10-K 1 mon-20140831x10k.htm 10-K MON-2014.08.31-10K
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Aug. 31, 2014
or
[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 001-16167
MONSANTO COMPANY
Exact name of registrant as specified in its charter
Delaware
 
43-1878297
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
800 North Lindbergh Blvd., St. Louis, Missouri
 
63167
(Address of principal executive offices)
 
(Zip Code)
 
 
Registrant’s telephone number including area code:
 
(314) 694-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock $0.01 par value
 
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [X] No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One): Large Accelerated Filer [X] Accelerated Filer [ ] Non-Accelerated Filer [ ] Smaller Reporting Company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter (Feb. 28, 2014): approximately $57.5 billion.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 484,073,332 shares of common stock, $0.01 par value, outstanding at Oct. 24, 2014.
Documents Incorporated by Reference
Portions of Monsanto Company’s definitive proxy statement, which is expected to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in December 2014, are incorporated herein by reference into Part III of this Annual Report on Form 10-K.


MONSANTO COMPANY
 
2014 FORM 10-K

INTRODUCTION
This Annual Report on Form 10-K is a document that U.S. public companies file with the Securities and Exchange Commission (“SEC”) every year. Part II of the Form 10-K contains the business information and financial statements that many companies include in the financial sections of their annual reports. The other sections of this Form 10-K include further information about our business that we believe will be of interest to investors. We hope investors will find it useful to have all of this information in a single document.
The SEC allows us to report information in the Form 10-K by “incorporating by reference” from another part of the Form 10-K or from the proxy statement. You will see that information is “incorporated by reference” in various parts of our Form 10-K. The proxy statement will be available on our website after it is filed with the SEC in December 2014.
Monsanto was incorporated in Delaware on Feb. 9, 2000, as a subsidiary of Pharmacia Corporation (subsequently converted to Pharmacia LLC). Monsanto includes the operations, assets and liabilities that were previously the agricultural business of Pharmacia. Pharmacia is now a subsidiary of Pfizer Inc.
“Monsanto,” “the company,” “we,” “our” and “us” are used interchangeably to refer to Monsanto Company or to Monsanto Company and its subsidiaries, as appropriate to the context. With respect to the time period prior to Sept. 1, 2000, these defined terms also refer to the agricultural business of Pharmacia.
Unless otherwise indicated, trademarks owned or licensed by Monsanto or its subsidiaries are shown in special type. Unless otherwise indicated, references to “Roundup herbicides” mean Roundup branded herbicides, excluding all lawn-and-garden herbicides, and references to “Roundup and other glyphosate-based herbicides” exclude all lawn-and-garden herbicides.
Information in this Form 10-K is current as of Oct. 29, 2014, unless otherwise specified.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
In this report, and from time to time throughout the year, we share our expectations for our company’s future performance. These forward-looking statements include statements about our business plans; the potential development, regulatory approval, and public acceptance of our products; our expected financial performance, including sales performance, and the anticipated effect of our strategic actions; the anticipated benefits of recent acquisitions; the outcome of contingencies, such as litigation 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 “Legal Proceedings,” “Overview — Executive Summary — Outlook,” “Seeds and Genomics Segment,” “Agricultural Productivity Segment,” “Financial Condition, Liquidity, and Capital Resources” and “Outlook.” Any statements we make that are not matters of current reportage or historical fact should be considered forward-looking. Such statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “will” and similar expressions. By their nature, these types of statements are uncertain and are not guarantees of our future performance.
Our forward-looking statements represent our estimates and expectations at the time that we make them. However, circumstances change constantly, often unpredictably, and investors should not place undue reliance on these statements. Many events beyond our control will determine whether our expectations will be realized. We disclaim any current intention or obligation to revise or update any forward-looking statements, or the factors that may affect their realization, whether in light of new information, future events or otherwise, and investors should not rely on us to do so. In the interests of our investors, and in accordance with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, Part I. Item 1A. Risk Factors below sets forth some of the important reasons that actual results may be materially different from those that we anticipate.

1

MONSANTO COMPANY
 
2014 FORM 10-K

TABLE OF CONTENTS FOR FORM 10-K

 
Page
Item 1.
 
 
 
 
 
 
 
 
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
Item 5.
Item 6.
Item 7.
 
 
 
 
 
 
 
Item 7A.
Item 8.
 
 
 
 
 
 
 
 
Item 9.
Item 9A.
Item 9B.
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
Item 15.


2

MONSANTO COMPANY
 
2014 FORM 10-K

PART I
ITEM 1. BUSINESS
Monsanto Company, along with its subsidiaries, is a leading global provider of agricultural products for farmers. Our seeds, biotechnology traits, herbicides, and precision agriculture products 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. We view our Seeds and Genomics segment as the driver for future growth for our company. In our Agricultural Productivity segment, global glyphosate producers have substantial capacity to supply the market and we expect this global capacity to maintain pressure on margins.
We provide information about our business, including analyses, significant news releases, and other supplemental information, on our website: www.monsanto.com. In addition, we make available through our website, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after they have been filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Forms 3, 4 and 5 filed with respect to our equity securities under Section 16(a) of the Exchange Act are also available on our website by the end of the business day after filing. All of these materials can be found under the “Investors” tab. Our website also includes the following corporate governance materials, under the tab “Who We Are — Corporate Governance”: our Code of Business Conduct, our Code of Ethics for Chief Executive and Senior Financial Officers, our Board of Directors’ Charter and Corporate Governance Guidelines, and charters of our Board committees. These materials are also available on paper. Any shareowner may request them by contacting the Office of the General Counsel, Monsanto Company, 800 N. Lindbergh Blvd., St. Louis, Missouri, 63167. Information on our website does not constitute part of this report.
A description of our business follows.
SEEDS AND GENOMICS SEGMENT
Through our Seeds and Genomics segment, we produce leading seed brands, including DEKALB, Asgrow, Deltapine, Seminis and De Ruiter, and we develop biotechnology traits that assist farmers in controlling insects and weeds and precision agriculture products to assist farmers in decision making. We also provide other seed companies with genetic material for their seed brands. The tabular information about net sales of our seeds and traits that appears in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) — Seeds and Genomics Segment — is incorporated herein by reference.
 
Major Products
  
Applications
  
Major Brands
Germplasm
  
Row crop seeds:
Corn hybrids and foundation seed
Soybean varieties and foundation seed
Cotton varieties, hybrids and foundation seed
Other row crop varieties and hybrids, such as canola

  
 
DEKALB, Channel for corn
Asgrow for soybeans
Deltapine for cotton
 

 
 
Vegetable seeds:
Open field and protected-culture seed for tomato, pepper, melon, cucumber, pumpkin, squash, beans, broccoli, onions, and lettuce, among others

 

Seminis and De Ruiter for vegetable seeds

Biotechnology traits(1)
  
Enable crops to protect themselves from borers and rootworm in corn, certain lepidopteran insects in soybeans, and leaf- and boll-feeding worms in cotton, reducing the need for applications of insecticides

  
SmartStax, YieldGard, YieldGard VT Triple, VT Triple PRO and VT Double PRO for corn; Intacta RR2 PRO for soybeans;
Bollgard and Bollgard II for cotton

 
 
Enable crops, such as corn, soybeans, cotton and canola, to be tolerant of Roundup and other glyphosate-based herbicides

 
Roundup Ready and Roundup Ready 2 Yield
(soybeans only)
Genuity, global umbrella trait brand

(1)
Monsanto also offers farmers stacked-trait products, which are single-seed products in which two or more traits are combined.
 

3

MONSANTO COMPANY
 
2014 FORM 10-K

Distribution of Products
We have a worldwide distribution and sales and marketing organization for our seeds and traits. We sell our products under Monsanto brands and license technology and genetic material to others for sale under their own brands. Through distributors, independent retailers and dealers, agricultural cooperatives, and agents, we market our DEKALB, Asgrow and Deltapine branded germplasm to farmers in every agricultural region of the world. In the United States, we market regional seed brands under our American Seeds, LLC and Channel Bio, LLC businesses to farmers directly, as well as through dealers, agricultural cooperatives and agents. In countries where they are approved for sale, we market and sell our trait technologies with our branded germplasm, pursuant to license agreements with our farmer customers. In Brazil, Argentina and Paraguay, we have implemented a point-of-delivery, grain-based payment system. We contract with grain handlers to collect applicable trait fees when farmers deliver their grain. In addition to selling our products under our own brands, we license a broad package of germplasm and trait technologies to large and small seed companies in the United States and certain international markets. Those seed companies in turn market our trait technologies in their branded germplasm; they may also market our germplasm under their own brand name. Our vegetable seeds are predominantly marketed under either the Seminis or De Ruiter brand in more than 150 countries either directly to farmers or through distributors, independent retailers and dealers, agricultural cooperatives, plant raisers and agents.
Competition
The global market for the products of our Seeds and Genomics segment is competitive, and the competition has intensified. Both our row crops and our vegetable seed businesses compete with numerous multinational agrichemical and seed marketers globally and with hundreds of smaller companies regionally. Most of our seed competitors in row crops are also licensees of our germplasm or biotechnology traits and a few of our vegetable seed business competitors have licensed biotech traits for sweet corn or genetic improvements through advanced breeding. In certain countries, we also compete with government-owned seed companies. Our biotechnology traits compete as a system with other practices, including the application of agricultural chemicals, and traits developed by other companies. Our weed- and insect-control systems compete with chemical and seed products produced by other agrichemical and seed marketers. Competition for the discovery of new traits based on biotechnology or genomics is likely to come from major global agrichemical companies, smaller biotechnology research companies and institutions, state-funded programs and academic institutions. Enabling technologies to enhance biotechnology trait development may also come from academic researchers and biotechnology research companies. Competitors using our technology outside of license terms and farmers who save seed from one year to the next (in violation of license or other commercial terms) also affect competitive conditions.
Product performance (in particular, crop vigor and yield for our row crops and quality for our vegetable seeds), customer support and service, intellectual property rights and protection, product availability and planning and price are important elements of our market success in seeds. In addition, distributor, retailer and farmer relationships are important in the United States and many other countries. The primary factors underlying the competitive success of traits are performance and commercial viability; timeliness of introduction; value compared with other practices and products; market coverage; service provided to distributors, retailers and farmers; governmental approvals; value capture; public acceptance; and environmental characteristics.
Patents, Trademarks and Licenses
In the United States and many foreign countries, Monsanto holds a broad business portfolio of patents, trademarks and licenses that provide intellectual property protection for its seeds and genomics-related products and processes. Monsanto routinely obtains patents and/or plant variety protection for its breeding technology, commercial varietal seed products, and for the parents of its commercial hybrid seed products. Monsanto also routinely obtains registrations for its commercial seed products in registration countries, as well as Plant Variety Protection Act Certificates in the United States and equivalent plant breeders’ rights in other countries. In soybeans, while Monsanto’s patent coverage on the first generation Roundup Ready trait for soybeans has expired, most Roundup Ready soybeans in the U.S. are protected by utility patents covering specific varieties. In addition, most of our customers and licensees are choosing our second generation Roundup Ready 2 Yield trait containing soybean seed with patents that extend into the next decade. In Brazil, we expect farmers to adopt our next generation Intacta RR2 PRO soybean traits, which will also have patent coverage extending into the next decade. In corn, patent coverage on our first generation YieldGard trait has expired; however, most farmers have already upgraded to next generation Genuity corn traits with patent coverage extending into the next decade. In cotton, most growers globally are already using our second generation traits with patent coverage extending into the next decade.
 
Monsanto broadly licenses technology and patents to other parties. For example, Monsanto has licensed the Roundup Ready trait in soybean, corn, canola and cotton seeds and the YieldGard traits in corn to a wide range of commercial entities and

4

MONSANTO COMPANY
 
2014 FORM 10-K

academic institutions. Monsanto also holds licenses from other parties relating to certain products and processes. For example, Monsanto has obtained licenses to certain technologies that it uses to produce Roundup Ready seeds and Genuity SmartStax corn. These licenses generally last for the lifetime of the applicable patents.
Monsanto owns trademark registrations and files trademark applications for the names and for many of the designs used on its branded products around the world. Important company trademarks include Roundup Ready, Bollgard, Bollgard II, YieldGard, Genuity, Roundup Ready 2 Yield, Intacta RR2 PRO and SmartStax for traits; Acceleron for seed treatment products; DEKALB, Asgrow and Deltapine for row crop seeds; and Seminis and De Ruiter for vegetable seeds.
Raw Materials and Energy Resources
In growing locations throughout the world, we produce directly or contract with third-party growers for corn seed, soybean seed, vegetable seeds, cotton seed, canola seed and other seeds. The availability of seed and the cost of seed production depend primarily on seed yields, weather conditions, grower contract terms and commodity prices. Where practical, we seek to manage commodity price fluctuations through the use of futures contracts and other hedging instruments. Where practicable, we attempt to minimize weather risks by producing seed at multiple growing locations and under irrigated conditions. Our Seeds and Genomics segment also purchases the energy we need to process our seed; these energy purchases are managed in conjunction with our Agricultural Productivity segment.
AGRICULTURAL PRODUCTIVITY SEGMENT
Through our Agricultural Productivity segment, we manufacture Roundup brand herbicides and other herbicides and provide lawn-and-garden herbicide products for the residential market. The tabular information about net sales of agricultural productivity products that appears in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) — Agricultural Productivity Segment — is incorporated by reference herein.
 
Major Products
  
Applications
    
Major Brands
Herbicides
  
Nonselective agricultural, industrial, ornamental, turf and residential lawn and garden applications for weed control
 
Control of preemergent annual grass and small seeded broadleaf weeds in corn and other crops
    
Roundup branded
products
 
Harness for corn and
cotton
Distribution of Products
We have a worldwide distribution and sales and marketing organization for our agricultural productivity products. In some world areas, we use the same distribution and sales and marketing organization for our agricultural productivity products as for our seeds and traits. In other world areas, we have separate distribution and sales and marketing organizations for our agricultural productivity products. We sell our agricultural productivity products through distributors, independent retailers and dealers and agricultural cooperatives. In some cases outside the United States, we sell such products directly to farmers. We also sell certain of the chemical intermediates of our agricultural productivity products to other major agricultural chemical producers, who then market their own branded products to farmers. Certain agricultural productivity products are marketed through The Scotts Miracle-Gro Company.
Competition
We compete with numerous major global manufacturing companies for sales of agricultural herbicides. Competition from local or regional companies may also be significant. Global glyphosate producers have substantial capacity to supply the market and we expect this global capacity to affect margins. Our lawn-and-garden business has fewer than five significant national competitors and a larger number of regional competitors in the United States. The largest market for our lawn-and-garden herbicides is the United States.
Competitive success in agricultural productivity products depends on price, product performance, the scope of solutions offered to farmers, market coverage, product availability and planning, and the service provided to distributors, retailers and farmers. Our lawn-and-garden herbicides compete on product performance and the brand value associated with our trademark Roundup. For additional information on competition for our agricultural herbicides, see Item 7 — MD&A — Outlook — Agricultural Productivity, which is incorporated by reference herein.
 

