply environment for glyphosate. These actions were designed to enable Monsanto to stabilize the Agricultural Productivity business and allow it to deliver optimal gross profit and a sustainable level of operating cash in the coming years, while better aligning spending and working capital needs. The company also announced that it would take steps to better align the resources of its global seeds and traits business. These actions included certain product and brand rationalization within the seed businesses. On Sept. 9, 2009, the company committed to take additional actions related to the previously announced restructuring plan. Furthermore, while implementing the plan, the company identified additional opportunities to better align the company’s resources, and on Aug. 26, 2010, committed to take additional actions. The plan was substantially completed in the first quarter of fiscal year 2011, and the remaining payments were made in fiscal year 2012.

13


MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

There were no charges incurred for the three and six months ended Feb. 28, 2013, and Feb. 29, 2012. The following table displays the cumulative pretax charges of $723 million under the 2009 Restructuring Plan.
  
Cumulative Amount through Feb. 28, 2013
(Dollars in millions)
Seeds and
Genomics
 
Agricultural
Productivity
 
Total
Work Force Reductions
$
229

 
$
99

 
$
328

Facility Closures / Exit Costs
75

 
81

 
156

Asset Impairments
 
 
 
 
 
Property, plant and equipment
43

 
5

 
48

Inventory
119

 
13

 
132

Other intangible assets
59

 

 
59

Total Restructuring Charges, Net
$
525

 
$
198

 
$
723

The company’s written human resource policies are indicative of an ongoing benefit arrangement with respect to severance packages. Benefits paid pursuant to an ongoing benefit arrangement are specifically excluded from the Exit or Disposal Cost Obligations topic of the ASC, therefore severance charges incurred in connection with the 2009 Restructuring Plan are accounted for when probable and estimable as required under the Compensation – Nonretirement Postemployment Benefits topic of the ASC. In addition, when the decision to commit to a restructuring plan requires an asset impairment review, Monsanto evaluates such impairment issues under the Property, Plant and Equipment topic of the ASC.
There was no restructuring liability as of Feb. 28, 2013, and Aug. 31, 2012.
NOTE 7.
RECEIVABLES
Trade receivables on the Statements of Consolidated Financial Position are net of allowances of $74 million and $64 million as of Feb. 28, 2013, and Aug. 31, 2012, respectively.
The company has financing receivables that represent long-term customer receivable balances related to past due accounts which are not expected to be collected within the current year. The long-term customer receivables were $152 million and $156 million with a corresponding allowance for credit losses on these receivables of $138 million and $141 million as of Feb. 28, 2013, and Aug. 31, 2012, respectively. These long-term customer receivable balances and the corresponding allowance are included in long-term receivables, net on the Statements of Consolidated Financial Position. For these long-term customer receivables, interest is no longer accrued when the receivable is determined to be delinquent and classified as long-term based on estimated timing of collection.
The following table displays a roll forward of the allowance for credit losses related to long-term customer receivables.
(Dollars in millions)
  
Balance Aug. 31, 2011
$
213

Incremental Provision
3

Recoveries
(14
)
Write-offs
(54
)
Other(1) 
(7
)
Balance Aug. 31, 2012
$
141

Incremental Provision
1

Recoveries
(2
)
Write-offs
(7
)
Other(1)
5

Balance Feb. 28, 2013
$
138

(1)Includes reclassifications from current receivables and foreign currency translation adjustments.

