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Annual Report 1980 Monsanto PLAINTIFF'S EXHIBIT MAR 001437 LAM017556 4 MAR 001438 Contents Monsanto at a Glance Operational Highlights To Our Shareowners Current Performance Agricultural Products Chemical Intermediates Industrial Chemicals Plastics & Resins Textiles Fisher Controls International Social Responsibility Research and Innovation Financial Report Directors and Officers 1. 2 3 9 10 11 12 13 14 15 16 17 21 29 68 Italics identify Monsanto's trademarks. 4 .- " t -. . ' :** * -,, * , i - J't ***** >*4 ' *iV"* '* , * i T? . -*- r<'*\ . ;*> * 1 *3 ** i'> 1 y .......... ` - H l >1 LAM017557 Research and Innovation M W onsanto Company, headquartered in St. Louis, today is the fourth largest U. S. chemical company. It has investments in 169 manufac turing plants, laboratories and technical centers in 21 nations. Its products are sold in more than 120 nations. Monsanto's operating orga nization includes five operat ing companies--Agricultural Products, Chemical Inter mediates, Industrial Chemi cals, Plastics & Resins, and Textiles--plus Fisher Controls International, Inc., a majorityowned subsidiary; and Mon santo International, which coordinates operations outside the United States in conjunc tion with the operating com panies and manages worldwide joint ventures. tufi im n C o * 0) 4L). no (/) * 0) > 0) |2 o 00 0> MAR 001439 LAM017558 i 29 John W. Hanley. Chairman and Chief Executive Officer, belore a portrait of John F. Queeny, who lounded Monsanto in 1901. 4 production base, and the Company purchased a modem polyester plant in Fayetteville, North Carolina, at a cost very substantially lower than that ot expansion or new construction. At about the same time, however, technical advances by our customers led to stringent new technical perfor mance requirements for polyester fila ment. Monsanto's fiber technology, realistically, did not meet the challenge in a timely w'av. No world producer has had a profitable polyester filament business in the past three years. But in a sorely depressed market, our Com pany's losses became disproportion ately severe. The fact that we have since achieved a potential breakthrough in polyester filament technology is a case of too little too late. We haye.withdrawn from the business, reached agreement in prin ciple to sell a portion of our facilities to Fiber Industries, Inc. (FII), and agreed to work with FII to bring to commercial fruition the next generation product produced in our laboratories. We hope to capture some portion of the rewards of invention for this technical break through, if the product is greeted enthu siastically by the world's consumers. That decision resulted in a charge to 1980 earnings of $69 million, or $1.90 per common share. A major concern growing out of our decision was the future of the employees involved. Most management and pro fessional personnel were redeployed within Monsanto. For employees who could not be redeployed, Monsanto mounted a program of counseling and assistance in finding other positions, and this has met with some success. A second troublesome decision was to end Monsanto's 67 percent partici pation in Aiscondel, S. A., our Spanish subsidiary. Aiscondel faced increas ingly severe problems in the late 1970s, compounded by a depressed Spanish economy. During 1979 and 1980, re medial steps included workforce re ductions, process improvements and the elimination of the weakest opera tions. Efforts also were made to sell parts of Aiscondel, but the financial losses continued. MAR 001440 LAM017559 In February, 1981, Monsanto trans ferred all of its interests in Aiscondel so as to allow it to continue in operation with full Spanish ownership. Monsanto previously established a provision for a write-off which reduced 1980 after-tax earnings by $39 million or $1.07 per common share. During the year, we further refined our options toward improving the unsatisfactory situation at our major Seal Sands acrylonitrile complex in the United Kingdom. Dramatic changes in user markets, including our own with drawal from the European nylon market, have contributed to an over capacity for acrylonitrile. Task forces are exploring a variety of alternatives open to us. While we do not see a com plete short-term solution to the situa tion, we are confident we will see yearto-year improvement. Building on Strengths Monsanto's steps in 1980 to build aggressively on its strengths were characterized by our capital spending strategy and direction of resources to enhance our current successes. Our capital spending reached a record $781 million. Excluding $52 million of capitalized interest from this total, spending was up 29 percent above 1979. The emphasis here is on leadership positions--for today and tomorrow. During 1980, a plant expansion for Roundup herbicide was completed in Belgium. In the rough economic weather of 1980, the robust performance of our agricultural herbicides business throughout the year buoyed Monsanto. Nearing completion now is a third plant {or Roundup in North Carolina, which will increase capacity by nearly 50 percent, and a fourth unit is on the drawing boards. Silicon is another clear example of support for leadership positions. A cur rent expansion will make the Com pany's electronic-grade silicon plant in South Carolina the world's largest, witness to Monsanto's commitment to be the leading supplier to the semicon ductor industry. Capital spending will support a tech nology achievement that enables Monsanto to make maleic anhydride from butane instead of benzene--a process with competitive advantages in raw material cost, reliability, and environmental considerations. Con struction is underway on the world's largest plant to produce this important chemical intermediate. An expanded exploration and pro duction program, directed by our Oil & Gas Division, is now investing more than $ 100 million a year to help ensure adequate feedstocks. Monsanto has proven reserves of approximately 130 million barrels of oil and equivalent gas --an asset with future net revenues estimated at $ 1.774 billion, or a present, discounted value of such rev enues estimated at $575 million. This is described in detail in the Financial Review section of this report. As the capital program feeds our growth, funding is also directed toward nourishment of today's successful busi nesses. This includes a firm manage ment commitment to the continued strength of our detergents and phos phates business, traditionally a solid income producer. It is further illus trated by our Saflex windshield inter layer and rubber chemicals businesses, which have been well positioned for the eventual turnaround of the automotive industry. And it is evident in the joining of a series of related products into the Nutrition Chemicals & Development Division, which is patterned after the early charter of our agricultural prod ucts group. This constructive use of our resources is linked to another area we seek to nourish--technology. Research and Technology The Company's bold approach to research and new technologies reached a dramatic level of visibility in 1980. Research and development expendi tures for the year rose 27 percent, to $204 million. We are determined to maintain the R&D momentum that will generate new products and processes for the decades of the '80s and '90s. Our strengths are based on continu ing research, on process technology, on frontier probes, and above all on the men and women of our technical communitv. MAB 0014U lAW017S60 5 29 Indicative of our commitment is our new laboratory facility, which adds 30 percent to research space at our St. Louis headquarters. Much of the addi tion will be devoted to our intensive agricultural R&D program, which now boasts several herbicides in tests lead ing toward commercialization. Our continuing silicon research supports our major commitment to that product line. Our process technology capabilities are exemplified by the maleic anhy dride process mentioned above. Research on the frontiers of technol ogy includes our molecular biology activities, which encompass our studies in recombinant DNA. We are optimistic about our work in DNA techniques with living plant cells, and similar research has the potential of providing new in dustrial processes and new health care products. In a closely related area, the Company purchased a $20 million interest in Biogen, a genetic engineering company with laboratories in Switzerland. Through our venture-capital com panies, Monsanto has held equity since the late 1970s in two other leading genetic engineering firms, Genex and Genentech. In mid-1980 Monsanto acquired approximately a 30 percent interest in Collagen Corporation, which has de veloped proprietary methods of process ing and purifying a protein building block from animal sources for use in re pairing human tissue. These equity investments give Monsanto windows on new technology and the flexibility to broaden our range. Because of Monsanto's emphasis not only on current strengths but also on bold, innovative steps, and because of the strength of our technical com munity, this report focuses impor tantly on research and innovation within the Company. (See special section, page 21.) team is now largely in place--from Finance Committee Chairman James J. Kerlev, President Richard J. Mahoney, and Vice Chairman Louis Fernandez, throughout the Company's ranks. In a broad sense, Monsanto employees in every part of the corporation are the essence of the report that follows. We have asked for their support and service in the face of trying times, and we have received it. The Company's future strength is in them. The decade ahead presents chal lenges, but it also offers a range of opportunities for growth and profit ability that is unprecedented. Thus, in our 80th anniversary' year, we look ahead fully confident that we have the product programs, technical resources and, most importantly, the human resources to achieve a future worthy of the best of our distinguished past. John W. Hanley Chairman of the Board and Chief Executive Officer March 10, 1981 001442 Monsanto Personnel Strengths As we have built for the future in our product lines, we have also built for the future in management strength. While we will sorely miss the contributions of our Vice Chairman H. Harold Bible, who retired in January, organizational moves in recent years have enabled us to develop unusual depth and breadth of management. That management LAM017561 Right: Polished silicon wafers reflect ceiling lights during produc tion in South Carolina, while an operator moni tors wafer thickness. LAWK)17563 Research and Innovation Current Performance 1980 sales of $1.384 billion, a decline of 2 percent. Sales revenues from ongoing businesses were at prior year levels, while consolidated operating losses of $111 million onsanto's consolidated net sales in reflect the $66 million pretax write-off M 1980 increased to $6,574 billion, a 6 percent increase over 1979. Net income for 1980, depressed by write-offs associated with Monsanto s withdrawal from the Company's Spanish subsidiary. Monsanto Textiles Company recorded an totaling $108 million and recession-impacted operating loss of $261 million, reflecting in demand, fell to $149 million, with primary part a pretax charge of $121 million related earnings per common share of $4.10 to withdrawal from polyester filament. Sales compared with $9.1 1 in 1979. revenues fell 3 percent to $1.041 billion. The dividend paid on a common share Weak demand, excess capacity and low during 1980 was increased by $0.20 to $3.55. pricing for U.S. polyester filament and Monsanto Agricultural Products Company European acrylic fiber, plus higher costs and set sales and operating income records in low plant utilization rates led to operating 1980. Total sales were $1.012 billion, a 21 losses. percent increase over 1979. Operating Fisher Controls International, Inc., a income rose 22 percent from $329 million to worldwide leader in the manufacture of $401 million. process control equipment, is owned Monsanto Chemical Intermediates approximately two-thirds by Monsanto and Company had a merchant market sales one-third by The General Electric Company increase of 13 percent to $966 million in Limited of the United Kingdom. 1980, but operating income fell from $116 Fisher recorded 1980 sales of $593 million, million in 1979 to $18 million in 1980. The up 19 percent from the previous year. unit manages the production of basic inter Operating income was $72 million in 1980, mediate chemicals, with approximately 60 compared with $44 million in 1979. percent used bv other operating units and Monsanto International experienced sales the remainder sold to the merchant market. increases in all world areas, with a Oil & Gas Division sales grew to $125 substantial growth rate in the Asia-Pacific million, a 54 percent increase over 1979. sector. For the year, ex-U.S. sales--including Monsanto Industrial Chemicals Company exports from U.S. plants--grew to $2,601 reached $1.578 billion in sales, up 4 percent billion, equivalent to 40 percent of total from 1979. Operating income, affected by Monsanto Company sales. higher energy and raw material costs as well Operating income from International as general weakness in the economy, fell business made a strong contribution to the from $202 million in 1979 to $133 million. Company's performance despite the Monsanto Plastics & Resins Company, economic downturn in many areas of the which manufactures plastics raw materials, world and the write-off associated with the resin products and fabricated products, had withdrawal from Aiscondel in Spain. Left: A broad expanse of architectural glass laminated with Saflex interlayer is a feature of the Forum des Halles in Paris. Center: Lasso herbicide is used widely to control grassy weeds in com and soybeans. Right: A Monsantooperated drilling rig explores for natural gas in Wvoming. LAM017564 9 29 Agricultural Products was extended to forestry applications. Key registrations were received for agricultural use in Japan and in the Soviet Union. Operating Sales Income The People's Republic of China has poten Total Assets tial to become a large market for Roundup, Lasso and other Monsanto herbicides. During 1980 SI,012.3 $400.8 $802.7 1980, a Company delegation visited China to 1979 839.9 328.8 660.2 strengthen marketing and product develop 1978 734.4 303.8 629.0 ment efforts there. To supply rapidly growing demand, the 1977 654.0 274.3 579.4 Company started production of Roundup in 1976 573.2 242.0 463.4 a fully integrated plant in Antwerp during 1980. In North Carolina, construction is on schedule for 1981 start-up of a third facility Iith sales passing the $1 billion for Roundup. W mark for the first time, Monsanto Agricultural Products Company set sales and operating income records in Monsanto sees strong future markets for agricultural products, both existing and new. World population is expected to 1980. This performance occurred in spite of increase from today's 4 billion people to 6 a general world economic slowdown and billion by 1995. bad weather in several major markets. During 1980, existing technology for the The strong growth was led by the Company's successful herbicides w'as Company's highly successful herbicides. extended to new candidates in field trials. Lasso, Roundup, Avadex BW and Machete Looking beyond existing proprietary herbicides all reached record volumes in herbicides technology, Monsanto is actively 1980. The sales of ammonium nitrate for engaged in the investigation of plant growth fertilizer and blasting products were also at regulators to improve yields of major crops. a record level during the year. Still further ahead, much of the Lasso, used to control grassy weeds in revolutionary agricultural technology for the com and soybeans, continued to be the 1990s and beyond will come from research in largest selling herbicide in the United States. cell biology and genetic engineering. Roundup, with broad application as a post- Through recombinant DNA techniques, for emergent herbicide for agricultural and example, scientists hope to develop new industrial uses, again was the Company's plant strains with desirable qualities such as fastest growing product, especially in ex-U.S. greater disease resistance and higher yields. markets. To support its commitment to agriculture, Sales of Roundup were aided by new and the Company will complete an advanced more intense uses in existing markets and by new laboratory and test farm in Brazil in geographic expansion into new markets. In 1981. The Company will expand its research the United States, registered use of Roundup laboratory' in Belgium by 50 percent. Significant growth for Roundup herbicide results from special application equipment. A rope-wick wiper per mits selective control of C5 weeds without harm to this soybean crop. LAM017565 10 Research and Innovation Chemical Intermediates decline in overall volume, though dollar sales to external customers increased 13 percent due to higher prices. Operating Sales Income Petrochemicals recorded a year-to-year Total Assets dollar sales increase of 10 percent. Sales of process chemicals increased 3 percent. 1980 $965.7 $ 17.8 $1,178.6 As the U.S. recession cut into chemical 1979 858.6 1 15.5 1,123.4 demand for internal and external sales, 1978 523.2 75.1 849.8 market conditions softened. This in turn led to a 15 percent year-to-year decline in plant 1977 522.0 128.0 735.9 capacity utilization. Although this improved 1976 498.2 156.7 611.1 during the fourth quarter, operations were Intercompany sales, not included in the above, made on a market price basis were SI65.3, SI 51.9, $116.3, S 129.5 and SI 17.2 for 1980 through 1976, respectively. at 75 to 80 percent capacity for the year. Plans for producing maleic anhydride from butane were increased when a Pensacola, Florida, plant under construction was scaled up by 30 percent. n the fourth quarter, Monsanto Chemical I Intermediates Company completed Oil & Gas Division start-up of an expanded 8-billion-pound- For the fifth consecutive year, Monsanto a-vear petrochemical plant. Together with anincreased its oil and gas reserves bv ' existing unit, the plant more than doubled discovering more than it produced. In 1980, capacity at Monsanto's Chocolate Bavou site the Company invested $ 135 million on to manufacture olefins and aromatics, inter exploration, development and acquisition of mediate chemicals used to produce a broad producing properties. range of industrial and consumer products. Monsanto participated in drilling fifty- This new plant is a joint project with one net exploratory wells in 1980, compared Conoco Inc., aimed at strengthening to 20 net in 1979; an additional 81 develop Monsanto's hvdrocarbon-based feedstock ment wells were drilled. Of the total, 76 position. Advanced technology results in percent were oil or gas producing. energy savings of 5.8 trillion Btu a year over The division added 3.9 million barrels of previous production methods. oil and 64.0 billion cubic feet (BCF) of gas to A complementary crude oil processing its proven reserves. After oil and gas sales, unit at Conoco's refinery site at Lake Charles, proven year-end reserves totaled 29.7 Louisiana, will provide feedstock for the million barrels of oil and 618.6 BCF of gas. Texas plant. The Lake Charles unit, also Most of the oil and gas produced is not jointly owned by Monsanto and Conoco, used directly by Monsanto, but traded or began start-up at the end of 1980 with a ca sold for liquid feedstocks needed by the pacity of 100,000 barrels of crude per day. petrochemical operations. Net sales were For the year, this operating unit felt a $125 million, a 54 percent increase over 1979. Left: At a training ses sion for Monsanto's phosphorus emergency response team, molten slag from a phosphorus furnace makes a dramatic backdrop. Center: Reinforced plastics made with maleic anhydride are used in new model cars to reduce weight, thus helping increase milesper-gallon of gasoline. LAM017566 n 29 Industrial Chemicals developing a new product line called Santoprene thermoplastic rubber. A multi-million-pound pilot plant, built in Operating Sales Income 1980, will be used to support the market Total Assets development program. Investments in Europe, where Monsanto 1980 $1,577.6 $132.6 $1,113.0 is the leading manufacturer of rubber chemi 1979 1,513.8 202.1 984.1 cals and instruments, were made to mod 1978 1,290.1 218.7 ernize the product form of rubber chemicals, 849.6 enabling customers to handle them in the 1977 1,156.4 211.9 750.3 most modem equipment and to improve 1976 1,108.6 220.1 651.9 industrial hygiene. Four new testing instru Intercompany sales made on a market basis were $45.3, $44.1, $26.6, $24.0 and $22.9 for 1980 through 1976. re spectively. ments were also introduced there. Nutrition chemicals sales increased 16 percent. The new Alimet liquid methionine, an amino-acid feed supplement for poultry and swine, has enjoyed a successful n April, 1980, Monsanto Industrial marketing debut. The liquid form of the I Chemicals Company began operation of its new electronic-grade silicon plant in South Carolina, The following month, product is currently produced in West Virginia, and a 100-million-pound plant at the Chocolate Bayou, Texas, site is planned Monsanto's Board approved plans to boost for 1983 completion. the capacity still further, which will make it Specialty chemicals had a 5 percent the largest such plant in the world. increase in sales in 1980, led bv strong Silicon, used by the semiconductor volume in ACL swimming pool products. The industry in electronic devices including division continued its investment program computers, calculators, digital displays and to support its world leadership in aspirin electronic games, is also produced by production. Monsanto in Missouri and in Malaysia. Prism separators, introduced in 1979, have For the year, the operating company 's had encouraging acceptance. Prism is a pro sales of detergent and phosphate products prietary hollow fiber system that separates increased by 1 percent. hydrogen from other gases in plant exhaust Worldwide dollar sales of plasticizers streams. The potential for the product in were up 8 percent, and rubber chemicals cludes hydrogen recovery in future synfuel sales up 2 percent, in spite of both projects, such as coal gasification. businesses being severely affected by the Record sales of catalyst and equipment for automobile and housing market declines. Monsanto Enviro-Chem Systems, Inc., which The Rubber Chemicals Division is provides engineering services and pollution control equipment, led to improved performance for the product line in 1980. Left: Monsanto plasticizers provide flexibility and other qualities to plastics. Center: Silicon crystal ingot growth is monitored during production at Monsanto's South Carolina plant. mar 1448 LAM017567 Research and Innovation plastics & Resins support the Company's position as a leading ABS supplier. Vydvne R glass/mineral reinforced nylon Sales Operating Income was selected by American Motors Total Assets Corporation to mold the rocker arm covers for its 1981 model six-cylinder vehicles. 