5

MONSANTO COMPANY
 
2014 FORM 10-K

Patents, Trademarks, Licenses, Franchises and Concessions
Monsanto also relies on patent protection for the Agricultural Productivity segment of its business. Patents covering glyphosate, an active ingredient in Roundup branded herbicides, have expired in the United States and all other countries. However, some of the patents on Monsanto glyphosate formulations and manufacturing processes in the United States and other countries extend beyond 2015. Monsanto has obtained licenses to chemicals used to make Harness herbicides and holds trademark registrations for the brands under which its chemistries are sold. The most significant trademark in this segment is Roundup. Monsanto owns trademark registrations for numerous variations of Roundup such as for Roundup WeatherMAX.
Monsanto holds (directly or by assignment) numerous phosphate mineral leases from the U.S. government, the state of Idaho, and private parties. None of these leases are material individually, but are significant in the aggregate because elemental phosphorus is a key raw material for the production of glyphosate-based herbicides. The phosphate mineral leases have varying terms. The leases obtained from the U.S. government are of indefinite duration, subject to the modification of lease terms at 20-year intervals.
Environmental Matters
Our operations are subject to environmental laws and regulations in the jurisdictions in which we operate. Some of these laws restrict the amount and type of emissions that our operations can release into the environment. Other laws, such as the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601 et seq. (Superfund), can impose liability for the entire cost of cleanup on any former or current site owners or operators or any parties who sent waste to these sites, without regard to fault or to the lawfulness of the original disposal. These laws and regulations may be amended from time to time; they may become more stringent. We are committed to long-term environmental protection and compliance programs that reduce and monitor emissions of hazardous materials into the environment, and to the remediation of identified existing environmental concerns. Although the costs of our compliance with environmental laws and regulations cannot be predicted with certainty, such costs are not expected to have a material adverse effect on our earnings or competitive position. In addition to compliance obligations associated with our operations, under the terms of our Sept. 1, 2000, Separation Agreement with Pharmacia (the Separation Agreement), we are required to indemnify Pharmacia for any liability it may have for environmental remediation or other environmental responsibilities that are primarily related to Pharmacia’s former agricultural and chemicals businesses. For information regarding certain environmental proceedings, see Item 3 — Legal Proceedings. See also information regarding environmental liabilities, appearing in Note 25 — Commitments and Contingencies, which is incorporated herein by reference.
Raw Materials and Energy Resources
We are a significant purchaser of basic and intermediate raw materials. Typically, we purchase major raw materials and energy through long-term contracts with multiple suppliers. Certain important raw materials are supplied by a few major suppliers. We expect the markets for our raw materials to remain balanced, though pricing may be volatile given the current state of the global economy. Energy is available as required, but pricing is subject to market fluctuations. Where practical, we seek to manage commodity price fluctuations through the use of futures contracts and other hedging instruments.
Our proprietary technology is used in various global locations to produce the catalysts used in various intermediate steps in the production of glyphosate. We believe capacity is sufficient for our requirements and adequate safety stock inventory reduces the risks associated with production outages. We manufacture and purchase disodium iminodiacetic acid, a key ingredient in the production of glyphosate, and purchase chlorine from limited major suppliers. We manufacture almost all of our global supply of elemental phosphorus, a key raw material for the production of Roundup herbicides. We have multiple mineral rights which, subject to obtaining and maintaining appropriate mining permits, we believe will provide a long term supply of phosphate ore to meet our needs into the foreseeable future. As part of the ongoing course of operating our phosphorus production, we are required to periodically permit new mining leases. 

RESEARCH AND DEVELOPMENT
Monsanto’s expenses for research and development ("R&D") were $1,725 million in 2014, $1,533 million in 2013 and $1,517 million in 2012.

6

MONSANTO COMPANY
 
2014 FORM 10-K

SEASONALITY AND WORKING CAPITAL; BACKLOG
For information on seasonality and working capital and backlog practices, see information in Item 7 — MD&A — Financial Condition, Liquidity and Capital Resources, which is incorporated herein by reference.
EMPLOYEE RELATIONS
As of Aug. 31, 2014, we employed about 22,400 regular employees worldwide and approximately 4,600 temporary employees. The number of temporary employees varies greatly during the year because of the seasonal nature of our business. We believe that relations between Monsanto and its employees are satisfactory.
CUSTOMERS
In 2014, our four largest U.S. agricultural distributors and their affiliates represented, in the aggregate, 22 percent of our worldwide net sales and 40 percent of our U.S. net sales. During 2014, one major U.S. distributor and its affiliates represented 13 percent of the worldwide net sales for our Seeds and Genomics segment and 21 percent of the U.S. net sales for our Seeds and Genomics segment.
INTERNATIONAL OPERATIONS
See Item 1A under the heading “Our operations outside the United States are subject to special risks and restrictions, which could negatively affect our results of operations and profitability” and Note 26 — Segment and Geographic Data, which are incorporated herein by reference. Approximately 46 percent of Monsanto’s sales, including 39 percent of our Seeds and Genomics segment’s sales and 59 percent of our Agricultural Productivity segment’s sales, originated from our legal entities outside the United States during fiscal year 2014.
SEGMENT AND GEOGRAPHIC DATA
For information on segment and geographic data, see Item 8 — Financial Statements and Supplementary Data — Note 26 — Segment and Geographic Data, which is incorporated by reference herein.
ITEM 1A. RISK FACTORS
Competition in seeds and traits and agricultural chemicals has significantly affected, and will continue to affect, our sales.
Many companies engage in research and development of plant biotechnology and breeding and agricultural chemicals, and speed in getting a new product to market can be a significant competitive advantage. Our competitors’ success could render our existing products less competitive, resulting in reduced sales compared to our expectations or past results. We expect to see increasing competition from agricultural biotechnology firms and from major agrichemical and seed companies. We also expect to face continued competition for our Roundup herbicides and selective herbicides product lines, which could be influenced by trade and industrial policies of foreign countries. The extent to which we can realize cash and gross profit from our business will depend on our ability to: control manufacturing and marketing costs without adversely affecting sales; predict and respond effectively to competitor products, pricing and marketing; provide marketing programs meeting the needs of our customers and of the farmers who are our end users; maintain an efficient distribution system; and develop new products and services with features attractive to our end users.
 
Efforts to protect our intellectual property rights and to defend claims against us can increase our costs and will not always succeed; any failures could adversely affect sales and profitability or restrict our ability to do business.
Intellectual property rights are crucial to our business, particularly our Seeds and Genomics segment. We endeavor to obtain and protect our intellectual property rights in jurisdictions in which our products are produced or used and in jurisdictions into which our products are imported. Different nations may provide limited rights and inconsistent duration of protection for our products. We may be unable to obtain protection for our intellectual property in key jurisdictions. Even if protection is obtained, competitors, farmers, or others in the chain of commerce may raise legal challenges to our rights or illegally infringe on our rights, including through means that may be difficult to prevent or detect. For example, the practice by some farmers of saving seeds from non-hybrid crops (such as soybeans, canola and cotton) containing our biotechnology traits has prevented and may continue to prevent us from realizing the full value of our intellectual property, particularly outside the United States. In addition, because of the rapid pace of technological change, and the

7

MONSANTO COMPANY
 
2014 FORM 10-K

confidentiality of patent applications in some jurisdictions, competitors may be issued patents from applications that were unknown to us prior to issuance. These patents could reduce the value of our commercial or pipeline products or, to the extent they cover key technologies on which we have unknowingly relied, require that we seek to obtain licenses or cease using the technology, no matter how valuable to our business. We cannot assure we would be able to obtain such a license on acceptable terms. The extent to which we succeed or fail in our efforts to protect our intellectual property will affect our costs, sales and other results of operations.
We are subject to extensive regulation affecting our seed biotechnology and agricultural products and our research and manufacturing processes, which affects our sales and profitability.
Regulatory and legislative requirements affect the development, manufacture and distribution of our products, including the testing and planting of seeds containing our biotechnology traits and the import of crops grown from those seeds, and non-compliance can harm our sales and profitability. Obtaining and maintaining permits for mining and production, and obtaining and maintaining testing, planting and import approvals for seeds or biotechnology traits can be time-consuming and costly, with no guarantee of success. In addition, regulatory and legislative requirements may change over time which can also affect our sales and profitability. The failure to receive necessary permits or approvals could have near- and long-term effects on our ability to produce and sell some current and future products. Planting approvals may also include significant regulatory requirements that can limit our sales. Sales of our traits can be affected in jurisdictions where planting has been approved if we have not received approval for the import of crops containing such biotechnology traits by key import markets. Sales of our traits without having approval for the import of crops containing such biotechnology traits by an import market could lead to disruption of that market and we may face claims of potential liability. Concern about unintended but unavoidable trace amounts (sometimes called “low-level presence”) of commercial biotechnology traits in conventional (non-biotechnology) seed, or in the grain or products produced from conventional or organic crops, among other things, could lead to export disruption and increased regulation or legislation, which may include: liability transfer mechanisms that may include financial protection insurance; possible restrictions or moratoria on testing, planting or use of biotechnology traits; and requirements for labeling and traceability, which requirements may cause food processors and food companies to avoid biotechnology and select non-biotechnology crop sources and can affect farmer seed purchase decisions and the sale of our products. Further, the detection of the presence of biotech traits not approved in the country of planting (sometimes called “adventitious presence”) may affect seed availability or result in export disruption and compliance actions, such as crop destruction or product recalls. Legislation encouraging or discouraging the planting of specific crops can also harm our sales. In addition, concern and claims that increased use of glyphosate-based herbicides or biotechnology traits increases the potential for the development of glyphosate-resistant weeds or pests resistant to our traits could result in restrictions on the use of glyphosate-based herbicides or seeds containing our traits or otherwise reduce our sales.
The degree of public understanding and acceptance or perceived public acceptance of our biotechnology products can affect our sales and results of operations by affecting planting approvals, regulatory requirements and customer purchase decisions.
Although all of our products go through rigorous testing, some opponents of our technology actively raise public concern about the potential for adverse effects of our products on human or animal health, other plants and the environment. The potential for low-level or adventitious presence of commercial biotechnology traits in conventional seed, or in the grain or products produced from conventional or organic crops, is another factor that can affect general public acceptance of these traits. Public concern can affect the timing of, and whether we are able to obtain, government approvals. Even after approvals are granted, public concern may lead to increased regulation or legislation or litigation against government regulators concerning prior regulatory approvals, which could affect our sales and results of operations by affecting planting approvals, and may adversely affect sales of our products to farmers, due to their concerns about available markets for the sale of crops or other products derived from biotechnology. In addition, opponents of agricultural biotechnology have attacked farmers’ fields and facilities used by agricultural biotechnology companies, and may launch future attacks against farmers’ fields and our field testing sites and research, production, or other facilities, which could affect our sales and our costs.

8

MONSANTO COMPANY
 
2014 FORM 10-K

The successful development and commercialization of our pipeline products will be necessary for our growth.
We use advanced breeding technologies to produce hybrids and varieties with superior performance in farmers' fields, and we use biotechnology to introduce traits that enhance specific characteristics of our crops. We use advanced analytics, software tools, mobile communications and new planting and monitoring equipment to provide agronomic recommendations to growers. We also research biological products to protect farmers’ crops from pests and diseases and enhance plant productivity and fertility, and we research chemical products to protect against crop pests. There are a number of reasons why new product concepts in these areas may be abandoned, including greater than anticipated development costs, technical difficulties, regulatory obstacles, competition, inability to prove the original concept, lack of demand and the need to divert focus, from time to time, to other initiatives with perceived opportunities for better returns. The processes of breeding, biotechnology trait discovery and development and trait integration are lengthy, and a very small percentage of the genes and germplasm we test is selected for commercialization. The length of time and the risk associated with the breeding and biotech pipelines are interlinked because both are required as a package for commercial success in markets where biotech traits are approved for growers. In countries where biotech traits are not approved for widespread use, our sales depend on our germplasm. Commercial success frequently depends on being the first company to the market, and many of our competitors are also making considerable investments in similar new biotechnology, improved germplasm products, biological and chemical products, and agronomic recommendation products. Consequently, if we are not able to fund extensive research and development activities and deliver new products to the markets we serve on a timely basis, our growth and operations will be harmed.
Adverse outcomes in legal proceedings could subject us to substantial damages and adversely affect our results of operations and profitability.
From time to time, we have been involved in major lawsuits concerning intellectual property, biotechnology, torts, contracts, antitrust allegations, and other matters, as well as governmental inquiries and investigations. Pending and future lawsuits and governmental inquiries and investigations may have outcomes that may be significant to results of operations in the period recognized or limit our ability to engage in our business activities. While we have insurance related to our business operations, it may not apply to or fully cover any liabilities we incur as a result of these lawsuits. In addition, pursuant to the Separation Agreement, we are required to indemnify Pharmacia for certain liabilities related to its former chemical and agricultural businesses. We have recorded reserves for potential liabilities where we believe the liability to be probable and reasonably estimable. However, our actual costs may be materially different from this estimate. The degree to which we may ultimately be responsible for the particular matters reflected in the reserve is uncertain.
Our operations outside the United States are subject to special risks and restrictions, which could negatively affect our results of operations and profitability.
We engage in manufacturing, seed production, research and development and sales in many parts of the world. Although we have operations in virtually every region, our sales outside the United States in fiscal year 2014 were principally to customers in Brazil, Argentina, Canada and Mexico. Accordingly, developments in those parts of the world generally have a more significant effect on our operations than developments in other places. Our operations outside the United States are subject to special risks and restrictions, including: fluctuations in currency values and foreign-currency exchange rates; exchange control regulations; changes in local political or economic conditions; governmental pricing directives; import and trade restrictions; import or export licensing requirements and trade policy; restrictions on the ability to repatriate funds; and other potentially detrimental domestic and foreign governmental practices or policies affecting U.S. companies doing business abroad. Acts of terror or war may impair our ability to operate in particular countries or regions, and may impede the flow of goods and services between countries. Customers in weakened economies may be unable to purchase our products, or it could become more expensive for them to purchase imported products in their local currency, or sell their commodity at prevailing international prices, and we may be unable to collect receivables from such customers. Further, changes in exchange rates may affect our net income, the book value of our assets outside the United States, and our shareowners’ equity.
 
In the event of any diversion of management’s attention to matters related to acquisitions or any delays or difficulties encountered in connection with integrating acquired operations, our business, and in particular our results of operations and financial condition, may be harmed.
We have recently completed acquisitions and we expect to make additional acquisitions. We must fit such acquisitions into our long-term growth strategies to generate sufficient value to justify their cost. Acquisitions also present other challenges, including geographical coordination, personnel integration and retention of key management personnel, systems integration and the reconciliation of corporate cultures. Those operations could divert management’s attention from our business or

9

MONSANTO COMPANY
 
2014 FORM 10-K

cause a temporary interruption of or loss of momentum in our business and the loss of key personnel from the acquired companies.
Fluctuations in commodity prices can increase our costs and decrease our sales.
We contract production with multiple growers at fair value and retain the seed in inventory until it is sold. These purchases constitute a significant portion of the manufacturing costs for our seeds. Additionally, our chemical manufacturing operations use chemical intermediates and energy, which are subject to increases in price as the costs of oil and natural gas increase. Accordingly, increases in commodity prices may negatively affect our cost of goods sold or cause us to increase seed or chemical prices, which could adversely affect our sales. Where practical, we use hedging strategies and raw material supply agreements that contain terms designed to mitigate the risk of short-term changes in commodity prices. However, we are unable to avoid the risk of medium- and long-term increases. Farmers’ incomes are also affected by commodity prices; as a result, fluctuations in commodity prices could have an impact on farmers' purchasing decisions and negatively affect their ability and decisions to purchase our seed and chemical products.
Compliance with quality controls and regulations affecting our manufacturing may be costly, and failure to comply may result in decreased sales, penalties and remediation obligations.
Because we use hazardous and other regulated materials in our manufacturing processes and engage in mining operations, we are subject to operational risks including the potential for unintended environmental contamination, which could lead to potential personal injury claims, remediation expenses and penalties. Should a catastrophic event occur at any of our facilities, we could face significant reconstruction or remediation costs, penalties, third party liabilities and loss of production capacity, which could affect our sales. In addition, lapses in quality or other manufacturing controls could affect our sales and result in claims for defective products.
Our ability to match our production to the level of product demanded by farmers or our licensed customers has a significant effect on our sales, costs, and growth potential.
Farmers’ decisions are affected by market, economic and weather conditions that are not known in advance. Failure to provide distributors with enough inventories of our products will reduce our current sales. However, product inventory levels at our distributors may reduce sales in future periods, as those distributor inventories are worked down. In addition, inadequate distributor liquidity could affect distributors’ abilities to pay for our products and, therefore, affect our sales or our ability to collect on our receivables. Global glyphosate producers have the capacity to supply the market, but global dynamics including demand, environmental regulation compliance and raw material availability can cause fluctuations in supply and the price of generic products. We expect the fluctuation in global production will impact the selling price and margin of Roundup brands and our third party sourcing business. We depend on the availability of certain key raw materials used in our glyphosate production from single or limited major suppliers. If a major disruption in key raw materials were to occur, it could have a significant effect on our production, sales and costs.
Recent increases in and expected higher levels of indebtedness will effectively reduce our financial flexibility and the amount of funds available for other business purposes and may adversely affect our financial condition.
We recently incurred a significant amount of indebtedness related to our two-year, $10 billion share repurchase program and expect to incur additional significant indebtedness related to the program. Interest costs related to the increased debt are and will be substantial and will impact working capital, liquidity and cash flow. Our increased level of indebtedness and related covenants could cause adverse effects including: reducing funds available, and limiting our ability to obtain financing or increasing our cost to obtain financing, for acquisitions, capital expenditures, dividends, or other business purposes; lowering our credit ratings; and restricting our financial and operating flexibility. In addition, we regularly extend credit to our customers in certain areas of the world to enable them to acquire crop production products and seeds at the beginning of their growing seasons. Because of these credit practices and the seasonality of our sales and costs, we may need to issue short-term debt at certain times of the year to fund our cash flow requirements. The amount of short-term debt will be greater to the extent that we are unable to collect customer receivables when due and to manage our costs and expenses. Downgrades in our credit ratings, or other limitations on our access to short- or long-term financing or refinancing, could increase our interest cost and adversely affect our profitability.

