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Monsanto 1985 Annual Report 0674674 TOWOLDMONOOI5338 Ni*f toss in 1985 includes net restructuring coil of SWlmitlian ($4.43 per stsare) and an extraordi nary income item of Uf) million t$0.40per share}. Net income m ?9.3 includes an extraordi nary income item oft33 million ($0.41 per share). (Dollars in millions, except per share) Net Sales Net Income (Loss) Per Common Share: ` Net Income (Loss) Dividends Shareowners' Equity Depreciation and Amortization Funds Provided From Operations Research and Development Expenses Percent of Long-Term Debt to Total Capitalization 1985 *6,747 * (98) 1984 *6,691 * 439 1983 *6,299 S 402 *(1.27) 2.45 44.38 S 599 S 889 * 470 * 5.42 2.25 46,43 ' S 503 *1,008 * 370 S 4.89 2.075 44.83 S 523 * 948 * 290 38% 18% 20 i i i j Contavti Letter To Our Shareowners 2 Introduction 5 Monsanto Agricultural Company C Monsanto Chemical Company 10 | Monsanto Electronic Materials Company 14 ! Fisher Controls International, Inc. 16 ! G. D. Searle & Co. U The NutraSweet Company H Research and Development 20 Financial Report Contents 22 Board of Directors and Officers W | Shareowner Information 47 MflrtidflJO Company an4 Substdutriet 0674675 TOWOLDMONOOI5339 onsanto Company meets customer needs by Monsanto trademarks tn the Annual Report are Mproviding high-quality chemical and agricultural j identified by italics. products, pharmaceuticals, low-calorie sweeteners,! ; industrial process controls, man-made fibers and electronic! ! materials. We are growing in these markets by using j ; technology to develop new products which deliver added ! value to our customers and society. At the same time, our ; 1 56,000 employees are committed to the highest standards ! I of conduct in the more than 100 countries where we do | ! business. ! i 1985 Stitt by Dptratinc Group | Dollars in Miltions ' InJHiin 'icjrfir fiK the fnv /wonlh fitnud j .4kpijs-PKfmAr- lBBSWoriMdiSdai Dollars rw Millions IMS S*i to Milor Mwtata Dollars in Millions I TOWOLDMONOOI5340 Richard J. Mahoney, PmMmliid ChM Exocutlin Officer l ineteen eighty-five was the pivotal year in recent Company history. The decisions taken and carried out will influence the Company's fortunes for years to come. Consider this: We virtually completed the trails* formation of our chemicals, fibers and plastics businesses from heavy dominance by commodity petrochemicals just a few short years ago to a higher-performance, less-cyclical mix. Our future will be driven far more by our own technology, marketing and manufacturing than by broad, uncon trollable externa] conditions. This $3-plus billion unit, named Monsanto Chemical Company, is smaller in sales and staffing than its predecessors, but more profitable, and in 1986 it would rank just over No. 100 in the fortune 500. We acquired G. D. Searle & Co., capping a decade-long effort to enter the pharmaceutical business. The combined Searle/Monsanto pharmaceutical strengths based on chemistry and biotechnology have the potential to stand among the very best pharmaceutical companies in the world. We're investing heavily in leadershipquality research and development. Because we're plowing cash back into the business in Our commitment to the future, current earnings are non-existent -- but the rewards look very promising indeed. We added an extraordinary product to the corporation -- NutraSweet brand sweetener. Sales and earnings gains from The NutraSweet Company subsidiary are impressive, and we're working toward a secure position after U.S. patents expire in 1992. We expect this unique artificial sweetener will surprise a lot of people with its earning power and durability. NutraSweet is one of the early opportunities for the Searle/Monsanto merger to yield real synergy,with Monsanto's engineering know how now being applied to lower the cost of production. Monsanto's first biotechnology prod uct, targeted ro improve milk productivity in cows, is on schedule for market entry m 1988. Development expenses are very large, but so is tbe opportunity for profit -- this could well be a worldwide market ol more than SI billion. We've also made rapid progress on moving another promising biotechnology product out of our labs. Atrial peptides, which control high blood pressure, are now into the pharmaceutical development process at Searle. PfldVOX control room instrument'' from Fisher passed one of our mafor competitors in sales in this important growth sector, PRUVOX electronic instrumentation makes it possible for manufacturers to achieve plantwide, integrated process control, providing cost reduction and quality improvements -- critically important needs even in these times of low capital spending for new capacity. Across the Company, we made dramatic improvements in our cost -crik- 067487? TOWOLDMONOOI5341 | ture for 1986 and beyond. In doing so, we reducing production rather than supporting tteated our employees in a responsible global competitiveness for one of America's manner, offering generous early retirement premier high technology industries. Else or job search skills to those who were where in the agricultural world, we're doing displaced. satisfactorily, but the reduced U.S. corn and am We are very proud of the strides soybean acres will be missed, especially for achieved in making a safe company even Lasso herbicide. VCfe've intensified our effort safer. A special task force spearheaded a to move Roundup herbicide into new uses companywide JO percent reduction in the so it cc a continue its worldwide growth. storage of high-hazard materials and further We're working hard to get the agricultural j strengthened the safety of plant operations products earnings engine revved up again I and the shipment of raw materials and as we await R&D products now in the | products. pipeline. I We were able to get these things done Hi The U.S. industrial economy -- that I by carefully balancing borrowed cash with part that makes non-military goods -- is money from the sale of assets. We sold our still on hold. We expect the cheaper dollar i oil and gas business just before the bottom to provide some relief from the devastation fell out of the price of crude. Searle's of imports, but this is coming slowly. Even consumer products business and our Seal if the softening dollar helps on exports, the Sands plant in the United Kingdom were nc duration of the dollar's prior strength longer critical to our strategies and were encouraged a significant move from oppor j worth more in the hands of others. They tunistic imports to a more permanent kind. j were sold at an attractive value to our i Coping with this requires the most careful shareowners. ' market segmentation and competitive It: is a fact that today we are more assessment possible. Unfortunately, we leveraged, but our ability to generate cash is and our customers carry a lot of "made impressive and means we can both service in Washington" baggage in the competitive our debt and reduce it to targeted levels fray -- regulatory, litigation and other costs over the next few years. Wre not as flush which many of our international competi j with cash as we once were, but we're far tors don't face -- but it's our job to deal i more flush with opportunities and we have with these realities, and we will. i the total resources to capitalize on them. During the year, we quite often saw We also had some disappointments in outside reports on Monsanto's positive steps 198J: for the future characterized in one form or JI am Our long-standing promise to deliver profits in electronic-grade silicon wafers another as "Good strategic moves -- wait and see." i was derailed by the worst recession in the To your management, the job is very | U.S. semiconductor industry's history. We'll dear. We have invested substantial assets ! make no rosy forecast (as we did last year) towards the future, and we must make the except to say there is evidence that business future happen as quickly as possible. Wk \ will be better, and all the fundamentals are will, however, continue to make moves that j in place. We've lowered our break-even provide a durable result. The "Quick Stock ! point in silicon to about 50 percent of plant Fix" scenario has a siren song appeal: liqui | capacity, but that didn't matter much when date everything in sight, decimate research, : we ran a good pan of 1985 at 25 percent. buy in shares and listen to the applause 1 We need no new investment to turn this from the then shareowners. But next year : business around -- just some orders from this resulting dull, no-growth, uninteresting the overdue recovery of the world seimcon- stock would soon be dumped in favor of ductor market. the newest "asset play." Mb The U.S. agricultural economy has Instead, we have a view of somewhat deteriorated due in large measure to disap different stakeholders, those with short pearance of export markets. As usual, term and longer-term interests in the Washington's remedy is heavily weighted to Company. 0679876 -M i' Our intention to serve them is simple in concept. We intend to place Monsanto among the handful of great industrial enter prises in the world -- the best in what we choose to do -- measured by consistent returns for our many stakeholders. It requires no new strategy. Those deci sions are behind us. It does require these actions: ' For the shareowner-stakeholders, this promise means aiming for a return on equity year after year in the 20 percent range. We finished 19S4 at 12 percent, and 1985 was lower than that based on continu ing operations. Our past product mix could nor get us there. But now we have that Ritlrlng Ctolmin opportunity. Our restructured product mix Dr, Uub F*rinM<ta can get us there arithmetically in the 1990s -- we have a good balance now, and we intend to reach for this target. For our customer-stakeholders, we must work every day to meet the highesr standards of value, quality and service in the products we sell. Their rewards will be measured in how well we meet their needs. For our employee-stakeholders, we must provide safe, meaningful and reward ing work in an environment in which each person has an equal opportunity to succeed. Vfe want to ensure that Monsanto is a great place for our people to invest in their careers. For our neighbor-stakeholders, we must strive for a lasting and rewarding part nership which respects their needs. We want our communities to benefit from the contri- j butions of a highly desirable neighbor. j The job of the Board of Directors | and your management is to serve each of [ these groups. We have a clear view of the company we intend to be, and we're com- I mined to those actions which will get us j to our goals. The rewards are there for all | our stakeholders. j I i Richard J. Mahoney ; President and Chief Executive Officer * I March 5, 1986 j'Effective April t, 1986, \ Mr. Mahoney becomes I Chairman of the j Board and Chief : Executive Officer Dr. Louis Fernandez retires April 1 as Chairman of the Board of Direcrors for Monsanto Company, completing 37 years of outstanding service and leadership to the Company. When he joined Monsanto in 1949, Dr. Fernandez entered an industry that was just coming to grips with the tech nological revolution-in petrochemicals. He understood the magic of that technology, and he helped bring it to the world from a wide variety of executive positions. His ; skills, advice and counsel were invaluable I to the growth of Monsanto and to the | planning and implementing of the new | directions it is now taking. Equally impor- L> ! rant, he helped coach and shape outstanding managers at every level in Monsanto. 1 Those are proud accomplishments, but there is more. During the past decade. | Dr. Fernandez became a sensitive and effec tive leader for the chemical industry, particularly on environmental issues. He understands the public's concerns and knows that they must be dealt with openly . and honestly. He helped make Monsanto managers advocates of cooperation rather ; than confrontation on environmental issues, : and the Company has benefited from that | attitude. : Monsanto is a better company because ot : Dr. Fernandez. That is a legacy of which he can be proud. 0674879 TOWOLDMONOOI5343 I Tit* EmmuUvi Minfnwrt CmMNlitN toricb will iddt Mwwtnta In Hit r*rv nhtnd InchMtot; Wl to rl|M ftebtrt L tore*, Hirdd ), Cortott* FrandiJ. FHzftrnM onsanto Company has restructured to achieve its strategic goals and better serve its many stakeholders. Recent acquisitions and discoveries have added exciting new opportunities to its traditional strengths and markets. Nevertheless, challenges will face the Company in the years ahead and Monsanto is fully committed to meeting them head on. Results will be delivered by Monsanto's strong management team through the six operating companies and research efforts described in the following pages. Mclwtd |. Mihtmiri hrb H. >r. Irtandhf}, hr. 1 Alto HdHlnpr, ftotofl Q. Ntter Mchoto t Itodlif totmdtolh Dr* Hwranl A. SchMkbnran. Franck & StraMa. r/r MvtMJhtm mshs \\ ft -*4a- O6740BO s TOWOLDMONOOI5344 t onsanto Agricultural Company brings together Mhigh technology chemicals and products in plant and animal sciences to serve agricultural and related industries everywhere in the world. ; It was a tough year in 1985 for agricultural businesses, j Sales and operating income were lower than in 1984. Lasso herbicide is primarily a U.S. business, and the I recession in the nation's farm economy hurt sales in i major corn and soybean markets. That was the largest | single factor in the disappointing results. I MieMuMji apfllftt pit* I MMfMt MMd fiMtnl . tMMfltt ta Utt ltduoti Hfaga Mdt ol mimH pain pwn i I / I 1* 0674B81 TOWOLDMONOOI5345 !------------- :------------------------- Roundup herbicide, by comparison, is | more of an international business, with i hundreds of uses in more than 100 coun tries. Sales in the United States were affected by the farm economy, but business in other world areas, particularly northern i Latin America, Canada and Western | Europe, was relatively strong, The use of ' Roundup for industrial, forestry and home | and garden markets continued to grow, i Overall, however, sales of Roundup were i marginally lower, though usage was : higher, as inventories were reduced, j Avadex BW herbicide, used primarily | to control weeds in wheat and small grains, had a good year, with sales gains from outside the United States. During 1985, Monsanto Agricultural Company (MAC) introduced Limit turf [ regulator in the northeast United States for i commercial markets such as golf courses, ! highway rights-of-way and cemeteries. It : reduces the growth of cool season grasses, i allowing fewer mowings and more effi: cient property management. In other areas, sales of Alimet liquid feed supplement for poultry benefited from the company's low-cost manufactur ing position and a price increase was put I in place late in the year. In addition, proprietary varieties of soybean and hybrid wheat seeds continued to be well received ' by U.S. farmers. "It was a difficult year," said Nicholas j L. Reding, Monsanto Executive Vice : President and President of MAC. "Forming | a single agricultural company from three ! former units isn't a dramatic change. We ! are still in the same businesses -- agnail ! tural chemicals, animal products and seeds. But bringing them together helps ' us plan for challenging economic and competitive conditions. Our strategy is set for each major business." B Crop ChMtksal* MAC's large crop chemical businesses remain the foundation of the new company. Faced with a depressed farm economy in the U.S. and growing compe tition worldwide, the job of MAC is to sustain the flow of earnings from Lasso and Roundup, while developing new Mwrssto gartenHaral CMitM, PmMant Mehaln L Radtaf (cMtsrl plaw haalatti atratacfas Mi nthafiM, Lsno Mcre-Acft htrblcMt Mnttion MimKlats Mp h(MmHmi--Wj-v--BtaMuNcapiMtn-MtM-Iswal m mtewpndw pWehjw traittimugli vtaibbia In products. For Lasso, that means retaining its position as the premier corn and soybean herbicide. There are compelling economic reasons for farmers ro use Lasso in its various forms. On-the-farm rests show that using Lasso helps improve revenues through better weed control and less crop stress, which increase yields. In reduced tillage, farmers leave crop residues in the field after harvest. It conserves moisture, helps control erosion and reduces the number of tillage trips across a field, thus saving time and fuel. With the develop ment of effective herbicides like Lasso Micro-Tech, reduced tillage is becoming cost-effective and popular with farmers around the world. During 1985, the U.S. Environmental Protection