Document pp02xnJBKEJGK8ayjEM1j0Gpd

1977 ANNUAL REPORT MONSANTO COMPANY DSN 021072 STLCOPCB4006381 TOWOLDMONOQ14778 Cover: The 61 men and women on the cover are representative of Monsanto's worldwide employee family of 61,519. This year's Annual Report features closeup photos of a major Monsanto asset --its people. DSW 021073 STLCOPCB4006382 TOWOLDMONOOI4779 Table of Contents Operational Highlights................ 3 Letter to Shareowners.................. 4 Operating Summaries: Monsanto Agricultural Products Company................................... 6 Monsanto Chemical Intermediates Company..................................... 10 Monsanto Commercial Products Company..................................... 14 Monsanto Industrial Chemicals Company..................................... 16 Monsanto Plastics & Resins Company..................................... 20 Monsanto Textiles Company.... 24 International Division................... 28 Research and Development......... 32 Social Responsibility..................... 34 Financial Section........... .................37 Directors and Officers................... 64 Annual Meeting The next Annual Meeting of the shareowners of Monsanto Company will be held at 2:30 p.m., Friday, April 28, 1978, at the Company's General Offices, 800 N. Lindbergh Blvd., St. Louis County, Mo. A formal notice of the meeting, together with a proxy statement and form of proxy, is being mailed to each shareowner. 10-K Report Available A copy of Monsanto Company's 10-K Report filed with the Securities and Exchange Commission for 1977, which contains additional information relating to Monsanto, can be obtained by writing to: Shareowner Relations Department, Monsanto Company, 800 N. Lindbergh Blvd., St. Louis, Mo. 63166. Italics identify Monsanto's trademarks. DSW 021074 1 STLCOPCB4006383 TOWOLDMONOOI4780 NET SALES NET INCOME 2 DSW 021075 STLCOPCB4006384 TOWOLDMONOQ14781 OPERATIONAL HIGHLIGHTS (Dollars in millions, except per share) Net Sales..................................................................................... ............... Net Income................................................................................ ................ Per Common Share: Primary Earnings................................................................ ............... Fullv Diluted Earnings........................................................ Dividends.............................................................................. Shareowners' Equity.......................................................... Property, Plant and Equipment Additions............................. ............ Depreciation, Obsolescence and Depletion............................. ............... Taxes--Income, Payroll, Property and Other...................... ............... Research and Development..................................................... ............... Year End: Shareowners--Common Shares........................................ Employees............................................................................ 1977 $4,594.5 $ 275.6 $ 7.46 7.37 3.025 66.16 $ 607.1 $ 296.0 $ 375.2 $ 132.3 85,021 61,519 1976 $4,270.2 $ 366.3 S 10.05 9.77 2.75 61.79 $ 646.8 $ 226.0 $ 346.5 $ 114.3 84,647 61,903 Operating Results by Operating Company Operating Company: Agricultural Products........................... Chemical Intermediates........................ Commercial Products........................... Industrial Chemicals............................. Plastics & Resins................................... Textiles................................................... Eliminations and Unallocated Corporate Expenses........................... Sales and Operating Income. . . . Income Charges (Credits)--Net................ Income Before Income Taxes.................... Income Taxes . . . .................................... Net Income................................................... 1977 Net Sales Income S 654.0 505.0 385.4 1,054.6 1,111.2 884.3 $4,594.5 $273.4 132.3 (15.2) 209.7 76.3 (39.0) (27.8) 609.7 86.0 523.7 248.1 $275.6 1976 Net Sales Income $ 573.2 476.2 398.2 950.4 1,018.7 853.5 $4,270.2 $240.6 152.6 (0.1) 206.6 100.8 (1.2) (31.5) 667.8 50.1 617.7 251.4 S366.3 Monsanto's Operating Company and World Area data for 1977 and 1976 have been restated to reflect new reporting requirements of the Financial Accounting Standards Board. The restatement consisted of separating elim inations and certain corporate expenses from the operating companies' results, which amounts had previously been allocated. Financial data for 1975, 1974, and 1973 have not been restated. DSW 021076 3 STLCOPCB4006385 TOWOLDMONOOI4782 TO OUR SHAREOWNERS term objectives. In this report we want to put both into reasonable perspective. Monsanto Company weathered difficult conditions and some unexpected setbacks in 1977 while continuing to build toward the future. We had a number of disappointments, which contributed to financial results that fell short of management expectations. On the plus side, we made continued progress in defining and implementing business strategies that should prepare us well for the decade ahead. An evaluation of the year's significance should take into account both the short-term disappointments and the progress made toward longer- 1977 Financial Results Monsanto's financial results for 1977 fell below the previous year's record levels, with modest sales growth not reflected in an increase in profits. Consolidated net sales for the year were $4,595 billion--an increase of 7.6 percent over the $4,270 billion for 1976. Net income for 1977 was $275.6 million--a decline of 24.8 percent from 1976's $366.3 million. Primary earnings per common share for 1977 were $7.46 compared with $10.05 the previous year. Fully diluted earnings per common share (assuming all convertible issues are converted to common stock) were $7.37 for 1977 and $9.77 for 1976. John W. Hanley Three factors warrant special attention--write-offs (both voluntary and mandatory), a higher tax rate and currency translation losses. Each had a major adverse impact on earnings, though a significant portion of the total impact of these factors should be non-recurring. Write-Off Resulting from FDA Edict The first factor--write-offs-- penalized earnings by 94 cents per share, more than half of that due to the unreasonable governmental regulatory edict against the Company's plastic soft drink bottle. During 1977 the U.S. Food and Drug Administration issued a final administrative decision effectivelyprohibiting the manufacture of Monsanto's Cycle-Safe plastic beverage containers. While we believe the bottle is safe and continue to challenge that decision in the Federal Court, it seemed clear that there had been a meaningful impairment of the fixed assets involved in the manufacture of the bottles. Therefore, in line with sound accounting practice, we recorded a write-off of these fixed assets during 1977. The write-off, together with other shutdown costs associated with Cycle-Safe, reduced 1977 earnings by 55 cents per common share. This development was particularlydisappointing not only because the Company has lost an opportunity for future earnings from Cycle-Safe but, more importantly, the consuming public has been prevented from using a lightweight, safe container that was designed to reduce litter and conserve energy through recyclability. The other write-offs during 1977 came as a result of Monsanto's continuing program of formal business analysis. This program entails a management commitment to divest, or manage for cash generation, any business or product line in which we see inadequate longer-term profit potential. These decisions generally have involved a short-term penalty-- and often present a real challenge in the compassionate management of our human resources. However, properlyhandled, these difficult decisions are key to the long-term vitality of the Company. DSH 021077 STLCOPCB4006386 TOWOLDMONOQ14783 For example, we withdrew from the expandable polystyrene business in the United States, reduced the scope of our nylon operations in Luxembourg, closed a fiber texturizing plant in West Germany, and withdrew from several unprofitable segments of our European plastics and fibers businesses. These moves further reduced earnings by 39 cents per common share. Taxes and Currency Translation The second factor--the higher tax rate--reduced earnings by 95 cents per common share. For 1977 we provided for current and deferred tax liabilities at a 47.4 percent tax rate, 6.7 percentage points higher than that of 1976. The higher rate was due primarily to the fact that the Company was unable to apply losses from subsidiaries outside the United States against taxable income. The third factor--currency exchange and translation losses--reduced 1977 earnings by 93 cents per common share, compared with 52 cents per common share in 1976. This loss was related to the precipitous drop in the value of the U.S. dollar in relation to other major world currencies, especially in the fourth quarter. Monsanto has substantial business activities outside the United States that are financed by long-term debt in such currencies as the German deutsche mark, the British pound sterling, the Japanese yen, and the Swiss and Belgian francs. Financial Accounting Standards Statement No.8 requires that we restate all such debt in terms of the current value of the dollar at the end of our accounting periods. When the dollar fell in relation to those currencies, the dollar value of the debt became inflated. Generally, Monsanto has not attempted to hedge the earnings fluctuations due to floating rates of exchange through purchases of such currencies to cover its long-term foreign debt exposure. The currency relationships, in all likelihood, will continue to fluctuate from the levels existing at the end of 1977 to some other levels in the future when the debt becomes payable. The value of the dollar could recover from its 1977 weakness compared with those currencies, thereby providing us with future translation gains. These three unusual factors are not directly cumulative because a portion of the exchange and translation losses is reflected in the tax rate. However, they do serve to aid in an analysis of the year-to-year change in the Company's operating results. Review of Operations The body of this report contains detailed analyses and discussions of the 1977 operating results of each of Monsanto's six operating companies. A brief overview of operations indicates that our Agricultural Products Company maintained its excellent momentum of the past several years, led by sales of Lasso herbicides. Lasso continued to be the premier corn and soybean herbicide in the United States and made strong gains in other parts of the world. The Company's new Roundup herbicide--the Fust herbicide that destroys the root structure of perennial weeds--has surpassed the spectacular early record of Lasso. Sales of Roundup were divided almost equally between the United States and the rest of the world. Monsanto Industrial Chemicals Company recorded its seventh consecutive year-to-year gain for both sales and operating income, despite a year-end decline reflecting inventory adjustments by major customers. Worldwide overcapacity resulted in cost/price pressures for a number of chemical intermediates--including phenol, acrylonitrile and styrene monomer--as well as for polystyrene plastics. This led to year-to-year declines in operating income for the Chemical Intermediates and Plastics & Resins companies. The operating loss for Monsanto Commercial Products Company reflected the write-off of the CycleSafe container business provoked by the FDA action described earlier. The operating loss incurred by Monsanto Textiles Company stemmed from severe price and volume erosion in Europe, where the man-made fiber industry remains severely depressed. An overall evaluation of our operations shows that, despite the disappointments of the year, we were able to maintain the higher plateau of earnings established at Monsanto over the past five years. Our profits from 1973 through 1977 have averaged $300 million, compared with $100 million a year during the previous five-year period, 1968 through 1972. The primary goal of your management is to reach a new and higher level of profitability by supplying quality goods and services to customers in a manner that is in harmony with commercial interests as well as with the broader needs of society. We are confident that Monsanto is well positioned, our people well prepared, and our strategies well defined to achieve that objective. John W. Hanley Chairman of the Board and President March 14, 1978 DSW 021078 STLCOPCB4006387 TOWOLDMONOOI4784 AGRICULTURAL PRODUCTS .'/'p/Mm in ;n;Uions: ! Q7 : . ;v"6. , 1977 . . i 97.1 .... iy"7 .. . . .. ,. .... .. .. . bales 56^1.0 5" V 2 >47 4 4jt).7 2M.4 Operating Income 0704 74(1,6 ..62.9 PA.V iiiU hnc.'e.uscd i cncreJe Je.-p,m4 .cr Monsanto"? bread lint* a;' herbicides ;ed the Monsanto Agricultural Products Company to higher saics and operating income for i9~". Sales and (.perming income both increased i4 percent over 1976 levels. Sales of Lasso Set New Highs Lasso, Monsanto's premier herbicide, continued its uninterrupted growth due to its versatility and broadbased preference among U.S. corn and soybean farmers. During 1977, Lasso herbicide further established its position as an industry standard as it wan used on more corn and soybean acres than any other herbicide. A proprietary Monsanto product, Lasso is used to control grassy weeds principally in corn and soybeans. During 1977, U.S. farmers planted record corn and soybean crops, creating additional demand for Lasso. Clsde Wilson (above!, senior research specialist, records test data on plants grown at Monsanto laboratories in Si. Louis. Thousands of compounds are tested betore one successful product is put on the market. 6 OSW 021079 STLCOPCB4006388 TOWOLDMONOQ14785 Sales .sere turner stimulated -v an increase in herbicide mixtures and by an improvement in the rate of applications. Monsanto has long been a leader in advocating the concept of herbicide mixtures. In a single application, the farmer can treat a variety of weeds using a combination of herbicides. Some of these control broad leaf weeds and others, like Lasso, control grassy type weeds. During 1977, the use of mixtures continued to increase in the United States. Lasso is the decided leader in brand shares of these mixtures. Increasingly, U.S. farmers are using Lasso at or near recommended rates of application--thereby receiving improved weed control and increased crop yields. In 1977, rates of appli cation showed further improvement. As a result of increased demand for herbicides, inventories of Lasso herbicide at the farmer, dealer and the end of ;he planting season, in order to assure adequate supplies of Lasso for the forthcoming planting season, somewhat higher levels of shipments of Lasso were initiated during the fourth quarter. With [he resumption of shipments, the selling price for Lasso in liquid form was increased three percent to help offset increased manufacturing costs. Outside the United States, sales of Lasso also showed good year-to-year gains as shipments in Europe and South America increased. In Europe. Lasso is used primarily on maize, while in South America, it is used on soybeans. Growth of Roundup Excellent Sales of Roundup, Monsanto's newest entrant to the broad, world wide herbicide markets, scored gains Record sales of Lasso herbicide kept Danny Harris (left) and other employees at Monsanto plants busy during 1977. Francois Schwind (above), a researcher at Monsanto's new agricultural laboratory at Louvain-la-Neuve. Belgium, works in special rooms monitoring plant growth under climate conditions characteristic to Europe. DSW 021080 STLCOPCB4006389 TOWOLDMONOOI4786 :n ail *or:d areas during 19". Sales for 19" '.'ere significantly ahead of those for 1976 both inside and outside of the United States. Sales of Roundup were substantially ahead of those of Lasso in the comparative years of their life cycles. Roundup is a postemergent. nonselective herbicide that controls a broad spectrum of problem weeds. Markets for Roundup herbicide are worldwide and, during 1977, more than half of the herbicide's sales were generated outside of the United States. In Brazil, Roundup was increasingly used on coffee, sugarcane and citrus crops. It is being used in Scandanavia, in forest preserves, in vineyards in France, in rubber plantations in Malaysia and in cereal crops in Australia. In the United States, Roundup is used to control such perennial weeds as Johnsongrass, quackgrass and field bindweed in major crops. As with ail nerbicides, use of Roundup is regulated by the Environmental Protection Agency which, in late 1975, approved its preplant use for major grain crops in the United States. Additional approvals for other uses have been applied for but not yet approved by EPA. Sales of A vadex Off Sales of Avadex herbicides, used to control wild oats in wheat and small grains, were below 1977 expectations. Used primarily in the northern United States and Canada, granular Avadex is used in fall applications or liquid Avadex is used in spring applications. Strong sales of granules in the fall of 1976, combined with drought conditions in Canada and sections of the United States, served to reduce 1977 spring sales of Avadex. Fall sales of Avadex granular in 1977 were impacted by declining wheat prices. In Europe. -n;rrr.ents uf ; uuuv-ju ;rueu good year-to-year gams. Shipments of Machete r:ce herbicides increased during [he .ear as rice producers in Japan, Taiwan and the Republic of Korea increasingly selected this Monsanto herbicide to control weeds. Sales of Rolans plant growth regulator, which increases the sucrose content of sugarcane, also registered gains in 1977 as sales were extended in Brazil and Caribbean countries. Parathion sales were ahead of those of 1976. Parathion, an insecticide used to control bollworms and boll weevils in cotton crops, is sold primarily m the Mississippi Delta area of the United States and in Central American cotton-producing countries. New methods of parathion applications-- where growers used parathion in combination with other insecticides-- hindered larger sales gains. Farmers in the Far East receive advice on the proper use of Monsanto agricultural products from marketing representatives such as Masahiro Miki, located in Tokyo, 8 Monsanto sales representative John Hamilton (above) follows farming conditions closely around Arthur, Illinois, in the heart of the U.S. Corn Belt. Lasso is the premier corn and soybean herbicide in the Corn Belt. Norm Eason (right), a Monsanto salesman in Florida, examines sugarcane treated with Polaris plant growth regulator. Sales of Polaris registered gains in 1977. osy 021081 STLCOPCB4006390 TOWOLDMONOQ14787 Early ;n 19 , parathier. <ell:r.i prices were increased. Startup of a new plant for the production of parathicn is scheduled for 1978, solidifying Monsanto's position as the largest and lowest-cost manufacturer of this important product. Production of anhydrous ammonia increased during 1977 from a new plant brought on stream late in December in the United States. Anhydrous ammonia is an important raw material used in the production of synthetic fibers, nitric acid and ammonium nitrate for blasting products and fertilizer. External sales were flat with the prior year due to the coal industry strike and shortfall in fall fertilizer sales resulting from decreased planting and farmer uncertainty. Income was lower than that of 1976 because of pricing pressure caused by nitrogen industry excess capacities. Researchers such as Eric Schreurs (above), at the Monsanto laboratory in Louvain-laNeuve have the most advanced equipment to tailor Monsanto herbicides, plant growth regulators and other products to the needs of European farmers. 