10

MONSANTO COMPANY
 
2014 FORM 10-K

Our results of operations and financial condition may be significantly affected by disruptions caused by weather, natural disasters, accidents, and security breaches, including cyber-security incidents.
Weather and field conditions can adversely affect the timing of crop planting, acreage planted, crop yields and commodity prices. In turn, seed production volumes, quality and cost may also be adversely affected which could impact our sales and profitability. Natural disasters or industrial accidents could also affect our manufacturing facilities, or those of our major suppliers or major customers, which could affect our costs and our ability to meet supply requirements. One of our major U.S. glyphosate manufacturing facilities is located in Luling, Louisiana, which is an area subject to hurricanes.  In addition, several of our key raw material and utility suppliers have production assets in the U.S. gulf coast region and are also susceptible to damage risk from hurricanes.  Hawaii and Puerto Rico, which are also subject to hurricanes, are major seeds and traits locations for our pipeline products. Security breaches and disruptions to our information technology systems could seriously harm our operations.  We utilize and critically rely upon information technology systems in all aspects of our business, including increasingly large amounts of data to support our products and advance our research and development pipeline.  We have experienced cyber-security attacks that have not had a material impact on our financial results, but it is not possible to predict the impact of future incidents.  Failure to effectively prevent, detect and recover from the increasing number and sophistication of information security threats could result in theft, misuse, modification and destruction of information, including trade secrets and confidential business information, and cause business disruptions, delays in research and development, reputational damage, and third-party claims, which could significantly affect our results of operation and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
At Aug. 31, 2014, there were no unresolved comments from the staff of the SEC related to our periodic or current reports under the Exchange Act.
ITEM 2. PROPERTIES
We and our subsidiaries own or lease manufacturing facilities, laboratories, seed production and other agricultural facilities, office space, warehouses, and other land parcels in North America, South America, Europe, Asia, Australia and Africa. Our general offices, which we own, are located in St. Louis County, Missouri. These office and research facilities are principal properties.
Additional principal properties used by the Seeds and Genomics segment include seed production and conditioning plants at Boone, Grinnell and Williamsburg, Iowa; Constantine, Michigan; Enkhuizen and Bergschenhoek, Netherlands; Illiopolis, Waterman and Farmer City, Illinois; Remington, Indiana; Kearney and Waco, Nebraska; Oxnard, California; Peyrehorade and Trèbes, France; Rojas, Argentina; Sinesti, Romania; Nagyigmand, Hungary; Uberlândia and Petrolina, Brazil; Thobontle, South Africa; and Hyderabad, India, and research sites at Ankeny, Iowa; Research Triangle Park, North Carolina; Maui, Molokai and Oahu, Hawaii; Middleton, Wisconsin; Mystic, Connecticut; and Woodland, California. We own all of these properties, except Research Triangle Park and some sites in Hawaii. The Seeds and Genomics segment also uses seed foundation and production facilities, breeding facilities, and genomics and other research laboratories at various other locations worldwide.
The Agricultural Productivity segment has principal chemicals manufacturing facilities at Antwerp, Belgium; Camaçari, Brazil; Luling, Louisiana; Muscatine, Iowa; São José dos Campos, Brazil; Soda Springs, Idaho; Zárate, Argentina; and Rock Springs, Wyoming. We own all of these properties, except the one in Antwerp, Belgium, which is subject to a lease for the land underlying the facility.
We believe that our principal properties are suitable and adequate for their use. Our facilities generally have sufficient capacity for our existing needs and expected near-term growth. Expansion projects are undertaken as necessary to meet future needs. Use of these facilities may vary with seasonal, economic and other business conditions, but none of the principal properties is substantially idle. In certain instances, we have leased portions of sites not required for current operations to third parties.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various legal proceedings that arise in the ordinary course of our business, as well as proceedings that we have considered to be material under SEC regulations. These include proceedings to which we are party in our own name and proceedings to which our former parent Pharmacia LLC or its former subsidiary Solutia Inc. is a party but that we manage and for which we are responsible. Information regarding certain material proceedings and the possible effects on our business of proceedings we are defending is disclosed in Note 25 — Commitments and Contingencies — under the subheading “Environmental and Litigation Liabilities — Litigation” and is incorporated by reference herein. Following is information regarding other material proceedings for which we are responsible.

11

MONSANTO COMPANY
 
2014 FORM 10-K

Patent and Commercial Proceedings
Two purported class action suits were filed against us on Sept. 26, 2006, supposedly on behalf of all farmers 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. Plaintiffs 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. On July 18, 2007, the court ruled that any such suit had to be filed in federal or state court in Missouri; the court granted our motion to dismiss the two original cases. On Aug. 8, 2007, plaintiffs in the remaining three cases voluntarily dismissed their complaints, which have not been re-filed. On Aug. 10, 2007, the same set of counsel filed a parallel action in federal court in San Antonio, Texas, on behalf of a retailer of glyphosate named Texas Grain. Plaintiffs seek to certify a national class of all entities that purchased glyphosate directly from us since August 2003. The magistrate judge issued his recommendation to the District Court on Aug. 7, 2009, denying class certification and the litigation has remained dormant since that event. We believe we have meritorious legal positions and will continue to represent our interests vigorously in this matter.
Governmental Proceedings and Undertakings
On May 25, 2011, the EPA issued a Notice of Violation to us, alleging violations of federal environmental release reporting requirements at our phosphorous manufacturing plant in Soda Springs, Idaho. The EPA has asserted that the alleged violations may subject us to civil penalties. We are working with the EPA to reach a resolution of this matter.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
 
Executive Officers
See Part III — Item 10 of this Report on Form 10-K for information about our Executive Officers.

12

MONSANTO COMPANY
 
2014 FORM 10-K

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Monsanto’s common stock is traded principally on the New York Stock Exchange, under the symbol MON. The number of shareowners of record as of Oct. 24, 2014 was 31,118.
The following table sets forth dividend declarations, as well as the high and low intra-day sales prices for Monsanto’s common stock, for the fiscal years 2014 and 2013 quarters indicated.
Dividends per Share
 
1st
Quarter
 
2nd
Quarter
 
3rd
Quarter
 
4th
Quarter
 
Fiscal
Year
2014
 
$—
 
$0.86(1)
 
$—
 
$0.92(1)
 
$1.78
2013
 
$—
 
$0.75(2)
 
$—
 
$0.81(2)
 
$1.56
 
 
 
 
 
 
 
 
 
 
 
Common Stock Price
 
1st
Quarter
 
2nd
Quarter
 
3rd
Quarter
 
4th
Quarter
 
Fiscal
Year
2014
 
High
 
$114.50
 
$117.50
 
$122.00
 
$128.79
 
$128.79
 
 
Low
 
98.84
 
104.08
 
109.24
 
112.13
 
98.84
2013
 
High
 
$93.00
 
$104.19
 
$109.33
 
$106.80
 
$109.33
 
 
Low
 
82.70
 
88.56
 
98.92
 
94.00
 
82.70
(1)
Monsanto's board of directors declared four dividends in 2014, $0.43 per share on Dec. 9, 2013, $0.43 per share on Jan. 28, 2014, $0.43 per share on June 6, 2014, and $0.49 per share on Aug. 5, 2014.
(2)
Monsanto's board of directors declared four dividends in 2013, $0.375 per share on Dec. 3, 2012, $0.375 per share on Jan. 31, 2013, $0.375 per share on June 6, 2013, and $0.43 per share on Aug. 6, 2013.
Issuer Purchases of Equity Securities
The following table summarizes purchases of equity securities during the fourth quarter of fiscal year 2014 by Monsanto and affiliated purchasers, pursuant to SEC rules.
Period
(a) Total Number of
Shares Purchased
 
(b) Average
Price Paid per Share(1)
 
(c) Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs
 
(d) Approximate Dollar    
Value of Shares that May    
Yet Be Purchased Under    
the Plans or Programs
 
June 2014:
 
 
 
 
 
 
 
 
June 1, 2014, through June 30, 2014

 
$

 

 
$
1,056,511,363

 
July 2014:
 
 
 
 
 
 
 
 
July 1, 2014, through July 31, 2014
39,338,010

 
$
124.20

 
39,338,010

 
$
4,970,601,586

(2) 
August 2014:
 
 
 
 
 
 
 
 
Aug. 1, 2014, through Aug. 31, 2014
786,254

 
$
116.65

 
786,254

 
$
4,878,881,716

(2) 
Total
40,124,264

 
$
124.06

 
40,124,264

 
$
4,878,881,716

(2) 
(1)
The average price paid per share is calculated on a trade date basis and excludes commission.
(2)
The approximate dollar value of shares that may yet be purchased under the plans or programs is reduced by the $1.2 billion that reflects the aggregate value of the stock held back by JPMorgan and Goldman Sachs pending final settlement of our company’s accelerated share repurchase agreements with those firms per Note 21 - Capital Stock.
In June 2013, the company announced a new three-year repurchase program of up to an additional $2 billion of the company's common stock. This repurchase program commenced on Aug. 20, 2013 and was completed on Jul. 1, 2014.
In June 2014, the company announced a new two-year repurchase program of up to an additional $10 billion of the company's common stock. The repurchase program commenced on Jul. 1, 2014. There were no other publicly announced plans outstanding as of Aug. 31, 2014.
The timing and number of shares purchased in the future under the repurchase programs, if any, depends upon capital needs, market conditions and other factors.

13

MONSANTO COMPANY
 
2014 FORM 10-K


Stock Price Performance Graph
The graph below compares the performance of Monsanto’s common stock with the performance of the Standard & Poor’s 500 Stock Index (a broad-based market index) and a peer group index over a 60-month period extending through the end of the 2014 fiscal year. The graph assumes that $100 was invested on Sept. 1, 2009, in our common stock, in the Standard & Poor’s 500 Stock Index and the peer group index, and that all dividends were reinvested.
Because we are involved both in the agricultural products business and in the seeds and genomics business, no published peer group accurately mirrors our portfolio of businesses. Accordingly, we created a peer group index that includes Bayer AG ADR, Dow Chemical Company, DuPont (E.I.) de Nemours and Company, BASF AG and Syngenta AG. The Standard & Poor’s 500 Stock Index and the peer group index are included for comparative purposes only. They do not necessarily reflect management’s opinion that such indices are an appropriate measure of the relative performance of the stock involved, and they are not intended to forecast or be indicative of possible future performance of our common stock.
 
8/31/2009
8/31/2010
8/31/2011
8/31/2012
8/31/2013
8/31/2014
Monsanto Company
100
63.79
84.90
108.94
124.31
149.20
S&P 500 Index
100
104.91
124.32
146.70
174.14
218.10
Peer Group
100
110.08
137.20
155.07
196.64
241.41
In accordance with SEC rules, the information contained in Stock Price Performance Graph shall not be deemed to be “soliciting material,” or to be “filed” with the SEC or subject to the SEC’s Regulation 14A, or to the liabilities of Section 18 of the Exchange Act, except to the extent that Monsanto specifically requests that the information be treated as soliciting material or specifically incorporates it by reference into a document filed under the Securities Act or the Exchange Act.

14

MONSANTO COMPANY
 
2014 FORM 10-K


ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
 
Year Ended Aug. 31,
(Dollars in millions, except per share amounts and ratios)
2014
 
2013
 
2012
 
2011
 
2010
Operating Results:
 
 
 
 
 
 
 
 
 
Net sales
$
15,855

 
$
14,861

 
$
13,504

 
$
11,822

 
$
10,483

Income from operations
4,075

 
3,570

 
3,148

 
2,502

 
1,603

Income from continuing operations including portion attributable to noncontrolling Interest
2,749

 
2,514

 
2,087

 
1,657

 
1,111

Income on discontinued operations
13

 
11

 
6

 
2

 
4

Net income attributable to Monsanto Company
2,740

 
2,482

 
2,045

 
1,607

 
1,096

Basic Earnings per Share Attributable to Monsanto Company:
 
 
 
 
 
 
 
 
 
Income from continuing operations
$
5.25

 
$
4.63

 
$
3.82

 
$
2.99

 
$
2.01

Income on discontinued operations
0.03

 
0.02

 
0.01

 
0.01

 
0.01

Net income attributable to Monsanto Company
5.28

 
4.65

 
3.83

 
3.00

 
2.02

Diluted Earnings per Share Attributable to Monsanto Company:
 
 
 
 
 
 
 
 
 
Income from continuing operations
$
5.19

 
$
4.58

 
$
3.78

 
$
2.96

 
$
1.99

Income on discontinued operations
0.03

 
0.02

 
0.01

 

 

Net income attributable to Monsanto Company
5.22

 
4.60

 
3.79

 
2.96

 
1.99

Financial Position at End of Period:
 
 
 
 
 
 
 
 
 
Total assets
$
21,981

 
$
20,664

 
$
20,224

 
$
19,844

 
$
17,852

Working capital(1)
4,563

 
5,741

 
5,437

 
4,080

 
3,494

Current ratio(1)
1.89:1

 
2.32:1

 
2.29:1

 
1.86:1

 
1.98:1

Long-term debt
7,528

 
2,061

 
2,038

 
1,543

 
1,862

Debt-to-capital ratio(2)
50
%
 
14
%
 
15
%
 
16
%
 
17
%
Other Data:
 
 
 
 
 
 
 
 
 
Dividends per share
$
1.78

 
$
1.56

 
$
1.28

 
$
1.14

 
$
1.08

Stock price per share:
 
 
 
 
 
 
 
 
 
High
$
128.79

 
$
109.33

 
$
89.73

 
$
77.09

 
$
87.06

Low
$
98.84

 
$
82.70

 
$
58.89

 
$
47.07

 
$
44.61

End of period
$
115.65

 
$
97.89

 
$
87.11

 
$
68.93

 
$
52.65

Basic shares outstanding
519.3

 
533.7

 
534.1

 
536.5

 
543.7

Diluted shares outstanding
524.9

 
539.7

 
540.2

 
542.4

 
550.8

(1)
Working capital is total current assets less total current liabilities; current ratio represents total current assets divided by total current liabilities.
(2)
Debt-to-capital ratio is the sum of short-term and long-term debt, divided by total Monsanto Company shareowner's equity, short-term and long-term debt.
See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — for information regarding the factors that have affected or may affect the comparability of our business results.