Agency (EPA) initiated a Special Review of Lasso herbicide. Tests submitted to EPA by Monsanto for (he agency's Standard re-registration process showed that laboratory rats fed high levels of alachlor, the active ingredient in Lasso. daily for most of their lives developed tumors. There is no evidence that alachlor causes tumors in humans, but as a result, EPA began a Special Review to examine all health, safety and benefits data on Lasso. That review should continue through 1986. MAC remains convinced that Lasso can be used safely, and the scientific data support (he product's continued registration. Also during the year, French authori ties reviewed the same issues and reaf firmed their decision that Lasso should continue to be registered. In Canada, a decision by the Minister of Agriculture to cancel Lasso registration has been T 0674BdZ TOWOLDMONOOI5346 appealed by Monsanto, and a special ' review panel has been established as provided for by Canadian law. No signifi cant effect on operating results is expected i from these reviews. ' Continuing the growth of Roundup , herbicide is a second element in the agri! cultural chemical strategy. Since its introduction in 1974/Roundup has been 1 one of the most successful herbicides ever developed. It has been accepted by farmers for controlling difficult weeds, by forestry professionals as a management tool and by industrial and highway maintenance departments as a cost-saving herbicide. Monsanto will build on that success, i "We're doing that by entering new markets and by fine-tuning the formulation for new ; uses,1' Mr. Reding said. "Landmaster herbicide, a mixture using the active ingre dient in Roundup, was introduced in 1985 ro U.S. wheat growers." Landmaster is especially beneficial in reduced tillage applications for dryland i wheat and small grains. Landmaster joins many ocher MAC specialized mixtures . developed to meet local needs, such as for ' wheat in Australia, vineyards in France ` and plantations in Malaysia. "We've also reduced prices for Roundup in the United States," Mr. Reding said. "We expect this to open new markets Bnk rwMrch Into Uw hnKUmUi nature ol plant* h ahnad at ervatbif xeHtag imw product! tar tarmurc. chemicals also has become more intense. "We're casting a wider net for new prod* ucts," Mr. Reding said. "MAC has the finest worldwide marketing, sales and product development organization in the industry, and we intend to keep ir busy." The company is investigating licens ing and acquisition opportunities around the world. MAC laboratories are looking aggressively for new herbicides and disease control products. A new class of chemicals looks promising. And, MAC is developing ways to speed up the screening and testing . process for new products, and has built in tougher research checkpoints to identify potential products more quickly. lapctidiii afriotdtufol prodiwtMty through batlor wadi h an Impertaat part of awr feturo -- indudhg eaaareh palm on ri Jacob Hail* Saod Co., Ik., part of Hjrbrflbch Scad bitermtteaali Inc. mm Animal Scfmcw While crop chemicals remain the largest product segment in MAC, new products in animal sciences have potential for growth and profitability. The most immediate task here is to commercialize bovine somato' tropin, a protein produced through genetic ' engineering that increases the efficiency of 1 milk production in dairy cattle. Field trials j are under way now on this research prod uct, and MAC has established a team of ; research, development and marketing people to commercialize it as soon as possible after regulatory approval. "We`re also pursuing a broad pro ; gram based on biotechnology to develop other products to improve animal produc tivity," Mr. Reding said. "They are aimed at reducing cosrs for the producer -- which in rurn means stabilizing or cutting the costs of meat, milk and eggs for consumers." while it helps farmers by reducing costs." An important part of the strategy is continuing growth in international markets for existing products. For exam ple, trial programs testing the effectiveness of Roundup, and other agricultural chemicals on farms in the Soviet Union and the People's Republic of China increased in 1985. The search for new agricultural mm Plant Sciences Two efforts are under way in plant sciences. One is an ongoing business. HybriTech Seed International, Inc., which markets hybrid whear seeds and propnetary soybean seeds in the United States and is developing hybrid wheat seeds m France. In wheat, research is under way , enhance hybrid seed production through chemical techniques. In soybeans, the Jacob Hartz Seed Co., Inc. continues to develop high-performing seed and food grade varieties. They introduced several 0674663 1 new lines in 1985. ' The second area involves funda1 mental work in Monsanto's corporate research laboratories using biotechnology 1 to develop more productive crop plants. : Short-term* the goal is to continue devel] oping improved proprietary seeds for existing markets. Longer-term, the goal is to use new technology in the seed industry, This mighr include plants that produce more protein, supply their own fertilizer, i grow in dry or cold conditions or protect { themselves against pests. Work also contim ; ues on developing microbes that produce | natural pesricides for protecting plants. Economic Outlook The economic outlook for agricultural : markets is mixed. Much of the farm econ omy in the United States is depressed and . probably will stay thar way for some time. For 1986, we expect only modest growth due ro uncertainty surrounding the U.S. government's farm programs, reduced Wtownti priOnU art JwlBMd for tWacUrn-- under ngtoHtf eMrittbM, m at Moftunta'i Kawacht plantings, continued depressed commodity prices and continuing fluctuations in credit/currency conditions worldwide. Other world areas, including the Eastern i bloc nations and the People's Republic of ; China, have growth potential. "Everywhere, the emphasis is on efficient production," said Mr. Reding. "Our products are aimed at helping im prove thar efficiency, particularly during difficult times. And in line with this | commitment, we will continue to speak | out for agriculture -- supporting eduea- ! tion and improved government policies ; and programs which help farmers. Our i fortunes are tied to theirs, and we intend ! to help them be successful. "A strong company like MAC cjn I manage its way through the times ahead I and continue to bring new and needed i technology to the market. That gives us a | decided edge now and for the future.'' 06 7466*1 * TOWOLDMONOOI5348 i; ,i n January 1,1986, Monsanto reaffirmed the Oimportance of its chemical heritage. Monsanto Chemical Company (MCC) joined the Company's i strongest chemicals, plastics and fibers businesses into a j $3-plus billion international organization. It was put together carefully with a wide range of successful products and with the resources to build on technology and market strengths for new products in the future, i MCC's goal is to bring to its many markets superior 1 products that offer higher value to its customers. thtnaoptoHc nkbttairhActmi*ctrt OrauMy pmwrtad at > tradt khe. M 0674065 TOWOLDMONOOI5349 Adding value to chemical products in innovative ways is the key to MCC's success. "To do this, the company must define its markets, differentiate the performance of its products from competition and become the most reliable supplier at the lowest cost in the marketplace," said Francis J. Fitzgerald, Monsanto Chemical Company President.* During the rest of the decade, MCC is expected to contribute a large percentage of total corporate profits. The j ptovtte (nttriifif, company is built around a less cyclical, less ' feand h lnnHwM flit*, ifforiblhti ffaumcM commodity-dominated product mix and a huMutim twpfWfd wMy steady flow of new marketing opportuni ties from products and services that are expected to drive growth through the 1990s and beyond. The future of the combined Monsanto Chemical Company businesses is brighter now than at any time in the last 20 years. , Major Product Families Monsanto Chemical Company has ongo- : ing businesses which are expected to turn , in sales of $3-plus billion in 1986, world wide. Approximately $2 billion of that . will come from healthy product families including carpet staple, detergent mate ; rials, Luslran plastics, rubber chemicals and Sjfhx interlayer. These product fami lies are supplemented by a healthy specialty chemicals business as well as a group of other smaller businesses, making it dear that MCC has a solid product foundation for the future, 1 Monsanto is the largest U.S. producer of nylon staple fibers for carper. Carpets ' made from Monsanro fibers are eligible : for inclusion in the program for Weardated textile products. This means that if the products don't perform in accord ance with Monsanto's warranty, Monsanro replaces them. MCC carpet fiber sales arc supported with some of the most innova tive marketing programs in the rex rile industry. The acquisition of the Witfield Divi- MMrtCLMtor, PrttMmt, Mvnttate Oi--ilcal CamMuy talfsctln Mprll 1] Pffcctire Apert I. tWifi, Mr. hligeraht becomes President And Chief Operating Officer of Monsanto. Mr. Robert (i. fritter becomes Peesident of MC'C orr that date. sion from Witco Corporation in 1985 reinforced Monsanto's position in the ! detergent industry. The Witfield unit, ! which extended Monsanto's product line : and broadened its overall product mix, . produces surfactant intermediates for ! detergent and specialty applications. I Lustrart is Monsanto's leading entry in high-performance plastics. There is a great deal of growth potential in this prod uct as manufacturers find more uses for Lustran in appliances, auto parts and | consumer products. Other major plastics j products include Vydyne nylon, Cadtm engineering thermoplastic and a new lire of polymer alloy engineering thermoplas tics. MCC is continuing to invest in the future of its plastics businesses. A new plastics customer applications laboratory soon will be under construction in the ) northeastern United States, and plant j capacity expansions are under way in Belgium and Japan. In addition, modern nation programs have beer completed at plants in Mexico and Canada. Monsanto's rubber chemicals busi; ness continued to lead the industry in ' worldwide sales in 1985. In addition, . the rubber chemicals j.'.ision completed i an expansion at its Akron, Ohio market ; ing and research center. Current research | programs are being aimed ar developing ' the lowest cost chemical processes and , new proprietary chemicals and instrii: ments for the rubber industry, Saftex plastic interlayer for auto motive and architectural glass continues to be an indusrry leader in worldwide markets. New markets are opening as . architects make more use of laminated glass in homes and offices. Saflux otters n 06798B6 uslical and ;s for industion offer n the automo- : Hwmrti h wftin nw Mfti ta4ards Hr qitfHty i control ami ipoeMtiMm it tta rocontty Mptmtod rnlbor ebomteota rooMrch contor In Miron, Ohio. nesses provides ales, Key hemicals which in established e ACL family /hich is a leader dimming pools, are analgesics t transfer func- , An hifo-Shar* oomlnor In ! LoiAflEolct, one of ton ; |ftM in IM5, Map Moifont iMtorlili , oootomiTf tocthr nrftti MonoMto lochwho, cwtomor urrloo and pMk poUcy oxborto. resins indude ure-sensirive X resins used ch as paints, wishes and reflec ts. crvlic fiber gained re in 198J, and is itcd on high value specialty products. Acrifon and other trademarked products include new fibers for socks, sweatsuits, upholstery, craft yarn and swearers. A growing number of leading mills and retailers offer Wr.nDated products, demonstrating high consumer recognition of the brand. Nylon filament, with a variety of industrial and carper end uses, continues to be an integral part of tbe fibers division. In addition, MCC maintained its world leadership position in acetic acid and maleic anhydride technologies. MCC\ other businesses include fabricated prod' nets, engineered products and HnviroChcm Systems, Inc. New Products MCC is commercializing innovative new- products. Simtopreuc thermoplastic rubber, for example, offers plastic's lower manufacturing costs and rubber's higher performance in hose, undcr*the*hood auto motive products, wire and cable, sheeting 06 7*1667 J TOWOLDMONOOI5351 and glazing gaskets. Certain grades of Siintoprene have been accepted by Under writers Laboratories, Inc. and the Mine Safety and Health Administration, while others can be used in accordance with U.S. Kood and Drug Administration reg ulations. A variation of Simtoprene introduced this year, Geofost thermoplas tic elastomer, combines the oil resistance of rubber with the economics and process ing case of thermoplastics. Technology Technologies offering substantial opportu nity tor commerical success are being funded in 1986 at $125 million. MCC has a three-fold strategy for technology. Hirst, scientists and engineers are working to shorten product develop ment lime -- the goal is five to seven years from discovery to commercialization. Second, MCC is increasing emphasis on the acquisition of technology from outside the company. Finally* it is expanding ta part if teer effln Panned* Technical CMtarr oomnwreW Interior Miner* axamhw ngrten carpet etepte libera. collaborative research with Monsanto customers in each of the major product families. "We will be able to accelerate the development of new products by building on existing technologies and finding new ways to apply them," said Mr. Fitzgerald. "We're putting less emphasis on building new processes and more emphasis on extending existing technology to proi idc a broader product mix. Acquiring new technologies, rather than developing them ourselves, will be an option we'll pursue." MCC technology programs will he less capital intensive. The focus will he mi the development of products like .S'tiufrjprune thermoplastic rubber-- productwhich are patented, meet market needs and whose value is in their function and performance. For example, Monsanto has devel oped sophisticated new technologies to combine polymers that ordinarily are incompatible, such as AflS plastic and u 0674866 TOWOLDMONOOI5352 I- nylon. Like metal alloys, these combina- i tions perform better than their compo nents would alone. The ABS-nylon alloy is among the toughest thermoplastics known, and also performs well at high temperatures. As a housing for power tools or lawn and garden equipment, it can stand up to motor heat, vibration and rough handling. Monsanto already has a solid record in amino resin cross-linkers, which help increase the durability and gloss of paints , and other coatings for automobiles, appli ances, metal cans and other items. A j newly developed family of cross-linkers I reduces solvent emissions and allows the coating to cure at lower temperatures. Reduced emissions are a major goal of the coating industry and lower temperature curing conserves energy and allows plastic to be substituted for metal, also reducing weight. Positive Public Imige "As a chemical producer, Monsanto has been leaving the low-margin commodities to focus on higher-value products," Mr. Fitzgerald said. "Beyond the business advantages, this change means we will no longer be dealing with some high-hazard products and will be transporting less hazardous raw mate rials. In addition, we will continue to take the lead in environmental safety and open, communications with the public," he said. "MCC inherited a good safety record and a tradition of high level performance. The new company's challenge is to maintain and improve on it," he said, "MCC's goal is leadership in both financial results and corporate citizenship. MCC's performance will be measured by Monsanto's investors, our customers, our employees and our neighbors." MatarUhCoffvuiry 14 onsanto Electronic MMaterials Company makes high-quality silicon wafers, the substrate for semiconductors used in computers and other electronic products. The company is among the world's largest suppliers of this material. i Markets for silicon were severely depressed i in 1985, particularly in the United States. | Customers were working off huge invento ries of semiconductors built up in prior years. In addition, semiconductor imports into the United States depressed markets | for U.S. producers. As a result, silicon j sales were extremely weak and the comj pany lost money for the year. Looking ! ahead, there are signs that the semiconducj tor market should improve in 1986, and Monsanto expeers sales to benefit. Monsanto's overall strategy of becoming an international producer of hlgh-qualiry silicon has not changed. There is also increased emphasis on cost control. The break-even point in manufac turing has been dramatically lowered to ; about SO percent of capacity, allowing quicker financial improvement when markets improve. New facilities in Japan, Korea and the United Kingdom are on schedule for completion in 1986, bringing production closer to worldwide markets. 