1980 SI,383.8 S( 110.5) SI.000.0 Sales of Fome-Cor board, polystyrene 1979 1,414.2 9.6 1,110.7 foam laminated between two layers of liner 1978 1,223.6 57.6 1.088.2 board, were also affected bv the slump in the housing and automotive industries. The 1977 1,111.2 76.3 891.9 product's major uses are in manufactured 1976 1,018.7 100.8 752.9 housing and home residing, as a headliner in automobiles and as a graphic arts board. Lustrex polystyrene maintained its onsanto Plastics & Resins worldwide 1979 sales level. A new grade M Company sales in 1980 declined 2 was introduced during the year for such percent from 1979 levels; sales were uses as dinnerware and drink cups and lids. at, or exceeded, 1979 levels in all world areas The Company's newest fabricated prod except North America. Several major uct, Spray Guard rain flaps, was adversely factors were responsible for the decline in affected by a 30 percent downturn in new year-to-year operating income, including truck sales. However, the future still looks operating losses and the write-off associated bright for this product. with Monsanto's withdrawal from During 1980 Monsanto's new AstroTurf-8 Aiscondel, the majority-owned Spanish synthetic turf system became commercial. subsidiary. A softening European economy The system will help the Company continue and reduced plant utilization caused by to expand sales into the high school, weak automotive and housing industries in small college and municipal markets. North America were other contributing Blownware had another solid perform factors. ance in 1980, with improved profitability Liistran ABS plastic felt the impact of the despite the recessionary environment. economic downturn chiefly in the Sales of Saflex polyvinyl butyral inter automotive and housing sectors, with other layer for use in laminated safety glass for major markets less severely affected. automobile windshields declined. However, Three new grades of Lustran were sales for laminated architectural glass introduced during 1980 as a result of an applications increased. accelerated technical program to help In the other resin areas, paper chemicals, formalin and Gelva specialty adhesive resins recorded modestly higher sales, while other resins declined from previous year levels. Left: Fome-Cor board is widely used in the graphic arts market for mounting photographs and prints and for point-of-purchase displays. Center: The Forum des Halles shopping com plex in Paris contains 3,500 square meters of glass laminated with Saflex interlayer. Architectural uses of the laminate continue to grow. MAR 001449 LAM017568 13 29 Textiles 1980 1979 1978 1977 1976 Sales $1,041.1 1,069.4 963.2 884.3 853.5 Operating Income $(261.1) (168.7) (29.2) (39.0) (1.2) Total Assets $1,019.5 1,022.7 1,050.1 1,011.2 947.5 n January, 1981, Monsanto announced I its decision to withdraw from the polyester filament segment of the textiles industry. The withdrawal results in the closure of the polyester filament plant at Guntersville, Alabama, and the older of two facilities at Fayetteville, North Carolina. Monsanto reached agreement in principle to sell certain assets related to polyester filament to Fiber Industries, Inc. (FII), a subsidiary of Celanese Corporation. Under the agreement FII would pay Monsanto $30 million for the assets, including the newer plant at Fayetteville, plus up to $8 million mor e to ensure the continuation for one year of the research to develop Monsanto's new in-line texturing technology. The agreement also provides for potential future payments for technology and patent rights. In conjunction with the shutdown of the plants, the Company will cease marketing Bidim engineering fabric made of polyester filament. Monsanto Textiles Company performance was affected negatively by several major factors in addition to the write-off related to polyester filament. Depressed selling prices together with weak demand through the year resulted in unacceptable polyester filament losses. Excess capacity and soft demand in the European acrylic fiber markets kept acrylic fiber operations there in a loss position. Monsanto has a strong raw material base in Europe plus excellent technology. During the year, two acrylic producers withdrew from the European market, and further rationalization is probable. The downturn in the U. S. housing market also cut into demand for nylon used in carpets. Despite this, carpets of Ultron nylon in the first year of Monsanto's program for Wear-Dated carpets retained sales volume, in large part due to the strength of this consumer warranty program. Retailers have called this program the best salesclosing tool ever for carpets. Late in the year, the operating company introduced Ultron Z nylon, a fiber with advanced soil-shedding characteristics for easy cleaning. In the fourth quarter, demand and pricing for carpet nylon improved dramatically. U.S. sales of Acrilan acrylic fiber, including U.S. exports, remained strong. Monsanto strengthened its acrylic product line in 1980 with the introduction of two new bicomponent products--Pa-Qel acrylic for the apparel market and Remember acrylic for the handcraft yam market. Acrylic pricing in the United States improved in January, 1981. Left: Carpet pile of new Ullron Z nvlon provides the consumer with the most advanced soilshedding characteris tics for easy cleaning. Center: Monsanto carpet technical service repre sentatives work closely with customers to ensure quality end products. LAM017569 MAR 001450 14 Research and Innovation Fisher Controls products are used broadly throughout the chemical, petrochemical, power, paper, metal processing, and oil and gas industries. ----- Operating Sales Income Fisher control room instrumentation Total Assets provides computer technology to control manufacturing processes. In mid-year, 1980 $593.1 $71.9 $412.8 Fisher introduced PROVOX instrumentation, 1979 1978 496.7 284.2 44.4 353.3 a major new family of digital process control systems. The new instrumentation, which 37.0 202.5 uses microcomputer technology' in 1977 263.5 37.9 181.7 controlling process variables for optimum 1976 210.8 24.3 148.6 production, was demonstrated at international trade exhibitions. Fisher Controls' totals for 1980 and 1979 reflect the opera tions of a neve subsidiary, FisherControls International, Inc , Fisher also introduced a high performance formed be Monsanto and The General Electric Companv pressure controller to its line of pneumatic- Limited of the United Kingdom. Totals lor 1978 and prior vears reflect the operations of Monsanto s then existing vehollv owned subsidiary, Fisher Controls Companv, Inc. instruments, which measure process variables in the field. Fisher's control valve products are used in a wide variety of process control applica isher Controls International, Inc., tions-- from low pressure gases to critical Frecorded strong North American sales of control valves and instrumentation in 1980 despite the economy. New orders service in cryogenic, high temperature, ultra-high pressure, toxic or radioactive fluid systems. and production of industrial process controls Two new control valve lines were were also at record levels in North America. introduced during 1980. High performance Somewhat offsetting U.S. progress were rotary control valves broaden the line of weak European product demand and closure products for general service applications. A of Fisher's Brazilian manufacturing plant new family of high pressure globe-type and three small European facilities. valves was designed for high technology Fisher Controls is a leading supplier of markets, where severe service requires instrumentation equipment and systems, valves that can withstand elevated control valves and regulators. These temperatures, high pressures and erosive flow. FisherControls employs over 10,000 people at 45 manufacturing and service centers in 11 countries. Sales offices staffed by engineers with extensive experience in selecting and applying control products and control technology are located in principal cities of the world. Fisher control valve components are prepared lor assembly. Globe and rotary valves serve the process and energy industries, in service from mild to severe conditions such ascrvogenic, high temperature or high pressure mar 001451 75*70 15 29 International Sales of Saflex interlayer for laminated safety glass reached record levels, with a significant expansion in architectural appli cations. Production of Butvar resin, the prin onsanto International posted another cipal raw material for Saflex, is to be ex M sales record for 1980. Consolidated panded at the Antwerp plant by 45 percent. sales outside of the United States, In the Canada-Latin America area, sales including U.S. exports, were $2,601 billioinncreased by 11 percent to $649 million, and represented 40 percent of Monsanto's generating $79 million in operating income. total net sales. Export sales from U.S. Continued strong U.S. export sales there, manufacturing locations, continuing a significant sales growth in Brazil, and strong contribution to international sales, income from affiliated companies were reached a high of $1.026 billion. major contributors. Consolidated international operating Two new plants completed their first full income, including operating profits from year of operation in Brazil, one producing U.S. exports and the Company's share of net Roundup, Lasso and Machete herbicides, the income from overseas affiliates, was $151 other for Santicizer 160 plasticizer. Monsanto million--a 4 percent decrease from 1979 also plans to build a new polystyrene plant in and equivalent to 67 percent of total cor Brazil, with start-up scheduled for 1982. porate operating profit. In Mexico, the joint venture IRSA, 39 In spite of deteriorating economic con percent owned by Monsanto, continued ditions in major world markets, underlying strong growth. product strengths led to an international The Asia-Pacific area continues to produce sales increase of 10 percent. Major contrib the most rapid growth, with 1980 sales of utors include agricultural chemicals, par $521 million, a 23 percent increase over ticularly Roundup herbicide, increased 1979. Consolidated operating income was exports to Asia-Pacific markets and solid $47 million. growth in Brazil. Significantly expanded U.S. exports to In the Europe-Africa area, sales were Japan, Korea, Singapore, Malaysia and the $ 1.431 billion, a 6 percent increase over 1979. People's Republic of China contributed to Consolidated operating income of $25 the gain in sales. Demand increased for million was negatively affected by a $66 herbicides, chemical intermediates, plastics million pretax charge associated with the and fibers, although profit margins were withdrawal from the Spanish subsidiary, trimmed by escalating raw material and Aiscondel, which eliminates a significant distribution costs. drain on future earnings. In New Zealand, Monsanto Australia Ltd. Demand for herbicides achieved record expanded its manufacturing position by levels in 1980. Deliveries of Roundup herb acquiring a 65 percent interest in Revertex icide from the new fully integrated plant at Industries (NZ) Ltd., a producer of industrial Antwerp began during 1980. resins and chemicals. Agricultural research at the Monsanto laboratory in Louvainla-Neuve, Belgium, is carried out in a regu lated environment with temperature, light and moisture controlled by computer. mar 001452 LAM017571 Research and Innovation Social Responsibility Another vital measure of social responsi bility is a company's attitude toward safety of its employees, customers and communities. Safety in the workplace was emphasized n Mississauga, Ontario, a Monsanto again during 1980, and 140 Monsanto I employee led a local drive to build a locations worldwide were cited by manage special hospital bum center; Ruabon ment for improved safety records. Monsanto's plant management established an emergencysafety record is one of the best in an industry planning program with village officials in that is historically one of the safest in the North Wales; Australian employees taught United States. underprivileged youth in Sydney how to build and repair boats. Environmental and Worker Health In a variety of ways every day, Monsanto During 1980, environmental and health employees reach out to their communities. protection continued to become more and Similarly, the Company itself demonstrates more an integral part of the way the Com social responsibility in its commitment to the pany does business, rather than an extra health, safety and fulfillment of our em ordinary expense. Stewardship for the ployees, to the satisfaction of our customers protection of human health and the environ and the well-being of our home communities. ment is shared by corporate organizations This philosophy takes traditional and dedicated to these purposes and by all of the newer forms of corporate responsibility, the operating, research, and major supporting most visible being contributions. Monsanto staff units. and its philanthropic arm, the Monsanto The 1980 worldwide capital and operating Fund, in 1980 gave a total of more than $7.2 expenditure of about $251 million for health million to health, welfare, educational, and environmental protection was largely cultural, youth and civic or community caused by compliance with laws and regula organizations. That equates to 1.4 percent of tions at all levels of government. Nearly 900 the average annual pre-tax earnings for the employees work full-time to deal with work 1977-1979 period. place and product safety issues. During 1980, the Fund program matched Working with trade associations and other $300,000 in employee contributions to edu companies, Monsanto was able to influence cational and cultural organizations and many proposed laws and regulations to en hospitals. Total contributions by Monsanto sure their prudent effectiveness. Fund and employees to United Wav organi A computerized Medical and Environ zations amounted to more than $4.2 million. mental Health Information (MEHI) system, (The Company will furnish to shareowners brought on-line in 1980, provides data about upon request a report of the contributions materials, workplace exposures, and worker made during 1980 by the Monsanto Fund, medical and employment histories. This listing the names of donees and the amount information--contained in the largest such contributed to each organization.) system in industry--is invaluable in main- Left: An air sampling device is worn by an employee to monitor air quality. Center: A Monsanto Fund grant has been approved for the National Humanities Center in North Carolina, an institute for advanced cu I tural studies. MAR 001453 LAM017572 17 29 taining and documenting workplace safety. Monsanto's commitment to employee Similar large-scale efforts were begun in fulfillment is reflected in an emphasis on 1980 in the areas of waste treatment and dis advancement opportunities for minorities posal, and in auditing environmental protec and females. In 1980, minorities and women tion at plants. Gains were made in activating made up 8.6 percent of Monsanto's manage several major plant antipollution facilities ment employees and 19.6 percent of all and in protecting important products. professional employees. Significantly, In recent years, changes in availability and minorities and women now hold 3.4 percent cost of energy have spurred new efforts on of the top 3,000 jobs in the Company-- energy conservation and more energy- compared to only 0.6 percent in 1976. efficient manufacturing processes. While The Company gave vivid expression to its these are primarily cost-reduction steps, they policy of doing business with minority- also provide a clear benefit for society. owned firms. In 1980 purchases from these The economic downturn of 1980 reduced firms totaled more than $27 million. De production rates at U.S. plants, lowering posits of more than $41 million were main levels of energy efficiency. However, tained in minority-owned banks. During the Monsanto plants worldwide achieved a 21 year, Monsanto signed a contract with the percent reduction in energy consumption, nation's largest minority-owned insurer for compared to the pre-oil embargo base year of the reinsurance of $61 million in coverage. 1972, and saved $141 million in energy costs. An important way employees contribute to The corporation's 1985 goal is a 35 percent the governmental process is through the reduction with projected annual fuel savings Monsanto Citizenship Fund, a voluntary of more than $300 million. political action committee formed in 1976. Difficult business decisions in 1980 brought Contributors to the Fund can ear-mark other challenges to the social aspects of the their contributions to individual political Company's operations. Employee layoffs candidates or allow the contributions com caused by the decision to leave the polyester mittee of the Fund to select the candidates to V< ... filament business activated a Company-wide be supported. A separate Monsanto Florida program to assist affected individuals. The Citizenship Fund has been created by em impact was eased through placement of em ployees in that state, to support Florida state ployees in other jobs within Monsanto where and local candidates. possible, employment counseling services, (More information on the Citizenship Fund and cooperative efforts with state employ is available through the Corporate Govern ment commissions and other employers in mental Affairs Department in St. Louis.) the areas. In some cases, the Company pro Through its concern about employees, and vided educational training where employ its concern for the total environment, ment opportunities redirected an individual's Monsanto strives to reflect a philosophy of career path. Within a month, a large both an economic and social commitment to percentage of the affected employees were the world in which we live. placed in new assignments. Left: Monitoring the workplace environment at Monsanto includes plant noise measure ment. Right: Hollow fiber bundles undergo testing in St. Louis. Research is aimed at further defin ing applications based on proprietary technology. oo1454 18 Research and innovation Commitment to Tomorrow: Research and Innovation Above: A developmental 'liquid crystalline" polymer produces molded parts with grainy structures which resemble wood more than plastic. Left: Hollow fiber re search, at Monsanto's research center in North Carolina, builds on the early success of Prism separators for industrial gases and explores other potential applications. he first employee ever The award carries a $50,000 Thired by Monsanto was prize. The Dr. Charles Allen Dr. Louis Veillon,a Thomas/Dr. Carroll Hochwalt chemist. Eighty years ago he Award, named for former helped plan, engineer and officers and leaders in Mon build the Company's first santo's scientific research, will plant, and established Mon recognize a fundamental con santo as a technology-based tribution in science or engineer company. His successors in ing. It carries a $25,000 prize. 1981 face very different chal lenges, but their work will Today's Research Directions shape the Company 's future no Monsanto's growth and profit less decisively. ability depend in large mea This report reflects our de sure on its technological termination to maintain the options and choices for new R&D momentum that will directions. generate the new products Selectivity is one key to a and processes of that future. successful R&D program: Identify the right targets and Support for Innovation provide the major resources The Company's R&D expendi needed for technological lead tures rose 19 percent in 1979 to ership. Another key is interdis a record $161 million, another ciplinary cooperation: 27 percent in 1980 to $204 mil Chemists must work with lion, and will increase this year biologists, engineers, computer to approximately $230 million. scientists, and many other dis Representative of this com ciplines to ensure that Mon mitment was the 1980 comple santo's technology is "out tion of a new research building front'' in its chosen areas. in St. Louis to house agricul Monsanto has built up suc tural research and the Molec cessful research teams in a ular Biology Center. It repre number of specific areas of sents a 30 percent increase in technology that are crucial research space at the site. today and will be decisive in Monsanto's attitude toward the future. We also have identi innovation includes funding fied a select number of new that emphasizes longer-term fields of technology that offer opportunities, technology ob exceptionally attractive busi jectives designed to encourage ness opportunities. Our tech a spirit of scientific adventure, nological efforts will focus on and the development of attrac four main areas: tive career and incentive plans 1. Traditional areas of for its technical community. strength, such as chemical Recognition is important to engineering systems, catalysis, innovative scientists and engi polymer science and agricul neers. The Company's Fellow tural chemistry. Program, which has evolved 2. New materials and since the late 1940s, recognizes systems, such as electronic the contributions of those who materials and membrane choose scientific and engineer separations. ing careers rather than man 3. Life sciences, including agement positions. plant biology', animal nutri During 1980 Monsanto tion, molecular biology and established two awards to ac biotechnology. knowledge publicly outstand 4. Alternate feedstocks to ing technical achievements of replace oil and gas. employees. The Edgar M. Queeny Award, named lor the former chairman, will be given for the development of signifi MAR 001457 cant, proprietary technology. LAM017576 21 29 Financial Report Traditional Strengths The past year was one of impor tant progress, particularly in support of current products. Proprietary Monsanto tech nology for the manufacture of maleic anhydride uses butane as a feedstock instead of ben zene. Butane is a plentiful co product of natural gas produc tion; it offers advantages in raw material cost and avail ability, and is faced with fewer environmental questions. Support of agricultural products extends worldwide, with a new laboratory in Bra zil nearing completion and the laboratory in Belgium sched uled for expansion. In St. Louis, one focus of corporate research is on new wavs to manufacture existing and future products. Explora tory catalysis research uses the latest equipment includ ing laboratory-scale reactors controlled by microprocessors. Research teams have made extensive use of a novel metal atom reactor which facilitates the design of new catalysts. New Materials and Systems New technologies are being explored in silicon production. We have devised and put in place automated production and have greatly enhanced quality. We are also probing wholly new ways to produce electronic grade silicon. Monsanto's Prism separa tors, which made a commercial debut in 1979, use bundles of hollow fibers to remove hydro gen selectively from process or waste gas streams. Extensions of this technology to other industrial gas separations are under active investigation. New materials research includes work on phenolic foam board products to re spond to fire safety and dimen sional stability concerns. New thermoplastic rubber prod ucts, now in customer testing, appear to offer cost and perfor mance advantages in indus trial rubber applications. n MAR 001458 Above: Fundamental exploration is underwav to determine new wavs to control pests, based on basic science. Left: Monsanto re searchers conduct basicstudies in plant photo synthesis to better understand the pro cesses which contribute to improved crop yields. Right: With cell biologx techniques, researchers seek to modify major plant species in an effort to improve crop vields and qualm. LAM017577 The field of biochemistry-- the chemistry' of living cells-- represents perhaps the most significant new research direction for Monsanto. mar 001459 UXMOV'6'78 23 29 Financial Report Monsanto's growth and profitability depend in large measure on its techno logical options and choices for new directions. Above: Tesi laminates with Saflex are prepared at Monsanto's research laboratory