15

MONSANTO COMPANY
 
2014 FORM 10-K


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Background
Monsanto Company, along with its subsidiaries, is a leading global provider of agricultural products for farmers. Our seeds, biotechnology trait products, herbicides and precision agriculture tools provide farmers with solutions that help improve productivity, reduce the costs of farming and produce better foods for consumers and better feed for animals.
We manage our business in two segments: Seeds and Genomics and Agricultural Productivity. Through our Seeds and Genomics segment, we produce leading seed brands, including DEKALB, Asgrow, Deltapine, Seminis and De Ruiter, and we develop biotechnology traits that assist farmers in controlling insects and weeds and precision agriculture to assist farmers in decision making. We also provide other seed companies with genetic material and biotechnology traits for their seed brands. Through our Agricultural Productivity segment, we manufacture Roundup and Harness brand herbicides and other herbicides. Approximately 46 percent of our total company sales, 39 percent of our Seeds and Genomics segment sales and 59 percent of our Agricultural Productivity segment sales originated from our legal entities outside the United States during fiscal year 2014.
In the fourth quarter of 2008, we entered into an agreement to divest the animal agricultural products business (the Dairy business). This transaction was consummated on Oct. 1, 2008, and included a 10-year earn-out with potential annual payments being earned by Monsanto if certain revenue levels are exceeded. As a result, financial data for this business has been presented as discontinued operations as outlined below. Accordingly, for all periods presented herein, the Statements of Consolidated Operations and Consolidated Financial Position have been conformed to this presentation. The Dairy business was previously reported as part of the Agricultural Productivity segment.
This MD&A should be read in conjunction with Monsanto’s consolidated financial statements and the accompanying notes. The notes to the consolidated financial statements referred to throughout this MD&A are included in Part II — Item 8 — Financial Statements and Supplementary Data — of this Report on Form 10-K. Unless otherwise indicated, “earnings per share” and “per share” mean diluted earnings per share. Unless otherwise noted, all amounts and analyses are based on continuing operations.
Non-GAAP Financial Measures
MD&A includes financial information prepared in accordance with U.S. generally accepted accounting principles ("GAAP"), as well as two other financial measures, EBIT and free cash flow, that are considered “non-GAAP financial measures.” Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. The presentation of EBIT and free cash flow information is intended to supplement investors’ understanding of our operating performance and liquidity. Our EBIT and free cash flow measures may not be comparable to other companies’ EBIT and free cash flow measures. Furthermore, these measures are not intended to replace net income (loss), cash flows, financial position or comprehensive income (loss), as determined in accordance with GAAP.
EBIT is defined as earnings (loss) before interest and taxes. Earnings (loss) is intended to mean net income (loss) as presented in the Statements of Consolidated Operations under GAAP. EBIT is an 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 26Segment and Geographic Data — for a reconciliation of EBIT to net income for fiscal years 2014, 2013 and 2012.
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 net cash provided or required by investing activities. Free cash flow does not represent the residual cash flow available for discretionary expenditures. We believe that free cash flow is useful to investors and management as a measure of the ability of our business to generate cash. Once business needs and obligations are met, this cash can be used 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.
 

16

MONSANTO COMPANY
 
2014 FORM 10-K

Executive Summary
Consolidated Operating Results — Net sales increased $994 million, 7 percent, in fiscal year 2014 compared to fiscal year 2013. The primary contributor to the increase is both our global Roundup and other glyphosate-based herbicides and soybean businesses. In both of these businesses we have achieved pricing and volume benefits. Net income attributable to Monsanto Company in fiscal year 2014 was $5.22 per share, compared with $4.60 per share in fiscal year 2013.
Financial Condition, Liquidity and Capital Resources — In fiscal year 2014, working capital was $4,563 million compared with $5,741 million in fiscal year 2013, a decrease of $1,178 million. For a detailed discussion of the factors affecting the working capital comparison, see the "Working Capital and Financial Condition" section of the "Financial Condition, Liquidity and Capital Resources" section in this MD&A.
In fiscal year 2014, net cash provided by operating activities was $3,054 million compared with $2,740 million in fiscal year 2013. Net cash required by investing activities was $2,095 million in fiscal year 2014 compared with $777 million in fiscal year 2013. Free cash flow was $959 million in fiscal year 2014 compared with $1,963 million in fiscal year 2013. For a 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.
In fiscal year 2014, our debt-to-capital ratio was 50 percent compared with 14 percent in fiscal year 2013. The increase was primarily driven by an increase in long-term debt due to the $1 billion debt issuance that occurred in November 2013 and the $4.5 billion debt issuance that occurred in July 2014, and a decrease in shareowners' equity resulting from treasury stock purchases. These factors were partially offset by an increase in shareowners' equity as a result of earnings.
In fiscal year 2014, capital expenditures were $1,005 million compared with $741 million in fiscal year 2013, an increase of $264 million. The primary driver of the increase relates to higher overall spending on projects related to our additional corn seed plant expansions in Brazil, Latin America and Europe and research facilities in the United States.
In July 2014, we entered into uncollared accelerated share repurchase (“ASR”) agreements with two banks. Under the ASR agreements, we agreed to purchase approximately $6 billion of Monsanto common stock pursuant to the share repurchase programs announced in June 2014 and June 2013. For a detailed discussion see the "Capital Resources and Liquidity" section of the "Financial Condition, Liquidity and Capital Resources" section in this MD&A and Note 21 - Capital Stock.
In February 2014, we entered into a collaboration agreement with Novozymes to launch The BioAg Alliance. Monsanto paid Novozymes an aggregate upfront cash payment of $300 million for recognition of Novozymes ongoing business and capabilities in microbials and for Novozymes' ability to supply the alliance products. For a detailed discussion see the "Capital Resources and Liquidity" section of the "Financial Condition, Liquidity and Capital Resources" section in this MD&A.
In November 2013, we purchased The Climate Corporation and hold 100 percent of the outstanding stock following the acquisition. The total fair value of the acquisition was $932 million and the total cash paid for the acquisition was $917 million (net of cash acquired). For a detailed discussion see the "Capital Resources and Liquidity" section of the "Financial Condition, Liquidity and Capital Resources" section in this MD&A.
Outlook — We plan to continue to innovate and 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 and improving yields and improving the ways they can produce food, fiber, feed and fuel. We use the tools of modern biology and technology in an effort to make seeds easier to grow, to allow farmers to do more with fewer resources and to help produce healthier foods for consumers. Our current R&D strategy and commercial priorities are focused on bringing our farmer customers second- and third-generation traits, on delivering multiple solutions in one seed (“stacking”), on providing yield and productivity tools 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, continued patent and legal rights to offer our products, general public acceptance of the products and the value they will deliver to the market.
Roundup herbicides remain the largest crop protection brand globally. Monsanto’s crop protection business focus is to strategically support Monsanto’s Roundup Ready crops through our weed management platform that delivers weed control offerings for farmers. We are focused on managing the costs associated with our agricultural chemistry business as that sector matures globally.

17

MONSANTO COMPANY
 
2014 FORM 10-K

See the “Outlook” section of MD&A for a more detailed discussion of some of the opportunities and risks we have identified for our business. For additional information related to the outlook for Monsanto, see “Caution Regarding Forward-Looking Statements” above and Part I — Item 1A — Risk Factors of this Form 10-K.
New Accounting Pronouncements — See Note 3New Accounting Standards — for information on recently issued accounting guidance.
 

18

MONSANTO COMPANY
 
2014 FORM 10-K

RESULTS OF OPERATIONS
 
Year Ended Aug. 31,
 
Change
(Dollars in millions, except per share amounts)
2014
 
2013
 
2012
 
2014 vs.
2013
 
2013 vs.
2012
Net Sales
$
15,855

 
$
14,861

 
$
13,504

 
7
 %
 
10
 %
Cost of goods sold
7,281

 
7,208

 
6,459

 
1
 %
 
12
 %
Gross Profit
8,574

 
7,653

 
7,045

 
12
 %
 
9
 %
Operating Expenses:
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
2,774

 
2,550

 
2,380

 
9
 %
 
7
 %
Research and development expenses
1,725

 
1,533

 
1,517

 
13
 %
 
1
 %
Total Operating Expenses
4,499

 
4,083

 
3,897

 
10
 %
 
5
 %
Income from Operations
4,075

 
3,570

 
3,148

 
14
 %
 
13
 %
Interest expense
248

 
172

 
191

 
44
 %
 
(10
)%
Interest income
(102
)
 
(92
)
 
(77
)
 
11
 %
 
19
 %
Other expense, net
102

 
61

 
46

 
67
 %
 
33
 %
Income from Continuing Operations Before Income Taxes
3,827

 
3,429

 
2,988

 
12
 %
 
15
 %
Income tax provision
1,078

 
915

 
901

 
18
 %
 
2
 %
Income from Continuing Operations Including Portion Attributable to Noncontrolling Interest
2,749

 
2,514

 
2,087

 
9
 %
 
20
 %
Discontinued Operations:
 
 
 
 
 
 
 
 
 
Income from operations of discontinued businesses
22

 
17

 
10

 
NM

 
NM

Income tax provision
9

 
6

 
4

 
NM

 
NM

Income on Discontinued Operations
13

 
11

 
6

 
NM

 
NM

Net Income
$
2,762

 
$
2,525

 
$
2,093

 
9
 %
 
21
 %
Less: Net income attributable to noncontrolling interest
22

 
43

 
48

 
(49
)%
 
(10
)%
Net Income Attributable to Monsanto Company
$
2,740

 
$
2,482

 
$
2,045

 
10
 %
 
21
 %
Diluted Earnings per Share Attributable to Monsanto Company:
 
 
 
 
 
 
 
 
 
Income from continuing operations
$
5.19

 
$
4.58

 
$
3.78

 
13
 %
 
21
 %
Income on discontinued operations
0.03

 
0.02

 
0.01

 
NM

 
NM

Net Income Attributable to Monsanto Company
$
5.22

 
$
4.60

 
$
3.79

 
13
 %
 
21
 %
NM = Not Meaningful
 
 
 
 
 
 
 
 
 
Effective Tax Rate
28
%
 
27
%
 
30
%
 
 
 
 
Comparison as a Percent of Net Sales:
 
 
 
 
 
 
 
 
 
Cost of goods sold
46
%
 
49
%
 
48
%
 
 
 
 
Gross profit
54
%
 
51
%
 
52
%
 
 
 
 
Selling, general and administrative expenses
17
%
 
17
%
 
18
%
 
 
 
 
Research and development expenses
11
%
 
10
%
 
11
%
 
 
 
 
Total operating expenses
28
%
 
27
%
 
29
%
 
 
 
 
Income from continuing operations before income taxes
24
%
 
23
%
 
22
%
 
 
 
 
Net income attributable to Monsanto Company
17
%
 
17
%
 
15
%
 
 
 
 

19

MONSANTO COMPANY
 
2014 FORM 10-K

Overview of Financial Performance (2014 compared with 2013)
The following section discusses the significant components of our results of operations that affected the comparison of fiscal year 2014 with fiscal year 2013.
Net sales increased $994 million in fiscal year 2014 from fiscal year 2013. Our Seeds and Genomics segment net sales increased $400 million, and our Agricultural Productivity segment net sales increased $594 million. The following table presents the percentage changes in fiscal year 2014 worldwide net sales by segment compared with net sales in fiscal year 2013, including the effect that volume, price and currency had on these percentage changes: 
 
2014 Percentage Change in Net Sales vs. 2013
 
Volume    
 
Price    
 
Currency    
 
Total    
Seeds and Genomics Segment
(1)%
 
6%
 
(1)%
 
4%
Agricultural Productivity Segment
5%
 
10%
 
(2)%
 
13%
Total Monsanto Company
1%
 
7%
 
(1)%
 
7%
Cost of goods sold increased $73 million in fiscal year 2014 from fiscal year 2013. Our Seeds and Genomics segment cost of goods sold decreased $113 million, and our Agricultural Productivity segment cost of goods sold increased $186 million. Cost of goods sold as a percent of net sales for the total company decreased 3 percentage points to 46 percent. The following table represents the percentage changes in fiscal year 2014 worldwide cost of goods sold by segment compared with cost of goods sold in fiscal year 2013, including the effect that volume, costs and currency had on these percentage changes: 
 
2014 Percentage Change in Cost of Goods Sold vs. 2013
 
Volume    
 
Costs
 
Currency    
 
Total    
Seeds and Genomics Segment
1%
 
(2)%
 
(2)%
 
(3)%
Agricultural Productivity Segment
5%
 
2%
 
(1)%
 
6%
Total Monsanto Company
3%
 
(1)%
 
(1)%
 
1%
Gross profit increased $921 million. Total company gross profit as a percent of net sales increased 3 percentage points to 54 percent in fiscal year 2014.
For a more detailed discussion of the factors affecting the net sales, cost of goods sold and gross profit comparison, see the “Seeds and Genomics Segment” and the “Agricultural Productivity Segment” sections.
Operating expenses increased $416 million in fiscal year 2014 from fiscal year 2013. Selling, general and administrative (SG&A) expenses increased 9 percent primarily because of increased investment in additional growth platforms, including The Climate Corporation, and increased activity related to marketing and administrative functions. R&D expenses increased 13 percent due to The Climate Corporation acquisition, breeding expansion and increased investment in our product pipeline. As a percent of net sales, SG&A expense remained consistent at 17 percent of net sales and R&D expense increased 1 percentage point to 11 percent of net sales in fiscal year 2014.
Interest expense increased $76 million in fiscal year 2014 from fiscal year 2013. The increase was primarily the result of the $1 billion debt issuance that occurred in November 2013 and the $4.5 billion debt issuance that occurred in July 2014.
Other expense — net increased $41 million in fiscal year 2014. The increase was primarily the result of current period foreign currency losses largely related to the Argentine peso.
Income tax provision for fiscal year 2014 is $1,078 million, an increase of $163 million from fiscal year 2013 primarily as a result of lower discrete tax benefits and the increase in pretax income from continuing operations in 2014. The effective tax rate increased to 28 percent, an increase of 1 percentage point from fiscal year 2013. Fiscal year 2014 included several discrete tax adjustments resulting in a tax benefit of $12 million. The majority of this benefit resulted from deferred tax adjustments and adjustments to unrecognized tax benefits. Fiscal year 2013 included several discrete tax adjustments resulting in a tax benefit of $153 million. Without the discrete items, our effective tax rate for fiscal year 2014 would have been lower than the 2013 rate, primarily due to foreign tax credits.