0674889 isher Controls International, Inc. is a leading Fworldwide manufacturer and supplier of process control equipment and systems for the process and energy industries. Fisher sells more than equipment. It sells innovative solutions to customers' process I control needs. Fisher's sophisticated valves, regulators, measurement instrumentation and control systems are : designed, manufactured and sold through an expanding international network of research, manufacturing, sales and customer service facilities. Mart L Flynn, Ctakimn I Fisher overcame sluggish demand in some wdCWrtlwwbw Offkwr, PWwr Mtnto ! markets to outpace its competitors in 1985. ' PRoVOX distributed control instruments' tion led the way in that success, growing at twice the market rate since it was inrro- ; duced five years age*. PRoVOX is the cornerstone of Fisher's strategic position ! ing as a supplier of solutions for integrated ; process control. Product introductions continued in I 1985 with new valves and measurement instrumentation,, such as a portable level : expected to double by the 1990s. Fisher detector that can measure levels of liquids ; intends to be parr of this growth. | and solids from outside containers. i Fisher broadened its worldwide | PRoVOX technology also moved i manufacturing and product support i forward rapidly with the development : in 1985 with a new instrumentation j of software and interface packages I facility in England and other facilities i targeted to meet customers' needs in small | nearing completion. In addition, rhe 1 systems markets. These additions expand i company expanded its service and sales the already extensive PRoVOX line. They network, opening new markets in Europe : are attractive to customers because they ! and Asia-Pacific. | increase the capability of existing systems, ! In January 1986, the Monsanto 5epa- 1 give more price and capacity choices and | rations Business Group was incorporated i make plantwide system integration easier, ' as Perinea, Inc., and became a Fisher sub i The market for integrated systems is sidiary. Permea, Jnc. supplies membrane In lb first nwllcflUM In tin t--4 Mustrft mmkutounwMtoi pnvMts Uw Un4*m mifnrlns pUnt In and adsorption systems for gas processing, along with a variety of gas processing products. Permea, Inc, includes the newlyacquired Kemp and Maritime Protection Mflwr Iml coortiutlon, npwtlH iml trecfclnc. businesses. Fisher operates in competitive, international businesses. To continue its success, the company is committed to "Process Performance" -- combining qual ity, service applications, engineering and research to meet rhe needs of its many worldwide customers. Q67409O it OMK i new inU-idctf product approved In Europe* Latin America and bit, to produced under "dean room" coedittone at thtoledllty In England. cquiring G. D. Searle Sc Co. in 1985 gave Monsanto Aa long-awaited entry into the international pharma ceutical industry. Searle intends to strengthen its position through developing new chemical and biological products for its worldwide marketing and sales organiza tion. Discoveries emerging from Searle's research, plus those already under development at Monsanto, give Searle the breadth of research and diversity of discovery necessary to meet human needs for new, effective pharmaceuticals. 16 067*691 J TOWOLDMONOOI5355 G. 0. Searle & Co. was acquired by : sary to establish their safety and efficacy. Monsanto to provide established devel Among them is Atrial Peptide III, for opment and marketing skills as well as cardiovascular therapy. pharmaceutical research capabilities. Atrial peptide research is a good Monsanto's Health Care Division has been j example of how the Searle/Monsanto merged into Searle to create a strong, free- efforts support each other. This exciting standing subsidiary. "We now have an international protein was first identified at Washington University for further testing. Through pharmaceutical organization that is one collaboration with Monsanto, test quan of the top 30 in the world, and we intend to make it even stronger," said Earle H, j tities were produced using biotechnology and chemical synthesis. Based on promis Harbison, Jr., an Executive Vice President of Monsanto* and Chairman of the Board of Searle, Research will be the basis of that j ! fearlrt JYHrvdlte pid j \ prwfcte* HCM<d>r Rttrvtt Ihfrapy ter Dm pravurtto* ing results, atrial peptides are now moving into the development process at Searle. in addition to Searle's own new chemical compounds, new products arc strength. During the several years prior to the acquisition by Monsanto, Searle had increased its discovery efforts, and new drug candidates are beginning to emerge j {ditit pita}, thine a ! "UrMfhtfitpfcta"*vc drihwrjr ijntmt rfmtepvd by Suite raaaarcfe, hffrv- coming from Lorex, the Searle/Synthelaho joint venture. Lorex filed an application in the United States in 1985 to markeT Kertone, a patented beta blocker for the from that process. Combined with the health care research formerly conducted by var 124*baur parted. treatment of angina and hypertension. Kertone already is marketed outside the Monsanto, total research and development United States. capabilities at Searle have increased by To strengthen the companyposition almost 50 percent. Contributing to that in key markets, Searle has completed new work are the molecular biotechnology and I pharmaceutical manufacturing facilities chemical synthesis strengths of Monsanto | in Japan and Korea. In addition, a major and its joint research arrangements with | leading universities. j facility to support Cytotee was brought on stream in England. "Combining biotechnology with traditional chemical research forms a balanced program with the breadth we need to be a force in the marketplace," I Dr.SMdMQ.Ufm, PmklmtiBd Ctikf ExtentIr* OHteftr, G. 0. Start* AC*. Mr. Harbison said. "We will fund that work at between S160 million and $170 million in 1986, and we intend to keep investing at appropriate levels in the future." One of the important products now emerging from the Searle research efforts is Cyforec for the treatment of ulcers. Cyfofer has been successfully launched in Mexico and introduced in Switzerland, Searle's tasks for the future are to Malaysia and Singapore. continue Its aggressive research, divide its Cytotee registrations have been efforts appropriately among discovery, submitted in 36 countries, including I pre-clinical and clinical work, continue its the United States. To date, it has been toxicological and formulation testing, and approved in eight countries, with addi further strengthen its marketing and sales tional approvals anticipated in 1986. organization around the world. Beyond Cyforec, there are 21 new : "We intend to build one of the top chemical or biological entities in various : competitors in pharmaceuticals, world stages of the development process neces- j ; wide," said Mr. Harbison. "Time will tell, tiff'cctiiv April f. 1986, Mr. Harbison becomes Vice C/urrHUM of Monsanto Company. ' 1 but we are confident we have the elements in place to be a winner." II 0679B92 he NutraSweet Company was made a free-standing Tsubsidiary on January 1,1986, allowing the company to focus on continuing its outstanding market success with NutraSweet brand sweetener, the leading low-calorie sweetener in the United States. Since its approval by the U.S. Food and Drug Administration in 1981, NutraSweet has grown to sales of over $700 million in 1985? It is estimated that more than 100 million people throughout the world now use products containing NutraSweet. And the markets continue to grow. II 0674893 The effect of NutraSweet on the growth of several food categories has been dramatic. After hot cocoa mixes sweetened with NutraStveet appeared on the market, sales of rhese products stopped declining and grew by about 25 percent. Powdered soft drinks were once a stagnant $650 million market. Since the introduction of NutraStveet brand sweetener in rhese prod ucts. their sales grew to $900 million in less than three years. Equal, a low-calorie tabletop sweetener made with NutmSweet and the company's entry into the food business, is another excellent example of market growth. Since Equal was intro duced in 1982. the tabletop sweetener market has grown from about $100 million to over two and one half times that amount; and Equal has captured over half of the dollar sales in this expanded market. But most dramatic has been the impact of NutraStveet on the soft drink industry. Until the introduction of NutmSweet in carbonated beverages in late 3983, the diet soft drink market had been growing at a moderate rate. Since that time, there has been a tremendous acceleration in this segment's growth. Currently, sugar-free brands are growing at an annual rate of 11 percent as compared to a 2 percent rate for sugar soft drinks. In 1985, sugar-free soft drinks accounted for about 25 percent of grocery store soft drink sales in the United States. Today, more than 45 sugar-free soft drink brands, including all the major brands, are sweetened 100 percent with NutmSweet. NutraSweet has become the industry's sugar-free sweetener of choice. As with any successful product, there are those who seek to make unsub stantiated charges against the product. NutraSweet is one of the most thoroughly tested food additives ever evaluated by the U.S. Food and Drug Administration (FDA) and has undergone over 100 scientific studies over a 20-vear period. Regulatory and scientific authorities throughout the world have reviewed rhe data on .VnfiuSuvrf and have found it to be safe for the general population. These authori ties include the FDA, the World Health : Organization, the Council on Scientific ; Affairs of the American Medical Associa- i tion, the Scientific Committee for Food of : the Commission of the European Commiti niries and rhe regulatory bodies of more j than 50 nations. When NutraSweet was nationally : launched, the decision was made to market it as a brand -- which was a first for a food ingredient. Food and beverage manu facturers carried the NutraSweet brand ! name on packaging and in advertising. ' A red and white peppermint swirl was 1 created to identify products sweetened i exclusively with NutraSweet brand ' sweetener. Marketing and advertising campaigns in 1985 were designed to develop the ; consumer's understanding of the benefits j of NutraSweet, to promote recognition of j the NutraSweet swirl logo, and ro build consumer preference for brands sweetened 100 percent with NutraSweet, Today, some j 98 percent of U.S. consumers are aware of i NutraSweet. Further, 72 percent of The public has tried products containing NutraSweet, and three-quarters of rhese U.S. consumers are repeat users. Sweeteners are not new to Monsanto -- over 85 years ago the Company's first product was saccharin. Today, Monsanto is excired at reentering this market with NutraSweet, one of the most successful ' new food ingredients in history. Th* tti and vhN PPtniiliri iwtrl UmMm pradaeU iwHtaiMd ocelli' tfrfly wHh PMnSmtL 0674694 it onsanto's ability to improve the profitability of Mexisting products and to discover new ones is the strongest in history. With over $500 million budgeted for research and development programs in 1986, the Company is well positioned to compete effectively, not only in today's marketplace, but two, five and ten years from now. Intimidating skills in chemistry, molecular biology, process engineering, life sciences and other fields are closely coupled to imaginative business strategies. Dr. Hotrird L SphiwUMinM Itafl], tocuim pttMidal bktfclmdoir ippHcnUon wMh Dr. flnrfft JL Kayworth II |MHhr|, ScfcflM Mvtor loth* PrMMtnt, Md MIaii Prlnw IHflMtr Rijh Gandhi ttlie Natkn*l Acjutany of Sctoncn, Wothhifton, D.C. Dr. Philip NMdkniM |oitdl Wwwni Prohisor Mid Mood of lh PhproiO' cotafy Dvportimnt ot WnMnilM Unkaretty khotl of Modklni, kotitod mi MoirtMod trill MPIdH mw Mni divlopod by Burlt. According to Dr. Howard A.Schneiderman, Senior Vice Presidenr and Chief Scientist, Corporate Research and Development, "Monsanto has a powerful technological and scientific base on which to draw to ensure the economic future of the Company, A challenging and productive research environment attracts and keeps top scientists and engineers. As business objectives change, the supporting science and technology also change. But Monsanro's unswerving and durable commitment to good science remains the key to the corporation's technology and business strategy," Biotechnology and genetic engineer ing arc important areas of research emphasis. An extraordinarily talenred team of young scientists is looking for new ways to treat major human diseases, to improve meat and milk production and to enhance productivity in important agricultural crops. In each of these areas. Monsanto's biotechnology ream has developed attractive produa candidates which are moving steadily toward commercialization. Monsanto has established intimate assumptions with major research-based universities, such as Washington Univer sity; Oxford University and Rockefeller University, which have begun to pay divi dends by identifying new product leads and by expanding the scientific under standing needed to discover new- products. New fibers, plastics, composites, high-performance polymers and polymer blends, coating materials, rubber chemicals and detergent materials are crucial areas of major on-going research. In optimizing Monsanto's traditional strengths, scientists and engineers are focusing on innovative ways to shorten the time required to develop products, including collaboratin' research with customers. In agriculture, new sources of product leads for herbicides and fungi cides come from both internal research and from aggressive licensing. Maior efforts to increase the speed and effectiveness of screening candidate compounds have led to borh improved processes to select candidate compounds and improved screens. While fundamental studies are essen tial building blocks for the future, there is a clear realization that exploratory prot ects must be directed toward the develop ment of important products for the market place. Relevant science, well executed on an urgent schedule, coupled with intense commercial development, are keys to a full pipeline of profitable new products. 0674695 Monsanto 1985 Financial Report Q674B96 TOWOLDMONOOI5360 Content* Management Report 13 Independent Auditors' Opinion IS Statement of Consolidated Income Consolidated Results of Operations 24 * Operating Unit Segment Data Research and Development World Area Segment Data 27 SO SI Quarterly Data 32 Inflation-Adjusted Data Statement of Consolidated Financial Position Review of Liquidity and Capital Resources | Statement of Changes in Consolidated i Financial Position Review of Sources and Uses of Funds 27 Statement of Consolidated Shareowners' Equity It Notes to Financial Statements 29 Significant Accounting Policies 30 Basis ofConsolidation 30 Principal Acquisitions 29 Restructuring 29 Depreciation and Amortization 40 Currency Translation 40 Inventory Valuation 40 Oil and Gas Activities ; Income Taxes ' Earnings per Share Supplemental Data 40 41 41 Fund* Provided 41 From Pension Plans 41 Short-Term Debt and Credit Arrangements 42 Long-Term Debt . Commitments and Contingencies Capital Stock 42 42 42 Stock Option Plans 42 Segment Information 44 Financial Summary 45 Untetf otherwise indicated by the context, "Monsanto" means Monsanto Company and consolidated subsidiaries and "the Company" means Monsanto Company only. All dotiars are in millions, except per share data. 0 ^tor _ Dollars in Millions 198.1 S948 1984 SLOW 1985 SS89 tt Mouwgjo CowrpjMy and Subttjiann 007469? Monsanto Company management is responsible for the fair presentation and consistency of all financial data included in this Annual Report. Where necessary, the data reflect management estimates. Management is also responsible for maintaining a system of internal accounting control to provide reasonable assurance that assets are safeguarded against material loss from unauthorized use or dispo sition and that authorized transactions are properly recorded to permit the preparation of accurate finan cial data. Cost-benefit judgments are an important consideration in this regard. The effectiveness of internal controls is maintained by: (1) personnel selection and training; (2) division of responsibilities; (31 establishment and communication of policies; and (4) ongoing internal review programs and audits. As ratified by shareowner vote at the 1985 Annual Meeting, Deloitte Haskins Sc Sells was appointed to examine, and express an opinion as to the fair presentation of, the consolidated financial statements. This opinion appears below. Monsanto's Audit Committee, consisting of five non-employee directors, meets with Controllership, Interna] Audit and Deloitte Haskins Sc Sells personnel to review internal controls, financial reporting and accounting practices. Deloitte Haskins Sc Sells and internal auditors meet with the Committee, with and without management present, to discuss their examinations, the adequacy of internal controls and the quality of financial reporting. Richard J. Mahoney President and Chief Executive Officer* Francis A. Stroble Senior Vice President and Chief Financial Officer February 28, 1986 "Effective April f,1986, Mr. Mahoney becomes Chairman of the Board and Chief Executive Officer, Mepeodeat Auditors7 Opinion To the Shareowners of Monsanto Company: Vk have examined the statement of consolidated financial position of Monsanto Company and Subsidiaries as of December 31,1985 and 1984, 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 31,1985. 