14


MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

In addition, the company has long-term contractual receivables. These receivables are collected at fixed and determinable dates in accordance with the customer long-term agreement. The long-term contractual receivables were $241 million and $361 million as of Feb. 28, 2013, and Aug. 31, 2012, respectively, and did not have any allowance recorded related to these balances. These receivables are included in long-term receivables, net on the Statements of Consolidated Financial Position. There are no balances related to these long-term contractual receivables that are past due. These receivables are outstanding with large, reputable companies who have been timely with scheduled payments thus far and are considered to be fully collectible. Interest is accrued on these receivables in accordance with the agreements and is included within interest income in the Statements of Consolidated Operations.
On an ongoing basis, the company evaluates credit quality of its financing receivables utilizing aging of receivables, collection experience and write-offs, as well as evaluating existing economic conditions, to determine if an allowance is necessary.
NOTE 8.
INVENTORY
Components of inventory are:
 
As of Feb. 28
 
As of Aug. 31,
(Dollars in millions)
2013
 
2012
Finished Goods
$
1,151

 
$
1,050

Goods In Process
1,668

 
1,537

Raw Materials and Supplies
430

 
395

Inventory at FIFO Cost
3,249

 
2,982

Excess of FIFO over LIFO Cost
(154
)
 
(143
)
Total
$
3,095

 
$
2,839

NOTE 9.
GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the net carrying amount of goodwill for the first six months of fiscal year 2013, by segment, are as follows:
(Dollars in millions)
Seeds and
Genomics
 
Agricultural
Productivity
 
Total
Balance as of Aug. 31, 2012
$
3,378

 
$
57

 
$
3,435

Acquisition activity (see Note 3)
60

 

 
60

Effect of foreign currency translation adjustments
32

 
(8
)
 
24

Balance as of Feb. 28, 2013
$
3,470

 
$
49

 
$
3,519

Goodwill increased during the six months ended Feb. 28, 2013, due to the acquisition of Agradis and the effects of foreign currency translation adjustments. See Note 3 - Business Combinations - for further information. There were no events or circumstances indicating that goodwill might be impaired as of Feb. 28, 2013. The 2013 annual goodwill impairment test will be performed as of March 1, 2013.

15


MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

Information regarding the company’s other intangible assets is as follows:
  
As of Feb. 28, 2013
 
As of Aug. 31, 2012
(Dollars in millions)
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Carrying
Amount
 
Accumulated
Amortization
 
Net
Acquired Germplasm
$
1,134

 
$
(722
)
 
$
412

 
$
1,144

 
$
(707
)
 
$
437

Acquired Intellectual Property
1,091

 
(781
)
 
310

 
1,085

 
(771
)
 
314

Trademarks
351

 
(133
)
 
218

 
348

 
(124
)
 
224

Customer Relationships
307

 
(169
)
 
138

 
285

 
(152
)
 
133

Other
163

 
(93
)
 
70

 
168

 
(87
)
 
81

Total Other Intangible Assets, Finite Lives
$
3,046

 
$
(1,898
)
 
$
1,148

 
$
3,030

 
$
(1,841
)
 
$
1,189

In Process Research & Development, Indefinite Lives
72

 

 
72

 
48

 

 
48

Total Other Intangible Assets
$
3,118

 
$
(1,898
)
 
$
1,220

 
$
3,078

 
$
(1,841
)
 
$
1,237

The increase in total other intangible assets during the six months ended Feb. 28, 2013, is primarily related to the acquisition of Agradis. Total amortization expense of other intangible assets was $31 million and $38 million in second quarter of fiscal years 2013 and 2012, respectively. Total amortization expense of other intangible assets was $59 million and $75 million for the six months ended Feb. 28, 2013, and Feb. 29, 2012, respectively. The estimated intangible asset amortization expense for fiscal year 2013 through fiscal year 2017 is as follows:
(Dollars in millions)
Amount
2013
$
104