20

MONSANTO COMPANY
 
2014 FORM 10-K

Overview of Financial Performance (2013 compared with 2012)
The following section discusses the significant components of our results of operations that affected the comparison of fiscal year 2013 with fiscal year 2012.
Net sales increased $1,357 million in fiscal year 2013 from fiscal year 2012. Our Seeds and Genomics segment net sales increased $551 million, and our Agricultural Productivity segment net sales increased $806 million. The following table presents the percentage changes in fiscal year 2013 worldwide net sales by segment compared with net sales in fiscal year 2012, including the effect that volume, price and currency had on these percentage changes: 
    
 
2013 Percentage Change in Net Sales vs. 2012
 
Volume    
 
Price    
 
Currency    
 
Total    
Seeds and Genomics Segment
4%
 
4%
 
(2)%
 
6%
Agricultural Productivity Segment
6%
 
19%
 
(3)%
 
22%
Total Monsanto Company
4%
 
8%
 
(2)%
 
10%
Cost of goods sold increased $749 million in fiscal year 2013 from fiscal year 2012. Our Seeds and Genomics segment cost of goods sold increased $527 million, and our Agricultural Productivity segment cost of goods sold increased $222 million. Cost of goods sold as a percent of net sales for the total company increased 1 percentage point to 49 percent. The following table represents the percentage changes in fiscal year 2013 worldwide cost of goods sold by segment compared with cost of goods sold in fiscal year 2012, including the effect that volume, costs and currency had on these percentage changes: 
    
 
2013 Percentage Change in Cost of Goods Sold vs. 2012
 
Volume    
 
Costs
 
Currency    
 
Total    
Seeds and Genomics Segment
3%
 
12%
 
(1)%
 
14%
Agricultural Productivity Segment
4%
 
6%
 
(2)%
 
8%
Total Monsanto Company
5%
 
9%
 
(2)%
 
12%
Gross profit increased $608 million. Total company gross profit as a percent of net sales decreased 1 percentage point to 51 percent in fiscal year 2013.
For a more detailed discussion of the factors affecting the net sales, cost of goods sold and gross profit comparison, see the “Seeds and Genomics Segment” and the “Agricultural Productivity Segment” sections.
Operating expenses increased $186 million in fiscal year 2013 from fiscal year 2012. Selling, general and administrative (SG&A) expenses increased 7 percent primarily because of higher spending for commissions, marketing and administrative functions. R&D expenses increased 1 percent due to increased investment in our product pipeline. As a percent of net sales, SG&A and R&D expenses each decreased 1 percentage point to 17 percent and 10 percent of net sales, respectively, in fiscal year 2013.
Other expense — net increased $15 million in fiscal year 2013 due to foreign currency activity, offset by a legal settlement recorded in the prior year.
Income tax provision for fiscal year 2013 is $915 million, an increase of $14 million from fiscal year 2012 primarily as a result of the increase in pretax income from continuing operations, offset by a higher discrete tax benefit in 2013. The effective tax rate decreased to 27 percent, a decrease of 3 percentage points from fiscal year 2012.  Fiscal year 2013 included several discrete tax adjustments resulting in a tax benefit of $153 million. The majority of this benefit resulted from the favorable resolution of tax matters, a capital loss from a deemed liquidation of a subsidiary, the expiration of statutes in various jurisdictions and the retroactive extension of the US Research and Development (R&D) credit pursuant to the enactment of the American Taxpayer Relief Act of 2012 on January 2, 2013. Fiscal year 2012 included several discrete tax adjustments resulting in a tax benefit of $47 million. Without the discrete items, our effective tax rate for fiscal year 2013 would have still been lower than the 2012 rate, primarily due to the extension of the R&D credit.


21

MONSANTO COMPANY
 
2014 FORM 10-K

SEEDS AND GENOMICS SEGMENT
 
Year Ended Aug. 31,
 
Change
(Dollars in millions)
2014
 
2013
 
2012
 
2014 vs. 2013
 
2013 vs. 2012  
Net Sales
 
 
 
 
 
 
 
 
 
Corn seed and traits
$
6,401

 
$
6,596

 
$
5,814

 
(3
)%
 
13
 %
Soybean seed and traits
2,102

 
1,653

 
1,771

 
27
 %
 
(7
)%
Cotton seed and traits
665

 
695

 
779

 
(4
)%
 
(11
)%
Vegetable seeds
867

 
821

 
851

 
6
 %
 
(4
)%
All other crops seeds and traits
705

 
575

 
574

 
23
 %
 
 %
Total Net Sales
$
10,740

 
$
10,340

 
$
9,789

 
4
 %
 
6
 %
Gross Profit
 
 
 
 
 
 
 
 
 
Corn seed and traits
$
3,932

 
$
3,929

 
$
3,589

 
 %
 
9
 %
Soybean seed and traits
1,364

 
948

 
1,160

 
44
 %
 
(18
)%
Cotton seed and traits
461

 
519

 
585

 
(11
)%
 
(11
)%
Vegetable seeds
401

 
337

 
419

 
19
 %
 
(20
)%
All other crops seeds and traits
438

 
350

 
306

 
25
 %
 
14
 %
Total Gross Profit
$
6,596

 
$
6,083

 
$
6,059

 
8
 %
 
 %
EBIT(1)
$
2,607

 
$
2,412

 
$
2,570

 
8
 %
 
(6
)%
(1) 
EBIT is defined as earnings (loss) before interest and taxes. Interest and taxes are recorded on a total company basis. We do not record these items at the segment level. See Note 26 — Segment and Geographic Data — and the “Overview — Non-GAAP Financial Measures” section of MD&A for further details.
Seeds and Genomics Financial Performance for Fiscal Year 2014
The net sales increase of $449 million in soybean seed and traits was driven by increased collections of Roundup Ready 2 Yield royalties in the United States, volume growth and improved germplasm and trait mix in the United States and the launch of Intacta RR2 PRO, primarily in Brazil.
The net sales decrease of $195 million in corn seed and traits was primarily driven by lower volumes in the United States and Latin America and unfavorable foreign currency changes in Brazil, offset by increases in pricing in all world areas due to improved germplasm and trait mix and volume growth in Europe.
The net sales increase of $130 million in all other seeds and traits was primarily due to The BioAg Alliance with Novozymes and higher canola volume.
Cost of goods sold in the Seeds and Genomics segment primarily represents field growing, plant processing and distribution costs. Cost of goods sold decreased $113 million, or 3 percent, to $4,144 million in fiscal year 2014 compared to $4,257 million in fiscal year 2013. The decrease was primarily the result of lower volumes and lower costs in corn seed and traits in Latin America and the United States and favorable currency changes in Brazil, Europe and Canada. The decrease was offset by higher volumes in soybean seed and traits, higher costs in cotton seed and traits and The BioAg Alliance with Novozymes.
Gross profit increased $513 million, or 8 percent, to $6,596 million in fiscal year 2014 compared with $6,083 million in fiscal year 2013. Gross profit as a percent of sales for this segment increased 2 percentage points to 61 percent in fiscal year 2014.
Gross profit for soybean seed and traits increased 44 percent compared to the 27 percent increase in net sales for soybean seed and traits. This additional percentage increase in gross profit over the net sales increase is the result of improved price mix and Roundup Ready royalties in the United States, which carry higher gross margins, and the launch of Intacta RR2 PRO in Brazil.
Gross profit for vegetable seeds increased 19 percent compared to the 6 percent increase in net sales for vegetable seeds. This additional percentage increase in gross profit over the net sales increase is primarily the result of decreased inventory obsolescence in the current fiscal year.

22

MONSANTO COMPANY
 
2014 FORM 10-K

Gross profit for cotton seed and traits decreased 11 percent compared to the 4 percent decrease in sales for cotton seeds and traits. This additional percentage decrease in gross profit over the net sales decrease was primarily due to an inventory obsolescence write down in the current fiscal year.
Gross profit for all other crops seeds and traits increased 25 percent compared to the 23 percent increase in net sales for all other crops seeds and traits. The increase in gross profit was driven by higher net sales due to The BioAg Alliance and higher volumes in canola discussed above.
Seeds and Genomics Financial Performance for Fiscal Year 2013
The net sales increase of $782 million in corn seed and traits was primarily driven by an overall global increase in pricing and volume. In the United States, Argentina and Brazil prices were higher due to improved germplasm and trait mix. In Europe and Mexico prices were higher driven by germplasm mix. Global volumes were higher due to increased demand for our corn technologies. Larger planted area in Mexico also contributed to the increase in volume.
The net sales decrease of $118 million in soybean seed and traits was primarily driven by the reduction in revenue in Brazil due to decreased collections of Roundup Ready royalties. This decrease was partially offset by volume growth in the United States due to stronger customer demand and increases in pricing from improved germplasm and trait mix.
The net sales decrease of $84 million in cotton seed and traits is the result of lower planted acres in the United States and Australia due to decreased cotton commodity prices which caused a shift to other crops being planted.
Cost of goods sold in the Seeds and Genomics segment primarily represents field growing, plant processing and distribution costs. Cost of goods sold increased $527 million, or 14 percent, to $4,257 million in fiscal year 2013 compared to $3,730 million in fiscal year 2012. The increase was primarily the result of higher plant processing and field costs driven by lower corn production yields and higher corn winter production resulting from drought conditions in the summer of 2012, higher commodity prices and inflation. Also contributing to this increase was higher sales volume as noted in the net sales discussion above.
Gross profit remained relatively consistent with fiscal year 2012 and gross profit as a percent of sales for this segment decreased 3 percentage points to 59 percent in fiscal year 2013.
Gross profit for soybean seed and traits decreased 18 percent compared to the 7 percent decrease in net sales for soybean seed and traits. This additional percentage decrease in gross profit over the net sales decrease is the result of the reduction in revenue in Brazil due to decreased collections of Roundup Ready royalties, which carry higher gross margins, and increased manufacturing costs in the United States due to higher production, additional treatment costs and higher commodity prices.
Gross profit for vegetable seeds decreased 20 percent compared to the 4 percent decrease in net sales for vegetable seeds. This additional percentage decrease in gross profit over the net sales decrease is the result of an increase in inventory obsolescence.
Gross profit for all other crops seeds and traits increased 14 percent despite the consistent net sales. This increase is primarily the result of lower production costs.
AGRICULTURAL PRODUCTIVITY SEGMENT
 
Year Ended Aug. 31,
 
Change
(Dollars in millions)
2014
 
2013
 
2012
 
2014 vs. 2013
 
2013 vs. 2012  
Net Sales
 
 
 
 
 
 
 
 
 
Agricultural Productivity
$
5,115

 
$
4,521

 
$
3,715

 
13
%
 
22
%
Total Net Sales
$
5,115

 
$
4,521

 
$
3,715

 
13
%
 
22
%
Gross Profit
 
 
 
 
 
 
 
 
 
Agricultural Productivity
1,978

 
1,570

 
986

 
26
%
 
59
%
Total Gross Profit
$
1,978

 
$
1,570

 
$
986

 
26
%
 
59
%
EBIT(1)
$
1,345

 
$
1,048

 
$
477

 
28
%
 
120
%
(1) 
EBIT is defined as earnings (loss) before interest and taxes. Interest and taxes are recorded on a total company basis. We do not record these items at the segment level. See Note 26 — Segment and Geographic Data — and the “Overview — Non-GAAP Financial Measures” section of MD&A for further details.

23

MONSANTO COMPANY
 
2014 FORM 10-K

Agricultural Productivity Financial Performance for Fiscal Year 2014
Net sales in our Agricultural Productivity segment increased $594 million in fiscal year 2014 due to increased sales of Roundup and other glyphosate-based herbicides in all markets. This improvement was primarily due to an increase in the average net selling price of Roundup and other glyphosate-based herbicides in Brazil, United States, Latin America and Europe.  The average net selling price for Roundup and other glyphosate-based herbicides increased as sales shifted to higher priced branded products in fiscal year 2014 compared to fiscal year 2013.
Cost of goods sold in the Agricultural Productivity segment primarily represents material, conversion and distribution costs. Cost of goods sold increased $186 million, or 6 percent, in fiscal year 2014 to $3,137 million compared to $2,951 million in fiscal year 2013. Roundup and other glyphosate-based herbicides cost of goods sold increased as fiscal year 2014 sales shifted to branded products, which are more costly to produce. In addition, the cost of goods sold for Roundup and other glyphosate-based herbicides increased from higher priced raw materials when compared to 2013. 
The net sales and cost of goods sold discussed above resulted in $408 million higher gross profit in fiscal year 2014. Gross profit as a percent of sales for the Agricultural Productivity segment increased 4 percentage points to 39 percent in fiscal year 2014 primarily due to the increased average net selling price discussed above.
Agricultural Productivity Financial Performance for Fiscal Year 2013
Net sales in our Agricultural Productivity segment increased $806 million in fiscal year 2013 from increased average net selling prices of Roundup and other glyphosate-based herbicides in all markets. In addition, sales volumes of Roundup and other glyphosate-based herbicides increased 7 percent in fiscal year 2013 primarily from increased demand for our products in Brazil and Argentina due to increased market size.
Cost of goods sold in the Agricultural Productivity segment primarily represents material, conversion and distribution costs. Cost of goods sold increased $222 million, or 8 percent, in fiscal year 2013 to $2,951 million compared to $2,729 million in fiscal year 2012. Roundup and other glyphosate-based herbicides cost of goods sold increased as fiscal year 2013 sales shifted to branded products, which are more costly to produce. Increased volume in our Roundup and other glyphosate-based herbicides business, as discussed above, also contributed to this increase.
The net sales and cost of goods sold discussed above resulted in $584 million higher gross profit in fiscal year 2013. Gross profit as a percent of sales for the Agricultural Productivity segment increased 8 percentage points to 35 percent in fiscal year 2013 primarily due to the increased average net selling price discussed above.

24

MONSANTO COMPANY
 
2014 FORM 10-K

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Working Capital and Financial Condition
 
As of Aug. 31,
(Dollars in millions, except current ratio)
2014
 
2013
Cash and Cash Equivalents(1)
$
2,367

 
$
3,668

Trade Receivables, Net(1)
2,014

 
1,715

Inventory, Net
3,597

 
2,947

Other Current Assets(2)
1,697

 
1,747

Total Current Assets
$
9,675

 
$
10,077

Short-Term Debt(1)
$
233

 
$
51

Accounts Payable(1)
1,111

 
995

Accrued Liabilities(1)(3)
3,768

 
3,290

Total Current Liabilities
$
5,112

 
$
4,336

Working Capital(4)
$
4,563

 
$
5,741

Current Ratio(4)
1.89:1

 
2.32:1

(1) 
Includes restrictions as a result of our variable interest entities. See the Statements of Consolidated Financial Position and Note 7Variable Interest Entities — for more information.
(2) 
Includes short-term investments, miscellaneous receivables, deferred tax assets and other current assets.
(3) 
Includes income taxes payable, accrued compensation and benefits, accrued marketing programs, deferred revenues, grower production accruals, dividends payable, customer payable and miscellaneous short-term accruals.
(4) 
Working capital is total current assets less total current liabilities; current ratio represents total current assets divided by total current liabilities.
Working capital decreased $1,178 million between Aug. 31, 2014, and Aug. 31, 2013, primarily because of the following factors:
 
Cash and cash equivalents decreased $1,301 million. For a more detailed discussion of the factors affecting the cash flow comparison, see the “Cash Flow” section in this section of MD&A.
Other current assets decreased $50 million due to a $214 million decrease in short-term investments to fund operations and investments, offset by increases in miscellaneous receivables due to an increase in value added tax receivable, deferred tax assets, and fiduciary assets from the acquisition of The Climate Corporation.
Short-term debt increased $182 million as a result of the recognition of redeemable shares related to a consolidated variable interest entity and additional short-term borrowings in Europe and Brazil.
Accounts payable increased $116 million primarily due to the acquisition of The Climate Corporation and timing of payments in Brazil and Europe.
Accrued liabilities increased $478 million primarily due to the following fluctuations:
Accrued marketing programs increased $316 million due to increased sales and recording of amounts within accounts receivable with the right of offset primarily in the U.S., and an increase in Brazil related primarily to cotton seed and traits.
Miscellaneous short-term accruals increased $150 million primarily due to higher accrued interest on increased debt, the acquisition of The Climate Corporation and higher deferred tax liabilities.

These decreases to working capital were partially offset by the following factors:

Trade receivables, net increased $299 million primarily due to increased revenue from royalty agreements in the U.S., the timing of cash receipts in the U.S. and increased sales in Brazil and Europe, offset by accrued marketing programs with the right of offset primarily in the U.S.
Inventory, net increased $650 million between respective periods primarily from our seeds and genomics segment due to larger corn seed and traits production plans to rebuild inventory volume following the prior year drought in the U.S. and to meet demand in Europe, in addition to higher production plans for soybeans in the U.S. and lower than expected corn seeds and traits sales volume in Brazil in fiscal year 2014. Agricultural productivity contributed to this increase as a result of expected fiscal year 2015 demand.

25

MONSANTO COMPANY
 
2014 FORM 10-K


Backlog: Inventories of finished goods, goods in process and raw materials and supplies are maintained to meet customer requirements and our scheduled production. As is consistent with the nature of the seed industry, we generally produce in one growing season the seed inventories we expect to sell the following season. In general, we do not manufacture our products against a backlog of firm orders; production is geared to projected demand.
 