in Belgium. Further growth of auto motive use of Saflex is expected in markets outside the United Slates. Right: At Monsanto Textiles Company's Decatur Technical Center, a technician monitors fiber testing. Left. Process data are recorded at Monsanto s maleic anhydride unit in St. Louis. The new butane prucess is incor porated in a plant under construction in Florida. *** Ol4Sl Life Sciences Agricultural research has provided new proprietary herbicide candidates, which are in tests leading toward commercialization. These new products show excellent poten tial for selective preemergence control of annual and perennial w'eeds in important crops. Studies continue to evaluate possible plant growth regula tor chemicals, which would increase the yield of crops under a wide range of environ mental conditions. In addition, exploratory research is under way on novel ways of decreas ing the impact of pests. We are making efforts to extend our other businesses that relate to food and nutri tion and have greatly in creased research in nutritional chemicals. A major target is enhanced feed efficiency in animals: more meat from less grain in less time at lower cost. The field of biochemistry-- the chemistry of living cells-- represents perhaps the most significant new research direc tion for Monsanto. The next decade will see a major thrust by Monsanto aimed at the development of biological products or products made by biological action. Biochemistry will provide solutions to many of society's problems in areas such as nutrition and health. Possible products include novel animal feed supplements and various means to improve yields of important crops. Work will also involve "bioprocess devel opment"-- including the use of recombinant DNA techniques and fermentation to develop low cost and environmentally attractive methods for pro ducing chemicals. Several projects are already underway. While we have been involved in a range of molecular biology activities in recent years--in cluding recombinant DNA re search through investments in new companies in this field --Monsanto in 1979 lormal- LAM017580 25 29 Financial Report ized commitment to this area bv establishing a Molecular Biology Center. Staffing of this Center is underway to create a major new skill base in molecular biology. This new corporate research thrust is being coordinated with the Company's research ers in Agricultural Products, Chemical Intermediates and Nutrition Chemicals. Alternate Feedstocks Today more than 80 percent of Monsanto's product line depends on hydrocarbons de rived from oil and gas. During the next 20 years, gas produced from coal will become an important feedstock, replacing traditional petrochemicals in many processes. This period of transition to new kinds of raw materials provides attrac tive opportunities to devise new synthetic routes to impor tant chemicals. Monsanto pioneered the use of carbon monoxide as a feedstock in our acetic acid process, which reached commercial produc tion in 1970. Monsanto will build on this skill base in catal ysis and process engineering to create new methods to syn thesize key chemicals from the products of coal gasifica tion and liquefaction. New Opportunities Monsanto's New Ventures Group seeks new opportuni ties outside the chartered areas of the operating companies by I acquisitions. In 1980 Monsanto acquired Radiation Dynamics, the leading producer of electron beam processing equipment. This technology is now used to heat-shrink food wrap, cure MAR 001462 26 tire components and sterilize medical supplies. We believe it has considerable additional potential. In 1980, Monsanto also acquired approximately a 30 percent interest in Collagen Corporation. The company's name comes from collagen, the main protein building block of skin, bone and other tissues. Collagen Corporation has developed proprietary methods of processing and purifying this protein from animals to replace lost or defective tissue in humans. Monsanto purchased a $20 million interest in Biogen, a genetic engineering company. Biogen is known for using re combinant DNA techniques to produce interferon, an anti viral agent. The New Ventures group also oversees Monsanto's ven ture capital effort, which takes investment positions in new areas of technology. In addition, Monsanto has established joint research pro grams with major groups in selected universities. This combination of two great resources--Monsanto skills in applied science and univer sity skills in selected areas of chemistry, chemical engineer ing, physics, biology and medicine--should prove to be a productive partnership. Innovation--the National Climate Monsanto regards innovation as vital not only for the Com pany's future success, but also the economic vitality of entire countries. As an American-based multi national corporation, Mon santo is concerned about the decline in U.S. industrial R&D. Monsanto believes there is an opportunity for a national effort to improve capital in vestment by restructuring U.S. tax policies, and to pro vide greater incentives for R&D by revisions in the patent system. The motivation for under taking costly programs of high-risk R&D is the profit potential inherent in the pro tection afforded by patents. Unfortunately, developments over the last several decades have eroded the traditional rights of patent holders. For example, product regis tration, characterized by lengthy pre-market testing and regulatory' review, has effec tively reduced the patent term well below the 17 years intended. A U.S. Environmen tal Protection Agency study estimates the commercially usable patent term for a new - pesticide may be effectively reduced to about 12 years by the time the product is ap proved for marketing. The in dustry estimates the usable patent life of a new pesticide can be as short as 8 to 10 years. As one step to return the patent system to its position as a major incentive for innova tion, Monsanto believes the term of patent protection for regulated products and their uses should be extended to restore the years of patent life lost in the review process. With steps such as this, the climate for innovation in the United States can be enhanced if there is a complementary impetus for innovation within individual companies. This is the challenge to industrial corporations. Through Monsanto's com mitment to research and its healthy climate for innovation, the Company should be well served in the ninth and tenth decades of its history. Right: Process science research uses this metaJ atom reactor in an exploratory program seeking novel ways to synthesize catalysts. LAM017581 Financial Contents Responsibilities for Financial Data Financial Review Description of the Business Economics of Major Markets Review of the Results of Operations Review of Liquidity and Capital Resources Oil and Gas Reserve Data Financial Statements Summary of Significant Accounting Policies Statement of Consolidated Income Statement of Consolidated Financial Position Statement of Changes in Consolidated Financial Position Statement of Consolidated Shareowners' Equity Notes to Financial Statements Independent Auditors' Opinions Ten-Year Summary 30 31 31 31 33 41 47 50 50 51 52 54 55 56 65 66 oim a 4) VC Left: These solid-state machines accelerate electrons to several mil lion volts. Made by Radiation Dynamics, which became a Monsanto subsidiary in 1980, they are used to irradiate a variety of products. mar 001465 LAM017584 29 Responsibilities for Financial Data Management Report Monsanto Company management is responsible for the integrity of all financial data, whether audited or unaudited, included in this Annual Report. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles consistently applied in all material respects, except where otherwise noted, and reflect necessary estimates by management. Where acceptable alternative accounting principles exist, as described in the Summary of Significant Accounting Policies on page 50, management has used its best judgment in selecting those principles that, in the circumstances, reflect fairly the consolidated financial position, results of operations and changes in financial position of Monsanto. All financial information in this Annual Report is consistent with that in the consolidated financial statements. The management of Monsanto is responsible for establishing and maintaining a system of internal accounting control. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of control procedures. The objectives of a system are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles. Because of inherent limitations in any system of internal accounting control, errors or irregularities may occur and not be detected. Also, projection of any evaluation of the system to future periods is subject to the risk that procedures may become inadequate because of changes in conditions, or that the degree of compliance with the procedures may deteriorate. However, management believes that the continuing viability of Monsanto's internal accounting controls is maintained by: (1) the selection and training of personnel; (2) a division of responsibility in all organizational arrangements; (3) the establishment and communication of accounting and business policies; and (4) a program of internal audits with follow-up, when necessary, by management. Management further believes that Monsanto's internal accounting controls provide reasonable assurance that assets are safeguarded against material loss from unauthorized use or disposition, that transactions are executed with proper authorization and that the financial records are reliable for preparing financial statements and other 30 data and maintaining accountability for assets. As ratified by shareowner vote at the 1980 Annual Meeting, Deloitte Haskins & Sells, an international firm of independent auditors, examined the consolidated financial statements contained in this Annual Report. Their examination was made in accordance with generally accepted auditing standards, which provide for limited tests of the accounting records and other auditing procedures. The principal result of this examination is the expression of an opinion, which appears on page 65, as to the fairness of the presentation of the consolidated financial statements in accordance with generally accepted accounting principles. At management's request, Deloitte Haskins & Sells also performed a study and evaluation of the system of internal accounting control of Monsanto Company and its United States subsidiaries in effect during the year ended December 31, 1980, for the purpose of expressing an opinion, on the system. This opinion is found on page 65. The Audit Committee of the Board of Directors is responsible for reviewing and monitoring Monsanto's internal controls, financial reports and accounting practices. The membership of the Committee consists of four non-employee directors. At periodic meetings, the Committee discusses audit and financial reporting matters with representatives of financial management, the internal audit function and Deloitte Haskins & Sells. The independent auditors and the director of the internal audit function have full and free access to meet with the Audit Committee--with or without the presence of management representatives--to discuss the results of their examinations, the adequacy of internal accounting controls and the quality of financial reporting. John W. Hanley Chairman of the Board and Chief Executive Officer Chairman of the Finance Committee (Chief Financial Officer) February 23,1981 MAR 001466 LAW1017585 financial Review mnBars in millions, exceptper share) MAR 001467 Description of the Business Monsanto Company was incorporated in 1933 under Delaware law and is the successor to a Missouri corporation, Monsanto Chemical Works, organized in 1901 The Company is a multinational corporation engaged directly and through subsidiaries in the manufacture and sale of a widely diversified line of chemicals, plastics, fibers and other products derived principally from petroleum and natural gas, along vvith other raw materials. Monsanto chemicals, plastics and fibers are marketed as raw materials and intermediate products, and also are converted by Monsanto into finished products. Within Monsanto there are five operating units and Fisher Controls International, Inc., a two-thirds owned subsidiary. The five operating units are Monsanto Agricultural Products Company, Monsanto Chemical Intermediates Company, Monsanto Industrial Chemicals Company, Monsanto Plastics & Resins Company, and Monsanto Textiles Company. Certain major chemicals, such as acrylonitrile, styrene monomer, nylon salt, phosphorus and phenol are used by several Monsanto operating units as intermediate "building block" materials. To control process development and reduce manufacturing costs, the Chemical Intermediates Company is responsible for the management of the manufacturing operations related to most of these materials. However, each operating unit that uses the "building block" chemicals in the manufacture of end products is considered as if it were the joint owner of the manufacturing facilities and shares the product manufacturing costs and investments based on its annual production commitment. Each operating unit's share of these costs and investments is reflected as part of its respective financial data. Economics of Major Markets The demand for Monsanto's products comes from many sectors of the economies served by the Company. Monsanto sells little of its product directly to end-users. Generally, the Company supplies materials toother industries which, in turn, manufacture the end products identifiable to the consumer. Monsanto's consolidated sales--as a percentage by end-use industries served--are shown in the following table. Sales Percentage By End-Use Industry Served 1980 1979 1978 Agriculture.................................. Construction & equipment .... Motor vehicles............................ Apparel.......................................... Chemical industry...................... Carpets and home furnishings................................ Pharmaceuticals, soaps & toiletries.................................... Appliances, furniture & fixtures...................................... Packaging...................................... Other.............................................. 17% 13 11 11 8 7 7 5 6 15 100% 14% 14 13 11 7 8 8 5 6 14 100% 15% 13 16 11 4 8 7 6 4 16 100% Because Monsanto supplies materials to a wide variety of industries, the demand for its products is influenced by growth trends in a number of end-use markets. The accompanying charts depict the growth trends in several of these end-use markets in the United States, as well as the trends in U.S. chemical Consumer Spending on Goods billions of 1972 dollars Textile Mill Production vear 1967 = 100 Total New Housing Units millions of units production and industrial production of major world areas of particular interest to Monsanto. World economic growth in 1980 was characterized bv a sharp cyclical downturn experienced in most industrial countries. This recession was due to restrictive economic policies enacted in late 1979 and 1980 to slow down accelerating rates of inflation caused partly by rising energy prices. The basic industries were particularly hard hit reflecting the drop in motor vehicle sales and construction. Several developing countries (e.g., Mexico and Brazil), however, continued to experience relatively strong growth but at the expense of higher rates of inflation. In the U.S., consumer markets of importance to Monsanto weakened significantly, particularly the durable goods sector. Growth in real (inflationadjusted) consumer spending for all goods declined 1.6 percent in 1980--with durable goods spending (automobiles, appliances, etc.) falling 7.5 percent. Real expenditures on nondurables (clothing, drugs, cosmetics, etc.) rose only 0.8 percent, the lowest ad vance since the 1974-75 recession. For 1980, motor vehicles sales--automobiles and trucks--declined 2.7 million units or 18.9 percent from 1979. Record high interest rates, erosion of con sumer purchasing power, and higher operating costs and prices contributed to the deterioration of this market. The situation was exacerbated for U.S. auto mobile producers by the continued growth of market share of ex-U.S. manufacturers offering fuel-efficient cars. However, the emphasis on lighter cars is creat ing new opportunities for lightweight materials, such as plastics. The housing sector, another key market, also experienced a precipitous fall-off in 1980 with conventional and manufactured units down 25 per cent or 500,000 units. The decline can be primarily attributed to record high mortgage and interest rates and reduced savings flows to financial institutions. The underlying demographic and investment factors remain strong, and the housing industry is expected to recover as interest rates recede. The squeeze on consumer income and anxiety concerning interest rates and the recession also contributed to a decline, in real terms, in furniture, appliance and furnishing purchases. However, food and clothing sales rose modestly in 1980 as consumers channeled a larger portion of their discretionary income toward "lower ticket" items. Nonresidential investment (i.e., business construction and equipment) was depressed in 1980, falling 3.4 percent after four solid years of growth. Higher borrowing costs and a deteriorating economy contributed to the decline. This sector of the economy is expected to record strong growth in the 1980's, providing increasing demand for various Monsanto products. As a result of the general weakness in the domestic and export markets and the need to keep inventories lean, textile mill industry production declined 5.5 percent in 1980. Industry-wide chemical and synthetic materials production fell by 5.3 percent-- after four years of strong growth. The agricultural sector is relatively independent of general economic fluctuations and continues to provide strong demand for Monsanto herbicide products. Combined acres planted of com and soybeans (crops historically most important to Monsanto) increased to record levels in 1980. Efforts to improve agricultural production will also continue world-wide, providing a growing market for agricultural chemicals. In areas outside the U. S. of importance to Monsanto, growth generally weakened during 1980, especially in the second and third quarters. These declines were in sharp contrast to strong growth of the prior year. Western European and Canadian industrial production is estimated to have declined 001468 LAM017587 *' fa 1980, while Japan's industrial output rose an estimated 7.5 percent in 1980. Industrial activity accelerated in Brazil, and Mexico continued to benefit from oil wealth. Overall, the 1980 recession can be characterized as a transition year--as governments attempted to control inflation through restrictive economic policies. The world economy is expected to remain relatively weak during early 1981, but to resume growth to a more stable path in the latter half of the year. Review of the Results of Operations The following discussion reviews Monsanto's results ofoperations for 1980 vs. 1979 and 1979 vs. 1978. A discussion of the effects of inflation on Monsanto begins on page 43. Consolidated Sales, Net Income and Earnings per Share ,,s0 ,,,, 1978 Net sales........................................ Net income.................................. Earnings per share: Primary.................................... Fully diluted............................ $6,573.6 $6,192.6 $5,018.7 148.8 331.0 302.6 4.10 4.06 9.11 9.03 8.29 8.21 1980 vs. 1979. Sales for 1980 reached $6,574 billion, a 6.2 percent increase over 1979. This increase was principally driven by higher selling prices, as physical volumes for 1980 declined 5.6 percent from 1979 levels. Recessionary factors in the U.S. and in Europe were the primary reasons for the decline in sales volumes. Declining demand from two of Monsanto's largest customer industries--automotive and hous ing--impacted the results of Monsanto's petrochem icals, industrial chemicals, plastics and man-made fibers businesses. In contrast, 1980 volume gains were recorded from agricultural products and the Fisher Controls subsidiary. Net income for 1980 was $148.8 million compared with net income of $331.0 million for 1979. The lower net income reflected the sensitivity of chemical industry profits to physical volumes. In addition, two major unusual factors occurring in the fourth quarter of 1980 significantly impacted the decline. The Company decided to terminate all of its interests in Aiscondel, S. A., a two-thirds vned Spanish plas tics subsidiary. This decision resulted in a charge of $38.7 million or a penal tv of $1.07 per primary'share. The Company also withdrew from the polyester fila ment business, incurring a charge of $69.0 million, $1.90 per primary share. Both Aiscondel, S. A., and the polyester filament business have experienced losses from operations in recent years. Prior to these unusual factors, Monsanto's earnings for 1980 would have been $7.07 per primary share, a decline of 33.2 percent from 1979 earnings of $10.58 per primary share as adjusted for writeoffs of $ 1.47 per primary share from the withdrawal from Euro pean nylon operations and certain ex-U.S. plastics businesses in that year. The disappointing results for 1980 were due in large part to recessionary conditions in the U.S. and Europe. In response to these conditions, and beginning early in 1980, Monsanto launched a program to improve profitability and to conserve working capital. While this program was successful overall, it did have the effect of reducing earnings as the Company absorbed idle capacity costs significantly higher in 1980 than had been ex perienced in 1979. In addition, the chemical industry in general, and Monsanto in particular, was unable to raise prices sufficiently to offset higher raw material and other costs. Gross profit margins declined from 22.1 percent in 1979 to 19.6 percent in 1980, excluding the unusual factors for both years discussed above. A change in accounting for interest costs--as required by a new Financial Accounting Standards Board Statement--had a positive effect ori 1980 profitability. In 1979 and prior years, all interest Net Sales Net Income MAR 001469 33 costs were charged to expense as incurred. In 1980, Monsanto capitalized $51.6 million of interest costs that relate to financing construction-in-progress expenditures. As a result, net income was increased $27.5 million, or $0.76 per primary share. The required capitalization of interest costs moderated the earnings impact of a significant increase in interest costs incurred--from $123.3 million in 1979 to $163.4 million in 1980. These costs were driven principally bv the issuance of commercial paper, the relatively high interest rates in 1980 and additional financing costs associated with the Aiscondel, S. A. subsidiary. Analysis of Change in Primary Earnings per Share Increase (Decrease) in Primary Earnings per Share 1980 1979 vs. 1979 vs. 1978 Operating Income: Selling prices .................................... Sales volume and product mix .... Raw material prices ........................ Other manufacturing costs ............ Shutdown costs.................................. Start-up costs .................................... Nonmanufacturing expenses ........ Decrease in operating income ........................................ Other Causes: Interest costs incurred...................... Interest costs capitalized................ Other income credits--net ............ Effective tax rate ............................. Shares outstanding.......................... Increase from other causes.......... Net increase (decrease)............ $13.86 (3.85) (5.27) (5.87) (1.50) (0.46) (2.15) $ 9.18 3.15 (8.02) (2.74) (1.67) (0.10) (1.88) $(5.24) $(2.08) $ (0.54) 0.76 (0.19) 0.20 -- $ 0.23 $(5.01) $(0.30) -- 1.01 2.15 0.04 $ 2.90 $ 0.82 Other nonoperating factors influence a comparison of 1980 results with the prior year's. Interest income in 1980 was $36.4 million, down sharply from $63.6 million of interest income in 1979. In 1980, there were foreign currency translation and transaction gains of $1.2 million, net of taxes, as compared with losses of $32.1 million, net of taxes, in 1979. The effective tax rate was 27.7 percent for 1980 as contrasted to 31.2 percent for 1979, primarily reflecting higher invest ment tax credits. 1979 vs. 1978. For 1979, Monsanto's consolidated sales were $6,193 billion--a 23.4 percent increase over 1978 sales of $5,019 billion. The revenue gain includes the first full-year results of two partially owned subsidiaries--Aiscondel, S. A., and Fisher Controls International, Inc. Adjusting for these factors, the year-to-year sales gain was approximately 19 percent and was almost evenly split between higher sales volume and increased selling prices. Net income for 1979--$331.0 million--was the second highest in the history of the Company and represented a nine percent year-to-year improvement. While improved sales volumes and higher year-to-year selling prices helped to offset some part of higher raw material and conversion costs, two important contributors to the level of net income were a higher level of interest income ($63.6 million in 1979 versus $35.6 in 1978, pretax) and a substantially lower effective tax rate for 1979. The gross profit margin was 20.4 percent in 1979 vs. 25.4 percent in 1978. For 1979, Monsanto's profit ability was affected severely by the absorption of costs associated with the closing of some of its un profitable businesses and the restructuring of others. The shutdown costs of Monsanto's European nylon operations and certain ex-U.S. plastics businesses resulted in 1979 pretax charges of $105.1 million-- equal to $ 1.47 per primary share on an after tax basis In 1978, the sale of the Company's high density poly- Net Income--Percent of Sales Net Income--Percent of Average Shareowners' Equity 34 LAM017589 %thylene business resulted in a $10.1 million pretax gain. The lower effective tax rate for 1979 (31.2 percent) as compared to 1978 (47.5 percent) reflects a lower U S. statutory rate, significantly higher credits from domestic international sales corporations, decreased losses ofex-U.S. subsidiaries for which no tax benefits are available and a reversal of $ 16.8 million of deferred income taxes due to a change in U.K. tax laws for stock relief. Raw Materials and Energy 1980 1979 1978 Purchased raw material ................... purchased energy ... . $2,459.0 $2,345.2 531.4 484.7 $1,538.4 375.2 Purchased raw material prices advanced approxi mately 25 percent in 1980, following an approximate 30 percent increase in the prior year. Feedstocks--crude oil and refined products--are a very significant area of purchases by Monsanto. These feedstocks have, in recent years, been subject to considerable price escalation due to world political and market conditions. Decontrol of domestic crude oil prices and continued increases in foreign crude oil prices will result in higher costs for these feedstocks. In 1980, to improve its petrochemical raw material position, Monsanto started up a new ethylene and co-products facility jointly owned with Conoco, Inc. The joint venture also provides for a complementary crude oil processing unit, starting up in early 1981, to provide feedstock to the new ethylene and co-products facility. In addition, Monsanto engages in oil and gas exploration activities, which primarily support the feedstock supply program of the Company (see Oil and Gas Reserve Data on page 47). Purchased energy prices increased 9.6 percent in 1980 over 1979 and 29.2 percent in 1979 over 1978. Such price increases for energy reflect many of the same economic and political conditions which affect raw material prices. Research and Development 1980 1979 1978 Research and development costs......... As a percent of sales ......... $204.4 3.1% $161.3 2.6% $135.9 2.7% Research and development costs increased 26.7 per cent in 1980 as compared to 1979 and 18.7 percent in 1979 as compared to 1978. A continuing commitment to generate new products and processes, and particu larly intensive agricultural products and electronic materials programs account for these increases. Sup plementing this substantial commitment to research funding were three investments in high technology companies in 1980. In February, the Company acquired all of the common stock of Radiation Dynamics, Inc., a company involved principally in the manufacture and sale of high-voltage electron accel erators and in developing irradiation processes and irradiated products. In July, the Company purchased a minority interest in Collagen Corporation, a devel oper of patented and proprietary' methods of process ing and purifying collagen (a protein that is the building block of skin, bone, tendon, and other tissue) from animal sources into products which can be im planted in the human body to replace lost or defective tissue. In October, the Company acquired an equity interest in Biogen, S. A., a company based in Switzer land engaged in the field of molecular biology and recombinant DNA research. These three investments totaled some $57 million. Earnings per Share MAR 001471 Dividends per Share 76 77 78 79 80 76 77 78 79 80 LAM017590 35 The table below sets forth the dollar amount and percentage of Monsanto's consolidated net sales contributed by each operating company and Fisher Controls and each product group during the last three years. Sales by Product Group Agricultural Products: Herbicides, insecticides & other products........................................ Chemical Intermediates: Petrochemicals....................................... Process chemicals ................................ Oil & gas production and exploration ............................................ Industrial Chemicals: Detergents & phosphates.............. Specialty and nutrition chemicals...................................... Rubber chemicals ............................ Plasticizers ...................................... Electronic materials and chemical & environmental systems ........ Plastics & Resins: Plastic materials ............................ Resin products................................ Fabricated products ...................... Textiles: Man-made fibers ............................ Fisher Controls: Valves, regulators & electronic process controls.......................... Total consolidated.................. 1980 $1,012.3 643.5 196.8 125.4 965.7 405.3 385.1 298.5 299.4 189.3 1,577.6 793.2 378.2 212.4 1,383.8 1,041.1 15.4% 9.8 3.0 1.9 14.7 6.2 5.9 4.5 4.5 2.9 24.0 12.1 5.8 3.2 21.1 15.8 593.1 $6,573.6 9.0 100.0% 1979 $ 839.9 585.1 192.1 81.4 858.6 399.9 353.8 292.5 278.2 189.4 1,513.8 799.2 404.7 210.3 1,414.2 1,069.4 13.6% 9.4 3.1 1.3 13.8 6.5 5.7 4.7 4.5 3.1 24.5 . 12.9 6.5 3.4 22.8 17.3 496.7 $6,192.6 8.0 100.0% 1978 $ 734.4 288.4 160.9 73.9 523.2 348.5 324.1 255.6 228.1 133.8 1,290.1 661.1 355.2 207.3 1,223.6 963.2 14.6% 5.7 3.2 1.5 10.4 6.9 6.5 5.1 4.5 2.7 25.7 13.2 7.1 4.1 24.4 19.2 284.2 $5,018.7 5.7 100.0% Research and Development Expenditures $250 Research and Development Expenditures--Percent of Sales 76 77 78 79 80 36 LAM017591 Foreig*1 Currency 1980 1979 1978 Qain (loss) from: Foreign currency transactions and translation of ex-U. S. subsidiaries' financial statements ........................... Translation of ex- U. S. affiliated companies' financial statements .... Forward exchange contracts ............................... gefore-tax gains (losses) -----Related income taxes............... After-tax gains (losses)............ per primary share...................... $ 15.5 (17.5) 13.5 11.5 10.3 $ 1.2 $ 0.03 $(35.8) 2.3 6.6 (26.9) 5.2 $(32.1) $(0.88) $(27.7) (14.1) 13.5 (28.3) 4.2 $(32.5) $(0.89) Of the total gain (loss) on foreign currency transactions and translation of ex-U.S. subsidiaries' financial statements, losses of $2.7 million, $22.3 million, and $5.9 million were classified in cost of goods sold in 1980-1978, respectively. The remaining pretax gain (loss) on foreign currency of $14.2 million, $(4.6) million, and $(22.4) million for 1980-1978, respectively, is reflected in other income-net. For 1980, hedging gains were larger and revaluation losses were smaller than in 1979. The higher hedging gains in 1980 were attributable to the strong appreciation in both the Japanese yen and the United Kingdom pound over the course of the year, and the fact that these are the two currencies in which hedging was maintained at a relatively high level. The smaller revaluation losses were attributable to the general weakness of the Continental European currencies, where the Company has significant net liability exposures, and the early 1980 restructuring of financing in the Company's major Brazilian subsidiary. In 1979, after-tax foreign currency losses of $32.1 million were experienced. A significant amount of 1979's losses was generated by the devaluation of the Brazilian cruzeiro. Foreign currency losses of $32.5 million for 1978 do not reflect a full year's impact of hedging, since the program vyas begun in the latter part of that year. As the U.S. dollar generally devalued' against other major currencies in 1978, the unhedged impact is reflected in that year's after-tax losses. Financial Accounting Standards Board Statement No. 8 (FAS No. 8) requires that working capital items Quarterly Foreign Currency Gains (Losses) 1980 After Taxes Per Primary Share First quarter..................................................................... $ 5.9 Second quarter............................................................... (12.8) Third quarter........................................................................... 5.3 Fourth quarter......................................................................... 2.8 $ 0.16 (0.35) 0.15 0.07 Total year..................................................................... $ 1.2 $ 0.03 1979 After Taxes $ 6.4 (10.4) (17.4) (10.7) $(32.1) Per Primary Share $ 0.18 (0.29) (0.48) (0.29) $(0.88) 1978 After Taxes $(12.8) (2.7) (12.5) (4.5) $(32.5) Per Primary Share $(0.35) (0.07) (0.35) (0.12) $(0.89) Capital Expenditures - --- 1$850 Depreciation Expense MAR 001473 76 77 78 79 80 37 (except inventory) and long-term debt--when denominated in foreign currencies--are to be translated at current exchange rates. The net balance sheet amounts translated at the current rates of exchange determine the level of translation gains or losses that are charged immediately to earnings. In Monsanto's case, except in a limited number of countries, these net balance sheet amounts represent a net liabilitv exposure. The Company has consistently maintained that translation gains or losses resulting from the FAS No. 8 rules are unrealized and may never be realized. The reflection of these unrealized gains or losses in reported earnings can cause large fluctuations which obscure the underlying results of operation. Furthermore, because inventory and property, plant and equipment are translated at historical rates under FAS No. 8, the gains or losses included in earnings were--in direction and magnitude--different from what many perceived to be the economic effect of the change in currency rates. The Financial Accounting Standards Board (FASB) has now proposed foreign currency translation rules that Monsanto believes to be, in general, superior to the existing FAS No. 8 rules. Linder the FASB's proposal, virtually all assets and liabilities would be translated at the current rate. Furthermore, translation gains or losses would be deferred in a shareowners' equity account until realized. Under these proposed rules--which are not yet effective and will not likely be finalized for implementation in 1981, if ever--Monsanto would generally be in a net exposed asset position as compared with the generally net exposed liability position under FAS No. 8. Had these proposed rules been in place for 1980-1978, the Company would not have reported foreign currency translation losses or gains in those years and its forward exchange contracts position might have been significantly different. Quarterly Results Net Sales Cost of Goods Net Sold Income Earnings per Common Share Fully Primary Diluted 1980: First quarter... Second quarter... Third quarter... Fourth quarter... Total year $1,822.5 1,548.6 1,538.7 1,663.8 $6,573.6 $1,330.4 1,281.7 1,308.8 1,555.1 $5,476.0 $16422 23.2 29.6 (68.2) $148.8 $ 4.53 0.64 0.81 (1.88) $ 4.10 $ 4.49 0.64 0.81 (1.88 $ 4.06 1979: First quarter.. . Second quarter... Third quarter... Fourth quarter... Total year $1,623.8 1,526.8 1,496.7 1,545.3 $6,192.6 $1,153.7 1,264.9 1,178.4 1,335.0 $4,932.0 $161.8 59.5 98.9 10.8 $331.0 $4.44 1.64 2.73 0.30 $9.11 $4.40 1.63 2.70 0.30 $9.03 1978: First quarter... Second quarter... Third quarter... Fourth quarter... Total year $1,342.7 1,185.0 1,187.0 1,304.0 $5,018.7 $ 903.4 885.1 918.5 1,036.6 $3,743.6 $135.7 76.1 46.8 44.0 $302.6 $3.71 2.09 1.28 1.21 $8.29 $3.67 2.07 1.27 1.2C $8.21 Monsanto's quarterly consolidated sales typically exhibit the seasonality of the agricultural products segment of the Company's business. Agricultural Raw Material Cost Index 1972 = 100 Selling Price Index 1972 = 100 400 300 250 200 LAW1017593 38 I products accounted for 15.4 percent, 13.6 percent / and 14.6 percent of consolidated sales in 1980-1978, respectively. Of the total agricultural products sales, 38.9 percent, 44.0 percent and 48.1 percent were concentrated in the first quarter of 1980-1978, respectively. In addition to this seasonal factor, 1980's last three quarters' sales, while slightly higher than the comparable quarters of the prior year because of selling price increases, were nevertheless de pressed by the lower volumes resulting from the recession. The sales for 1979, as contrasted with the comparable 1978 quarters, exhibited strong second and third quarter performances. This performance was due to accelerated customer purchases in anticipation of price increases from rapidly rising costs of raw materials in that year. The fourth quarter 1979 sales, however, began to exhibit the softening of customer demand that carried into and depressed sales volume for 1980. Net income is even more seasonally affected by the agricultural products segment of the Company's business because of the relatively greater profitability of this operating unit. Agricultural products accounted for 190.7 percent, 67.5 percent, and 48.1 percent of consolidated operating income for 19801978, respectively. Following its sales pattern, agri cultural products' operating income is heavily concentrated in the first quarter. Of the total agricul tural products operating income for the year, 42.3 percent, 52.3 percent and 55.6 percent was reported in the first quarter of 1980-1978, respectively. Beyond the seasonal factor, 1980's quarterly net income pattern reflects the effects of the recession, most notably in the second and third quarters as compared to the prior year. The second and, particu larly, the third quarter of 1980 also include higher idle plant costs incurred to control inventory levels during these difficult periods. In contrast, the second and third quarters for 1979, compared to 1978, reflect the earnings impact of significant sales gains result ing from strong volume in those quarters. As mentioned in the sales discussion above, 1979's fourth quarter results were impacted by decreased demand. Unusual factors also affecting the 1980 vs. 1979 and 1979 vs. 1978 comparison of quarterly operating results are indicated in the table below. Unusual Items, by Quarter 1980 Increase (Decrease) in Net Earnings Primary EPS 1979 Increase (Decrease) in Net Earnings Primary EPS 1978 Increase (Decrease) in Net Primary Earnings EPS First Quarter: Capitalized interest .................................... Second Quarter: Capitalized interest .................................... Europe nylon operations shutdown cost.......................................... Third Quarter: Capitalized interest .................................... Reversal of prior periods' income taxes.............................. Gain on sale of high-densitv polvethvlene business............................ Fourth Quarter: Capitalized interest .................................... Changes in accounting estimates-- LIFO provision.............. ....................... Effective tax rate.................................. Aiscondel withdrawal and closing costs . Polvester filament withdrawal and closing costs...................................... $ 4.9 5.3 $0.14 0.14 8.3 0.23 14.9 0.41 9.0 0.25 (38.7) (69.0) (1.07) (1.90) $$ (42.7) (1.18) 16.8 0.46 (8.1) 12.3 (10.5) (0.22) 0.34 (0.29) $$ 7.1 0.20 The 1980 third quarter reversal of prior periods' income taxes reflects a change in accounting estimate of the effective tax rate, which amount principally relates to the first quarter. The 1979 third quarter reversal of prior periods' income taxes is the effect of a change in U.K. tax laws. Changes in accounting estimates for the LIFO provision and the effective tax rate in the fourth quarter of 1979 were not significant to any other quarter of that year. MAR 001475 LAM017594 39 Common Stock Data 1980 Dividends per Common Share First quarter.................... Second quarter.............. Third quarter.................. Fourth quarter................ Total year.................... Dividend Payout Percentage $0.85 0.90 0.90 0.90 $3.55 86.6% 1980 Common Stock Prices: First quarter.................... Second quarter.............. Third quarter.................. Fourth quarter................ High $623/< 54 % 59 Vi 70 V* Low $46 Vi 42*4 50 Vi 50 Vi Shareowners' Equity Per Common Share........ Number of Common Shareowners.................. 1980 $77.63 82,441 1979 $0.80 0.85 0.85 0.85 $3.35 36.8% 1979 High Low $52 Vi 545/ 60% 62 $45 46% 49% 53 1979 $77.20 85,608 The Company has paid dividends on its common shares--without interruption or reduction--since 1928. The dividend is paid quarterly and has been increased in each of the past eight years. Due to the depressed level of earnings, the dividend payout percentage jumped in 1980. In 1979, the dividend payout percentage was more indicative of dividend payouts in recent years, although the Company's dividend policies are not tied to a set payout percentage. Pension Plans' Funding Status 1980 Actuarial present value of accumulated plan benefits: Vested.......................................................... Nonvested.................. ,........................... Total........................................................ Net assets available for benefits.................... Excess of assets.................................................. $ 775.' 114.* 890.: 1,260..' $ 370.! The number of common shareowners as of February 23,1981, was 81,003. Monsanto's common stock is traded principally on the New York Stock Exchange. Other than in connection with small acquisitions in 1974 and 1975, the Company has not had a public offering of common shares in recent history. Again, generally in connection with acquisitions, the Company last issued convertible securities in the 1969-1974 period. Currently, Monsanto has convertible preferred stock, convertible debentures and convertible loan stock outstanding. In addition, common shares are regularly issued under employee stock option plans. The total common shares reserved for convertible securities and stock option plans was 2,821,625 at December 31, 1980. A treasury stock acquisition program is in place to mitigate the dilutive effect of the issuance of common shares under stock option plans and outstanding convertible securities. However, certain financial criteria permitting purchases under the program were not met in 1980 and, accordingly, no treasury shares were acquired under it. Also, the Company has an employee stock purchase program whose requirements are immediately funded with the purchase of treasury shares. 1979 Actuarial present value of accumulated plan benefits: Vested......................................................... Nonvested ................................................. Total ........................................................ Net assets available for benefits.................... Excess of assets.................................................. $ 863.! 28.1 892.! 957.i $ 65.i Monsanto provides pension benefits for substantially all of its employees. The funding of these obligations represents a significant future commitment by the Company. Pension expense for 1980-1978 was $97.7 million, $92.3 million and $84.2 million, respectively, and represents 7.2 percent, 7.5 percent and 8.0 per cent, respectively, of salaries and wages for those years. The above tables for 1980 and 1979 reflect the com bined funding status for U. S. and ex-U.S. pension plans representing 96 percent and 97 percent, respec tively, of pension expense. This accumulated benefits information was determined in accordance with the requirements of FASB Statement No. 36, "Disclosure of Pension Information." Under these requirements, it is not permissible to use a salary increase assump tion. Accordingly, the accumulated benefits in the above table represent vested and nonvested benefits that have been accrued based on employee service and earnings to date. The plans' assets in the table are stated at market values determined at the end of each respective period. MAR 001476 LAM017595 40 Annual valuations of the major pension plans are made by an outside firm of actuaries to determine funding requirements and pension expense. The "entry age normal'' actuarial method is used. In 1980, i jjl actuarial assumptions were reviewed and most > Were changed to some extent. The key actuarial i: assumptions used in 1980 for the largest domestic plans include an annual average investment return on pension assets of 7.5 percent (7.0 percent in 1979) and an average salary increase, when applicable, of6.5 percent (6.0 percent in 1979). In 1980, Monsanto in creased the contribution to one major pension plan to ? the maximum deductible amount for tax purposes. _ The net impact of the changes in the major domestic pension plans' assumptions and funding was to de crease pension expense for these plans by $ 1.0 million. In addition, these changes resulted in an increase in 1980 actuarial present value of nonvested accumulated plan benefits, and a corresponding de crease in vested benefits, of approximately $83 millionThe plans' status and assumptions are reviewed regularly by the Company's outside actuaries and the pension and Savings Funds Committee of the Board of Directors. The Company believes that the methods and assumptions used, in the aggregate, are reasonable for the purpose of determining the annual pension funding requirements and pension expense. In the actuarial valuation process, an actuary calculates the present value of prospective benefits to estimate the amount of funds needed to provide benefits in future years to all employees then covered by a pension plan. There are various actuarial methods to budget the present value of prospective benefits that are to be financed. Some methods do not develop unfunded prior service costs (sometimes referred to as "unfunded actuarial liability"). The actuarial method used by the Company--"entry age normal"--tends to develop relatively large unfunded prior service costs and is followed because it levels out pension costs as a percent of future payroll. Unfunded prior service costs are generally amortized over 10-30 year periods. Monsanto believes that the funding of its pension plans is financially sound. Subsequent to December 31,1980, the Company approved an increase in the benefits under certain major domestic plans. These increases will result in higher pension expense and greater accumulated benefits in future years. Review of Liquidity and Capital Resources The following discussion reviews Monsanto's ability to generate cash and describes its principal capital resources. Cash Flow Statement 1980 1979 1978 Sources of cash: Income before income taxes $ 205.7 $ 481.1 $ 576.3 Depreciation and obsolescence.................... 