2014
123

2015
119

2016
120

2017
109

NOTE 10.
INVESTMENTS AND EQUITY AFFILIATES
Investments
As of Feb. 28, 2013, and Aug. 31, 2012, Monsanto has short-term investments outstanding of $310 million and $302 million, respectively. The investments are comprised of commercial paper with original maturities of one year or less. See Note 14 — Fair Value Measurements.
Monsanto has investments in long-term equity securities, which are considered available-for-sale. As of Feb. 28, 2013, and Aug. 31, 2012, these long-term equity securities are recorded in other assets in the Statements of Consolidated Financial Position at a fair value of $20 million and $35 million, respectively. Net unrealized gain (net of deferred taxes) of $5 million is included in accumulated other comprehensive loss in shareowners’ equity related to these investments as of Feb. 28, 2013, and Aug. 31, 2012. For both the three and six month periods ended Feb. 28, 2013 and Feb. 29, 2012, no significant impairments were recorded.
Monsanto has cost basis investments recorded in other assets in the Statements of Consolidated Financial Position. As of Feb. 28, 2013, and Aug. 31, 2012, these investments were recorded at $85 million and $70 million, respectively. Due to the nature of these investments, the fair market value is not readily determinable. These investments are reviewed for impairment indicators. For both the three and six month periods ended Feb. 28, 2013 and Feb. 29, 2012, no impairments were recorded.

16


MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

Equity Affiliates
Monsanto owns a 19 percent interest in a seed supplier that produces, conditions and distributes corn and soybean seeds. Monsanto is accounting for this investment as an equity method investment as Monsanto has the ability to exercise significant influence over the seed supplier. As of Feb. 28, 2013, and Aug. 31, 2012, this investment is recorded in other assets in the Statements of Consolidated Financial Position at $76 million and $70 million, respectively. Monsanto purchased $87 million and $196 million of inventory from the seed supplier for the three and six months ended Feb. 28, 2013, respectively, and $70 million and $130 million for the three and six months ended Feb. 29, 2012, respectively. There were no sales of inventory to the seed supplier for both the three and six months ended Feb. 28, 2013, and Feb. 29, 2012. As of Feb. 28, 2013, the amount payable to the seed supplier is $68 million and is recorded in accounts payable in the Statement of Consolidated Financial Position. As of Aug. 31, 2012, there were no amounts payable to the seed supplier. As of Feb. 28, 2013, there were no prepayments. As of Aug. 31, 2012, there were prepayments of $13 million included in other current assets in the Statement of Consolidated Financial Position for inventory that was delivered in fiscal year 2013.
NOTE 11.
DEFERRED REVENUE
As of Feb. 28, 2013, and Aug. 31, 2012, short-term deferred revenue was $756 million and $396 million, respectively. This balance primarily consists of cash received related to Monsanto’s prepayment programs in the United States and Brazil. These programs allow Monsanto’s customers to receive a discount if they prepay by a certain date, and the short-term deferred revenue balance is consistent with the seasonality of Monsanto’s business. Prepayment options are attractive to customers given the discounted pricing and the ability to utilize cash flow from the prior season's grain harvest to pay for the next season's seed purchases. The deferred revenue balance related to these prepayment programs is considered short-term in nature and thus classified in current liabilities as the prepayments are for products to be shipped within the next 12 months.
In 2008, Monsanto entered into a corn herbicide tolerance and insect control trait technologies agreement with Pioneer Hi-Bred International, Inc. Among its provisions, the agreement modified certain existing corn license agreements between the parties. Under the agreement, which requires fixed annual payments, the company recorded a receivable and deferred revenue of $635 million in first quarter 2008. Cumulative cash receipts will be $725 million over an eight-year period. Revenue of $20 million related to this agreement was recorded for each of the three months ended Feb. 28, 2013, and Feb. 29, 2012, and revenue of $40 million was recorded for each of the six months ended Feb. 28, 2013, and Feb. 29, 2012. As of Feb. 28, 2013, and Aug. 31, 2012, the remaining receivable balance is $227 million and $313 million, respectively. The majority of this balance is included in long-term receivables on the Statements of Consolidated Financial Position, and the current portion is included in trade receivables. As of Feb. 28, 2013, and Aug. 31, 2012, the remaining deferred revenue balance is $198 million and $238 million, respectively, of which $79 million is included in current deferred revenue in both periods. The interest income recorded on this receivable is $2 million for each of the three months ended Feb. 28, 2013, and Feb. 29, 2012. Interest income recorded on this receivable is $3 million and $5 million for the six months ended Feb. 28, 2013, and Feb. 29, 2012, respectively.
In 2008, Monsanto and Syngenta entered into a Genuity Roundup Ready 2 Yield Soybean License Agreement, which grants Syngenta access to Monsanto’s Genuity Roundup Ready 2 Yield Soybean technology in consideration of royalty payments from Syngenta, based on sales. The minimum obligation from Syngenta over the nine-year contract period is $81 million. Revenue of $8 million and $3 million related to this agreement was recorded for the three months ended Feb. 28, 2013, and Feb. 29, 2012, respectively, and revenue of $12 million and $4 million was recorded for the six months ended Feb. 28, 2013, and Feb. 29, 2012, respectively. As of Feb. 28, 2013, and Aug. 31, 2012, the remaining receivable balance is $58 million and $67 million, respectively. The majority of this balance is included in long-term receivables on the Statements of Consolidated Financial Position and the current portion is included in trade receivables. As of Feb. 28, 2013, and Aug. 31, 2012, the remaining deferred revenue balance is $45 million and $56 million, respectively, of which $24 million and $12 million, respectively, is included in current deferred revenue.
NOTE 12.
INCOME TAXES
Monsanto recorded a tax benefit of $47 million in the first half of 2013 primarily as a result of a capital loss from a deemed liquidation of a subsidiary, the retroactive extension of the research and development credit pursuant to the enactment of the American Taxpayer Relief Act of 2012 on Jan. 2, 2013, and the favorable resolution of domestic and ex-US tax matters.