Customer Financing Programs: We participate in various customer financing programs in an effort to reduce our receivables risk and to reduce our reliance on commercial paper borrowings. As of Aug. 31, 2014, the programs had $503 million in outstanding balances and we received $535 million of proceeds in fiscal year 2014 under these programs. Our future maximum payout under the programs, including our responsibility for our guarantees with lenders, was $106 million as of Aug. 31, 2014. See Note 6Customer Financing Programs — for further discussion of these programs.

Cash Flow
 
Year Ended Aug. 31,
(Dollars in millions)
2014
 
2013
 
2012
Net Cash Provided by Operating Activities
$
3,054

 
$
2,740

 
$
3,051

Net Cash Required by Investing Activities
(2,095
)
 
(777
)
 
(1,034
)
Free Cash Flow(1)
959

 
1,963

 
2,017

Net Cash Required by Financing Activities
(2,259
)
 
(1,485
)
 
(1,165
)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(1
)
 
(93
)
 
(141
)
Net Increase (Decrease) in Cash and Cash Equivalents
(1,301
)
 
385

 
711

Cash and Cash Equivalents at Beginning of Period
3,668

 
3,283

 
2,572

Cash and Cash Equivalents at End of Period
$
2,367

 
$
3,668

 
$
3,283

(1) 
Free cash flow represents the total of net cash provided or required by operating activities and provided or required by investing activities (see the “Overview — Non-GAAP Financial Measures” section in MD&A for a further discussion).
2014 compared with 2013:
Operating: The increase in cash provided by continuing operations in fiscal year 2014 compared to fiscal year 2013 was primarily due to the following:
Increased earnings from fiscal year 2013 to fiscal year 2014; and
Decrease in payments for accounts payable and accrued liabilities primarily due to timing of payments and increased accrued marketing programs.
The above factors were offset by the following:
Increase in payments for inventory due to higher production plans for corn and soybeans and inventory build for agriculture productivity;
Increase in receivables due to increased revenue from royalty agreements in the U.S., the timing of cash receipts in the U.S. and increased sales in Brazil and Europe;
Decrease in receipts of deferred revenues due to higher fiscal year 2013 deferred revenue balance in Brazil; and
Increase in tax payments due to increased earnings and timing of tax payments.
Investing: The increase in cash required by investing activities in fiscal year 2014 compared to fiscal year 2013 was primarily due to the acquisition of The Climate Corporation, our collaboration with Novozymes and an increase in capital expenditures, as detailed below, offset by net cash provided by net purchases and maturities of short-term investments used to fund operations and investments.
Financing: The increase in cash required by financing activities in fiscal year 2014 compared to fiscal year 2013 was primarily due to the following:
Increased treasury stock purchases resulting from the ASR agreements, as discussed below, and dividend payments in order to provide increased returns to our shareowners;
Lower proceeds from noncontrolling interests; and
Debt issuance costs related to the $4.5 billion issuance and $1 billion issuance during fiscal year 2014, as discussed below.

26

MONSANTO COMPANY
 
2014 FORM 10-K


The above factors were offset by the following:
Long-term debt proceeds from the $4.5 billion issuance and $1 billion issuance during fiscal year 2014, as discussed below; and
Lower payments to noncontrolling interests.
2013 compared with 2012: In 2013, our free cash flow was a source of cash of $1,963 million, compared with $2,017 million in 2012. Cash provided by operating activities decreased 10 percent, or $311 million, to $2,740 million in in 2013 compared with $3,051 million in 2012. The decrease was primarily driven by higher tax payments due to increased earnings and the timing of tax payments, increased payments related to marketing programs due to increased fiscal year sales, increased payments for inventory due to higher corn production costs and higher commodity prices, and increased incentive payments based on increased company results and additional cash contributions related to our ESOP. These factors were offset by increased earnings in fiscal year 2013 compared with fiscal year 2012.
Cash required by investing activities was $777 million in 2013 compared with $1,034 million in 2012. The decrease was primarily driven by higher proceeds from the sale of assets and a decrease in the purchase price of current year acquisitions, offset by an increase in capital expenditures as discussed below.
The amount of cash required by financing activities was $1,485 million in 2013 compared with $1,165 million in 2012. The increase was primarily driven by increased treasury stock purchases and dividend payments in order to provide increased returns to our shareowners and a reduction in long-term debt proceeds due to debt issuance in fiscal year 2012 that did not occur in fiscal year 2013. These factors were offset by a decrease in long-term debt reductions due to the repayment of outstanding debt in fiscal year 2012, which was partially paid with the debt issuance in fiscal year 2012.

Capital Resources and Liquidity
 
As of Aug. 31,
(Dollars in millions, except debt-to-capital ratio)
2014
 
2013
Short-Term Debt
$
233

 
$
51

Long-Term Debt
7,528

 
2,061

Total Monsanto Company Shareowners’ Equity
7,875

 
12,559

Debt-to-Capital Ratio
50
%
 
14
%
A major source of our liquidity is operating cash flows, which can be derived from net income. This cash-generating capability and access to long-term investment grade debt financing markets provides us with the financial flexibility we need to meet operating, investing and financing needs. We believe our sources of liquidity will be sufficient to sustain operations and to finance anticipated investments. To the extent that cash provided by operating activities is not sufficient to fund our cash needs, we believe short-term commercial paper borrowings can be used to finance these requirements. We had no commercial paper borrowings outstanding at Aug. 31, 2014.
In July 2014, we issued $4.5 billion senior unsecured notes with a group of banks. The net proceeds from the issuance were used to repurchase the company’s common stock pursuant to the ASR agreements in July 2014 discussed below.
In November 2013, we issued $1 billion senior notes with a group of banks, primarily to fund the acquisition of The Climate Corporation, as discussed below, and for general business purposes.
We have a $2 billion credit facility agreement with a group of banks that provides a senior unsecured revolving credit facility through April 1, 2016. As of Aug. 31, 2014, we did not have any borrowings under this credit facility and we were in compliance with all debt covenants. Subsequent to Aug. 31, 2014, we requested an increase in the overall borrowing limit pursuant to a provision in the credit agreement that allowed us to do so, and effective Sept. 30, 2014, the limit was increased to $2.5 billion.
Our debt-to-capital ratio increased to 50 percent at Aug 31, 2014, compared with 14 percent at Aug. 31, 2013, as a result of the debt issuances as discussed above and treasury share purchases as discussed below, offset by the increase in shareowners' equity as a result of earnings.

27

MONSANTO COMPANY
 
2014 FORM 10-K

We held cash and cash equivalents and short-term investments of $2,407 million and $3,922 million at Aug. 31, 2014, and Aug. 31, 2013, respectively, of which $2,023 million and $2,319 million was held by foreign entities, respectively. Our intent is to indefinitely reinvest approximately $4.4 billion of the $4.8 billion of undistributed earnings of our foreign operations that existed as of August 31, 2014. It is not practicable to estimate the income tax liability that might be incurred if such indefinitely reinvested earnings were remitted to the United States.

Dividends: In fiscal year 2014, we declared the following dividends:
Quarter Ending
Declaration Date
Dividend
Payable Date
To Shareowners of Record as of:
Aug. 31, 2014
Aug. 5, 2014
49 cents
Oct. 31, 2014
Oct. 10, 2014
May 31, 2014
June 6, 2014
43 cents
July 25, 2014
July 3, 2014
Feb. 28, 2014
Jan. 28, 2014
43 cents
April 25, 2014
April 4, 2014
Feb. 28, 2014
Dec. 9, 2013
43 cents
Jan. 31, 2014
Jan. 10, 2014
We paid dividends totaling $904 million in fiscal year 2014, $802 million in fiscal year 2013 and $642 million in fiscal year 2012.
Share Repurchases: On July 1, 2014, we entered into uncollared ASR agreements with each of JPMorgan Chase Bank, N.A. (“JPMorgan”) and Goldman, Sachs & Co. (“Goldman Sachs”). Under the ASR agreements, we agreed to purchase approximately $6.0 billion of Monsanto common stock, in total. On July 7, 2014, JPMorgan and Goldman Sachs delivered to us approximately 38.6 million shares in total based on then-current market prices, and we paid a total of $6 billion. The payments to JPMorgan and Goldman Sachs were recorded as a reduction to shareowners' equity, consisting of a $4.8 billion increase in treasury stock, which reflects the value of the 38.6 million shares received upon initial settlement, and a $1.2 billion decrease in additional contributed capital, which reflects the value of the stock held back by JPMorgan and Goldman Sachs pending final settlement of the ASR agreements. The final number of shares of Monsanto common stock that we may receive, or may be required to remit, upon settlement under the ASR agreements will be based upon the average daily volume weighted-average price of Monsanto common stock during the term of the ASR agreements, less a negotiated discount. Final settlement of each ASR agreement is expected to occur by the end of the third quarter of 2015, and may occur earlier at the option of JPMorgan and Goldman Sachs. The terms of the ASR agreements are subject to adjustment if we were to enter into or announce certain types of transactions that may affect our stock. If we are obligated to make an adjustment payment to either or both of JPMorgan or Goldman Sachs under the ASR agreements, we may elect to satisfy such obligation in cash or in shares of Monsanto common stock. The ASR agreements were entered into pursuant to the share repurchase programs announced in June 2013 and in June 2014 as discussed below.
In June 2014, the company announced a new two-year repurchase program of up to $10 billion of the company's common stock. This repurchase program commenced on July 1, 2014, and was in addition to the remaining $1.1 billion share repurchase authorization from June 2013 discussed below. During fiscal year 2014, we purchased 48.6 million shares for treasury, which includes 38.6 million shares under the ASR agreements discussed above. We spent $7.1 billion purchasing these shares, which includes the $1.2 billion held back on the $6.0 billion ASR agreements. As of Aug. 31, 2014, we had approximately $4.9 billion remaining under the June 2014 share repurchase program.
In June 2013, the company announced a three-year repurchase program of up to $2 billion of the company's common stock. This repurchase program commenced on Aug. 20, 2013, and was completed on July 1, 2014.
In June 2012, the company announced a three-year repurchase program of up to $1 billion of the company’s common stock. This repurchase program commenced on Jan. 14, 2013, and was completed on Aug. 20, 2013.
There were no other publicly announced plans outstanding as of Aug. 31, 2014. The timing and number of shares purchased in the future under the repurchase programs, if any, depends upon capital needs, market conditions and other factors.

Capital Expenditures: Our capital expenditures were $1,005 million in fiscal year 2014, $741 million in fiscal year 2013 and $646 million in fiscal year 2012. The primary driver of this year’s increase relates to higher overall spending on projects related to our additional corn seed plant expansions in Brazil, Latin America and Europe and research facilities in the United States. We expect fiscal year 2015 cash required by investing to be $1.2 billion to $1.4 billion, with the capital expenditures component primarily allocated towards the seeds and genomics segment and growth platforms.  


28

MONSANTO COMPANY
 
2014 FORM 10-K

Healthcare Benefits: The short-term impact of the Healthcare Acts does not have a material impact on our consolidated financial statements. We are currently evaluating the long-term impact of the Healthcare Acts, but we do not expect a material impact on our consolidated financial statements. We will continue to assess how the Healthcare Acts apply to us and how best to meet the stated requirements.
Pension Contributions: In addition to contributing amounts to our pension plans if required by pension plan regulations, we continue to also make discretionary contributions if we believe they are merited. Although contributions to the U.S. qualified plan were not required, we contributed $32 million in fiscal year 2014, $36 million in fiscal year 2013 and $60 million in fiscal year 2012. For fiscal year 2015, contributions in the range of $30 million are planned for the U.S. qualified pension plan. As the level of required future contributions is unpredictable and depends heavily on return on plan asset experience and interest rate levels, we will evaluate required contributions to the plan on a regular basis in the near term.
In July 2012, the Surface Transportation Extension Act (the Act), also referred to as the Moving Ahead for Progress in the 21st Century Act (MAP-21), was passed by Congress and signed by the President. The Act included pension funding stabilization provisions and specifically impacted the discount rate companies used to determine future funding requirements for U.S. pension plans, which could potentially reduce required pension contributions in the short-term. In August 2014, the Highway and Transportation Funding Act of 2014 (HATFA) was signed by the President to fund the Highway Trust Fund through May 2015. Funding of the bill will come from the extension of the MAP-21 provisions and extends those provisions through 2020. As with the 2012 Act, it will specifically impact the discount rate companies use to determine future funding requirements for U.S. pension plans, which in turn could potentially reduce required pension contributions in the near term.  Our fiscal 2015 contribution range, noted above, takes into account the impact of the provisions of the bill extension.
Fiscal year 2015 pension expense will be determined using assumptions as of Aug. 31, 2014. Our expected rate of return on assets assumption will remain consistent for fiscal year 2015 at 7.50 percent for the U.S. Plan. This assumption was 7.50 percent in each of fiscal years 2014, 2013 and 2012. To determine the rate of return, we consider the historical experience and expected future performance of the plan assets, as well as the current and expected allocation of the plan assets. The U.S. qualified pension plan’s asset allocation as of Aug. 31, 2014, was approximately 55 percent equity securities, 40 percent debt securities and 5 percent other investments, in line with our policy ranges. We periodically evaluate the allocation of plan assets among the different investment classes to ensure that they are within policy guidelines and ranges. Although we do not currently expect to change the assumed rate of return in the near term, holding all other assumptions constant, we estimate that a half-percent decrease in the expected return on plan assets would lower our fiscal year 2015 pre-tax income by approximately $11 million.
Our discount rate assumption for the 2015 pension expense is 4.04 percent for U.S. pension plans. This assumption was 4.44 percent, 3.44 percent and 4.59 percent in fiscal years 2014, 2013 and 2012, respectively. In determining the discount rate, we use yields on high-quality fixed-income investments that match the duration of the pension obligations. To the extent the discount rate increases or decreases, our pension obligation is decreased or increased accordingly. Holding all other assumptions constant, we estimate that a quarter-percent decrease in the discount rate would decrease our fiscal year 2015 pre-tax income by approximately $4 million. Our salary rate assumption as of Aug. 31, 2014, was approximately 4.0 percent. Holding all other assumptions constant, we estimate that a half-percent decrease in the salary rate assumption would increase our fiscal year 2015 pretax income by $5 million.
 