30162S STLCOPCB4006391 TOWOLDMONOOI4788 CHEMICAL INTERMEDIATES tDollars in millions) 197"........... ___ 1976 ........... ... 1975 ........... . . . . 1974 ........... . . . . 1973 ......... ___ Sales S505.0 476.2 390.3 416.8 247.3 Operating Income S132.3 152.6 90.2 82.2 20.0 Monsanto Chemical Intermediates Company is a major supplier of basic chemical raw materials to the merchant market and to Monsanto's other operating units. Sales to outside customers were up 6 percent during 1977 and reached record levels. Operating income however, was dowrn 13 percent from the record levels of 1976. Excess capacity throughout the world led to lack of full utilization of plants and downward price pressures on many products. This factor, coupled with increased costs, resulted in a significant cost-price squeeze. Petrochemical Profits Down Sales of petrochemicals were up marginally in 1977 as the growth in market demand was offset by the competitive environment, characterized b> new industry capacit.e' ^rouzm m stream and resultant price attrition for such major products as styrene monomer, acrylonitrile and pnenoi. Meanwhile, the cost of petrochemical feedstocks and energy continued to move upward and this, combined with start-up costs associated with some major new production facilities, resulted in a profit decline for this business group. Monsanto nearly doubled its ITS. capacity for producing acrylonitrile when a new plant with an annual capacity of 420 million pounds became commercially operable in May. This facility, located at Texas City. Texas, will be duplicated with another plant at Teesside, England, due for start-up in 1978. Monsanto is the world's largest producer of acrylonitrile, a basic petrochemical. Acrylonitrile is used to Process technologist Sally Davila is one of many professionals working to optimize production of the high-volume intermediates essential to other Monsanto operating companies. Monsanto completed a number of gas wells during 1977 in Wyoming, Texas, and other parts of the United States. The gas mas be used either at Monsanto plants or traded for other essential resources. 10 DSW 021083 STLCOPCB4006392 TOWOLDMONOQ14789 maa.xse aa.cr;. lies -uah as Humor: aar-.ac fiber; nylon intermediates and Lustran ABS/ SAN plastics. Sign Conoco Agreement in October, Monsanto signed agreements with Continental Oil Company (Conoco) to manufacture petrochemicals jointly at an enlarged ethylene and related products plant at Monsanto's Chocolate Bayou site near Alvin, Texas. Most of the feedstock for the expanded plant will be supplied from a new unit to be constructed at Conoco's Lake Charles. Louisiana, refinery. The new Chocolate Bayou unit will be completed in the second half of 1980. The agreements bring together the crude oil position held by Conoco with the strong technology and manufac turing experience of Monsanto. The Rod Smith, chief geophysicist at the Houston office, assists Monsanto's efforts in searching for natural gas and oil. Sometimes called "doodlebuggers." geophysicists combine science, experience and intuition in their jobs. I1 KOfcS 301630 STLCOPCB4006393 TOWOLDMONOOI4790 new faculties -aill proxies noth companies with additional petro chemicals needed for the future. Of particular importance to Monsanto are propylene and benzene and the improved feedstock security behind those key building block chemicals. The expansion will more than double Chocolate Bayou's ethylene and coproducts capacity to about 8 billion pounds of petrochemicals a year. The Lake Charles facility will have the capacity to process 100,000 barrels of crude oil a day. More Expansion Progress Outside the U.S., two joint ventures to build new plants are part of Monsanto's efforts to secure long-term supplies of important intermediates. In Australia, commercial sales of styrene monomer began ;n November from Hydrocarbon Products Pry. Ltd., a joint venture with a subsidiary of Broken Hill Proprietary Co. Ltd. Styrene monomer is a raw material used to make polystyrene plastics, synthetic rubber and other products. In Britain, work was nearing completion on a new plant at Teesside that will produce he.xamethylenediamine, an important raw material used to make nylon fibers and nylon plastics. The plant, a joint venture with Montefibre, a subsidiary of Montedi son of Italy, will utilize a Monsanto proprietary process which uses acrylonitrile as its principal raw material. Construction should be completed during the first half of 1978. Strong Demand for Process Chemicals Sales of process chemicals reacned a record high in 19". These products are used by industry as the building blocks in manufacturing a wide variety of chemicals to serve a broad spectrum of markets. The increase in sales resulted from a combination of good volume growth and selective price increases during the year; however, downward price pressures on some products were evident toward year-end. During the year, an expansion at the Sauget, Illinois plant increased the annual capacity for phosphorus trichloride from 63 million pounds to 108 million pounds. Monsanto is a major supplier of phosphorus trichloride which is used in the manufacture of agricultural chemicals. Marcus Perez (above) is a technician at the Chocolate Bayou, Texas, plant where a unit of the Monsanto-Conoco joint project will be built. Even at the modern chemical plant in Texas City, it is at times easiest to rely on old established methods, including the bicycle used by Cathy Ponds (right), a job distribution clerk. 12 DSW 021085 STLCOPCB4006394 TOWOLDMONOQ14791 >.a:er treatment nmicaii. ;ur:ac:an: intermediates. oil antioxidants, coatings and dyes. [n September, work was completed on a phosphorus pentasulfide expansion at Anniston, Alabama, which doubled Monsanto's capacity there to 50 mil lion pounds a year. Monsanto has unique manufacturing capabilities for phosphorus pentasulfide w-hich is used in making insecticides and oil additives. Expanded Exploration Sales in Monsanto's oil and gas business reached a new high for 1977. An expanded exploration program resulted in the completion of significant gas wells in the Gulf of Mexico, West Texas and Wyoming, with additions to reserves in excess of production for the year. No: ail me oil ar.d gas memo. - . Monsanto is soid outside toe company It is an important part of the company's feedstock and enerev strategy to supply an increasing portion of its needs from internal sources. Exploration and production efforts center in the U.S. or offshore areas so that production can be traded or used directly by Monsanto's plants to the maximum extent possible. Some exploration and production is under way also in Canada, the North Sea and the Java Sea. Thousands of highly-trained people operate multi-million dollar chemical plants. Security guards, such as Jim Ridenour, protect Monsanto's huge investment in people and property. DSW 021086 13 STLCOPCB4006395 TOWOLDMONOOI4792 COMMERCIAL PRODUCTS (Dollars in millions) 1977.................. 1976 ................... 1975 .................. 1974 .................. 1973 ................... Sales S385.4 398.2 318.7 299.0 239.3 Operating Income SU5.2) (0.1) (11,1) (15.6) (9.6) Monsanto Commercial Products Company was bolstered during 1977 by another strong performance from Fisher Controls Company, a whollyowned subsidiary. The lower 1977 sales performance and the large operating loss reflect the impact of lost sales revenue from Cycle-Safe containers and the establishment of a provision to write off the fixed assets associated with Cycle-Safe. electronic instruments for 'he chemical, refining, power generation and pulp and paper industries. Incoming orders were at a record rate during the last half of the year and there is a shipment backlog for Fisher products extending well into 1978. A new rotary valve plant at Sherman, Texas had a successful start up during the year and shipments were ahead of projected levels. A Strong Year for Fisher A substantial increase in spending by manufacturing industries in the United States led to significantly higher sales of Fisher Controls Company products. The business further benefited from programs implemented early in the year to expedite shipments. Fisher manufactures process control valves, regulators, controllers and Status of Cycle-Safe On November 17, Monsanto filed a petition with the United States Court of Appeals in Washington, D.C.. challenging the final decision by the Commissioner of the U.S. Food and Drug Administration, That decision effectively prohibited the manufacture How much plant space will be needed in the next decade? Bob Moy (above) of Marshalltown, Iowa, studies marketing plans, business direction papers and data from other plants to answer this type of question in his Facilities Planning job. 14 Precision valves made by Tom Nevins (above) and others at Fisher Controls Company were in heavy demand during 1977. Fisher products control the flow of process liquids and gases. OSW Q21087 STLCOPCB4006396 TOWOLDMONOQ14793 or' C-c:e-See pia.s:;c :.'n:a:ner;. Tie evaluation of the Companv's petition bv the court is expected to be lengthy and it is doubtful that any final court action will occur for several months. A full discussion of the Cycle-Safe situation is found on page 4. Electronics Division Posts Loss Severe competitive activity, intense pricing pressure and a dramatic drop in demand for consumer products using light emitting diodes (LED) combined to produce an operating loss for the Electronics Division during 1977. The implementation of several manufactur ing and technical improvements in the production of silicon wafers helped offset the softness encountered in the electronics markets. Monsanto :$ a leading supplier of silicon materials to the electronics industry and views this business as a major growth area. During 1977, the company completed phase one of a three-part expansion and cost reduction program and began implementation of phase two. In 1978, production capacity for silicon materials will be increased by about 30 percent worldwide. Planning is underway for phase three which includes construction of a second U.S. manu facturing plant. These expansion plans are backed by significantly increased research efforts aimed at further cost reductions and new product break throughs for high-grade materials used by semiconductor manufacturers. Markets for LED watches and hand held calculators remained saturated during 1977, and demand for Monsanto - ill-* materia.; meu make the diodes remained mow Enviro-Chem Construction Down Monsanto Enviro-Chem Systems, Inc., a wholly-owned subsidiary, is heavily involved in the design and construction of sulfuric acid plants. During 1977, construction activity for new plants was at the lowest rate in two decades and, as a result, that part of the business was off substantially. Replacement sales of vanadium catalyst used in the sulfuric acid manufacturing process remained strong, however, as did sales of mist eliminator equipment used to control air pollution and processing problems. Jerry Retter aliens a huge gasfield valve on ihe producnon line ar Marshalltown, Iowa. Fisher Controls' products are used extensively in gas and oil fields around the world. High quality silicon wafers for the electronics industry undergo careful inspection by Annalee Twellman at the St. Peters, Missouri, plant. Monsanto is expanding its silicon operations using improved manufacturing techniques. osw 021088 STLCOPCB4006397 TOWOLDMONOOI4794 INDUSTRIAL CHEMICALS .yO-e. ....................... It.'04 5 crp.................... "9.! i-Oi............. OIS IvM.................... :yVs................ Owb Operating i net-me f-'OO iv3.S -93.3 9, c VOwum,:- industrial i. her:'; Ccripany during j b-~ cerumued us wrong jro-vT.il. reaching record sales :od opcratm? income for the seventh consecutive year. Sales tor !-r~ increased by 11 percent compared with i'Od, and operating income increased 1.5 percent over the poor ;-ear. pales were strong during he 'irsi p-.if of the year bui weakened a: --ome product areas in the second hid. reflecting slowing economic conditions worldwide. Banner Year for .Specialty Chemicals Sales gains were steady throughout the year over the broad range of specialty ciemteals produced by Monsanto. Food and fine chemicals recorded an especially strong year, and demand for vanillin--a food flavoring and chain;?.ceuticai intermediate--was very strong. Sales of bulk aspirin Moncireo's leadership in supplying chemicals ana equipment :o the rubber industry is made possible by people like* tennis Martin, a senior research technician at. Akron. Ohio, and a iO-year .Monsanto errtpioy'je. !6 OSM 021089 STLCOPCB4006398 TOWOLDMONOQ14795 rebounded well from 19~6, and Monsanto remains the largest supplier of the widely used pain reliever. Monsanto became the sole U.S. producer of sorbic acid and potassium sorbate in 1977 following start-up in June of a plant at the Chocolate Bayou site near Alvin, Texas. Sorbates are food preservatives used in products such as bakery goods, cheese, margarine and wine. In August, the U.S. Treasury Department agreed to investigate charges by Monsanto that Japanese manufacturers of sorbates were selling them in the United States at prices far below those charged in Japan. An initial finding on the "dumping" charges is expected in the first quarter of 1978. At Luling, Louisiana, a new facility was completed that will produce acetaminophen, APAP. a popular analgesic compound which will complement Monsanto'< production of aspirin. The plant has an annual capacity of eight million pounds, making Monsanto the second largest producer in the United States. Sales of functional products were very strong in 1977 led by ACL sanitizer and bleaching compounds. The line of Dequest water treatment chemicals, Phos-Chek fire retardants, and Skvdrol and Pydraul hydraulic fluids also recorded firm year-to-year sales gains. On October 31, Monsanto announced it had completed the phaseout of its polychlorinated biphenyl (PCB) business. The companyhad been the principal supplier of dielectric insulating fluids. This phaseout was announced in 1976, and an orderly timetable was established to allow customers to develop and test alternate products. Monsanto Industrial Chemicals' employees, such as Bob Jenkins (left), combine a wide array of skills needed to produce over 1,000 different products -- the most of any Monsanto operating unit. Steve Webb (above) and other Monsanto engineers oversee construction projects around the world. The Industrial Chemicals Company completed several new projects during 1977. DSM 021090 STLCOPCB4006399 TOWOLDMONOOI4796 Phosphate Business Mi.vcc Shipments or detergent aw materials, a major product tins, were down, modestly during. \9~~ as a result <>r' legislation in some nates that limns the amount of phosphates in detergent1!. Shipment'; increased during the year to growing markets lor phosphate salts ana tuner phosphate Jcrwatives which ate used in food, dental products and industrial applications. Throe cross?;! markets -Mil continue to receive more emphasis. Price increases were announced for some products during the year, in,chiding an increase for sodium tfipolyphosphate, the major detergent builder. Power shortages in Idaho during the firs; half of the year restricted production which, in turn, created manufacturing scheduling problems and resulted in higher costs. International phosphate shipments orrpr-'wed over T>"$ ieveis us more elemental phosphorus was supplied to Monsanto's Brazilian facility which produces phosphoric acid and various phosphate salts. Rubber Chemical Sales Were Strong Mon>anto is the leading supplier of ;t full range of chemicals used for processing natural and synthetic rubber. In addition to being used in tires, these chemicals are necessary to produce industrial rubber products such as conveyor belts, hoses, gaskets and belting. The industrial rubber products market is growing at twice the rate of the tire market. Monsanto also has an expanding line of processing equipment and precision testing nstruments for the rubber industry which are used to test rubber materials and monitor production for increased quality and cost controls. Dan Hagier. mechanical draftsman and ituee-year employee, takes elevation tradings at a piant site in Si. Louis, lirigineerlrie services are vital to me expansion programs of Monsanto. 