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, 1985 and 1984, and rhe results of their operations and changes in their financial position for each of the three years in the period ended December 31, 1985, in conformity with generally accepted accounting principles applied on a consistent basis. 1 Saint Louis, Missouri ! February 28,1986 0674698 MoFtjdntc Company and StrtsiJjjne's Statement of ConsoMated Income (Dollars in millions, except per share} Net Sales Cost of goods sold Gross Profit ' Marketing and administrative expenses Technological expenses Amortization of intangible assets Operating Income 1985 $6,747 4,841 1,906 919 S48 88 1,555 351 Interest expense Interest income Other income -- net Income Before Unusual Item, Income Taxes and Extraordinary Items (178) 63 23 (92) 259 Restructuring cost -- net Income (Loss) Before Income Taxes and Extraordinary Items Income taxes Income (Loss) Before Extraordinary Items (557) (298) (170) (128) Extraordinary Items: Gain from repayment of debt Tax benefits from utilization of ex-U.S. loss carryforwards Net Income (Loss) 30 * (98) 1984 56,691 4,839 1,852 722 446 7 1,175 677 (100) 92 38 30 707 707 268 439 1983 $6,299 4,734 1,565 681 359 4 1,044 521 (96) 73 72 49 5~n 570 201 369 _______ 33 * 439 $ 402 Earnings per Share: Before extraordinary items Extraordinary items $(1.67) 0.40 ' After extraordinary items J(1.27) The above statement should be read in conjunction with pages J 9 through 44 of this report. S J.42 $ 5.42 $ 4.48 0.41 $ 4.89 I l Altwrwrrfo Owijjusry Sulmdames 0674899 Consolidated Results of Operations Building forth* Falun Has a Price Today The Company's principal long-term financial goal is to improve return on shareowners' equity. To achieve that goal under current and projected economic condi tions required taking bold steps that negatively affected 1985 financial results. The two major steps taken were the acquisition of C. D. Searle Sc Co. and the completion of a companywide restructuring program. Monsanto's operating income for 1985 was $351 million, compared with $677 million in 1984. However, the costs associated with restructuring Monsanto for the future resulted in a 1985 net loss of $98 million, compared to 1984 net income of $439 million. Earnings per share for 1985 were a loss of $1.27, compared to income of $5.42 for 1984. operating income of the divested and discontinued product lines in 1985 were $931 million and $48 million, respectively. Year Dollars in Millions m? ivm ]*ss (52) (677 S351 Key Strategic Objective Met with Searle AcquWlkw The acquisition of G. D. Searle 8c Co. in August 1985 Wuk Agricultural and Semiconductor Economloa accomplished a key corporate objective of becoming Impact Operating ProfitebIRty - a major factor in the pharmaceutical industry. The Operating income for 1985 declined 48 percent from acquisition provides resources to commercialize prod 1984, due to weak economic conditions in several of ucts resulting from Monsanto's pharmaceutical research activities. In addition, Searle's ongoing Monsanto's markets, particularly agriculture and semiconductors. research activities complement those of Monsanto, Continuing problems in the domestic farm econ adding to the number of new products expected in the omy significantly affected sales of Lasso and Roundup future. Searle also brings to Monsanto the leading herbicides. Sales volume of Lasso herbicide, which is low-calorie sweetener -- NutiaSweet. This product sold primarily in the United States, was 20 percent . has rapidly established itself in the diet soft drink lower than 1984. Worldwide usage of Roundup herb]- industry and other food categories, and is expected I cide increased in 1985, but sales volume decreased to continue to grow in the future. Searle's sales and 2 percent as United States customers reduced invrn- operating income (after deducting intangible asset tory levels. Sales of Roundup continued to grow in all amortization expense} were $561 million and other world areas. $30 million, respectively, for the August-December The market for Monsanto's silicon materials was J period of 1985. However, the interest expense associ adversely affected by the depressed semiconductor : ated with rhe debt incurred to finance the acquisition industry. Eased on leading industry indicators, rhe , of Searle more than offset Searle's operating income. Company believes that the downturn reached its lowest point in the fourth quarter of 1985, and that , Major Restructuring Accomplished 1986 should show at least moderate recovery in In the fourth quarter of 1985, the Company's Board demand for high value, electronic-grade silicon wafers. of Directors approved a restructuring program and | Actions taken in 1985 have significantly lowered reorganization of Monsanto with the objective of I Monsanto's break-even point in plant capacity utiliza- redirecting Monsanto's financial and employee i tion, which should favorably affect future profitability resources toward businesses with higher growth potential- These actions included withdrawals from I when the silicon materials markets return to higher | demand levels. selected low-return businesses and production facili i Monsanto's net income was also negatively ties, sales of certain assets which no longer had | affected by increased international competition for strategic importance and reductions in the number of ! certain chemical-based products. The strength of employees. In connection with the approved plan, the | the U.S. dollar throughout most of the year, though Company provided $1,055 million for asset write j reduced somewhat from 1984 year-end levels, eon- . downs and costs associated with the restructuring tinued to fuel heavy imports from international : program. This charge was reduced by gains on the competitors. Although the U.S. dollar had begun ro sale of Monsanto's oil and gas operations and the Seal return to more normal levels by year-end, Monsanto's Sands, United Kingdom, chemical intermediates plant, United States markets will be slow to recover as resulting in a net restructuring cost of $557 million international competitors have firmly established ($341 million after tax, or $4.43 per share}. Sales and themselves in these markers. 0674900 AlhWJW'Jlfi Owi/JJMY JMi# .Slll'i/ifril'Vi^M SaW* Up Sightly Net sales increased slightly in 1985 to $6,747 million. The additional 1985 net sales of the acquired Searle businesses more than offset the volume and pricing declines in other businesses. Sales volume declined 4 percent, excluding divestitures and the acquisition of Searle. Selling prices in 1985 declined 3 percent. Most operating segments had lower 1985 sales, reflecting reduced demand and increased competition for certain products. The gross profit margin was 28 percent, unchanged from 1984, despite lower levels of busi ness activity and pricing pressure from ex-U.S. com petitors. Monsanto's asset management and cost reduction programs, coupled with lower raw material costs and the higher margins associated with 5earle's products, were the principal contributing factors to maintaining these relatively good margins. Manufac turing facilities operated at approximately 70 percent of capacity, down from 75 percent in 1984. Raw material costs declined approximately 3 percent. The year-to-year increase in marketing and administrative expenses reflects the inclusion of Searle's businesses, with their heavier marketingrelated expenses. Technological expenses in 1985 increased 23 percent over 1984, reflecting continuing commit ment to research and development programs and the acquisition of Searle. RScD expenses were 7 percent of sales in 1985, compared with 6 percent in 1984 and 5 percent in 1983. The increase in 1985 was concen trated in expenditures directed toward emerging technologies. Amortization of intangible assets increased substantially as a result of acquired Searle parents and, to a lesser extent, goodwill and other intangible assets. Interest expense was also substantially higher in 1985, reflecting the cost of the debt issued to acquire Searle. Interest income declined in 1985, reflecting lower interest rates and lower average levels of security investments. Net income in 1985 included a $30 million extraordinary gain from the repayment, at a discount, of $168 million in long-term debt. Net income as a percent of average shareowners' equity was a negative 3 percent compared with 12 percent in 1984. Exclud ing the net restructuring cost and the extraordinary gain from repayment of debt, 1985 income as a percent of average shareowners' equity was 6 percent. Sales in 1984 increased 6 percent over 1983 or a volume increase of 5 percent, net of divestitures, and an increase of 1 percent due to higher selling prices. The volume increase resulted from the strong economic recovery in the first half of 1984, which affected most product lines. Market conditions weak ened substantially later in the year, however, because of an economic slowdown in several industrial sectors and the persistent strength of the U.S. dollar, which increased international competition and unfavorably affected the translation of ex-U.S. earnings into U.S. dollars. Net income in 1984 was 9 percent higher than the preceding year, as a result of the strong first half performance. Net income in 1983 was increased by a $33 million extraordinary tax benefit from utili zation of prior years' ex-U.S. loss carryforwards. Analysis of Change in Earnings par Shan Better (Worse) Sales Related Factors Selling prices Sales volume and mix Total Sales Related Factors 1985 vs. 1984 S (1.1BJ 11.98] 13.16) Cost Related Factors; Raw material prices Other manufacturing costs Marketing and administrative expenses Technological expenses 0.52 0.40 <0.18) (0.24) Total Cost Related Factors 0.50 Other Factors; Acquisitions , Operations Intangible asset amortization Divestitures Total Other Factors 0.75 (0.62) 0.03 0.16 Operating Income (1.50) Interest expense: Acquisition related Other Interest income Other income -- net Effective tax rate Shares outstanding Change in Income Before Unusual and Extraordinary Items (0.84) 0.24 (0.22) (0.111 0.65 0.12 (2.66) Restructuring cost -- net Extraordinary items Change in Earnings per Share (4.43) 0.40 i 16.6V) 1984 vs. 1983 S 0.56 1.07 1.63 0.29 0,38 10.2": 10.65: [0.25: (0.031 10.02: (0.1 Oi (0.15; t .21 (0,03:. 0,15 (0.>" iO.23 IKU9 0.94 10.41 5 0.51 Montanto Company and Subsidiaries 0674901 Operating Unit Sejjnent Data 1985 Net Sales 1984 1983 1985 Operating Income {Loss) 1984 1983 1985 Agricultural Products: Crop Chemicals . Animal Sciences Chemicals Electronic Materials Fisher Controls ` NutraSweet Pharmaceuticals Oil and Gas Biotechnology Product Discovery Corporate Items and Eliminations Total consolidated 11,073 79 4,051 137 652 317 262 172 *1,256 82 4,360 220 SSO IS 203 $1,167 83 4,148 120 535 241 4 S5 *6,747 *6,691 $6*299 *298 (55) 234 (67) 36 58 (84) 16 (31) (54) $351 $438 () 336 4 27 (30) 27 (24) (52) S677 (400 (53) 230 <56| ,24 (15) 41 (21) (49) S521 *110 32 128 16 20 11 96 31 26* 1470 '`Corporate R&D expenses are allocated oh a weighted average basis of investment to operating units in determining operating income (loss). Rescanrh and Develo >mew 1984 1983 $107 22 131 14 23 ( '184 112 14 13 24 15 24 21 25* 23* sro $290 1985 Total Assets 1984 1983 Capital Expenditures 1985 1984 1983 Depreciation and Amortization 1985 1984 1983 Agricultural Products: Crop Chemicals Animal Sciences Chemicals Electronic Materials Fisher Controls NutraSweet Pharmaceuticals Oil and Gas : Biotechnology Product Discovery 1 Nonoperating Assets Total consolidated *1,061 174 2,982 302 636 1,862 1,438 33 589 SI,236 184 3,222 m 536 80 578 31 226 SI,214 187 3,201 253 503 3 543 15 508 *8,877 16,373 $6,427 I 84 31 291 55 53 4 33 85 3 6 1645 t 88 31 279 47 32 7 107 17 6 *614 $109 60 213 26 29 4 101 15 3 $560 "3S 89 S 80 $ 1621 20 248 273 >98 37 30 28 28 21 20 73 139 7 159 69 85 21 3 21 $599 $503 $523 I 'The above data ibotdd be read in conjunction with the ''Segment Information" note to dte financial itatemenu on page 44. i The Company realigned its financial reporting of | Operating Unit Segments to closely align with the 1 recent reorganization and to better reflect the future i direction of Monsanto's operations following the ! acquisition of G. D. Searle & Co. The fibers and inrer- ! mediates, industrial chemicals, polymer products and j most of the fabricated products businesses have been : combined to form a new Chemicals segment. Two new segments, Pharmaceuticals and NutraSweet, include the acquired operations of G. D. Searle 8i Co. The Electronic Materials business has been made a separate segment and the separations business, previ ously part of fabricated products, has been transferred to and combined with Fisher Controls, because they serve similar markets. The businesses in the former Biological Sciences segment have been realigned with the animal products now being separately reported as Animal Sciences, the Health Care Division has been merged with Searle and included in the Pharmaceuti cals segment and other products have been transferred to the Chemicals segment. Biotechnology Product Discovery represents the Corporate basic RflcD effort in biotechnology, a major thrust of the Company. 0674902 Monsanto Company and Swi-iiduru's TOWOLDMONOOI5366 Crop Chemicals NhSiJm198? I Hrrbiades and other ' apticulturalchemicalsH,Q73 1984 81,258 1983 51,167 ( Sales and operating income for 1985 declined 15 and 32 percent, respectively, reflecting the lower ! sales volumes and prices in certain products. Sales volume of Lasso herbicide, primarily used in the United States during rhe spring planting season, de creased 20 percent, due to the weak United States (arm economy. In addition, the uncertain demand for 1988 resulted in lower fourth quarter 1985 sales, I when customers historically have purchased herbiI cldes in advance of the spring planting season. I Worldwide usage of Roundup herbicide increased | again in 1965, but sales volume declined 2 percent as United States customers reduced inventory levels. Strong demand in other world areas was more than offset by lower sales in the United States. Herbicide sales in Europe and Latin America benefited from unusually dry weather after harvest, which allowed farmers to apply Roundup herbicide to re-emerged weeds. The weak farm economy adversely affected Roundup herbicide sales in the United States. The United States Environmental Protection Agency (EPA) has begun their Special Review to determine whether Lasso herbicide may cause an unreasonable adverse effect on humans or the envi ronment. That review should continue through 1986. Pending the review results, Monsanto and the EPA agreed to modifications in the label for Lasso, which do not significantly affect the majority of uses for Lasso. Monsanto's tests confirm that Litsso poses no unreasonable adverse effects to humans or the envi1 ronment, and the Company believes the EPA review will result in a similar conclusion. The Canadian Minister of Agriculture is reviewing Lasso herbicide use in that country. Pending completion of the review, the Minister of Agriculture decided not to extend the temporary registration of Lasso for 1986. The Compa ny has appealed that decision. No significant effect on operating results is expected from these reviews. Sales and operating income in 1984 increased ! 