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1988 Annual Report Monsanto The strategy is working QSW 021772 STLCOPCB4007081 Table of Contents The Strategy is Working, by Chairman and CEO Richard /. Mahoney In his letter to shareowners, the chairman reviews Monsanto's best vear ever. The Strategy at Work, by President and Chief Operating Officer Earle H. Harlnson, Jr. Six case studtes show how the strategy is being implemented by Monsanto employees worldwide. Plant Of the '90s, by Don Bell A leading architect of the "Plant of the '90s" shows how to gain extraordinary productivity improvements. Inventing Products for Agriculture, by Will D. Carpenter and Lee A. Miller Renewed chemical herbicide R&D and biotechnology research have produced a large number of new-product candidates. Licensing, Acquisitions, Joint Ventures, by Ronald L. Goode, Ph.D., and Hendrik A. Verfaillie Aggressive searches for externally invented technologies supplement new products developed through internal R&D. Protecting the Environment, by HaroldJ. Corbett Senior VP Corbett assesses Monsanto's industry-leading environmental initiatives during the past five years. Globalization: Korea, by Kim Dong Sung Monsanto has been a partner in the growth of Korea. Country Director Kim foresees profitable new opportunities. Globalization: Brazil, by James H. Nisbet Monsanto Brazil's president, saying Monsanto has discovered the secret of success in complex Brazil, urges long-term view. Financial Section Board of Directors Officers Shareowner Information 2 5 6 8 10 12 14 16 19 45 inside hack (over >tdc hdek anrr Monsanto's Commitments Monsanto Company makes and markets highvalue chemical and agricultural products, pharma ceuticals, low-calorie sweeteners, industrial process equipment, man-made fibers, plastics and other performance materials. In doing so, we arc committed to serving the interests of all our stake holders around the world by: Aiming for a consistent and superior return on equity for our shareowners, 1 Meeting the needs of customers with the highest standards of value, quality and service, ' Providing employees with safe and rewarding work in an environment where each has an equal opportunity to succeed, and Striving for a lasting and rewarding partnership with neighbors. C 1989 Monsanto Company Trademarks of Monsanto and its subsidiaries are indicated hy italics throughout this publication. Turtle photo on p Ij courtesy of III Dept, of Conservation. OSW 021773 STLCOPCB4007082 Operational Highlights (Dollars in millions, except per share) Net Sales Net Income Per Share: Net Income Dividends Shareowners' Equity Depreciation and Amortization Cash Provided by Operations Research and Development Expenses Return on Shareowners' Equity Percent of Total Debt to Total Capitalization Shareowners (year-end) Shares Outstanding (year-end, in millions) Employees (year-end) QfOtal SataB (dollars m billions) B Sales in the United States Sales in all other countries VllN MM (dollars m millions) 1988 $ 8,293 S 591 8 8.27 2.95 55.21 S 703 $ 1,304 $ 575 15% 34% 66,066 69 45,635 1987 8 7,639 8 436 8 5.63 2.75 52.65 8 679 8 902 8 557 11% 35% 68,032 74 49,734 1986 8 6,879 8 433 8 5.55 2.575 48.69 8 780 8 960 8 523 12' 35 70,367 78 51,703 Mtftst Mb (percent oftotal sales) 1984 1988 3,000 Capital Equipment Construction and Home Furnishings 13% 14% 19% 12% 0 1984 1985 1986 1987 1988 SB Value Added (sales less energy and ___ raw materials) Bl MAT (marketing, administration and tedmology) SB Technology DSW 021774 1 STLCOPCB4007083 DSU 021775 STLCOPCB4007084 n 1988 Monsanto turned in its best financial Iperformance ever. Net income reached S591 million, one-third more than in any other year in our history. Those results moved the Company significantly forward toward the goal we announced "to become one of the great industrial enterprises of the world." Financial performance,. which enables us to reward all the stake holders in Monsanto, moved toward our target of 20 percent return on shareowners' equity (ROE) in the early 1990s. When we first announced that financial goal a few years ago, many observers of our industry were skeptical. However, we are meeting, even exceeding, the intermediate targets on the way to our ROE goal. The strategy carefully constructed and put into place during the past decade is working, thanks to 46,000 Monsanto people worldwide. ROE improved in 1988 to more than 15 percent from 1987's 11 percent, putting us a full year ahead of our plans. Value added -- the difference between selling price and the cost of raw materials and energy -- increased to 70 percent of sales in 1988. We expert continued increases in this measure in the years ahead. Customers rewarded our renewed commitment to quality, innovation and service by buying a record $8.3 billion of our products, 43 percent of which were sold outside the United States. Strong financial results, however, are only one measure of greatness. We must also behave in the manner of the very best. Last year, in a book for employees, A Commitment to Greatness, I explained how Monsanto as a great company must behave. I wrote that greatness rests on commitment to the highest of standards and principles. Those include safety in the workplace and protection of the environment. All employees must have an equal opportunity to succeed, and then be empowered by their management to get the job done. The people in a great company have a drive for results and complete dedication to serving customers, wherever they are around the world. Above all, we must do the right thing in all circumstances. Our commitment to these principles must endure through bad times as well as good. Certainly, economic conditions in 1988 generally were favorable around the world; indeed, most chemistrybased companies performed well. However, the measure of financial strength isn't one good year, but consistently good years. We're not recessionproof, but we are now far more recession-resistant. To achieve that, we have focused on less cyclical markets and on products linked directly to our customers' view of value. In 1988, one-third of our sales were to end-use markets closely linked to industrial business cycles. In 1980, it was two-thirds. This course delivered outstanding results