18 Core samples identify phosphate deposits: for Ronald Ferrel and other mining professionals at Soda Springs, Idaho, and Columbia. Tennessee. These samples are also used to develop mining plans to facilitate future reclamation programs. DSW 021091 STLCOPCB4006400 TOWOLDMONOQ14797 During 19 . :he company became a supplier of x-ray tire testing equipment to the tire industry. Rubber chemical sales for the >ear were up 15 percent compared with those of 1916. In the United States, near-record automobile sales helped increase demand for Monsanto's products, especially during the first nine months of the year. A large share of the company's rubber chemicals sales was also realized from business demand in markets outside the United States. These markets are served by the company's worldwide network of production facilities. Plasticizer Sales Improve Plasticizer sales for 1977 were up 10 percent over those of the previous year. These products, including Santicizer 160 and Santicizer 711 plasticizers, give plastics flexibility and other .mp.-osed characteristics. Thev are especially important to the production of polyvinyl chloride plastics. Demand remained essentially level, quarter-to-quarter, as the growth of the U.S. economy slowed. Market shifts to alternative materials were experienced and included increased usage of carpeting rather than vinyl flooring and fabric rather than vinyl upholstery in automobiles. Monsanto's worldwide capacity for producing Santicizer 160 was increased over 40 percent when a new plant was completed in December at Sauget, Illinois. Santicizer 160 is a fast-fusing plasticizer used in the manufacture of resilient flooring, vinyl foam, adhesives, rubber compounds and coatings. Hosea Owens (above, left) and Leatha Reily (right), project engineers at the Chocolate Bayou sorbate food preservative facility, monitor operations. Sorbates are used in many food products to retard spoilage. DSN 021092 STLCOPCB4006401 TOWOLDMONOOI4798 PLASTICS a RESINS 'Dt'iiun; in nuUiomf 1,:` 7 V .... . . 1976. . . . . . . 1475 . I9"c......... 177 t . . . . Sales il.il! 2 1,0117 Mvl.l S i 2.6 Operating 1 nep me >76.3 100.S 318 ci 4 "4.0 Monsanto Plastic:; St Rr-,ins Company improved uoon us brilionjoflar :ales performance of [he previous year as worldwide revenues increased 9 percent for !4~7, Operating income, because of excess mdusu-v capacity and price weakness in specific plastic products worldwide, failed to keep pace. Worldwide Demand i'or Thermoplastics Mixed First-half shipments of plastic materials irt the United States gained strength from vigorous construction activity and solid demand for durable goods and automobiles. Shipments were slightly lower in the second hair with a normal seasonal decline during December, Tht: overall strong year resulted in record revenues for Monsanto's largevolume plastics, lusinm ABS and .SAN styrene copolymers and Lustrex Ralph Ortberg (above) and other employees at facilities producing Lustran A8S/SAN :n the United States were kept busy ail year handling near-record shipments of the tough, versatile thermoplastics. >A DSW 021093 STLCOPCB4006402 TOWOLDMONOQ14799 polystyrene. Vydyne nylon resins and Fome-Cor board also showed significant sales increases. Sales of Lustran Up Building from its major position in this dynamic market, the company announced plans to add an additional 100 million pounds of capacity of Lustran by the fourth quarter of 1978. The additions are part of a long-term program to secure industry leadership for versatile Lustran. A new 30-million pound facility is being constructed at Springfield, Massachusetts, and an existing plant at Addyston, Ohio, is being expanded by 70 million pounds. The increases will raise Monsanto's annual capacity of Lustran in the United States to more than 500 million pounds. The company continued its international expansion plans for Lustran despite some softness in ABS demand in Europe and Canada. A new 50-million-pound facility was completed late in the year at Antwerp, Belgium, with an additional 50 million pounds scheduled for completion there during the fourth quarter of 1979. With the completion of the latter unit, Monsanto's annual worldwide capacity of Lustran will exceed one billion pounds. Lustran plastics are used extensively in refrigerators, small appliances, luggage, telephones, construction piping and automotive body parts. Mixed Results for Lustrex Although shipments of Lustrex polystyrene in the United States increased significantly faster than the market, excess industry capacitycontinued to hamper profitability. This prevented recovery of inflation-driven and energy-related cost increases. World polystyrene capacity, Lighter weight Volvo automobile grilles made with Monsanto's Lustran ABS plastic are inspected by Clemens von Claparede (left) and a Volvo supervisor at a plant at Ghent, Belgium. Laboratory technicians such as Catherine Gourdain (above) at Louvain-la-Neuve test Monsanto's plastics and resins products under actual manufacturing conditions to determine how they will perform on the job. 21 DSW 021094 STLCOPCB4006403 TOWOLDMONOOI4800 expanded in the eiirW-'Br to nicer :';e- oil cmbaiso growth rates. lx ;cr;ouuy -overbuilt as a result of .lower actual strowsh rates in recent years. This sanation has created continuing pnee weakness, particularly in Europe, .-here industry growth has been itiinim.il. l.usirex has major toes in ucphaneC'., packaging tt-eti .ronsumer disposable goods. During July. Monsanto discontinued a small expandable polystyrene business irt the United States, white continuing its international operations tor lire plastic bead product. A write off 'was taken during the third quarter for r.'ie business closure. Monsanto did noi have a significant position in the (US. market for the product and decided to concentrate its resources on those products where it possesses a combination of secure raw materials, attractive process economics, and important market positions. Hngineernts Thermoplastics Grow Engineering thermoplastics continue -to be Simon? the fastest growing families of plastic materials. New applications m the automotive, industrial machine, appliance and electrical industries resulted in attractive sales increases for Vydyne nylon resin in both its natural and mineral reinforced product lines. Expansions of product lines for Vydyne were completed during the year a: Pensacola, Florida. Near-record sales of automobiles and mobile homes in the United States led to a substantial increase in shipment of Fome-Cor sheathing board. Fome-Cor. a lightweight rigid beard of expanded polystyrene foam bonded between two layers of krai?, liner board, has major uses as head liners in automobiles, insulation in manufactured housing and re-siding in the hone improvement market. Deco Uefevre packs rolls of Siiflex plastic inirrinyer at [he Ghent. Belgium, plant. Major expansion at the plant will more :ban double European production to meet growing demand for safety auto glass. y -s DSW 02X095 STLCOPCB4006404 TOWOLDMONOQ14801 Saflex Leads Resin Gains Strong worldwide automotive and construction demand resulted in record high sales for Saflex plastic interlayer. The polyvinyl butvral interlayer is used in laminated safety glass for automobile windshields, as well as in laminated architectural glass applications. In June, Monsanto announced a major, two-stage expansion of capacity for Saflex at its Ghent, Belgium plant which will more than double European production. Completion of stage one is expected in early 1979. Sales of other resins used in the manufacture of paints, coatings, paper, adhesives and bonding materials also showed an increase. Fabricated Products Demand Flat Sales levels for various fabricated plastic products were somewhat reduced from those of 19"6. However, sales of blownware bottles to the high growth personal care and pharmaceutical markets increased. Demand was up for polyethylene film used in the construction and agricultural markets. Sales of AstroTurf stadia products were down as the rate of new installations declined in the major U.S. markets. During the fourth quarter, the company completed its sale of a Belgian subsidiary which produced a range of oriented polystyrene film and sheet products. The company. Sidaplax NV, was sold to a group of local investors. A loss on the sale of the subsidiary was reflected in the thirdquarter results. Monsanto's Brazilian affiliate, Govana S.A., manufactures a variety of finished plastic products. Here Jose Agusto da Silva (left) and Paulo Eduardo de Salles discuss a shipment of beverage cases for Brazil's leading brewery. Precision moldings, such as the automobile front screen being measured by Willy- Moon (abovel, a technical officer in Belgium, are made of Lusiran ABS plastic, Auto parts of Lusiran are lightweight, strong and allow design flexibility. ^ DSW 021096 STLCOPCB4006405 TOWOLDMONOOI4802 TEXTILES (Dollars in millions) 1977 ........... ... 1976 ........... . ... 1975 ........... ___ 1974 ......... . . . . 1973 ......... . ... Sales 5884.3 853.5 747.2 770.0 701.8 Operating Income S(39.0) (1.2) (17.2) 65.2 119.5 Monsanto Textiles Company, despite an increase in worldwide sales, recorded a substantial operating loss for 1977 due primarily to its operations outside of the United States. The operating loss included a large nonrecurring charge resulting from closing or withdrawing from segments of the fiber business outside of the United States which did not offer satisfactory future growth and profits. During 1977, the Textiles Company operated in an environment of severe worldwide overcapacity. Although the U.S. industry's utilization rate was significantly better than Europe's, the overcapacity situation resulted in depressed prices and, accordingly, unsatisfactory profits for nearly all fiber producers. I'.S. Fiber Operations Sylon Monsanto is the second lareest producer of nylon fiber in the U.S. This profitable business segment is supported by efficient chemical intermediate plants that have substan tial potential for low cost expansion. Increased housing starts resulted in market gains for nylon fibers during 1977. Nylon staple for carpet and home furnishing markets was particularly strong. During 1977, Monsanto expanded its nylon staple capacity by more than 70 million pounds to become the largest producer in the U.S. A substantial reservoir of low cost, debottlenecking capacity for nylon staple is available that can be added in stages to meet the market growth. The first step in a continuing program of plant modifications to George Pizzo (above), of the Apparel Advertising and Promotion Department, takes part in a meeting to discuss a 1978 advertising campaign for men's wear made with Monsanto fibers. Miles of nylon yarn, used to strengthen tires and industrial rubber products, are processed on drawtwist equipment at the Pensacola plant under the watchful eye of foreman John Watkins. 24 DSW 021097 STLCOPCB4006406 TOWOLDMONOOI4803 reduce :he cost of nylon filament for carpet as well as to provide new genera tion products was completed in 1977. In addition, the program continues to reduce the number of nylon filament products for apparel markets and to focus resources on providing nylon feeder yarns for the texturing trades. Polyester During the next decade, polyester filament is expected to be the fastest growing man-made fiber. Advances in its aesthetic qualities, plus its easy care characteristics, will combine with this fiber's distinct cost advantages to make it increasingly attractive to garment producers and consumers alike. Polyester filament has a prominent place in Monsanto's future. In December, the company completed arrangements to purchase a plant at Fayetteville, North Carolina, from Rohm & Haas Company for T Helen Burwell (above), a quality control technician, tests Monsanto fibers to make sure they meet high standards demanded by clothing manufacturers. 25 DSW 021098 STLCOPCB4006407 TOWOLDMONOOI4804 .Hp:.u:ly to produce itulhon pound; ,i*' noivp-ucr niamem a seat. the acquisition of the plant wtli allow Monsanto to meet future demanos Jt a cost substantially !oer than would oe needed for expanding current factifries or building new ones The plant v-iii be pm into operation gradually as fie demand Mr the polyester filament increases. Siroaa demand during the firm half .(' 5977 pushed eperving rater for polyester filament, to about si) percent of capacity. and meaningful price Increases 'were put in place. Even though inventories were trimmed Turing the second half of the year, and operating rates dropped to 70 percent of capacity, selling prices remained reasonable firm. Although Monsanto's thrust in polyester will focus on polyester filament, polyester staple is an. coTipar-v wni continue to maximize the utiii/atton of it? production facilities for this product. Acrylics Monsanto has the world's largest capacity for acrylic fiber; and is also ote world's largest producer of the raw material for acrylic fibers. Monsanto has ample U.S. acrylic fiber capacity clue to an expansion made in 1976. In 1977, investments were made to reduce costs. This cos: reduction investment program will be continued in 1978. Demand for Monsanto's Acnian acrylic fiber in the United States was on me upswing during 1977. Acrylic shipments were significantly above those of the previous year reflecting increased consumer demand as a result of the energy shortage which prompted the use of warmer clothing. Acrylics are in increased demand for sweaters. Willie Kikrea.se (above) carefully checks i.iit: temperature of diamine, an intermediate chemical used in die manufacture of nylon. Monsanto's avion is used in products ranging from tire cord o carnet. 26 Archie Wilbanks, Director, Product Development (right) offers customers a selection of colorful fabrics manufactured from fibers that provide the warmth of wool or the sleekness of silk. DSW 021099 STLCOPCB4006408 TOWOLDMONOOI4805 hand knit yarns, pile liners and blankets and are also finding new uses as replacement for natural and cellulosic fibers in the home furnishings area for applications such as upholstery fabrics and draperies. European Fiber Business Excess capacity in ail major fibers, weak demand, price erosion and large volumes of imports of finished apparel continued to plague the European fibers markets during 1977. Losses for all European fibers manufacturers were reported to total SI billion for the year, and announcements of reduced operations and plant shutdowns were common during the second half of the year. Although Monsanto fiber plants operated significantly above the industry average, low volume and low prices caused severe losses. A number of cost reduction and consolidation actions were taken in 197" to improve Monsanto's position. Monsanto's work force at a major plant in Echternach, Luxembourg, was reduced by 20 percent and a texturizing operation at Crailsheim, West Germany, was closed. A moderni zation and cost reduction investment at the Coleraine, Northern Ireland.acrylic fiber plant was completed. Monsanto, one of the largest U.S. producers of man-made fibers, has a long-term commitment to the fibers business which it expects to make positive contributions to future Monsanto profitability. Monsanto's strategy is to focus on growth areas where the company has a strong raw material or technical position and to be on the leading edge of new fiber applications. As manager of public relations in the New York office, Mary Fennell (above, center) keeps pace with the swirl of fashion news and events in the garment center of the United States. DSM 021100 STLCOPCB4006409 TOWOLDMONOOI4806 INTERNATIONAL Saies from Monsanto's international operations advanced at a somewhat faster pace than for the Company for 1977, reaching SI.424 billion, an increase of 10.3 percent over 1976 sales of SI.292 billion. Sales include exports from the United States. Operating income for 1977, however, failed to keep pace as a number of Monsanto subsidiaries, particularly in Western Europe, operated at less than optimum rates and faced severe cost/price pressures. Operating income for 1977 was S67.1 million compared with S105.5 million for 1976--a decline of 36 percent. Worldwide sales and operating income have been included in the operating company sections. The international presentation provides shareowners with another perspective of Monsanto's worldwide operations. The sales and operating income data reported in this section are based on the location of the sale--even -..tough the product may nave been produced or processed elsewhere. Europe-Africa Sales for the Europe-Africa area reached S741.1 million for 19"-- including exports from the United States--compared with $697.3 million for 1976. Operating loss for this world area was SO.6 million for 1977 compared with operating income of S37.4 million for 1976. European results were particularly hard hit by significant industry overcapacity in man-made fibers and plastics which resulted in low rates of capacity utilization and a severe erosion of selling prices. Both fibers and plastics businesses operated in loss positions for the year. Saies of Monsanto's Roundup herbicide showed excellent year-toyear gains, and modest revenue i Monsanto market researcher, Geert Van Cyril Evans (right, green hat), a safety- Brandt (above, center), talks with Belgian engineer at the Ruabon plant in North farmers about Roundup herbicide, Wales, joins foremen for a regular meeting which has expanding applications around to discuss safety precautions and to the world. discover potential hazards before an accident happens. 