8 and 10 percent, respectively. Sales volumes of Roundup and Lasso herbicides both increased | 6 percent year to year. The higher operating income I from greater sales volume more than offset the ! increased research and development expenses. Animal Sciences Net Sale* Animal products 1985 % 79 19B4 l 82 1983 S 83 Sales for 1985 declined 4 percent. Sales volume of Ahmet animal feed supplement continued to grow, but selling prices were negatively affected by compe- tition from ex-U.S. manufacturers. Operating losses increased over the three year period as a result of significant research expenses, along with expanded marketing efforts. Significant progress continues to be made in one of the Company's first biotechnol ogy products, bovine growth factor, which research indicates increases the milk production of cows. It is expected the product will be accepted for commercial sale in the United Kingdom in the late 1980s. For 1984, sales were essentially level with the prior year as higher volumes were offset by lower sell ing prices, resulting from ex-U.S. competition. The continuing heavy R&D and facility start-up costs resulted in an operating loss for both 1984 and 1983. Chemicals Net Sties Detergent materials Engineered products Man-made libers Plastics Resin products Rubber chemicals and instruments Specialty chemicals 1985 t 550 251 1,080 804 637 283 446 1984 5 577 281 1,194 874 693 310 431 19H3 5 340 22.1 i ,m H09 '42 2'9 383 In 1985, sales and operating income declined 7 and 30 percent, respectively, as compared with 1984, Intense import competition and stagnant United States economic sectors associated with many of the Compa ny's product lines resulted in lower selling prices and volumes for many products, including detergent mate rials, man-made fibers, rubber chemicals, plastics and resin products. The intensive import competition was due to the continuing strength of the U.S. dollar. In addition, industry capacity expansion in the last half of 1984 resulted in competitive pressures on styrene monomer prices and volumes. Nylon fiber profitabil ity was also lower in 1985 versus 1984 from both lower selling prices and, to a lesser extent, sales volume. Sales to the automotive industry remained relatively good during 1985. Overall, chemical plant capacity utilization rates were lower in 1985. However, the resulting higher unit manufacturing costs were partially onset by the benefits from cost reduction programs and lower raw material costs. During the fourrh quarter of 1985, the decision was made to withdraw from selected low-return businesses and production facilities. In December 1985, the Seal Sands chemical intermediates plant was sold. Sales of these divested and discontinued chemical product lines in 1985 were S645 million. Sales in 1984 increased 5 percent over 1983 due to strong sales volumes of branded nylon carper fibers, higher sales volumes of products to the automo tive and housing industries, industrial chemicals and increased construction project activity in Monsanto ] Monsanto Company and Subsidiaries 0674903 Enviro-Chem Systems, Inc. Operating income increased | by continuing weak European performance, caused 46 percent* reflecting strong demand and improved by the adverse impact of the strong U.S. dollar on pricing for nylon carpet fibers and intermediates and United States exports and the depressed capital improved sales volumes of other products. The higher goods market, sales volumes also resulted in improved plant capacity utilization. In addition, 1984 was favorably affected ___N__utraSweet by the elimination of 1983 divested business losses. i Net sale*" M fkctwilc Material* ; NutraSweet low-calorie sweetener products and nonprescription pharmaceutical products>31? NtiI S71985 <984 1983 ! *for the five month period, August-December 1985. , Electronic-grade silicon ! materials 1137S2^0$120 1 \ This segment includes rhe NutraSweet, Equal and U.S. consumer products businesses acquired as part Sales declined 38 percent in 1985, reflecting sharply [ of Searle. The NutraSweet business, including Equal, lower demand for silicon wafers in the depressed j is now operated as a separate subsidiary, The Nutra ! semiconductor market. This resulted in a substantial ! Sweet Company. Operating income in 1985 reflects . operating loss in 1985. Based on leading indicators in 1 strong NutraSweet profitability for the August' . the semiconductor industry, the Company believes . December period, partially offset by amortization | that the downturn reached its lowest poinr in the ! expense related to intangible assets recorded as part I fourth quarter of 1985, and that 1986 should show \ of the Searle acquisition. Sales of NutraSweet in 1 at least moderate recovery in demand for high value, 1985, including the period prior to its acquisition by | electronic-grade silicon wafers. Actions taken during ; Monsanto, were 27 percent higher than 1984, The | 1985 have significantly reduced Monsanto's break-even conversion of the carbonated soft drink industry from point in plant capacity utilization. This should result : a Nttlr&Su'eef/saccharin formulation to 100 percent . in better performance when the silicon marker returns NutraSweet was a major factor in the increase. In , to higher levels. : 1985, a $130 million NutraSweet manufacturing facil 1 Electronic materials had strong growth in 1984, ; ity was completed in Augusta, Georgia. The majority i with silicon wafer sales increasing 83 percent, reflect- 1 of rhe consumer products business was sold in [ ing both higher volume and prices. These factors, . December 1985. 1 along with higher silicon materials plant capacity j | utilization, resulted in a $60 million operating profit j m Ptwrmacautkil* 1 improvement over 1983. ; Net Sales1985* 1984 m Flthtr CmiM* ' Pharmaceutical products 1262 $15 Net Sales1985 19B4 1983 `Includes Searle for the five month period, August-December 198,5. Valves, regulators, electronic process controls and gas separation systems 1652 S550 This segment comprises the pharmaceutical products of Searle and rhe former Monsanto Health Care Divi $535 sion. The operating loss in 1985 reflects heavy RfkD Sales increased 19 percent in 1985. Sales of PRoVOX efforts and the amortization expense related to intan instrumentation systems continued to grow signifi gible assets recorded as part of the Searle acquisition. cantly, and selling prices for other products were Including the sates of Searle prior to acquisition, sales higher in 1985. Demand for control valves continues of pharmaceutical products were virrually rhe same in to be somewhat weak in North America. The Euro 1985 as compared to 1984. Increased sales of Cairn, pean control valve business is strong and continues Nitrodisc, oral contraceptives and Theophylline-!-) to grow; however, shipping problems hampered were offset by declining sales of Searle's mature prod that growth in 1985. Sales of gas separation systems ucts and negative ex-U.S. currencies' impacr. Sales also grew significantly. Operating income in 1985 ; of Searle's pharmaceutical products continue to be improved 33 percent as a result of these positive ; affected by competition from new drugs and intensi factors, partially offset by higher levels of marketing ; fied generic drug competition. Cytotec, Searle * new effort associated with launching PRoVOX, an operat- > ulcer treatment product, was introduced in Switzer ing loss of a small 1985 acquisition and currency devaluations in Mexico. ; j land, Singapore and Malaysia during 1985, and Food and Drug Administration approval is being sought tor Sales and operating income in 1984 increased ' introduction to rhe United States market. 3 and 13 percent, respectively, over 1983. Improved operations in North and Latin America and higher The 1984 and 1983 operating losses reflect Monsanto's pharmaceutical related research effort sales of gas separation systems were offset by a one and the costs associated with the establishment of time acquisition-related technological expense and the former Health Care Division. Mtmsjnto Company juiJ > 0674904 TOWOLDMONOOI5368 M OHmhIGm BkrtMhiHMn Product Dtaeovwy Nti Sales Oil and gas $172 1984 $203 $241 Reduced oil and gas volumes and prices resulted in lower salts and operating income in 1985 as compared with 1984, and in 1984 as compared with 1983. As part of Monsanto's restructuring program to divest of non-strategic businesses, the Company sold its oil and gas business in December 1985 (see notes to financial statements). Reivircl and development expenses________________ 19*5 $31 $21 These expenses relate to basic and applied biotech nological research aimed at developing new biotechnology-based product opportunities that are further developed and commercialized by rhe crop chemicals, animal sciences and pharmaceuticals busi nesses, The cost of the current biotechnology effort directly related to crop chemicals, animal sciences and pharmaceutical activities is included as an expense in those segments. Continuing high levels of research have resulted in increasing expenses over the three year period. Research and Devetopment In recent years, Monsanto's research has focused on emerging technologies -- biotechnology, plant biology, animal nutrition, human health care and electronic materials. In addition, substantial research efforts continue in support of traditional areas of strength, such as agricultural chemistry, catalysis, polymer science, industrial chemicals, chemical engineering systems and applications research, and in support of NutraSweet low-calorie sweetener. The continuing growth in research and develop ment expense is evidence of Monsanto's commitment to the strategy of developing new products and market opportunities from emerging technologies. For 1985, approximately one-half of total R&D expenses were directed toward these emerging technologies. In 1985, total R&D expenses increased to a record level and were 7 percent of sales, compared to 6 and 5 percent in 1984 and 1983, respectively. R&D expenses for 1985 include only five months of Searle's R&D expenses. Total R&D expenses for 1986 are expected to approximate $520 million. RAD Exjmtttt 1985 RAD By Business Ate* Pterctm of Total Expenses 5% fequMUon of Searie Expands Research Capabilities G. D. Searie & Ca significantly expands and complements Monsanto's research capabilities in biotechnology and human health care, adding both experienced professionals and facilities to Monsanto's existing research organization. In addition, Searie provides Monsanto with established organizations skilled at developing and marketing products that flow from the research program. The combination of the Company's strengths in basic and applied research in molecular biology and biotechnology, 'Washington University's powerful biomedical discovery capabili ties and Searle's strengths in product development and marketing will further Monsanto's goal of becoming a leading supplier in the pharmaceutical industry. This research focuses on diseases of the cardiovascular, gastrointestinal, central nervous systems and immunesystems. Vear Dollars in Millions I m Monsanto Company and Subsidiaries 0674905 World Area Segment Data United States Europe*A frica Canada Latin America Asia-Pacific Unallocated corporate-items Affiliates' equity income included in individual world areas Total consolidated 1985 54,451 1,073 310 360 553 1984 $4,498 968 292 360 573 Net Sal 1983 4,243 943 274 305 534 6,747 6,691 6,299 ___________ Operating Income fLossl 1985 mi 87 1984 516 93 1983 S452 44 66 61 51 26 22 29 55 IL 2' (SI) (52) !49' (251 1351 (18) 677 115; 5521 . As required by generally accepted accounting prmci- m Europe-Africs ' pies, world area segment data (page 44) in the notes Sales in 1985 increased 11 percenr over the preceding to financial statements are prepared on an "entity year on the strength of chemicals, crop chemicals and basis." This means sales and income of the legal emity Fisher Controls sales and the inclusion of Seatle's | are assigned to the area where the entity is located businesses for the August-December period. Sales (e.g., a sale from the United States to Latin America ! is reported as a United States sale). The above table volumes increased as European customers had higher production levels to meet their increased competitive , summarizes Monsanto's results on an "area basis" ness with Unired States manufacturers. Operating wherein sales and income are assigned to the customer | income, however, declined 6 percent due to the higher location (e.g., a sale from the United States to Latin operating expenses of the former Health Care Divi- America is reported as a Latin American sale). ! sion. The strong U.S. dollar hurt the competitiveness of United States exports, but benefited Monsanto's ; UnKad States sales of European manufactured products. ; Approximately two-thirds of Monsanto's worldwide ; In December 1985, the chemical intermediates sales are to customers in the United States. Sales for j plant at Seal Sands, United Kingdom, and Monsanto's 1985 declined 1 percent. However, on a comparable i North Sea oil and gas properties were sold I sec notes | year-to-year basis excluding the acquisition of | to financial statements). j G. D. Searte Sc Co. and divestitures, sales declined ' Sales in 1984 increased 3 percent as compared : approximately 10 percent. A combination of a diffi I to 1983, reflecting the improved European economic cult Unired States farm economy, the downturn in rhe I conditions. Operating income for 1984 more than semiconductor materials market and stiff competition I doubled, benefiting from strong acrylonitrile and from ex-U,S. manufacturers resulted in lower 1985 | nylon intermediates profits, and increased sales ot sales. The strength of the U.S. dollar and the resulting ( Roundup herbicide. increased competition from cx-U,S. manufacturers I continued to negatively affect prices and volumes of mm Canada many chemical-based product lines. Sales in 1985 increased 6 percenr and operating These factors, coupled with lower plant capacity income increased 8 percent from the inclusion of utilization and higher levels of technological expense, Searle's operating results and sales volume increases resulted in operating income declining sharply from in many other product lines. The higher operating 5516 million in 1984 to $222 million in 1985. In income was partially offset by the adverse trans October 1985, the Company announced a restructur lation effect of the strong U.S. dollar. During 1985, ing program and in December 1985, the Company Monsanto benefited from strong Roundup herbicide sold its oil and gas business (see notes to financial . sales, increased sales to the automotive industry and statements). . higher sales of Fisher Controls valves and PR6VI J.\ For 1984, sales increased 6 percent from 1983 : systems, Avadex herbicide sales volumes, however. due to the stronger economy and the discontinuation declined due to inventory reductions by distributors. of the 1983 Unired States government's Payment-in : Sales and operating income increased in 1984 as Kind (PIK) agricultural program. Operating income compared to 1983 from good detergent product and in 1984 increased 14 percent due to improved sales j crop chemicals sales. volume and better plant capacity utilization, offset to some extent by greater import competition from ex- U.S. competitors as a result of the strong U.S. dollar. 