546.9 412.7 288.3 Current provision for income taxes.................... (24.2) (167.2) (197.2) Cash provided by operations........................ 728.4 726.6 667.4 Outside financing: Long-term (including $225.0 of commercial paper in 1980).................. Net short-term.................... 266.3 5.7 55.4 20.3 284.9 79.1 1,000.4 802.3 1,031.4 Requirements for cash: Capital expenditures.............. Dividend payments................ Debt reduction........................ Net change in working capital, excluding cash and short-term debt.................. Other--net .............................. 780.5 128.4 59.2 565.9 121.2 93.3 479.9 115.4 133.2 (29.9) 122.9 123.6 (25.4) 56.8 96.8 1,061.1 878.6 882.1 Increase(decrease) in cash .... Cash at beginning of vear.......... (60.7) 271.3 (76.3) 347.6 149.3 198.3 Cash at end of vear...................... $ 210.6 $ 271.3 $ 347.6 In the above table, cash is defined to include time deposits, certificates of deposit and short-term marketable securities. Cash provided by operations increased slightly in 1980 as compared to 1979, despite the decline in results of operations, principally reflecting significant 1980 non-cash write-offs for Aiscondel, S.A. and the polyester filament business. Cash provided in 1979 increased over 1978, reflecting the effects of non-cash write-offs in 1979 for European nylon operations and ex-U.S. plastics businesses. While cash is generated by operations throughout the year, significant receipts from agricultural product sales are concen trated in the first quarter. Tax and dividend payments are made quarterly during the year. For 1980-1978, the cash generated by operations has significantly exceeded debt reduction and dividend requirements. MAR 001477 LAM017596 41 Long-Term Liquidity and Capital Resource Measures 1980 1979 1978 Capital expenditures for the year.................................. .. Total commitments for uncompleted property additions at year-end.......... .. Long-term debt at year-end .. .. Long-term debt-tocapitalization ratio.............. Interest coverage (times)........ $ 780.5 $ 138.2 $1,370.5 32.8% 1.9 $ 565.9 $ 191.6 $1,202.5 30.2% 4.9 $ 479.9 $ 146.2 $1,223.5 32.2% 6.6 The interest coverage (times) shown in the above table excludes the effect of capitalized interest in 1980. Capital expenditures for 1980, excluding $51.6 million of capitalized interest, were 28.8 percent higher than in 1979; expenditures in 1979 were 17.9 percent higher than 1978. Expenditures for capital equipment have typically been financed by a combi nation of cash provided from operations and long term debt. In 1980, no major long-term financing was made for the current capital expenditure program, but rather commercial paper was used as a bridge to what the Company hopes will be a more attractive long-term debt market in 1981. The long-term debtto-capitalization ratio increased in 1980 compared to 1979, reflecting the issuance of commercial paper expected to be refinanced on a long-term basis. Over the long term, the Company expects its long-term debt-to-capitalization ratio to approximate the current level. The decline in interest coverage ratio in 1980 reflects significant non-recurring charges, recession depressed earnings and sharply increased interest costs, including higher bank loans of Aiscondel, S. A. The Company has made extensive use of pollution control and industrial development bond financing when the project qualifies. Because of the tax-free nature of these obligations, the associated interest rates are quite favorable. Total outstanding pollution control and industrial development bond obligations at December 31,1980, were $184.4 million. While the Company will continue to pursue this form of financing when available in the future, the individual issues have generally not exceeded $10 million in the past and the average offering has been substantially smaller. In addition to the use of long-term debt, the Company has occasionally used other forms of financing, principally lease arrangements and joint venture arrangements involving take-or-pay contracts. These alternative forms of financing are used when the effective interest cost is attractive or the nature of the capital project requires their use. Frequently, such arrangements are "off balance sheet" under existing generally accepted accounting principles. While not reflected in the above table's ratios, the Company does consider these arrangements as part of its total debt capacity. The Company will continue to use lease, joint venture and other innovative financing arrangements in the future as appropriate, but the extent of their use in the Company's overall financial structure is impossible to predict. Substantially all of the assets reflected in Monsanto's financial statements are free from lien and are not used to collateralize debt. Accordingly, these assets represent a source of additional debt capacity. The Company has no present plans to pursue this source of debt financing. In addition, covenants of various existing debt agreements restrict, to some extent, the incurrence of debt through the encumbrance of Monsanto's assets. Monsanto is involved in oil and gas exploration activities and owns reserves whose current value is not reflected in the accompanying financial statements. See "Oil and Gas Reserve Data" on page 47. Because crude oil is important to the chemical industry as feedstock, Monsanto intends to increase its oil and gas exploration activities in the future. The Company's proved reserves represent a valuable asset that could be used to increase its total debt capacity. Short-Term Liquidity and Capital Resource Measures 1980 1979 1978 Working capital...................... Current ratio............................ Short-term debt...................... $1,226.4 $1,322.7 2.1:1 2.2:1 $ 238.8 $ 233.1 $1,295.7 2.5:1 $ 212.8 The Company's working capital level has remained high, although the current ratio has decreased somewhat in recent years. Management believes that a working capital ratio of approximately 2:1 is desirable. The higher ratios of prior years reflect a temporary excess cash position because the Company pre-borrowed funds for capital expansion at attractive long-term rates. Early in 1980, working capital needs were affected by the recession, requiring higher than expected short-term financing. The Company moved quickly as the recession developed, however, to control inventory levels and postpone, when appropriate, capital expenditures to conserve cash. As the year progressed, however, the actions to control inventory and postpone some capital expenditures could not totally offset the on-going needs of the Company, resulting in a somewhat diminished level of working capital at the end of 1980. During 1980, the Company began raising funds in the commercial paper market. These funds were generally available at rates below the rates on the Company's lines of credit. Because the Company intends to refinance a major portion of the commercial paper borrowings on a long-term basis, and has the ability to do so under existing revolving 001478 42 LAM017597 credit agreements, $225.0 million of commercial paper outstanding at December 31,1980, is classified as long-term debt. The Company has available $400.0 million of exist ing domestic revolving credit, $200.0 million of Euro currency revolving credit and $457.1 million through ex-U.S. subsidiaries' short-term facilities. Only $141.3 million under these existing credit arrange ments was utilized at December 31,1980, all of which related to short-term facilities of ex-U.S. subsidiaries. Commercial paper and short-term lines of credit are intended to be used by the Company to finance seasonal working capital needs and to provide "bridge" financing until more attractive rates prevail in long-term debt markets. Supplemental Financial Data Adjusted for the Effects of Changing Prices Historical Cost Adjusted Adjusted for for General Changes in Inflation Current Costs (In Average 1980 Dollars) Net sales........................ Cost of goods sold, excluding depreciation and depletion.................. Depreciation and depletion expense . . Marketing, administrative and technological expense...................... Other expense and income -- net............ Income taxes................ Net income (loss) from operations................ Income (loss) from operations per primary share.......... Cain from decline in purchasing power of net amounts owed.......... $6,573.6 5,149.0 327.0 887.4 4.5 56.9 $ 148.8 $ 4.10 $6,573.6 5,216.3 478.3 887.4 4.5 56.9 $ (69.8) $ (1.93) $ 134.4 $6,573.6 5,161.5 493.9 887.4 4.5 56.9 $ (30.6) $ (0.85) $ 134.4 Vlonsanto's financial statements appearing in the Annual Report outside of this section are prepared in iccordance with generally accepted accounting prin:iples, which include the concept of historical cost. Jnder this concept, inventory and property generally ire reported at the amounts originally paid and do lot reflect subsequent changes in (1) the general mrchasing power of the dollar, (2) the current cost of eplacing the asset, or (3) the amount for which the isset could be sold--its market value. The Financial Accounting Standards Board issued statement of Financial Accounting Standards No. 33 FAS No. 33), entitled "Financial Reporting and -hanging Prices," which requires the disclosure in he above table of selected data under two different sets of assumptions. One set of data--the "constant dollar" disclosures--reflects the adjustment of the historical cost financial statements for changes in the general purchasing power of the dollar. The second set of data--the "current cost" disclosures--reflects adjustments based on estimates of the current cost to replace, in kind, existing assets. The current cost data attempt to measure the impact of price changes which are specific to Monsanto. Only the following specific items are adjusted in the current year under the constant dollar and current cost disclosures: inventories; property, plant and equipment; cost of goods sold; and depreciation and depletion expense. Income tax provisions are not adjusted for the inflation effects. Monsanto generally believes that the current cost method best reflects some impacts of inflation. However, in most years the difference between the current cost and constant dollar methods will not be significant, particularly given the subjective estimates involved in making these computations. In a period of inflation, the result is the same--historical cost earnings overstate the ability of most manufacturing companies to generate cash flow for the growth of the business and the growth of dividends in a "real" sense. Inflation must first be "financed" from historical cost earnings by increased expenditures to replace worn out and obsolete facilities. While these facilities will not be replaced in their current form as the computational methods of the data suggest--technological advances will be incorporated as replacement occurs and some facilities will never be replaced--nevertheless, the impact reflected in the FAS No. 33 data is a useful approximation of some inflation effects. However, impacts from inflation can be mitigated by management actions and, from the shareowners' perspective, through the existence of debt. Recognizing the impact of rising costs in selling prices is frequently mentioned as one way management responds to inflation. Cyclical over-capacity in the chemical industry, aggravated by the recent recession, allowed Monsanto to pass along only a portion of the higher costs in selling prices as the market for many products will not currently support full cost pass-through. Accordingly, to maintain profitability in an inflationary environment, the Company continually searches for ways to reduce costs. Improved technology, increased productivity and programs such as the Company's successful energy conservation efforts allow Monsanto to remain competitive from a selling price standpoint, while mitigating some of the impact of rising costs. In addition, the Company is constantly reviewing its businesses to determine those whose long-term economics will not justify continued investment. Monsanto has disposed of several such businesses in recent years. To the extent that creditors also bear some of the impact of inflation, shareowners' equity is protected. MAR 0014 79 LAM017598 43 Selected Financial Data Historical Cost, as reported: Net sales................................................... Net income................................................ Primary earnings per share .................. Total assets.................. Net assets................................................. Long-term debt........................................ Dividends per common share................ Constant Dollar Data, in average 1980 dollars: Net income (loss) from operations----Net income (loss) from operations per primary share................................ Net assets.................................................. Current Cost Data, in average 1980 dollars: Net income (loss) from operations .... Net income (loss) from operations per primary share................................ Net assets.................................................. Increase in specific prices of inventory and property over (under) increase caused solely by general inflation.................................. Other Data, in average 1980 dollars: Net sales.................................................... Gain from decline in purchasing power of net amounts owed.............. Dividends per common share................ Market price of common stock at vear-end............................................ Average Consumer Price Index.................... 1980 $6,573.6 148.8 4.10 5,796.4 2,808.2 1,370.5 3.55 (69.8) (1.93) 3,942.8 (30.6) (0.85) 4,063.9 1979 $6,192.6 331.0 9.11 5,539.1 2,781.8 1,202.5 3.35 193.2 5.31 4,143.5 213.0 5.86 4,226.3 (278.7) 6,573.6 134.4 3.59 $ 65.54 246.8 108.8 7,028.6 139.3 3.85 $ 63.99 217.4 1978 $5,018.7 302.6 8.29 5,035.7 2,579.4 1,223.5 3.175 6,337.6 4.04 $ 57.16 195.4 1977 $4,594.5 275.6 7.46 4,350.1 2,400.9 1,030.6 3.025 6,246.2 4.13 $ 76.74 181.5 1976 $4,270.2 366.3 10.05 3,959.1 2,252.5 915.4 2.75 6,179.8 4.00 $ 124.81 170.5 An approximation of the net effects of inflation borne by creditors is shown in the table on page 43 as "gain from decline in purchasing power of net amounts owed." Shown in the preceding table are a statement of net income from operations and certain other information for the year ended December 31,1980, adjusted for changing prices in accordance with FAS No. 33, and the historical cost information reported in the pri mary financial statements for the same period. The increase in current cost of inventories and property, plant and equipment for the year ended December 31,1980, stated in average 1980 dollars, was $234.9 million. This amount was $278.7 million less than the increase that would have been caused solely by general inflation. At December 31,1980, the current cost of inventory and property, plant and equipment (net of accumulated depreciation) was $1,340.3 million and $4,047.9 million, respectively, stated in year-end 1980 dollars. Net income (loss) from operations reflects higher depreciation and depletion expense and cost of goods sold. Income taxes have not been adjusted for these higher costs, resulting in a tax provision on a net loss from operations for the constant dollar and current cost data as compared to an effective tax rate of 27.7 44 percent under historical cost. Adjustments for general inflation have been made using the Consumer Price Index-All Urban Consumers as required by FAS No. 33. The amounts reported as the estimated current costs are calculated as described below. These estimates, although based on the best judgments of management, are not necessarily indicative of either the amounts for which the assets could be sold or the cost at which such assets might be replaced in the future. Inventories determined on a FIFO basis were used to approximate inventories on a current cost basis. Cost of goods sold as determined on a LIFO basis, or techniques that approximate the results obtained on a LIFO basis, was used to approximate cost of goods sold on a current cost basis. The current costs (specific prices) of property, plant and equipment were generally estimated using appropriate construction and equipment indices. Accumulated depreciation and depletion for the current cost of existing facilities and related expenses, were estimated using the same methods and rates as used in the historical cost financial statements. Certain additional historical cost, constant dollar and current cost data appear in the table above. MAR 001480 LAM017599 Operating Unit Segment Data Net Sales Operating Income (Loss) Depreciation Research Total and Capital and Assets Obsolescence Expenditures Development 1980 Agricultural Products................... Chemical Intermediates............... Industrial Chemicals..................... plastics & Resins............................ Textiles........................................... Fisher Controls.............................. Eliminations................................... Unallocated corporate expenses .. Total operating.......................... Income charges--net..................... Nonoperating assets...................... Total consolidated..................... 1979 Agricultural Products.................... Chemical Intermediates............... Industrial Chemicals.................... Plastics & Resins............................ Textiles........................................... Fisher Controls................................ Eliminations................................... Unallocated corporate expenses .. Total operating.......................... Income charges--net..................... Nonoperating assets...................... Total consolidated.................... 1978 Agricultural Products.................... Chemical Intermediates............... Industrial Chemicals.................... Plastics & Resins............................ Textiles........................................... Fisher Controls............................... Unallocated corporate expenses .. Total operating.......................... Income charges--net.................... Nonoperating assets...................... Total consolidated..................... $1,012.3 965.7 1,577.6 1,383.8 1,041.1 593.1 6,573.6 $6,573.6 $ 839.9 858.6 1,513.8 1,414.2 1,069.4 496.7 6,192.6 $6,192.6 $ 734.4 523.2 1,290.1 1,223.6 963.2 284.2 5,018.7 $5,018.7 $ 400.8 17.8 132.6 (110.5) (261.1) 71.9 (2.0) (39.3) 210.2 4.5 $ 205.7 $ 328.8 115.5 202.1 9.6 (168.7) 44.4 (8.2) (36.6) 486.9 5.8 $ 481.1 $ 303.8 75.1 218.7 57.6 (29.2) 37.0 (31.3) 631.7 55.4 $ 576.3 $ 802.7 1,178.6 1,113.0 1,000.0 1,019.5 412.8 5,526.6 269.8 $5,796.4 $ 660.2 1,123.4 984.1 1.110.7 1.022.7 353.3 5,254.4 284.7 $5,539.1 $ 629.0 849.8 849.6 1,088.2 1,050.1 202.5 4,669.2 366.5 $5,035.7 $ 44.5 85.6 88.2 135.7 180.8 10.5 1.6 546.9 $546.9 $ 74.1 308.4 181.3 883 99.6 22.8 774.5 6.0 $780.5 $ 38.4 ,, .,.. . $ 43.4 76.4 222.2 71.1 126.7 78.0 91.6 138.4 59.1 9.1 18.9 1.3 412.7 561.9 $412.7 4.0 $565.9 $ 34.6 36.2 61.1 69.5 80.6 5.1 1.2 288.3 $288.3 $ 57.5 185.7 88.2 91.9 44.5 9.0 476.8 3.1 $479.9 $ 41.3 30.9 51.6 36.1 33.3 11.2 204.4 $204.4 $ 29.6 21.9 39.9 32.7 30.1 7.1 161.3 $161.3 $ 26.9 15.8 34.0 29.1 25.0 5.1 135.9 $135.9 The above data should be read in conjunction with the `Segment Information" note on page 63. MAR 001481 LAM017600 45 World Area Segment Data 1980 United States............................ Europe-Africa............................ Canada-Latin America.............. Asia-Pacific............................... Eliminations.............................. Unallocated corporate expenses Total operating..................... Income charges--net................ Nonoperating assets................. Total consolidated.................. 1979 United States................................ Europe-Africa................................ Canada-Latin America................ Asia-Pacific.................................... Eliminations.................................. Unallocated corporate expenses Total operating.......................... Income charges--net.................. Nonoperating assets.................... Total consolidated.................... 1978 United States................................ Europe-Africa................................ Canada-Latin America................ Asia-Pacific.................................... Eliminations.................................. Unallocated corporate expenses Total operating.......................... Income charges--net.................. Nonoperating assets.................... Total consolidated.................... Net Sales Outside Customers InterArea Income (Loss) $4,464.4 1,377.8 459.2 272.2 6,573.6 $ 534.5 59.2 4.0 27.4 (625.1) ____ $255.4 (43.8) 24.2 12.9 0.8 (39.3) 210.2 4.5 $6,573.6 $-- $205.7 $4,233.7 1,316.6 409.1 233.2 6,192.6 $ 451.0 65.5 4.6 26.2 (547.3) ____ $564.2 (66.8) 3.6 20.4 2.1 (36.6) 486.9 5.8 $6,192.6 $-- $481.1 $3,631.1 848.2 385.8 153.6 5,018.7 $ 338.2 56.9 1.7 23.7 (420.5) -- $630.7 15.2 10.0 10.5 (3.4) (31.3) 631.7 55.4 $5,018.7 $- $576.3 the "Segment Information" note on page 63. Total Capital Assets Expenditures $4,256.0 1,026.3 291.3 176.1 (223.1) 5,526.6 269.8 $5,796.4 $3,840.3 1,198.3 300.5 181.0 (265.7) 5,254.4 284.7 $5,539.1 $3,264.9 1,147.7 308.6 158.4 (210.4) 4,669.2 366.5 $5,035.7 $636.8 102.7 27.1 7.9 774.5 6.0 $780.5 $430.7 96.9 26.8 7.5 561.9 4.0 $565.9 $337.9 114.7 16.1 8.1 476.8 3.1 $479.9 001482 ng during the early part of 1980. However, as the year progressed, offshore results were adversely affected by deteriorating economic conditions in the major world markets. Total consolidated international sales reached $2,601.1 million in 1980, compared to $2,365.3 million in 1979 and $1,697.7 million in 1978. For 1980, aggregate exports of products manufactured at plant locations in the United States reached $ 1,026.4 million, an increase of 19.7 percent over the comparable $857.4 million in 1979. These export sales included $491.9 million in 1980 and $406.4 million in 1979 which were sold directly to ex-U. S. customers. Finished products which were exported to Monsanto locations around the world and then resold to cus tomers (resales) amounted to $434.5 million in 1980 and $372.8 million in 1979. Intercompany transfers of raw materials from the U.S. to ex-U.S. plants rep resented another $100.0 million in 1980 and $78.2 million in 1979. The growth in 1980 and 1979's export sales and resales was aided by favorable U.S. manu facturing economics and the lagged effect of the 46 weakness of the U.S. dollar in recent years. The 1980 rate of increase in exports was slower than in previous years due to new Monsanto production units offshore supplying markets that previously had been served by U. S. manufactured products. Total consolidated international operating income, including U.S. operating profit on exports and equity in the net income of ex-U.S. affiliates, was $ 150.8 million in 1980 compared to $157.8 million in 1979 and $145.2 million in 1978. Operating income in 1980 was heavily impacted by slowing economies in many countries. Europe-Africa's operating income in 1980 was also adversely affected hy the $66.3 million provision, before income taxes, for the withdrawal from Aiscondel, S. A. In 1979, Europe-Africa's operating income reflected a pretax charge of $77.4 million related to the shutdown of the European nylon operations and $15.6 million for the planned closing of certain product lines in Aiscondel, S. A. Canada-Latin America's operating income for 1979 included a $12.1 million charge related to the closing of a plastics business and $8.5 million relating to the LAM017601 maxi-devaluation of the Brazilian cruzeiro. The Company has been making the difficult decisions to resolve its ex-U.S. business problems. During the year, options were identified toward improving the unsatisfactory situation at the major acrylonitrile complex at Seal Sands, United King dom. Dramatic changes in user markets, including Monsanto's own withdrawal from the European nylon market, have contributed to the overcapacity of acrylonitrile. Task forces are exploring a variety of open alternatives. While no short-term solution to the situation is seen, year-to-year improvement should be forthcoming. The following information reconciles ex-U.S. sales and operating income as shown in the above world area segment data to consolidated international sales and operating income, which includes U. S. sales and pretax profits for export shipments and the Company's equity in the net income of ex-U.S. affiliates. International Sales and Operating Income 1980 1979 1978 Sales by ex-U.S. subsidiaries; Europe-Africa .................. Canada-Latin America .. Asia-Pacific........................ U.S. export sales.................. Inter-area eliminations........................ Total consolidated international sales............ $1,437.0 463.2 299.6 2,199.8 1,026.4 $1,382.1 413.7 259.4 2,055.2 857.4 $ 905.1 387.5 177.3 1,469.9 648.3 (625.1) (547.3) (420.5) $2,601.1 $2,365.3 $1,697.7 Operating income (loss) of ex-U.S. subsidiaries: Europe-Africa.................. Canada-Latin America .. Asia-Pacific........................ U.S. export operating profit, net of allocated administrative expenses .............................. Equity in ex-U.S. affiliates' net income........ Total consolidated international operating income.................................. $ (43.8) $ i66.8) $ 24.2 3.6 12.9 20.4 (6.7) (42.8) 15.2 10.0 10.5 35.7 141.8 15.7 174.3 26.3 120.9 (11.4) $ 150.8 $ 157.8 $ 145.2 09 and Gas Reserve Data The availability and the price of crude oil as it has affected the chemical industry in the recent past, and as it will affect it in the future, is important to Monsanto. The Company's exploration and production operation has, for many years, explored successfully for and produced crude oil and natural gas. The crude oil is used as a trading vehicle to obtain the various hydrocarbon-related raw materials that the Company needs in its operations. In recognition of the importance of its oil and gas exploration and production activity, Monsanto established a separate Oil and Gas Division in mid-1980. In recent years, Monsanto has expanded its exploration efforts for hydrocarbon reserves. At the present time, its exploration activities are concentrated in the United States and in selected other world areas. The effort is currently concentrated in liquid-prone areas where the Company can make maximum internal use of the production. Certain reserve and related data regarding the Company's oil and gas activities follow. The following definitions are important to understanding these data: Proved Oil and Gas Reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions; Proved Developed Oil and Gas Reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved Undeveloped Oil and Gas Reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for completion. Estimated Future Net Revenues are computed by applying cuiTent prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of existing proved oil and gas reserves, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves, and assuming continuation of existing economic conditions. Present Value ofEstimated Future Net Revenues is computed using a discount factor of 10 percent applied to the Estimated Future Net Revenues. Reserve Recognition Accounting (RRA) is an accounting method that reflects: 1. Proved oil and gas reserves as assets in the balance sheet; 2. Additions to proved reserves and changes in valuations of proved reserves in the income statement; and 3. All costs associated with finding and developing additions to proved oil and gas reserves, together with all costs determined to be nonproductive during the current period, in the income statement. MAR 001483 47 LAM017602 RRA is prescribed by the Securities and Exchange Commission for supplemental disclosure only and is the basis used in determining the results of oil and gas producing activities reflected in the "Summary" included in this section. The "value" assigned to proved reserves under RRA is the present value of the estimated future net revenues from those reserves. However, the basic financial statements include the Company's oil and gas activities under the successful efforts method of accounting, which does not recognize the value of reserves as assets, reflects income only to the extent that oil and gas are sold, and provides for capitalization of costs to find reserves and drill and develop successful wells. Net Quantities of Proved Reserves United States Natural Oil (1) Gas (2) Canada Natural Oil (1) Gas (2) Total Natural Oil (1) Gas (2) Proved developed and undeveloped reserves: December 31, 1979............................................................ Revisions of previous estimate................................... Purchases of minerals-in-place................................... Extensions, discoveries and other additions............. Production..................................................................... December 31,1980............................................................ Proved developed reserves: December 31, 1979............................................................ December 31, 1980............................................................ 27.3 (0.1) 0.1 3.9 (2.6) 28.6 25.1 26.5 554.9 (14.3) 1.3 62.1 (33.6) 570.4 452.1 449.4 1.2 (0.1) 1.1 1.1 1.0 58.8 (10.1) 1.9 (2.4) 48.2 56.2 45.6 28.5 (0.1) 0.1 3.9 (2.7) 29.7 26.2 27.5 613.7 (24.4) 1.3 64.0 (36.0) 618.6 508.3 495.0 (1) Stated in millions of barrels. Does not include natural gasoline and liquified petroleum gases produced from other companies' natural gas processed in Company plants of 1.9 million Bbls. (2) Stated in billions of cubic feet (Bcf). Does not include residue gas applicable to other companies' natural gas processed in Company plants of 4.4 Bcf of gas. (3) Oil and gas reserves relating to royalty interests are not available and. therefore, are not included in the net quantities of proved reserves. Monsanto's share of production from these royalty interests in 1980 was not significant. In determining the estimated future net revenue data which follow, current prices were based on actual 1980 year-end selling prices for oil and gas. In accordance with the SEC's requirements, effects of future price decontrol or inflation were not considered. Similarly, future expenditures were determined by using the actual 1980 year-end cost levels to develop and produce reserves. Estimated Future Net Revenues of Oil and Gas Reserves at December 31,1980 Proved developed and undeveloped reserves: 1981........................................................................................................... ........................ 1982........................................................................................................... ........................ 1983 ........................................................................................................... ........................ Remainder............................................................................................... ........................ Total........................................................................................................ ........................ Proved developed reserves: 1981........................................................................................................... ........................ 1982 ........................................................................................................... ........................ 1983 ........................................................................................................... ........................ Remainder............................................................................................... ........................ Total......................................................................................................... United States $ 61.9 86.6 93.0 2,137.4 $2,378.9 $ 70.9 84.7 78.5 1.450.3 Canada $ 5.8 7.1 6.3 75.0 $94.2 $ 6.0 7.1 6.2 70.5 $89.8 Total $ 67.7 93.7 99.3 2,212.4 $2,473.1 $ 76.9 91.8 84.7 1,520.8 $1,774.2 MAR 001484 48 LAR/J07 7603 present Value of Estimated Future Net Revenues of Oil and Gas Reserves proved developed and undeveloped reserves: December 31,1980.......................................... December 31, 1979......................................... Proved developed reserves: December 31,1980.......................................... December 31,1979......................................... United States $535.0 $331.8 $482.5 $317,0 Canada S39.7 $30.5 $38.6 $30.1 Total $574.7 $362.3 $521.1 $347.1 A summary of oil and gas producing activities using RRA and an analysis of the net change in present value of estimated future net revenues for the year ended December 31,1980 follows. This summary is prescribed by the Securities and Exchange Commission. Monsanto recommends that the RRA results be evaluated with caution and an awareness of the inherent limitation of any prescribed method for determining changes in value. Changes in the discount rate, future selling prices, costs or reserve estimates made in developing the RRA data could significantly affect the results. As indicated above, the future selling prices and costs used in calculating the present value of oil and gas reserves are based on current--not probable future--selling prices and costs. As a result, the present value calculated using the RRA technique is--if the recent trend of oil and gas selling price increases continues--a conservative estimate of the value of these reserves. The results of oil and gas activities in the Summary do not include the operation of natural gas plants, which operations are included in the product group data on page 36. Monsanto's historical cost financial statements include pretax earnings of $27.6 million corresponding to the oil and gas activities reflected in the Summary. No interest costs or general corporate expenses have been allocated to either the historical cost or RRA results of oil and gas activities. Aggregate property acquisition costs, costs of uncompleted exploratory wells and major development costs that have been deferred pending further evaluation and, accordingly, are not reflected in the Summary, were $76.8 million as of December 31,1980. With respect to this amount, valuation allowances of $6.6 million were provided during the period. Total valuation allowances related to the deferred costs were $19.1 million as of December 31,1980. Summary of Oil and Gas Producing Activities for the Year Ended December 31,1980 Change In Present Value of Estimated Net Revenues RRA Results of Oil & Gas Producing Activities Additions to estimated proved reserves, gross.............. Revisions to estimates of reserves proved in prior years: Changes in prices............ Other.................................. Accretion of discount.............. Total additions and revisions.................... Evaluated acquisition, exploration, development and production costs incurred, including valuation allowances.......... Present value of estimated future development and production costs.................. Expenditures during 1980 that reduced estimated future development costs at December 31,1979 ........ Purchase of reserves in place . Sales of oil and gas and value of transfers, net of production costs of $34.9 ..................................... Net change.................... Additions and revisions to proved reserves in excess of evaluated costs........ Provision for income taxes............................ After-tax results.......... .. $101.8 221.3 (26.7) 36.2 332.6 (43.6) 8.3 3.4 (88.3) $212.4 $101.8 221.3 (26.7) 36.2 332.6 (142.6) (43.6) 146.4 71.4 $ 75.0 MAR 001485 LAM017604 49 Summary of Significant Accounting Policies Management has selected the following accounting principles from acceptable alternatives in preparing the consolidated financial statements of Monsanto Company and Subsidiaries (Monsanto). Except as described below, these principles have been consistently applied in all material respects. on a substantial portion of the undistributed earnings of domestic subsidiaries, including domestic international sales corporations (DISC's), whose distribution would be subject to additional taxes, because Monsanto intends to indefinitely reinvest those earnings. Basis of Consolidation The consolidated financial statements include Monsanto Company (Company) and its majorityowned subsidiaries with continuing operations. Significant intercompany transactions have been eliminated in consolidation. Investments in affiliates in which Monsanto has an ownership interest greater than 20 percent, but which are not majority-owned, are accounted for by the equity method. Depreciation Monsanto generally uses the straight line method of computing depreciation; however, the sum of the years digits method is used for most domestic assets placed in service prior to January 1,1972. Income Taxes Investment tax credits are recorded under the "flow through" method of accounting as a reduction of income tax expense in the year in which they are used to offset the Federal income tax liability. Income taxes have not been provided on the undistributed earnings of ex-U. S. subsidiaries since any taxes on dividends received from those subsidiaries would be substantially offset by foreign tax credits. Also, income taxes have not been provided Inventory Valuation Inventories are stated at the lower of cost or market. The term "cost" represents, in the case of raw materials and supplies, actual cost, and with respect to finished goods and goods in process, standard cost which approximates actual cost. Standard cost includes elements for direct labor, raw material and manufacturing overhead based on practical capacity. The cost of substantially all domestic inventories is determined by the last-in, first-out (LIFO) method. The cost of other inventories is generally determined by the first-in, first-out (FIFO) method. Reclassifications Certain items, principally deferred income taxes, have been reclassified from a noncurrent to a current classification in the Statement of Consolidated Financial Position at December 31,1980, in accordance with Financial Accounting Standards Board Statement No. 37 and generally accepted practice for similar items. These reclassifications were not significant in prior years and the net effect on the Statement of Consolidated Financial Position at December 31,1979, is included in "other-net" in the Statement of Changes in Consolidated Financial Position for the year ended December 31,1980. MAR 001486 LAM017605 50 Statement of Consolidated Income Monsanto Company and Subsidiaries (Dollars in millions, except per share) Net Sales Cost of Goods Sold Marketing and Administrative Expenses Technological Expenses Operating Income Other Expense and Income: Interest expense Other income--net Income Before Income Taxes Income Taxes Net Income Earnings per Common Share: Primary Fully diluted 1980 $6,573.6 5,476.0 617.9 269.5 6,363.4 210.2 1979 $6,192.6 4,932.0 551.6 222.1 5,705.7 486.9 1978 $5,018.7 3,743.6 453.2 190.2 4,387.0 631.7 111.8 107.3 4.5 205.7 56.9 $ 148.8 123.3 117.5 5.8 481.1 150.1 $ 331.0 102.8 47.4 55.4 576.3 273.7 $ 302.6 $ 4.10 $ 9.11 $ 8.29 4.06 9.03 8.21 Wut 001487 The above statement should be read in conjunction with page 50 and pages 56 through 64 of this report. LAM017606 51 Statement of Consolidated Financial Position Monsanto Company and Subsidiaries (Dollars in millions, except per share) Assets Current Assets: Cash Time deposits and certificates of deposit Short-term securities--at cost which approximates market Trade receivables, net of allowances of $43.4 in 1980 and $35.6 in 1979 Miscellaneous receivables and prepaid expenses Inventories Investments and Other Assets: Investments in affiliates Other Property, Plant and Equipment, at Cost: Land Buildings Machinery and equipment Mineral rights and oil and gas properties Construction-in-progress Less accumulated depreciation and depletion Dec. 31,1980 Dec. 31, 1979 $ 44.8 104.3 61.5 1,105.9 228.2 832.3 2,377.0 158.2 152.1 310.3 57.0 670.3 4,628.4 352.0 365.9 6,073.6 2,964.5 3,109.1 $5,796.4 $ 43.7 94.2 133.4 1,085.1 192.1 909.9 2,458.4 129.8 133.1 262.9 55.9 619.9 4,086.0 314.1 452.8 5,528.7 2,710.9 2,817.8 $5,539.1 MAR 001488 LAM017607 Monsanto accounts for its oil and gas production and exploration activities under the "successful efforts" method of accounting. The above statement should be read in conjunction with page 50 and pages 56 through 64 of this report. 52 Liabilities and Shareowners' Equity Current Liabilities: Accounts payable Wages and commissions Income and other taxes Miscellaneous accruals Short-term debt Long-Term Debt Deferred Credits and Other Liabilities: Deferred income taxes Other Minority Interests in Subsidiaries Shareowners' Equity: Preferred stock--authorized, 10,000,000 shares without par value, issuable in series; outstanding, 123,139 shares in 1980 and 158,181 shares in 1979; involuntary liquidation preference, $35 per share, or an aggregate of $4.3 in 1980 Common stock--authorized, 100,000,000 shares, par value $2 each; issued, 36,978,084 shares in 1980 and 1979 Additional contributed capital Reinvested earnings Less common stock in treasury, at cost (808,435 shares in 1980 and 946,916 shares in 1979) Dec. 31,1980 Dec. 31,1979 $ 425.8 105.4 60.2 320.4 238.8 1,150.6 1,370.5 338.1 26.3 364.4 102.7 $ 585.4 105.2 66.7 145.3 233.1 1,135.7 1,202.5 295.4 39.8 335.2 83.9 0.3 73.9 651.8 2,122.7 2,848.7 40.5 2,808.2 $5,796.4 0.3 73.9 652.9 2,102.3 2,829.4 47.6 2,781.8 $5,539.1 MAR 001489 LAM017608 Statement of Changes in Consolidated Financial Position Monsanto Company and Subsidiaries (Dollars in millions) Source of Working Capital: Net income Charges not affecting working capital: Depreciation, depletion and obsolescence Deferred income taxes Other--net Working capital from operations Outside financing--net of unexpended funds from industrial development bonds Property disposals Other--net Application of Working Capital: Property, plant and equipment additions Dividends Debt reduction Other--net Increase (Decrease) in Working Capital Changes in Elements of Working Capital: Increase (decrease) in current assets: Cash Time deposits and certificates of deposit Short-term securities Trade receivables, net Miscellaneous receivables and prepaid expenses Inventories (Increase) decrease in current liabilities: Accounts payable Wages and commissions Income and other taxes Miscellaneous accruals Short-term debt Increase (Decrease) in Working Capital MAR 001490 1980 $ 148.8 546.9 60.0 (88.2) 667.5 266.3 8.4 942.2 780.5 128.4 59.2 70.4 1,038.5 $ (96.3) 1979 $ 331.0 412.7 (17.1) (59.9) 666.7 55.4 35.7 49.6 807.4 565.9 121.2 93.3 780.4 $ 27.0 $ 1.1 10.1 (71.9) 20.8 36.1 (77.6) (81.4) 159.6 (0.2) 6.5 (175.1) (5.7) (14.9) $ (96.3) $ (21.7) (53.1) (1.5) 179.9 (14.7) 189.1 278.0 (188.7) (19.4) 10.7 (33.3) (20.3) (251.0) $ 27.0 1978 $ 302.6 288.3 76.5 24.8 692.2 284.9 47.3 1,024.4 479.9 115.4 133.2 80.2 808.7 $ 215.7 $ 27.1 30.7 91.5 214.2 87.1 (5.6) 445.0 (103.4) (16.5) 9.5 (39.8) (79.1) (229.3) $ 215.7 LAM017609 The above statement should be read in conjunction with page 50 and pages 56 through 64 of this report. 54 Statement of Consolidated Shareowners' Equity Monsanto Company and Subsidiaries (Dollars in millions, except per share) Preferred Stock Balance, January 1, 1978 Net income Dividends: Preferred--$2.75 per share Common--$3,175 per share Conversion of $2.75 Preferred Stock to common stock Shares issued under employee stock ownership and option plans Shares purchased Other $0.6 (0.2) Balance, December 31, 1978 Net income Dividends: Preferred--$2.75 per share Common--$3.35 per share Conversion of $2.75 Preferred Stock to common stock Shares issued under employee stock ownership and option plans Shares issued upon conversion of Monsanto Limited convertible loan stock Shares reclassified from Miscellaneous Investments Shares purchased Other 0.4 (0.1) Balance, December 31, 1979 Net income Dividends: Preferred--$2.75 per share Common--$3.55 per share Conversion of $2.75 Preferred Stock to common stock Shares issued under employee stock ownership and option plans Shares issued upon conversion of Monsanto Limited convertible loan stock Shares purchased Other 0.3 Balance, December 31,1980 $0.3 Common Stock $73.7 0.2 73.9 73.9 $73.9 Additional Contributed Capital $650.6 Reinvested Earnings $1,705.3 302.6 (0.6) (114.8) Treasury Stock $(29.3) 0.8 0.1 651.5 (1.3) 0.3 0.2 2.2 652.9 (1.9) 0.3 0.2 0.3 $651.8 1,892.5 331.0 (0.5) (120.7) 3.2 (12.8) (38.9) 1.4 4.5 2,102.3 148.8 (0.4) (128.0) 2.0 (4.4) (12.4) 0.2 (47.6) 1.9 7.1 $2,122.7 2.1 (4.0) $(40.5) MAR 001491 The above statement should be read in conjunction with page 50 and pages 56 through 64 of this report. LAM017610 55 Notes to Financial Statements (Dollars in millions, except per share) Business Combinations On February 21,1980, Monsanto acquired substantially all of the common stock of Radiation Dynamics, Inc. (RDI) for $31.9 in cash in a transaction accounted for under the purchase method. The results of RDI's operations subsequent to the date of acquisition have been included in Monsanto's 1980 consolidated financial statements. The effect of including RDI in Monsanto's 1979 consolidated financial statements on a pro forma basis would not be material. On February 28,1979, Monsanto signed an agreement with the General Electric Company Limited (GEC), an English limited company, that provided for the formation of a new corporation consisting principally of Fisher Controls Company, Inc., a then wholly owned subsidiary of the Company engaged in the manufacture of valves, regulators, controllers and process controls instrumentation, and similar operations of GEC. GEC contributed net assets with an estimated fair value of approximately $70.0 and received 33.5 percent of the common shares of the new corporation, Fisher Controls Corporation of Delaware, whose name was changed to Fisher Controls International, Inc. (FCII) in 1980. Monsanto contributed net assets with a book value of approximately $134.0 and received 66.5 percent of the common shares of FCII. The transaction was accounted for under the purchase method with no excess of cost over fair value of the GEC operations' net assets. The effective date of the transaction was specified as January 1,1979. Accordingly, the results of FCII's operations are included in the accompanying consolidated financial statements for all of 1979 and 1980. The effect of including FCII in Monsanto's 1978 consolidated financial statements on a pro forma basis would not be material. MAR 001492 Shutdown Costs In January 1981, the Board of Directors approved the withdrawal from the polyester filament business in the United States. Accordingly, 1980 cost of goods sold includes a provision for losses of $121.2, or $69.0 ($1.90 per primary share) net of related tax effects. In connection with the withdrawal from this business, the Company has an agreement in principle with a subsidiary of Celanese Corporation to sell certain polyester manufacturing facilities and related technology at Fayetteville, North Carolina, and certain patent rights. The parties are required under the Hart-ScottRodino Act to refrain from consummating the trans action for twenty days after submission to the Federal Trade Commission of requested data, which data were submitted on February 23,1981. The remaining related manufacturing facilities will be shut down and facilities that do not have alternative future uses within the Company will be disposed of as soon as practical. This business had sales of approximately $134.0 in 1980. In December 1980, Monsanto's Board of Directors approved a decision to terminate all of its interest in Aiscondel, S. A., a majority-owned Spanish subsidiary. Cost of goods sold for 1980 includes a provision for losses of $66.3, or $38.7 ($1.07 per primary share) net of related tax effects, as a result of this decision. Pursuant to the December 1980 Board authorization, the Company has entered into an agreement to sell its interest in Aiscondel, S. A. to the minority partners for a nominal amount. As part of this agreement, the Company obtained a revision of certain intercompany obligations of Aiscondel and agreed to guarantee a new $12.6 line of credit on behalf of Aiscondel. In addition, the Company will pay certain debts of Aiscondel which had previously been guaranteed by the Company. The Company has not included Aiscondel's assets, liabilities or results of operations in the consolidated financial statements subsequent to November 30, 1980. On a U.S. dollar basis, Aiscondel had sales of approximately $126.0 for the eleven months then ended. In June 1979, the Board authorized withdrawal from nylon operations in Europe. Accordingly, the related nylon manufacturing facilities were shut down by the end of 1979 and are in the process of being disposed. Also in June 1979, the Board authorized the shutdown or sale of all of the operations of an ex-U .S. subsidiary in the plastics business. In December 1979, the Board approved the closing of certain product lines of Aiscondel. Monsanto recorded provisions for losses related to these actions in 1979 of $105.1 in cost of goods sold or $53.2 ($1.47 per primary share) net of related tax effects. As of December 31,1980, the remaining accruals for the losses discussed above have been reduced to $246.1, which amount is principally included in 56 LAM017611 accumulated depreciation and depletion ($71.3) and miscellaneous accruals ($110.4). The reduction in accruals results from actual expenditures for shutdown or withdrawal costs, disposal of certain facilities, and operating losses subsequent to the recording of the provisions. The remaining accruals are estimated to be sufficient to absorb any additional costs related to these actions. Depreciation, Depletion and Obsolescence Charges to expense were: 1980 1979 1978 Depreciation and depletion........ $327.0 Obsolescence.................................. 219.9 $546.9 $294.9 117.8 $412.7 $265.5 22.8 $288.3 The above table includes depreciation, depletion and amortization expense related to oil and gas production and exploration activities (see "Oil and Gas Activities" note). Obsolescence expense for 1980 and 1979 included $187.5 and $93.1, respectively, related to "Shutdown Costs" discussed above. The weighted average assigned life for U.S. machinery and equipment is approximately 11 years. Pension Plans Most Monsanto employees are covered by noncontributory pension plans. The expense related to these plans was $97.7, $92.3 and $84.2 in 1980-1978, respectively. These amounts include charges applicable to current service and amortization of unfunded prior service costs over periods generally ranging from 10 to 30 years. It is Monsanto's policy to fund pension costs accrued. Certain changes in the actuarial assumptions for Monsanto's major pension plans were approved in 1980 and became effective on January 1,1980. These changes were adopted to reflect more current assumptions with respect to projected future events and conditions. All actuarial assumptions were reviewed and most were changed to some extent. The major assumptions changed were those with respect to the investment rate of return and the annual rate of increase in salaries. The investment return assumption was changed from the 7.0 percent that had been used for prior years to 7.5 percent for 1980. The salary increase assumption was changed from a uniform 6.0 percent for prior years to a set of age-dependent assumptions which had an overall average of 6.5 percent for 1980. Monsanto also in creased the contribution for one major pension plan to the maximum deductible amount for tax purposes. The net effect of these changes was to decrease 1980 pension expense by approximately $1.0. Estimated benefit and asset information for plans representing 96 and 97 percent of total pension expense for 1980 and 1979, respectively, is presented below on an aggregate basis as of December 31 of each year. Net assets were measured at market value at those dates and year-end accumulated benefits were estimated from actuarial valuations made earlier in the year. Subsequent to December 31,1980, increased benefit levels under the Company's major domestic plans were approved. Amounts presented below do not include the effect of these increases. 1980 1979 Actuarial present value of accumulated plan benefits: Vested ........................................... Nonvested..................................... Total........................................... Net assets available for benefits $ 775.5 114.7 $ 890.2 $1,260.3 $863.3 28.9 $892.2 $957.8 Technological Expenses Technological expenses consisted of the following: 1980 1979 1978 Research and development... Engineering, commercial development and patent ... $204.4 65.1 $269.5 $161.3 60.8 $222.1 $135.9 54.3 $190.2 Interest Costs and Income Beginning January 1,1980, Monsanto began capitalizing interest costs related to constructionin-progress expenditures in accordance with Financial Accounting Standards Board Statement No. 34. In prior years, all interest costs were expensed as incurred. Total interest cost incurred during 1980 was $ 163.4, of which $51.6 was capitalized. The net effect of adopting Statement No. 34 was an increase in 1980 net income of $27.5 ($0.76 per primary share). Interest income included in other income-net for 1980-1978 was $36.4, $63.6 and $35.6, respectively. Equity in Affiliates Monsanto's equity in the net income (loss) of affiliates, including foreign currency gains or losses on translation of financial statements, totaled $17.3, $25.8 and $(10.1) in 1980-1978, respectively, and is included in other income-net. Foreign Exchange Net exchange gains (losses) resulting from foreign currency transactions and translation of foreign currency financial statements were $ 11.5, $(26.9) and $(28.3) in 1980-1978, respectively, including a gain (loss) of $(17.5), $2.3 and $(14.1), respectively, related to the translation of equity affiliates' financial statements. i a ruinnci o MAR 001493 57 Eamsigs per Common Share Income and the number of shares used in the computation of earnings per common and common equivalent share were determined as follows: 1980 Fully Primary Diluted Income Net income....................................................................... Preferred dividends......................................................... Interest (less tax) on: Loan stock of Monsanto Limited.............................. Debentures of Monsanto International Finance Company................................................... Number of Shares (In thousands) Weighted average shares: Outstanding................................................................. Incremental shares for outstanding stock options............................................................. Shares issuable upon conversion: Loan stock of Monsanto Limited.......................... Debentures of Monsanto International Finance Company............................................... $2.75 Preferred Stock............................................. $148.8 $148.8 (0.4) 0.3 0.3 $148.7 0.3 $149.4 36,061 25 202 36,288 36,061 187 202 147 155 36,752 1979 Fullv Primary Diluted $331.0 $331.0 (0.5) 0.3 0.3 $330.8 0.3 $331.6 36,068 5 242 36,315 36,068 24 242 174 191 36,699 1978 Fullv Primary Diluted $302.6 $302.6 (0.6) 0.3 0.3 $302.3 0.4 $303.3 36,212 9 259 36,480 36,212 11 259 194 248 36,924 Income Taxes The U.S. and ex-U.S. components of income before income taxes were as follows: 1980 1979 1978 U.S............................... .............. Ex-U.S........................ .............. $211.6 (5.9) $205.7 $526.9 (45.8) $481.1 $624.2 (47.9) $576.3 The components of income tax expense were: 1980 1979 1978 A change in tax laws in the United Kingdom during 1979 resulted in a reversal of deferred taxes of $16.8 ($0.46 per primary share), which amount is reflected in deferred foreign income tax expense for 1979. These deferred taxes were established in prior years for differences in book and tax bases of U.K. inventories. Investment tax credits for 1980-1978 were $48.5, $28.4 and $28.0, respectively. The sources of timing differences in the recognition of revenue and expense for tax and financial statement purposes and the tax effect of each were: 1980 1979 1978 Current: Federal..................... .............. State......................... .......... Ex-U.S...................... .............. Deferred: Federal.................................... State ......................... .............. Ex-U.S...................... .............. $ (5.0) 4.6 24.6 24.2 $126.1 16.0 25.1 167.2 $164.3 16.8 16.1 197.2 19.0 2.8 10.9 32.7 $56.9 44.2 4.0 (65.3) (17.1) $150.1 69.3 6.1 1.1 76.5 $273.7 Additional depreciation and obsolescence for (book) tax purposes.............. Reversal of deferred taxes related to U.K. inventories............................ Net change in accrual for pension expense.................... Intangible drilling and development costs................ Interest capitalization............ Other items--net.................... $ (7.6) $(22.1) $58.6 (4.5) 14.6 23.4 6.8 $32.7 (16.8) 14.8 11.0 (4.0) $(17.1) 0.7 8.0 9.2 $76.5 MAR 001494 LAM017613 58 Monsanto's effective income tax rate differed from the federal statutory rate due to the following factors: Federal statutory rate............ Investment tax credit.............. Tax treatment afforded earnings of DISC'S................ Losses of ex-U.S. subsidiaries for which no tax benefits are currently available.............. U.K. stock relief, including reversal of previously deferred taxes........................ Ex-U.S., state and local income taxes.......................... Other ......................................... Effective income tax rate........ 1980 46.0% (23.6) (12.4) 19.0 0.7 (2.0) 27.7% 1979 46.0% (5.9) (4.9) 1.8 (5.1) 1.1 (1.8) 31.2% 1978 48.0% (4.9) (2.9) 4.8 3.3 (0.8) 47.5% Undistributed earnings of subsidiaries for which additional taxes in the event of distribution have not been provided were: 1980 1979 1978 Inventories at December 31,1980 and 1979 would have been $509.3 and $429.3, respectively, higher than reported if the FIFO basis of inventory valuation (which approximates current cost) had been used for all inventories. Key Employee Bonus Data relating to the Monsanto Management Incentive Plan of 1974 were: 1980 1979 1978 Maximum allowable addition to bonus reserve.... Actual charge to expense (and addition to bonus reserve) as determined by the Executive Compensation and Development Committee of the Board of Directors .... Bonus Awards: Number of directors and officers.......................... Number of other key emplovees............................ Amount...................................... Balance in bonus reserve at vear-end................................ $12.0 $14.5 $11.9 $ 8.4 2 73 $0.7 $4.7 25 488 $12.6 $ 5.4 25 471 $ 9.5 $ 6.7 Ex-U.S.subsidiaries................ Domestic subsidiaries, including DISC'S.................. $ 77.7 290.5 $368.2 $ 78.2 218.1 $296.3 $ 80.0 159.5 $239.5 Ex-U.S. net operating loss carryforwards for which no tax benefits have been recorded were approximately $121.3 at December 31, 1980, and expire in various years beginning in 1981. Miscellaneous receivables and prepaid expenses on the Statement of Consolidated Financial Position as of December 31, 1980, includes $10.0 of deferred income taxes. Inventories Inventories consisted of the following: 1980 1979 The bonus award amounts for 1979 and 1978 include respective five-year accumulated award payments to 33 and 36 officers and employees of $ 1.8 and $ 1.6 for the long-term incentive program established under the Monsanto Management Incentive Plan of 1974. Guarantees, Leases and Other Commitments Monsanto was contingently liable as guarantor of bank loans and for discounted customers' receivables totaling approximately $50.7 at December 31,1980. This amount includes $25.8 related to guarantees of loans of affiliates. Rent expense under operating leases with a term of more than one month was approximately $71.0, $62.2 and $54.9 in 1980-1978, respectively. Minimum rental commitments for future years under operating leases with initial or remaining terms of one year or more at December 31,1980, were approximately: Valued on a FIFO basis: Finished goods............................... ....... Goods in process................................... Raw materials............................... ....... Materials and supplies ................ ....... Valued on a LIFO basis.................... $163.9 68.8 995 130.1 370.0 $832.3 $194.6 74.4 113.4 121.4 406.1 $909.9 1981 ................................................................................. 1982 ................................................................................. 1983 ................................................................................. 1984 ................................................................................ 1985 ................................................................................ After 1985 ....................................................................... $17.9 15.1 12.4 8.4 6.9 33.4 $94.1 The LIFO method used by Monsanto does not identify inventories by classification (i.e., finished goods, goods in process, raw materials, materials and SUPPlieS) MAF 001495 Commitments in connection with uncompleted additions to property aggregated approximately $138.2 at December 31,1980. LAM017614 59 Long-Term Debt Long-term debt, exclusive of current maturities and repayable in U.S. dollars, except where indicated, was as follows: Notes: (a) This amount of commercial paper outstanding at December 31,1980, has been included in the Long-Term Debt because the Company intends to refinance these borrowings on a long-term basis, and long-term financing is available under credit agreements described in "Short-Term Debt and Bank Credit Arrangements" note. Monsanto Company: (b) These debentures are currently convertible into the 8% notes due 1985 ......................................... $ 100.0 $ 100.0 Company's commonstock at $86 per share, subject to adjustment 7V4% promissory notes due 1982/1986....... 9.9 123 under certain conditions. 4t% promissory notes due 1993 ................. 8i/2% sinking fund debentures due 2000 -- 9'/d% sinking fund debentures due 2000 -- y/t% income debentures due 2002............... 4'/% income debentures due 2008............... 83/i% sinking fund debentures due 2008 -- 44A%-7'/2% industrial development bond obligations due 1983/2009 ............. Capitalized lease obligations........................ Commercial paper, 14'/s%-20ys%(a)........... Other............................................................... Monsanto International Finance Company: 58.0 174.4 89.7 91X1 50.0 198.9 184.4 12.4 225.0 1.4 62.7 175.0 84.0 91.0 50.0 200.0 156.7 13.7 1.3 (c) This loan stock is convertible into the Company's common stock at a rate equivalent to $55 per share, subject to adjustment under certain conditions. Of the total loan stock originally issued in 1969,63 percent has been retired through December 31,1980, by conversion into 294,872 shares of the Company's common stock. (d) The interest rates on these bank loans will be reduced by a government subsidy ranging from 4.0 percent-2.8 percent, which expires in 1981. Monsanto has the option of repaying these loans in 1981. (e) At December 31,1980, Aiscondel is not included in the consolidated financial statements. See "Shutdown Costs" note. 41/2% sinking fund debentures due 1985(b)........................................................ 10.0 123 The amounts shown in the above table for 1980 are Monsanto International N. V. net of related unamortized debt discount. (Netherlands Antilles subsidiary): 8V% sinking fund debentures due 1985...................................................... 1.8 Maturities and sinking fund requirements on 33 long-term debt are $36.7, $48.9, $41.6, $38.8 and Monsanto Limited (United Kingdom $ 142.2 for the five years ending December 31,1981 subsidiary) (British pound): through 1985, respectively. 5% loan stock due 1982/1986(c)................ Other............................................................. Monsanto (Suisse) S.A. (Swiss subsidiary) (Swiss franc): 6Vi% sinking fund debentures due 1986.. 9.7 11.0 Covenants of certain loan agreements restrict 29.8 31.7 maximum borrowings and dividend payments. It is not anticipated that additional future borrowings will 26.6 30.1 be affected by these restrictions, and none of the Monsanto Europe, S.A. (Belgian Company's reinvested earnings were restricted as to subsidiary) (Belgian franc): 9% bank loan due 1982/1986 .................... 9V*%-11 %o% bank loans due 1982/1988(d)...................................... 93/<% bonds due 1982/1991 ........................ dividend payments at December 31,1980. 0.4 0.5 Under various parallel loan agreements, Monsanto 80.9 100.0 has borrowed $92.4 in pounds sterling from United 12.6 14.3 Kingdom companies and has made United States Aiscondel, S.A. (Spanish subsidiary): dollar loans to the U. K. companies or their subsidiaries 9%-19'/2% bank and commercial loans due 1981/2015(e): U.S. dollar................................................ Spanish peseta.......................................... Other ................................................................. aggregating $90.4 as of December 31,1980. These 32.0 agreements require the parties to either make 16.9 additional loans in the respective currency or repay 3j6 ___________ ^6loans whenever the exchange rate varies by a $1,370.5 $1,2023 predetermined percent. At December 31,1980, no additional amounts were due to or from any of the parties. As both parties to the agreements have the legal right to offset in case of default by the other MAR 001496 party, the parallel transactions are reflected net in the accompanying financial statements. Interest rates on the sterling loans are 2V2 percent to 23A percent higher than the interest rates on the corre sponding dollar loans. Maturity dates of the loans range from 1982 through 1986. Substantially all long-term debt of subsidiaries is guaranteed by the Company. 60 LA A/1017615 Short-Term Debt and Bank Credit Arrangements Short-term debt included the following: 1980 1979 t Notes payable to banks......................... Commercial paper.................................. Current portion of long-term debt .... $187.2 14.9 36.7 $238.8 $168.6 64.5 $233.1 In March, 1980, the Company amended its domestic Revolving Credit/Term Loan Agreement with 21 banks to increase the commitment to $400.0 from $ 150.0, and terminated $ 150.0 of open domestic short-term lines of credit. The amended Agreement provides for a five-year revolving credit, with any borrowings outstanding at the end of that period convertible into a three-year term loan. Interest on borrowings under the revolving credit is at the prime rate of the agent bank, Citibank, N. A., and interest on borrowings under the term loan will be one-quarter percent above the then Citibank prime rate. The Company also has $200.0 committed under Eurocurrency Revolving Credit Agreements dated August 1, 1980. These Eurocurrency commitments are subject to mandatory reduction after four and one-half years and terminate at the end of seven years. Interest rates for the Eurocurrency agreements are Vi percent-5/8 percent above the prevailing London or Luxembourg interbank offer rate. No borrowings were made under either the amended Revolving Credit/Term Loan or Eurocurrency Agreements through February 23, 1981. Because these Agreements provide the ability to refinance the Company's commercial paper borrowings on a long-term basis, which the Company intends to accomplish through use of these Agreements or other sources of borrowings, $225.0 of commercial paper outstanding at December 31,1980, has been included in Long-Term Debt. In addition, certain ex-U.S. subsidiaries have short-term loan facilities aggregating approximately $457.1, under which loans totaling $141.3 were outstanding at December 31,1980. Interest on these loans is related to various ex-U.S. bank rates. Legal Proceedings Monsanto is a party to a number of lawsuits arising in the normal course of business. The more significant litigation is discussed below. On March 17,1978, the EPA filed suit in the United States District Court for the Northern District of Illinois against Outboard Marine Corporation of Waukegan, Illinois. The action is based on several federal pollution statutes and seeks recovery of civil penalties and the removal of polychlorinated biphenyls (PCB's) allegedly discharged by Outboard Marine into Waukegan Harbor and North Ditch, a tributary of Lake Michigan. In November, 1978, Monsanto was joined as a third-party defendant from whom indemnity or contribution was sought for products allegedly sold by it to Outboard Marine. The EPA filed an amended complaint on July 22,1980, asserting claims directly against Monsanto as the manufacturer of the products allegedly discharged by Outboard Marine. The EPA seeks a mandatory injunction requiring Monsanto and Outboard Marine jointly and severally to clean up the alleged PCB contamination. Monsanto has filed a crossclaim against Outboard Marine seeking indemnity or contribution for any losses it may incur. In a separate but related action, the State of Illinois has filed suit against Outboard Marine seeking substantially identical relief as that sought by the EPA. Outboard Marine has filed a third-party complaint in the Illinois action seeking indemnity or contribution from Monsanto. Monsanto is vigorously defending its position in both actions. The Company is one of several defendants in a number of lawsuits arising out of the use by the United States government of an herbicide known as agent orange in the Vietnam war. The first lawsuit in which the Company was served as a defendant was filed on February 1, 1979. Many of these actions have been consolidated for pretrial purposes in the United States District Court for the Eastern District of New York. The actions allege death, illnesses and birth defects resulting from exposure of United States and Australian Vietnam war veterans to agent orange. On December 26, 1980, the court granted plaintiffs' motion for class certification and dismissed the Company's and other defendants' third party complaints against the United States government. The Company and other defendants are seeking immediate appeal of these rulings. The Company will vigorously defend these actions. On June 11, 1979, Monsanto was joined as a defendant in the first of a number of lawsuits arising out of a tank car derailment which occurred on January 10,1979, in Sturgeon, Missouri. The initial actions were filed in state and federal courts in Missouri and in a state court in Illinois. During 1980, the Missouri state court cases were dismissed and refiled in Illinois state court. There are currently approximately 70 cases pending in the Illinois state courts, involving about 120 plaintiffs, and one case, involving 53 plaintiffs, pending in Missouri federal court. As a result of the refiling in Illinois, it is no longer possible to determine accurately the amount of damages claimed in those cases. The Illinois cases seek "in excess of" $1.0 actual damages and "in excess of" $0.7 punitive damages while the Missouri claim is for $2.6 actual damages. The cases have been filed against the railroad which had control of the tank car, the manufacturer of the tank car and the manufacturer of an allegedly defective coupling MAR 001497 LAM017616 61 device, as well as against Monsanto. Plaintiffs, who are residents and property owners in Sturgeon and workers involved in the cleanup of the spill of orthochlorophenol crude, allege against Monsanto that the Company negligently failed to warn of the alleged hazards of this material, failed to properly containerize the chemical and supplied an unreasonably dangerous product. In a separate suit filed in Missouri federal court, the railroad has sued Monsanto, the tank car manufacturer and the coupler manufacturer, seeking a determination of responsibility for expenses of the cleanup. In all of these cases, Monsanto has filed a third-party complaint against the company which conducted the cleanup, seeking indemnity or contribution for any judgment which may be rendered against the Company. Monsanto is vigorously defending each of these lawsuits. On February 21,1980, a federal jury in the Northern District of Illinois returned a $3.5 antitrust verdict against Monsanto. The Company's trial counsel has advised that there are substantial bases for appeal. Any final judgment would be trebled. While the results of litigation cannot be predicted with certainty, management believes, based upon the advice of Company counsel, that the final outcome of such litigation will not have a material adverse effect on Monsanto's consolidated financial statements. Capital Stock The outstanding preferred stock is stated at $2.24 per share, has a cumulative dividend of $2.75 per share and is convertible into the Company's common stock. The conversion rate of 1.12 shares of common for each share of preferred is subject to adjustment in certain events under antidilution provisions. The Company issued 39,241, 30,120 and 96,505 common shares upon conversion of 35,042, 26,931 and 86,194 preferred shares in 1980-1978, respectively. The 1980 and 1979 issuances included 39,241 and 28,552 shares, respectively, from treasury stock. Of 2,330,510 preferred shares originally issued in the period 1969 through 1974, a total of 2,207,371 preferred shares has been converted to 2,471,899 shares of common stock through December 31, 1980. The outstanding preferred stock may be redeemed solely at the Company's option at $73 per share (the voluntary liquidation preference). The Company also issued 40,775 and 41,138 shares out of treasury stock in 1980 and 1979, respectively, upon exercise of conversion rights by *** 00149B holders of convertible loan stock issued bv Monsanto Limited, a United Kingdom subsidiary. There were no conversions of loan stock in 1978. No common shares were issued in 1980,1979 or 1978 for conversion of convertible debentures issued by Monsanto International Finance Company. The Company held 58,106 and 55,174 shares of its common stock for specific purposes (principally for distribution to participants in the Employee Stock Purchase Plan) at December 31, 1980 and 1979, respectively. These shares are included in Common Stock in Treasury. There were 2,821,625 shares of common stock reserved for the following purposes at December 31,1980: Shares Conversion of $2.75 Preferred Stock........................ Stock option plans....................................................... Conversion of convertible loan stock of Monsanto Limited.................................................... Conversion of debentures of Monsanto International Finance Company............................ 137,916 2,372,332 176,400 134,977 2,821,625 Stock Option Plans The status of authorized common shares for stock option plans and the changes occurring during 1980 were: 1969 and 1974 Plans Shares Under Options Outstanding Shares Available For Grant At January 1,1980.............. Grants.................................. Exercises.............................. Cancellations...................... At December 31,1980........ 1,238,239 252,700 (15,285) (53,011) 1,422,643 1,153,128 (252,700) 49,261 949,689 Options outstanding at December 31,1980, were granted at prices ranging from $44.50 to $92.88, or a weighted average of $62.37 per share. Options for 932,529 shares were exercisable at December 31, 1980. The options exercised during the year had been granted at prices ranging from $32.50 to $61.44 per share. Stock appreciation rights (SAR's) are authorized to be granted at the same time the related non-qualified options under the 1974 Plan are granted. In addition, SAR's may be granted retroactively for any unexercised non-qualified options under either the 1974 or 1969 Plan. The exercise of an SAR cancels the related option; conversely, the exercise of an option cancels the related SAR. At December 31,1980, SAR's with respect to options for 371,821 shares were outstanding; of these, 262,371 were exercisable. In 1980, SAR's with respect to options for 58,350 shares were granted; 1,700 were exercised; and 15,700 were cancelled. 62 LAM017617 Ofl and Gas Activities Revenue and cost information concerning the Company's worldwide oil (crude oil, condensate and natural gas liquids) and gas related activities follows. The Company's net revenue (gross revenue less production costs) from oil and gas production from proved developed oil and gas reserves for 1980 was $88.3 ($84.1 United States and $4.2 ex-U.S.). These net revenue amounts exclude royalty interests and the operation of natural gas plants, which were $1.6 and $5.8, respectively, in 1980. The aggregate amount of capitalized costs (including construction-in-progress) relating to oil and gas producing activities and the aggregate amount of the related accumulated depreciation, depletion and amortization (DD&A), at December 31, 1980, were as follows: United States Ex-U.S. Total Proved properties: Gross capital...................... DD&A....................... .......... Unproved properties: Gross capital...................... DD&A.................................. $307.8 107.8 68.8 15.7 $13.7 5.9 8.0 3.4 $321.5 113.7 76.8 19.1 Costs incurred in oil and gas producing activities for the year ended December 31,1980, were as follows: United States Ex-U.S. Total Property acquisiton. . .......... Exploration................ .......... Development.............. .......... Production................... .......... DD&A......................... ....... Amortization of undeveloped leases .......... $ 32.9 44.9 44.4 39.7 11.8 6.0 $ 2.6 10.5 0.3 1.4 0.6 0.6 $ 35.5 55.4 44.7 41.1 12.4 6.6 Segment Information Operating Unit and World Area segment data for 1980-1978 required by Financial Accounting Standards Board Statement No. 14 appear on pages 45 and 46 of this Annual Report and are integral parts of the accompanying financial statements. The following discussion should be read in conjunction with that data. The impact of adopting Financial Accounting Standards Board Statement No. 34 in 1980 (see "Interest Costs and Income" note) was not material to the results of any of the operating units or world areas. Operating Unit Segment Data: The principal product lines included in each operating unit are shown in the "Sales by Product Group" data on page 36. Total sales between operating units (made on a market basis) were $249.8, $229.7 and $169.5 in 1980-1978, respectively. These sales were not significant for any operating units except Chemical Intermediates ($ 165.3, $ 151.9 and $ 116.3 in 1980-1978, respectively) and Industrial Chemicals ($45.3, $44.1 and $26.6 in 1980-1978, respectively). Unusual or nonrecurring charges or credits to operating income were as follows: Textiles operating loss for 1980 included a charge of $ 121.2 relating to withdrawal from the polyester filament business; Plastics & Resins operating loss for 1980 included a charge of $66.3 relating to withdrawal from Aiscondel, S. A., a majority-owned Spanish subsidiary; Textiles operating loss for 1979 included a charge of $77.4 relating to withdrawal from the European nylon business; Plastics & Resins operating income for 1979 included charges of $12.1 relating to the shutdown of a plastics business and $15.6 for the closing of certain product lines of Aiscondel, S.A.; and Plastics & Resins operating income for 1978 included a credit of $10.1 from the sale of the high density poly ethylene business. The Fisher Controls amounts for 1980 and 1979 reflect the operations of a new corporation formed by Monsanto and the General Electric Company Limited (See "Business Combi nations" note). Profit derived from intercompany sales is the principal item reflected in eliminations in arriving at the consolidated totals. Certain corporate expenses, primarily those related to the overall management of the Company, were not allocated to the operating units. Nonoperating assets principally include cash, short-term securities, time deposits and investments. World Area Segment Data: Inter-area sales, which are sales from one Monsanto location to another Monsanto location in a different world area, were made on a market basis. Export sales included in United States net sales to outside customers were as follows: Canada- Europe- Latin Asia- Africa America Pacific Total 1980.................. 1979.................. 1978.................. $68.5 55.7 73.2 $182.4 178.3 135.3 $241.0 172.4 101.6 $491.9 406.4 310.1 Unusual or nonrecurring charges or credits to operating income were as follows: United States operating income for 1980 included a charge of $ 121.2 relating to withdrawal from the polyester filament business; Europe-Africa operating income for 1980 included a charge of $66.3 relating to withdrawal from Aiscondel, S. A., a majority-owned Spanish MAR 001499 LAM01761B 63 subsidiary; Europe-Africa operating income for 1979 included charges of $77.4 relating to withdrawal from the European nylon business and $ 15.6 for the closing of certain product lines of Aiscondel, S. A.; Canada-Latin America operating income for 1979 included charges of $ 12.1 relating to the shutdown of a plastics business and $8.5 relating to the maxi-devaluation of the Brazilian cruzeiro; and United States operating income for 1978 included a credit of $10.1 from the sale of the high density polyethylene business. Inter-area receivables and the profit derived from inter-area sales are the principal items reflected as eliminations in arriving at the consolidated totals. World area operating income (loss) for 1979 was restated from that previously reported to reflect a consistent method of allocating the inter-area items for the periods presented. Unallocated corporate expenses and nonoperating assets are the same as those described for the Operating Unit Segment Data. Following is a reconciliation of ex-U. S. operating income and total assets as shown on page 46 to the Company's equity in the net income (loss) and net assets of consolidated ex-U.S. subsidiaries: 1980 1979 1978 Operating income (loss): Europe-Africa.................. ... Canada-Latin America .. Asia-Pacific...................... Income charges--net.......... Income taxes......................... Net (loss) of consolidated ex-U.S. subsidiaries.......... .. $ (43.8) 24.2 12.9 (6.7) 48.2 10.9 $ (66.8) 3.6 20.4 (42.8) 56.7 (69.5) $ 15.2 10.0 10.5 35.7 80.5 13.7 $ (65.8) $ (30.0) $ (58.5) 1980 1979 1978 Total assets: Europe-Africa.................... Canada-Latin America ... Asia-Pacific.......................... Total liabilities...................... Net assets of consolidated ex-U. S. subsidiaries.......... $1,026.3 291.3 176.1 1,493.7 699.9 $ 793.8 $1,198.3 300.5 181.0 1,679.8 918.4 $ 761.4 $1,147.7 308.6 158.4 1,614.7 1,025.3 $ 589.4 001500 LAM017619 64 Independent Auditors' Opinion on Financial Statements Independent Auditors' Opinion on System of Internal Accounting Control To the Shareowners of Monsanto Company: We have examined the statement of consolidated financial position of Monsanto Company and Subsidiaries as of December 31,1980 and 1979, and the related statements of consolidated income, shareowners' equity and changes in financial position for each of the three years in the period ended December 31,1980. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, such consolidated financial statements present fairly the financial position of Monsanto Company and Subsidiaries at December 31, 1980 and 1979, and the results of their operations and changes in their financial position for each of the three years in the period ended December 31,1980, in conformity with generally accepted accounting principles consistently applied during the period except for the change, with which we concur, in 1980 to the method of capitalizing certain interest costs as described in the "Interest Costs and Income" note to the financial statements. To the Shareowners of Monsanto Company: We have made a study and evaluation of the system of internal accounting control of Monsanto Company and its United States subsidiaries in effect during the year ended December 31,1980. These companies constitute approximately 75 percent of consolidated total assets at December 31,1980 and approximately 68 percent of consolidated revenues for the year then ended. Our study and evaluation was conducted in accordance with standards established by the Ameri can Institute of Certified Public Accountants. The "management report" on page 30 explains the responsibility of management of Monsanto Company to establish and maintain a system of internal accounting control and the broad objectives and inherent limitations of a system of internal account ing control. In our opinion, the system of internal accounting control of Monsanto Company and its United States subsidiaries in effect during the year ended December 31,1980, taken as a whole, was sufficient to meet the objectives referred to above insofar as those objectives pertain to the prevention or detection of errors or irregularities in amounts that would be material in relation to the financial statements of Monsanto Company and its United States subsidiaries. /{itnZtc. Saint Louis, Missouri February 23,1981 Saint Louis, Missouri February 23,1981 MAR 001501 LAW1017620 65 Ten-Year Summary Monsanto Company and Subsidiaries (In millions, except per share and where italicized) Operating Results Net sales................................................................................................................................................ Operating income................................................................................................................ Interest expense.................................................................................................................... Income taxes............................................................................................................................... Net income......................................................................................................................................... Percent ofnet sales................................................................................................................ Percent ofaverage shareowners' equity............................................................................ 1980 $6,574 210 112(1) 57 149(1) 2.3% 5.3% Earnings per common share: Primary................................................................................................................................. Fully diluted........................................................................................................................... $ 4.10(1) 4.06 Year-End Financial Position Total assets................................................................................................................................. Working capital................................................................................................................................ Property, plant and equipment--gross......................................................................................... Property, plant and equipment--net............................................................................................. Long-term debt........................................................................................................................................... Shareowners'equity....................................................................................................................... $5,796 1,226 6,074 3,109 1,371 2,808 Other Data Per common share: Dividends................................................................................................................................. Shareowners'equity............................................................................................................ Property, plant and equipment additions........................................................................ Depreciation, depletion and obsolescence...................................................................... Year-end: Shareowners: Common................................ Preferred .............................. Common shares outstanding Employees................................ $ 3.55 77.63 $ 781 547 82,441 871 36.2 61,836 1979 $6,193 487 123 150 331 5.3% 12.3% $ 9.11 9.03 $5,539 1,323 5,529 2,818 1,203 2,782 $ 3.35 77.20 $ 566 413 85,608 952 36.0 63,926 MAR 001502 LAM017621 (1) Beginning January 1, 1980, Monsanto began capitalizing interest costs related to construction-in-progress expenditures in accordance with Financial Accounting Standards Board Statement No. 34, "Capitalization of Interest Cost." In 1979 and prior years, all interest costs were expensed as incurred. The effect of the new accounting principle was to decrease interest expense by S51.6 and increase net income for 1980 by $27.5, or $0.76 per primary share. (2) As of January 1, 1974, the Company and certain of its domestic subsidiaries changed their method of inventory valuation for substantially all United States inventories from the FIFO basis to the LIFO basis. The effect of this change was to decrease 1974 income by $77.5, or $2.26 per primary' share. 66 1978 $5,019 632 103 274 303 6.0% 12.2% $ 8.29 8.21 $5,036 1,296 5,167 2,605 1,224 2,579 $3,175 71.26 $ 480 288 86,775 1,156 36.2 62,851 1977 $4,595 610 86 248 276 6.0% 11.9% $ 7.46 7.37 $4,350 1,080 4,745 2,409 1,031 2,401 $3,025 66.16 $ 607 296 85,021 1,404 36.3 61,519 1976 $4,270 668 80 251 366 8.6% 17.3% $10.05 9.77 $3,959 1,106 4,208 2,090 915 2,253 $ 2.75 61.79 $ 647 226 84,647 1,956 36.4 61,903 1975 $3,625 547 56 230 306 8.4% 16.4% $ 8.63 8.22 $3,451 1,150 3,620 1,660 845 1,977 $ 2.55 56.62 $ 528 173 91,725 2,836 34.8 59,242 1974 $3,498 550 43 251 323(2) 9.2% 20.0% $ 9.25(2) 8.73 $2,938 968 3,157 1,312 587 1,755 1973 $2,648 406 39 173 238 9.0% 17.2% $ 6.90 6.54 $2,545 855 2,852 1,152 579 1,484 1972 $2,225 216 37 81 122 5.5% 9.7% $ 3.49 3.40 $2,237 til 2,765 1,133 576 1,294 1971 $2,087 178 39 66 94 4.5% 7.8% $ 2.65 2.63 $2,154 547 2,735 1,170 558 1,226 $ 2.30 51.39 $ 313 172 $ 1.90 44.26 $ 205 170 $ 1.80 39.05 $ 168 194 $ 1.80 37.16 $ 205 187 98,542 3,709 34.1 60,926 98,964 3,855 33.4 58,277 104,369 3,939 33.0 57,891 110,490 3,897 32.8 59,271 MAR 001503 LAIW017622 67 Directors and Officers Board of Directors John W. Hanley, St. Louis Chairman of the Board and Chief Executive Officer Edmond S. Bauer, St. Louis Chairman of the Board and President, Fisher Controls International, Inc. Donald C. Carroll, Philadelphia Dean of The Wharton School, University of Pennsylvania C. Raymond Dahl, San Francisco Chairman of the Board, Crown Zellerbach Corporation Louis Fernandez, St. Louis Vice Chairman of the Board J. William Fisher, Marshalltown, la. Former Chairman of the Board, Fisher Controls Company, Inc. Richard I. Fricke, Montpelier, Vt. President, National Life Insurance Company James J. Keriey, St. Louis Chairman of the Finance Committee Howard M. Love, Pittsburgh President, National Steel Corporation Richard J. Mahoney, St. Louis President Jean Mayer, Medford, Mass. President, Tufts University Buck Mickel, Greenville, S.C. Chairman of the Board, Daniel International Corporation (a subsidiary of Fluor Corporation) Edward L. Palmer, New York Chairman of the Executive Committee, Citicorp and Citibank, N. A. Francis E. Reese, St. Louis Senior Vice President Monte C. Throdahl, St. Louis Senior Vice President Margaret Bush Wilson, St. Louis Attorney, Wilson, Smith and McCullin Committees of the Board of Directors Audit Jean Mayer Buck Mickel Edward L. Palmer Margaret Bush Wilson Executive Louis Fernandez John W. Hanley James J. Keriey Richard J. Mahoney Margaret Bush Wilson Executive Compensation and Development Richard I. Fricke Howard M. Love Buck Mickel Finance Donald C. Carroll C. Raymond Dahl J. William Fisher John W. Hanley James J. Keriey Richard J. Mahoney Edward L. Palmer Nominating C. Raymond Dahl Howard M. Love Buck Mickel Pension and Savings Funds Donald C. Carroll Louis Fernandez Richard I. Fricke James J. Keriey Jean Mayer Officers Chairman of the Board and Chief Executive Officer John W. Hanley Vice Chairman of the Board Louis Fernandez President Richard J. Mahoney Chairman of the Finance Committee James J. Keriey AC Executive Vice President Francis J. Fitzgerald Senior Vice Presidents Robert L. Berra Francis E. Reese Howard A. Schneiderman Monte C. Throdahl Group Vice Presidents Robert E. Burke C. Preston Cunningham Earle H. Harbison, Jr. Nicholas L. Reding Vice President, Secretary and General Counsel Richard W. Duesenberg Vice Presidents Constantine E. Anagnostopoulos Alfred W. Andrews Leonard A. Cohn Harold J. Corbett S. Allen Heininger Joseph T. Nolan Sam Pickard 2 Ernest S. Robson, Jr. ^ Francis A. Stroble Treasurer 3 o John A. Rolls S Controller Michael F. Mee LAM017623 MAR 001505 LAM017624 Annual Meeting The next Annua] Meeting of the shareowners of Monsanto Com pany will be held at 1:45 p.m., Friday, April 24,1981, at the Com pany's General Offices, 800 N.Lindbergh Blvd., St. Louis County, Mo. A formal notice of the meeting, together with a proxy statement and form of proxy, is being mailed to each shareowner. 10-K Report A copy of Monsanto Company's Form 10-K Report filed with the Securities and Exchange Com mission for 1980, which contains additional information relating to Monsanto, can be obtained by writing to: Shareowner Rela tions Department, Monsanto Company, 800 N. Lindbergh Blvd., St. Louis, Mo. 63166. Transfer Agents Morgan Guaranty Trust Company of New York The Boatmen's National Bank of St. Louis Registrars The Chase Manhattan Bank, N.A. St. Louis Union Tfust Company Design: Arnold Saks. Inc. Monsanto Company :00 North Lindbergh Boulevard it. Louis, Missouri 63166 MAR 001506 LAM017625