28 OSW 021101 STLCOPCB4006410 TOWOLDMONOOI4807 improvements were recorded for Avadex and Lasso herbicides in the Europe-Africa area. Good gams were reported for specialty and rubber chemicals and for Saflex polyvinyl butyral sheet. During 1977, European management took a number of actions to help minimize future losses by withdrawing from or closing several operations in the fibers and plastics areas. Operating results from Aiscondel. S.A., a Monsanto affiliate and a major producer of plastic products in Spain, were below 1976's depressed levels. Higher start-up costs of a new vinyl chloride monomer plant, together with weak market conditions, resulted in a loss for the year. Canada-Latin America Sales for Canada-Latin America, including U.S. exports, reached 5488.4 million for 1977, a 13 percent increase Paulo Ferra Ira (above), a utilities operator, and his fellow employee' a: Companhia Brasileira de Plasticos Monsanto produce polystyrene for the growing plastics markets in Brazil and of South America. OSH 021102 STLCOPCB4006411 TOWOLDMONOQ14808 .onr ; ',iius : >'-3 ; t'n.oicr t'peiium?; mcome uechiieu i ` eei'cer;;. S54.S nuilion for 1-/T from spl y million un iV"6. Sprit'.;.', shipments of -ivace:-: homicides omd nv Canadian * heat vccon '. rpiiifpi wiki C-ats. 'vero mo;- -an da.no or the previous yum- ot.tc prmamy m siroeelsi conditions, imi: niprueius were impacted by pConmoiino wheat prices, resulting :n a car-:;'-.sour 'dies demine io; v. Tito arc rate pi' economic growth in Canada hindered revenue gains in finer markets. Shipments and filing pfives of Monsanto's Lusiran ABS and Lusirex polystyrene plastics were soft throughout 1977. in Latin America, sains of agricultural products, rubber chemicals, styrene monomer and acrylonitrile experienced modest sales earns; ami new rubber chemical and phosphate plants in Brazil completed the first year of fuii production. Ice Katie mined vtoneanio re Newport, i 'nired K. cv.ff :n ipsa, iu- four years Pier iifc p'ae, bc-ran operations. Slatting .vifh fyuff.eoe deteraents, the plant today has more man bit denartroems rnanufacctrin? a cie'V f pioduuts. !0 OSW 021103 STLCOPCB4006412 TOWOLDMONOOI4809 Sales of Industrias Resistol, S.A., a Monsanto affiliate, were down modestly in 1977, reflecting economic conditions in Mexico. Industrias Resistol manufactures an extensive line of chemicals and plastic products. Asia-Pacific Asia-Pacific sales reached $194.9 million for 1977, a 19 percent increase over 1976 sales of $163.7 million, despite sluggish economies in Japan and Australia. Sales included exports from the United States. Asia-Pacific operating income also improved to $12.9 million, compared with $5.1 million for 1976. Strong gains were achieved in sales, income and market position for Machete and Roundup herbicides, particularly in Japan, Taiwan and Malaysia. Other significant gains came from Fisher control systems and valves, plastics and specialty chemicals. During 1977, Monsanto continued to direct increased resources to this rapidly developing world area. In Japan, increases in sales and operating income were registered by Monsanto's affiliate, Mitsubishi Monsanto Chemical Company, despite the depressed economic situation. Worldwide Interests Included among Monsanto's member companies around the world are those appearing in the following list. Percent ownerships are noted parenthetically. In addition, there are a number of other member companies not listed, many of which have been established for marketing or investment purposes. UNITED STATES Farmers Hybrid Companies. Inc. (100%) produces hybrid breeding swine. Fisher Controls Company, Inc. (100%) manufactures and markets process measurement and control equipment. United Kingdom Monsamo Limited (100%) manufactures and markets chemicals, plastics, acrylic fiber and nylon 6,6 yarns. West Germany Monsanto (Deutschland) GmbH (100%) manufactures acrylic fiber and markets Monsanto products. CANADA-LATIN AMERICA Argentina Monsanto Argentina S.A.I.C. (100%) manufactures plastics and chemicals. Brazil Industrias Monsanto, S.A. (100%) manufactures rubber chemicals and phosphates, and process control equipment. Monsanto Enviro-Cbem Systems, Inc. (100%) develops and markets engineered chemical facilities and pollutionabatement systems. Monsanto Flavor/Essence, Inc. (100%) manufactures essential oils, aroma chemicals, flavors and fragrances. Monsanto International Finance Company (100%) obtains funds abroad to help finance overseas expansion. Monsanto Research Corporation (100%) conducts research for government agencies and for Monsanto; produces nuclear sources; operates a governmentowned laboratory. Cia. Brasileira de Plasticos Monsanto (57%) manufactures polystyrene. Goyana, S.A. Industrias Brasiieiras de Materias Plasticas (44%) manufactures and markets plastic products. Canada Monsanto Canada Limited (100%) manufactures chemicals and plastics. Mexico Industrias Resistol, S.A. (39%) produces chemicals and plastics. Compania Industrial de Plasticos, S.A. (100%) fabricates plastic consumer products. EUROPE-AFRICA Belgium Monsanto Europe, S.A. (100%) area headquarters and coordinating office for Monsanto's manufacturing, marketing and research in Europe (chemicals, plastics, man-made fibers). France Sodete Monsanto, S.A. (100%) manufactures plastics. Israel Israel Chemical Fibres Limited (53%) manufactures acrylic fiber. Luxembourg Monsanto Cle. S.A. (100%) manufactures nylon 6,6 yams. Spain Aiscoadd, S.A. (50%) makes consumer plastic products. A subsidiary produces chemicals and plastics. ASIA-PACIFIC Australia Monsanto Australia Limited (100%) manufactures chemicals and plastics. Affiliated companies produce styrene monomer, fluorocarbons and synthetic latex products. Indonesia P.T. Monsanto Pan Electronics (83%) assembles light emitting diodes. Japan Mitsubishi Monsanto Chemical Company (49%) manufactures and markets chemicals and plastics. Korea Korag Company Limited (50%) manufactures agricultural chemicals. Malaysia Monsanto Electronics Sendirian Berhad (100%) assembles light emitting diodes. Andre Van Houtte keeps a watchful eye on tests of Saflex at the Monsanto Technical Center - Europe in Belgium. More stringent safety requirements for European auto mobiles have increased the market for Saflex plastic interlayer for windshields. DSW 021104 31 STLCOPCB4006413 TOWOLDMONOQ14810 RESEARCH AND DEVELOPMENT Product, innovations true improvemcjus. along with th development of new cost-cutting technologies and processes, continued :o be at the heart of Monsanto's rtsearch and development efforts during 197". in addition, the corporate tc'.r meal staff was reorganized during the vear into two groups it', order to provide senior technical leadership in environmental matters as well as traditional research. Products announced during the year included a new family of Rre-recardanr engineering plastics and a giassreir.forced, flame-retardam nylon plastic. These materials will be used initially in electronics products including computers and instrumentation. Fisher Controls Company, a whollyowned subsidiary, developed a new line of electronic process recorders with an advanced monitoring system that promotes easier readouts ana reduced : Diane Cook labo'-ei works on a scale model oi a new Monsanto facility. The use of models, made ;o toe exact proportions of the nlant. allow:: optimum plant layout and operations. M lottn Schaefer tright), leader of the computer group in agricultural research oversees operations of a sophisticated new computer system designed :o aid Monsanto researchers ;n their efforts to search fot new arid improved products. DSy 021105 STLCOPCB4006414 TOWOLDMONOQ14811 maintenance. These recorders will add to the line of Fisher products which serve the chemical, hydrocarbon, paper and pulp, and other process industries. New grades of Lustrex polystyrene introduced during the year upgraded the product line to meet the specific needs of the plastics industry. And a second generation of Fome-Cor sheathing materials under development is lighter in weight and designed to enhance the Company's leadership in the automotive headliner market. Researchers in Monsanto's rubber chemicals line have developed a computerized testing and control laboratory that combines a number of complex rubber testing operations into one process. The facility was developed in response to a need in the tire industry for accurate prediction, measurement and control of the rubber mixing and curing process. Bidim, a nonwoven engineering textile, is showing commercial promise as a useful underlayer in road building, rail track beds, heavy work sites and soil drainage projects. Tests are continuing in a number of other civil engineering applications. In addition to the Bidim work, extensive research is being conducted to improve the aesthetics of nonwoven fabrics. It is aimed at improving the feel, appearance and softness of nonwovens for wider acceptance in apparel and home furnishing markets. Monsanto is a leading producer of silicon materials for the semiconductor industry, and improvements in silicon operations during 1977 resulted in significant manufacturing and cost efficiencies. By 1978, these improvements are expected to increase production capabilities in the United States by 30 percent and double European capabilities. Further research and development designed to provide more improvements has been funded. New technology used in the production of Lustrex polystyrene has reduced costs for manufacturing this high volume plastic material used in a wide variety of products. In July, as a result of the growing importance and complexity of health and environmental issues, Monsanto's technical staff was separated into two parallel organizations. The Corporate Environmental Policy Staff will provide leadership in forming the Company's policies and programs which deal with environmental issues. The Corporate Research & Development Staff will focus highlevel attention on new products and processes. Under this new alignment, the operating companies will have expanded responsibility for developing new long-range growth programs in their respective fields. The corporate staff will be charged with supporting these efforts and with building successful new businesses for Monsanto. Monsanto's research and development program is designed to apply the best science and technologyavailable to the task of developing new and better products for the many markets served by the Company. That work has been the basis for the Company's success in the past, and will provide the foundation for continued success. In past years, Monsanto's agricultural research has developed successful products such as Lasso and Roundup herbicides and Polaris plant growth regulator. Those research capabilities were significantly increased during the past year with the opening of a new laboratory at the Monsanto Technical Center--Europe at Louvainla-Neuve, Belgium. Work there will extend ongoing research into new herbicides and plant growth regulators. One of the most modern agricultural research facilities in the world, the laboratory has test chambers which allow scientists to monitor plant growth under carefully controlled conditions. They can simulate climatic conditions ranging from those found in Northern Europe to those in Central Africa in order to develop products tailored for many diverse markets. In Monsanto's Corporate Research Laboratories, investigations continue into several aspects of health care and long-range biomedical research. One new product has reached the early stages of clinical trials, and in another area, progress is being made in the development of clinical diagnostic techniques. DSW 021106 STLCOPCB4006415 TOWOLDMONOQ14812 SOCIAL RESPONSIBILITY Dur.r 1J.'.tonf-aru;.: ,:rer.sihned Hi program; and policse* dialing with broad social responsibility issues. N'ew programs were begun. and ongoing programs were given increased emphasis and support. That work was parr of a reexamination of how the Company defines its overall v..x:iai goats. The Environment Protecting the environment in plant communities was one of the first issues tackled. Monsanto's existing guidelines were studied and expanded where necessary, using the work done by a special study committee. The guidelines are now being translated into programs including environmental appraisals at plant locations, standards for disposal of wastes in deep wells, and standards for discharging wastes into the air and water. I>w Cbar.'pcU (third from right). Fire Chief it the Newport, L.K. plan;. leads a earn of piofesdonal and au.vlUry firemen. V>uh rum arc. from leu, Andy Owen. ticrcus Outsort, Roger Floyd. fed f.luvers. ansi Trevor Martin. 3i Strictly enforced safety measures, including equipment and clothing as worn by Fred Speaker fright) at Chocolate Bayou, provide Monsanto with some of Lhe safes; workplaces in lhe U S. DSW 021107 STLCOPCB4006416 TOWOLDMON0014813 tn every case. the bandaras are strict. At locations anywhere in the world at which Monsanto has operating control, the standards not only take into account local laws, but also any additional measures the Company believes necessary and proper to guard employee health and protect the environment. Company operations will be guided by the new standards or by local laws, whichever are more demanding. A new Environmental Analytical Science Center has been established at the Company's Dayton, Ohio laboratory. Scientists there will develop new analytical methods, train people to do the work, and perform analytical work for Monsanto's six operating companies. The center was accredited early this year by the American Industrial Hygiene Association, which helps to insure that its analyses will be accepted by T.e L 5. Occupattcnu. Safety and Health Administration and other governmental agencies. Employee Conduct During 19" Monsanto issued a set of "Guidelines for Employee Conduct." These guidelines clearly set forth what is expected of Monsanto employees and, in return, vs hat standards employees can expect from the Company. Areas covered by the guidelines include: business conduct, antitrust, corporate political activity, conflicts of interest, outside business activities, equal employment opportunity and affirmative action, proprietary and competitive information, and inside information and the trading in securities. These are specific expectations. They allow little or no room for deviation from the highest standards of ethical conduct. Sheryl Wiley Solomon (left! and Sharen Bull (right) of the Monsanto Fund staff work with Monsanto people at Companylocations around the United States to make effective contributions to worthwhile taxexempt organizations. DSW 021108 STLCOPCB4006417 TOWOLDMONOOI4814 Equal Employment Opportunity Monsanto continued to make progress in the utilization and development of minorities and women. Women and minorities in the classification of managers and supervisors increased from 2.3 percent in 1972 to 5.9 percent in 1977. in professional jobs, minority and female representation has increased from 6 percent in 1972 to 14.8 percent in 1977. In white-collar jobs, excluding office and clerical, minority and female representation has increased from 6.2 percent in 1972 to 12.5 percent in 1977. Minority Economic Development Monsanto has had a minority economic development program for several years. Through this program, the Company actively seeks minorityowned firms as suppliers and contractors. Now, the program has been extended. A minority development office, -v:;n corporate wide responsibility, was set up within the Energy & Materials Management Group. That office has new goals that are expressed in terms of dollars and development aid for minority firms. Community Support During 1977, Monsanto substantially increased its support of activities and programs in communities around the United States where the Company has facilities. Monsanto Fund, the Company's philanthropic arm which administers the support programs, distributed S4.2 million during the year; other corporate donations totaled more than $800,000 for projects outside the tax guidelines of the Fund. In 1976, $2.7 million was distributed by the Fund. The increase reflects the growing awareness that the Company has a stake in the quality of life provided in towns and cities where Monsanto people .we ir.d v Money from Monsanto Fund went to nearly 1,000 organizations and groups around the country that have received necessary tax-exempt status from the federal government. United Way programs, colleges and universities, community organizations, youth groups and cultural activities all benefited from Monsanto's communitysupport efforts. Monsanto has always had programs and policies that recognize its responsibilities to society. Activities during 1977 and subsequent years will build on that tradition by keeping pace with changing attitudes and making sure that Monsanto remains responsive to the needs of society. Chuck Keffer (above, right) supervises reclamation of Lustran ABS/SAN plastic materials that were formerly lost in manufacturing waste. Similar new methods are installed wherever possible to recover usable materials and reduce pollution. 36 Bill Caparoon (left), Vinton Cromer and other volunteer firemen at the Muscatine, Iowa, plant train on their own time, away from regular jobs, to protect fellow employees and plant property. DSU 021109 STLCOPCB4006418 TOWOLDMONOQ14815 FINANCIAL SECTION Contents Responsibilities for Integrity of Financial Data.................................................................................. Financial Review.................................................................................................................................... Summary of Significant Accounting Policies...................................................................................... Statement of Consolidated Income....................................................................................................... Statement of Consolidated Financial Position.................................................................................... Statement of Changes in Consolidated Financial Position................................................................ Statement of Consolidated Shareowners' Equity............................................................................... Notes to Financial Statements.............................................................................................................. Accountants' Opinion................................................................... Ten-Year Summary................................................................................................................................ 37 38 48 49 50 52 53 54 61 62 Responsibilities for Integrity of Financial Data The management of Monsanto Company is responsible for the integrity of the financial data reported by Monsanto and its subsidiaries. Fulfilling this responsibility requires preparing financial statements in accordance with generally accepted accounting principles and reporting data which, using management's best judgment, fairly reflect financial position, results of operations and changes in financial position. To gather and control financial data, Monsanto establishes and maintains accounting systems adequately supported by internal controls. Management believes a high level of internal control is maintained by the selection and training of qualified personnel, by the establishment and communication of accounting and business policies and by internal audits. In establishing internal controls, management weighs the cost of such systems against the benefits derived. Management believes the internal control systems in use are sufficient to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition and that the financial records are reliable for preparing financial statements and maintaining accountability for assets. Haskins & Sells, certified public accountants, are engaged to render an opinion on our consolidated financial statements. This opinion, which appears on page 61, is based on an examination of our consolidated financial statements in accordance with generally accepted auditing standards. These standards provide for a review of the internal control systems and tests of a limited number of transactions. The Board of Directors, through its Audit Committee consisting of three outside directors, is responsible for reviewing and monitoring the Company's financial reports and accounting practices. The Audit Committee discusses audit and financial reporting matters with both management and Haskins & Sells. To ensure complete independence, the certified public accountants have full and free access to meet with the Audit Committee, with or without the presence of management representatives. DSM 021110 37 STLCOPCB4006419 TOWOLDMONOOI4816 FINANCIAL REVIEW /Dollars in millions, except per share) CONSOLIDATED OPERATING DATA Quarterly Results Net Sales 1977.................................. ................ 1976......................... .. ................ % increase ....................... ................ First $1,306.1 $1,173.6 11.3% Net Income 1977.................................. ................ $ 147.9 1976.................................. ................ $ 156.9 % decrease....................... ................ 5.7% Earnings per Share Primary 1977.................................. ................ $ 4.01 1976.................................. ................ $ 4.40 % decrease....................... ................ 8.9% Fully Diluted 1977.................................. ................ $ 3.95 1976................................. ................ $ 4.19 % decrease....................... ................ 5.7% Quarter Second Third Fourth $1,122.1 $1,063.4 5.5% $1,075.8 $ 998.4 7.8% $1,090.5 $1,034.8 5.4% $ 81.5 $ 98.4 17.2% S 24.9 $ 63.4 60.7% $ 21.3 $ 47.6 55.3% $ 2.21 $ 2.69 17.8% $ 0.66 '$ 0.58 $ 1.69 $ 1.27 60.9% 54.3% $ 2.18 $ 2.62 16.8% $ 0.66 $ 0.58 $ 1.69 '$ 1.27 60.9% 54.3% Total Year $4,594.5 $4,270.2 7.6% $ 275.6 $ 366.3 24.8% $ 7.46 $ 10.05 25.8% $ 7.37 $ 9.77 24.6% Monsanto's consolidated sales for each quarter of 1977 and for the total year of 1977 were higher than for 1976 and produced the highest sales level in the history of the Company. On a percentage basis, quarter-to-quarter sales gains over 1976 generally decreased, however, as the year progressed. Net income for 1977, and for each of the quarters of 1977, was down from the comparable periods of the prior year. Net income for the first quarter and, more importantly, for the third quarter was impacted by shutdown costs and the write-down of the fixed assets associated with the Cycle-Safe container operations. The third-quarter results were also impacted unfavorably by the decision to withdraw from the expandable polystyrene business in the United States, to reduce the scope of operations at a nylon plant in Luxembourg and to withdraw from three small unprofitable lines of the plastics and fibers businesses outside the United States. Foreign exchange and translation losses had a severe impact on the results for the fourth quarter--particularly for NET SALES NET INCOME DSW 021111 STLCOPCB4006420 TOWOLDMONOQ14817 purposes of comparing the last three months of 1977 with those of 1976. A higher effective tax rate, reflecting reduced investment tax credits and losses of certain foreign subsidiaries for which no benefits are currently available, also impacted 1977 results unfavorably. Analysis of Change in Primary Earnings per Share 1977 vs. 1976 Operating Income: Higher Selling Prices.......................................................................................................... $ Sales Volume and Product Mix.............................................................................................. Higher Raw Material Prices..................................................................................................... Higher Other Manufacturing Costs....................................................................................... 2.47 0.91 (0.65) (2.57) Lower Start-up Costs.................................................................................................................................. Higher Nonmanufacturing Expenses....... ............................................................................. 0.02 (1.13) Decrease in Operating Income...................................................................................... $ (0.95) Other Causes: Higher Interest Expense...................................................................................................... S (0.10) Lower Other Income Credits--Net......................................................................................... (0.49) Higher Tax Rate....................................................................................................................... (0.97) Increased Shares Outstanding................................................................................................ (0.08) Decrease from Other Causes..................................................................... S (1.64) Net Decrease............................................................................................................................ $ (2.59) Higher selling prices had the most significant positive effect on primary earnings per share during 1977. Earnings per share were also favorably impacted by increased sales volumes. These favorable influences, however, were more than offset by higher raw material prices and other manufacturing costs. In addition, higher nonmanufacturing expenses affected 1977 earnings per share unfavorably. Included in the adverse impact of higher other manufacturing costs was a SO.55 per primary share charge resulting from the shutdown costs and write-down of the fixed asset investment in the Cycle-Safe container program. Additionally, included in higher other manufacturing costs was a $0.39 per primary share charge resulting from anticipated losses due to terminating or divesting certain product lines. Lower other income credits, which include exchange and translation losses, and a higher tax rate also impacted earnings per share unfavorably. Higher interest expense and an increased number of shares outstanding added to the downward pressure on earnings per share. NET INCOME (as a percent of net sales) NET INCOME (as a percent of average shareowners' equity) OSW 021112 39 STLCOPCB4006421 TOWOLDMONOQ14818 FINANCIAL REVIEW (Dollars in millions, except per share) OPERATING COMPANY DATA Selected Financial Information 1977 Net Sales Operating Income (Loss) Depreciation, Research Total Obsolescence Capital and Assets and Depletion Expenditures Development Agricultural Products . . . $ 654.0 Chemical Intermediates . . 505.0 Commercial Products . . . 385.4 Industrial Chemicals .... 1,054.6 Plastics & Resins............. 1,111.2 Textiles.............................. 884.3 Eliminations.................... Unallocated corporate expenses......................... $ 273.4 $ 576.6 132.3 715.4 (15.2) 280.8 209.7 691.7 76.3 891.9 (39.0) 1,011.2 (1.1) (3.1) (26.7) $ 29.6 41.0 48.5 43.5 50.4 82.0 1.0 $ 81.2 208.4 22.0 80.2 86.4 127.2 $ 19.6 15.9 24.0 23.0 24.2 25.6 Total Operating .... 4,594.5 609.7 4,164.5 296.0 605.4 132.3 Income charges (credits).. Nonoperating assets......... Total Company......... $4,594.5 86.0 185.6 $ 523.7(1) $4,350.1 $296.0 1.7 $607.1 $132.3 1976 Agricultural Products . .. $ 573.2 Chemical Intermediates .. 476.2 Commercial Products . .. 398.2 Industrial Chemicals .... 950.4 Plastics & Resins.............. 1,018.7 Textiles.............................. 853.5 Eliminations .................... Unallocated corporate expenses......................... $ 240.6 $ 460.6 152.6 593.9 (0.1) 291.2 206.6 588.6 100.8 752.9 (1.2) 947.5 (6.8) (0.7) (24.7) Total Operating . . .. 4,270.2 667.8 3,634.0 Income charges (credits).. Nonoperating assets......... Total Company......... $4,270.2 50.1 325.1 $ 617.7(i) $3,959.1 $ 13.2 43.7 27.5 35.1 36.8 69.2 0.5 226.0 $226.0 $127.0 175.9 32.1 79.1 82.2 147.8 $ 15.7 12.8 21.4 21.7 17.9 24.8 644.1 2.7 $646.8 114.3 $114.3 (1) Income before inconte taxes The principal product lines included in each operating company are shown in the "Sales by Product Group" data on page 43. Total sales between operating companies made on a market basis were $195.0 and $181.7 for 1977 and 1976, respectively. These sales were not significant for any operating company except Chemical Intermediates ($127.2 for 1977; $123.8 for 1976) and Industrial Chemicals ($40.5 for 1977; $36.2 for 1976). Included in Commercial Products' operating loss for 1977 was a $35.6 charge related to the Cycle-Safe container. Textiles' and Plastics & Resins' operating results for 1977 included $11..7 and $7.0 charges, respectively, related to terminating or divesting certain product lines. Included in Textiles' operating loss for 1976 was a $12.4 charge resulting from the closing of a plant. Commercial Products' operating loss for 1976 included a $9.4 charge resulting from the acceleration of provisions for obsolescence of certain machinery and equipment. Intercompany receivables and profit derived from intercompany sales were the principal items reflected as eliminations in arriving at the consolidated totals. Certain corporate expenses, primarily those related to the overall management of the Company, were not allocated to the operating companies. Nonoperating assets principally include cash, short-term securities and time deposits, and investments. DSW 021113 40 STLCOPCB4006422 TOWOLDMONOQ14819 Five of the six operating companies had year-to-year sales increases with the largest percentage gain being recorded by Agricultural Products. Industrial Chemicals also had a good sales gain. A decline in year-to-year sales for Commercial Products resulted from the cessation of production and shipments of the Cycle-Safe containers in the first quarter of 1977 and a decline in the construction of sulfuric acid plants. Chemical Intermediates, Plastics & Resins and Textiles had modest sales gains. Increases in operating income were achieved in 1977 by Agricultural Products and Industrial Chemicals. Chemical Intermediates and Plastics & Resins experienced operating income declines from 1976. The operating losses for 1977 for Commercial Products and Textiles were larger than the operating losses for the prior year. Operating income was restated to conform to the requirements of Financial Accounting Standards Board Statement No. 14 (FASB No. 14) and, to that extent, some slight differences are reflected when compared with interim reports for 1977 and the 1976 Annual Report. Total assets increased for five of the six operating companies, with the largest gains occuring in Plastics & Resins and Chemical Intermediates. Depreciation, obsolescence and depletion expenses were higher for 1977. The largest increases in depreciation expense occurred in Commercial Products and Agricultural Products. Greater obsolescence expense due to the Cycle-Safe container write-down contributed to the Commerical Products increase. Capital expenditures were down in total from 1976, although Chemical Intermediates had a significant increase in capital additions. Textiles' 1977 additions, which are lower than the prior year's, include the acquisition of Rohm & Haas' textile facilities in Fayetteville, North Carolina for $55.0. Agricultural Products' expenditures were down significantly. Commercial Products also experienced a decrease in capital expenditures. Research and development expenditures increased for 1977, with all of the operating companies sharing in the increase. Income charges (credits) increased in 1977 due principally to increased interest expense, a lower level of interest income and decreased income from unconsolidated affiliates. Nonoperating assets for 1977 decreased from the prior year, primarily as a result of decreased short-term securities and time deposits. CAPITAL EXPENDITURES DEPRECIATION EXPENSE DSW 021114 STLCOPCB4006423 TOWOLDMONOOI4820 FINANCIAL REVIEW (Dollars in millions, except per share) Quarterly Results Sales--1977 Agricultural Products........................... . Chemical Intermediates......................... . Commercial Products........................... . Industrial Chemicals............................. . Plastics & Resins.................................... . Textiles.................................................... . Total Company............................. . First Quarter $ 340.1 121.3 89.5 269.5 264.1 221.6 $1,306.1 Second Quarter S 98.6 140.0 95.8 267.5 287.3 232.9 $1,122.1 Third Quarter $ 94.4 132.7 100.2 267.9 273.3 207.3 $1,075.8 Fourth Quarter $ 120.9 111.0 99.9 249.7 286.5 222.5 $1,090.5 Year $ 654.0 505.0 385.4 1,054.6 1,111.2 884.3 $4,594.5 Operating Income--1977 Agricultural Products........................... . Chemical Intermediates......................... . Commercial Products........................... Industrial Chemicals.............................. . Plastics & Resins..................................... . Textiles..................................................... . Eliminations and unallocated corporate expenses........................... Total Company.............................. . First Quarter $ 166.4 35.5 (4.3) 62.9 23.8 3.9 Second Quarter $ 38.5 43.3 5.7 62.3 27.3 (2.0) Third Quarter $ 27.2 32.3 (21.5) 52.0 12.2 (24.5) Fourth Quarter $ 41.3 21.2 4.9 32.5 13.0 (16.4) Year $ 273.4 132.3 (15.2) 209.7 76.3 (39.0) (5-6) (8.1) (7.6) (6.5) (27.8) $ 282.6 $ 167.0 $ 70.1 $ 90.0 $ 609.7 Agricultural Products, due principally to herbicide sales, was responsible for the seasonal pattern of the Company's sales. Herbicide sales are concentrated in the early months of the year, particularly in the first quarter. The other operating companies experienced relatively stable quarter-to-quarter sales levels, except for a slight tapering-off in the third and fourth quarters. Agricultural Products was also responsible for the seasonal concentration of operating income in the first quarter. Chemical Intermediates, Industrial Chemicals and Plastics & Resins experienced quarter-to-quarter fluctuations in operating income with a marked decline in the third and fourth quarters. Commercial Products experienced an operating loss for the year including a substantial operating loss in the third quarter resulting from the write-down of the fixed asset investment in Cycle-Safe containers. Textiles also had an operating loss for the year, with substantial losses in both the third and fourth quarters. Textiles' third quarter operating loss was increased by write-offs associated with terminating and divesting certain product lines. SHAREOWNERS' EQUITY (per common share) DSW 021115 42 STLCOPCB4006424 TOWOLDMONOQ14821 Sales by Product Group Agricultural Products: Herbicides, Insecticides & Other Products................................ Chemical Intermediates: Petrochemicals.................................... Process Chemicals................................ Oil & Gas Production and Exploration...................................... Commercial Products: Process Controls & Electronics......... Chemical & Environmental Systems and Other Products......................... Industrial Chemicals: Detergents & Phosphates.................... Specialty Chemicals........................... Rubber Chemicals................................ Plasticizers........................................... Plastics & Resins: Plastic Materials.................................. Resin Products.................................... Fabricated Products........................... Textiles: Man-Made Fibers................................ Total Company................................ 