0674906 .Mofrw'rtti Company Jrtd Sitl>nJidn< s TOWOLDMONOOI5370 M Ufa America Sales in 198$ were level year-to-year, but operating income increased 18 percent. The higher profitability resulted from significant currency translation gains of Monsanto's Mexican equity affiliate, Industrias Resistol, S.A. This was partially offset by lower agricultural products sales in Brazil. Sales in 1984 increased IS percent from the prior year, due primarily to higher agricultural products sales in Brazil. Operating income in 1984 doubled to $22 million due to higher earnings of Industrias Resistol and higher agricultural products sales. M Aala-PacHic Sales decreased 3 percent and operating income decreased 47 percent. Product mix and the effect of the strong U.S. dollar on the competitiveness of United States exports were negative factors. In addi tion, sales and profitability were adversely affected by the translation effect on ex-U.S. currency denomi nated results, especially the products manufactured and sold by the Company's Australian subsidiary. Agricultural product sales and profitability were lower in 198S due to a drought in Australia and lower ship ments to the People's Republic of China, Electronic materials operating results also were lower than the prior year. Sales were higher in 1984 principally due to agri cultural products sales volume growth. Operaring income in 1984 was up 104 percent over 1983, due to improved results in Australia and increased sales of agricultural products. A reconciliation of 198$ area basis sales and operating income to ex-U.S. entity basis sales and operating Income (reflected in the notes to financial statements) follows: Ex-U.S. entities U.S. exports U.S. expenses allocated to ex-U.S- products ExU.S, affiliates' equity income Less: Inter-area eliminations Ex-U.S. entities' operating income on sales to U.S. Ex-U.S. area basis U.S. area basis Affiliates' equity income included in individual world areas Unallocated corporate expenses Total consolidated Net Sales 12,114 902 Operating Income 1216 45' (7201 (42| V 2.296 4.451 (J6) 208 222 $4,747 (241 (54) 5551 Nft of allocated costs, Quarterly fata Net Sales Cross Profit Income (Loss) Before Extraordinary Item Net Income (Loss) i Earnings per Share Before Extraordinary Item After Extraordinary Item 1985 1984 1985 1984 1985 1984 1985 1984 First Quarter 11,624 1,732 441 527 87 175 87 17J Second Quarter 51,627 1,801 471 535 124 145 124 145 1985 1984 1985 1984 1.12 _____ _2.J3__ 1.12 2.13 1.60 1.77 1,60 1.77 Third Quarter 51,741 1,599 470 413 31 _ 7_8___ 31 78___ Fourth Quarter 11,755 1,559 524 377 '(370) 41 (340) 41 0.42 (4.SI) 0.97 0.55 0.42 (4.41) 0.97 0.55 Total Year 56.747 6,691 1,906 1.852 (128) 439 (98) 419 (1.67) >.42 ll,2') '.42 Crop chemicals sales historically are concentrated in the first half of the year and generally are more profit able than sales of other segments. Net income in each quarter of 1985 was lower than 1984 due to the diffi cult economic environment for United States chemical ! based industries that has persisted since mid-1984, and j the currently depressed United States farm economy. | The second half of 1985 financial results include ! G. D. Searle & Co., acquired in August 1985. Fourth quarter 1985 results were affected by the exclusion of the operating results of divested and discontinued product lines. The only 1985 major nonrecurring or unusual items affecting net income were in the fourth quarter and were the net restructuring cost of $341 million, or $4.43 per share, and the gain from repayment of debt of $30 million, or $0.40 per share. There were no major nonrecurring or unusual items in 1984. Company and Subsidiaries 0674907 Data Year Ended December 31, 1985 Historical Current Cow______ Cost Net talcs Com of goods sold* excluding depreciation Depreciation expense All other expenses -- net Income taxes Net income before restructuring cost and extraordinary item Restructuring cost -- ner (after tax) Loss before extraordinary item 16,74? 4,364 477 1,647 46 213 4341) t (lit) $6,747 4,365 632 1,647 46 5? (341) 1 (284) Current cost amounts shown above attempt to mea sure the effect of inflation on cost of goods sold and depreciation. Other historical amounts, including income taxes, are not adjusted for inflation to arrive at current cost net income. All current cost amounts are stated in average 1985 dollars using the U.S. Consumer Price Index (the "translate-restate'' method). The 1985 increase in current cost of inventories and property, plant and equipment was 584 million. At December 31, 1985, the current cost of inventory and property, plant and equipment (net of accumu lated depreciation) was 51,505 million and 53,452 million stated in year-end 1985 dollars. The current cost of inventories was estimated using the FIFO (first-in, first-out) inventory method. Cost of goods sold on a current cost basis was approximated using the LIFO method, or similar techniques. The current cost of property, plant and equipment was estimated generally by using construc tion and equipment indexes. Current cost accumulated depreciation and related expenses were estimated using the same overall method and lives as used on a historical cost basis. Salacted Financial Data 1985 1984 1983 1982 1981 Historical cost, as reported1: Net sales Income (loss) -- Before extraordinary items -- Per share Total assets Longterm debt Dividends per common share $6,747 (128) (1.67) 8,877 2,087 2.45 $6,691 439 5.42 6,373 824 2.25 $6,299 369 4.48 6,427 937 2.075 56.325 329 4.10 6,07? 1.003 1.975 6,948 445 5.-5 6,069 1,110 1.8-5 Current cost (average 1985 dollars) r Net sales Income (loss) -- Before extraordinary items -- Per share Purchasing power gain on monetary items Increase in specific prices of inventory and property over (under) increase caused by general inflation Aggregate foreign currency adjustment, net of taxes Net assers 16,747 (284) (3.69) 66 [108] 97 4,164 56.930 309 3.81 33 1 (148) 4,844 $6,802 289 3.5) 31 (243) (107) 5,026 $7,050 106 1.33 37 (2441 1184) 5,218 58,218 272 Ut 116 i ] *4) 5.-- 1 Other data (average 1985 dollars): Dividends per common share Year-end common stock price Average consumer price index S 2.46 46.99 322.2 $ 2.34 44.94 311.1 S 2.25 55.86 298,4 $ 2.21 42.02 289,1 S 2.24 40.15 2 "2.4 In 1982, the requirements ofStatement of financial Accounting Standards No. S2, "foreign Currency Translation." were adopted. I 0674908 AfoffjjflJo Company ai<.i ShIWi^ifs Statement of Consolidated Financial Position (Dollars m millions, except per share) Assets Current Assets: Cash, time deposits and certificates of deposit Short'term securities* ac cost which approximates market Trade receivables, net of allowances of $42 in 1985 and $49 in 1984 Miscellaneous receivables and prepaid expenses Deferred income tax^benefit Inventories Intangible Assets, net of accumulated amortization of Slid in 1985 and S3 J in 1984 Investments in Affiliates Other Assets Property, Plant and Equipment, at Cost: Land Buildings MachineTM and equipment Mineral rights and oil and gas properties Construcrion-in-progress Less accumulated depreciation Total Assets UabUttltt and Shareowners' Equttr Current Liabilities: Accounrs payable Wages and commissions Income and other raxes Miscellaneous accruals Short-term debt ' Long-Term Debt Deferred Income Taxes Other Liabilities Shareowners' Equity: Common stock -- authorized, 200,000,000 shares, par value $2; issued, 82,197,097 shares in 1985 and 1984 Additional contributed capital Accumulated currency adjustment Reinvested earnings Less treasury stock, at cost (5,444,544 shares in 1985 and 3,916,071 shares in 1984} Total Liabilities and Shareowners' Equity j The ahove statement should be read in conjunction with pages 39 through 44 of this report. Monsanto Company and Subsidiaries At December M 1985 19K4 $ 195 98 1,218 402 . 267 1,097 3,277 $ 149 310 1,078 181 40 839 2,597 2,199 164 203 101 961 5,460 34 284 6,840 3,806 3,034 $8,877 123 1 19 160 81 '32 5,094 765 247 6,919 3,545 3,374 $6,37.1 $ 522 129 348 675 704 2,378 2,087 584 421 164 854 (191) 2,824 3,651 244 3,407 *8,877 $ 497 110 69 249 IT? 1.202 824 661 52 164 855 1319' 3.no 3,810 1 "6 3,634 $6,37.1 0674909 faww of lijuwfity mm! Cifitai Resources l Financial Strength OMnonatratad Monsanto s strong financial position, which resulted from the Company's comprehensive asset manage ment and cost reduction programs, was demonstrated in the acquisition of G. D. Searle & Co, in 1985, This strong financial position enabled the Company to secure a $3.0 billion line of credit, which was used to finance initially the $2,754 million acquisition of Searle, Debt Reduction Program on Target To restore debt levels and financial ratios to accept able levels after the Searle acquisition, the Company advanced the program to dispose of several businesses and assets that did not match Monsanto's long-term strategies. During 1985, the sales of such businesses and facilities generated gross cash proceeds of $1,612 million, which were used primarily to reduce the debt incurred in the acquisition of Searle. Ar yearend 1985, rhe long-term debt to total capitalization Level was 58 percent, as compared with 18 and 20 percent in 1984 and 1983, respectively. Manage ment believes rhe long-term debt to total capitaliza tion ratio should approximate 33 percent over time. The interest coverage ratio (times interest earned) was affected by the debt incurred to acquire Searle and by lower earnings. That ratio (excluding the cost of the restructuring program, the extraordinary gain and the effect of capitalized interest) was 2.3 in 1985, as compared to 6.9 in 1984 and 5.3 in 1983. Monsanto's current ratio (current assers divided | by current liabilities), an indicator of liquidity, was | |,4;1 at year-end 1985, compared to 2.2:1 in 1984. | Management believes a 2.0:1 ratio is desirable. Work ! ing capital was $899 million ar year-end 1985, com| pared to $1,395 million in 1984. Working capital was ; reduced by higher short-term debt and by resrructur| ing cost accruals, net of related income tax benefits. 1 Inventories increased principally due to the acquisi| tion of Searle. Receivables increased due to rhe ' acquisition of Searle and a $140 million miscellaneous j receivable, which was collected in January 1986, i related to the sale of assets. The Company has available various short and medium-term bank credit lines, which are discussed in the "Short-Term Debt and Credit Arrangements" and "Long-Term Debt" notes to the financial statements (page 42), The Company has made use of pollution control and industrial development bonds to finance qualified projects. Pollution control and industrial development bond obligations were 13 percent of all outstanding long-term debt at year-end 1985. To a limited extent, Monsanto has used other forms of financing, princi pally lease arrangements and ioint venture arrange ments, when the effective interest cost is attractive or the nature of the capital project requires their use. Monsanto's assets generally are free from lien and not used to collateralize debt. Intangible assets substantially increased as a result of the acquisition of Searle. The assets of Senrlc were recorded at their estimated fair values at the date of acquisition, and included patents ($1,265 million), goodwill ($582 million) and other intangible assets ($319 million). Patents are being amortized over their Legal Lives (approximately 8 years); goodwill and other intangible assets are being amortized over their estimated useful lives (approximately 40 and 13 years, respectively). Property, plant and equipment in 1985 reflect the addition of Searle's assets, the sale of Monsanto's oil and gas properties and the Seal Sands, United Kingdom plant, and the write-down to estimated fair values of other facilities to be shut down or sold at less than book value under the restructuring program. The second half 1985 weakening of the U.S. dollar, relative to ex-U.S, currencies in which Monsanto conducts business, resulted in the accumu lated currency adjustment account decreasing rn $191 million at year-end 1985. Currency adjustments are accumulated in this account until the related ex-U.S, investment is sold or liquidated. Kay Financial Stntlftks 1 Working Capital (Current assets less current liabilities) | Current Ratio (Current assets divided by current liabilities) | Percent of Long-Term Debt to Total Capitalization* i Percent of Long-Term Debt to Total Shtreownffi'Equity ; * Total capitalization is the sum of tong-term debt ptrts shareowners' equity. 1985 S899 1.4 38% 61% $U 2.1 IN",, 21% 0674910 iMoniJ'rto Conrfwjjv jmi Subinharnt Statement of Chaises in Consolidated Financial Position (Dollars in millions) Sources (Uses) of Funds Operations: Income (loss) before extraordinary items Charges not using (credits nor providing) funds: Depreciation and amortization Deterred income taxes Other Restructuring cost -- net (after rax) Funds provided from operations, before changes in working capital and extraordinary items Investment and Other Transactions: Extraordinary items Working capital changes: Trade receivables Inventories Other current assets Accounts payable and accrued liabilities Short-term debt Total working capital changes Foreign currency adjustments on working capital Property, plant and equipment additions Net proceeds from investment and property disposals (gross proceeds of 11,612 in 1985) Repayment of short-term acquisition debt Acquisitions and investments (other than Searle) Other Acquisition of Seailti Acquisition financing Searle assets and liabilities acquired: Current assets, excluding cash Intangible assets Other noncurrent assets Current liabilities Noncurrem liabilities Searle cash, time deposits and certificates of deposit at acquisition Financial Transactions: Long-term financing Long-term debt reduction Treasury stock purchases Dividends Increase (Decrease) in Funds 1985 I (128) 599 93 (16) 341 889 30 2 (54) (258) 28 (108) (390) 69 (645) 1,402 (1,154) (78) 82 (684) 2,754 (549) (2,166) (1,023) 828 372 216 415 (723) (91) (188) (587) l (166) Increase (Decrease) in Elements of Funds: Cash, time deposits and certificates of deposit Short-term securities ' S 46 (212) Increase (Decrease) in Funds S (166) The above statement should be read in conjunction with pages 39 through 44 of this report. 1984 * 439 503 103 (37) 1983 J 369 523 71 (13) 1,008 948 37 (61) (16) (42) 24 (58) (38) (614) 39 (94) 60 (725) 33 (39) 46 (65) 147 ______ 122 211 (47) (560) 39 (208) ___ 49 (483) 12 (127) (184) (182) (481) $ (198) 49 (87] (14) _____ (.170) (222) S 243 S (15) (183) J (198) $ 21 222 1 243 Monsanto Company and Sabudunes 0674911 TOWOLDMONOOI5375 Review of Sources end Uses of Funds Monsanto's 1985-1983 sources and uses of funds are j shown in the Statement of Changes in Consolidated i Financial Position on the preceding page. ! Monsanto's combined cash and snort-term secu1 rities declined primarily as a result of using excess : cash to reduce debt incurred to acquire C. D. Searle ! & Co. ; In 1985, Monsanto acquired Searle for i 2,754 million, which was initially financed through borrowings under a $3.0 billion credit line arranged for that purpose. The line of credit was reduced ro $2.0 billion at year-end 1985. Those borrowings were : subsequently repaid in late 1985 through sales of * assets, which generated gross proceeds rotaling $1,612 million, and the issuance of commercial paper and long-term debt. The Company issued 400 million ` of domesric long-term debt in November 1985. In January and February 1986, the Company issued $300 million of long-term debt in the domestic and I ex-U,S. financial markers. Proceeds from these borrowings were used to reduce the Company's commercial paper outstanding. The Company plans ; to issue additional debt and may issue equity securi- i ries* depending upon future financing needs and | market conditions. Expenditures for property, planr and equip ment in 1985, including capitalized interest, totaled $645 million. The more significant 1985 expenditures were for additional capital projects at the Life Sciences Research Center in St. Louis County, Missouri, a new Fisher Controls PRdVOX systems assembly plant in Austin, Texas, and the silicon wafer plant at Milton Keynes, United Kingdom. In addition, capital expenditures included $85 million for the oil and gas business, which was sold in December 1985. In recent years, capital expenditures generally have been financed by cash from operations. Operation! Provide Subatontlil Financial Resource* Despite the downturn in many of Monsanto's busi nesses and rhe effects of the restructuring program, funds provided from operations continued to be at a : high level in 1985. These funds are the primary source of support for the significant research and develop . ment expenses and growth investment. Dividends Inereis* for 13th Consecutive Year The Company has paid dividends on its common shares without interruption or reduction since 1928 and has increased the dividend in each of the past thir teen years. Dividend payout for 1985 was 21 percent of funds provided from operations. The Company's dividend policy reflects a desired long-term payour percentage based on Monsanto's expectation of future growth and profitability levels. In any individual year, additional consideration is given ro expected financial position and results, working and fixed capital needs, scheduled debt repayments and economic conditions, including inflation. Monsanto's common stock is traded principally on the New York Stock Exchange. The number of shareowners of record as of February 28,1986, was 72,933 and the high and low common stock prices on that date were $60 and $58%. 