17


MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

NOTE 13.
DEBT AND OTHER CREDIT ARRANGEMENTS
In November 2011, Monsanto filed a new shelf registration with the SEC (2011 shelf registration) that allows the company to issue an unlimited capacity of debt, equity and hybrid offerings. The 2011 shelf registration will expire in November 2014.
In July 2012, Monsanto issued $250 million of 2.20% Senior Notes which are due on July 15, 2022, (2022 Senior Notes) and $250 million of 3.60% Senior Notes which are due on July 15, 2042 (2042 Senior Notes). Both were issued under the 2011 shelf registration.
The net proceeds from the sale of the 2022 and 2042 Senior Notes were used for general corporate purposes, including refinancing of the company’s indebtedness.
Monsanto has a $2 billion credit facility agreement with a group of banks that provides a senior unsecured revolving credit facility through April 1, 2016. Effective May 31, 2012, the facility was extended one year from April 1, 2015, to April 1, 2016.
The fair value of the total short-term debt was $152 million and $36 million as of Feb. 28, 2013, and Aug. 31, 2012, respectively. The fair value of the total long-term debt was $2,409 million and $2,411 million as of Feb. 28, 2013, and Aug. 31, 2012, respectively.
NOTE 14.
FAIR VALUE MEASUREMENTS
Monsanto determines the fair market value of its financial assets and liabilities based on quoted market prices, estimates from brokers, and other appropriate valuation techniques. The company uses the fair value hierarchy established in the Fair Value Measurements and Disclosures topic of the ASC, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy contains three levels as follows, with Level 3 representing the lowest level of input:
Level 1 — Values based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2 — Values based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, discounted cash flow models, or model-based valuation techniques adjusted, as necessary, for credit risk.
Level 3 — Values generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions would reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques could include use of option pricing models, discounted cash flow models and similar techniques.
The following tables set forth by level Monsanto’s assets and liabilities that were accounted for at fair value on a recurring basis as of Feb. 28, 2013, and Aug. 31, 2012. As required by the Fair Value Measurements and Disclosures topic of the ASC, assets and liabilities are classified in their entirety based on the lowest level of input that is a significant component of the fair value measurement. Monsanto’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of fair value assets and liabilities within the fair value hierarchy levels.