1977 1976 1975 1974 1973 $ 654.0 $ 573.2 $ 547.4 $ 410.7 $ 283.4 286.6 137.6 284.0 125.2 230.5 101.3 258.1 107.9 143.6 74.2 80.8 67.0 58.5 50.8 29.5 334.4 286.3 237.9 212.4 194.3 51.0 111.9 80.8 86.6 45.0 328.4 293.7 228.8 203.7 310.5 254.9 199.0 186.0 315.4 206.3 172.4 158.7 254.5 196.5 169.7 168.1 173.9 143.8 127.2 108.6 589.9 321.1 200.2 514.4 291.5 212.8 360.5 223.5 184.3 395.4 227.9 189.3 289.5 184.2 148.7 884.3 853.5 747.2 770.0 701.8 $4,594,5 $4,270.2 $3,624.7 $3,497.9 $2,647.7 Sales of all major product groups, except Chemical & Environmental Systems and Other Products and Fabricated Products, increased over 1976. Oil & Gas Production and Exploration and Process Controls & Electronics recorded the highest percentage increases. Significant year-toyear gains were also experienced by Herbicides, Insecticides & Other Products, Specialty Chemicals, Rubber Chemicals and Plastic Materials. Sales of Chemical & Environmental Systems and Other Products were adversely affected by the shutdown of plants producing the Cycle-Safe container and the decline in the construction of sulfuric acid plants. LONG-TERM DEBT AND SHAREOWNERS' EQUITY 1977 $1030.6 1976 $913.4 1975 $845.3 1974 $387.0 1973 579.3 PRICE/COST INDEX (Worldwide) (Year 1972 = 100) 1977 1976 1975 1974 1973 105.2 108.5 $1483.7 $1976.7 $1755.0 : . . ; Debt 168.8 162.0 156.7 190.3 141.7 Price $2400.9 $2252.5 Equity 210.8 203.6 202.1 Cost DSM 021116 STLCOPCB4006425 TOWOLDMONOOI4822 FINANCIAL REVIEW (Dollars in millions, except per share) WORLD AREA DATA Selected Financial Information Net Sales Outside Customers 1977 United States ....................................... $3,409.5 Europe................................................... 706.0 Other Ex-USA..................................... 479.0 Eliminations......................................... Unallocated corporate expenses .... ________ InterArea $317.9 43.4 15.2 (376.5) _______ Total Operating............................ 4,594.5 -- Income charges (credits)..................... Nonoperating assets........................... ............... Total Company............................ $4,594.5 _______ $-- Operating Total Capital Income Assets Expenditures $614.1 8.5 18.9 (5.1) (26.7) $3,030.4 910.8 385.8 (162.5) _______ 609.7 4,164.5 86.0 ______ _ 185.6 $ 523.7(i> $4,350.1 $424.6 162.7 18.1 ______ 605.4 ___ 1/7 $607.1 1976 United States....................................... Europe................................................... Other Ex-USA..................................... Eliminations......................................... Unallocated corporate expenses .... Total Operating............................ $3,165.7 669.4 435.1 ________ 4,270.2 Income charges (credits)..................... Nonoperating assets............................ Total Company............................ ............... $4,270.2 $ 283.5 54.5 22.4 (360.4) _______ -- _______ $-- $616.1 54.8 15.0 6.6 (24.7) 667.8 $2,660.4 752.0 354.8 (133.2) _______ 3,634.0 50.1 _______ 325.1 $ 617.7(1) $3,959.1 $473.5 143.3 27.3 ______ 644.1 ___ 2/7 $646.8 (1) Income before income taxes Inter-area sales, which are sales from one Monsanto location to another Monsanto location in a different world area, were made on a market basis. Export sales included in the United States net sales to outside customers were as follows: 1977 ................................... 1976 ................................... Europe $49.6 32.5 Other Ex-USA $198.8 169.6 Total $248.4 202.1 United States operating income for 1977 included a charge of $35.6 related to the Cycle-Safe container. Europe operating income for 1977 included a $12.2 charge from terminating or divesting certain product lines. Included in United States operating income for 1976 were charges of $12.4 and $9.4 relating to the closing of a plant and accelerated provisions for obsolescence of certain machinery and equipment, respectively. Inter-area receivables and profit derived from inter-area sales are the principal items reflected as eliminations in arriving at the consolidated totals. Unallocated corporate expenses and nonoperating assets are the same as those described for the Operating Company Data on page 40. Following is a reconciliation of the Europe and Other Ex-USA operating income and total assets shown above to the Company's equity in the net loss and net assets of consolidated Ex-USA subsidiaries: Operating income............... . . Income charges--net......... .. Income taxes...................... . . Net loss............................... . . 1977 $ 27.4 81.0 14.7 $(68.3) 1976 $ 69.8 54.0 30.0 $(14.2) Total assets................. ......... Total liabilities............. ......... Net assets..................... ......... 1977 $1,296.6 764.2 $ 532.4 1976 $1,111.7 619.6 $ 492.1 DSW 021117 STLCOPCB4006426 TOWOLDMONOOI4823 Net sales to outside customers improved for 1977 in all world areas. In addition, 1977 export sales increased over those of the prior year. Operating income, however, was down from 1976 levels in the United States and significantly lower in Europe. Total assets increased in each world area. Capital expenditures were down slightly. Europe had increased expenditures, whereas the United States and Other Ex-USA had decreases. Income charges (credits) increased and nonoperating assets decreased as explained in "Operating Company Data" on page 40. The Company's equity in the net loss of foreign subsidiaries increased as a result of lower operating income and higher other income charges. In addition, there was a substantial increase in losses of certain foreign subsidiaries for which no tax benefits are currently available. The Company's equity in net assets of foreign subsidiaries increased from the prior year. OTHER FINANCIAL DATA Consolidated Assets, Liabilities and Shareowners' Equity Working Capital................................................. ............. Net Property, Plant and Equipment............... ............. Long-Term Debt................................................ ............. Other Assets (Liabilities)--Net........................ ............. Shareowners' Equity...................................... ............. 1977 $1,080.0 2,408.7 1,030.6 (57.2) $2*400.9 1976 $1,105.9 2,089.8 915.4 ,__(27.8) $2*252.5 Percent Increase (Decrease) (2.3)% 15.3 12.6 -- 6*6__ Monsanto's financial position continued strong for 1977. Working capital (current assets less current liabilities) decreased only slightly from 1976. Net property, plant and equipment increased, as did long-term debt. Shareowners' equity increased over the prior year. SALES BY WORLD AREA 1977 $3,409.3 $706.0 $479.0 1976 WORKING CAPITAL 1977 1976 1975 1974 1973 $3,163.7 $669.4 $435.1 United States Europe Other $854.5 $967.8 SIOSO.O $1105.9 $1149.6 DSW 021118 45 STLCOPCB4006427 TOWOLDMONOOI4824 FINANCIAL REVIEW <Dollars in millions, except per share) Major Operating Expenses Purchased raw materials.......................................................................... Energy and utilities..................................................................................... Wages, salaries and employee benefits.................................................... Income, payroll, property and other taxes.............................................. 1977 51,501.6 345.2 1,145.1 375.2 1976 51,317.9 290.8 1,041.6 346.5 In 1977, the cost of purchased raw materials and energy and utilities increased at rates of approximately 14 percent and 19 percent, respectively. Wages, salaries and employee benefits were 10 percent higher than the previous year. Income, payroll, property and other taxes increased 8 percent in 1977 over 1976. Foreign Exchange Losses First quarter . . Second quarter Third quarter . Fourth quarter Foreign Exchange Losses (Gains) Earnings per Share Effect 1977 1976 $0.10 0.22 0.01 0.60 $ 0.02 0.15 0.38 (0.03) $0.93 $ 0.52 The above amounts include not only the earnings per share effect on Monsanto Company and its consolidated subsidiaries ($0.74 for 1977), but also the earnings per share effect on equity income of unconsolidated affiliates. As a result of Financial Accounting Standards Board Statement No. 8 (FASB No. 8), the Company must translate many items, including long-term debt, on the balance sheets of Ex-USA subsidiaries and affiliates at current exchange rates. This accounting method, although required by FASB No. 8, does not reflect the long-term economic results of the Company's policy of risk management for foreign exchange exposures related to non-dollar denominated debt. Losses related to long-term debt translations may, or may not, be realized when the debt must actually be repaid in the future. Accordingly, the Company manages such exposures from a long-term viewpoint, which policy may result in losses or gains being reflected in periodic earnings because of the accounting prescribed by FASB No. 8. Selected Statistics Current ratio............................................ Debt-to-equity ratio................................. Return on average shareowners' equity. Shareowners' equity per common share 1977 2.6:1 30.0 11.9% $66.16 1976 2.9:1 28.9 17.3% $61.79 The current ratio decreased slightly for 1977, principally as a result of increased current liabilities. The debt-to-equity ratio increased only slightly from the prior year. The return on average shareowners' equity was down for 1977 as compared with 1976. Shareowners' equity per common share continued to advance in 1977. WAGES. SALARIES AND EMPLOYEE BENEFITS DSW 021119 STLCOPCB4006428 TOWOLDMONOOI4825 Common Stock Dividends per Share 1977 Dividend Payments per Share: First quarter........................................SO.70 Second quarter................................... 0.775 Third quarter........................................ 0.775 Fourth quarter...................................... 0.775 $3.025 1976 S0.65 0.70 0.70 0.70 $2.75 1975 $0.60 0.65 0.65 0,65 $2.55 1974 $0.50 0.60 0.60 0.60 $2.30 1973 $0.45 0.45 0.50 0,50 $1,90 Effective with the second-quarter payments of 1977, the Board of Directors increased the quarterly dividend from $0.70 to $0,775 per share. The dividend has been increased in each of the past five years and the regular cash dividend has been paid quarterly without interruption or reduction since 1928. Stock Prices (New York Stock Exchange) Common Stock Prices First quarter................................................... ... Second quarter.............................................. . .. Third quarter................................................. ... Fourth quarter.............................................. ... Preferred Stock Prices First quarter................................................... .. . Second quarter.............................................. ... Third quarter................................................ ... Fourth quarter.............................................. ... 1977 High Low 88% 82% 70% 60s/, 73% 69% 58s/, 52 High 94V, 91V, 77 64 1977 Low 82V, 77% 61V2 58% 1976 High Low 98 V, 100 93 % 88% 76 86V, 84V, 78V, 1976 High Low 108% 110% 84V, 98 102% 96 95 % 89 Monsanto's common stock (symbol--MTC) is traded on the New York Stock Exchange and certain other major exchanges throughout the world. The Company's preferred stock is also traded on the New York Stock Exchange. Quarterly highs and lows for the Company common and preferred stocks were lower in 1977 than in 1976. DIVIDENDS AND EARNINGS 1977 $3,025 1976 $2.75 1975 $2.55 1974 $2.30 1973 $1.90 COMMON STOCK PRICE RANGE 1977 1976 1975 $41 539% $43`/. $52 $7.46 $6.90 Dividends $8.63 $9.25 $10.05 Earnings $88% $76 1 $100 1 $80'/, $69% $75% At December 31 47 0SW 021120 STLCOPCB4006429 TOWOLDMONOOI4826 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis in all material respects. Where acceptable alternative accounting principles exist, Monsanto Company and Subsidiaries (the Company) have selected the methods they believe to be preferable in the circumstances. A summary of the significant alternative accounting principles selected follows. Basis of Consolidation The consolidated financial statements include Monsanto Company and its majority-owned subsidiaries. All significant intercompany transactions have been eliminated. Investments in the common stock of certain affiliates, in which the Company has a greater than 20 percent interest, but which are not majority owned, are accounted for by the equity method. Depredation The Company generally uses the straight line method of computing depreciation on assets; however, the sum of the years digits method is used on most domestic assets placed in service prior to January 1, 1972. Income Taxes The Company follows the "flow through" method of accounting for investment tax credits. Under this method, benefits are recognized as a reduction of income taxes in the year they are realized by an offset to the Federal income tax liability. Income taxes on the undistributed earnings of foreign subsidiaries and domestic international sales corporations (DISC'S) have not been provided because the Company intends to indefinitely invest these earnings. Inventory Valuation Inventories are stated at the lower of cost or market. The method of determining cost for substantially all domestic inventories is the last-in, first-out (LIFO) basis. The cost for other inventories is determined generally on the first-in, first-out (FIFO) basis. Pension Plans Pension costs include charges applicable to current service and amortization of unfunded prior service costs over periods ranging from 15 to 30 years. The policy is to fund pension costs accrued. DSW 021121 48 STLCOPCB4006430 TOWOLDMONOOI4827 Monsanto Company and Subsidiaries STATEMENT OF CONSOLIDATED INCOME (Dollars in millions, except per share) Net Sales.................................................. Cost of Goods Sold............................... . Marketing and Administrative Expenses Technological Expenses........................ Operating Income........... Income Charges (Credits): Interest expense........... Other--net.................. Income Before Income Taxes . Income Taxes.......................... Net Income........................... Earnings per Common Share: Primary........................... Fully diluted.................... Year 1977 $4,594.5 3.409.7 399.6 175.5 3.984.8 609.7 Year 1976 $4,270.2 3,096.8 350.7 154.9 3,602.4 667.8 86.0 ____ 86.0 523.7 248.1 $ 275.6 79.8 (29.7) 50.1 617.7 251.4 $ 366.3 $ 7.46 7.37 $ 10.05 9.77 The above statement should be read in conjunction with page 48 and pages 54 through 61 of this report. DSN 021122 STLCOPCB4006431 TOWOLDMONOOI4828 Monsanto Company and Subsidiaries STATEMENT OF CONSOLIDATED FINANCIAL POSITION (Dollars in millions, except per share) ASSETS Current Assets: Cash........................................................................................................ Short-term securities and time deposits, at cost which approximates market..................................................................... Receivables, net of allowances of $19.1 in 1977 and $18.6 in 1976 .. Inventories........................................................................................... Dec. 31, 1977 $ 38.3 160.0 810.7 726.4 1,735.4 Dec. 31, 1976 $ 37.3 282.9 731.1 631.8 1,683.1 Investments and Miscellaneous Assets: Investments in affiliates, at equity....................................................... Miscellaneous investments and receivables, at cost or less............... 109.2 37.1 146.3 111.1 29.6 140.7 Property, Plant and Equipment, at Cost: Land........................................................................................................ Buildings................................................................................................. Machinery and equipment.................................................................... Mineral rights and oil and gas properties............................................ Less accumulated depreciation and depletion, etc.............................. Net property.................................................................................... 45.0 573.3 3,914.5 212.3 4,745.1 2,336.4 2,408.7 44.5 541.8 3,439.2 182.8 4,208.3 2,118.5 2,089.8 Deferred Charges........................................................................................ 59.7 $4,350.1 45.5 $3,959.1 The above statement should be read in conjunction with page 48 and pages 54 through 61 of this report. DSW 021123 50 STLCOPCB4006432 TOWOLDMONOOI4829 LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities: Accounts payable and accruals................................................ ......... Income taxes............................................................................... ......... Current portion of long-term debt............................................ ......... Long-Term Debt............................................................................. ......... Other Liabilities and Deferred Credits: Deferred income taxes............................................................... ......... Miscellaneous............................................................................. ......... Shareowners' Equity: Preferred stock--authorized, 10,000,000 shares without par value, issuable in series; outstanding, 271,306 shares in 1977 and 382,587 shares in 1976; involuntary liquidation preference, $35 per share, or an aggregate of $9.5 and $13.4 at December 31, 1977 and 1976, respectively........................................................... Common stock--authorized, 100,000,000 shares, par value $2 each; issued, 36,872,323 shares in 1977 and 36,708,144 shares in 1976............................................................................................... Additional contributed capital............................................................ Reinvested earnings............................................................................. Less common stock in treasury, at cost (591,603 shares in 1977 and 268,903 shares in 1976).................................................................. Dec. 31, 1977 $ 551.8 50.1 53.5 655.4 1,030.6 236.0 27.2 263.2 0.6 73.7 650.6 1,705.3 2,430.2 29.3 2,400.9 $4,350.1 Dec. 31, 1976 $ 517.6 34.3 25.3 577.2 915.4 181.3 32.7 214.0 0.8 73.4 648.2 1,541.1 2,263.5 11.0 2,252.5 $3,959.1 DSW 021124 51 STLCOPCB4006433 TOWOLDMONOOI4830 Monsanto Company and Subsidiaries STATEMENT OF CHANGES IN CONSOLIDATED FINANCIAL POSITION (Dollars in millions) Source of Working Capital: Net income............................................................................................. Charges not affecting working capital: Depreciation, obsolescence and depletion................................... Deferred income taxes.................................................................. Other--net...................................................................................... Working capital from operations............................................ Outside financing--net of unexpended funds from industrial development bonds....................................................... Property disposals............................................................................... Proceeds from issuance of capital stock............................................ Application of Working Capital: Property, plant and equipment additions.......................................... Dividends............................................................................................... Debt reduction...................................................................................... Other--net............................................................................................. Decrease in Working Capital.................................................................... Year 1977 $ 275.6 296.0 54.7 28.4 654.7 126.3 26.9 2.0 809.9 607.1 111.4 79.0 38.3 835.8 S 25.9 Year 1976 $ 366.3 226.0 61.5 14.3 668.1 81.7 20.3 8.8 778.9 646.8 100.9 33.6 41.3 822.6 S 43.7 Changes in Elements of Working Capital: Increase (decrease) in current assets: Cash, short-term securities and time deposits............................ Net receivables............................................................................... Inventories...................................................................................... (Increase) decrease in current liabilities: Accounts payable and accruals..................................................... Income taxes.................................................................................. ' Current portion of long-term debt.............................................. Decrease in Working Capital.................................................................... $(121.9) 79.6 94.6 52.3 (34.2) (15.8) (28.2) (78.2) $ 25.9 $(105.4) 51.7 105.7 52.0 (89.9) (1.8) (4.0) (95.7) $ 43.7 The above statement should be read in conjunction with page 48 and pages 54 through 61 of this report. DSW 021125 52 STLCOPCB4006434 TOWOLDMONOQ14831 Monsanto Company and Subsidiaries STATEMENT OF CONSOLIDATED SHAREOWNERS' EQUITY (Dollars in millions, except per share) Additional Preferred Common Contributed Reinvested Treasury Stock Stock Capital Earnings Stock Balance, January 1, 1976...................... . $3.7 Net income............................................ Dividends: Preferred --$2.75 per share........... Common --$2.75 per share........... Conversion of $2.75 Preferred Stock to common stock.................. Shares issued under stock option plans................................... Shares issued upon conversion of Monsanto Limited convertible loan stock........................................ Shares issued upon conversion of Monsanto International Finance Company convertible debentures . Other..................................................... Balance, December 31, 1976 ................ . (2.9) 0.8 Net income............................................ Dividends: Preferred --$2.75 per share........... Common --$3,025 per share......... Conversion of $2.75 Preferred Stock to common stock.................. Shares issued under stock option plans................................... Shares issued upon conversion of Monsanto Limited convertible loan stock........................................ Shares purchased................................. Other ..................................................... Balance, December 31, 1977 ............... . (0.2) $0.6 $70.2 2.9 0.2 0.1 73.4 0.2 0.1 $73.7 $638.1 $1,275.7 366.3 $(11.0) (2.2) (98.7) 4.8 1.9 1.8 1.6 648.2 1,541.1 275.6 (11.0) (0.9) (110.5) 1.7 0.2 0.5 $650.6 (18.3) $1,705.3 $(29.3) The above statement should be read in conjunction with page 48 and pages 54 through 61 of this report. OSW 021126 STLCOPCB4006435 TOWOLDMONOOI4832 NOTES TO FINANCIAL STATEMENTS (Dollars in millions, except per share) Bank Credit Agreements At December 31, 1977, the Company had $115.0 of domestic unsecured short-term lines of credit with nineteen banks. During February 1978, the lines of credit were increased to $300.0 with twenty-one banks. The lines of credit are renewable annually and provide that any loans thereunder bear interest at the prime commercial rate of the various banks. No borrowings were made under any of the arrangements through February 13, 1978. Capital Stock The outstanding preferred stock is stated at $2.24 per share and has a cumulative dividend of $2.75 per share. The preferred stock is convertible into Monsanto Company common stock at the rate of 1.12 shares of common for each share of preferred, subject to adjustment in certain events under antidilution provisions. During 1977, 111,281 preferred shares were converted into 124,561 common shares; in 1976, 1,283,597 preferred shares were converted into 1,437,537 common shares. Of 2,330,510 total preferred shares originally issued in the period 1969 through 1974, 2,059,204 preferred shares have been converted to 2,306,033 shares of common stock through December 31, 1977. The preferred stock may be redeemed at the Company's option at $73 per share, which amount is also the voluntary liquidation preference. The Company issued 2,0% and 34,471 shares of common stock in 1977 and 1976, respectively, to holders of convertible loan stock issued by Monsanto Limited, a United Kingdom subsidiary, upon exercise of their conversion rights. The Company also issued 21,458 shares of common stock in 1976 to holders of convertible debentures issued by Monsanto International Finance Company upon exercise of their conversion rights. The Company held 37,754 shares of its common stock for specific purposes which are included in Miscellaneous Investments in the accompanying Statement of Consolidated Financial Position at December 31, 1977. There were 1,810,068 shares of common stock reserved for the following purposes at December 31, 1977: Conversion of $2.75 Preferred Stock.................................................................................. Stock option plans................................................................................................................. Conversion of convertible loan stock of Monsanto Limited............................................ Conversion of debentures of Monsanto International Finance Company...................... Shares 303,863 1,035,485 258,313 212,407 1,810,068 Depreciation, Obsolescence and Repairs Charges to expense were: Depreciation, amortization and depletion Obsolescence............................................. Repairs and maintenance........................... 1977 $239.5 56.5 $296.0 $289.3 1976 $189.3 36.7 $226.0 $222.7 54 DSW 021127 STLCOPCB4006436 TOWOLDMONOOI4833 Earnings per Common Share Income and the number of shares used in the computation of earnings per common and common equivalent share were determined as follows: Income Net income........................................................................... . Preferred dividends............................................................ Interest (less tax) on: Loan stock of Monsanto Limited................................. . Debentures of Monsanto International Finance Company..................................................................... Number of Shares (In thousands) Weighted average shares: Outstanding.................................................................... . Incremental shares for outstanding stock options .... . Shares issuable upon conversion: Loan stock of Monsanto Limited............................. . Debentures of Monsanto International Finance Company................................................................ $2.75 Preferred Stock................................................. 1977 Fully Primary Diluted $275.6 $275.6 (0.9) 0.2 0.2 0.5 $274.9 $276.3 36,511 36,511 67 69 259 259 36,837 237 352 37,428 1976 Fully Primary Diluted $366.3 $366.3 (2.2) 0.3 0.3 0.5 $364.4 $367.1 35,835 35,835 161 167 276 276 36,272 269 983 37,530 Employee Stock Options The status of the authorized common shares for the stock option plans and the changes occurring during 1977 were: 1974 Plan_________________ 1969 Plan Authorized Outstanding Not Granted Outstanding At January 1, 1977 ................................................................ Granted.................................................................................. Exercised................................................. .............................. Terminated............................................................................. 509,601 259,100 (13,812) (20,389) 407,453 (259,100) 20,389 157,453 (23,710) (1,500) At December 31,1977............................................................ 734,500 168,742 132,243 Under the above plans, options for 866,743 shares were outstanding at December 31,1977 at prices ranging from $32.50 to $95.25 per share, or a weighted average of $67.53 per share. During the year, options for 37,522 shares were exercised at prices ranging from $32.50 to $73.19 per share. Equity in Affiliates The equity of the Company in the net loss of affiliates totaled $12.5 in 1977 and is included in other income. For 1976, the equity of the Company in the net income of affiliates totaled $6.8. Foreign Exchange Net exchange losses resulting from foreign currency transactions and translation of foreign currency financial statements, excluding unconsolidated affiliates, were $29.9 and $29.4 in 1977 and 1976, respectively. The Company's equity in net exchange losses for unconsolidated affiliates was $7.0 in 1977; in 1976 there was a gain of $3.6. 55 OSW 021128 STLCOPCB4006437 TOWOLDMONOOI4834 NOTES TO FINANCIAL STATEMENTS (Dollars in millions, except per share) Income Taxes The components of income tax expense were: Current: Federal (after investment tax credits of $38.3 in 1977 and $47.6 in 1976)................................................................................................. State.......................................................................................................... Foreign.................................................................................................... Deferred: Federal...................................................................................................... Foreign.................................................................................................... 1977 $172.3 13.4 7.7 193.4 45.9 8.8 54.7 $248.1 1976 $157.6 15.4 16.9 189.9 43.4 18.1 61.5 $251.4 The source of timing differences in the recognition of revenue and expense for tax and financial statement purposes and the tax effect of each were: 1977 1976 Excess of depreciation for tax purposes over book............................... $49.6 $47.2 Other items--net......................................................................................... 5.1 14.3 $54.7 $61.5 Income tax expense was less than the federal statutory rate because of the factors indicated below: 1977 Statutory corporate tax rate........................................................................... Investment tax credit....................................................................... Tax treatment afforded earnings ofDISC'S.................................................. Foreign, state and local income taxes............................................................ Other.................................................................................................................... 48.0% (2.1) 8.6 0.2 47.4% 1976 48.0% (7.3)(7.7) (2.6) 4.4 (1.4) 40.7% Undistributed earnings of foreign subsidiaries and DISC'S for which Federal income taxes were not provided because of the Company's intention to indefinitely invest these amounts were: 1977 1976 Foreign subsidiaries.................................................................................... DISC'S.......................................................................................................... $141.1 124.8 $226.9 102.2 $265.9 $329.1 Any taxes on dividends that may be received from foreign subsidiaries would be substantially offset by foreign tax credits. Foreign net operating loss carryforwards for which no tax benefits have been recorded are approximately $96.2 at December 31, 1977 and expire in various years through 1982. Inventory Valuation Inventories at December 31, 1977 and 1976 would have been $229.8 and $201.0, respectively, higher than reported if the FIFO basis of inventory valuation (which approximates replacement cost) had been used for all inventories. DSW 021129 56 STLCOPCB4006438 TOWOLDMONOOI4835 Key Employee Bonus Data relating to the Monsanto Management Incentive Plan of 1974 were: Maximum allowable addition to bonus reserve........................................ Actual charge to expense (and addition to bonus reserve) as determined by the Executive Compensation and Development Committee............................................................................................... Bonus awards: Number of directors and officers.......................................................... Number of other key employees............................................................ Amount................................................................................................... Balance in bonus reserve at year-end....................................................... 1977 $17.4 $ 5.2 23 454 $ 4.2 $ 7.9 1976 $25.9 $ 9.6 20 426 $ 6.6 $ 6.9 Leases, Guarantees and Other Commitments The Company was contingently liable as guarantor of bank loans and for customers' receivables discounted aggregating approximately $98.6 at December 31, 1977. Commitments in connection with uncompleted additions to property aggregated approximately $118.6 at December 31, 1977. Rent expense under operating leases with a remaining term of more than one month was approximately $41.1 in 1977 and $36.5 in 1976. Minimum rental commitments under noncancelable operating leases are: 1978 ................................................. 1979 ................................................. 1980 ................................................. 1981 ................................................ 1982 ................................................. After 1982.............................................. $ 7.7 6.5 5.5 5.0 3.4 40,9 $69.0 Legal Proceedings The Company is party to a number of lawsuits arising in the normal course of business. The more significant pending lawsuits are described below. The Company is a defendant in various lawsuits alleging damages from products containing polychlorinated biphenyls (PCB's). Some of these lawsuits purport to be class actions, among which are the following: three class actions purport to be on behalf of those having alleged interests, such as ownership of property, business operations or utilization of certain water bodies as a source of food or a means of recreation, connected with the Coosa River and its tributaries and Weiss Lake located between the States of Georgia and Alabama. These suits were filed in the U.S. District Court for the Northern District of Georgia on September 20, 1976, the Superior Court of Fulton County, State of Georgia, on September 24, 1976, and the U.S. District Court for the Northern District of Alabama on December 29, 1976. Damages claimed in each of the first two of these suits are $500.0, and in the last is $1,000.0. The State of Alabama, through its Attorney General, has intervened in the Northern District of Alabama suit seeking $100.0 actual damages, $0.1 punitive damages and restoration and clean-up costs. These lawsuits claim that the Company failed to warn of the alleged dangers of PCB's. The Company will vigorously defend all such lawsuits. While the results of litigation cannot be predicted with certainty, management, based upon advice of Company counsel, believes that the final outcome of such litigation will not have a materially adverse effect on the consolidated financial statements of the Company. DSW 021130 57 STLCOPCB4006439 TOWOLDMONOOI4836 NOTES TO FINANCIAL STATEMENTS (Dollars in millions, except per share) Long-Term Debt At December 31, 1977 and 1976, the long-term debt of the Company, exclusive of current maturities and repayable in U. S. dollars, except where parenthetically indicated, was as follows: 1977 1976 Parent Company: V/i9!* promissory notes due 1979/1985................................................ 8<7o notes due 1985 .................................................................................. 43/4(7o promissory notes due 1993 ......................................................... 8`/j`To sinking fund debentures due 2000.............................................. 91/sl7b sinking fund debentures due 2000.............................................. y/;7o income debentures due 2002....................................................... 41/4<7o income debentures due 2008 ....................................................... Leases capitalized (a)............................................................................. 44/5<7o-71/2(% industrial development bond obligations due 1983/2007 ........................................................................................... Monsanto International Finance Company: 4'/2<7o sinking fund debentures due 1985 (b)........................................ Monsanto International N.V. (Netherlands Antilles subsidiary): 5l/i% bonds due 1987 (Swiss franc)..................................................... Monsanto Limited (United Kingdom subsidiary) (British pound): 5% loan stock due 1982/1986(c)......................................................... Monsanto (Suisse) S.A. (Swiss subsidiary) (Swiss franc): 63/4<7o sinking fund debentures due 1985 .............................................. 6l/2lo sinking fund debentures due 1986 .............................................. Monsanto Europe, S.A. (Belgian subsidiary) (Belgian franc): 9% bank loan due 1978/1986................................................................ lO'/io'To-l V/ioV* bank loans due 1980/1987 (d)................................... 9V4% bonds due 1982/1991 ................................................................... Other............................................................................................................. $ 14.6 100.0 67.3 175.0 125.3 91.0 50.0 15.6 124.2 17.5 39.2 11.2 14.7 24.5 17.7 44.3 11.8 86.7 $100.0 72.0 175.0 138.0 91.0 50.0 66.4 20.0 32.0 10.1 12.0 20.0 16.9 12.5 10.0 89.5 Total (e)........................................................................................... $1,030,6 S91S.4 Notes: (a) These are leases capitalized to conform with the provisions of Financial Accounting Standards Board Statement No. 13, "Accounting for Leases." (b) These debentures are currently convertible into Monsanto common stock at S86 per share, subject to adjustment under certain conditions. (c) This loan stock is convertible into Monsanto common stock at the approximate rate of one share per 22 pounds 92 new pence ($44 at December 31, 1977 exchange rate), subject to adjustment under certain conditions. Of the $25.9 total loan stock originally issued in 1969, $14.7 had been retired through December 31,1977 by conversion into 212,959 shares of common stock. (d) The interest rates on these bank loans will be reduced by a government subsidy ranging from 4.0%-2.8l7o, which expire in 1980/1981. The Company has the option of repaying these loans in 1981. (e) Maturities and sinking fund requirements on long-term debt are $53.5, $31.0. $35.3. $35.7, and $50.4 for the five years ending December 31, 1978 through 1982, respectively. (0 Covenants of certain loan agreements restrict maximum borrowings of the Company. It is not anticipated that additional future borrowing will be affected by these restrictions. (g) Under various parallel loan agreements, the Company has borrowed $85.7 in pounds sterling from United Kingdom (U.K.) companies and the Company has made United States (U.S.) dollar loans to the U.K. companies or their subsidiaries aggregating $75.7 as of December 31, 1977. These agreements require the Company to make additional U.S. dollar loans of $10.0, which amount is reflected as a current liability. As both parties to the agreements have the legal right to offset in case of default by the other party, the parallel transactions are reflected net in the accompanying financial statements. Interest rates on the sterling loans are 2'/,% to 2`/j% higher than the interest rates on the corresponding dollar loans. Maturity dates of the loans range from 1982 through 1986. (h) The long-term debt of each individual subsidiary company shown above is guaranteed by the parent company. DSW 021131 58 STLCOPCB4006440 TOWOLDMONOOI4837 Pension Plans Several noncontributory pension plans provide retirement benefits for substantially all employees of the Company. The expense related to these pension plans was $74.6 in 1977 and $70.7 in 1976. The estimated actuarially computed value of vested benefits of the major plans exceeded the market value of the plans' assets by $51.6 as of December 31, 1977. Replacement Cost Data (Unaudited) As the Summary of Significant Accounting Policies indicates, the Company's consolidated financial statements are prepared in accordance with generally accepted accounting principles which include the concept of historical cost. Under this concept, assets generally are recorded and reported at the amounts originally paid despite subsequent changes in (1) the purchasing power of the dollar, (2) the amount for which the asset could be sold--its market value--or (3) the current cost of replacing the asset--its replacement cost. In an attempt to begin providing readers of financial statements with information as to the "current economics" of businesses, the Securities and Exchange Commission established rules in 1976 that require some companies--Monsanto is one--to estimate and report certain replacement cost data. Under these rules, the estimated impact of replacement cost on the amounts reported in the accompanying (historical cost) financial statements for inventories; property, plant and equipment; cost of goods sold; and depreciation expense is to be disclosed. These disclosures do not take into account the impact of replacement cost on other assets, liabilities, revenues or expenses reported in the accompanying financial statements. Based on the best estimates of management, use of the replacement cost basis would impact the amounts reported in the consolidated financial statements in the following manner: Inventories determined on a first-in, first-out (FIFO) basis approximate the estimated replacement cost. Buildings and machinery and equipment would have been more than reported in the historical cost financial statements by approximately $1,400 for 1977 and $1,440 for 1976. After adjusting for accumulated depreciation, the net building and machinery and equipment would have been higher than reported on a historical cost basis by approximately $800 for 1977 and $835 for 1976. Depreciation expense would have been higher than the reported historical cost depreciation by approximately $145 for 1977 and $95 for 1976. Cost of goods sold, excluding the impact of replacement cost depreciation, would have been approximately the same as on a historical cost basis. A statement of the procedures used to estimate the replacement cost data and management's concerns with respect to the reliability of such data, as well as certain other information with respect to the replacement cost data, is contained in Monsanto Company's Form 10-K filed with the Securities and Exchange Commission for 1977. A copy of this report is available from the Company on request. Segment Information Financial Accounting Standards Board Statement No. 14 requires disclosure of certain industry and world area "segment" data. Accordingly, the Operating Company and World Area data appearing on pages 40 and 44 of the Financial Review Section of this Annual Report are an integral part of the accompanying financial statements. DSW 021132 59 STLCOPCB4006441 NOTES TO FINANCIAL STATEMENTS (Dollars in millions, except per share) Selected Quarterly Financial Data (Unaudited) Selected unaudited quarterly financial data for 1977 and 1976 follow: 1977: First Quarter............................... ........................ Second Quarter........................... ......................... Third Quarter............................. ........................ Fourth Quarter........................... ........................ Year........................................ ........................ Net Sales $1,306.1 1,122.1 1,075.8 1,090.5 $4,594.5 Cost of Goods Sold Net Income Earnings per Common Share Fully Primary Diluted $ 871.2 819.4 872.3 846.8 $3,409.7 $147.9 81.5 24.9 21.3 $275.6 $ 4.01 2.21 0.66 0.58 $ '7.46 $3.95 2.18 0.66 0.58 $7.37 1976: First Quarter............................... ........................ Second Quarter........................... ........................ Third Quarter............................. ......................... Fourth Quarter........................... ........................ Year........................................ ........................ $1,173.6 1,063.4 998.4 1,034.8 $4,270.2 $ 769.8 760.8 753.8 812.4 $3,096.8 $156.9 98.4 63.4 47.6 $366.3 $ 4.40 2.69 1.69 1.27 $10.05 $4.19 2.62 1.69 1.27 $9.77 The 1977 first and third quarters' operating results include charges of $1.9 ($0.05 per primary share) and $18.5 ($0.50 per primary share), respectively, related to the Cycle-Safe container, as further explained in "Write-down of Net Investment in Cycle-Safe." The 1977 third quarter operating results also include a charge of $13.1 ($0.36 per primary share) for anticipated losses due to terminating or divesting certain product lines. Fourth quarter 1977 operating results include a charge of $22.0 ($0.60 per primary share) resulting from the weakened position of the United States dollar against several other currencies in that quarter. The 1976 third quarter operating results include a $10.3 ($0.28 per primary share) charge due to the devaluation of the Mexican peso. Fourth quarter 1976 operating results include two unusual charges aggregating $12.9 ($0.35 per primary share). One charge of $7.3 ($0.20 per primary share), results from the closing of a plant. The other charge of $5.6 ($0.15 per primary share), results from acceleration of provisions for obsolescence of certain machinery and equipment. DSW 021133 60 STLCOPCB4006442 TOWOLDMONOOI4839 Technological Expenses Technological expenses consisted of the following: Research and development.......................................... Engineering, commercial development and patent . . 1977 $132.3 43.2 $175.5 1976 $114.3 40.6 $154,9 Write-down of Net Investment in Cycle-Safe Following a February 1977 announcement by the Food and Drug Administration (FDA) of its intention to suspend the food additive regulations permitting the use of acrylonitrile copolymers in the fabrication of plastic containers for carbonated beverages, Monsanto suspended production of its acrylonitrile/styrene copolymer Cycle-Safe container. In September 1977, despite management's efforts to convince the FDA that no health hazard exists in the use of the CycleSafe container, the FDA issued a final decision prohibiting the use of acrylonitrile to make plastic beverage containers. In light of the decision of the FDA, included in cost of goods sold for 1977 is a $35.6 charge resulting from the write-down of the net investment in Cycle-Safe container operations and related expenses. This charge reduced earnings by $20.4, net of income taxes, or $0.55 per primary share. Management continues to believe that the use of the Cycle-Safe container poses no health hazards but, rather, possesses considerable positive environmental and consumer convenience attributes. The Company has filed a petition in the Federal Appeals Court for the District of Columbia challenging the FDA's decision to prohibit the use of acrylonitrile copolymers in plastic soft-drink bottles. Accountants' Opinion HASKINS & SELLS CERTIFIED PUBLIC ACCOUNTANTS TEN BROADWAY SAINT LOUIS 63102 Monsanto Company: We have examined the accompanying consolidated financial statements (pages 48 through 61) of Monsanto Company and Subsidiaries for the years ended December 31, 1977 and 1976. 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 financial statements present fairly the consolidated financial position of Monsanto Company and Subsidiaries at December 31, 1977 and 1976 and the results of their operations and changes in their financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis. February 13, 1978 DSM 021134 STLCOPCB4006443 TOWOLDMONOOI4840 Monsanto Company and Subsidiaries TEN-YEAR SUMMARY (In millions, except per share and where italicized) Operating Results Net sales.......................................................... Operating income................................................... Interest expense..................................................... Income taxes............................................................ Income before extraordinary items...................... Extraordinary charges (credits)--net.................... Net income.............................................................. Percent of net sales............................................ Percent of average shareowners'equity........... Earnings per common share: Primary: Before extraordinary items........................ After extraordinary items........................... Fully diluted: Before extraordinary items........................ After extraordinary items........................... Note: Refer to the management analysis of the results of operations which is included under the caption "Analysis of Change in Primary Earnings" on page 39 of this report. Year-End Financial Position Total assets................................................. Working capital........................................ Property, plant and equipment--gross .. Property, plant and equipment--net.... Long-term debt.......................................... Shareowners' equity................................. Other Data Per common share: Dividends............................................. Shareowners' equity........................... Property, plant and equipment additions Depreciation, obsolescence and depletion Year-end: Shareowners: Common........................................ Preferred........................................ Common shares outstanding............. Employees............................................. (1) As of January 1, 1974, the Company and certain of its domestic subsidiaries changed their method of inventory valuation for substantially all United States inventories from the FIFO basis to the LIFO basis. The effect of this change was to decrease 1974 in come by $77.5 or $2.26 per primary share. (2) Excludes $16.0 applicable to extraordinary charges. 1977 $4,595 610 86 248 276 276 6.0% 11.9% 1976 $4,270 668 80 251 366 366 8.6% 17.3% $ 7.46 7.46 7.37 7.37 $10.05 10.05 9.77 9.77 $4,350 1,080 4,745 2,409 1,031 2,401 $3,959 1,106 4,208 2,090 915 2,253 $ 3.025 66.16 $ 607 296 $ 2.75 61.79 $ 647 226 85,021 1,404 36.3 61,519 84,647 1,956 36.4 61,903 DSW 021135 62 : ; ; r ! STLCOPCB4006444 TOWOLDMONOQ14841 1975 $3,625 547 56 230 306 306 8.4% 16.4% 1974 $3,498 550 43 251 323(i) 323d) 9.2% 20.0% 1973 $2,648 406 39 173 238 238 9.0% 17.2% 1972 $2,225 216 37 81 122 122 5.5% 9.7% 1971 $2,087 178 39 66 94 94 4.5% 7.8% 1970 $1,972 128 33 35 78 11 67 3.4% 5.6% 1969 $1,939 191 22 73 109 (7) 116 6.0% 9.8% 1968 $1,865 214 21 88 116 116 6.2% 10.3% $8.63 8.63 8.22 8.22 $9.25 9.25 8.73 8.73 $6.90 6.90 6.54 6.54 $3.49 3.49 3.40 3.40 $2.65 2.65 2.63 2.63 $2.17 1.83 2.17 1.83 $3.08 3.28 3.03 3.21 $3.26 3.26 3.20 3.20 $3,451 1,150 3,620 1,660 845 1,977 $2,938 968 3,157 1,312 587 1,755 $2,545 855 2,852 1,152 579 1,484 $2,237 677 2,765 1,133 576 1,294 $2,154 547 2,735 1,170 558 1,226 $2,145 538 2,637 1,170 589 1,194 $2,012 510 2,471 1,071 454 1,205 $1,957 520 2,345 1,047 473 1,154 $ 2.55 56.62 $ 528 173 $ 2.30 51.39 $ 313 172 $ 1.90 44.26 $ 205 170 $ 1.80 39.05 $ 168 194 $ 1.80 37.16 $ 205 187 $ 1.80 36.27 $ 301 170(2) $ 1.80 36.25 $ 220 164 $ 1.65 34.74 $ 135 174 91,725 2,836 34.8 59,242 98,542 3,709 34.1 60,926 98,964 3,855 33.4 58,277 104,369 3,939 33.0 57,891 110,490 3,897 32.8 59,271 121,399 3,941 32.8 62,940 118,156 3,621 33.1 64,604 111,538 33.1 62,815 OSW 021136 63 STLCOPCB4006445 TOWOLDMONOOI4842 DIRECTORS AND OFFICERS DIRECTORS COMMITTEES OF THE BOARD OF DIRECTORS OFFICERS John W. Hanley, St. Louis Chairman of the Board and President Edmond S. Bauer, St. Louis Executive Vice President H. Harold Bible, St. Louis Vice President Donald C. Carroll, Philadelphia Dean of The Wharton School University of Pennsylvania C.R. Dahl, San Francisco Chairman, Crown Zellerbach Corporation John R. Eck, St. Louis Senior Vice President Louis Fernandez, St. Louis Executive Vice President J.W. Fisher, Marshalltown, Iowa Former Chairman, Fisher Controls Company, Inc. Richard I. Fricke, Montpelier, Vermont Vice Chairman, National Life Insurance Company James J. Kerley, St. Louis Executive Vice President Howard M. Love, Pittsburgh President, National Steel Corporation Jean Mayer, Medford, Massachusetts President, Tufts University Buck Mickel, Greenville, S.C. Chairman, Daniel International Corporation, engineering and construction firm Edward L. Palmer, New York Chairman of the Executive Committee, Citicorp and Citibank, N.A. Francis E. Reese, St. Louis Group Vice President Tom K. Smith Jr., St. Louis Senior Vice President Charles H. Sommer, St. Louis Former Monsanto Chairman Monte C. Throdahl, St. Louis Group Vice President Margaret Bush Wilson, St. Louis Attorney, Wilson, Smith, Wunderlich & Smith Audit Donald C. Cairoll Edward L. Palmer Margaret Bush Wilson Executive Edmond S. Bauer H. Harold Bible John W. Hanley James J. Kerley Charles H. Sommer Margaret Bush Wilson Executive Compensation & Development Richard I. Fricke Howard M. Love Buck Mickel Charles H. Sommer Finance J.W. Fisher John W. Hanley James J. Kerley Buck Mickel Edward L. Palmer Charles H. Sommer Pension & Savings Funds H. Harold Bible Richard I. Fricke James J. Kerley Jean Mayer Chairman of the Board and President John W. Hanley Vice Chairman H. Harold Bible Executive Vice Presidents Edmond S. Bauer Louis Fernandez James J. Kerley Richard J. Mahoney Group Vice Presidents James E. Crawford Jr. Francis J. Fitzgerald Francis E. Reese Monte C. Throdahl Senior Vice Presidents John R. Eck Tom K. Smith Jr. Vice Presidents Robert L. Berra Robert E. Burke Earle H. Harbison Jr. S. Allen Heininger Joseph T. Nolan Nicholas L. Reding Ernest S. Robson Jr. J. Virgil Waggoner Vice President, Secretary and General Counsel Richard W. Duesenberg Vice President and Treasurer Richard C. O'Sullivan Vice President and Controller Francis A. Stroble Regional Vice Presidents Richard T. Clark Sam Pickard 64 DSN 021137 ' STLCOPCB4006446 TOWOLDMONOOI4843 Transfer Agents Morgan Guaranty Trust Company of New York The Boatmen's National Bank of St. Louis Registrars The Chase Manhattan Bank, N.A. St. Louis Union Trust Company DSW 021138 STLCOPCB4006447 TOWOLDMONOOI4844 Monsanto Company 800 North Lindbergh Boulevard St. Louis, Missouri 63166 DSW 021139 STLCOPCB4006448 TOWOLDMONOOI4845