0674912 Momanlv Company anti SuUttJuTHi Statement of ConsefcUted Shareowners' Equity i (Dollars m millions, except per share) 1985 ' Common Stock: : Balance, January 1 New shares issued (138,117 shares in 1984 and 11,289 shares ; in 1983) 1 Far value of stock issued in two-for-one stock split S 164 Balance, December 31 $ 164 j Additional Contributed Capital: l Balance, January 1 : New shares issued ; Par value of stock issued in two-for-one stock split | Other [ Balance, December 31 $ 855 (1) $ 854 i Accumulated Currency Adjustment: ) Balance* January l ' Translation adjustments Income taxes ; Balance, December 31 1 Reinvested Earnings: . Balance, January 1 ! Net income (loss) ' Preferred dividends ($2.06 per share in 1984 and $2.75 per ! share in 1983) ! Common dividends (52.45, $2.25 and $2,075 per share for 1 1985-1983, respectively) S (319) 131 (3) * (191) $3,110 (98) (188) 1 Balance, December 31 $2,824 Common Stock in Treasury: Balance, January 1 Shares purchased (2,052,300,4,053,300 and 159,570 shares in 1985-1983, respectively) ' Conversion of convertible securities and issuances under ' employee stock plans (523,827, 349,837, and 471,966 \ shares in 1985-1983, respectively) ! Balance, December 31 $ (176) (91) 23 $ (244) ! The above statement should he read in conjunction with pages 39 through 44 of this report. 1984 $ 82 82 $ 164 $ 93_6 (82) 1 $ 855 $ (200) (121) 2 $ (319) $2,853 439 (182) $3,110 $ (4) (184) 12 $ (176) 1983 $ 82 $ 82 $ 93_1 5 $ 936 $ (122) (84) 6 $ (200) $2,621 402 (170) $2,853 $ (22) (14) 32 $ 14) \ Key FliUBdel StatMto -- Common Stock Data Stock Price* Per Common Share High Low Dividends Share-owners' Equity "Based on daily reported high and low stock prices. ms S SSY* 4QV* 2,45 44,38 1984 S 53-A 40 V* 2.25 46.43 IW1 S 5Kl V' - ;,ir> 44.N ^ MimhjjtUj Company and Subsidiaries 0674913 TOWOLDMONOOI5377 Netuto SMenents SIcnMcant Accounting PolldM The Company's significant accounting policies are italicized in the following Notes to Financial Statements. pharmaceuticals business; and Monsanto's oil and gas business, the Seal Sands, United Kingdom plant and ' certain other assets. The gross sales proceeds from these transactions were $1,612 million. Where deter minable, the operating results associated with the Bntsef Contollditlon above described assets have been eliminated from the The consolidated financial statements include pro forma data presented above. Nonrecurring gains : the Company and its majority-owned subsidiaries. . and losses from the sales of these assets have been Intercompany transactions have been eliminated in ; excluded from the pro forma operating results. consolidation. Companies in which Monsanto has ! The pro forma operating results do rot purport ' an ownership interest between 20 and SO percent i to present Monsanto's actual operating results had are included in "Investments in Affiliates" in the the acquisition of Searle and rhe other transactions Statement of Consolidated Financial Position and referred to above occurred on January 1 of the years Monsanto's share of these companies' income or loss presented, nor to present Monsanto's consolidated is included in "Other income -- nef" in the Statement i operating results for any subsequent period. ! of Consolidated Income. ; In 1983, Monsanto purchased for $178 million ' Principal Acquisitions In August 1985, Monsanto acquired G. D. Searle & : Co. for SI,754 million. Searle researches, manufac 1 rhe minority interest in Fisher Controls International. : Inc. (FCII), increasing the Company's ownership to 100 percent from rhe previous 66 Vr percent. The : excess purchase price above FCH's net assets attribut tures and distributes prescription pharmaceutical , products and aspartame-based, low calorie sweetener products. The acquisition of Searle was accounted for , using the purchase method, and Searle's assets and able to the minority interest was $81 million, whtch is being amortized on a straight-tine basis over 20 years. . liabilities have been recorded at their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the identifiable net assets acquired ($582 million) is being amortized ; on a straight-line basis over 40 years. Searle's results of operations have been included in the Statement of . Consolidated Income from August 1985. The following table presents unaudited, pro forma operating results as if the acquisition of Searle and the sales of certain assets (described below) had occurred on January 1, 1985 and 1984. wm Restructuring in October 1985, the Company's Board of Directors approved a restructuring and reorganization program, The approved actions included the withdrawal from selected low-return businesses and production facili ties, the sale of certain assets which no longer have strategic importance and reductions in the number of employees. In connection with this program, in the fourth quarter of 1985 the Company provided a $557 million charge to "Restructuring cost -- net" in the Statement of Consolidated Income, comprising the 1995 19S4 following: Net. vales Net income (loss} Earnings per share, after extraordinary item $7*150 (136) 11.771 $7,469 331 4.09 The pro forma operating results include Searle's . results of operations for the indicated years, less increased amortization of intangible assets, increased interest expense on the acquisition debt, and relared income tax effects. In addition, the pro forma results reflect lower interest expense that would have resulted ; from using the net proceeds from certain sales of assets to reduce debt, as if those transactions had occurred on January 1 of the years presented. Asset Asset write-downs Cost of employee reductions, including a Special Incentive Retirement program Other costs Gains on sales of assets _(ddflt . S 530 2S2 2 \3 Restructuring cost -- net__________ __________________ S 55 ' The impact on net income was $341 million (net of estimated tax benefits of $216 million), or $4.43 per share. As part of the restructuring and reorganization program, several sales of businesses and production facilities have occurred or are planned. In the fourth sales include the sale of Searle's investment in Pearle Health Services, Inc. and Searle's nonprescription 0674914 - tAfnnsjriKa Cofttft,iity .tnJ \uh>i,Ujt quarter of 1985, the Company sold its oil and gas mm Currency Translation operations at a net gain of $201 million ($392 million Most of Monsanto's ex-U.S. operations' financial before tax), or $2.61 per share. Also in the fourth statements are translated into US. dollars using quarter of 1985, Monsanto sold its Seal Sands, United current exchange rates. Unrealized currency adjust Kingdom fiber intermediates plant at a net gain of ments in the Statement ofConsolidated Financial $82 million ($105 million before rax), or $1.06 per Position ore accumulated in shareowners' equity. The share. The Company intends to sell the Texas City, financial statements of ex-U.S. operations that operate Texas chemical plant and will close several operations, in hyperinflationary economies, including Brazil, including the facilities at Columbia, Tennessee and Mexico and Argentina, are translated at either current Anniston, Alabama. or historical exchange rates, as appropriate, and Subsequent to its acquisition by Monsanto, currency adjustments are included in net income. Searle sold its investment in Fearle Health Services, Major currency exposures are the British pound Inc. and its nonprescription pharmaceuticals business. sterling and Belgian franc. Other important currencies Because Monsanto recorded the assets of these busi include the German made, French franc, Canadian nesses at their fair values as of the date of acquisition, dollar, Australian dollar, Japanese yen, Brazilian no gain or loss resulted from these sales. cruzeiro and Mexican peso Currency restrictions Net sales of the divested and discontinued prod are not expected to have a significant effect on uct lines in 1985 were $931 million, principally in the Monsanto's cash flow, liquidity or capital resources. Chemicals segment. Management expects the restructuring program mm Inventory Valuation to be substantially complete by the end of 1986. Inventories are stated at cost or market, whichever A Special Incentive Retirement program was is less. Actual cost is used for raw materials and effective in November and December 1985. Of the supplies, and standard cost, which approximates 3,880 United States employees eligible under rhe actual cost, is used for finished goods and goods program, 2,358 elected to accept early retirement. in process. Standard cost iitcludes direct labor, taw material and manufacturing overhead based on a Depredation imI Amortization practical capacity. The cost of substantially all Depreciation and depletion Artiortiwion of intangible assets Obsolescence 198S 1984 1983 United States inventories is determined using the lastin, first-out (UFO) method, generally reflecting the $477 449 *456 effects of inflation on cost ofgoods sold sooner than 88 7 4 other inventory cost methods. The cost of other 34 47 63 inventories (approximately 20 percent ofall invento Ton! depreciation and amortization ries) generally is determined using the first-in, first-out S599 *503 523 (FIFO) method. The cost ofplant and equipment is depreciated using the straight-line method over weighted average periods of22 years for buildings and 13 years for machinery and equipment. Inventories at December 31,1985 and 1984 would have been $408 million and $432 million, respectively, higher than reported if the FIFO method of inventory valuation (which approximates current Patents ($1,219 million and $33 million at i cost) had been used for all inventories. Monsanto's December 31,1985 and 1984, respectively) are being : LIFO inventory policies make it impracticable to iden- amortized over their legal lives (approximately 8 years i tify inventories by classification (i.e., finished goods, in 1985). Other intangible assets ($330 million and i goods in process, raw materials and supplies!. $14 million at December 31,1985 and 1984, respec tively) are being amortized over their estimated useful j b OUandGasActMUaa lives (approximately 13 years in 198S). Goodwill | Oil and gas exploration and production activities ($650 million and $76 million at December 31, 1985 j were accounted for using the successful efforts and 1984, respectively) is amortized over periods of I method. 5 to 40 years, I [ d | Monsanto Company ustd Subsidiaries ! 0674915  mm Income Tun Investment tax credits are recorded as a reduc j The components of income before income taxes were: tion of income tax expense in the year they reduce ! ! ! i Total 1985 U.S. 1(590) Ex-US, 292 t(29B| 1984 J442 26S 5707 . 1983 1419 151 5570 the federal income tax liability, investment tax credits, net of recapture, for 1985-1983 were $10 million, $30 million and 526 million, respectively. Income taxes have not been provided on $371 million ofundistributed earnings of subsidiaries ' The components of income tax expense were: either because any taxes on dividends would be offset substantially by foreign tax credits or because 1985 1984 1983 Monsanto intends to indefinitely reinvest those | Current: Federal $ 44 J 72 5103 earnings, [ 5 ! Deferred: I ; 1 Stare Ex-U.S. Federal Stare Ex-VJ.S. 13 154 211 (338] (21) (21) 13*1) 21 56 149 72 3 44 119 6 45 ^m Earnlitft per Share 154 Earnings per share were computed using the weighted average number of common and common equivalent 11 shares outstanding each year (76,995,625, 4 80,909,755 and 82,215,156 in 1985-1983, respec a) tively), Common share equivalents (116,247, 335,979 H and 563,622 in 1985-1983, respectively) consist j Tax effect of low carryforwards 33 primarily of common stock issuable upon exercise of ; Total 1(170) 1268 5201 outstanding stock options. Earnings per share assum ing full dilution were not significantly different from 1 The sources of timing differences in the tecogni- the primary amounts. I tion of revenue and expense for tax and financial i statement purposes and the tax effect of each were: | h Suppkmwittt Data i' ) Depreciation, depletion \ and obsolescence | Restructuring program 1 Intangible drilling and development costs ! Capitalized interest j Other 1 Total 1985 1984 f 70 (346) (98) -- (7) 1(3*1) 1 92 11 -- 16 (119 1983 5 19 (3) 8 (10) 5 14 I Factors causing the effective tax rate to differ from the statutory rate were: | Federal statutory rate Lower ex-U.S. tax rates Investment and other Tax credits Benefits attributable to export < earnings i Dividends from ex-U.S. ! subsidiaries Reversal of prior years' [ foreign tax credits ; Other 1985 (46)% (ID (9) 1984 46% (3) (5) 1983 46% m (6) 13) (2) 13) 9---- 8 (4) 2 U) Raw material and energy costs Employee compensation and benefits Current income and other taxes Rent expense Technological expenses: Research and development Engineering, commercial development and patent Total technological expenses Interest expense: Operations Searle acquisition Less capitalized interest Net interest expense Equity in affiliates1 income Foreign currency gains (losses) including equity in affiliates' currency gams and losses 1985 1984 1983 12,557 52,522 $2,345 1,886 435 92 1,739 363 SO 1.68'' 154 *3 470 370 29(1 78 76 69 548 446 154 97 117 12ft 95 (14) (17) 178 100 25 18 1 5 1131 l i Effective income tax rate (57)% 3S% 35% 0674916 Momaxtc Company and SubWuw.` i 41 * mm Fmtlon PUn* j Most Monsanto employees are covered by nortcontributory pension plans. Upon retirement, many Monsanto employees also receive other benefits, principally medical and life insurance. j Pension costs are funded as accrued and include I current service and amortization of unfunded prior : service costs generally over periods of 10 to 30 years. | Other postretirement benefits are not currently l funded and are expensed as incurred. ' Pension expense for all plans was $85 million, I $116 million and $131 million in 1985-1983, respec- lively. The 1985 decrease in pension expense principally resulted from the updating of actuarial assumptions and the change of the actuarial cost j method for one plan, offset in part by the pension expense of Searle since its acquisition by Monsanto. I During 1985, the Company changed its actuarial cosr 1 method for one of its principal plans from the entry ; age normal method to the projected unit credit ; method. The assumed rate of return used for funding ; and cost assumptions was increased from 7.5 percent ' to 8.5 percent for the two principal United States ! plans. The effect of these changes was to lower total 1 pension cost by $28 million. The 1985-1983 expense recorded for other post retirement benefits was $18 million, $18 million and $13 million, respectively ' Estimated benefit and asset information at year' end for Monsanto's pension plans is presented below, | Net assets of the pension trusts were measured at fair : value and accumulated benefits were estimated from 1 actuarial valuations, principally using the projected unit credit actuarial cost method. Actuarial present value of plan benefits: i Vested - Nonvested i Accumulated benefits i Effect of projected future salary increases ! Total ' Plan assets at fair value 1985 11,994 154 2,148 318 12,466 $2,672 1984 l,554 184 1,738 312 2,050 2,074 , The actuarial present value of plan benefits in ! 1985 includes Searle's pension plans and additional ! benefits resulting from the Company's 1985 Special \ Incentive Retirement program and from plan amend ments effective January 1, 1986. j United States salaried and hourly employees are covered by two principal plans. The actuarial assump tions also include an overall average annual salary increase of 6.5 percent for the salaried employees plan. The actuarial present value of plan benefits and plan assets included in the above table for the two principal United States plans were approximately $2,100 million and $2,215 million, respectively, at December 31,1985. Short"Trm Debt and CradH Arrangement* 8S_ totes payable: Banks Commercial paper Bank overdrafts . Current portion of long-term debt______ J 130 468 fll 25 Total5 704 Maximum amount of notes payable and bank overdrafts outstanding at any month-end ' Average notes payable and bank overdrafts outstanding ytkightrd average interest rate during the year VWrighted average interetr rate at December 31 $1,962 $ 730 9% 9% 43 t L] lit 52"- S Tb $H2 IS",. 