Divestiture: In October 2008, we consummated the sale of the Dairy business after receiving approval from the appropriate regulatory agencies and received $300 million in cash, and may receive additional contingent consideration. The contingent consideration is a 10-year earn-out with potential annual payments being earned by the company if certain revenue levels are exceeded.
2014 Collaboration: In February 2014, we entered into a collaborative agreement with Novozymes to launch The BioAg Alliance. The BioAg Alliance will focus on the next wave of microbial solutions by bringing together Novozymes' capabilities for discovering, developing and producing microbial solutions with Monsanto's discovery programs, and advanced development, testing and commercial capabilities. Value from commercialization will be shared 50-50 between both companies. Monsanto paid Novozymes an aggregate upfront cash payment of $300 million for recognition of Novozymes ongoing business and capabilities in microbials and for Novozymes' ability to supply alliance products.
2014 Acquisition: In November 2013, Monsanto acquired 100 percent of the outstanding stock of The Climate Corporation, a San Francisco, California based company. The Climate Corporation is a leading data analytics company with core capabilities around hyper-local weather monitoring, weather simulation and agronomic modeling which has allowed them to develop risk management tools and agronomic decision support tools for growers. The acquisition combined The Climate Corporation's expertise in agriculture risk-management with Monsanto’s R&D capabilities, and is expected to further enable farmers to

29

MONSANTO COMPANY
 
2014 FORM 10-K

significantly improve productivity and better manage risk from variables that could limit agriculture production. The total fair value of the acquisition was $932 million and the total cash paid for the acquisition was $917 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.
2013 Acquisitions: In August 2013, Monsanto acquired certain assets and manufacturing capabilities of Dieckmann GmbH & Co.KG, a business based in Germany which specializes in the breeding of oilseed rape and rye seeds. The acquisition, which qualifies as a business under the Business Combinations topic of the ASC, is expected to complement Monsanto's existing activities in the breeding, production and marketing of oilseed rape in Europe. The total fair value and cash paid for the acquisition was $30 million. The fair value of the acquisition was primarily allocated to goodwill and intangibles. 
In June 2013, Monsanto acquired 100 percent of the outstanding stock of GrassRoots Biotechnology, Inc., a business based in Durham, North Carolina, that is focused on gene expression and other agriculture technologies. The acquisition of the company, which qualifies as a business under the Business Combinations topic of the ASC, is expected to complement Monsanto's existing research platforms. The total fair value and cash paid for the acquisition was $15 million (net of cash acquired). The fair value of the acquisition was primarily allocated to goodwill and intangibles.
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, is expected to complement Monsanto's existing research platforms. The total fair value and cash paid for the acquisition was $35 million. The fair value of the acquisition was primarily allocated to goodwill and intangibles.
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, is intended to support Monsanto's efforts to provide farmers with sustainable biological products to improve crop health and productivity. The total cash paid and the fair value of the acquisition was $85 million, and the purchase price was primarily allocated to goodwill and intangibles.
For all acquisitions described above, the business operations and employees of the acquired entities were added into the Seeds and Genomics segment results upon acquisition. These acquisitions were accounted for as purchase transactions. Accordingly, the assets and liabilities of the acquired entities were recorded at their estimated fair values at the dates of the acquisitions. See Note 4Business Combinations and Collaborative Arrangements — for further discussion of these acquisitions.

30

MONSANTO COMPANY
 
2014 FORM 10-K

Contractual Obligations: We have certain obligations and commitments to make future payments under contracts. The following table sets forth our estimates of future payments under contracts as of Aug. 31, 2014. See Note 25Commitments and Contingencies — for a further description of our contractual obligations.
 

 
Payments Due by Fiscal Year Ending Aug. 31,
(Dollars in millions)
Total  
 
2015
 
2016
 
2017
 
2018
 
2019
 
2020 and
beyond  
Total Debt, including Capital Lease Obligations(1)
$
7,761

 
$
233

 
$
307

 
$
901

 
$
302

 
$
802

 
$
5,216

Interest Payments Relating to Long-Term Debt and Capital Lease Obligations(1)
5,755

 
273

 
272

 
261

 
255

 
236

 
4,458

Operating Lease Obligations
556

 
133

 
102

 
80

 
65

 
57

 
119

Purchase Obligations:
 

 
 
 
 
 
 
 
 
 
 
 
 
Commitments to purchase inventories
2,079

 
1,201

 
255

 
217

 
216

 
186

 
4

Commitments to purchase breeding research
605

 
55

 
55

 
55

 
55

 
55

 
330

R&D alliances and joint venture obligations
182

 
53

 
54

 
32

 
28

 
8

 
7

Uncompleted additions to property
79

 
72

 
7

 

 

 

 

Other purchase obligations
15

 
12

 
1

 
1

 
1

 

 

Other Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Postretirement liabilities(2)
76

 
76

 

 

 

 

 

Unrecognized tax benefits(3)
87

 

 

 

 

 

 

Other liabilities
188

 
27

 
21

 
8

 
6

 
6

 
120

Total Contractual Obligations
$
17,383

 
$
2,135

 
$
1,074

 
$
1,555

 
$
928

 
$
1,350

 
$
10,254

(1)
For variable rate debt, interest is calculated using the applicable rates as of Aug. 31, 2014.
(2)
Includes the company’s planned pension and other postretirement benefit contributions for 2015. The actual amounts funded in 2015 may differ from the amounts listed above. Contributions in 2016 and beyond are excluded as those amounts are unknown. Refer to Note 17 — Postretirement Benefits — Pensions — and Note 18 — Postretirement Benefits — Health Care and Other Postemployment Benefits — for more information.
(3)
Unrecognized tax benefits relate to uncertain tax positions recorded under the Income Taxes topic of the ASC. The company is unable to reasonably predict the timing of tax settlements, as tax audits can involve complex issues and the resolution of those issues may span multiple years, particularly if subject to negotiation or litigation. See Note 13 — Income Taxes — for more information.
Off-Balance Sheet Arrangements
Under our Separation Agreement with Pharmacia, we are required to indemnify Pharmacia for certain matters, such as environmental remediation obligations and litigation. To the extent we are currently managing any such matters, we evaluate them in the course of managing our own potential liabilities and establish reserves as appropriate. However, additional matters may arise in the future, and we may manage, settle or pay judgments or damages with respect to those matters in order to mitigate contingent liability and protect Pharmacia and Monsanto. See Note 25Commitments and Contingencies — and Part I — Item 3 — Legal Proceedings — for further information.
We have entered into various customer financing programs which are accounted for in accordance with the Transfers and Servicing topic of the ASC. See Note 6Customer Financing Programs — for further information.
We are in the process of making a significant expansion of our Chesterfield, Missouri, facility. In December 2013, we executed the first of a series of incentive agreements with the County of St. Louis, Missouri. Under these agreements we have transferred our Chesterfield, Missouri, facility to St. Louis County and received Industrial Revenue Bonds in the amount of up to $470 million which enables us to reduce our cost of constructing and operating the expansion by reducing certain state and local tax expenditures. We immediately leased the facility from the County of St. Louis and have an option to purchase the facility upon tendering the Industrial Revenue Bonds we received to the County. The payments due to us in relation to the Industrial Revenue Bonds and owed by us in relation to the lease of the facilities qualify for the right of offset under ASC 210, Balance Sheet, on our Statements of Consolidated Financial Position. As such, neither the Industrial Revenue Bonds nor the lease obligation are recorded on the Statements of Consolidated Financial Position as an asset or liability, respectively. The Chesterfield facilities and the expansion is being treated as being owned by Monsanto.

31

MONSANTO COMPANY
 
2014 FORM 10-K

Other Information
As discussed in Note 25Commitments and Contingencies — and Part I — Item 3 — Legal Proceedings, Monsanto is responsible for significant environmental remediation and 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.
Seasonality
Our fiscal year end of August 31 synchronizes our quarterly and annual results with the natural flow of the agricultural cycle in our major markets. It provides a more complete picture of the North American and South American growing seasons in the same fiscal year. Sales by our Seeds and Genomics segment, and to a lesser extent, by our Agricultural Productivity segment, are seasonal. In fiscal year 2014, approximately 72 percent of our Seeds and Genomics segment sales occurred in the second and third quarters. This segment’s seasonality is primarily a function of the purchasing and growing patterns in North America. Ag productivity segment sales were more evenly spread across our fiscal year quarters in 2014.
 
Net income has been the highest in second and third quarters, which correlates with the sales of the Seeds and Genomics segment and its gross profit contribution. Sales and income may shift somewhat between quarters, depending on planting and growing conditions. Our inventory has been at its lowest level at the end of our fiscal year, which is consistent with the agricultural cycles in our major markets. Additionally, our trade accounts receivable have been at their lowest levels in our fourth quarter, primarily because of collections received on behalf of both segments in the United States and Latin America, and the seasonality of our sales.
As is the practice in our industry, we regularly extend credit to enable our customers to acquire crop protection products and seeds at the beginning of the growing season. Because of the seasonality of our business and the need to extend credit to customers, we sometimes use short-term borrowings to finance working capital requirements. Our need for such financing has generally been higher in the first and third quarters of the fiscal year and lower in the second and fourth quarters of the fiscal year. Our customer financing programs are expected to continue to reduce our receivable risk and to reduce our reliance on commercial paper borrowings.
OUTLOOK
We believe 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 part of our businesses is quite different. In the Seeds and Genomics segment, our seeds and traits business is expected to expand via our investment in new products. In the Agricultural Productivity segment, we expect to deliver competitive products in a more steady-state business.
We believe that our company is positioned to deliver value-added products to growers enabling us to grow our gross profit in the future. We expect to see strong cash flow in the future, and we remain committed to returning value to shareowners through vehicles such as investments that expand the business, dividends and share repurchases. We will remain focused on cost and cash management, 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.
In the United States, we expect to incur significantly higher interest costs due to increased debt levels. We will continue to evaluate options for returning value to shareowners, including the possibility of continued dividend increases and additional share repurchases under the existing program.
Outside of the United States, our businesses will continue to face additional challenges related to the risks inherent in operating in emerging markets. We will continue to consider, assess and address these developments and the challenges and issues they place on our businesses. We believe we have taken appropriate measures to manage our credit exposure, which has the potential to affect sales negatively in the near term. In addition, volatility in foreign currency exchange rates may negatively affect our profitability, the book value of our assets outside the United States, and our shareowners’ equity. We continuously monitor the potential for currency devaluation in Argentina, Venezuela and Ukraine, including changes to exchange rate mechanisms or structures, and the potential impact on future periods.
Seeds and Genomics
Our capabilities in plant breeding and biotechnology research and development are generating a rich and balanced product pipeline that we expect will drive long-term growth. We plan to continue to invest in the areas of seeds, genomics,

32

MONSANTO COMPANY
 
2014 FORM 10-K

biotechnology, precision agriculture and biologicals 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 seeds and traits businesses will have near-term growth opportunities through a combination of improved breeding, continued growth of stacked biotech traits and expansion in established and emerging markets.
We expect advanced breeding techniques combined with improved production practices and capital investments will continue to contribute to improved germplasm quality and yields for our seed offerings, leading to increased global demand for both our branded germplasm and our licensed germplasm. Our vegetable seeds business, which has a portfolio focused on 21 crops, is expected to continue to develop and deliver new innovative products to our customer base as we continue to focus on our breeding investments and process optimization. While near term financial results for the vegetable business could be affected by lower sales in certain regions experiencing political or economic instability, the business integration into a global platform, along with a number of process improvements, are expected to continue to improve our ability to develop and deliver new innovative products to our customer base. We plan to continue to pursue strategic acquisitions in our seed businesses to grow our branded seed share, expand our germplasm library, and strengthen our global breeding programs. We expect to see continued competition in seeds and genomics. We believe we will have a competitive advantage because of our global breeding capabilities and our multiple-channel sales approach in the United States for corn and soybean seeds.
Commercialization of second- and third-generation traits and the stacking of multiple traits in corn, soy 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 continue to experience an increase in competition in biotechnology as more competitors launch traits in the United States and internationally. Acquisitions may also present mid-to-longer term opportunities to increase penetration of our traits.
In South America, we expect to operate our business model of collecting on the sale of certified seeds, a point-of-delivery payment system (Intacta RR2 PRO soybeans) and our indemnification collection system (Bollgard cotton), to capture value on all of our Intacta RR2 PRO soybeans and Bollgard cotton crops grown there. To achieve this, we are pursuing grower and grain handler agreements to ensure we will be compensated for providing the technology. The majority of grain handlers have enrolled in the point-of-delivery system and we are selling Intacta RR2 PRO primarily in Brazil and Argentina. Intacta RR2 PRO technology has been fully approved by Argentina and export markets, and we intend to broaden our commercial launch in Argentina to cover the main production areas. We also intend to finalize the last steps of the business model approach to enable farmer payments on new and legally saved seed. Following an adverse ruling from a panel of five judges in the Brazilian Superior Court of Justice denying our term correction for the first generation Roundup Ready patent term to 2014, we deferred collection of royalties for first generation Roundup Ready soybeans in Brazil until a final decision is reached by the courts. The Supreme Court of Brazil has granted certiorari of the patent term correction case. We do not plan to collect on first generation Roundup Ready soybeans in Argentina.
Our international traits businesses, in particular, probably will continue to face unpredictable regulatory environments that may be highly politicized. We operate in volatile, and often difficult, economic and political environments. Longer term, income is expected to grow in South America as farmers choose to plant more of our approved traits in soybeans, corn and cotton. The agricultural economy in Brazil and Argentina could be impacted by global commodity prices, particularly for corn and soybeans. We continue to maintain our strict credit policy, expand our grain-based collection system and focus on cash collection and sales, as part of a continuous effort to manage our risk in Brazil and Argentina against such volatility. Growth in India's cotton germplasm and traits business continues to be impacted by government controlled pricing and uncertainties in the regulatory approval process for new trait introductions.
In May 2013, the USDA announced an investigation into alleged glyphosate-resistant volunteer wheat reported on a single field on an Oregon farm. In September 2014, the USDA issued its final report which concluded that the glyphosate-resistant wheat found on the Oregon farm was an isolated event and that there is no evidence that genetically modified wheat is in commerce or the commercial seed supply. The USDA noted that glyphosate-tolerant wheat does not present a public health or food safety concern as the FDA completed its assessment of the product in 2004. The consultative process at the FDA was completed and the agency concluded that this product is as safe as non-GM wheat currently on the market. Initial development of glyphosate-tolerant wheat was discontinued in 2005 under stringent stewardship procedures which were in compliance with USDA regulations. Lawsuits which assert numerous legal claims have been filed against the company and have been consolidated in the Federal District Court of Kansas. We have reached an agreement in principle to resolve suits filed by the soft white wheat growers for an immaterial amount, and continue discussions with other parties. We properly discontinued the development of the glyphosate-tolerant wheat event in 2005, have meritorious legal arguments against liability and will vigorously represent our interests in this matter.


33

MONSANTO COMPANY
 
2014 FORM 10-K

Agricultural Productivity
Our Agricultural Productivity businesses operate in markets that are competitive. Gross profit and cash flow levels will fluctuate in the future based on global business dynamics including market supply, demand and manufacturing capacity. We expect to maintain our brand prices at a slight premium over generic products and we believe our Roundup herbicide business will continue to be a sustainable source of cash and gross profit. Monsanto’s crop protection business focus is to strategically support Monsanto’s Roundup Ready crops through our weed management platform that delivers weed control offerings for farmers. In addition, we expect our lawn-and-garden business will continue to be a solid contributor to our Agricultural Productivity segment.
Global glyphosate producers have the capacity to supply the market, but global dynamics including demand, environmental regulation compliance and raw material availability can cause fluctuation in supply and the price of those generic products. We expect the fluctuation in global capacity will impact the selling prices and margins of Roundup brands and our third party sourcing opportunities.
The staff of the SEC is conducting an investigation of financial reporting associated with our customer incentive programs for glyphosate products for the fiscal years 2009 and 2010, and we have received subpoenas in connection therewith. It is not reasonably possible to assess the outcome of the investigation at this time, but potential outcomes could include the filing of an enforcement proceeding and the imposition of civil penalties as well as non-monetary remedies, which may require the Company to incur future costs. We continue cooperating with the investigation.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our financial statements, we must select and apply various accounting policies. Our most significant policies are described in Note 2Significant Accounting Policies. In order to apply our accounting policies, we often need to make estimates based on judgments about future events. In making such estimates, we rely on historical experience, market and other conditions, and on assumptions that we believe to be reasonable. However, the estimation process is by its nature uncertain given that estimates depend on events over which we may not have control. If market and other conditions change from those that we anticipate, our results of operations, financial condition and changes in financial condition may be materially affected. In addition, if our assumptions change, we may need to revise our estimates, or to take other corrective actions, either of which may also have a material effect on our results of operations, financial condition or changes in financial condition. Members of our senior management have discussed the development and selection of our critical accounting estimates, and our disclosures regarding them, with the audit and finance committee of our board of directors, and do so on a regular basis.
We believe that the following estimates have a higher degree of inherent uncertainty and require our most significant judgments. In addition, had we used estimates different from any of these, our results of operations, financial condition or changes in financial condition for the current period could have been materially different from those presented.
 