18


MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

  
Fair Value Measurements at Feb. 28, 2013, Using
(Dollars in millions)
Level 1
 
Level 2
 
Level 3
 
Cash
Collateral
Offset(1)
 
Net
Balance
Assets at Fair Value:
 
 
 
 
 
 
 
 
 
Cash equivalents
$
4,024

 
$

 
$

 
$

 
$
4,024

Short-term investments
310

 

 

 

 
310

Equity securities
20

 

 

 

 
20

Derivative assets related to:
 
 
 
 
 
 
 
 
 
Foreign currency

 
6

 

 

 
6

Commodity contracts
10

 
12

 

 
(10
)
 
12

Total Assets at Fair Value
$
4,364

 
$
18

 
$

 
$
(10
)
 
$
4,372

Liabilities at Fair Value:
 
 
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
40

 
$

 
$
40

Derivative liabilities related to:
 
 
 
 
 
 
 
 
 
Foreign currency

 
16

 

 

 
16

Commodity contracts
39

 
18

 

 
(37
)
 
20

Total Liabilities at Fair Value
$
39

 
$
34

 
$
40

 
$
(37
)
 
$
76

Liabilities Not Recorded at Fair Value:
 
 
 
 
 
 
 
 
 
Short-term debt instruments(2)
$

 
$
152

 
$

 
$

 
$
152

Long-term debt instruments(2)

 
2,409

 

 

 
2,409

Total Liabilities Not Recorded at Fair Value
$

 
$
2,561

 
$

 
$

 
$
2,561

Total Liabilities Recorded and Not Recorded at Fair Value
$
39

 
$
2,595

 
$
40

 
$
(37
)
 
$
2,637

(1)
As allowed by the Derivatives and Hedging topic of the ASC, commodity derivative assets and liabilities have been offset by cash collateral due and paid under a master netting arrangement.
(2)
Short-term and long-term debt instruments are not recorded at fair value on a recurring basis however they are measured at fair value for disclosure purposes, as required by the Fair Value Measurements and Disclosures topic of the ASC.


19


MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

  
Fair Value Measurements at Aug. 31, 2012, Using
(Dollars in millions)
Level 1
 
Level 2
 
Level 3
 
Cash
Collateral
Offset (1)
 
Net
Balance
Assets at Fair Value:
 
 
 
 
 
 
 
 
 
Cash equivalents
$
2,787

 
$

 
$

 
$

 
$
2,787

Short-term investments
302

 

 

 

 
302

Equity securities
35

 

 

 

 
35

Derivative assets related to:
 
 
 
 
 
 
 
 
 
Foreign currency

 
11

 

 

 
11

Commodity contracts
86

 
23

 

 
(85
)
 
24

Total Assets at Fair Value
$
3,210

 
$
34

 
$

 
$
(85
)
 
$
3,159

Liabilities at Fair Value:
 
 
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
39

 
$

 
$
39

Derivative liabilities related to:
 
 
 
 
 
 
 
 
 
Foreign currency

 
7

 

 

 
7

Commodity contracts
7

 
22

 

 
(7
)
 
22

Total Liabilities at Fair Value:
$
7

 
$
29

 
$
39

 
$
(7
)
 
$
68

Liabilities Not Recorded at Fair Value:
 
 
 
 
 
 
 
 
 
Short-term debt instrument(2)
$

 
$
36

 
$

 
$

 
$
36

Long-term debt instruments(2)

 
2,411

 

 

 
2,411

Total Liabilities Not Recorded at Fair Value
$

 
$
2,447

 
$

 
$

 
$
2,447

Total Liabilities Recorded and Not Recorded at Fair Value
$
7

 
$
2,476

 
$
39

 
$
(7
)
 
