Document qmYKNM6jQRGdZaVr4g0VZ48ek

Annual Report 1982 OSN 021444 STLCOPCB4006753 Contents To Our Shareowners Strategies for the Future Renew Our Core Businesses Increase Options for Growth Emphasize Growth Around the World Extend Leadership of Growth Businesses Create Windows on Technology .Anticipate Society's Concerns Performance in Major Markets Financial Report Financial Review Financial Statements Financial Summary Directors and Officers 2 7 8 11 12 14 21 25 31 33 4~ 58 60 Cover Our Annual Report cover illustrates three highlights of1982 (left to right): Monsanto's new maleic anhydride plant in Pensacola, Florida; world wide expansion ofRoundup herbicide uses (as on thisfarm in Kenya); and growing research involvement with research universi ties (like Washington University in St. Louis, pictured here). Italics throughout the Annual Report identify Monsanto s trademarks. DSW 021445 STLCOPCB4006754 Operational Highlights (Dollars in millions, except per share) 1 1982 1981 Net Sales $6325 $6,948 Net Income $ 352 $ 445 Per Common Share: Net Income Dividends Shareowners' Equity $ 8.79 3.95 85.97 $11.50 3.75 84.37 Property, Plant and Equipment Additions $ 673 $ 668 Depreciation and Obsolescence $ 439 $ 263 Research and Development $ 256 $ 225 Yearend: Shareowners-- Common Shares Employees 75,943 52,199 79,029 57,391 Note: Net income for 1982 includes an extraordinary gain of *23 million, or 10.58 per share, from an exchange of debt for common shares. 1980 $6,574 $ 149 $ 4.10 3.55 77.63 $ 781 $ 547 $ 208 82,441 61,836 Monsanto at a Glance Monsanto Company's purpose is to serve customers worldwide through quality products, processes and ser The Company sells more than 1,000 vices in harmony with society's goals. products in 100 countries. Among Headquartered in St Louis, Monsanto is a multinational indus trial company of more than 52,000 people engaged primarily in the manufacture of chemicals. Founded these products are chemicals, agri cultural products, man-made fibers, electronics materials, industrial process controls and other capital equipment in 1901, it now has investments in Monsanto's organization includes 166 manufacturing plants, labor four operating companies -- atories and technical centers in Agricultural Products, Fibers and 20 nations. Intermediates, Industrial Chemicals, and Polymer Products -- as well as five operating divisions -- Animal and Plant Products, Electronics, Engineered Products, Health Care, and Nutrition Chemicals. Monsanto Oil Company, a wholly owned subsidiary, engages in explo ration for and production of oil and natural gas. Fisher Controls Interna tional, Inc., a majority-owned subsid iary, is a leading worldwide supplier of industrial process control systems, instrumentation, control valves and regulators. DSW 021446 STLCOPCB4006755 7 Chairman John W. Hanley, flanked by President RichardJ. Mahoney (left) and Vice Chairman Louis Fernandez. To Our Shareowners: Faced with a grinding recession throughout 1982, Monsanto per formed better than many of its major competitors while carrying out a farreaching reorganization to meet the challenges of the decade ahead. 1982. was the first year that the ITS. farm economy negatively affected our agricultural products business which is by far the largest contribu tor to corporate earnings. Even so, our Lasso and Roundup herbi cides outperformed 1981, but the growth curve for Roundup fell below expectations for this extraor dinary crop chemical. Our steadfast commitment to asset management and cost-reduction pro grams helped offset somewhat the effects of lower demand for our industrial products. By shedding non-productive assets, w:e signifi cantly improved our break-even point to about 60 percent of plant utilization. We retired additional long- and short-term debt, winding up the year in a strong financial posi tion that provides a solid foundation for future growth. Reported net income for 1982 was $352 million or $8.79 per share. This refleas the Board of Directors' approval in February 1983 of the planned sale of our European acrylic fibers business and the establish ment of a 1982 loss provision of $18 million ($0.46 per share). Net income for 1981 was $445 million or $11.50 per share, including a gain of $68 million or $1.75 per share from the sale to Conoco of Monsanto's assets in a joint venture. A more meaningful comparison of net income from operations in the DSW 02144? STLCOPCB4006756 3 buttressed by first-class technology If Monsanto could aim at a doubling past two years would exclude the of its earnings every 10 years, he 1982 extraordinary gain on our debt- said -- in contrast to the preceding equity exchange as well as the 1981 decade's annual growth rate of only gain on the sale of the Conoco joint 3.2 percent -- it would have a goal venture assets. These modifications which would be at once challenging, would put net income in 1981 realistic, and readily affordable at $377 million and 1982 at within the resource limitations that $329 million -- a year-to-year prevailed. decrease of 13 percent. After three or four years, when As 1983 begins, we see several significant progress had been made encouraging economic signals. toward this aspiration, it became Inflation and interest rates are lower. evident that inflation was invali Consumer confidence is on the rise. dating the original goal, and some There is a measurable upturn in rethinking was in order. A logical single-family housing starts, and conclusion emerged: the idea of U.S. auto production is predicted to increasing earnings at a rate which be up substantially. We anticipate would double in 10 years after infla modest economic growth in 1983, tion -- in other words, a doubling although less than normally follows a in real terms. That has been our recession. If our expectations are adjusted long-range goal. realized, the economy's recent down ward pressure on earnings will be behind us. Because 1982 was a year in which Monsanto reached a milestone in both product portfolio analysis and reorganization, we feel it is appropri ate in this Annual Report to give our shareowners a perspective of two decades -- the past one and the one ahead -- so this will be the theme of our letter. If Monsanto had moved toward that goal in regular annual steps, earn ings would have advanced in real dollar terms at a rate of approxi mately 7.2 percent a year. But our profitability over the past decade has been importantly influenced by an inflation-plagued environment; two oil shocks of pervasive impact; and a Company policy of enlarging its expenditures on research and devel opment while at the same time with Tha Past Decad* drawing from businesses where Monsanto has been evolving at a prospects were no longer attractive. rate that sees it quite a different organization today from the one which installed John W. Hanley as President and CEO in late 1972. Because Monsanto's earnings during the 1973-82 period were far from a steady progression, a point-to-point comparison tends to blur the pic At that time, the new CEO told Board ture. A better comparison would be members his objective was to build a to measure cumulative real earnings company with strong finances, sound over the decade against our goal. management, and solid businesses When we do so, we find that we earned a total of $2.1 billion alto gether, against a goal of $1.8 billion -- exceeding our growth target by about 16 percent. Over the decade, Monsanto has made notable progress in other areas as well. Sales and earnings per share have grown at annual compound rates of 11.0 percent and 9.7 percent, respectively, in nominal dollarsfrom 1972 to 1982. Shareowner equity and return on it have improved markedly --from Si3 billion and9.7percent in 1972 to S3-5 billion and 10.3 percent last year. Dividends over the decade totaled Si .1 billion, as the Board increased the dividend rate 10 times during the 10-year period. Our balance sheet has been greatty strengthened -- debt to total capital having been loweredfrom 31 per cent to 22 percent. Of course, the past decade was not without its setbacks. Our calculated but high-risk expansion in polyester filament failed to live up to our hopes, and we eventually withdrew from that beleaguered segment of the textile business. Our buildup of acrylonitrile facilities in Europe, in anticipation of expansion in plastics and fibers, proved to be unwar ranted in light of subsequent mar ket conditions. However, these disappointments were more than offset by our gains in total -- success in agricultural products and in such traditional businesses as rubber chemicals, DSW 021448 STLCOPCB4006757 4 Saflex interlayer, Fisher's controls, and detergents and phosphates. Success, too, in putting in place a vigorous new management team, installing modem planning proce dures, and raising managers' awareness of the changing dimen sions of socially responsible corporate conduct. Keeping Ahead of Change The progress made over the past decade amply validates our strategy of moving our product portfolio toward specialties and high-technol ogy. But the chemical industry is changing rapidly, and we are deter mined to keep ahead of the changes. So we have been adjusting our strat egy over the past three years to become even more competitive in the bracing environment we antici pate in the decade ahead. In explaining our new strategic directions, it is helpful to start with the basic raw materials of the chemi cal business -- oil and natural gas. These are upgraded first into what are called primary petrochemical intermediates -- the large-volume, commodity raw materials like ethyl ene, propylene, benzene and others. Then they are further upgraded into first-stage products, the traditional monomers such as benzene into styrene and on to polystyrene. Finally, come the specialty chemi cals -- rubber chemicals, resins for paints, adhesives, paper coatings, MHA feed additives, and all the way to herbicides like Lasso and Roundup. We made a judgment to withdraw from the production of the primary petrochemical intermediates, and to emphasize the upgraded steps. This decision was formalized with the sale of our interest in the Conoco joint venture in 1981. Our strategic direction is to buy these materials, and use benzene and other purchased petrochemicals in far more complicated products with a higher component of value added by Monsanto and value received by our customers. At the same time, we are investing to expand our non-petrochemical base -- silicon wafers, phosphates, and the engineered products portions of Monsanto including Fisher's total process-control systems and Radia tion Dynamics' emerging electronbeam product line. We are simultaneously moving into health care, the third leg of the in terrelated agricultural chemicals/ nutrition chemicals/health care busi nesses, all tied together through the new biotechnology. This next major wave of chemistry has implications at least as far-reaching for our industry as the advent of petrochemicals in the 1930s. Recent advances in biotechnology -- molecule manipulation like recom binant DNA -- give promise of opening up dramatic new opportu nities for the chemical, medical drug and agricultural industries. Indeed, it is not too farfetched to imagine whole new industries selling prod ucts that today cannot even be conceived, let alone made. Strong R&D Commitment To position Monsanto to share in both old and new growth areas, we have substantially strengthened our commitment to research and devel opment all across the Corporation. We have increased four-fold our agri cultural programs in just the past five years; launched a five-year $23-5 million research venture in protein chemistry for new drug uses with Washington University which was recently singled out by President Reagan as a model of private-sector initiative; formed partnerships with some of America's and Europe's fore most research institutions giving us access to the finest scientific minds of our time; started a new Nutrition Chemicals unit which has in the development stage Monsanto's first recombinant DNA product, animal growth hormone; and begun a multimillion-dollar project for building and staffing a world-class life-sci ences laboratory complex in suburban St. Louis County. Even as we probe new frontiers, we have maintained a lively interest in the basic chemical businesses on which Monsanto was founded and from which it has drawn sustenance over the years. We have formed a corporate group to examine renewal of our higher value-added chemicals through technology and business acquisitions. We intend to invest prudently in basic chemicals and manage them for balanced income growth around the world. The use of innovative technology, like the butane route to maleic anhydride, will become an increasingly impor tant part of Monsanto's strategy for the decade ahead. OSW 021449 STLCOPCB4006758 5 To help achieve our new strategic directions, we carried out in 1982 a wide-ranging reorganization to streamline both staff and line. selves of this option, bringing about Goal of Reorganization The reorganization was intended to position selected high value-added a more appropriate balance between people and jobs, and eliminating the need for massive layoffs. businesses for growth, strengthen Throughout the dislocations of reor our chemicals, fibers and plastics ganization, our 52,000 employees businesses, reinforce our interna proved themselves once again a bul tional posture, meet customer needs wark of strength, as they have during more effectively, and enhance the contribution of technology to our the entire evolution of the past dec ade. They are as able and dedicated a overall performance. As a result, we group of men and women as can be now have a structure which will per found in any enterprise, fully com mit us to serve our customers better, mitted to building a company whose link raw materials and products products enhance the quality of life more closely, and focus our around the world. resources more efficiently. Their dedication is matched by that In the reorganization, we grouped of the Board of Directors which our businesses under three broad never lost sight of our longer-term headings: our major chemicals and goals as it guided Monsanto through fibers units; our biological sciences a difficult economic period. During units including agriculture and nutri the year, the Board lost the services tion; and our non-chemical growth of two valued members. Edmond S. units such as electronics, oil and gas, Bauer, Chairman of Fisher Controls Fisher Controls and engineered International and a 40-year veteran products. Each of these units has of Monsanto, died unexpectedly. worldwide responsibility for the J. William Fisher, a former Chairman manufacture and sale of its products of the company bearing his name, -- a recognition of the fact that retired from the Board upon reach important segments of our future ing the age of 68. Both men had growth will occur outside the United contributed substantively and effec States where we plan to pursue an tively over the years to the Board's active investment program. deliberations, and we are deeply When we found that we had more people than would be required in appreciative of their extraordinarily productive service. the restructured organization, we We are confident that the heartening offered an incentive program for progress of the past decade can be those voluntarily choosing early extended into the next When eco retirement. About 1300 salaried nomic health returns to the world, workers -- more than 61 percent of we believe that Monsanto is posi those eligible - elected to avail them tioned to take full advantage of it. Looking to the future, we are deter mined to build a Monsanto of the 1990s that is sufficiently productive and profitable to be highly attractive to investors, that enjoys and deserves a reputation for excellence among its customers, that is a source of pride to its employees, and that is known in its plant and office communities as a socially responsible corpo rate citizen. Our optimism is strongly related to the fact that we have a management team and a strategy in place that befit the trust that shareowners have mani fested by their investments. We are confident these factors can sustain the Company's success pattern into the next decade -- and the next century. John W. Hanley Chairman of the Board and Chief Executive Officer RichardJ. Mahoney President and Chief Operating Officer Dr. Louis Fernandez Vice Chairman of the Board March 7,1983 DSN 021450 STLCOPCB4006759 DSW 021451 STLCOPCB4006760 A\gronomists harvest sugar beets on Monsanto's agricultural researchfarm in Belgium. Strategies for the Future Monsanto's strategy is to expand toward production of higher-value proprietary and specialty products. We intend to become a company less vulnerable to the cyclical fluctuations of the economy, one less capital intensive but more research-inten sive -- and a company with the technological and business strengths to flourish in the markets of the next decade and beyond. For several years now, we have closely examined all our businesses and candidly debated the proper course for our future. Certain things became clear. First, raw materials, particularly petroleum-based ones, had become too large a component of too many of our products. Second, we faced structural -- and threatening -- changes in the petro chemical intermediates business as the major oil companies and oil-pro ducing nations moved into that market by upgrading their petro leum into primary intermediates. Third, some of our most promising growth businesses were already pointing the way to our new corpo rate strategy. The