Goodwill: The majority of our goodwill relates to our seed company acquisitions. We are required to periodically assess whether any of our goodwill is impaired. In order to do this, we apply judgment in determining our reporting units, which represent component parts of our business. Our annual goodwill impairment assessment involves estimating the fair value of a reporting unit and comparing it with its carrying amount. If the carrying value of the reporting unit exceeds its fair value, additional steps are required to calculate a potential impairment loss.
Calculating the fair value of the reporting units requires significant estimates and long-term assumptions. Any changes in key assumptions about the business and its prospects, or any changes in market conditions, interest rates or other externalities, could result in an impairment charge. We estimate the fair value of our reporting units by applying discounted cash flow methodologies. A discounted cash flow analysis requires us to make various judgmental estimates and assumptions that include, but are not limited to, sales growth, gross profit margin rates and discount rates. Discount rates were evaluated by reporting segment to account for differences in inherent industry risk. Sales growth and gross profit margin assumptions were based on our long range plan.
The annual goodwill impairment tests were performed as of Mar. 1, 2014, and Mar. 1, 2013. No indications of goodwill impairment existed as of either date. The results of management’s Mar. 1, 2014, goodwill impairment test indicated that all reporting units had a calculated fair value greater than 10 percent in excess of its carrying value. In 2014 and 2013, we recorded goodwill related to our acquisitions (see Note 4Business Combinations and Collaborative Arrangements). As part of the annual goodwill impairment tests, we compared our total market capitalization with the aggregate estimated fair value of our reporting units to ensure that significant differences are understood. At Mar. 1, 2014, and Mar. 1, 2013, our market

34

MONSANTO COMPANY
 
2014 FORM 10-K

capitalization exceeded the aggregate estimated fair value of our reporting units. Future declines in the fair value of our reporting units could result in an impairment of goodwill and reduce net income.
Income Taxes: Management regularly assesses the likelihood that deferred tax assets will be recovered from future taxable income. To the extent management believes that it is more likely than not that a deferred tax asset will not be realized, a valuation allowance is established. When a valuation allowance is established or increased, an income tax charge is included in the consolidated financial statements, and net deferred tax assets are adjusted accordingly. Changes in tax laws, statutory tax rates and estimates of the company’s future taxable income levels could result in actual realization of the deferred tax assets being materially different from the amounts provided for in the consolidated financial statements. If the actual recovery amount of the deferred tax asset is less than anticipated, we would be required to write-off the remaining deferred tax asset and increase the tax provision, resulting in a reduction of net income and shareowners’ equity.
Under the Income Taxes topic of the ASC, in order to recognize the benefit of an uncertain tax position, the taxpayer must be more likely than not of sustaining the position, and the measurement of the benefit is calculated as the largest amount that is more than 50 percent likely to be realized upon resolution of the position. Tax authorities regularly examine the company’s returns in the jurisdictions in which we do business. Management regularly assesses the tax risk of the company’s return filing positions and believes its accruals for uncertain tax positions are adequate as of Aug. 31, 2014.
As of Aug. 31, 2014, management has recorded deferred tax assets of approximately $452 million in Brazil primarily related to net operating loss carryforwards (NOLs) that have no expiration date. Management continues to believe it is more likely than not that we will realize our deferred tax assets in Brazil.
Revenue Recognition: Monsanto sells its products directly to customers as well as through distributors. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred.
We may enter into multiple-element arrangements, including those where a customer purchases technology and licenses. When elements of a multiple element arrangement do not have stand-alone value, we account for such elements as a combined unit of accounting. We allocate revenue to each unit of accounting in a multiple element arrangement based upon the relative selling price of each deliverable. When applying the relative selling price method, we determine the selling price for each deliverable by using vendor-specific objective evidence (“VSOE”) of selling price, if it exists, or third-party evidence (“TPE”) of selling price. If neither VSOE nor TPE of selling price exist for a unit of accounting, we use our best estimate of selling price for that unit of accounting. When we use our best estimate to determine selling price, significant judgment is required. The significant assumptions used to estimate selling price for significant units of accounting may consist of cost, gross margin objectives or forecasted customer selling volumes. Changes in assumptions used to estimate selling price could result in a different allocation of arrangement consideration across the units of accounting within an arrangement. Revenue allocated to each unit of accounting is recognized when all revenue recognition criteria for that unit of accounting have been met. License revenue, including those within multiple element arrangements, is generally recognized over the contract period as third-party seed companies sell seed containing Monsanto traits, which can be from one year up to the related patent term.
We record reductions to revenue for estimated customer sales returns and certain customer incentive programs. These reductions to revenue are made based upon reasonable and reliable estimates that are determined by historical experience, contractual terms and current conditions. The primary factors affecting our accrual for estimated customer returns include estimated return rates as well as the number of units shipped that have a right of return. At least each quarter, we re-evaluate our estimates to assess the adequacy of our recorded accruals for customer returns and allowance for doubtful accounts, and adjust the amounts as necessary.
 
Customer Incentive Programs: Customer incentive program costs are recorded in accordance with the Revenue Recognition topic of the ASC, based upon specific performance criteria met by our customers, such as purchase volumes, promptness of payment and market share increases. The cost of certain customer incentive programs is recorded in net sales in the Statements of Consolidated Operations. Certain customer incentive programs require management to estimate the number of customers who will actually redeem the incentive. As actual customer incentive program expenses are not known at the time of the sale, an estimate based on the best available information (such as historical experience and market research) and the specific terms and conditions of particular incentive programs are used as a basis for recording customer incentive program liabilities. If a greater than estimated proportion of customers redeem such incentives, Monsanto would be required to record additional reductions to revenue, which would have a negative impact on our results of operations and cash flow. Management analyzes and reviews the customer incentive program balances on a quarterly basis, and adjustments are recorded as appropriate.

35

MONSANTO COMPANY
 
2014 FORM 10-K

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the effect of interest rate changes, foreign currency fluctuations, and changes in commodity, equity and debt securities prices. Market risk represents the risk of a change in the value of a financial instrument, derivative or nonderivative, caused by fluctuations in interest rates, currency exchange rates, and commodity, equity and debt securities prices. Monsanto handles market risk in accordance with established policies by engaging in various derivative transactions. Such transactions are not entered into for trading purposes.
See Note 2Significant Accounting Policies, Note 15Fair Value Measurements —and Note 16Financial Instruments — to the consolidated financial statements for further details regarding the accounting and disclosure of our derivative instruments and hedging activities.
The sensitivity analysis discussed below presents the hypothetical change in fair value of those financial instruments held by the company as of Aug. 31, 2014, that are sensitive to changes in interest rates, currency exchange rates and commodity and equity securities prices. Actual changes may prove to be greater or less than those hypothesized.
Changes in Interest Rates: Our interest-rate risk exposure pertains primarily to the debt portfolio. To the extent that we have cash available for investment to ensure liquidity, we will invest that cash only in short-term instruments. Most of our debt as of Aug. 31, 2014, consisted of fixed-rate long-term obligations.
Market risk with respect to interest rates is estimated as the potential change in fair value resulting from an immediate hypothetical 1 percentage point parallel shift in the yield curve. The fair values of our investments and debt are based on quoted market prices or discounted future cash flows. As the carrying amounts on short-term debt and investments maturing in less than 360 days and the carrying amounts of variable-rate medium-term notes approximate their respective fair values, a one percentage point change in the interest rates would not result in a material change in the fair value of our debt and investments portfolio.
The following table illustrates the fair values of the company's long-term debt instruments at Aug. 31, 2014, and Aug. 31, 2013, and the effect on fair values for each of these instruments of a hypothetical one percentage point decrease in interest rates to the rate that existed at Aug. 31, 2014, and Aug. 31, 2013:
 
Initial Principal Amount Issued
Fair Value (3)
 
Fair Value Sensitivity
 
As of Aug. 31,
 
As of Aug. 31,
(Dollars in millions)
2014
2013
 
2014
2013
5.500% Senior Notes due 2035 issued July 2005
$
400

$
483

$
441

 
$
552

$
505

5.500% Senior Notes due 2025 issued August 2005
314

376

363

 
410

397

5.125% Senior Notes due 2018 issued April 2008
300

335

339

 
347

354

5.875% Senior Notes due 2038 issued April 2008
250

310

299

 
358

345

2.750% Senior Notes due 2016 issued April 2011
300

310

312

 
313

330

2.200% Senior Notes due 2022 issued July 2012
250

238

227

 
256

246

3.600% Senior Notes due 2042 issued July 2012
250

228

212

 
272

252

1.850% Senior Notes due 2018 issued November 2013(1)
300

300


 
312


4.650% Senior Notes due 2043 issued November 2013(1)
300

326


 
386


1.150% Senior Notes due 2017 issued July 2014(1)
500

499


 
513


2.125% Senior Notes due 2019 issued July 2014(1)
500

501


 
525


2.750% Senior Notes due 2021 issued July 2014(1)
500

502


 
535


3.375% Senior Notes due 2024 issued July 2014(1)
750

765


 
832


4.200% Senior Notes due 2034 issued July 2014(1)
500

519


 
595


4.400% Senior Notes due 2044 issued July 2014(1)
1,000

1,032


 
1,228


4.700% Senior Notes due 2064 issued July 2014(1)
750

780


 
962


Floating Rate Senior Notes due 2016 issued November 2013(1)(2)
400

401


 
404


(1) 
These instruments were not outstanding as of Aug. 31, 2013, accordingly, no amounts are shown for prior year comparisons.
(2) 
A 1 percentage point increase in interest rates would result in an annualized increase to interest expense of approximately $4 million related to the Floating Rate Senior Notes due 2016.
(3) 
Does not include the fair value of other long term debt, primarily consisting of capital lease obligations, which had a fair value of $23 million and $38 million at Aug. 31, 2014 and Aug. 31, 2013, respectively.

36

MONSANTO COMPANY
 
2014 FORM 10-K

Foreign Currency Fluctuations: In managing foreign currency risk, we focus on reducing the volatility in consolidated cash flows and earnings caused by fluctuations in exchange rates. We may use foreign currency forward exchange contracts, foreign currency options and economic hedges to manage the net currency exposure, in accordance with established hedging policies. We may hedge recorded commercial transaction exposures, intercompany loans, net investments in foreign subsidiaries and forecasted transactions. The company’s significant hedged positions included the European euro, the Mexican peso, the Brazilian real, the Canadian dollar, the Australian dollar and the Argentine peso. Unfavorable currency movements of 10 percent would negatively affect the fair values of the derivatives held to hedge currency exposures by $195 million.
Changes in Commodity Prices: Where practical, we use futures contracts to protect the company against commodity price increases and use option contracts to limit the unfavorable effect that price changes could have on these purchases. Our futures contracts are accounted for as cash flow hedges and are mainly in the Seeds and Genomics segment. Our option contracts do not qualify for hedge accounting under the provisions specified by the Derivatives and Hedging topic of the ASC. The majority of these contracts hedge the committed or future purchases of, and the carrying value of payables to growers for, soybean and corn inventories. In addition, we collect payments on certain customer accounts in grain, and enter into forward sales contracts to mitigate the commodity price exposure. A 10 percent decrease in the prices would have a negative effect on the fair value of these instruments of $46 million. We also use natural gas, diesel and ethylene swaps to manage energy input costs and raw material costs. A 10 percent decrease in the price of these swaps would have a negative effect on the fair value of these instruments of $12 million.
Changes in Equity Securities Prices: We also have investments in marketable equity securities. All such investments are classified as long-term available-for-sale investments. The fair value of these investments is $22 million as of Aug. 31, 2014. These securities are listed on a stock exchange, quoted in an over-the-counter market or measured using an independent pricing source and adjusted for expected future credit losses. If the market price of the marketable equity securities should decrease by 10 percent, the fair value of the equities would decrease by $2 million. See Note 11Investments — for further details.

37

MONSANTO COMPANY
 
2014 FORM 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management Report
Monsanto Company’s management is responsible for the fair presentation and consistency, in accordance with accounting principles generally accepted in the United States of America, of all the financial information included in this Form 10-K. Where necessary, the information reflects management’s best estimates and judgments.
Management is also responsible for establishing and maintaining an effective system of internal control over financial reporting. The purpose of this system is to provide reasonable assurance that Monsanto’s assets are safeguarded against material loss from unauthorized acquisition, use or disposition, that authorized transactions are properly recorded to permit the preparation of accurate financial information in accordance with generally accepted accounting principles, that records are maintained which accurately and fairly reflect the transactions and dispositions of the company, and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the company. This system of internal control over financial reporting is supported by formal policies and procedures, including a Business Conduct program designed to encourage and assist employees in living up to high standards of integrity, as well as a Code of Ethics for Chief Executive and Senior Financial Officers. Management seeks to maintain the effectiveness of internal control over financial reporting by careful personnel selection and training, division of responsibilities, establishment and communication of policies, and ongoing internal reviews and audits. See Management’s Annual Report on Internal Control over Financial Reporting for Management’s conclusion of the effectiveness of Monsanto’s internal control over financial reporting as of Aug. 31, 2014.
Monsanto’s consolidated financial statements have been audited by Deloitte & Touche LLP, independent registered public accounting firm. Their audits were conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), and included a test of financial controls, tests of accounting records, and such other procedures as they considered necessary in the circumstances.
The Audit and Finance Committee, composed entirely of outside directors, meets regularly with management, with the internal auditors and with the independent registered public accounting firm to review accounting, financial reporting, auditing and internal control matters. The committee has direct and private access to the registered public accounting firm and internal auditors.
/s/ Hugh Grant
Hugh Grant
Chairman and Chief Executive Officer
/s/ Pierre Courduroux
Pierre Courduroux
Senior Vice President and Chief Financial Officer
Oct. 29, 2014

38

MONSANTO COMPANY
 
2014 FORM 10-K

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareowners of Monsanto Company:
We have audited the accompanying statements of consolidated financial position of Monsanto Company and subsidiaries (the "Company") as of August 31, 2014, and 2013, and the related statements of consolidated operations, comprehensive income, cash flows and shareowners’ equity for each of the three years in the period ended August 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Monsanto Company and subsidiaries as of August 31, 2014 and 2013 and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of August 31, 2014, based on the criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 29, 2014 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
St. Louis, Missouri
Oct. 29, 2014

39

MONSANTO COMPANY
 
2014 FORM 10-K

Statements of Consolidated Operations
 
 
Year Ended Aug. 31,
(Dollars in millions, except per share amounts)
2014
 
2013
 
2012
Net Sales
$
15,855

 
$
14,861

 
$
13,504

Cost of goods sold
7,281

 
7,208

 
6,459

Gross Profit
8,574

 
7,653

 
7,045

Operating Expenses:
 
 
 
 
 
Selling, general and administrative expenses
2,774

 
2,550

 
2,380

Research and development expenses
1,725

 
1,533

 
1,517

Total Operating Expenses
4,499

 
4,083

 
3,897

Income from Operations
4,075

 
3,570

 
3,148

Interest expense
248

 
172

 
191

Interest income
(102
)
 
(92
)
 
(77
)
Other expense, net
102

 
61

 
46

Income from Continuing Operations Before Income Taxes
3,827

 
3,429

 
2,988

Income tax provision
1,078

 
915

 
901

Income from Continuing Operations Including Portion Attributable to Noncontrolling Interest
2,749

 
2,514

 
2,087

Discontinued Operations:
 
 
 
 
 
Income from operations of discontinued businesses
22

 
17

 
10

Income tax provision
9

 
6

 
4

Income on Discontinued Operations
13

 
11

 
6

Net Income
2,762

 
2,525

 
2,093

Less: Net income attributable to noncontrolling interest
22

 
43

 
48

Net Income Attributable to Monsanto Company
$
2,740

 
$
2,482

 
$
2,045

Amounts Attributable to Monsanto Company:
 
 
 
 
 
Income from continuing operations
$
2,727

 
$
2,471

 
$
2,039

Income on discontinued operations
13

 
11

 
6

Net Income Attributable to Monsanto Company
$
2,740

 
$
2,482

 
$
2,045

Basic Earnings per Share Attributable to Monsanto Company: