10-Q 1 mon-20141130x10q.htm 10-Q MON-2014.11.30-10Q
MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q

 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Nov. 30, 2014
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     
Commission file number 001-16167
MONSANTO COMPANY
(Exact name of registrant as specified in its charter)
 
Delaware
43-1878297
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
800 North Lindbergh Blvd.,
63167
St. Louis, MO
(Zip Code)
(Address of principal executive offices)
 
(314) 694-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
  
Accelerated filer
o
Non-accelerated filer
o  (Do not check if a smaller reporting company)
  
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 483,285,896 shares of Common Stock, $0.01 par value, outstanding as of January 5, 2015.
 


MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q

CAUTION REGARDING FORWARD-LOOKING STATEMENTS
In the interests of our investors, and in accordance with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, this section of our report explains some of the important reasons that actual results may be materially different from those that we anticipate. In this report, and from time to time throughout the year, we share our expectations for our company’s future performance. These forward-looking statements include statements about our business plans; the potential development, regulatory approval, and public acceptance of our products; our expected financial performance, including sales performance, and the anticipated effect of our strategic actions; the anticipated benefits of recent acquisitions; the outcome of contingencies, such as litigation and the previously announced SEC investigation; domestic or international economic, political and market conditions; and other factors that could affect our future results of operations or financial position, including, without limitation, statements under the captions “Overview — Executive Summary — Outlook,” “Seeds and Genomics Segment,” “Agricultural Productivity Segment,” “Financial Condition, Liquidity, and Capital Resources,” “Outlook,” “Critical Accounting Policies and Estimates” and “Legal Proceedings.” Any statements we make that are not matters of current reportage or historical fact should be considered forward-looking. Such statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “will,” and similar expressions. By their nature, these types of statements are uncertain and are not guarantees of our future performance.
Since these statements are based on factors that involve risks and uncertainties, our company’s actual performance and results may differ materially from those described or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, among others: continued competition in seeds, traits and agricultural chemicals; the company’s exposure to various contingencies, including those related to intellectual property protection, regulatory compliance and the speed with which approvals are received, and public acceptance of biotechnology products; the success of the company’s research and development activities; the outcomes of major lawsuits; developments related to foreign currencies and economies; successful operation of recent acquisitions; fluctuations in commodity prices; compliance with regulations affecting our manufacturing; the accuracy of the company’s estimates related to distribution inventory levels; recent increases in and expected higher levels of indebtedness; the company’s ability to obtain payment for the products that it sells; the effect of weather conditions, natural disasters and accidents on the agriculture business or the company’s facilities; and other risks and factors described or referenced in Part II — Item 1A — Risk Factors — below and Part I — Item 1A of our Report on Form 10-K for the fiscal year ended Aug. 31, 2014.
Our forward-looking statements represent our estimates and expectations and are based on currently available information at the time that we make those statements. However, circumstances change constantly, often unpredictably, and many events beyond our control will determine whether the expectations encompassed in our forward-looking statements will be realized. As a result, investors should not place undue reliance on these forward-looking statements. We disclaim any current intention or obligation to revise or update any forward-looking statements, or the factors that may affect their realization, whether in light of new information, future events or otherwise, and investors should not rely on us to do so.



1

MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q

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



2

MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q

PART I—FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
The Statements of Consolidated Operations of Monsanto Company and its consolidated subsidiaries for the three months ended Nov. 30, 2014, and Nov. 30, 2013, the Statements of Consolidated Comprehensive Income (Loss) for the three months ended Nov. 30, 2014, and Nov. 30, 2013, the Statements of Consolidated Financial Position as of Nov. 30, 2014, and Aug. 31, 2014, the Statements of Consolidated Cash Flows for the three months ended Nov. 30, 2014, and Nov. 30, 2013, the Statements of Consolidated Shareowners’ Equity for the three months ended Nov. 30, 2014, and year ended Aug. 31, 2014, and related Notes to the Consolidated Financial Statements follow. Unless otherwise indicated, “Monsanto” and the “company” are used interchangeably to refer to Monsanto Company or to Monsanto Company and its consolidated subsidiaries, as appropriate to the context. Unless otherwise indicated, “earnings per share” and “per share” mean diluted earnings per share. In the notes to the consolidated financial statements, all dollars are expressed in millions, except per share amounts. Unless otherwise indicated, 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.



3

MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q

Statements of Consolidated Operations
Unaudited
(Dollars in millions, except per share amounts)
Three Months Ended
Nov. 30, 2014
Nov. 30, 2013
Net Sales
$
2,870

$
3,143

Cost of goods sold
1,459

1,580

Gross Profit
1,411

1,563

Operating Expenses:
 
 
Selling, general and administrative expenses
580

589

Research and development expenses
412

409

Total Operating Expenses
992

998

Income from Operations
419

565

Interest expense
115

53

Interest income
(38
)
(24
)
Other expense, net
15

20

Income from Continuing Operations Before Income Taxes
327

516

Income tax provision
100

152

Income from Continuing Operations Including Portion Attributable to Noncontrolling Interest
$
227

$
364

Discontinued Operations:
 
 
Income from operations of discontinued businesses
26

14

Income tax provision
10

5

Income from Discontinued Operations
16

9

Net Income
$
243

$
373

Less: Net income attributable to noncontrolling interest

5

Net Income Attributable to Monsanto Company
$
243

$
368

Amounts Attributable to Monsanto Company:
 
 
Income from continuing operations
$
227

$
359

Income from discontinued operations
16

9

Net Income Attributable to Monsanto Company
$
243

$
368

Basic Earnings per Share Attributable to Monsanto Company:
 
 
Income from continuing operations
$
0.47

$
0.68

Income from discontinued operations
0.03

0.02

Net Income Attributable to Monsanto Company
$
0.50

$
0.70

Diluted Earnings per Share Attributable to Monsanto Company:
 
 
Income from continuing operations
$
0.47

$
0.67

Income from discontinued operations
0.03

0.02

Net Income Attributable to Monsanto Company
$
0.50

$
0.69

Weighted Average Shares Outstanding:
 
 
Basic
484.4

526.9

Diluted
489.4

532.6

Dividends Declared per Share
$

$

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




4

MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q

Statements of Consolidated Comprehensive Income (Loss)
Unaudited
(Dollars in millions)
Three Months Ended
Nov. 30, 2014
Nov. 30, 2013
Comprehensive (Loss) Income Attributable to Monsanto Company
 
 
Net Income Attributable to Monsanto Company
$
243

$
368

Other Comprehensive (Loss) Income, Net of Tax:
 
 
Foreign currency translation, net of tax of $(6), and $(8), respectively
(484
)
127

Postretirement benefit plan activity, net of tax of $6, and $5, respectively
10

8

Unrealized net (losses) gains on investment holdings, net of tax of $(3), and $3, respectively
(5
)
5

Unrealized net derivative gains (losses), net of tax of $(2), and $(25), respectively
5

(43
)
Realized net derivative (gains) losses, net of tax of $0, and $3, respectively
(1
)
5

Total Other Comprehensive (Loss) Income, Net of Tax
(475
)
102

Comprehensive (Loss) Income Attributable to Monsanto Company
$
(232
)
$
470

Comprehensive (Loss) Income Attributable to Noncontrolling Interests
 
 
Net Income Attributable to Noncontrolling Interests

5

Other Comprehensive (Loss) Income
 
 
Foreign currency translation
(1
)
5

Total Other Comprehensive (Loss) Income
(1
)
5

Comprehensive (Loss) Income Attributable to Noncontrolling Interests
$
(1
)
$
10

Total Comprehensive (Loss) Income
$
(233
)
$
480

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



5

MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q

Statements of Consolidated Financial Position
Unaudited
(Dollars in millions, except share amounts)
As of
Nov. 30, 2014
Aug. 31, 2014
Assets
 
 
Current Assets:
 
 
Cash and cash equivalents (variable interest entity restricted - 2015: $24 and 2014: $118)
$
3,136

$
2,367

Short-term investments
40

40

Trade receivables, net (variable interest entity restricted - 2015: $117 and 2014: $39)
2,247

2,014

Miscellaneous receivables
870

817

Deferred tax assets
605

635

Inventory, net
4,300

3,597

Other current assets
200

205

Total Current Assets
11,398

9,675

Total property, plant and equipment
10,286

10,357

Less accumulated depreciation
5,301

5,275

Property, Plant and Equipment, Net (variable interest entity restricted - 2015: $2 and 2014: $2)
4,985

5,082

Goodwill
4,254

4,319

Other Intangible Assets, Net
1,506

1,554

Noncurrent Deferred Tax Assets
400

450

Long-Term Receivables, Net
19

92

Other Assets
812

809

Total Assets
$
23,374

$
21,981

Liabilities and Shareowners’ Equity
 
 
Current Liabilities:
 
 
Short-term debt, including current portion of long-term debt (variable interest entity restricted - 2015: $122 and 2014: $136)
$
636

$
233

Accounts payable (variable interest entity restricted - 2015: $27 and 2014: $25)
905

1,111

Income taxes payable
62

99

Accrued compensation and benefits (variable interest entity restricted - 2015: $1 and 2014: $1)
249

500

Accrued marketing programs
952

1,394

Deferred revenues
2,529

438

Grower production accruals
514

54

Dividends payable
1

239

Customer payable
28

82

Miscellaneous short-term accruals (variable interest entity restricted - 2015: $5 and 2014: $0)
1,123

962

Total Current Liabilities
6,999

5,112

Long-Term Debt
7,529

7,528

Postretirement Liabilities
339

345

Long-Term Deferred Revenue
45

47

Noncurrent Deferred Tax Liabilities
514

509

Long-Term Portion of Environmental and Litigation Liabilities
179

184

Other Liabilities
337

342

Shareowners’ Equity:
 
 
Common stock (authorized: 1,500,000,000 shares, par value $0.01)
 
 
Issued 607,363,499 and 606,457,369 shares, respectively
 
 
Outstanding 483,609,174 and 485,261,017 shares, respectively
6

6

Treasury stock 123,754,325 and 121,196,352 shares, respectively, at cost
(10,323
)
(10,032
)
Additional contributed capital
10,061

10,003

Retained earnings
9,255

9,012

Accumulated other comprehensive loss
(1,589
)
(1,114
)
Total Monsanto Company Shareowners’ Equity
7,410

7,875

Noncontrolling Interest
22

39

Total Shareowners’ Equity
7,432

7,914

Total Liabilities and Shareowners’ Equity
$
23,374

$
21,981

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


6

MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q

Statements of Consolidated Cash Flows
Unaudited
(Dollars in millions)
Three Months Ended
Nov. 30, 2014
Nov. 30, 2013
Operating Activities:
 
 
Net Income
$
243

$
373

Adjustments to reconcile cash provided by operating activities:
 
 
Items that did not require (provide) cash:
 
 
Depreciation and amortization
182

162

Bad-debt expense
13

11

Stock-based compensation expense
31

27

Excess tax benefits from stock-based compensation
(16
)
(15
)
Deferred income taxes
42

(6
)
Equity affiliate expense, net
3

3

Net gain on sales of a business or other assets
(1
)
(1
)
Other items
6

20

Changes in assets and liabilities that provided (required) cash, net of acquisitions:
 
 
Trade receivables, net
(249
)
(478
)
Inventory, net
(827
)
(898
)
Deferred revenues
2,114

2,319

Accounts payable and other accrued liabilities
(111
)
332

Pension contributions
(6
)
(23
)
Other items
(75
)
(128
)
Net Cash Provided by Operating Activities
1,349

1,698

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

(105
)
Maturities of short-term investments

110

Capital expenditures
(347
)
(303
)
Acquisition of businesses, net of cash acquired

(917
)
Purchases of long-term debt and equity securities
(30
)
(12
)
Technology and other investments
(5
)
(21
)
Other proceeds
2

7

Net Cash Required by Investing Activities
(380
)
(1,241
)
Cash Flows Provided (Required) by Financing Activities:
 
 
Net change in financing with less than 90-day maturities
410

117

Short-term debt proceeds
14

2

Long-term debt proceeds
3

999

Long-term debt reductions
(3
)
(1
)
Payments on other financing

(39
)
Debt issuance costs

(8
)
Treasury stock purchases
(296
)
(561
)
Stock option exercises
27

64

Excess tax benefits from stock-based compensation
16

15

Tax withholding on restricted stock and restricted stock units
(24
)
(2
)
Dividend payments
(238
)
(228
)
Dividend payments to noncontrolling interests
(16
)
(12
)
Net Cash (Required) Provided by Financing Activities
(107
)
346

Effect of Exchange Rate Changes on Cash and Cash Equivalents
(93
)
25

Net Increase in Cash and Cash Equivalents
769

828

Cash and Cash Equivalents at Beginning of Period
2,367

3,668

Cash and Cash Equivalents at End of Period
$
3,136

$
4,496

See Note 1 — Background and Basis of Presentation and Note 19Supplemental Cash Flow Information for further details.
The accompanying notes are an integral part of these consolidated financial statements.


7

MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q

Statements of Consolidated Shareowners’ Equity
  
Monsanto Shareowners
  
  
Unaudited
(Dollars in millions, except per share data)
Common Stock
Treasury Stock
Additional Contributed Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss) (1)
Non-Controlling
Interest
Total
Balance as of Aug. 31, 2013
$
6

$
(4,140
)
$
10,783

$
7,188

$
(1,278
)
$
169

$
12,728

Net income



2,740


22

2,762

Other comprehensive income




164

10

174

Treasury stock purchases

(5,892
)
(1,204
)



(7,096
)
Restricted stock withholding


(16
)



(16
)
Issuance of shares under employee stock plans


248




248

Net excess tax benefits from stock-based compensation


72




72

Stock-based compensation expense


120




120

Cash dividends of $1.78 per common share



(916
)


(916
)
Recognition of redeemable shares of VIE





(134
)
(134
)
Payments to noncontrolling interest





(28
)
(28
)
Balance as of Aug. 31, 2014
$
6

$
(10,032
)
$
10,003

$
9,012

$
(1,114
)
$
39

$
7,914

Net income



243



243

Other comprehensive loss




(475
)
(1
)
(476
)
Treasury stock purchases

(291
)




(291
)
Restricted stock withholding


(17
)



(17
)
Issuance of shares under employee stock plans


29




29

Net excess tax benefits from stock-based compensation


15




15

Stock-based compensation expense


31




31

Payments to noncontrolling interest





(16
)
(16
)
Balance as of Nov. 30, 2014
$
6

$
(10,323
)
$
10,061

$
9,255

$
(1,589
)
$
22

$
7,432

(1)
See Note 17Accumulated Other Comprehensive Loss — for further details of the components of accumulated other comprehensive income (loss).
The accompanying notes are an integral part of these consolidated financial statements.


8


MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED




NOTE 1.
BACKGROUND AND BASIS OF PRESENTATION
Monsanto Company, along with its subsidiaries, is a leading global provider of agricultural products for farmers. Monsanto’s seeds, biotechnology trait products, 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.
Monsanto manages its business in two segments: Seeds and Genomics and Agricultural Productivity. Through the Seeds and Genomics segment, Monsanto produces leading seed brands, including DEKALB, Asgrow, Deltapine, Seminis and De Ruiter, and Monsanto develops biotechnology traits that assist farmers in controlling insects and weeds and precision agriculture to assist farmers in decision making. Monsanto also provides other seed companies with genetic material and biotechnology traits for their seed brands. Through the Agricultural Productivity segment, the company manufactures Roundup and Harness brand herbicides and other herbicides. See Note 21Segment Information — for further details.
In the fourth quarter of 2008, the company announced plans to divest its animal agricultural products business, which focused on dairy cow productivity (the Dairy business) and was previously reported as part of the Agricultural Productivity segment. This transaction was consummated on Oct. 1, 2008, 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.
The accompanying consolidated financial statements have not been audited but have been prepared in conformity with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported. This Report on Form 10-Q should be read in conjunction with Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2014. Financial information for the first three months of fiscal year 2015 should not be annualized because of the seasonality of the company’s business.
NOTE 2.
NEW ACCOUNTING STANDARDS
In June 2014, the FASB issued accounting guidance, "Compensation - Stock Compensation" which seeks to resolve the diversity in practice that exists when accounting for share-based payments. The new guidance requires a performance target that affects vesting and that could be achieved after the requisite service period to be treated as a performance condition. This standard is effective for fiscal years and interim periods within those years beginning after Dec. 15, 2015. Accordingly, Monsanto will adopt this standard in the first quarter of fiscal year 2017, with early adoption permitted. The guidance may be adopted either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The company is currently evaluating the impact this guidance will have on the consolidated financial statements.
In May 2014, the FASB issued accounting guidance, "Revenue from Contracts with Customers." The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and clarify guidance for multiple-element arrangements. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the Statement of Consolidated Financial Position. This standard is effective for fiscal years and interim periods within those years beginning after Dec. 15, 2016. Accordingly, Monsanto will adopt this standard in the first quarter of fiscal year 2018, with early adoption prohibited. The company is currently evaluating the impact this guidance will have on the consolidated financial statements.
In April 2014, the FASB issued accounting guidance, "Presentation of Financial Statements and Property, Plant, and Equipment." The new standard raises the threshold for a disposal transaction to qualify as a discontinued operation and requires additional disclosures about discontinued operations and disposals of individually significant components that do not qualify as discontinued operations. This standard is effective prospectively for all disposals of components that occur within annual periods beginning on or after Dec. 15, 2014, and interim periods within those years. Accordingly, Monsanto will adopt this standard in the first quarter of fiscal year 2016. Early adoption is permitted for new disposals (or new classifications as held for

9


MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

sale) that have not been reported in the financial statements previously. The company is currently evaluating the impact that this guidance will have on the consolidated financial statements.
In July 2013, the FASB issued accounting guidance requiring entities to present unrecognized tax benefits as a reduction to any related deferred tax assets for net operating losses, similar tax losses, or tax credit carryforwards if such settlement is required or expected in the event an uncertain tax position is disallowed. Currently, U.S. Generally Accepted Accounting Principles ("U.S. GAAP") does not provide explicit guidance on the topic. This new presentation guidance will become effective prospectively for fiscal years, and interim periods within those years, beginning after Dec. 15, 2013. Accordingly, Monsanto adopted this standard in the first quarter of fiscal year 2015.
NOTE 3.
BUSINESS COMBINATIONS AND COLLABORATIVE ARRANGEMENTS
Business Combinations
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 hyperlocal 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 will combine The Climate Corporation's expertise in agriculture risk-management with Monsanto’s research and development ("R&D") capabilities, and is expected to further enable farmers to significantly improve productivity and better manage risk from variables that could limit agriculture production. The acquisition of the company qualifies as a business under the Business Combinations topic of the Accounting Standards Codification ("ASC"). 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. The goodwill is not deductible for tax purposes.
For the 2014 acquisition described above, the business operations and employees of the acquired entity were included in the Seeds and Genomics reportable segment results upon acquisition. There have been no significant changes to the purchase price allocation. Pro forma information related to the 2014 acquisition is not presented because the impact of the acquisition on Monsanto's consolidated results of operations is not significant.
Collaborative Arrangements
In the normal course of business, Monsanto enters into collaborative arrangements for the research, development, manufacture and/or commercialization of agricultural products. Collaborative arrangements are contractual agreements with third parties that involve a joint operating activity, such as research and development and commercialization of a collaboration product, where both Monsanto and the third party are active participants in the activities of the collaboration and are exposed to significant risks and rewards of the collaboration. These collaborations generally include cost sharing and profit sharing. Monsanto's collaboration agreements are performed with no guarantee of either technological or commercial success. The company's significant arrangements are discussed below.
Monsanto has entered into various multiyear research, development, manufacturing and commercialization collaborations related to various activities including plant biotechnology and microbial solutions. Under these collaborations, Monsanto and the third parties participate in the R&D and/or manufacturing activities and Monsanto has the primary responsibility for the commercialization of the collaboration products. The collaborations are accounted for in accordance with the Collaborative Arrangements topic of the ASC.

10


MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

NOTE 4.
CUSTOMER-FINANCING PROGRAMS
Monsanto participates in customer-financing programs as follows:
 
As of
(Dollars in millions)
Nov. 30, 2014
Aug. 31, 2014
Transactions that Qualify for Sales Treatment
 
 
U.S. agreement to sell trade receivables(1)
 
 
Outstanding balance
$
214

$
436

Maximum future payout under recourse provisions
89

21

European and Latin American agreements to sell trade receivables(2)
 
 
Outstanding balance
$
48

$
67

Maximum future payout under recourse provisions
14

34

Agreements with Lenders(3)
 
 
Outstanding balance
$
81

$
71

Maximum future payout under the guarantee
67

51

The gross amounts of receivables sold under transactions that qualify for sales treatment were: 
  
Gross Amounts of Receivables Sold
 
Three Months Ended
(Dollars in millions)
Nov. 30, 2014
Nov. 30, 2013
Transactions that Qualify for Sales Treatment
 
 
U.S. agreement to sell trade receivables(1)
$
4

$
23

European and Latin American agreements to sell trade receivables(2)
23

7

(1)
Monsanto has an agreement in the United States to sell trade receivables up to a maximum outstanding balance of $500 million and to service such accounts. These receivables qualify for sales treatment under the Transfers and Servicing topic of the ASC and, accordingly, the proceeds are included in net cash provided by operating activities in the Statements of Consolidated Cash Flows. The agreement includes recourse provisions and thus a liability is established at the time of sale that approximates fair value, based upon the company’s historical collection experience and a current assessment of credit exposure.
(2)
Monsanto has various agreements in European and Latin American countries to sell trade receivables, both with and without recourse. The sales within these programs qualify for sales treatment under the Transfers and Servicing topic of the ASC and, accordingly, the proceeds are included in net cash provided by operating activities in the Statements of Consolidated Cash Flows. The liability for the guarantees for sales with recourse is recorded at an amount that approximates fair value, based on the company’s historical collection experience for the customers associated with the sale of the receivables and a current assessment of credit exposure.
(3)
Monsanto has additional agreements with lenders to establish programs that provide financing for select customers in the United States, Brazil, Latin America and Europe. Monsanto provides various levels of recourse through guarantees of the accounts in the event of customer default. The term of the guarantee is equivalent to the term of the customer loans. The liability for the guarantees is recorded at an amount that approximates fair value, based on the company’s historical collection experience with customers that participate in the program and a current assessment of credit exposure. If performance is required under the guarantee, Monsanto may retain amounts that are subsequently collected from customers.
In addition to the arrangements in the above table, Monsanto also participates in a financing program in Brazil that allowed Monsanto to transfer up to 1 billion Brazilian reais (approximately $390 million) for select customers in Brazil to a revolving financing program. Under the arrangement, a recourse provision requires Monsanto to cover the first credit losses within the program up to the amount of the Company's investment. Credit losses above Monsanto's investment would be covered by senior interests in the entity by a reduction in the fair value of their mandatorily redeemable shares. The company evaluated its relationship with the entity under the guidance within the Consolidation topic of the ASC and, as a result, the entity has been consolidated. For further information on this topic, see Note 5Variable Interest Entities.
There were no significant recourse or non-recourse liabilities for all programs as of Nov. 30, 2014, and Aug. 31, 2014. There were no significant delinquent loans for all programs as of Nov. 30, 2014, and Aug. 31, 2014.

11


MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

NOTE 5.
VARIABLE INTEREST ENTITIES
Monsanto has a financing program in Brazil that is recorded as a consolidated variable interest entity ("VIE"). For the most part, the VIE consists of a revolving financing program that is funded by investments from the company and other third parties, primarily investment funds, and has been established to service Monsanto’s customer receivables. A 91 percent senior interest in the entity is held by third parties, primarily investment funds, as of Nov. 30, 2014, and Aug. 31, 2014, and Monsanto holds the remaining nine percent interest. The senior interests held by third parties are mandatorily redeemable shares and are included in short-term debt in the Statements of Consolidated Financial Position.
Under the arrangement, Monsanto is required to maintain an investment in the VIE of at least nine percent and could be required to provide additional contributions to the VIE. Monsanto currently has no unfunded commitments to the VIE. Creditors have no recourse against Monsanto in the event of default by the VIE. The company’s financial or other support provided to the VIE is limited to its investment. Even though Monsanto holds a subordinate interest in the VIE, the VIE was established to service transactions involving the company and the company determines the receivables that are included in the revolving financing program. Therefore, the determination is that Monsanto has the power to direct the activities most significant to the economic performance of the VIE. As a result, the company is the primary beneficiary of the VIE and the VIE has been consolidated in Monsanto’s consolidated financial statements. The assets of the VIE may only be used to settle the obligations of the respective entity. Third-party investors in the VIE do not have recourse to the general assets of Monsanto other than the maximum exposure to loss relating to the VIE. Monsanto's maximum exposure to loss was $12 million and $13 million as of Nov. 30, 2014, and Aug. 31, 2014, respectively. See Note 4Customer-Financing Programs — for additional information regarding the revolving financing arrangement.
Monsanto has entered into several agreements with third parties to establish entities to focus on research and development related to various activities including agricultural fungicides and biologicals for agricultural applications. All such entities are recorded as consolidated VIEs of Monsanto. Under each of the arrangements, Monsanto holds call options to acquire the majority of the equity interests in each VIE from the third-party owners. Monsanto will fund the operations of the VIEs in return for either additional equity interests or to retain the call options. The funding, which may total up to $108 million, will be provided in separate research phases if research milestones are met over the next several years. The VIEs were established to perform agricultural-based research and development activities for the benefit of Monsanto, and Monsanto provides all funding of the VIEs' activities. Further, Monsanto has the power to direct the activities most significant to the VIEs. As a result, Monsanto is the primary beneficiary of the VIEs and the VIEs have been consolidated in Monsanto's consolidated financial statements. Monsanto's maximum exposure to loss was $53 million and $43 million as of Nov. 30, 2014, and Aug. 31, 2014, respectively, which includes the Company's current investment in the VIEs, the funding required to be provided to the VIEs during the research phases and/or the initial consideration paid related to the call options. The third-party owners of the VIEs do not have recourse to the general assets of Monsanto beyond Monsanto's maximum exposure to loss at any given time relating to the VIEs.
NOTE 6.
RECEIVABLES
Trade receivables in the Statements of Consolidated Financial Position are net of allowances of $78 million and $72 million as of Nov. 30, 2014, and Aug. 31, 2014, respectively.
The company has financing receivables that represent long-term customer receivable balances related to past due accounts which are not expected to be collected within the current year. The long-term customer receivables were $135 million and $136 million with a corresponding allowance for credit losses on these receivables of $123 million and $125 million as of Nov. 30, 2014, and Aug. 31, 2014, respectively. These long-term customer receivable balances and the corresponding allowance are included in long-term receivables, net in the Statements of Consolidated Financial Position. For these long-term customer receivables, interest is no longer accrued when the receivable is determined to be delinquent and classified as long term based on estimated timing of collection.

12


MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

The following table displays a roll forward of the allowance for credit losses related to long-term customer receivables.
(Dollars in millions)
  
Balance as of Aug. 31, 2013
$
104

Incremental Provision
11

Recoveries
(4
)
Write-offs
(15
)
Other(1) 
29

Balance as of Aug. 31, 2014
$
125

Incremental Provision
1

Recoveries
(2
)
Write-offs
(3
)
Other(1)
2

Balance as of Nov. 30, 2014
$
123

(1)Includes reclassifications from the allowance for current receivables and foreign currency translation adjustments.
On an ongoing basis, the company evaluates credit quality of its financing receivables utilizing aging of receivables, collection experience and write-offs, as well as evaluating existing economic conditions, to determine if an allowance is necessary.
NOTE 7.
INVENTORY
Components of inventory are:
 
As of
(Dollars in millions)
Nov. 30, 2014
Aug. 31, 2014
Finished Goods
$
2,100

$
1,591

Goods In Process
1,882

1,721

Raw Materials and Supplies
481

445

Inventory at FIFO Cost
4,463

3,757

Excess of FIFO over LIFO Cost
(163
)
(160
)
Total
$
4,300

$
3,597

NOTE 8.
GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the net carrying amount of goodwill for the first three months of fiscal year 2015, by segment, are as follows:
(Dollars in millions)
Seeds and
Genomics
Agricultural
Productivity
Total
Balance as of Aug. 31, 2014
$
4,262

$
57

$
4,319

Effect of foreign currency translation adjustments
(72
)
7

(65
)
Balance as of Nov. 30, 2014
$
4,190

$
64

$
4,254

There were no events or circumstances indicating that goodwill might be impaired as of Nov. 30, 2014. The fiscal year 2015 annual goodwill impairment test will be performed as of Mar. 1, 2015.

13


MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

Information regarding the company’s other intangible assets is as follows:
  
As of Nov. 30, 2014
As of Aug. 31, 2014
(Dollars in millions)
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Accumulated
Amortization
Net
Acquired Germplasm
$
1,103

$
(749
)
$
354

$
1,116

$
(751
)
$
365

Acquired Intellectual Property
1,159

(522
)
637

1,160

(507
)
653

Trademarks
362

(145
)
217

366

(142
)
224

Customer Relationships
331

(206
)
125

338

(204
)
134

Other
181

(109
)
72

181

(106
)
75

Total Other Intangible Assets, Finite Lives
$
3,136

$
(1,731
)
$
1,405

$
3,161

$
(1,710
)
$
1,451

In Process Research & Development, Indefinite Lives
101


101

103


103

Total Other Intangible Assets
$
3,237

$
(1,731
)
$
1,506

$
3,264

$
(1,710
)
$
1,554

Total amortization expense of total other intangible assets was $37 million and $27 million for the three months ended Nov. 30, 2014, and Nov. 30, 2013, respectively.
The estimated intangible asset amortization expense for fiscal year 2015 through fiscal year 2019 is as follows:
(Dollars in millions)
Amount
2015
$
158

2016
181

2017
173

2018
143

2019
132

NOTE 9.
INVESTMENTS
As of both Nov. 30, 2014, and Aug. 31, 2014, Monsanto had short-term investments outstanding of $40 million. The investments consist of commercial paper with original maturities of one year or less. See Note 12Fair Value Measurements.
Monsanto has investments in long-term equity and debt securities, which are considered available for sale. As of Nov. 30, 2014, and Aug. 31, 2014, these long-term equity and debt securities are recorded in other assets in the Statements of Consolidated Financial Position at a fair value of $44 million and $22 million, respectively. See Note 17Accumulated Other Comprehensive Loss.
Monsanto has cost basis investments recorded in other assets in the Statements of Consolidated Financial Position. As of Nov. 30, 2014, and Aug. 31, 2014, these investments were recorded at $93 million and $91 million, respectively. Due to the nature of these investments, the fair market value is not readily determinable. These investments are reviewed for impairment indicators.
No significant impairments were recorded on any investments for each of the three-month periods ended Nov. 30, 2014, and Nov. 30, 2013.
NOTE 10.
DEFERRED REVENUE
As of Nov. 30, 2014, and Aug. 31, 2014, short-term deferred revenue was $2,529 million and $438 million, respectively. This balance primarily consists of cash received related to Monsanto's prepayment programs in the United States and Brazil. These programs allow Monsanto's customers to receive a discount if they prepay by a certain date, and the short-term deferred revenue balance is consistent with the seasonality of Monsanto's business. Prepayment options are attractive to customers given the discounted pricing and the ability to utilize cash flow from the current year grain harvest to pay for the next season seed purchases. The deferred revenue balance related to these prepayment programs is considered short-term in nature and thus classified in current liabilities as the prepayments are for products to be shipped within the next 12 months.

14


MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

NOTE 11.
DEBT AND OTHER CREDIT ARRANGEMENTS
In June 2014, Monsanto filed a new shelf registration with the SEC (2014 shelf registration) that allows the company to issue an unlimited capacity of debt, equity and hybrid offerings. The 2014 shelf registration expires in June 2017.
In July 2014, Monsanto issued $500 million of 1.15% Senior Notes due in 2017, $500 million of 2.125% Senior Notes due in 2019, $500 million of 2.75% Senior Notes due in 2021, $750 million of 3.375% Senior Notes due in 2024, $500 million of 4.20% Senior Notes due in 2034, $1 billion of 4.40% Senior Notes due in 2044 and $750 million of 4.70% Senior Notes due in 2064. All notes were issued under the 2014 shelf registration. The net proceeds from the July 2014 issuance were used to purchase treasury shares pursuant to the accelerated share repurchase agreements disclosed in Note 16Capital Stock.
In November 2013, Monsanto issued $400 million of Floating Rate Senior Notes which are due in 2016, $300 million of 1.85% Senior Notes due 2018 and $300 million of 4.65% Senior Notes due in 2043. All notes were issued under the 2011 shelf registration. The net proceeds from the sale of the November 2013 issuances were used for the acquisition of The Climate Corporation and general corporate purposes.
Monsanto has a credit facility agreement with a group of banks that provides a senior unsecured revolving credit facility through Apr. 1, 2016. During the first quarter of fiscal year 2015, Monsanto requested an increase in the overall borrowing limit pursuant to a provision in the credit agreement that allowed Monsanto to do so, and effective Sept. 30, 2014, the limit was increased from $2 billion to $2.5 billion. As of Nov. 30, 2014, Monsanto was in compliance with all debt covenants, and there were no outstanding borrowings under this credit facility.
Monsanto's short-term debt instruments include commercial paper, the current portion of long-term debt, mandatorily redeemable shares of a VIE, and notes payable to banks. As of Nov. 30, 2014, Monsanto had commercial paper borrowings outstanding of $395 million which is included in short-term debt on the Statements of Consolidated Financial Position. As of Aug. 31, 2014, there were no commercial paper borrowings outstanding.
The fair value of total short-term debt was $636 million and $233 million as of Nov. 30, 2014, and Aug. 31, 2014, respectively. The fair value of the total long-term debt was $7,879 million and $7,928 million as of Nov. 30, 2014, and Aug. 31, 2014, respectively. See Note 12Fair Value Measurements — for additional information.
NOTE 12.
FAIR VALUE MEASUREMENTS
Monsanto determines the fair market value of its financial assets and liabilities based on quoted market prices, estimates from brokers, and other appropriate valuation techniques. The company uses the fair value hierarchy established in the Fair Value Measurements and Disclosures topic of the ASC, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy contains three levels as follows, with Level 3 representing the lowest level of input.
Level 1 — Values based on unadjusted quoted market prices in active markets that are accessible at the measurement date for identical assets and liabilities.
Level 2 — Values based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, discounted cash flow models, or other model-based valuation techniques adjusted, as necessary, for credit risk.
Level 3 — Values generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions would reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques could include use of option pricing models, discounted cash flow models and similar techniques.
The following tables set forth by level Monsanto’s assets and liabilities disclosed at fair value on a recurring basis as of Nov. 30, 2014, and Aug. 31, 2014. As required by the Fair Value Measurements and Disclosures topic of the ASC, assets and liabilities are classified in their entirety based on the lowest level of input that is a significant component of the fair value measurement. Monsanto’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of fair value assets and liabilities within the fair value hierarchy levels.

15


MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

  
Fair Value Measurements at Nov. 30, 2014, Using
(Dollars in millions)
Level 1
Level 2
Level 3
Net Balance
Assets at Fair Value:
 
 
 
 
Cash equivalents
$
2,638

$

$

$
2,638

Short-term investments
40



40

Available-for-sale securities
16

28


44

Derivative assets related to:
 
 
 
 
Foreign currency contracts

33


33

Commodity contracts
6

9


15

Total Assets at Fair Value
$
2,700

$
70

$

$
2,770

Liabilities at Fair Value:
 
 
 
 
Short-term debt instruments
$

$
514

$
122

$
636

Long-term debt instruments(1)

7,879


7,879

Derivative liabilities related to:
 
 
 
 
Foreign currency contracts

11


11

Commodity contracts
54

29


83

Interest rate contracts

14


14

Total Liabilities at Fair Value
$
54

$
8,447

$
122

$
8,623

(1)
Long-term debt instruments are not recorded at fair value on a recurring basis; however, they are measured at fair value for disclosure purposes, as required by the Fair Value Measurements and Disclosures topic of the ASC.

  
Fair Value Measurements at Aug. 31, 2014, Using
(Dollars in millions)
Level 1
Level 2
Level 3
Net Balance
Assets at Fair Value:
 
 
 
 
Cash equivalents
$
1,664

$

$

$
1,664

Short-term investments
40



40

Equity securities
22



22

Derivative assets related to:
 
 
 


Foreign currency

11


11

Commodity contracts
20

16


36

Total Assets at Fair Value
$
1,746

$
27

$

$
1,773

Liabilities at Fair Value:
 
 
 
 
Short-term debt instruments
$

$
97

$
136

$
233

Long-term debt instruments(1)

7,928


7,928

Derivative liabilities related to:
 
 
 
 
Foreign currency

19


19

Commodity contracts
76

15


91

Total Liabilities at Fair Value
$
76

$
8,059

$
136

$
8,271

(1)
Long-term debt instruments are not recorded at fair value on a recurring basis; however, they are measured at fair value for disclosure purposes, as required by the Fair Value Measurements and Disclosures topic of the ASC.
The company’s derivative contracts are measured at fair value, including forward commodity purchase and sale contracts, exchange-traded commodity futures and option contracts, and over-the-counter (OTC) instruments related primarily to agricultural commodities, energy and raw materials, interest rates, and foreign currencies. Exchange-traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified as Level 1. Fair value for forward commodity purchase and sale contracts is estimated based on exchange-quoted prices adjusted for differences in local markets. These differences are generally determined using inputs from broker or dealer quotations or market transactions in either the

16


MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

listed or OTC markets. Interest rate contracts consist of interest rate swaps measured using broker or dealer quoted prices. When observable inputs are available for substantially the full term of the contract, it is classified as Level 2. Based on historical experience with the company’s suppliers and customers, the company’s own credit risk and knowledge of current market conditions, the company does not view nonperformance risk to be a significant input to the fair value for the majority of its forward commodity purchase and sale contracts. The effective portions of changes in the fair value of derivatives designated as cash flow hedges are recognized in the Statements of Consolidated Financial Position as a component of accumulated other comprehensive loss until the hedged items are recorded in earnings or it is probable the hedged transaction will no longer occur. Changes in the fair value of derivatives are recognized in the Statements of Consolidated Operations as a component of net sales, cost of goods sold and other expense, net.
The company’s short-term investments consist of commercial paper. The company’s available-for-sale securities consist of equity securities of publicly traded equity investments and debt security investments in Argentine sovereign bonds. Commercial paper and publicly traded equity investments are valued using quoted market prices and are classified as Level 1. The company's debt securities are classified as Level 2 and valued using broker or dealer quoted prices with a maturity greater than one year.
Short-term debt instruments consist of commercial paper, current portion of long-term debt, mandatorily redeemable shares, and notes payable to banks. Commercial paper, current portion of long-term debt and notes payables to banks are recorded at amortized cost in the Statements of Consolidated Financial Position, which approximates fair value. Mandatorily redeemable shares are recorded in the Statements of Consolidated Financial Position at fair value, which represents the amount of cash the consolidated variable interest entity would pay if settlement occurred as of the respective reporting date. Fair value of the mandatorily redeemable shares of the variable interest entity is calculated using observable and unobservable inputs from an interest rate market in Brazil and stated contractual terms (a Level 3 measurement). See Note 11Debt and Other Credit Arrangements for additional disclosures. Accretion expense is included in the Statements of Consolidated Operations as interest expense.
Long-term debt fair value was determined based on current market yields for Monsanto's debt traded in the secondary market.
For the three months ended Nov. 30, 2014, and Nov. 30, 2013, the company had no transfers between Level 1, Level 2 and Level 3. Monsanto does not have any assets with fair value determined using Level 3 inputs as of Nov. 30, 2014, and Aug. 31, 2014. The following table summarizes the change in fair value of the Level 3 liability for the three months ended Nov. 30, 2014.
(Dollars in millions)
 
 Balance Aug. 31, 2014(1)
$
136

Accretion expense
4

Effect of foreign currency translation adjustments
(18
)
 Balance Nov. 30, 2014(1)
$
122

(1)
Includes 300,000 mandatorily redeemable shares outstanding with a par value of $391 and $447 as of Nov. 30, 2014, and Aug. 31, 2014, respectively.
There were no significant measurements of assets or liabilities to their implied fair value on a nonrecurring basis during the three months ended Nov. 30, 2014, and Nov. 30, 2013.
The recorded amounts of cash, trade receivables, miscellaneous receivables, third-party guarantees, accounts payable, grower production accruals, accrued marketing programs and miscellaneous short-term accruals approximate their fair values as of Nov. 30, 2014, and Aug. 31, 2014.
Management is ultimately responsible for all fair values presented in the company’s consolidated financial statements. The company performs analysis and review of the information and prices received from third parties to ensure that the prices represent a reasonable estimate of fair value. This process involves quantitative and qualitative analysis. As a result of the analysis, if the company determines there is a more appropriate fair value based upon the available market data, the price received from the third party is adjusted accordingly.

17


MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

NOTE 13.
FINANCIAL INSTRUMENTS
Cash Flow Hedges
The company uses foreign currency options and foreign currency forward contracts as hedges of anticipated sales or purchases denominated in foreign currencies. The company enters into these contracts to protect itself against the risk that the eventual net cash flows will be adversely affected by changes in exchange rates.
Monsanto’s commodity price risk management strategy is to use derivative instruments to minimize significant unanticipated earnings fluctuations that may arise from volatility in commodity prices. Price fluctuations in commodities, mainly in corn and soybeans, can cause the actual prices paid to production growers for corn and soybean seeds to differ from anticipated cash outlays. Monsanto uses commodity futures and options contracts to manage these risks. Monsanto’s energy and raw material risk management strategy is to use derivative instruments to minimize significant unanticipated manufacturing cost fluctuations that may arise from volatility in natural gas, diesel and ethylene prices.
 
Monsanto’s interest rate risk management strategy is to use derivative instruments, such as forward-starting interest rate swaps and option contracts, to minimize significant unanticipated earnings fluctuations that may arise from volatility in interest rates of the company’s borrowings and to manage the interest rate sensitivity of its debt.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive loss and reclassified into earnings in the period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
The maximum term over which the company is hedging exposures to the variability of cash flow (for all forecasted transactions) is 15 months for foreign currency hedges and 37 months for commodity hedges. During the next 12 months, a pretax net loss of approximately $68 million is expected to be reclassified from accumulated other comprehensive loss into earnings. During the three months ended Nov. 30, 2014, and Nov. 30, 2013, no cash flow hedges were discontinued.
Fair Value Hedges
The company uses commodity futures, forwards and options contracts as fair value hedges to manage the value of its soybean inventory and other assets. For derivative instruments that are designated and qualify as fair value hedges, both the gain or loss on the derivative and the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. No fair value hedges were discontinued during the three months ended Nov. 30, 2014, and Nov. 30, 2013.
Derivatives Not Designated as Hedging Instruments
The company uses foreign currency contracts to hedge the effects of fluctuations in exchange rates on foreign currency denominated third-party and intercompany receivables and payables. Both the gain or loss on the derivative and the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.
The company uses commodity option contracts to hedge anticipated cash payments to growers in the United States, Mexico and Brazil, which can fluctuate with changes in commodity price. Because these option contracts do not meet the provisions specified by the Derivatives and Hedging topic of the ASC, they do not qualify for hedge accounting treatment. Accordingly, the gain or loss on these derivatives is recognized in current earnings.
To reduce credit exposure in Latin America, Monsanto collects payments on certain customer accounts in grain. Such payments in grain are negotiated at or near the time Monsanto’s products are sold to the customers and are valued at the prevailing grain commodity prices. By entering into forward sales contracts related to grain, Monsanto mitigates the commodity price exposure from the time a contract is signed with a customer until the time a grain merchant collects the grain from the customer on Monsanto’s behalf. The forward sales contracts do not qualify for hedge accounting treatment under the Derivatives and Hedging topic of the ASC. Accordingly, the gain or loss on these derivatives is recognized in current earnings.
Monsanto uses interest rate contracts to minimize the variability of forecasted cash flows arising from the company’s VIE in Brazil. The interest rate contracts do not qualify for hedge accounting treatment under the Derivatives and Hedging Topic of the ASC. Accordingly, the gain or loss on these derivatives is recognized in current earnings.
Financial instruments are neither held nor issued by the company for trading purposes.

18


MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

The notional amounts of the company’s derivative instruments outstanding as of Nov. 30, 2014, and Aug. 31, 2014, were as follows:
 
As of
(Dollars in millions)
Nov. 30, 2014
Aug. 31, 2014
Derivatives Designated as Hedges:
 
 
Foreign exchange contracts
$
428

$
585

Commodity contracts
860

626

Interest rate contracts
750


Total Derivatives Designated as Hedges
$
2,038

$
1,211

Derivatives Not Designated as Hedges:
 
 
Foreign exchange contracts
$
2,114

$
2,054

Commodity contracts
185

272

Interest rate contracts
139

160

Total Derivatives Not Designated as Hedges
$
2,438

$
2,486


19


MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

The net presentation of the company’s derivative instruments outstanding was as follows:
 
 
 
As of Nov. 30, 2014
(Dollars in millions)
Gross Amounts Recognized
Gross Amounts Offset in the Statement of Consolidated Financial Position
Net Amounts Included in the Statement of Consolidated Financial Position
Collateral Pledged
Net Amounts Reported in the Statement of Consolidated Financial Position
Other Items Included in the Statement of Consolidated Financial Position
Statement of Consolidated Financial Position Balance
Asset Derivatives:
 
 
 
 
 
 
 
Trade receivables, net
 
 
 
 
 
 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
$
2

$
(2
)
$

$

$

 
 
Total trade receivables, net
2

(2
)



$
2,247

$
2,247

Miscellaneous receivables
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
18


18


18

 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
13


13


13

 
 
 
 
Commodity contracts
7


7


7

 
 
Total miscellaneous receivables
38


38


38

832

870

Other current assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
2

(37
)
(35
)
35


 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)

(1
)
(1
)
1


 
 
Total other current assets
2

(38
)
(36
)
36


200

200

Other assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
2


2


2

 
 
 
 
Commodity contracts(1)
4

(16
)
(12
)
12


 
 
Total other assets
6

(16
)
(10
)
12

2

810

812

Total Asset Derivatives
$
48

$
(56
)
$
(8
)
$
48

$
40

 
 
Liability Derivatives:
 
 
 
 
 
 
 
Trade receivables, net
 
 
 
 
 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
$
2

$
(2
)
$

$

$

 
 
Total trade receivables, net
2

(2
)



 
 
Other current assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
37

(37
)



 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
1

(1
)



 
 
Total other current assets
38

(38
)



 
 
Other assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
16

(16
)



 
 
Total other assets
16

(16
)



 
 
Miscellaneous short-term accruals
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
1


1


1

 
 
 
 
Commodity contracts
15


15


15

 
 
 
 
Interest rate contracts
14


14


14

 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
10


10


10

 
 
 
 
Commodity contracts
2


2


2

 
 
Total miscellaneous short-term accruals
42


42


42

$
1,081

$
1,123

Other liabilities
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
10


10


10

 
 
Total other liabilities
10


10


10

327

337

Total Liability Derivatives
$
108

$
(56
)
$
52

$

$
52

 
 

20


MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

(1)
As allowed by the Derivatives and Hedging topic of the ASC, commodity derivative assets and liabilities have been offset by collateral subject to an enforceable master netting arrangement or similar arrangement. Therefore, these commodity contracts that are in an asset or liability position are included in asset accounts within the Statements of Consolidated Financial Position.
 
 
 
As of Aug. 31, 2014
(Dollars in millions)
Gross Amounts Recognized
Gross Amounts Offset in the Statement of Consolidated Financial Position
Net Amounts Included in the Statement of Consolidated Financial Position
Collateral Pledged
Net Amounts Reported in the Statement of Consolidated Financial Position
Other Items Included in the Statement of Consolidated Financial Position
Statement of Consolidated Financial Position Balance
Asset Derivatives:
 
 
 
 
 
 
 
Trade receivables, net
 
 
 
 
 
 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
$

$
(10
)
$
(10
)
$
10

$

 


Total trade receivables, net

(10
)
(10
)
10


$
2,014

$
2,014

Miscellaneous receivables
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
5


5


5

 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
4


4


4

 
 
 
 
Commodity contracts
13


13


13

 
 
Total miscellaneous receivables
22


22


22

795

817

Other current assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
4

(57
)
(53
)
53


 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
19

(1
)
18


18

 

Total other current assets
23

(58
)
(35
)
53

18

187

205

Other assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
2


2


2

 
 
 
 
Commodity contracts(1)

(19
)
(19
)
19


 


Total other assets
2

(19
)
(17
)
19

2

807

809

Total Asset Derivatives
$
47

$
(87
)
$
(40
)
$
82

$
42





Liability Derivatives:
 
 
 
 
 
 
 
Trade receivables, net
 
 
 
 
 
 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
$
10

$
(10
)
$

$

$

 
 
Total trade receivables, net
10

(10
)



 
 
Other current assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
57

(57
)



 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
1

(1
)



 
 
Total other current assets
58

(58
)



 
 
Other assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
19

(19
)



 
 
Total other assets
19

(19
)



 
 
Miscellaneous short-term accruals
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
6


6


6

 
 
 
 
Commodity contracts
3


3


3

 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
13


13


13

 
 
Total miscellaneous short-term accruals
22


22


22

$
940

$
962

Other liabilities
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
1


1


1

 

Total other liabilities
1


1


1

341

342

Total Liability Derivatives
$
110

$
(87
)
$
23

$

$
23






21


MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

(1)
As allowed by the Derivatives and Hedging topic of the ASC, commodity derivative assets and liabilities have been offset by collateral subject to an enforceable master netting arrangement or similar arrangement. Therefore, these commodity contracts that are in an asset or liability position are included in asset accounts within the Statements of Consolidated Financial Position.
The gains and losses on the company’s derivative instruments were as follows:
 
Amount of Gain  (Loss)
Recognized in AOCI(1) (Effective
Portion)
Amount of Gain (Loss)
Recognized in Income(2)
 
 
Three Months Ended
Three Months Ended
Statement of Consolidated Operations Classification
(Dollars in millions)
Nov. 30, 2014
Nov. 30, 2013
Nov. 30, 2014
Nov. 30, 2013
Derivatives Designated as Hedges:
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
Commodity contracts(3)
 
 
$
(2
)
$
(2
)
Cost of goods sold
Commodity contracts(4)
 
 
(4
)

Other expense, net
Cash flow hedges:
 
 
 
 
 
Foreign currency contracts
$
19

$
(2
)
7

(2
)
Net sales
Foreign currency contracts
9

(3
)


Cost of goods sold
Commodity contracts(5)
(11
)
(61
)
(3
)
(3
)
Cost of goods sold
Interest rate contracts(6)
(14
)
(2
)
(3
)
(3
)
Interest expense
Total Derivatives Designated as Hedges
3

(68
)
(5
)
(10
)
 
Derivatives Not Designated as Hedges:
 
 
 
 
 
Foreign currency contracts(7)
 
 
(60
)
22

Other expense, net
Commodity contracts
 
 
2

2

Net sales
Commodity contracts
 
 
3

5

Cost of goods sold
Total Derivatives Not Designated as Hedges
 
 
(55
)
29

 
Total Derivatives
$
3

$
(68
)
$
(60
)
$
19

 
(1)
Accumulated other comprehensive income (AOCI) (loss).
(2)
For derivatives designated as cash flow hedges under the Derivatives and Hedging topic of the ASC, this represents the effective portion of the gain (loss) reclassified from AOCI into income during the period.
(3)
Loss on fair value hedges includes a loss of less than $1 million and $1 million from ineffectiveness during the three months ended Nov. 30, 2014, and Nov. 30, 2013, respectively.
(4)
Loss on fair value hedges includes a loss of $4 million from ineffectiveness during the three months ended Nov. 30, 2014.
(5)
Loss on commodity cash flow hedges includes a loss of less than $1 million and $1 million from ineffectiveness for the three months ended Nov. 30, 2014, and Nov. 30, 2013, respectively. No gains or losses were excluded from the assessment of hedge effectiveness during the three months ended Nov. 30, 2014, and Nov. 30, 2013.
(6)
Loss on interest rate cash flow hedges includes a loss of less than $1 million from ineffectiveness for the three months ended Nov. 30, 2013.
(7)
Loss and gain on foreign currency contracts not designated as hedges is offset by foreign currency transaction gain of $51 million and loss of $41 million during the three months ended Nov. 30, 2014, and Nov. 30, 2013, respectively.
Several of the company’s outstanding foreign currency derivatives are covered by International Swap Dealers’ Association (ISDA) Master Agreements with the counterparties. There are no requirements to post collateral under these agreements; however, should Monsanto’s credit rating fall below a specified rating immediately following the merger of the company with another entity, the counterparty may require all outstanding derivatives under the ISDA Master Agreement to be settled immediately at current market value, which equals carrying value. Foreign currency derivatives that are not covered by ISDA Master Agreements do not have credit-risk-related contingent provisions. Most of Monsanto’s outstanding commodity derivatives are listed commodity futures, and the company is required by the relevant commodity exchange to post collateral each day to cover the change in the fair value of these futures in the case of an unrealized loss position. Non-exchange-traded commodity derivatives may be covered by the aforementioned ISDA Master Agreements and would be subject to the same

22


MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

credit-risk-related contingent provisions. The aggregate fair value of all derivative instruments under ISDA Master Agreements that are in a liability position was $34 million and $11 million as of Nov. 30, 2014, and Aug. 31, 2014, respectively, which is the amount that would be required for settlement if the credit-risk-related contingent provisions underlying these agreements were triggered.
Credit Risk Management
Monsanto invests its excess cash in deposits with major banks or money market funds throughout the world in high-quality short-term debt instruments. Such investments are made only in instruments issued or enhanced by high-quality institutions. As of Nov. 30, 2014, and Aug. 31, 2014, the company had no financial instruments that represented a significant concentration of credit risk. Limited amounts are invested in any single institution to minimize risk. The company has not incurred any credit risk losses related to those investments.
The company sells a broad range of agricultural products to a diverse group of customers throughout the world. In the United States, the company makes substantial sales to relatively few large wholesale customers. The company’s business is highly seasonal, and it is subject to weather conditions that affect commodity prices and seed yields. Credit limits, ongoing credit evaluation and account monitoring procedures are used to minimize the risk of loss. Collateral is secured when it is deemed appropriate by the company.
Monsanto regularly evaluates its business practices to minimize its credit risk and periodically engages multiple banks in the United States, Argentina, Brazil and Europe in the development of customer financing options that involve direct bank financing of customer purchases. For further information on these programs, see Note 4Customer-Financing Programs.
NOTE 14.
POSTRETIREMENT BENEFITS — PENSIONS, HEALTH CARE AND OTHER
Most of Monsanto’s U.S. employees hired prior to July 8, 2012 are covered by noncontributory pension plans sponsored by the company. Effective July 8, 2012, the U.S. pension plan was closed to new entrants; there were no changes to the U.S. pension plan for eligible employees hired prior to that date. The company also provides certain postretirement health care and life insurance benefits for retired employees through insurance contracts. The company’s net periodic benefit cost for pension benefits and health care and other postretirement benefits include the following components:
  
Three Months Ended Nov. 30, 2014
Three Months Ended Nov. 30, 2013
Pension Benefits
(Dollars in millions)
U.S.
Outside the
U.S.
Total
U.S.
Outside the
U.S.
Total
Service Cost for Benefits Earned During the Period
$
16

$
3

$
19

$
15

$
3

$
18

Interest Cost on Benefit Obligation
22

2

24

23

2

25

Assumed Return on Plan Assets
(38
)
(3
)
(41
)
(35
)
(2
)
(37
)
Amortization of Unrecognized Net Loss
13

2

15

16

1

17

Curtailment and Settlement Charge

1

1


1

1

Total Net Periodic Benefit Cost
$
13

$
5

$
18

$
19

$
5

$
24

Monsanto did not make any cash contributions to its U.S. qualified plan in the three months ended Nov. 30, 2014. In the three months ended Nov. 30, 2013, Monsanto contributed $15 million to its U.S. qualified plan. Monsanto contributed $5 million to plans outside the United States for the three month periods ended Nov. 30, 2014, and Nov. 30, 2013.
Health Care and Other Postretirement Benefits
Three Months Ended
(Dollars in millions)
Nov. 30, 2014
Nov. 30, 2013
Service Cost for Benefits Earned During the Period
$
2

$
3

Interest Cost on Benefit Obligation
2

3

Amortization of Unrecognized Net Gain
(1
)
(4
)
Total Net Periodic Benefit Cost
$
3

$
2


23


MONSANTO COMPANY
 
FIRST QUARTER 2015 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)

NOTE 15.
STOCK-BASED COMPENSATION PLANS
The following table shows total stock-based compensation expense included in the Statements of Consolidated Operations for the three months ended Nov. 30, 2014, and Nov. 30, 2013. Stock-based compensation cost capitalized in inventory was $3 million as of both Nov. 30, 2014, and Aug. 31, 2014.
 
Three Months Ended
(Dollars in millions)
Nov. 30, 2014
Nov. 30, 2013
Cost of Goods Sold
$
2

$
2

Selling, General and Administrative Expenses
25

20

Research and Development Expenses
8

5

Pre-Tax Stock-Based Compensation Expense
35

27

Income Tax Benefit
(10
)
(9
)
Net Stock-Based Compensation Expense
$
25

$
18

The following table summarizes stock-based compensation activity for and as of the three months ended Nov. 30, 2014. Monsanto Stock Plans include employees under the Monsanto Company 2005 Long-Term Incentive Plan, as amended and restated effective Jan. 24, 2012, and employees under The Climate Corporation 2006 Stock Plan, as amended on Oct. 30, 2013. The Director Plan includes members of the Board of Directors under the Monsanto Non-Employee Director Equity Incentive Compensation Plan. 
 
Monsanto Stock Plans
Director Plan
 
Stock
Options

Restricted
Stock Units

Deferred
Stock

Restricted
Stock

Granted
1,697,370