leadership of Fisher Controls International and of our premier herbicides businesses depends on high-technology pro prietary products. Silicon, hollowfiber separations, nutrition chemicals and other businesses are at the fore front of high technology and on the verge of commercial success. Finally, we have the research and development skills and resources to carry us into a future based on firstrate science and technology. With those realities before us, we have set our course toward proprie tary and specialty products with a greater Monsanto-added value and technological component. To reach that destination, we are simultane ously traveling several roads. We will continue, as elements of our strategy, to do the following: Renew our core chemical businesses. Increase our optionsfor growth. Emphasize growth around the world. Extend the market leadership ofour growth businesses. Create windows on new technology. Anticipate and respond to society's expectations Renew Core Businesses Monsanto's traditional non-agriculturai chemical businesses amount to more than half of both total invest ment and sales. These businesses will remain at the core of Monsanto for years to come, providing the strength for success in the near future and the basis for developing new businesses for the longer term. Strengthening our traditional core businesses means reinvestment in selected areas where we possess a substantial technological or market advantage. For instance, the Com pany installed an improved catalyst system at our acrylonitrile plant in the United Kingdom. The resulting cost reductions have contributed to this plants improved performance. In another case, Monsanto has been a market leader for most of the past 50 years in the building-block chemi cal, maleic anhydride. Today, we have strengthened that position through a more efficient and economical new technology to manufacture maleic. Because of the combination of our market position and technology advantage, Monsanto began construc tion in 1981 of the world's largest maleic anhydride plant, boosting our capacity in this chemical by about 75 percent. Another long-standing Monsanto business, oil and gas, has been positioned as a significant profit contributor through a change in strategy. The basic strategy for the oil and gas business during the past decade was to run it primarily for feedstock security rather than for profit. Today, with a long-term turna round in the feedstocks situation, we have encouraged our managers to participate fully in promising oil and gas ventures without regard to feed stocks requirements. We reorganized that business, effective July 1, 1982, to create Monsanto Oil Company, a wholly owned subsidiary which is expected to become a stronger earner for Monsanto. Our other core businesses have also been reorganized, bringing together the entire manufacturing process from raw material to finished prod uct, so they can be managed as strategic units. On January 1,1983, a new operating company organization went into effect reflecting this stra tegic shift. We dissolved Monsanto DSW 021452 STLCOPCB4006761 8 awaggKEB We like to regard asset management as a way of life. But we cannot save our way to pros perity To provide the cash muscle to pursue our new directions, we must renew today's core businesses." Francis J. Fitzgerald Executive Vice President Monsanto's longtime leadership in maleic anhydride uas strengthened with the start-up of its new Pensacola, Florida, plant, the worlds largest. Chemical Intermediates Company, which produced intermediate bulk chemicals for other Monsanto manu facturing units and supplied the merchant market. We then integrated each intermediates operation into the same manufacturing stream with the finished product, allowing us to supply and serve all our customers better. Strengthening core businesses -- indeed, all businesses -- for an improved return on investment means rigorous asset management, and that will be a continuing focus for the decade ahead. For the past three years, tighter management of the Company's $6 billion in assets has saved us well over $100 million annually. Asset management has also contributed to reducing the break even point of many of our core busi nesses to less than their 1982 operating average of about 62 per cent of capacity. Cost reductions have also come through stringent energy conserva tion measures. Compared to 1972, the year before the OPEC oil embargo and skyrocketing costs, Monsanto achieved more than a 27 percent reduction in its energyuse rate through the end of 1982. That achievement translates into a reduction of $175 million in pur chased energy costs in 1982. Increase Options for Growth A second strategic course Monsanto follows is to increase its options for growth -- not only through new businesses, but also through addi tions to traditional businesses. OSW 021453 STLCOPCB4006762 DSN 021454 STLCOPCB4006763 DSW 021455 STLCOPCB4006764 Saflex safety-glass interlayer has been usedfor years to make automobile glass shatter-proof It is now increasingly used in laminated architec tural glass, as in the new Dallas Galleria. The recently formed Corporate Emphasize Growth Development and Growth Commit Around the World tee v, ill explore options for growth through acquisitions. Its immediate Monsanto continues to place greater emphasis on planning for interna task is to strengthen selected tradi Monsanto is also promoting expanded tional growth. Today, roughly a third tional businesses for near term higher-value uses for Saflex polyvinyl of Monsanto's sales are in markets growth and to augment development butyral film. For decades we have outside the United States. Of those of growth businesses. Candidates for been a leader in supplying the inter .sales, more than half are supplied by acquisition must be developed busi layer for laminated automobile safety non-U.S. manufacturing operations. nesses with a market niche, a high- glass. In recent years, however, During the next decade, we expect technology component and the abil Saflex has become a leader in lami three-quarters of the absolute growth ity to contribute in the near term to a nated architectural glass. Besides of world chemical markets to occur strong return on capital. shatter resistance and aestheuc quali- outside the United States. Growth opportunities through new product development often result from process innovation, as in the case of Nyrim prepolvmer and cata lyst. This proprietary system permits molding of nylon parts in what are called reaction-injection-molding (RIM) machines. With these ues, Saflex offers value in noise reducbon and energy savings. One of Moasanto's most unusual -- as well as environmentally beneficial -- new product development efforts Is called the "Co-product Utilization Program." Begun in 1981, this pro gram seeks to find beneficial ases Monsanto's participation in the growth of international markets can not be done through exports alone. Local and regional differences often dictate local technical support. The need to gain freer access to markets frequendy makes local manufactur ing desirable. Consequendv, we have machines, a fabricator can eliminate and markets for manufacturing stepped up efforts to identify invest intermediate steps in the production wastes -- that Is, for co-products ment opportunities in all world areas. of such parts as automotive compo nents. In the past, polyurethane was the principal material used in RIM machines. Now, Nyrim permits the use of nylon resins, opening up a range of new possibilities for fabrica tors of plastic parts. We also search for new uses for generated in the manufacture of intended products. Today more than 20 co-products are in commercial ization or in various stages of commercial development The most successful of these co products has been dibasic acid (DBA), a co-product of the manufac Some early results of this emphasis have come in the areas of research and technical support. We opened a research center in Paulinia, Brazil, in 1981. In 1982 we expanded our agri cultural research facilities in Belgium and broke ground for a major agri cultural research facility in Japan. We existing products, based upon their ture of adipic acid. DBA has been also opened a technical center in unique qualities. For example, Fome- found to be more effective and more Japan to support the marketing of Cor polystyrene foam board laminate energy-efficient than conventional the Company's electronics materials has long been used as insulating technologies in "scrubbing" indus in the large Japanese market. material in home renovation, manu factured housing and automobiles. Recognized as the standard of quality in the graphic arts industry, Fome-Cor board has recendv gained popularity as an ideal backing for trial flue gases. Its use gready increases the removal of sulfur dioxide, one In some instances, international of the major causes of "acid rain." expansion comes from locating a By finding a profitable market for facility in a country where local this once-cosdy waste product, Monsanto is also helping coal-burn manufacture is legally or customarily required to protea patent rights. pictures and photographs. It is also ing electric utilities solve a serious Monsanto depends heavily on pat used for displays and exhibits. pollution problem. ents. For instance, 80 percent of the DSW 021456 STLCOPCB4006765 12 An automotivefascia panel is moldedfrom new Nyrtm prepolymer and catalyst at our Hloomfield Hdnucal Center sales of our agricultural products in 1982 were of patented products. Our reliance on patents will increase as we implement our strategy of mov ing toward specialty markets with proprietary products. However, rising economic national ism in lesser developed countries (LDCs) has spawned a movement to revise the century-old international patent protection system to reduce the benefits of patents to patent holders. Although their desire is to speed the transfer of advanced tech nology to their countries, the LDC approach would, in fact, do just the opposite. Without adequate patent systems, innovators within a country have little incentive to invent, and outsiders have little incentive to transfer technology into a nation where it is not protected. At the same time, a number of coun tries have come to a greater understanding of the need for patent protection to encourage domestic technology development as well as technology transfer and investment by international companies. The Peo ple's Republic of China, Malaysia and Indonesia are currently reviewing draft legislation that would establish patent systems in their countries. Extand LaadtonNp o# Growth BushMSSM Monsanto follows a strategy of extending the market leadership of our growth businesses through such measures as innovative marketing, emphasis on quality and value, and technological superiority. Monsanto's premier products today are its crop chemicals, particularly Lasso and Roundup herbicides. Through innovative marketing and full support in people and resources, we continue to extend their lead in herbicide markets. Lasso herbicide, a pre-emergent weed killer for com and soybeans, has been one of our best-selling her bicides for years and a leader in its market About five years ago, how ever, Lasso began to lose market share in the United States for the first time. A combined marketing and technical initiative resulted in a highly successful application method, known as Surface Blend, that reduces application costs. As a result of this effort, Lasso regained market share during 1981 and 1982 in one of the worst farm economies in memory. Non-selective Roundup herbicide has also benefited from energetic marketing. It made particularly impressive gains in minimum-tillage agriculture which requires little plowing and disking, leaving crop stubble and residue on the field. This reduces topsoil erosion, con serves soil moisture, reduces the amount of energy required, and pre vents soil compaction which results from the frequent passage of heavy machinery over fields. Monsanto sales efforts have built on this longrecognized need of farmers in order to penetrate new markets and lead the Company to international sales growth. Roundup is now registered in 73 countries for 500 uses. Not only has Roundup, along with the newly introduced Bronco herbi cide, found increasing favor in the highly developed farmlands of North America and Europe, but it has also gained favor in developing agricul tural areas. Monsanto promotes Roundup to supplement scarce rural labor in many developing countries and to permit farmers to increase the amount of land they cultivate. We also achieve and strengthen lead ership by adding special qualities and value to our products. The change in our approach to silicon illustrates this strategy. In an earlier market of simpler and lower-scale integrated circuits, one company's silicon wafer was much like that of another. Today, however, the market has changed. Electronics manufacturers have begun to make very large scale integrated devices that are much faster and contain as much as 256 times the capacity they once did. We have seized this oppor tunity to develop markets for highperformance wafers with characteris tics tailored to each customer's device-performance needs. Conse quently, we are moving away from commodity production of wafers toward application-specific manufac ture for a dozen or more semi conductor device markets. The emphasis now is on the value received by Monsanto's customers, an emphasis we hope will maintain and strengthen our market position. Monsanto also extends market lead ership through technology. Such is the case with Fisher Controls Inter national, Inc., our majority-owned subsidiary which is a world market leader in industrial process control. DSW 021457 STLCOPCB4006766 14 The thrust of our growth for the '80s will be to drive our highvalue-added product lines into expanding markets and to back them with innovative technology. We'll also augment selected strong traditional busi nesses through acquisitions." Earle H. Hartoison Jr. Executive Vice President M^swwasanaasv ,,'.v .> ; ,,.' ....- . .. . ... . j .. Valves and controls made by Fisher Ccrmrols International are used m this oil terminal in the Shetland Islands. Central to Fisher's leadership strategy is building superior technology into Fisher products. Mew Provox instru mentation system for process control is a prime example. Provox is a microprocessor-based system flexi ble enough to be applied to the entire range of industrial processes, from the simplest to the most complex. Of course, strengthening market position usually involves a combina tion of strategic approaches. For instance, we add higher value to our nylon carpet fibers by backing up products made from them with a five-year warranty. We then advertise and promote these products as Wear-Dated carpets. As a result, carpet makers in January 1983 intro duced the largest number of new grades and styles ever using our fibers. We count on this multifaceted program to strengthen our position in carpet fibers. Create Windows on "technology Since today's emerging technologies shape tomorrow's businesses, Monsanto uses several means to gain windows on new technology. We do this largely through in-house research and development as well as through partnerships with universi ties and through venture-capital investments in promising new hightechnology businesses. Monsanto's commitment to develop ing new proprietary products has strengthened the role of technology as the driving force in Monsanto's strategy for growth. Research spend ing has nearly doubled during the OSInl 021459 STLCOPCB4006768 DSW 021460 STLCOPCB4006769 021461 STLCOPCB4006770 A Kenyan small-bolderfanner applies Roundup herbicide in tea fields. past five years -- from $136 million in 1978 to $256 million in 1982 and $301 million budgeted for 1983. This expansion of research activity at Monsanto has required additional facilities. In 1982 Monsanto began construction of a major research complex on a 210-acre site near St. Louis. When the first phase is completed in 1985, a three-building facility will provide space for about 800 professional and technical people. New facilities enable Monsanto to open wider its main window on technology -- internal research. The Company engages in a broad range of research, from applied research for process improvements and exist ing product refinements to longrange exploratory and basic research. Traditional research strengths such as chemical engineering systems, cataly sis, polymer science, agricultural chemistry, organic and inorganic industrial chemistry, and applications research remain basic to Monsanto's growth and future profitability. The recent reorganization has bolstered these areas by combining related research efforts, such as in polymer research, so that we can better serve our customers. At the same time, we are pursuing two promising research growth areas -- new materials and systems, such as electronics materials and separa tions, and the life sciences, including plant biology, animal nutrition, human health care, molecular biol ogy and biotechnology. 17 'Tomorrow's success for the farmer -- indeed, for us all -- lies in today's research. Monsanto is committed to develop ing the agricultural technology of the future and to carrying it to every comer of the earth." Nicholas L Reding Executive Vice President DSW 021462 STLCOPCB4006771 18 A Monsanto scientist purifies experimental hoi me growth hormone, which can enhance milk and meat production in cattle. It is expected to he one of the earliest products of recombinant DNA technology Biotechnology research is advancing vigorously, and Monsanto scientists already have made fundamental dis Science and Technology, St. Andrews coveries in plant genetic engineer ing. We expea these discoveries to contribute to the creation of more produaive crop plants by about 1990. Meanwhile, the Company is building a powerful technical base for potentially substantial markets in the next decade and beyond. Monsanto's first commercial produa seleaed by an advisory committee appointed by Monsanto and by Wash ington University. The projects are collaborative, with close working relationships among the institutions' scientists. Patents arising from the projects will be held by the univer sity, though Monsanto will have exclusive licensing rights. University and the Nuffield Founda tion in the United Kingdom, and Boston University and Harvard University in the United States. In addition to providing an opportunity to assess and acquire new technolo gies in early stages of commercial development, Advent Eurofund enhances Monsanto's ability to apply technologies emerging from basic based on genetic engineering will The agreement is also considered a academic research. likely be bovine growth hormone (bGH), which increases meat and milk yields in cattle. Working with Genentech, Inc., we first succeeded in producing this hormone with genetically altered microorganisms in 1981. Recently, Monsanto and Cornell University scientists announced positive results from ini tial testing of the biosynthetic bGH. model in protecting the academic freedom of university scientists. Faculty members participating in the collaborative research projects are free to publish the results of their research. A third Monsanto window on new technology is venture-capital invest ment in innovative young businesses. In 1972 Monsanto and another indus As a result of these windows on tech nology, many new opportunities in the field of health care have become evident. Our research efforts in this area focus on proteins and peptides associated with blood faaors, the body's immune system and the growth of tissues and organs. From this research we foresee several potential new therapies for impor A second window through which trial company aeated a venture- tant and intractable human diseases. Monsanto observes and assesses capital firm, InnoVen, to make invest We anticipate that biotechnology will emerging technology is research ments with three goals in mind: first, contribute significantly to these collaboration with universities, an to keep abreast of emerging technol efforts and therapies. are^jn which Monsanto is widely regarded as a pioneer. Among our partnerships with uni versities is an innovative relationship ogies; second, to acquire new technologies for the parent compa nies; and third, to make a return on investment With these new opportunities before us, we recendy created a Health Care Division, which is accelerating Monsanto's entry into major health we established with Washington Uni InnoVen has succeeded in all three care businesses. While managing versity in Sc Louis during 1982. With objectives, and its success stimulated investments like that in Collagen Monsanto providing <23 5 million the creation in 1982 of Monsanto's Corporation, it will also develop over the next five years, the two most recent venture-capital enter commercial strategies for regulatory institutions will condua collabora prise -- Advent Eurofund. This proteins and peptides and related tive biomedical research in areas of $17 million fund invests in innova products of potential significance in proteins and peptides which regulate tive high-technology businesses in human medicine. These products cellular functions. Europe. Monsanto's partners in will emerge from our genetic engi Our agreement with Washington Advent Eurofund are major research neering research, from collaborative University is unique in several universities -- Cambridge University, research with Washington University respects. Research projects are Oxford University, Imperial College of and from other external research. DSW 021463 STLCOPCB4006772 DSW 021464 STLCOPCB4006773 DSW 021465 STLCOPCB4006774 Washington University in St. Louis hasjoined with Monsanto in an innovative coilaborative research ventitre. 21 Anticipate and Respond to Society's Concerns Monsanto continues to anticipate and respond to society's expectations about our performance in the areas of worker safety and health, environ mental protection, product quality and safety and all other aspects of good corporate citizenship. There is no greater test of Monsanto's behavior as a corporate citizen than protection of health and the environ ment. The Company continues to carry out an environmental strategy of running our operations with the least possible adverse effect on people and the environment and to allay public fears about the effects of our operations and products. That environmental strategy involves seeking public trust and confidence, which will develop only when a scientific consensus exists on such unresolved questions as extrapolat ing, or applying, the results of animal tests to humans. To assist in reaching this consensus, Monsanto's scientists conduct research in accordance with the highest canons of science. The Company will accelerate toxicologi cal research not only to learn of chemical effects on humans but also to discover the basic mechanisms of interactions between chemicals and humans. And we will communicate the results of our findings to the sci entific community, our employees, government officials and lawmakers, and the public. Public confidence depends on the proven safety of our operations and materials. In 1982 Monsanto spent more than $240 million for capital projects and ongoing programs to ensure that our operations and the materials we use and produce cause no harm. Much of this went toward gathering, managing and communicating infor mation about our processes and products. Through our own Environ mental Health Laboratory, the Chemical Industry Institute of Toxi cology and many other sources, we seek comprehensive knowledge of the health effects of all chemicals we use and make. Our computerized Medical and Environmental Health Information (MEHI) system, epide miology department, mobile Monsanto Employee Ifesting Unit and other systems constantly monitor our own workplaces and the health of our employees. lb ensure that our operations com ply with legal requirements and our own standards of environmental pro tection, we completed in 1982 the first series of environmental audits of all our U.S. plants. These audits have been extended to our European operations, all of which will be audited by the end of 1983. Monsanto seeks not only to handle and dispose of its wastes in the most responsible manner but also to reduce the volume of wastes through several means. One, finding benefi cial uses for wastes or "co-products," is discussed above. We have also accelerated the development of improved processes that generate less waste, of waste recovery and recycling systems, and of methods of detoxifying those wastes which cannot be eliminated. Monsanto's workplace safety efforts made 1982 the best year for safety in our history. For the second year in a row, there were no fatalities in any of our manufacturing operations around the world. Our "total record able rate" -- that is, the total number of fatalities, illnesses and injuries requiring more than simple first aid -- was 1.09 for every 200,000 employee-hours in 1982, an improve ment of nearly 17 percent over 1981. This achievement keeps Monsanto among the top three companies in the chemical industry, which itself has the best safety record of all industries surveyed by the National Safety Council. Not only must Monsanto be con cerned about the health and environment of our communities, but we must also be an active partici pant in those communities. That participation includes philanthropy, which the Company conducts pri marily through the Monsanto Fund. In 1982, with total Corporate and Monsanto Fund contribudons com ing to $7 million, we moved closer to our mid-1980s goal of contribut ing at least 2 percent of our pretax income to civic, educadonal and charitable causes. Good citizenship includes providing our employees with satisfying work and equality of opportunity for advancement. At the end of 1982, DSN 021466 STLCOPCB4006775 22 The 'Chris Chenery,' under contract to Mon santo Oil Company drillsfor oil in the North Sea offshorefrom Aberdeen, Scotland. 10 percent of Monsanto's 5,585 man agement employees were minorities and women. They held more than 23 percent of 5,990 professional positions, including 22 percent of 920 sales positions. Their number in middle and upper management has grown from 26 to 126 in the past five years. To manage its response to legitimate public expectations, Monsanto created a Social Responsibility Committee in 1976 and developed a series of social responsibility policy statements. At the same time, we formed an Environmental Policy Committee and Staff along with an Office of Social Responsibil ity. In 1981 the Board of Directors created its own Corporate Social Responsibility Committee. Company's efforts in the areas of energy conservation and product safety and quality. Committee chairwoman Margaret Bush Wilson said the Committee is "satisfied that the managing directors are keenly aware of the importance and place of corporate social respon sibility, and are themselves attuned to the social policy climate of today." She said that during 1983 the Com mittee plans to visit plant communi ties and talk with employees at all levels of the organization to see that social responsibility concepts are being carried out in day-to-day practice. From the beginning, the goal was to make social responsibility an integral pan of our regular line and staff operations. By the end of 1982, suffi cient progress had been made that the Company transferred primary responsibility to the major operating and staff units. The management Social Responsibility Committee received a new charter as an Emerg ing Issues Committee both to monitor long-range social and politi cal developments and to examine the appropriate future role of the corporation in modem society. As a result, the Board Committee has assumed greater responsibility for overseeing the performance of staff and operating unit managers. They conducted a social performance review of Monsanto during 1982 and were particularly impressed with the DSW 021467 STLCOPCB4006776 DSW 021468 STLCOPCB4006777 DSW 021469 STLCOPCB4006778 A Monsanto scientist conducts experiments with turfgrass aspan of basic research into the mechanisms ofplant growth. 25 Performance in Major Markets Difficult economic conditions bcth at home and abroad during 1982 affected nearly ail of the major markets in which the Company did business. Even agricul ture, Monsanto's largest market and one traditionally thought to be immune to cyclical pressure, was buffeted by high interest rates and declining growth. Housing and automobile production, two important markets for Monsanto prod ucts, fell to their lowest levels in decades. In the face of this, Monsanto fared rela tively well. The Company made good progress in implementing its long-term strategies for growth and refining its product portfolio toward meeting special customer needs. Combining that with continued careful management of assets and cost reductions during 1982, Monsanto was able to mitigate some what the effects of lowered demand for industrial products. Monsanto's performance in each of its major markets is described in this sec tion. Economic conditions for each market are summarized and depicted graphically on the right. CoMtnictton, Fumlturo and Hama furnishing Spending (Billion* ot 1972 Dollar*) PtmnnaooMtlc*>*, t**p* and TbBatri** Production (1967 - 100) Molar VOMcio Production--North America (Million* of Unit*) 1(1967- 100) Production (1967 - 100) 186.9 187.5 192.0 181.8 78.0 76.7 73.6 DSW 021470 STLCOPCB4006779 26 Agriculture Real farm income in 1982 fell to its lowest level since the 1930s, and farmers could not maintain their normal purchasing patterns. Nevertheless, agricultural product sales rose, although growth was slowed. Lasso herbicide for com and soybean crops continued to increase its U.S. market share, partly due to the new Surface Blend technique which has gained wide accept ance. New Bronco herbicide had an excellent reception in the no-till soybean market as farmers increasingly sought ways to conserve time, fuel costs and soil. Sales of Roundup herbicide continued to climb in mar kets around the world, although not as rapidly as in recent years. In the United States, Roundup showed impressive gains in the reduced tillage and industrial markets. In Europe, preharvest applications of Roundup were successfully introduced. Far-Go herbicide for wheat had strong U.S. growth, but outside the U.S. Avadex BW and Machete herbicides had reduced sales in 1982. This was largely due to poor planting weather and deteriorating farm economies, rather than a strong U.S. dollar. The new Rodeo herbicide is the first approved by the U. S. Environmental Protection Agency for non-restricted use in controlling weeds which often choke ponds and navigable waterways. Rodeo will be marketed beginning in 1983. Monsanto is an important supplier of amino acid feed supplements and preservatives to the poultry and swine feed markets. MHA and AJimet feed supplements, methionine sources for animal feed, demonstrated strong sales gains during the year despite competitive pressures. Research is continuing on a growth hormone which shows promise of improving milk production efficiency in cattle. Construction and Home Furnishings 'Numbers shown indicate percentages of Monsanto sales. A depressed housing industry during 1982 affected sales in construction and related markets which account for 17 percent of Monsanto's total sales. New residential construction had its worst year since World War II -- caused by inflation and high interest rates. The sale of existing homes, which often creates demand for home furnishings, was half its recent high. Monsanto products are also found in non-residential construction which picked up only modestly in 1982. Laminated architectural glass made with Saflex plastic interlayer gained increasing acceptance in building windows, doors and skylights. It provides the properties of sound reduction and safety, as well as solar control which saves on air conditioning. Sales of Lustran ABS plastic used in pipe declined due to continuing stiff competition from polyvinyl chloride and depressed industry conditions. However, Lustran Ultra ABS plastic for appliances and consumer electronic items did well. Resins and plasticizers found in plywood, paints, insulation and wallpaper, continued to be well accepted in the marketplace. Sant/a'zer plasticizers give flexibility to vinyl materials used in flooring and wall coverings. This product increased its market pene tration during the year. Monsanto is a leading supplier of nylon fiber to makers of commercial and residential carpets. During 1982, new product introductions shifted the nylon fiber sales mix toward more branded, higher-value items. The warranty program fa Wear-Dated carpet was well received by mill customers who introduced a record number of new Ultron nylon carpet styles and constructions. In home furnishings, Monsanto continued to see good growth for its Acrilan acrylic fibers in upholstery, draperies and wall coverings. While the penetration by acrylics in these markets suffered from the economic downturn, programs are in place with major mills to increase their acceptance in such applications. DSM 021471 STLCOPCB4006780 Capital Equipment Pharmaceuticals and Related Products 27 Capital spending dropped significantly during 1982. Major markets for Monsanto's subsidiary, Fisher Controls international, Inc., were particularly hard hit. The semiconductor industry, which purchases Monsanto's silicon, also suffered. Even in this environment, Fisher made strides in its sales of control valves and regulators. In 1982 Fisher introduced an innovative control valve with accessories designed for corrosive service applications. Meanwhile, develop ment work accelerated on next-generation products. Building on its strength in field measurement instrumen tation, Fisher introduced a temperature controller and vortex flowmeter product line using proprietary technology. Provox computerized control room instrumentation, first sold in 1980, continued strong worldwide growth. Sales increased by more than 100 percent with over 200 control systems and 15,000 control loops sold to date. New enhancements help customers coordinate batch control for multi-stream, multi-product applications and provide special energy management capabilities. Monsanto continued to improve both the quality and customer's device yield of its electronic-grade silicon. Materials for specialized customer applications contributed to the Company's leadership as a supplier to the semiconductor industry. The silicon business has faced lower than anticipated demand during the past two years as the result of a poor economy. Nevertheless, substantial long-term growth is foreseen with advances in mainframe and personal computers and telecommunications. Two Monsanto thrusts stressed energy efficiency. Monsanto Enviro-Chem Systems, Inc., a leader in design and construction of sulfuric acid plants, developed programs to generate electricity from excess steam. Prism separators have been sold in 10 countries. Their use in oil refineries is gaining increased acceptance. U.S. demand for products in the pharmaceuticals and related products area two of our oldest markets, remained largely flat during 1982. Existing inventories, rather than new production, met increased demand for health care products. Monsanto is the world's largest supplier of analgesics, producing both aspirin and acetaminophen. With production facilities in three countries, Monsanto main tained its strong position in serving the worldwide aspirin market Acetaminophen usage in the U.S. showed strong annual growth, and Monsanto's in creased capacity at our Luting,, Louisiana, plant reached record production of this product during 1982. As the only U.S. manufacturer of L-Dopa, a prescription drug used in the treatment of Parkinson^ disease, Monsanto continues to be a major factor in this worldwide market. Although mature, detergent and toiletries markets continue to be important to Monsanto as new opportunities de/elop for future products. Volume of our traditional builders and surfactants decreased during 1982, reflecting changing consumer spending pat terns. However, Monsanto was able to hold its overall share of phosphorus and derivatives, such as STP, our largest volume detergent raw material. Other sales in these markets remained strong. Monsanto is also a major supplier of packaging material to pharmaceutical and deter gent markets which consume about 70 percent of our blownware plastic bottles. Although Monsanto is recognized as a leader in quality and service, blcrwnware sales suffered due to overcapacity and price competition. A cross-licensing agreement with Yoshino Kogyosho Co., Ltd., in Japan permits Monsanto to exchange rights on tech nology and patents for production of plastic containers. As a result, Monsanto expects significant advances in this area DStt 021472 STLCOPCB4006781 28 Motor Vehicles A In North America fewer automobiles were produced in 1982 than in any year since 1961. Widespread reces sion and anxiety about unemployment caused American consumers to curtail motor vehicle purchases dramatically. Domestic spending on U.S.-built automo biles as a percent of gross national product was at its S&Blowest level ever. As a result, sales were down for most wHHw Monsanto products serving this important industry, including rubber chemicals and plasticizers. Several Monsanto products turned in a relatively good performance in spite of lowered motor vehicle volumes. Shipments of Lustran ABS resin for automotive components held their own, including two new impact-resistant and color-fast grades of Lustran ABS. Saflex interlayer for laminated automotive windshields also maintained its share in a declining market. During the year, Monsanto commercialized Nyrim catalyst and prepolymer for nylon block copolymer reaction injection molding systems. Nyrim's long-term market potential is replacement of conventional materials like steel and fiberglass in automotive body panels. Two entirely new materials introduced in 1981 performed well in test applications. Santoprene elastomer, the first multi-purpose thermoplastic rubber, is already being specified in high-performance applications. Monsanto's unique thermoplastic resin, Cadon, has been rapidly adopted for interior applications. The use in automobiles of electronic devices, many of which contain Monsanto silicon, has grown dramatically. Microprocessor control units that monitor and govern engine functions, such as fuel-air mixture for increased mileage, became almost universally accepted in 1982. Chemicals and Petroleum Refining 'Numbers shown indicate percentages of Monsanto sales. A The production of basic and industrial chemicals in the United States declined more than 15 percent during 1982 due to weak demand around the world, particu larly in the United States and Europe. Petroleum refining did not fare as badly with only a 6 percent drop in production. Monsanto strengthened its oil and gas exploration activities by forming Monsanto Oil Company, a wholly owned subsidiary, to direct its worldwide hyrdocarbon operations. This enhanced its identity in the oil and gas industry and improved its flexibility in joint venture activity. Monsanto's yearend oil reserves totalled 38 million barrels and natural gas reserves totalled 607 billion cubic feet, up from 1981 levels by 12 percent and 1 per cent respectively. With a drilling success ratio of 83 percent Monsanto Oil Company increased oil production to nearty 4 million barrels during the year. However, natural gas production declined due to reduced demand. Monsanto Oil Company now holds leases on more than one miSion net acres and has begun an exploratory drilling pro gram on one erf its severed United Kingdom leases in the North Sea. Monsanto's process chemicals are used by manufacturers to make many industrial and consumer products. Monsanto has the world's leading technology for acetic acid. Licensed in seven major industrialized countries, our methanol-based technology pro vides approximately 35 percent of the world's capacity for this chemical. Monsanto continued to expand its worldwide maleic anhydride capacity as a new plant at Pensacola, Florida neared completion. Therminol heat transfer fluids are used for indirect heating and cooling in chemical processing, on offshore drilling platforms, and in solar healing. Monsanto's major posi tion in these markets continued to improve during the year. DSW 021473 STLCOPCB4006782 Apparel In 1982, the demand created by increased consumer spending on apparel was largely filled from imports and existing inventories, putting downward pressure on ail apparel fibers. However, acrylics showed growing competitive strength over other fibers, with particularly strong performance in half hose and all activewear categories. Acrylic fiber products introduced over the past few years, including Pa-Qei, So-Lara and Fi-Lana, enhanced Monsanto's position by offering strong branded programs in market segments which moved against the downward trend of the industry in 1982. Monsanto reached two important milestones during the year when the Company commemorated the 20th anniversary of its warranty program for Wear-Dated products and the 10th anniversary of the introduction of SEF modacrylic fiber. Since 1962, when Monsanto first offered a warranty for qualified apparel products made with the Companyis fiber, the Wear-Dated trademark has become a recognized symbol for quality and value. The warranty is the strongest of its kind in the textile industry. SEF modacrylic fiber was developed to help Monsanto's customers meet the federal flammability standards for various apparel products. Its primary application in apparel is in children's sleepwear. In other apparel areas, Monsanto started to convert a major portion of its textile-denier nylon yam facilities to manufacture a product more suitable for use with the high speed texturing equipment being installed by customers. When completed, this should provide Monsanto with an attractive low-cost nylon product for women's hosiery, men's half hose and activewear. Monsanto sells a variety of other products to diverse markets ranging from food to graphic arts to water treatment chemicals. These were affected by the 8-percent drop in industrial production which reflected the longest post-war recession in the United States. Monsantos food ingredients include flavorings, acidulants and preservatives used in carbonated soft drinks, juices and wines. In the dairy industry, Monsanto's food ingredients preserve freshness and improve flavor. Monitor potassium sorbale food preservative, widely used by bakeries, increased penetration of this market 'while production costs were reduced. In the export market the strong U.S. dollar had some negative effect on prices, but the outlook had improved by year's end. Fome-Cor board has gained wide acceptance in the graphic arts industry in addition to its traditional use as energy-saving sheathing in manufactured housing and head liners for automobiles. Monsize, Mersize and Scripset paper sizing agents maintained their share in a weak market while Santo-Res wetstrength resins increased sales during 1982. Monsanto is a leading supplier to this important industry. Monsanto is also a major supplier of nylon fiber for various industrial applications and tires. Sales here were depressed due to conditions in end-use markets. Cerex spunbounded nylon fabric, used in such applications as filtration and disposable garments, demonstrated strong potential for medical and non-industrial markets, even though sales were down somewhat in 1982. i i : i DSW 021474 STLCOPCB4006783 DSW 021475 STLCOPCB4006784 "G" Building is one ofMonsanto's most modem office buildings attbeSt. Louis headquarters. 31 Firvjnm'cjl Rpnnrt rUliulk Ini XVCJJvJl l Contents Responsibilities for Financial Data Financial Review Financial Statements Financial Summary Pane Management Report 32 Independent Auditors' Opinion on System of Internal Accounting Control 32 Review of the Results of Operations Consolidated Sales 33 Sales by Product Group 33 Consolidated Net Income 34 Analysis of Change in Earnings per Share 34 Quarterly Results Operating Unit Segment Data 35 36 International Area Basis Data Raw Materials and Energy Research and Development Foreign Currency 38 39 39 39 Inflation-Adjusted Data 40 Selected Financial Data 41 Review of Liquidity and Short-Term Liquidity and Capital Resources 42 Capital Resources Long-Term Liquidity and Capital Resources 43 Common Stock Data 44 Oil and Gas Activities Proved Reserves 45 Standardized Measure of Discounted Future Net Cash Flows 46 Summary of Significant Accounting Policies 47 Independent Auditors' Opinion on Financial Statements 48 Statament of Consolidated Income 49 Statement of Consolidated Financial Position 50 Statement of Changes In Consolidated Financial Position 52 Statement of Consolidated Shareowners' Equity 53 Notss to Financial Statements Principal Divestitures 54 Supplemental Income and Expense Data 54 Pension Plans 54 Income Taxes 55 Earnings per Share 55 Inventories 55 Short-Term Debt and Bank Credit Arrangements 55 Long-Term Debt 56 Commitments and Contingencies 56 Capital Stock 56 Stock Option Plans 56 Segment Information 56 58 Except where otherwise indicated by the context the term"Monsanto" means Monsanto Company and its consolidated subsidiaries and the term"Company" means Monsanto Company alone. AM dollar amounts are in millions, except those amounts shown on a per share basis. DSW 021476 STLCOPCB4006785 32 Responsibilities for Financial Data Management Report The management of Monsanto Company is responsible for the fair presentation and consistency of all financial data included in this Annual Report. Where necessary, the data reflect management estimates. Management is also responsible for maintaining a system of internal accounting control to provide reasonable assurance that assets are safeguarded against material loss from unauthorized use or disposition and that authorized transactions are properly recorded to permit the preparation of accurate financial data. Cost-benefit judgments are an important consideration in this regard. Inherent limitations in any system include the possibility of undetected errors or irregularities. Also, significant changes in circumstances could result in inadequate current procedures, or deterioration in compliance with those procedures. Management believes that the effectiveness of Monsanto's system is maintained by: (1) personnel selection and training; (2) division of responsibilities; (3) establishment and communication of policies; and (4) on-going internal review programs and audits. As ratified by shareowner vote at the 1982 Annual Meeting, Detoitte Haskins & Sells was appointed to examine, and express an opinion as to the fair presentation of, the consolidated financial statements. This opinion appears on page 48. At management's request, Detoitte Haskins & Sells also expressed an opinion, which appears below, on the internal accounting control system in the United States. Monsanto's Audit Committee, consisting of four non-employee directors, periodically meets with representatives of the ControHership Staff, the Internal Audit Staff and Detoitte Haskins & Sells to review internal controls, financial reporting and accounting practices. Both the independent and internal auditors have complete access to meet with the Committee, with or without the presence of management, to discuss their examinations, the adequacy of internal controls and the quality of financial reporting. Independent Auditors' Opinion on System of Internal Accounting Control John W. Hanley ' Chairman of the Board and Chief Executive Officer Francis A. Stroble Senior Vice President and Chief Financial Officer February 25,1983 We have made a study and evaluation of the system of internal accounting control of Monsanto Company and its United States subsidiaries in effect during the year ended December 31,1982. These companies constitute approximately 81 percent of con solidated total assets at December 31,1982 and approximately 71 percent of 1982 consolidated revenues. Our study and evaluation were conducted in accordance with standards established by the American Institute of Certified Public Accountants. The above report explains management's responsibility for maintaining a system of internal accounting control and the objectives and limitations of such a system. In our opinion, this system of internal accounting control in effect during the year ended December 31,1982, taken as a whole, was sufficient to meet the objectives referred to above that pertain to toe prevention or detection of errors or irregularities in amounts material in relation to the consolidated financial statements. Saint Louis, Missouri February 25,1963 DSW 021477 STLCOPCB4006786 Rviw of the Results of Operations 33 1982 1981 Worldwide recession impacts sales Consolidated Solos $6,325_________________ 6,948_________________ 6,574_________________ Sales for 1982 decreased 9 percent as compared to 1981. In 1981, sales were 6 percent higher than the prior year. Sales volume for 1982 was down 11 percent versus 1981, with 1981 sales volume down 2 percent from the previous year. Higher selling prices contributed approximately 2 percent to 1982 sales in contrast with 1981 selling price increases of approximately 8 percent over the prior year. Sales volume the last two years was adversely impacted by worldwide recessionary conditions, especially in those businesses dependent on the automotive and housing industries. Polymer products, industrial chemicals and man-made fibers were particu larly affected. Although agricultural sales in 1982 were negatively impacted by the farm economy's depressed financial condition, sales did increase albeit at a more modest rate than in the past. Divestitures of various businesses (see "Principal Divestitures" note to the financial statements) adversely impacted both 1982 and 1981 sales. The continuing strength of the United States dollar against many foreign currencies also negatively impacted domestic export sales. 8ales by Product Group Agricultural and Nutritional Products Agricultural products Nutrition chemicals Tbtal Ftbar* and tntsmwdlatss Man-made libers Textile intermediates fetal industrial Chemicals Detergent and fine chemicals Specialty chemicals fetal Polymer Products Plastics Resin products Rubber chemicals and instruments fetal Engineered Products and Other Businesses Engineered products and materials Oil &gas fetal Fisher Controls Valves, regulators & electronic process controls fetal consolidated Sm "Rotatament" discussion on page 37. 1982 $1,168 148 1,311 880 377 1,257 552 258 810 775 742 269 1,788 357 216 573 1981 $1,099 135 1,234 1,014 418 1,432 609 289 898 1,052 813 282 2,147 414 186 600 588 $6,325 637 $6,948 DSW 021478 1980 $ 905 125 1,030 1,041 330 1,371 608 282 890 1,094 807 298 2,199 365 126 491 593 $6,574 STLCOPCB4006787 34 Profitability sustained in difficult economic climate by cost reduction and asset management programs Consolidated Nat Income $352_________________________ 445_________________________ 149_____________ _____ Reported net income fa 1982 was off 21 percent from 1981 's results. Part of this decrease is attributable to unusual and extraadinary items year-to-year. However, the decline also reflects recessionary conditions, excess manufacturing capacity and depressed prices in the chemical industry worldwide. In 1981, net income was up significantly versus 1980, but unusual items in 1981 and 1980 also impact this comparison. Net income in 1982 benefited from a $23 million extraadinary gain on the exchange of outstanding debt fa common shares. Lcrwer equity income from affiliated companies, which also includes substantially all of the Mexican peso devaluation impact, adversely impacted 1982 results. Net income fa 1981 included a $68 million gain from the sale of net assets related to a joint venture. In 1980, net income was significantly depressed by charges totaling $108 million related to various divestitures. See the "Principal Divestitures" note to the financial statements. During the past few years, Monsanto has initialed comprehensive programs of asset management and cost reduction. These programs were significant contributors to minimizing the 1982 net income decline by lowering the overall breakeven point of manufacturing facilities. Inventory levels were curtailed as part of these programs and resulted in aftertax income of $43 million and $21 million in 1982 and 1981, respectively, from nonreplacement of low cost inventories under the LIFO (last-in, first-out) inventory method. Aftertax foreign currency losses in 1982 of $6 million were reported under a new accounting method. In 1981, reported foreign currency gains were $29 million, up substantially versus 1980. See the "Foreign Currency'' discussion on page 39. The effective tax rate for 1982 was lower than in 1981 due principally to the larger impact of investment tax credits. In 1981, the effective tax rate was higher than in 1980 as a result of lower investment tax credits and Domestic International Sales Corpora tion (DISC) tax benefits. Earnings per share were $8.79 in 1982, versus $11.50 and $4.10 in 1981 and 1980, respectively. In 1982 and 1981, earnings per share were impacted by additional shares issued in those years. Pro forma earnings per share fa 1982 are disclosed in the "Earnings per Share" note to the financial statements. Analysis of Chang# In Earnings par Share -- Increase (Decrease) 1982 vs. 1981 1981 vs. 1980 SeMng prices Sales volume and mix Raw material prices Other manufacturing costs Divestitures Start-up costs Normanufacturing expenses Operating Income S 2.30 (3.96) 2.77 (1.22) (2.01) (0.09) (1.13) (3.34) $10.31 2.87 (3.47) (4.10) 4.72 0.62 (1.14) 9.81 Interest expense Other income credits -- net Effective tax rate Extraordinary item Shares outstanding 0.31 (0.36) 0.40 0.58 (0.30) 0.22 (0.31) (1-55) (0.77) Change In eemlngs per share $(2.71) $ 7.40 OSH 021479 STLCOPCB4006788 Quarterly Results Year 1982: Ibtal Quarter Ftrat Second Third Fourth 35 Net Setae $1,732 1,823 1,505 1,485 $8,325 Coat of Gooda Sold $1,264 1,240 1,166 1,142 $4,812 Aftertax Foreign Currency GaJna (Loasee) $ 14 (D (8) (11) $ (6) Not Income $147 87 71 47 $352 Earnings Pr Share $ 3.71 2.17 1.79 1.12 $ 8.79 Agricultural seasonality; cost reduction programs; nonrecurring items; and recession impact results 1981: total First Second Third Fourth $1,900 1,856 1,634 1,558 $6,948 $1,390 1,473 1,190 1,248 $5,301 $ 10 23 (D (3) $ 29 $176 94 123 52 $445 $ 4.81 2.35 3.09 1.25 $11.50 Income before the extraordinary gain on the exchange of outstanding debt for common shares was $24 million ($0.54 per share) for the fourth quarter of 1982. Quarterly consolidated sales and income typically exhibit the seasonality of the agri cultural business. Agricultural products' sales are heavily concentrated in the first half of the year, particularly in the first quarter, and have greater profitability than other lines of businesses. On a year-to-year basis, quarterly consolidated sales in 1982 trailed those of 1981. However, it is important to note that the period-to-period sales compari son reflects a combination of business divestiture impacts, year-to-year recessionary factors, and the influence of a strengthening United States dollar on export sales. Al quarterly results in 1982, as compared to the corresponding prior year's quarter, reflect the impact of the adoption of a new accounting method for foreign currency translation (see "Foreign Currency'' on page 39). Other nonrecurring and/or unusual items impacting 19621s results are as follows: First Impact on Earnings per Share Quarter Second Quarter Third Quarter 1982 Fourth Quarter Gain from nonreplacement of lew cost inventory tiers under UFO method $0.06 $0.13 $0.13 $0.76 Mexican peso devaluation 0.25 0.02 (0.18) (027) Gain or toes from fadWes shutdown a add (0.22) 0.03 (0.07) Earty retirement program cost (0.05) (0.21) Extraordinary gain on exchange o< debt tor common shares Ibtal $041 $(0.07) $(0.07) 0.58 $0.79 Third quarter 1981 includes a $1.75 per share gain from the sale of the Company's net assets related to a joint venture. In 1981, aftertax gains from nonreplacement of low cost inventories under the LIFO method were $0.09, $0.12, $0.18 and $0.16 per share in the first through fourth quarters, respectively OSW 021480 STLCOPCB4006789 36 Operating Unit Sogment Data 1982 Agricultural and Nutritional Products fibers and Intermediates Industrial Chemicals Polymer Products Engineered Products and Other Businesses fisher Controls Eliminations Corporate expenses "total operating Income charges -- net Nonoperating assets lbtal consolidated Net Sale* $1,311 1,257 810 1,786 573 588 6,325 Operating Income (Lota) $426 (25) 100 23 (27) 52 (5) (43) 501 -- $6,325 $501 "total Aaseta $1,180 1,152 779 1,138 985 418 5,652 425 $6,077 Depreciation and Obsolescence $ 71 136 56 76 85 13 Capital Expenditures $125 91 163 73 188 27 2 439 667 $439 6 $673 1981 Agricultural ana Nutritional Products fibers and Intermediates Industrial Chemicals Polymer Products Engineered Products and Other Businesses fisher Controls ETimlnalions Corporate expenses "total operating Income charges -- net Nonoperating assets "total consolidated $1,234 1,432 898 2,147 600 637 6.948 $6,948 $414 36 140 77 5 68 (2) (36) 702 9 $693 $1,011 1,300 670 1,390 853 435 5,659 410 $6,069 $ 55 96 68 (25) 54 13 2 263 $263 $108 118 105 97 210 24 662 6 $668 1980 Agricultural and Nutrtional Products fibers and Intemnedates Industrial Chemicals Polymer Products Engineered Products and Other Businesses fisher Controls Eliminations Corporate expenses Total operating Income charges -- net Nonoperating assets "total consolidated $1,030 1,371 890 2,199 491 583 6,574 $6,574 $355 (270) 171 (82) 5 72 (2) (39) 210 4 $206 $ 811 1,449 618 1,601 634 413 5,526 270 $5,796 $ 43 231 63 157 41 10 2 547 $547 $ 75 152 127 218 180 23 775 6 $781 Th above data should to (tod in conjunction with theuRestatement" dtacuaalon which follows and the "Segment Information'' note to financial state ments on page 56. DSW 021481 STLCOPCB4006790 Internal operating structure reorganized Agricultural business strong but impacted by weak farm economy Man-made fibers hard hit by recession Industrial chemical markets depressed Weak automotive and housing markets impact polymer products 37 Restatement Effective January 1,1983, Monsanto's internal operating structure was reorganized to integrate raw materials with downstream products and to better serve related markets and technologies. Consistent with this new direction, certain product management responsibilities were realigned. The Company is using a market-based transfer price policy for materials moving between operating units. All operating unit financial data shown in this Annual Report have been restated to reflect the reorganization. Prior to the reorganization, certain chemicals such as acrylonitrile, ammonia, styrene monomer, nylon salt, phosphorus and phenol were used by several operating units as intermediate "building block" materials. One operating unit was responsible for the management of the manufacturing operations related to most of these materials. However, each operating unit that used the "building block" chemicals in the manu facture of end products was considered to be the joint owner of the manufacturing facilities and shared the product manufacturing costs and investments based on its annual production commitment. Agricultural and Nutritional Products Sales for 1932 were up 6 percent over 1981 levels due to the full year impact of prior period selling price increases and 1982 volume improvements, with 1982 operating income growing 3 percent Despite the poor U.S. farm income situation, sales of Lasso and Roundup herbicides improved over 1981 levels, but Roundup sales growth in 1982 was less than experienced in prior years for this leading crop chemical. Nutrition chemicals, sales continued to grow in 1982. In 1981, agricultural and nutritional products' sales increased 20 percent from the prior year, with a 17 percent increase in operating income. Fibers and Intermediates In 1982, sales declined 12 percent from 1981 levels due to recession driven volume decreases and discontinuation of the polyester staple business. The 1982 operating loss, as compared to a 1981 profit reflects significant reduction in man-made fibers industry demand, a $15 million obsolescence charge for the polyester staple discontinuation and a $20 miHion loss on the planned sale of the acrylic fibers business in Europe. These factors were mitigated somewhat in 1982 by an $18 million reduction in the estimated costs related to prior years' shutdowns and a $20 million favorable impact from nonreplacement of lower cost UFO inventories. Although impacted by the 1980 withdrawal from the polyester filament business, sales in 1981 were up 4 percent versus 1980. Operating results improved in 1981, favor ably impacted by a $25 million gain due to nonreplacement of low cost LIFO inventories. In 1980, operating results included a $121 million writeoff for the polyester filament discontinuation. Industrial Chemicals Sales for 1982 decreased 10 percent from the prior year and related operating income was down 29 percent. Depressed activity in several markets served by these products accounts for the year-to-year decrease. Operating income in 1982 includes a $27 million favorable impact from the nonreplacement of low cost UFO inventories and an $11 million net gain as a result of the sate or shutdown of various production facilities. In 1981, sates were flat compared to 1980, and operating income was down 18 percent due to the recessionary conditions that were also evident in 1981. Polymer Products Sates decreased 17 percent in 1982 versus 1981 due to declin ing volumes as a result of recessionary conditions, particularly in the automotive and housing markets, and a 1981 divestiture. Operating income also declined in 1982. The year-to-year decline was due to inclusion in 1961 of a $124 million gain from the divest iture. Excluding this item, operating income improved in 1982 reflecting benefits from asset management and cost reduction programs and a $35 million favorable impact from nonreplacement of low cost UFO inventories. Offsetting these favorable factors in 1982 were poor economic conditions and a $15 million charge for shutdowns of various production facilities. Sates in 1981 were down slightly versus 1980, although operating results improved substantially. This improvement was principally due to a $124 million gain from a 1981 sate of net assets related to a joint venture, whereas 1980 was negatively impacted by a $66 million charge from a divestiture. Engineered Products and Other Businesses This operating unit segment includes fabricated products, electronic materials, chemical and environmental systems and oil and gas activities. Sates decreased ever 4 percent in 1982 versus 1981 due principally to the Monsanto Enviro-Chem Systems, Inc. (Enviro-Chem) -- a DSW 021482 STLCOPCB4006791 38 Other businesses also hurt by the recession Depressed capital spending impacts Fisher Ex-U.S. sales and income depressed by global recession and strong U.S. dollar European economies generally weak Canadian economy weak; Mexican peso impacts profits subsidiary -- reduced level of construction projects and lower fabricated products sales. These reductions were offset partially by increased Oil and Gas sales. Operat ing results wete down significantly in 1982 from 1981 levels mainly because of higher idle plant costs in the electronics' business, fewer Enviro-Chem construction projects, and lower fabricated products business. In 1981, sales increased 22 percent over 1980, although operating income was flat due to start-up and idle plant costs in the electronics business, partially offset by better Oil and Gas and Enviro-Chem profitability. Fisher Controls Sales were down 8 percent in 1982 compared to 1981, and oper ating income decreased 24 percent. Lower sales in 1982 were due to the depressed level of worldwide capital spending, particularly in the oil and gas industry, and increased competition and economic instability in Mexico. These factors were offset somewhat by higher selling prices. In 1981, sales increased 7 percent over the prior year, although operating income was down slightly. A combination of selling price and volume increases accounts for the 1981 sales improvement, but a strong U.S. dollar and a faltering European economy adversely affected that year's results. International Area Baals Data The world area segment data in the notes to the financial statements on pages 56-57 were prepared on an "entity basis" -- i.e., sales and income as recorded in the finan cial statements of the legal entity are assigned to the world area where the entity is located (e.g., a sale from a United States' subsidiary to a customer in Brazil is reported as a United States transaction). This presentation is required by generally accepted accounting principles. However, Monsanto views internal financial results on an "area basis'' wherein sales and income are assigned to the world area where the customer is located (e.g., a sale from a United Stales' subsidiary to a customer in Brazil is reported as a Latin American transaction). The table and discussion which follow summarize Monsanto's "area basis" results of operations. International Sales and Operating Incoma 1982 1981 1980 Sales by ex-US. subsidiaries (entity basis) U.S. export sales Inter-area eSrrunations International sales (area basts) $1,976 864 (801) $2,239 $2,218 1,042 (698) $2,562 $2,199 1,027 (625) $2,601 Operating income (loss) o( ex-US. subsidiaries (entity basis) U.S. export operating profit, net of allocated admnistralive expenses Equity in ex-US. affiliates' net income (loss) International operating income (area basis) $ 80 35 (11) $ 104 $ 104 76 34 $ 214 $ (7) 142 16 $ 151 Europe-Afrfca Area sales for 1982 were $1,092 million, down 14 percent from 1981 levels because local manufacturing operations were depressed by general recession ary factors. Area operating income for 1982 was $48 million, a decrease of 25 percent from 1981. Included in 1982 results was a $20 million loss on the planned sale of the acrylic fibers business in Europe and a $4 million net charge due to the discontinua tion or sale of other production facilities in the United Kingdom. The change in accounting principles for foreign currency translation (see "Foreign Currency" on page 39) favorably impacted the 1982 to 1981 income comparison. In 1981, area sales were down from the prior year reflecting the 1980 divestiture of the Company's Spanish subsidiary. Area operating results in 1981 were much improved over 1980, as the 1980 results reflected a $66 million charge due to the divestiture. Canada-Latln America Area sales in 1982 were $597 million, down 14 percent from 1981 levels. Some Latin American economies were relatively strong but could not offset the impacts of the Mexican peso devaluation and of the significant recession in Canada Area operating income was $35 million in 1982, a 61 percent decrease from the prior year, reflecting lower results from Mexican operations including a $9 million loss from devaluation of the Mexican peso, decreased U.S. exports to the weak 0SU 021483 STLCOPCB4006792 U.S. exports suffer in Asia-Pacific 1982 1981 1980 Raw material and energy costs decline 1982 Research and development funding increased in 1982 39 Canadian and Brazilian economies, and an $8 million write-off from the shutdown of a Canadian production facility, in 1981, area sales and operating income increased as compared to the prior year. Asia-Pacific Area sales in 1982 were $550 million, an 8 percent decrease compared to 1981. Area operating income in 1982 was $21 million, a 67 percent decline from 1981. The decreased 1982 results were due principally to a lower level of U.S. exports. A stronger United States dollar versus other currencies adversely impacted the competitiveness of U.S. exports. In 1981, area sales and operating income improved over the prior period. Raw Materials and Energy $2,435 3,042___________________________________________________________________________ 2,990_______________________________ Raw materials and energy include petrochemical feedstocks and energy used in production processes. Overall, these costs decreased significantly in 1982, after a relatively small increase in raw material and energy costs in 1981 over 1980. Raw material prices decreased approximately 5 percent in 1982, following increases of approximately 13 percent and 25 percent in 1981 and 1980, respectively. Raw material contracts for key materials have been secured with terms and con ditions which support the economic and security of supply requirements of Monsanto's business units. In addition, the Company continues to have available hydrocarbon resources from its Monsanto Oil Company subsidiary, which resources can be used in hydrocarbon sourcing programs, if required. Research and Development $256____________________________ 225____________________________ 208____________________________ Research and development costs continued at a high level in 1982, increasing to 4 percent of sales as compared to 3 percent in 1981 and 1980. In addition to these period costs, substantial new capital expenditure commitments were made in 1982 for expanded research facilities at a new St Louis County, Missouri, location. This level of funding, in light of the worldwide recessionary conditions and necessary cost reduc tion measures in 1982, testifies to Monsanto's continuing commitment to generate new products and processes. Research in traditional areas of strength such as catalysis, polymer science, agricul tural chemistry, chemical engineering systems, and application research is on-going. The Company also has intensive and growing R&D programs in plant biology, animal nutrition, electronic materials, biotechnology, molecular biology, and human health care. In 1982, Monsanto entered into a five-year, $24 million collaborative agreement with Washington University aimed at discovering new therapies for major human diseases. In January 1963, Monsanto announced the formation of the Health Care Division which will coordinate the Company's biomedical research and development programs. Foreign Currency Classification of Gains (Lossss) Income Statement: Pretax gains (losses) Income taxes Aftertax gains (losses) Per share Balance Sheet: Accumulated currency adjustment net change 1982 (SFAS No. 52) 1981 (SPAS No. 8) 1980 (SPAS No. 8) * (15) (9) * () #0.16) $ (28) (57) $ 29 $0.75 $ 12 11 $1 $0.03 $<10) DSW 021484 STLCOPCB4006793 40 New accounting method adopted for foreign currency impacts Mexican peso devaluation adversely impacts profitability Cumulative effects of inflation continue to distort historical results As mentioned in the Summary of Significant Accounting Policies, Monsanto adopted Statement of Financial Accounting Standards No. 52 (SFAS No. 52), "Foreign Currency Translation," beginning in 1982. Accordingly, in 1982 most ex-U.S. assets and liabilities were translated at current exchange rates and most translation impacts were reflected in a new accumulated currency adjustment account in shareowners' equity. In addition to the reported impacts as reflected in the above table, income was adversely impacted in 1981 under SFAS No. 8 (the previously required translation procedures) by the use of historical currency rates to translate inventory and deprecia tion expense. The Company significantly reduced its hedging actions (i.e., the use of forward exchange contracts) in 1982. Because of hedging actions by the Company under SFAS No. 8, it is not practical to restate prior years' foreign currency impacts on a basis comparable to 1982. Also, for the same reasons, 1982 foreign currency impacts were not accumulated on a "pro forma" SFAS No. 8 basis. The 1982 reported foreign currency loss was principally due to the Mexican peso devaluations. The 1981 aftertax gain reflects the general strengthening of the United States dollar against several currencies. The Company's ex-U.S. subsidiaries and affiliates generally use the local currency as the functional currency under SFAS No. 52 because of their relatively "self-contained" operations. Working and fixed capital needs for these entities are generally met through internal operations aid local country borrowings, supplemented by additional equity capital or intercompany borrowings from the Company when appropriate or necessary. Monsanto has subsidiaries or affiliates in Argentina, Brazil and Mexico, fa which the U.S. dollar was designated the functional currency because of the hyperin flationary conditions in those countries. There are no currency restrictions that are expected to have a significant impact on the Company's total cash flow, liquidity a capital resources as a result of ex-U.S. operations. Monsanto's major functional currencies, in terms of currency exposure, are the United Kingdom pound sterling and Belgian franc. Other important currencies include the West German mark, French franc, Canadian dollar and Australian dollar. Significant currencies of Monsanto's equity affiliates are the Japanese yen and Mexican peso. Inflation-Adjusted Data Year ended December 31,1982 Current Cost Historical (In Average Cost 1982 Dollars) Net safes Cost of goods sold, excluding depreciation Depreciation expense Marketing, administrative and technological expense Other expense and income -- net Income taxes Income before extraordinary Item $6,325 4,416 396 1.012 -- 172 $ 329 $6,325 4,499 567 1,012 -- 172 $ 75 The "current cost" disclosures, which reflect adjustments based on estimates of the current cost to replace existing assets in kind, attempt to measure the impact of infla tion on specific Monsanto assets. The following items are adjusted fa inflation: inventories; property, plant and equipment; cost of goods sold; and depreciation expense. Income tax provisions are not adjusted fa the inflation effects. All current cost data is stated in average 1982 dollars using the U.S. Consumer Price Index -- All Urban Consumers calculation method. This method is otherwise known as the "translate-restate" method. In a period of inflation, historical cost earnings can overstate the ability of most manu facturing companies to generate cash flow from operations sufficient to provide for business and dividend growth in a "real" sense. Inflation's effects must first be "financed" from historical cost earnings by inaeased expenditures to replace worn out and obsolete facilities. While many of these facilities will not be replaced in their current form as the computational methods of the current cost data suggest -- tech- DSW 021485 STLCOPCB4006794 Profit improvement programs, asset redeployment and technology advances lessen inflation impact 41 nologicai advances will be incorporated as replacement occurs and some facilities will never be replaced -- nevertheless, the data are useful in approximating certain infla tion effects. To maintain profitability in an inflationary environment, Monsanto increases selling prices as cost and competitive conditions warrant and continually searches for ways to reduce costs. Improved technology, increased productivity and successful energy conservation and asset management programs allow Monsanto to remain competitive from a selling pnce standpoint, while mitigating some of the impact of rising costs. In addition, management is constantly reviewing Monsanto's businesses to determine those with tong-term economics that will not justify continued investment. Monsanto has disposed of several such businesses in recent years. The 1982 increase in current cost of inventories and property, plant and equipment, stated in average 1982 dollars, was $144 million. At December 31,1982, the current cost of inventory and property, plant and equipment (net of accumulated depreciation) was $1,272 million and $4,230 million, respectively, stated in yearend 1982 dollars. Inventories determined on a FIFO (first-in, first-out) basis were used to approximate inventories on a current cost basis. Cost of goods sold as determined on a UFO basis (after adjustment for the impact of nonreplacement of low cost inventories) or similar techniques were used to approximate cost of goods sold on a current cost basis. The current cost of property, plant and equipment was generally estimated using appropnate construction and equipment indices. Accumulated depreciation for the current cost of existing facilities and related expenses were estimated using the same overall methods and rates as used in the historical cost financial statements. Selected Financial Data 1982 Historical coat, as reportad (see notes): Net sales Income before extraordinary item Income before extraordinary item per share total assets Long-temi debt Dividends per common share $6,325 329 8.21 6,077 1,003 3.95 Currant coat data. In avaraga 1982 dollars: Income (toss) before extra ordinary item Income (toss) before extra ordinary tern per share Purchasing power gain on net monetary items Increase in specific prices of inventory and property over (under) increese caused solely by general inflation 75 1.87 33 (73) Aggregate fcragn currency translation adp-istment, net of income taxes Net assets (178) 4,799 Other data. In average 1962 dollars: Net safes 8,325 Dividends per common share 3.98 Market pnce of common stock at yearend $75.39 Avaraga consumer price index 289.1 1961 $6,948 445 11.50 6.069 1,110 3.75 225 5.81 104 (32) 5.179 7.374 4.01 $72.02 272.4 I960 $6,574 149 4.10 5.796 1,371 3.55 (36) (100) 158 (327) 4.762 7,702 4.20 $76.80 246.8 1979 $6,193 331 9.11 5,539 1,203 3.35 250 6.87 163 128 4,952 8,235 4.51 $74.97 2174 1978 $5,019 303 8.29 5,036 1.224 3.175 7.426 4.73 S67 00 195.4 Currency D'anaJation," were adopted. Beginning In 1980, interest costa related to constructiorvinprogresa expenditures were capitalized In accordance with Statement ot Financial Accounting Stan dards No. 34, Capitalization of Interest Cost.1' In yearn prior to 1980, all Interest costs were expensed as incurred. The effect of the new accounting principle was to increase 1980 net income by $28 million, or $0.76 per share. DSW 021486 STLCOPCB4006795 42 Itovtow of Uquktty and Capital Rasourcas 1982 1981 1980 Monsanto maintains strong cash position while funding future growth opportunities Working capital position improves Short-term debt decreases Short-Term Liquidity and Capital Reaourcas _________________ Funds Provided from Operations ~ $880____________________________________________________________________ 806________________________________________________________________ _____________ 668___________________________________________________ _ Monsanto's 1982-1980 sources and uses of funds, defined as cash, time deposits, certificates of deposit and short-term securities, are shown in the Statement of Changes in Ccnkrfidated Financial Position on page 52. Monsanto has substantially maintained its strong cash position at yearend 1982, with cash and cash equivalents decreasing slightly to $414 million as compared to the 1981 level of $426 million. Funds provided from operations, before working capital changes, increased $74 million in 1982 versus 1981. A continued emphasis on man aging the Company's assets has resulted in good control over working capital requirements, while capital expenditures in the last two years have been essentially level. In addition, funds were provided by new common shares issued during 1981 and used to liquidate outstanding debt In 1981, significant proceeds were also received from the sale of the Company's net assets related to a joint venture. While cash is generated by operations throughout the year, significant receipts from agricultural products sales are concentrated in the first half. Tax and dividend payments are generally made quarterly, but most other significant sources and uses of funds occur throughout the year with the general level of operations. The current ratio, an indication of liquidity, continued to improve in 1982 to 2.6:1. The 1981 current ratio was 2.4:1 compared to 2.1:1 in 1980. Management believes a work ing capital ratio of at least 2.0:1 is desirable. Working capital (current assets less current liabilities) increased in 1982 to $1,503 million as compared to $1,486 million in 1981, as current liabilities declined more than current assets. Inventory reductions in 1982 reflect continued stringent control of inventory levels and the discontinuation of certain product lines. Yearend 1982 receivables were comparable with 1981. The Company has available various short-term bank facilities, which are further discussed in the "Short-Term Debt and Bank Credit Arrangements" note to the finan cial statements. When necessary, short-teim lines of credit and commercial paper are used to finance working capital and provide "bridge" financing for capital require ments until more attractive rates prevail in long-term debt markets. Short-term debt decreased to $131 million in 1982 as compared to $175 million in 1981. DSW 021487 STLCOPCB4006796 1982 1981 1980 Ample capital resources provide future flexibility Monsanto has available various long-term financing alternatives Long-Hirm Liquidity and Capital Resources Capital Expenditures ' $673______________________________________________ 668__________________________________ 781 43 Capita) expenditures shown in the graph include $46 million, $44 million and $52 million of capitalized interest for 1982-1980, respectively. At December 31,1982, Monsanto had purchase orders and contracts outstanding amounting to approximately $126 million in connection with uncompleted additions to property. Expenditures for capital equipment are typically financed by a combination of cash provided from operations and long-term debt. In 1981, the Company issued 3,000,000 new common shares and used the proceeds to reduce debt that had been incurred to fund the capital expenditure program. Long-term debt was further reduced in 1982 through an exchange for 988,075 common shares. As a result of the common share issuances and the reduction of long-term debt the long-term debt to capitaliza tion ratio decreased to 22 percent in 1982 as compared to 25 and 33 percent in 1981 and 1980, respectively. Over the tong term, Monsanto believes that its appropriate long-term debt to capitalization ratio is approximately 33 percent. The interest cover age ratio (times), excluding the 1982 extraordinary item and the effect of capitalized interest, was 4.6 in 1982, as compared to 5.5 in 1981. The Company has made extensive use of pollution control and industrial development bonds, including an additional $38 million in 1982, to finance qualified projects. Because of the tax status of these obligations, the associated interest rates are very favorable. The Company wil continue to pursue this form of financing when available in the future. While industrial development bond obligations now comprise 25 percent of all Monsanto's outstanding long-term debt, the individual issues have not been substantial. In addition to the use of long-term debt, Monsanto has occasionally used other forms of financing, prtocipally lease arrangements and joint venture arrangements involving take-or-pay contracts. These alternative forms of financing are used when the effective interest cost is attractive or the nature of the capital project requires their use. The Company wi consider using lease, joint venture and ether innovative financing arrangements in the future, as appropriate, but the extent of their use in Monsanto's overall financial structure has not been significant to the past. Virtually ai of the assets reflected in Monsanto's financial statements are free from lien and are not used to collateralize debt. Accordingly, these assets represent a source of additional debt capacity, although the Company has no present plans to pursue this source of financing. Through the Monsanto Oil Company subsidiary, Monsanto is involved to oil and gas exploration activities and owns reserves with a significant current value that is not reflected to the accompanying financial statements. The Company's proved reserves represent a valuable asset that could be used to increase its total debt capacity. In addition, Monsanto Oil Company's undeveloped acreage, or some portion of it, could be used in future joint arrangements with outside parties to provide funding for explo ration and development of the acreage. OSH 021488 STLCOPCB4006797 44 Common Stock Data Dividend* per Common Share Quarter First Second Third Fourth Total year 1982 $0.95 1.00 1.00 1.00 $3.95 1981 $0.90 0.95 0.95 0.95 $3.75 Common Stock Price* Quarter High First Second Third Fourth $70% 88% 79% 89 1982 Low $60 9ce07/* 57% 72 High $77% 87% 81% 72% 1981 Low $67 69% 59% 60% Dividends increase for 10th consecutive year Shareowners'equity per common share 1982 $85.97 1981 $84.37 Monsanto's common stock is traded principally on the New York Stock Exchange. The number of common shareowners of record as of February 22,1983, was 74,979 and the high and low common stock price on that date was $84%-$837/e. During the past two years, the Company issued nearty 4,000,000 additional new common shares in two major transactions. In addition, Monsanto has convertible preferred stock, convertible debentures and convertible loan stock outstanding which result in periodic issuances of common stock upon conversion. Common shares are also regularly issued under employee stock option plans. There were 2,146,379 common shares reserved for convertible securities and stock option plans at Decem ber 31,1982. A treasury stock acquisition program is in place to mitigate, when appropriate, the dilutive effect of the issuance of common shares under stock option and employee stock ownership plans and outstanding convertible securities. Also, the Company has an employee stock purchase program whose requirements are imme diately funded with the purchase at treasury shares. The Company has paid dividends on its common shares -- without interruption or reduction -- since 1928. The dividend is paid quarterly and has been increased in each of the past ten years. The dividend payout of 46 percent for 1982 is slightly higher than the average dividend payout over the last ten years because of the increased dividend rate and the somewhat lower level of earnings in 1982. The Company's dividend policies are not necessarily tied to a set payout percentage. DSW 021489 STLCOPCB4006798 ON and das Activities 45 1982 1981 1980 Quantities of proved reserves increase Proved Reserves (Oil Equivalent-Millions of Barrels) 139_____________________________________________________ 134_____________________________________________________ 133 In recent years, Monsanto has expanded its exploration efforts for hydrocarbon reserves. The Company's former Oil and Gas Division was established in 1982 as a separate wholly-owned subsidiary, Monsanto Oil Company, with activities principally located in the United States. Certain data regarding Monsanto Oil Company follow. Net Quantities of Proved Reserves Developed and Undavalopad Raaarvaa December 31,1979 Revisions of previous estimates Purchases of minerals-in-place Extensions and discoveries Production December 31,1980 Revisions of previous estimates Purchases of minerals-in-piace Extensions and discoveries Production December 31,1981 Revisions of previous estimates Purchases of mbwrals-in-ptacs Extensions and discoveries Production December 31,1982 011(1) 29 4 (3) 30 (D 2 6 (3) 34 2 1 5 (4) 38 Natural Gas(2) 614 (24) 1 64 (36) 619 (26) 1 45 (40) 599 46 (38) 607 (1) Stated in milions of barrels. (2) Stated In buttons of cubic teat (Bcf). In determining the estimated future cash inflow data which follow, actual 1982 yearend selling prices for oil and gas were used as prescribed by Statement of Financial Accounting Standards No. 69, ''Disclosures about OH and Gas Producing Activities.'' Similarly, future production and development costs were determined by using the actual 1982 yearend cost levels. A discount rate of 10 percent was used. The Compaty cautions that changes in the discount rate, future selling prices, or cost, production or reserve estimates made in developing the data could significantly affect the results. The capitalized costs of proved reserves, net of related accumulated depreciation, depletion and amortization, were $346 million as of December 31,1982. DSW 021490 STLCOPCB4006799 46 Discounted future net cash flows from proved reserves remain significant Standardized Measure of Discounted Future Net Cash Rows Future cash inflows Future production and development costs Future income tax expenses Future net cash flows Annual discount for estimated timing of cashflows Standardized measure of discounted future net cash flows Change In Standardized Measure of Discounted Future Net Cash Flow Beginning of year Sales, net of production costs Net change in prices and production costs Extensions, discoveries and improved recovery, less related costs Purchases of minerals-in-place Development costs incurred Revisions in previous quantities Accretion of discount Net change in income taxes Other, principally change in estimate of production rata End of year 1982 $3,491 738 1,190 1,565 1,113 $ 452 1981 $3,003 530 1,064 1,409 950 $ 459 1980 $2,945 471 1,102 1,372 1,053 $ 319 1982 $459 (149) 52 118 10 4 16 48 37 (141) $452 1981 $319 026) 5 123 39 23 (30) 32 (65) 139 $459 1980 $202 (88) 211 58 3 8 (16) 20 (80) 1 $319 DSW 021491 STLCOPCB4006800 Summary of Significant Accounting Policies Financial Statements 47 Basis of Consolidation The consolidated financial statements include the Company and its majority-owned subsidiaries. Intercompany transactions have been eliminated in consolidation. Investments in affiliates in which Monsanto has an owner ship interest between 20 and 50 percent are accbunted for by the equity method. Foreign Currency Ihmslation Effective January 1,1982, foreign currency trans actions and financial statements are translated in accordance with Statement of Financial Accounting Standards No. 52 (SFAS No. 52). The functional currency of substantially all ex-U.S. subsidiaries is the local currency. Intercompany advances to ex-U.S. subsidiaries are generally presumed to be of a long-term investment nature. The hyperinfiationary countries in which Monsanto had significant operations in 1982 were Brazil, Mexico and Argentina . For 1980 and 1981, foreign currency transactions and financial statements were trans lated in accordance with Statement of Financial Accounting Standards No. 8. It was not practical to restate these years under SFAS No. 52. Depreciation The straight-line method of computing depreciation is generally used, with approximate weighted average assigned lives of 23 years for buildings and 12 years for machinery and equipment Income Ifexee Investment tax credits are recorded as a reduction erf income tax expense in the year they offset the Federal income tax liability. Income taxes have not been provided on undistributed earnings of ex-U.S. subsidi aries since any taxes on dividends would be substantially offset by foreign tax credits. Income taxes have not been provided on a substantial portion of the undistributed earnings of domestic subsidiaries, including domestic international sales corporations (DISC'S), because Monsanto intends to indefinitely reinvest those earnings. Inventory Valuation Inventories are stated at the lower of cost or market. Actual cost is used for raw materials and supplies, and standard cost, which approximates actual cost is used for finished goods and goods in process. Standard cost includes elements for direct labor, raw material and manufacturing overhead based on practi cal capacity. The cost of substantially aM domestic inventories is determined by the last-in, first-out (UFO) method. The cost of other inventories is generally determined by the first-in, first-out (FIFO) method. Oil and Gas Activities Oil and gas exploration and production activities are accounted for using the successful efforts method. DSW 021492 STLCOPCB4006801 48 Independent Auditors' Opinion on Financial Statements lb the Shareowners of Monsanto Company: We have examined the statement of consolidated financial position of Monsanto Company and Subsidiaries as of December 31,1982 and 1981 and the related state ments of consolidated income, shareowners' equity and changes in financial position for each of the three years in the period ended December 31,1982. Our examinations were made in accordance with generally accepted auditing standards and, accord ingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, such consolidated financial statements present fairly the financial posi tion of Monsanto Company and Subsidiaries at December 31, 1982 and 1981, and the results of their operations and changes in their financial position for each of the three years in the period ended December 31,1982, in conformity with generally accepted accounting principles consistently applied during the period except for the change, with which we concur, in 1982 in the method of translating foreign currency trans actions and financial statements as described in the Summary of Significant Accounting Policies. Saint Louis, Missouri February 25,1983 DSW 021493 STLCOPCB4006802 Statement of Consolidated Income (Dollars in millions, except per share) Net Sales Cost of goods sold Marketing and administrative expenses Technological expenses Operating Income Other expense and income: Interest expense Interest income Other income -- net Income Before Income Ihxes and Extraordinary Gain Income taxes Income Before Extraordinary Gain Extraordinary gain from exchange of debt for common shares Net Income Eamlnga per Share: Before extraordinary gain After extraordinary gain 49 Monsanto Company and Subsidiaries 1982 $6,325 4,812 691 321 5,824 501 82 63 19 -- 501 172 329 23 $ 352 $ 8.21 8.79 1981 $6,948 5,301 656 289 6,246 702 101 68 24 9 693 248 445 $ 445 $11,50 11,50 1980 $6,574 5,476 615 273 6,364 210 112 36 72 4 206 57 149 $ 149 $ 4.10 4,10 The above statement should be read in conjunction with page 47 and pages 54 through 57 of this report. DSW 021494 STLCOPCB4006803 50 Statement of Consolidated Rnancial Position (Dollara in millions, except pet snare) Assets Current Assets: Cash Time deposits and certificates of deposit Short-term securities, at cost which approximates market Trade receivables, net of allowances of $38 in 1982 and $39 in 1981 Miscellaneous receivables and prepaid expenses Inventories Investments end Other Assets: investments in affiliates Other assets Property, Plant and Equipment, at Cost: Land Buildings Machinery and equipment Mineral rights and oil and gas properties Construction-in-progress Less accumulated depreciation Tbtal Assets The atxve staamert aftould be mad In oonfurcMon paga 47 and pages 54 through 57 o* tna report. At December 31 1982 1981 $ 51 92 271 1,076 140 824 2,454 $ 82 127 217 1.073 178 873 2,550 137 175 173 160 310 335 61 675 4,920 625 249 6,530 3,217 3,313 $6,077 58 666 4,600 475 419 6,218 3,034 3,184 $6,069 DSW 021495 STLCOPCB4006804 Liabilities and Shareowners' Equity Current Liabilities: Accounts payable Wages and commissions Income and other taxes Miscellaneous accruals Short-term debt Long-lbrm Debt Deferred Credits and Other Liabilities: Deferred income taxes Other liabilities . Minority Interests in Subsidiaries Shareowners' Equity: Preferred stock -- authorized, 10,000,000 shares, no par value; issued and outstanding, 91,902 shares in 1982 and 99,151 shares in 1981 Common stock -- authorized, 100,000,000 shares, par value $2; issued, 40,966,159 shares in 1982 and 39,978,084 shares in 1981 Additional contributed capital Accumulated currency adjustment Reinvested earnings Less treasury stock, at cost (common shares of 368,548 in 1982 and 509,800 in 1981) Total Liabilities and Shareowners' Equity 51 Monsanto Company and Substiiaries At December 31 1982 1981 $ 379 102 123 216 131 951 1,003 $ 492 107 99 191 175 1,064 1,110 493 421 31 30 524 451 109 114 82 931 (122) 2,621 3,512 22 3,490 $6,077 80 853 2,423 3,356 26 3,330 $6,069 DSW 021496 STLCOPCB4006805 52 Statement of Changes In Consolidated Financial Position (Dollars in miners) Monsanto ComDany ana Subsidiaries Sources (Uses) of Funds Operations: Income before extraordinary gain Charges not using (credits not providing) funds: Depreciation and obsolescence Deferred income taxes Other -- net Funds provided from operations, before changes in working capital Investment and Other 'fransactions: Working capital changes: Trade receivables Inventories Other current assets Accounts payable and accrued liabilities Short-term debt Property, plant and equipment additions Net proceeds from sale of assets related to joint venture Property disposals Foreign currency adjustments Other -- net Financial ThansactJona: Issuance of common stock Long-term financing Long-term debt reduction Extraordinary gain from exchange of debt for common shares Dividends Increase (Decrease) In Funds 1982 $ 329 439 85 27 880 1981 $ 445 263 83 15 806 1980 $ 149 547 60 (88) 668 (3) 49 38 (69) (44) (673) 31 (60) 10 (721) 75 38 (149) 23 (158) (171) $ (12) 33 (41) 51 (23) (64) (668) 219 33 51 (409) 205 32 (273) (145) (181) $ 216 (21) 78 (36) 9 6 (781) 8 (70) (807) 266 (60) (128) 78 $ (61) Increase (Decrease) in Elements of Funds: Cash Time deposits and certificates of deposit Short-term securities Increase (Decrease) In Funds * (31) (35) 54 S (12) $ 37 23 156 $ 216 $1 10 (72) $ (61) The above statement should be reed in conjunction with page 47 and pages 54 through 57 o( this report DSW 021497 STLCOPCB4006806 Statement of Consolidated Shareowners' Equity (Do!ars in millions, except per share) Preferred Stock: Balance, January 1 Conversion to common stock (7,249, 23,988 and 35,042 shares in 1982-1980, respectively) Balance, December 31 Common Stock: Balance, January 1 New shares issued (988,075 and 3,000,000 shares in 1982-1981, respectively) Balance, December 31 Additional Contributed Capital: Balance, January 1 New shares Issued Other Balance, December 31 Accumulated Currency Adjustment: Initial adjustment for SFAS No. 52 Translation adjustments Income taxes Transferred to net income Balance, December 31 Reinvested Earnings: Balance, January 1 Deferred taxes adjustment for SFAS No. 52 Net income Preferred dividends ($2.75 per share) Common dividends ($3.95, $3.75 and $3.55 per share for 1982-1980, respectively) Balance, December 31 Common Stock In Iteasury: Balance, January 1 Shares purchased (171,940,21,641 and 83,243 shares in 1982-1980, respectively) Conversion of convertible securities and issuances under employee stock plans (313,192,320,276 and 221,724 shares in 1982-1980, respectively) Balance, December 31 53 Monsanto Company and Subsidiaries 1982 1981 1980 $- -- S-- $ 80 2 $ 82 $- -- $- $ 74 6 $ 80 $- -- $- $ 74 $ 74 $ 853 73 5 $ 931 $ 652 199 2 $ 853 $ 653 (1) $ 652 $ (16) (111) 9 (4) $ (122) $2,423 4 352 -- (158) $2,621 $2,123 445 -- (145) $2,423 $2,102 149 -- (128) $2,123 5 (26) (13) 17 $ (22) $ (41) (D 16 $ (26) $ (48) (4) 11 $ (41) The above statement should be read in conjunction with page 47 and pages 54 through 57 of this report. DSW 021498 STLCOPCB4006807 54 Notes to Financial Statements Principal Divestitures In February 1983, the Company's Board of Directors approved the planned sale of the acrylic fibers business in Europe and the establishment of a 1982 loss prevision of $18 million ($0.46 per share) net of related taxes. The pretax loss of $20 million is reflected in obsolescence expense in cost of goods sold. An agreement in principle for the sale has been reached with the buyer, a company that is a joint venture partner with Monsanto in a nylon intermediates facility in the United Kingdom. The agreement also provides for Monsanto to purchase the buyeris interest in the nylon interme diates facility. The acrylic fibers business in Europe is a part of the Fibers and Intermediates operating unit and had 1982 sales of approximately $139 million. In August 1981, the Company sold its assets related to the MonsantryConoco joint venture. The CompanyS gain on the sale was recorded as a reduction of obsolescence expense in cost of goods sold in 1981 of $124 million, or $68 million ($1.75 per share) net of related tax effects. The facilities were a part of the Polymer Products operating unit in the United States and generated sales in 1981 of approximately $167 million. Cost of goods sold for 1980 included a provision for losses of $121 million, or $69 million ($1.90 per share) net erf related tax effects, from the Company's withdrawal from the polyester fila ment business in the United States. Certain manufacturing facilities and other assets were sold and the remaining manu facturing facilities have been shut down and will be disposed of as soon as practical. This business was part of the Fibers and Intermediates operating unit and had sales of approximately $134 million in 1980. In 1980, Monsanto decided to terminate its interest in Aiscondel, S.A., a majority-owned Spanish subsidiary, and in 1981 sold its interest to the minority shareholders. Cost of goods sold for 1980 included a provision for losses on termination of $66 million, or $39 million ($1.07 per share) net of related tax effects. This business was reported as part of the Polymer Products operating unit and had sales of approximately $126 million in 1980. As of December 31,1982, the remaining accruals for the divesti tures discussed above and the 1979 withdrawal from nylon operations in Europe have been reduced to $49 million through actual expenditures for shutdown or withdrawal costs, disposal of certain facilities, and operating losses subsequent to the recording of the provisions. The remaining accruals are expected to be sufficient to absorb future costs related to these actions. Supplemental Income and Expense Data 1982 Depreciation and obsolescence: Depredation Obsolescence (includes gains and losses from divestitures) Tbtal depreciation and obeoleecence Rent expense Technological expenses: Research and development Engineering, commercial develop ment arxt patent Tbtal technological expenses Interest expense: Total interest costs incurred Less capitalized interest Net Interest expense Equity Income: Equity in affiliates1 income and losses Equity in affiliates' foreign currency gar and losses Tbtal equity Income (lose) Foreign currency gains and losses (Including equity In affiliates' gains and losses) $396 43 $439 $ 78 $256 65 $321 $128 46 $ 82 $ (6) (5) $(11) $(15) 1981 $361 (98) $263 $ 74 $225 64 $289 $145 44 $101 $ 22 16 $ 38 $(28) 1980 $327 220 $547 $ 71 $208 65 $273 $164 52 $112 $ 34 (17) $ 17 $ 12 Pension Plans Most Monsanto employees are covered by noncontributory pension plans. The related pension expense was $136 million, $127 million and $98 million in 1982-1980, respectively, and includes charges applicable to current service and amortization of unfunded prior service costs over periods generally ranging from 10 to 30 years, it is Monsanto's policy to fund pension costs accrued. Actuarial assumptions reflect an investment return of 7.5 percent and, when applicable, an over all average salary increase of 6.5 percent. Effective for 1981, Monsanto increased retirement benefits and reduced the eligibility requirements for earty retirement and surviving spouses' automatic retirement benefits for its major domestic plans. The net effect of these changes was to increase 1981 expense by approximately $52 million. Estimated benefit and asset information at yearend for Monsanto's significant pension plans is presented below. Net assets were measured at market value and accumulated bene fits were estimated from actuarial valuations made earlier in the Actuarial present value of accumulated plan benefits: Vested Nonvested Total Nat assets available for benefits 1962 $1,366 177 $1,543 $1,697 1981 $1,221 157 $1,378 $1,358 DSW 021499 STLCOPCB4006808 55 Income Taxes The components of income before income taxes were: 1982 1981 Total U.S. Ex-U.S. $425 78 $501 $549 144 $693 The components of income tax expense were: 1982 1981 Current: Federal State Ex-U.S. $ 53 8 39 $ 91 8 38 100 137 Deferred: Total Federal State Ex-U.S. 72 4 (4) 72 $172 103 9 _ (1) 111 $248 I960 $212 (6) $206 1980 $ (5) 5 24 24 19 3 11 33 $ 57 Earnings per Share Earnings per share were computed using the weighted average number of common and common equivalent shares outstanding each year (39,975,498, 38,703,604 arid 36,287,214 in 1982-1980, respectively). Common share equivalents included in the computation consist of common stock issuable upon exercise of outstanding stock options (159,858, 200,801 and 24,611 in 1982-1980, respectively), and conversion of loan stock of Monsanto p.I.c. (109,904,144,952 and 202,204 in 1982-1980, respectively). Earnings per share assuming full dilution were not significantly different from the primary amounts. Had the common shares issued in October 1982 (see "Long Term Debt' note) been issued as of January 1,1982, pro forma earnings per share for 1982 would have been $8.71. The pro forma amount reflects the effect of decreased aftertax interest expense through the reduction of long-term debt and the increased number of shares outstanding. Inventories Inventories at December 31,1982 and 1981 would have been $447 million and $548 million, respectively, higher than reported if the FIFO basis of inventory valuation (which approximates current cost) had been used for all inven Investment tax credits for 1982-1980 were $53 million, $22 million and $49 million, respectively. The sources of timing differences in the recognition of revenue and expense for tax and financial statement purposes and the tax effect of each were: 1982 1981 1980 tories. Under the LIFO inventory method used, it is not practical to identify inventories by classification (i.e., finished goods, goods in process, raw materials and supplies). As a result of liquidation of lower cost inventory "tiers" under the LIFO method, 1982 earnings were favorably impacted by approxi mately $83 million before taxes. Additional depreciation and obso lescence for (book) tax purposes Intangible drilling and development costs Interest capitalization Other Tbtal $ 49 19 18 (14) $ 72 $ 66 23 14 8 $111 $ (8) 15 23 3 $ 33 Short-Tterm Debt and Bank Credit Arrangement* 1982 Notes payable to banks Current portion of long-term debt Tbtal $105 26 $131 1981 $139 36 $175 The Company has available a $100 million domestic Revolving Credit/Temn Loan Agreement and $100 million of short-term lines Factors causing the effective tax rate to differ from the statutory rate were: ________________________ 1982 1981 I960 of credit with twenty-one banks. The Agreement provides for revolving credit through 1986 with any borrowings outstanding at the end of that period convertible into a three-year term loan. The interest rates on any borrowings under these domestic facil Federal statutory rate 48% 46% 46% ities will generally be at or near prevailing prime rates. Investment tax credit Benefits attributable to DISC earnings Non-tax effected ex-U.S. subsidiaries' results Other Effective Income tax rata (10) (3) 1 34% (3) (24) The Company also has available $100 million under Eurocur (3) (12) rency Revolving Credit Agreements subject to mandatory (3) (D 36% 19 reductions beginning in 1985 and terminating in 1987. Interest rates under these agreements are at a margin above the C) 28% London or Luxembourg interbank offer rates. No borrowings were made under the above credit facilities Undistributed earnings of subsidiaries, for which additional taxes that may be required in the event of distribution have not been provided, were: 1982 1981 I960 Ex-U.S. subsidiaries U.S. subsidiaries, including DISOs Total $216 390 $806 $186 349 $535 $ 78 290 $368 through February 25,1983. In addition, certain ex-U.S. subsidiaries have short-term ban facilities aggregating approximately $403 million, under which bans totaling $76 million were outstanding at December 31, 1982. Interest on these bans is related to various ex-U.S. bank rates. Ex-U.S. net operating loss carryforwards at December 31,1982, for whbh no tax benefits have been recorded were approxi mately $115 million, a substantial portion of which has an unlimited carryforward period. 0SW 02X500 STLCOPCB4006809 56 Long-lferm Debt Long-term debt (exclusive of current maturities) repayable in U.S. dollars, except where indi cated, was: 1982 1981 Monsanto Company: 8% notes due 1985 $ 100 4%% promissory notes due 1993 49 9ya% sinking fund debentures due 1997 87 8yi% sinking fund debentures due 2000 127 3%% income debentures due 2002 85 4yi% income debentures due 2008 50 8%% sinking fund debentures due 2008 189 4y5%-li*o% industrial development bond obligations due 1984/2021 247 Capitalized lease obligations 10 Monsanto (Sulsas) S.A. (Swiss subsidiary) (Swiss franc): 6yi% sinking fund debentures due 1986 24 Monsanto Europe, SA. (Bslgtan subsidiary) (Bslgian franc): 9*%-l4yi% bank bats due 1984/1968 (a) 25 Other, prindpaty ex-US. subsidiaries (b) 50 Ibtal $1,003 $ 100 53 90 174 89 50 199 211 13 27 56 48 $1,110 (a) The interest rates on certain ot these bank loans are reduced by a government subsidy ot 4 percent, which is scheduled to expire In 1963. (b) Includes $5 million at December 31,1982 of Monsanto International Finance Company 4V4% sinking fund debentures convertible kite the Company's common stock at $85 per share, and $4 mHon at December 31,1982, of Monsanto p.I.c. (U.K. subsidiary) 5% loan stock convertible Into the Company's common stock at a rata equivalent to $66 per share. Maturities and sinking fund requirements on long-term debt are $26 million, $30 million, $153 million, $64 million and $27 million for the five years ending December 31,1983 through 1987, respectively. Covenants of certain loan agreements restrict maximum borrow ings and dividend payments. It is not anticipated that additional future borrowings will be affected by these restrictions, and none of the Company's reinvested earnings were restricted as to dividend payments at December 31,1982. Monsanto has various parallel loan agreements, scheduled to expire from 1983 through 1986, with U.K. companies. Monsanto's borrowings of $66 million and $85 million in British pounds ster ling and U.S. dollar loans of $69 rralion and $82 million as of December 31,1982 and 1981, respectively, are reflected net in the accompanying Statement of Consolidated Financial Position since both parties have the legal right of offset in case of default. Interest rates on the sterling loan are 2'h percent to Z* percent higher than the interest rates on the corresponding dollar loans. Substantially all long-term debt of subsidiaries is guaranteed by the Company. On October 22,1982, the Company exchanged 988,075 shares of its common stock for $100 miiion principal amount of various long-term debentures resulting in an extraordinary gain of $23 million ($0.58 per share). Commitment* and Contingencies Commitments in connection with uncompleted additions to property aggregated approximately $126 million at December 31,1982. Monsanto was contingently liable as guarantor of bank loans and for discounted customers' receivables totaling approximately $72 million at December 31,1982, including $13 million related to guarantees of loans of affiliates. Monsanto is a party to a number of lawsuits, which it is vigor ously defending, arising in the normal course of business. Certain of these actions seek damages in very large amounts. While the results of litigation cannot be predicted with certainty, management believes, based upon the advice of Company counsel, that the final outcome of such litigation will not have a material adverse effect on Monsanto's consolidated financial position. Capital Stock The outstanding preferred stock is stated at $2.24 per share, has a cumulative dividend of $2.75 per share and is convertible into 1,12 shares of the Company's common stock. Preferred stock may be redeemed solely at the Com pany's option at $73 per share (the voluntary liquidation prefer ence) and has an involuntary liquidation preference of $35 per share, or an aggregate of $3 million at Darember 31,1982. At December 31,1982, there were 296,738 common shares reserved for conversion of convertible securities and 1,849,641 common shares for employee stock options. Stock Option Plans At December 31,1982, there were 1,279,634 shares under options outstanding for the Company's 1969 and 1974 Plans at prices ranging from $48.50 to $92.88. Options for 829,989 shares were exercisable at December 31, 1982. During 1982,239,650 options were granted and 237,387 options, granted at prices ranging from $47.25 to $73.19 per share, were exercised. Stock appreciation rights (SAR's) are authorized to be granted under the 1974 Plan, and may be granted retroactively for unex ercised options under the 1963 and 1974 Plans. At December 31,1982, SAR's related to options for 303,028 shares were outstanding; of these, 187,321 were exercisable. During 1982, SAR's rotated to options for 57,900 shares were granted and 124,261 were exercised. Segment Information Certain operating unit segment data for 1982-1980 appear on page 36 and are integral parts of the accompanying financial statements. The principal product lines included in each operating unit are shown in the "Sales by Product Group" data on page 33. The operating unit segment information has been restated as described on page 37. Unusual or nonrecurring charges or credits were included in the operating units and world areas as discussed in the "Principal Divestitures" note. The liquidation of lower cost inventory `'tiers'' under the UFO method increased 1982 operating income by $20 million, $27 million and $35 million for Fibers and Intermedi ates, Industrial Chemicals and Polymer Products, respectively. DSW 021501 STLCOPCB4006810 Intercompany or inter-area receivables and profit derived from intercompany or inter-area sales are the principal items reflected in eliminations in arming at the consolidated totals. 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. Certain corporate expenses, primarily those related to the overall management of the Company, were not allocated to the operating units or world areas. Nonoperating 57 assets principally include cash, time deposits and certificates of deposit short-term securities and investments. Total sales between operating units (made on a market basis) were $311 million, $393 million and $381 million in 1982-1980, respectively. These sales were not significant for any operating units except Industrial Chemicals ($151 million, $162 million and $147 million in 1982-1980, respectively). Net sales by world area entities were: United States Europe-Africa Canada-Latin America Asia-Pacific Eliminations Total consolidated 1982 $4,483 1,079 448 315 6,325 $6,325 Outside Customer 1981 1980 $4,874 1,247 486 341 $4,465 1,378 459 272 6,948 6,574 $6,948 $6,574 1982 $ 467 108 5 21 601 (601) $-- 1981 $ 554 115 4 25 698 (698) $-- Inter-Area 1980 $ 535 59 4 27 625 (625) $-- United States entities' export sales to outside customers were: 1982 1981 Europe-Africa Canada-Latin America Asia-Pacific $ 32 144 221 $ 41 198 249 Total $ 397 $ 488 1980 $ 69 182 241 $ 492 Operating income (loss) and total assets by world area entities were: Operating Income (Loss) 1982 1981 1980 United States Europe-Africa Canada-Latin America Asia-Pacific $ 461 39 30 11 $ 650 38 41 25 $ 255 (44) 24 13 Eliminations Corporate expenses 541 8 (48) 754 (16) (36) 248 1 (39) Total operating Income charges-net Nonoperatinq assets 501 702 210 94 Total consolidated $ 501 $ 693 $ 206 1982 $4,711 790 247 172 5,920 (268) 5,652 425 $6,077 Total Assets 1981 1980 $4,437 1,049 280 227 $4,256 1,026 291 176 5,993 (334) 5,749 (223) 5,659 410 $6,069 5,526 270 $5,796 Following is a reconciliation of ex-U.S. operating income and total assets to the Company's equity in the net income (loss) and net assets of consolidated ex-U.S. subsidiaries: 1982 1981 1980 Operating income (loss) Income charges (credits)-net Income taxes $ 80 14 35 $ 104 (38) 30 $ (7) 48 11 Net Income (loss) of consolidated ex-U.S. subsidiaries $ 31 $ 112 $ (66) Total operating assets Total liabilities, net of nonoperatinq assets $1,209 440 $1,556 691 $1,493 699 Net assets of consolidated ex-U.S. subsidiaries $ 769 $ 865 $ 794 DSW 021502 STLCOPCB4006811 58 Financial Summary (Dollars in millions, excecrt per share) Operating Results Net Sales Operating Income Interest Expense Income Taxes Net Income Percent of Net Sales Percent of Average Shareowners' Equity 1982(1 )(2) 1981 $8,325 501 82 172 352 6% 10% $6,948 702 101 248 445 6% 15% Earnings Per Share Primary _______________ Fully Diluted $ 8.79 8.74 $11.50 11.43 Yearend Financial Position Total Assets Working Capital Property, Plant & Equipment: Long-Term Debt Shareowners' Equity Current Ratio Percent of Debt to Total Capitalization Gross Net $6,077 1,503 $6,530 3,313 $1,003 3,490 2.58 22% $6,069 1,486 $6,218 3,184 $1,110 3,330 2.40 25% Per Common Share: Dividends Shareowners' Equity Property, Plant & Equipment Additions Depredation and Obsolescence Shareowners: Common Preferred Common Shares Outstanding (in millions) Employees $ 3.95 85.97 $ 673 439 75,943 709 41 52,199 $ 3.75 84.37 $ 668 263 79,029 775 40 57,391 (1) Net Income tor 1982 indudw in *aon*wy gdn oU23mMon. or $0.58 per primary share, from an exchange of debt for common shares. (2) In 1982, the requirements of Statement ot Rnandai Accounting Standards No. 52, "Foreign Currency Denslstjon,'' were adopted. DSW 021503 STLCOPCB4006812 59 Monsanto Company and Subsidiaries 1980(3) $6,574 210 112 57 149 2% 5% 1979 $6,193 487 123 150 331 5% 12% 1978 $5,019 632 103 274 303 6% 12% 1977 $4,595 610 86 248 276 6% 12% 1976 $4,270 668 80 251 366 9% 17% 1975 $3,625 547 56 230 306 8% 16% 1974(4) $3,498 550 43 251 323 9% 20% 1973 $2,648 406 39 173 238 9% 17% 1972 $2,225 216 37 81 122 6< 10* $ 4.10 4.06 $ 9.11 9.03 $ 8.29 8.21 $ 7.46 7.37 $10.05 9.77 $ 8.63 8.22 $ 9.25 8.73 $ 6.90 6.54 $ 3.49 3.40 $5,796 1,226 $6,074 3,109 $1,371 2,808 2.07 33% $5,539 1,323 $5,529 2,818 $1,203 2,782 2.16 30% $5,036 1,296 $5,167 2,605 $1,224 2,579 2.46 32% $4,350 1,080 $4,745 2,409 $1,031 2,401 2.64 30% $3,959 1,106 $4208 2,090 $ 915 2253 2.92 29% $3,451 1,150 $3,620 1,660 $ 845 1,977 3.39 30% $2,938 968 $3,157 1,312 $ 587 1,755 2.88 25% $2,545 855 $2,852 1,152 $ 579 1,484 3.06 28% $2,237 677 $2,765 1,133 $ 576 1,294 3.17 31' $ 3.55 77.63 $ 781 547 82,441 871 36 61,836 $ 3.35 77.20 $ 566 413 85,608 952 36 63,926 $ 3.175 71,26 $ 480 288 86,775 1,156 36 62,851 $ 3.025 66.16 $ 607 296 85,021 1,404 36 61,519 $ 2.75 61.79 $ 647 226 84,647 1,956 36 61,903 $ 2.55 56.62 $ 528 173 91,725 2,836 35 59,242 $ 2.30 51.39 $ 313 172 96,542 3,709 34 60,926 $ 1.90 44.26 $ 205 170 98,964 3,855 33 58,277 $ 1.80 39.05 $ 168 194 104,369 3,939 33 57,891 (3) In 1980, Interest costs related to eonstnjcdon-ln-prograss expenditure* were capitalized In accordance with Statement of Financial Accounting Stan dards No. 34. Prior to 1980, all Interest costs were expensed as incurred. The effect of the new accounting principle was to Increase 1980 net Income by $28 million or $0.78 per primary share. (4) In 1974, the Company and certain of its domestic subsidiaries changed their method of Inventory valuation for substantially all United States Invento ries from the FIFO basis to the UFO basis. The effect of this change was to decrease 1974 income by $78 million or $2.26 per primary share. DSW 021504 STLCOPCB4006813 60 Directors and Officers Board of Directors Committees of the Board John W. Hanley St. Louis Chairman of the Board and Chief Executive Officer Dr. Donald C. Carroll Philadelphia Dean of The Wharton School University of Pennsylvania Edward L. Palmer C. Raymond Dahl San Francisco Retired Chairman of the Board Crown Zellerbach Corporation New York Retired Chairman of the Executive Committee Citicorp and Citibank, NA Dr. Louis Fernandez St. Louis Vice Chairman of the Board Francis E. Reese Sl Louis Senior Vice President Richard I. Fricke Monte G. Throdahl Montpelier, Vermont St Louis President and Chief Executive Officer Senior Vice President National Life Insurance Company Admiral Stansfield `Rimer Howard M. Love Pittsburgh Chairman of the Board and U.S. Navy, Redred Arlington, Virginia Consultant and Lecturer Chief Executive Officer National Steel Corporation Margaret Bush Wilson St Louis RichardJ. Mahoney St. Louis Attorney Wilson, Smith and McCullin President and Chief Operating Officer Dr. Jean Mayer Medford, Massachusetts President Advisory Directors__________ Rifts University Robert L. Berra Buck Mlckel Greenville, South Carolina Chairman of the Board and President Daniel International Corporation (a subsidiary of Fluor Corporation) Francis J. Fitzgerald Earle H. HarhisonJr. Nicholas L. Reding Dr. Howard A Schneiderman Francis A Stroble Audit Dr. Jean Mayer Buck Mickel Edward L. Palmer Margaret Bush Wilson Corporate Social Responsibility Dr. Louis Fernandez Dr. Jean Mayer Admiral Stansfield Rimer Margaret Bush Wilson Executive Dr. Louis Fernandez John W. Hanley Richard J. Mahoney Margaret Bush Wilson Executive Compensation and Development Richard I. Fricke Howard M. Love Buck Mickel Finance Dr. Donald C. Carroll C. Raymond Dahl John W. Hanley Richard J. Mahoney Edward L. Palmer Nominating C. Raymond Dahl Howard M. Love Buck Mickel Pension and Savings Funds Dr. Donald C. Carroll Dr. Louis Fernandez Richard I. Fricke Admiral Stansfield Turner DSW 021505 STLCOPCB4006814 Officers Officers Chairman of die Board and Chief Executive Officer John W. Hanley President and Chief Operating Officer Richard J. Mahoney Vice Chairman of the Board Dr. Louis Fernandez Executive Vice Presidents Francis J. Fitzgerald Earle H. Harbisonjr. Nicholas L. Reding Senior Vice Presidents Robert L. Berra Francis E. Reese Dr. Howard A. Schneiderman Monte C. Throdahl Senior Vice President and Chief Financial Officer Francis A. Stroble Senior Vice President, Secretary and General Counsel Richard W. Duesenberg Group Vice Presidents Robert E. Burke Harold J. Corbett Thomas L Gossage Robert G. Potter Vice Presidents Dr. Constantine E. Anagnostopoulos Alfred W. Andrews Leonard A Cohn Charles A Faden Dr. S. Allen Heininger Martin J. Kallen Dr. Joseph X Nolan Sam Pickard Ernest S. Robson Jr. Donald H. Swan Vice President and Treasurer Lawrence B. Skatoff Vice President and Controller Michael F. Mee Shareowner Information Annual Meeting The next Annual Meeting of the shareowners of Monsanto Company will be held at 1:45 p.m., Friday, April 22,1983, at the Company's General Offices, 800 N. Lindbergh Blvd., St. Louis, Missouri. A formal notice of the meeting, together with a proxy statement and form of proxy, is being mailed to each shareowner. 10-K Report, Corporate Data Book and Investor News A copy of Monsanto Company's Form 10-K Report filed with the Securities and Exchange Commission for 1982; a 1982 Corporate Data Book, which contains additional information relating to Monsanto; and Investor News can be obtained by writing to: Investor Relations Department Monsanto Company 800 N. Lindbergh Blvd. St. Louis, Missouri 63167 Transfer Agent and Registrar The First National Bank of Boston DSW 021506 STLCOPCB4006815 Monsanto Company 800 North Lindbergh Boulevard St. Louis, Missouri 63167 DSN 021507 STLCOPCB4006816