$
2,515

(1)
As allowed by the Derivatives and Hedging topic of the ASC, commodity derivative assets and liabilities have been offset by cash collateral due and paid under a master netting arrangement.
(2)
Short-term and long-term debt instruments are not recorded at fair value on a recurring basis however they are measured at fair value for disclosure purposes, as required by the Fair Value Measurements and Disclosures topic of the ASC.
The company’s derivative contracts are measured at fair value, including forward commodity purchase and sale contracts, exchange-traded commodity futures and option contracts, and OTC (over the counter) instruments related primarily to agricultural commodities, energy and raw materials, interest rates, and foreign currencies. Exchange-traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified as Level 1. Fair value for forward commodity purchase and sale contracts is estimated based on exchange-quoted prices adjusted for differences in local markets. These differences are generally determined using inputs from broker or dealer quotations or market transactions in either the listed or OTC markets. When observable inputs are available for substantially the full term of the contract, it is classified as Level 2. Based on historical experience with the company’s suppliers and customers, the company’s own credit risk and knowledge of current market conditions, the company does not view nonperformance risk to be a significant input to the fair value for the majority of its forward commodity purchase and sale contracts. The effective portions of changes in the fair value of derivatives designated as cash flow hedges are recognized in the Statements of Consolidated Financial Position as a component of accumulated other comprehensive loss until the hedged items are recorded in earnings or it is probable the hedged transaction will no longer occur. Changes in the fair value of derivatives are recognized in the Statements of Consolidated Operations as a component of net sales, cost of goods sold, and other expense, net.
The company’s short-term investments are comprised of commercial paper. The company’s equity securities are comprised of publicly traded equity investments. Commercial paper and publicly traded equity investments are valued using quoted market prices and are classified as Level 1.
The fair value of short-term and long-term debt was determined based on current market yields for our debt traded in the secondary market.

20


MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

The company’s contingent consideration relates to the Precision Planting acquisition and is measured at fair value using a combination of the probability weighted method and the income approach using market price of risk. This fair value amount is reflected as a component of miscellaneous short-term accruals in the Statements of Consolidated Financial Position. See Note 3Business Combinations — for purchase accounting information. The fair value is principally based on unobservable inputs (a Level 3 measurement) consisting mainly of the amount of future cash flows adjusted for probabilities associated with meeting certain operational and financial milestones and discounted at the appropriate market rate. A change in significant unobservable inputs of 10 percent would not result in a change in the fair value of the contingent consideration and the fair value recorded represents the maximum target of $40 million. Changes in the fair value of contingent consideration during the six month period ended Feb. 28, 2013, were recognized in the Statements of Consolidated Operations as a component of selling, general and administrative expenses.
For the three and six month periods ended Feb. 28, 2013, and Feb. 29, 2012, the company had no transfers between Level 1, Level 2 and Level 3. Monsanto does not have any assets with fair value determined using Level 3 inputs as of Feb. 28, 2013, and Aug. 31, 2012. The following table summarizes the change in fair value of the Level 3 liability for the six months ended Feb. 28, 2013.
(Dollars in millions)
Contingent
Consideration
Balance Sept. 1, 2012
$
39

Loss included in earnings
1

Balance Feb. 28, 2013
$
40

There were no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition during the three and six months ended Feb. 28, 2013, and Feb. 29, 2012.
The recorded amounts of cash, trade receivables, miscellaneous receivables, third-party guarantees, accounts payable, grower production accruals, accrued marketing programs and miscellaneous short-term accruals approximate their fair values as of Feb. 28, 2013, and Aug. 31, 2012.
Management is ultimately responsible for all fair values presented in the company’s consolidated financial statements. The company performs analysis and review of the information and prices received from third parties to ensure that the prices represent a reasonable estimate of fair value. This process involves quantitative and qualitative analysis. As a result of the analysis, if the company determines there is a more appropriate fair value based upon the available market data, the price received from the third party is adjusted accordingly.
NOTE 15.
FINANCIAL INSTRUMENTS
Cash Flow Hedges
The company uses foreign currency options and foreign currency forward contracts as hedges of anticipated sales or purchases denominated in foreign currencies. The company enters into these contracts to protect itself against the risk that the eventual net cash flows will be adversely affected by changes in exchange rates.
Monsanto’s commodity price risk management strategy is to use derivative instruments to minimize significant unanticipated earnings fluctuations that may arise from volatility in commodity prices. Price fluctuations in commodities, mainly in corn and soybeans, can cause the actual prices paid to production growers for corn and soybean seeds to differ from anticipated cash outlays. Monsanto uses commodity futures and options contracts to manage these risks. Monsanto’s energy and raw material risk management strategy is to use derivative instruments to minimize significant unanticipated manufacturing cost fluctuations that may arise from volatility in natural gas, diesel and ethylene prices.
Monsanto’s interest rate risk management strategy is to use derivative instruments, such as forward-starting interest rate swaps, to minimize significant unanticipated earnings fluctuations that may arise from volatility in interest rates of the company’s borrowings and to manage the interest rate sensitivity of its debt.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive loss and reclassified into earnings in the period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

21


MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

The maximum term over which the company is hedging exposures to the variability of cash flow (for all forecasted transactions) is 18 months for foreign currency hedges and 34 months for commodity hedges. During the next 12 months, a pretax net gain of approximately $46 million is expected to be reclassified from accumulated other comprehensive loss into earnings. During the three and six months ended Feb. 28, 2013, and Feb. 29, 2012, no cash flow hedges were discontinued.
Fair Value Hedges
The company uses commodity futures and options contracts as fair value hedges to manage the value of its soybean inventory. For derivative instruments that are designated and qualify as fair value hedges, both the gain or loss on the derivative and the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. No fair value hedges were discontinued during the three and six months ended Feb. 28, 2013, or Feb. 29, 2012.
Derivatives Not Designated as Hedging Instruments
The company uses foreign currency contracts to hedge the effects of fluctuations in exchange rates on foreign currency denominated third-party and intercompany receivables and payables. Both the gain or loss on the derivative and the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.
The company uses commodity option contracts to hedge anticipated cash payments to corn growers in the United States, Mexico and Brazil, which can fluctuate with changes in corn price. Because these option contracts do not meet the provisions specified by the Derivatives and Hedging topic of the ASC, they do not qualify for hedge accounting treatment. Accordingly, the gain or loss on these derivatives is recognized in current earnings.
To reduce credit exposure in Latin America, Monsanto collects payments on certain customer accounts in grain. Such payments in grain are negotiated at or near the time Monsanto’s products are sold to the customers and are valued at the prevailing grain commodity prices. By entering into forward sales contracts related to grain, Monsanto mitigates the commodity price exposure from the time a contract is signed with a customer until the time a grain merchant collects the grain from the customer on Monsanto’s behalf. The forward sales contracts do not qualify for hedge accounting treatment under the Derivatives and Hedging topic of the ASC. Accordingly, the gain or loss on these derivatives is recognized in current earnings.
Monsanto uses interest rate contracts to minimize the variability of forecasted cash flows arising from the company’s VIE. The interest rate contracts do not qualify for hedge accounting treatment under the Derivatives and Hedging Topic of the ASC. Accordingly, the gain or loss on these derivatives is recognized in current earnings.
Certain of Monsanto’s grower contracts that include minimum guaranteed payment provisions are considered derivatives under the Derivatives and Hedging Topic of the ASC. These contracts do not qualify for hedge accounting treatment. Accordingly, the gain or loss on these derivatives is recognized in current earnings.
Financial instruments are neither held nor issued by the company for trading purposes.
The notional amounts of the company’s derivative instruments outstanding as of Feb. 28, 2013, and Aug. 31, 2012, were as follows:
 
As of Feb. 28,
 
As of Aug. 31,
(Dollars in millions)
2013
 
2012
Derivatives Designated as Hedges:
 
 
 
Foreign exchange contracts
$
408

 
$
397

Commodity contracts
1,074

 
590

Total Derivatives Designated as Hedges
$
1,482

 
$
987

Derivatives Not Designated as Hedges:
 
 
 
Foreign exchange contracts
$
1,255

 
$
949

Commodity contracts
409

 
357

Interest rate contracts
166

 
161

Total Derivatives Not Designated as Hedges
$
1,830

 
$
1,467


22


MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

The fair values of the company’s derivative instruments outstanding as of Feb. 28, 2013, and Aug. 31, 2012, were as follows:
  
Balance Sheet Location
Fair Value
 
 
As of Feb. 28,
 
As of Aug. 31,
(Dollars in millions)
 
2013
 
2012
Asset Derivatives:
 
 
Derivatives designated as hedges:
 
 
 
 
Foreign exchange contracts
Miscellaneous receivables
$
5

 
$
6

Foreign exchange contracts
Other assets
1

 

Commodity contracts
Other current assets(1)
10

 
70

Commodity contracts
Other assets(1)

 
16

Total derivatives designated as hedges
 
16

 
92

Derivatives not designated as hedges:
 
 
 
 
Foreign exchange contracts
Miscellaneous receivables

 
5

Commodity contracts
Trade receivables, net
1

 
12

Commodity contracts
Miscellaneous receivables
9

 
7

Commodity contracts
Other current assets(1)
2

 
4

Total derivatives not designated as hedges
 
12

 
28

Total Asset Derivatives
 
$
28

 
$
120

Liability Derivatives:
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
Foreign exchange contracts
Miscellaneous short-term accruals
$

 
$
3

Commodity contracts
Other current assets(1)
30

 

Commodity contracts
Other assets(1)
6

 

Commodity contracts
Miscellaneous short-term accruals
5

 
7

Commodity contracts
Other liabilities
2

 
3

Total derivatives designated as hedges
43

 
13

Derivatives not designated as hedges:
 
 
Foreign exchange contracts
Miscellaneous short-term accruals
16

 
4

Commodity contracts
Trade receivables, net(1)
10

 
6

Commodity contracts
Other current assets(1)
4

 
6

Commodity contracts
Miscellaneous short-term accruals

 
7

Total derivatives not designated as hedges
30

 
23

Total Liability Derivatives
$
73

 
$
36

(1)
As allowed by the Derivatives and Hedging topic of the ASC, corn and soybean commodity derivative assets and liabilities have been offset by cash collateral due and paid under a master netting arrangement. Therefore, all commodity contracts that are in an asset or liability position are included in asset accounts within the Statements of Consolidated Financial Position. See Note 14Fair Value Measurements — for a reconciliation to amounts reported in the Statements of Consolidated Financial Position as of Feb. 28, 2013, and Aug. 31, 2012.

23


MONSANTO COMPANY
 
SECOND QUARTER 2013 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

The gains and losses on the company’s derivative instruments were as follows:
 
Amount of Gain  (Loss)
Recognized in AOCI(1) (Effective
Portion)
 
Amount of Gain (Loss)
Recognized in Income(2)(3)
 
 
 
Three Months Ended
 
Three Months Ended
 
Income Statement Classification
(Dollars in millions)
Feb. 28, 2013
 
Feb. 29, 2012
 
Feb. 28, 2013
 
Feb. 29, 2012
 
Derivatives Designated as Hedges:
 
 
 
 
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(4)
 
 
 
 
$
(6
)
 
$
(7
)
 
Cost of goods sold
Cash flow hedges:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
4

 
$
(6
)
 

 
1

 
Net sales
Foreign exchange contracts
1

 
(3
)
 
(1
)
 
1

 
Cost of goods sold
Commodity contracts
(87
)
 
28

 
43

 
46

 
Cost of goods sold
Interest rate contracts
<