21",. To finance the acquisition of Searle, Monsanto entered into a $3.0 billion bank credit agreement, which was subsequently reduced to $2.0 billion. Of that credit agreement, $500 million is a short-term facility expir ing July 1986. Interest on amounts borrowed under this agreement is at the U.S. "prime" interest rate, or a margin above rates paid on certificates of deposit or the London interbank offered rate. The credit agree ment may also be used to support the issuance of commercial paper. At December 31, 1985, all of the short-term facility was unused. In addition, certain ex-U.S. subsidiaries have aggregate short-term loan facilities of $289 million, under which loans totaling $130 million were out standing at December 31,1985. Interest on these loans is related to various ex-U.S. bank rates. ^m Long-Term Debt Long-term debt {exclusive of current maturities) was: 1985 1984 Industrial development bond obligations, weighted average mteresT rate of 7`/j%, due 1987 to 2021 Commercial paper to he refinanced on a long-term basis, weighted average rate of 8!4% 10!/*% notes due 1992 4Vi% promissory notes due 1993 9'/h% sinking fund debentures due 1997 81/2% sinking fund debentures due 2D00 3`A% income debentures due 2002 4'4% income debentures due 2008 814% sinking fund debentures due 2008 11!4% sinking fund debentures due 2015 Capitalized lease obligations Other Total f 264 950 149 66 127 169 250 17 95 $2.0*7 5252 19 h~ 12" 50 16V 5 38 SXM Alf>nsjniri Company and Sitbsidwmei 067691? A In November 1985, the Company repaid, prior ro maturity, $168 million principal amount of deben one Common Stock Purchase Right on each outstand ing share of Monsanto common stock. A right will tures and notes due 1993 to 2008. Because these debentures and notes were repaid at less than face value, the Company recorded an extraordinary net gain of $30 million ($59 million before tax), or $0.40 per share. Maturities and sinking fund requirements on long-term debr are $25 million, $23 million, $28 million, $27 million and $27 million for 1986-1990, respectively. The $2.0 billion bank credit agreement used to finance the acquisition of Searle (described above) also be issued with each share of Monsanto common stock that becomes outstanding prior to the time the rights become exercisable or expire. If a person or 1 group acquires a beneficial ownership of 20 percent or more, or announces a tender offer rhat would 1 result in a beneficial ownership of 30 percent or ; more, of Monsanto's outstanding common stock, ; the rights become exercisable and each right will enri, tie its holder to purchase one share of Monsanto I common stock for $150. If Monsanto is acquired in a business combination transaction, each right will enri- includes a $1.5 billion intermediate-term facility expir i tie its holder to purchase, for 5150, common shares of ing ratably from 1988 to 1993. At December 31, 1985, ' the acquiring company having a marker value of all of this facility was unused. In November 1985 | $300, Alternatively, if a 20 percent holder were ro and February 1986, the Company registered with the acquire Monsanto by means of a reverse merger in Securities and Exchange Commission $1.0 billion : which Monsanto and its stock survive or were ro aggregate principal amount of unsecured debt engage in certain "self-dealing'' transactions, each securities. Subsequently, $400 million in 1985 and right nor owned by the 20 percent holder would enti- $150 million in 1986 of those securities were issued tie its holder to purchase, for 5150, common shares and the proceeds were used to refinance short and of Monsanto having a market value of $300. The intermediate-term borrowings. The remaining unis Company can redeem each right for 5 cents at any sued debt securities may be issued in the future, time prior to its becoming exercisable. The rights depending on financing needs and market conditions. | expire in 1996. These rights may cause substantial Covenants under the bank credit agreement and , ownership dilution to a person or group who certain loan agreements restrict maximum borrowings ; attempts to acquire the Company without approval of and dividend payments and require the maintenance : Monsanto's Board of Directors. The rights should not of certain financial ratios. It is not anticipated rhat future borrowing needs will be affected by these ; interfere with a business combination transaction that has been approved by the Board of Directors. As of restrictions. Of the Company's reinvested earnings, the close of business on February 3, 1986, 5300 million were available for dividend payments 76,783,448 rights were outstanding. at December 31, 1985. wm Stock Option Plan* i Commitments end Contingencies , At December 31,1985, there were 2,871,626 shares Commitments in connection with uncompleted addi under options outstanding for the Company's 1974 tions to property and investments in affiliates were and 1984 Management Incentive Plans at prices rang approximately $166 million at December 31, 1985. ing from $26.16 to $57.59. Options for 1,703,124 Monsanto was contingently liable as guarantor of shares were exercisable at December 31, 1985. During bank loans and for discounted customers' receivables 1985, 568,200 options were granted and 275,886 totaling approximately $88 million at December 31, options, granted at prices ranging from $24.25 to 1985. $46.31 per share, were exercised. Under the 1984 Monsanto is a party to a number of lawsuits, Management Incentive Plan, 2,681,022 shares remain which it is vigorously defending, arising in the normal available for grant. course of business. Certain of these actions seek Stock appreciation rights (SARs) are authorized damages in very large amounts. While the results of to be granted under both the 1974 and 1984 Plans, litigation cannot be predicted with certainty, manage including retroactive grants for unexercised options. ment believes, based upon the advice of Company At December 31,1985, SARs related to options for counsel, that the final ourcome of such litigation will 792,365 shares were outstanding; of these, 387,524 not have a material adverse effect on Monsanto's were exercisable. During 1985, SARs related to consolidated financial position. options for 121,509 shares were granted and 91,246 mm Capital Stock were exercised. . At December 31, 1985, there were 5,631,994 common shares reserved for employee stock options. In January 1986, rhe Company's Board of Direc tors declared a dividend to shareowners consisting of 0674916 A!r>nsjfo Cnmpdnx Jmi SubstifiAWi TOWOLDMONOOI5382 Certain operating unit segment data for 1985-1983 appear on page 27 and are integral parts of the accompanying financial statements. The principal product lines included in each operating unit are shown in this segment data. Sales between operating units are not significant. Inter-area sales, which are sales from one Monsanto location to another Monsanto location in a different world area, were made on a market price basis. Net sales in 1985 of businesses divested or discontinued that are included in the Chemicals segment were $645 million. Certain corporate expenses, primarily those related to the overall management of the Company, were not allocated to the operating units or world areas. Restructuring cost -- net, interest expense, interest income and other income -- net, as shown in the Statement of Consolidated Income, are the only reconciling items between operating income and income before income taxes. Nonoperating assets principally include investments, a portion of cash, rime deposits and certificates of deposit, short-term securities and certain miscellaneous receivables. Net sales by entities in each world area were: United Stares EuropeAfrica Canada Latin America Asia-Pacific Eliminations Total consolidated 1985 14,814 1,076 268 220 3S9 _ Unaffiliated Customers 1984 1983 S4.914 945 278 203 351 $4,596 924 259 192 328 $6,747 $6,691 56,299 Irner-Arcs [Between Mon,anto Entities) 1985 1984 1983 S 529 163 5 2 21 (720) $ 534 207 9 6 33 (789) S 52h IS8 6 4 IS 1*4"#: t- 5- $- Operating income and total assets by entities in each world area were: United States Europe-Afnca Canada Larin America Asia-Pacific Eliminations Corporate expenses Nonoperating assets Total consolidated 1985 177 164 34 6 12 12 (54) Operating Income (Loss) 1984 1983 5 475 192 25 4 31 2 [52) $ 433 137 24 (4) 15 (55) (4V) t 351 S 677 S 321 1985 17,077 1,019 120 232 299 (2591 389 8,877 Total Assets 1984 1983 55,088 772 105 178 257 (253) $5,1 ID 696 92 ISO 203 226 $6,373 5(18 $6,42" Following is a reconciliation of ex-U.S. operating income and total assets to the Company's equity in the net income and net assets of consolidated ex-U.S. subsidiaries: 1985 1984 1981 Operating income Restructuring cost -- net Interest expense Interest income Other income -- net Income taxes (including extraordinary' tax benefits of loss carryforwards) Net income of consolidated ex-U.S, subsidiaries 216 14 (20) 38 (20) (70) t 132 S 252 (53) 36 29 (10S| 5 156 $ r: .65 28 36 ,45 $ 126 Total operating assets Total liabilities Net assets of consolidated ex-U.S, subsidiaries 51,670 847 823 $I,3I> 519 $ 793 si.n 4"<l S -ni Montanio Company and Subudiattet 06 74919 1 {Dollars in millions, except per share) 1985' 1984 1983t 1982*." 1981 : Operating Results : Net Sales : Operating Income | Net Income (Loss) As a Percent of Net Sales | As a Percent of Average i Shareowners' Equity i As a Percent of Average I Capital Employed11 *6,747 351 * (98) (1)% $6,691 677 $ 439 7% (3)% 12% --'% 10% $6,299 521 $ 402 6% $6,325 479 $ 352 6% $6,948 702 S 445 6% 11%' 10% 15% 10% 9% 11% 1 Earnings per Share * (1.27) $ 5.42 $ 4.89 $ 4.39 $ 5.7.5 : Year-end Financial Position ! Total Assets 1 Working Capital *8,877 899 $6,373 1,395 $6,427 1,535 $6,077 1,503 $6,069 1,486 | Property, Plant & Equipment Gross Net *6,840 3,034 $6,919 3,374 $6,639 3,284 $6,530 3,313 $6,218 3,184 ! Long-Term Debt 1 Shareowners' Equity *2,087 3,407 $ 824 3,634 $ 937 3,667 $1,003 3,490 $1,110 3,330 Current Ratio ' Percent of Long-Term Debt to Total Capitalization 1.4 38% 2.2 18% 2.3 20% 2.6 22% 2.4 25% Other Data i Property, Plant 8t Equipment Additions Depreciation and Amortization ; Interest Expense i Research and Development Expense Income Taxes S 645 599 178 470 (170) $ 614 503 100 370 268 $ 560 523 96 290 201 $ 673 439 82 264 172 $ 668 263 101 233 248 Stock Price High Low i Price/Earnings Ratio on 1 Year-end Stock Price * 55Vb 40Va -- $ S3V> 40Va 8 $ 58'4 379s 11 * 449i 28 V* 9 $ 43 vt 2914 6 ; Per Common Share . Dividends Shareowners1 Equity , Common Shareowners S 2.45 44,38 72,081 $ 2.25 46.43 71,343 $ 2.075 44.83 69,787 $ 1.975 42.99 75,943 $ 1.875 42.18 79,029 ' Common Shares Outstanding ; (in millions) ' Employees 77 56,103 78 50,754 82 48,835 81 52,199 79 57,391 Nei Jos! for 19j includes net restructuring cast of $341 million, or $4.43 per share, and an extraordinary gain of SJt) millton, or $0,40 per share, from repayment ofdebt. r Wet income for 1983 includes extraordinary tax benefits of JJJ million, or $0.41 per share, from the utilization of ex-U.S, loss carryforwards. ,, 'Net income for 1982 includes an extraordinary gain of $23 million, or $0.29 per skate, from an exchange of debt }or common itwc>. *ln m2, the requirements of Statement of Financial Accounting Standards No. S2> '`Foreign Currency Translation, tvere adopted. 'Capital employed is the sum of short-term debt, long-term debt and shareowners ` equity. The beginning of the year and t e eut <>( n year capital employed are averaged and divided into net income after adding back the aftertax effect of interest costs. 0674920 Monsanto Cfiwfu'is W .W>Wrjwj Board of Directors fcctwdJ. MahoMjr St, Louis President and Chief Executive Officer (Chairman of the Board and Chief Executive Officer)' Monsanto Company Dr. tarii Ferundei St. Louis Chairman of the Board 1 (retiring as Chairman of the Board and Director)' . Monsanto Company i Dr. Jdn Migftr Medford, Massachusetts President - Tufts University ! Buck Mkkd ! Greenville. South Carolina ' Vice Chairman, Fluor ' Corporation and Chairman of the Board i Daniel international ! Corporation , [a subsidiary of Fluor j Corporation) Dr. Donald C. tarred Upper Darbvr Pennsylvania Chairman CCW Data Services, Inc. C. Raymond Dahl San Francisco Retired Chairman of the Board Crown Zetlerbach Corporation i Edward L Palmar l New York Retired Chairman of the , Executive Committee | Citicorp and Citibank, N.A. j Mul Raari i New York : Chairman 1 Citicorp and Citibank, N.A. Franc* J.FHnaraW St. Louis Executive Vice President (Director, President and Chief Operating Officer)' Monsanto Company j Achard L Frlcfce Montpelier, Vermont Chairman and Chief Executive Officer National Life Insurance Company Min K Hnnley North Palm Beach, Florida ; Retired Chairman ' of the Board and Chief Executive Officer Monsanto Company j WIRtf* D. RtthoMiaul | Seattle ! Attorney i Perkins, Coie ; Dr. Mw B. Slaughter ; College Park, Maryland | Chancellor | University of Maryland I at College Park Admiral StanfMd Turner U.S. Navy, Retired McLean, Virginia Lecturer and Writer Morgant Bush WUaoti St. Louis Attorney Wilson, Smith and Seymour Eorte H. HarMuti.Jr. St, Louis Executive Vice President (Direcror and Vice Chairman of the Board)' Monsanto Company Howard M. Lava Pittsburgh Chairman of the Board and Chief Executive Officer National Intergroup, Inc- Advisory Director*; Robert L. Bena Harold J. Corbett Francis}. Fitzgerald** EarleH. Harbison, Jr.*" Robert G. Power' Nicholas L. Reding Dr. Howard A. Schneiderman Francis A. Srroble 'Effective April 1,1986 j "Until Aprill, 198b Committees of the Board Officers ; Audit CpmmtttH i Dr. Jean Mayer, Chairman ( Buck Mickel John S. Reed : Dr. John B. Slaughter | Margaret Bush Wilson Corporate Socle! Responsibility CommlttM i Admiral Stansfield Turner, | Chairman ! Dr, Louis Fernandez | Dr, Jean Mayer William D. Ruckelshaus Dr. John B. Slaughter Executive CommlttM ; John W. Hanley, Chairman ' Dr. Louis Fernandez F Richard J. Mahoney I Margaret Bush Wilson Executive ComowtkHi and | Development CommlttM 1 Howard M. Love, Chairman ; Richard l, Fricke . John W. Hanley | Buck Mickel 1 Finance CommlttM ' Edward L. Palmer, Chairman | Dr. Donald C. Carroll 1 C. Raymond Dahl i John W. Hanley I Richard J. Mahoney | Margaret Bush Wilson j Nominating CommlttM ; Buck Mickel, Chairman i C. Raymond Dahl j Howard M. Love ! PoftftlM and Savings Fund* I CoramItteo i Richard 1. Fricke, Chairman . Dr. Donald C. Carroll | Dr. Louis Fernandez | Admiral Stansfield Turner i ! President and , Chief Executive Officer ' Richard J. Mahoney1 Chairman of tin Board Dr. Louis Fernandez-1 Executive Vico President* | Francis J. FitzgeraldJ ; Earle H. Harbison, Jr.* , Nicholas L. Reding , av- -a1-o-rHnI-e-tm*- -e- wUe--mi Robert L. Berra ( Harold J. Corbett Dr. Howard A. Schneiderman Senior Vic* President and Chief Financial Officer Francis A. Srroble SmferVlM President, Secretary and Oenoral Cevaeel Richard W. Duescnberg Group Vico Presidents : Thomas L. Gossage : Robert G. Potter Donald H. Swan Vice Presidents ! Earl N. Brasfield Leonard A. Cohn i Stewart D. Daniels ! Dr. S. Allen Heinmger John F Hussey Martin J. Kallen Thomas H. Lafferre James H. Sengtr David L. Sliney Vtee President and Controller Lawrence B, Skatoff Troeenfer B. Clare Harris ! Effacth* April 1, 1986. I 1 To become Chairman of rtle ! Board and Chief Executive Otfher. I - kctMng as Chairman uf the | Board. i 1 To become President and < '.bet j Operating Officer. j * 7i> become Vice Chamtun the ; Board. I m Monianta Company and Subsidiaries 067*921 TOWOLDMONOOI5385 Animal Matting The next Annual Meeting of the shareowners of Monsanto Company will be held at 1:45 p.m., , Friday, April 25,1986, in K Building at the Com pany's General Offices, 800 N. Lindbergh Blvd., St. Louis, Missouri, A formal notice of the meet ing, together with a proxy statement is being mailed to each shareowner. 10-K Report, Corpants Data Booh and Investor News A copy of Monsanto Company's 1985 Form 10-K Report filed with the Securities and Exchange Commission; 1985 Corporate Data Book, which contains additional information relating to Monsanto; and Investor News can be obtained by writing to; Investor Relations Department Monsanto Company 800 N, Lindbergh Blvd. St. Louis, Missouri 63167 Quarterly Common Stack Data 1985 First Second Third Fourth Stock Price High Low $467* 49 S5V 49Vt $41* 427a 441/j 40 Va 1984 First Second Third Fourth 5537a 49 51 467- $417: 42 41^4 40s 1983 First Second Third Fourth $46V, 47 587a J*Wi S37'/a 39 74 42 vH 507a Stock Symbol = MIC Stock Exchangas/Botirses United States New York Chicago (options) Europe Amsterdam Brussels Frankfurt Geneva London Paris Zurich Transfer Agwit and RofMiar The First National Bank of Boston Box 644 Boston, Massachusetts 02102 Dividend in,.575 0,625 0.625 0.625 50.52' (J.5"5 U.5"5 Sn.5ij n.>2' 0.52'" u.'2' 0674922 Mcmumto Company jnd 47 TOWOLDMONOOI5386 Monsanto Company Nun Si>f(Ii Lindlr>frjj!i Boulevard Si, Missouri 0674922.01 TOWOLDMONOOI5387