in 1988, and we see continuing market gains in 1989 across the corporation. In the agricultural business, sales volumes of products based on glyphosate (the active ingredient in Roundup herbicide) increased by 29 percent over 1987 volumes. These products are tailored to the cost and performance needs of specific groups of customers. Growing residential and turf markets increase the prospects for these products. The chemicals unit, one of the top-performing chemical companies in the world, met its financial targets, as it has now done three years running. The chemicals, fibers and plastics businesses received quality-supplier awards from Goodyear, Chrysler, Pillsbury, Sony, Smith-Corona, 3M and General Electric, among others. I see more dedication to customers' needs, service and quality at Monsanto today than ever before. That close attention to the people who pay the bills is an absolute requirement of a value-added business. The Chemical Company in 1988 developed a new modified version of Saftex plastic interlayer, called Solarjiex, to reduce heat buildup in automotive interiors. The chemicals unit also introduced new high-performance thermoplastic alloys and new premium fibers. For G.D. Searle & Co., Calan anti-hypertensive drug had sales of more than $240 million in 1988, and it continues to grow. Cytotec anti-ulcer drug received approval in the United States, which joined a DSW 021776 STLCOPCB4007085 number of other nations that have approved its use. Cytotec is the only drug available to prevent or treat ulcers caused by anti-pain or anti-inflammatory drugs used by millions of people suffering from arthritis and other illnesses. Sales of diet soft drinks containing 100 percent NutmSweet brand sweetener continued to increase dramatically. Also in 1988, NutmSweet received approvals in France, Brazil and the Soviet Union. Prospects for growth remain strong. Fisher's strategy of marketing integrated manu facturing solutions began yielding results in 1988. Record levels of total incoming orders were received, and PROVOX instrumentation turned profitable after several years of market development. Fisher entered 1989 with its highest backlog ever. In 1988, we continued to prune under-performing assets and announced the sale of our silicon wafer business to Huels AG. The employees of that business delivered the quality and service that normally produce satisfactory business results, and the business earned money in 1988. But some corpomte decisions during the past decade weren't as successful, and the business never performed consistently well. Huels has the necessary commitment to the business to succeed. Financial markets gave the Company good marks for the year, with one troublesome exception. In the third quarter, news from a Minnesota court case involving G.D. Searle & Co. caused Monsanto's stock to drop sharply. Fear of a surge of similar suits led many investors to overreact. The surge did not occur, and our stock has recovered most of the lost value. We repeat here for our shareowners that any product claims arising from these Searle suits will have no material financial impact on die Company. This situation was yet another unfortunate result of the unique U.S. liability system, which often discourages new-product development and limits the competitiveness of U.S.-based companies in worldwide markets. There are signs of change, but this issue continues to hold my personal interest and to prompt my public efforts because of its implications for a science and technology company. Also of great personal interest is Monsanto's top priority for the future -- new products. We must develop more of them and bring them to market more quickly than ever. We're making good progress. Some examples: The launch of Cytotec anti-ulcer drug in the United States will be followed shortly by an impressive list of new pharmaceuticals. Dimension herbicide, a crabgrass killer that really works, will be commercialized within 12 months. It's the first product from a promising new family of chemistry. Bovine somatotropin (BST), which improves efficiency in milk production, is awaiting approval by the U.S. Food and Drug Administration (FDA). It will be our first biotechnology product, and it has major worldwide potential. The NutraSweet Company is expected in 1989 to introduce a major product, Simplesse all-natural fat substitute. A good-tasting substitute for fat in ice cream, salad oil and other products, Simplesse is cleared for sale in the United Kingdom and West Germany, and is under review by the U.S. FDA. These products, and many more after them, constitute a central component in the corporate strategy. Our new-product pipeline is as robust as it ever has been. We're spending a great deal of money on R&D to fill that pipeline. We recognize the cost, but we also recognize the leverage it has on our future. We will produce results from this investment. The redirection of the Company is clear. A feeling of excitement and accomplishment is building across the Company, and it's well earned. Now we must have the discipline to keep the momentum going. We must deliver the results that provide rewards to all our stake holders -- shareowners, employees, customers and neighbors. And we must have the vision to look beyond today and seize the oppor tunities that are emerging around the world. The strategy is working. Chairman and Chief Executive Officer March 6, 1989 OSW 021777 4 STLCOPCB4007086 The Strategy At Work By Earle H. Harbison, Jr., President and Chief Operating Officer Monsanto's corporate strategy is working. The steady financial progress of recent years, particularly the best-ever results of 1988, shows we are on course toward our financial goals. But the numbers show only the results, not the strategy itself in action. They do not show 46,000 Monsanto employees finding better ways of doing business every day -- all to move this Company toward the greatness it can achieve. In this report, we spotlight Monsanto's strategy at work. This includes optimizing income from current assets through impressive productivity gains. Don Bell, a prime architect of a strategy that has revolutionized manufacturing, tells the story. The strategy includes creating unique value for our customers through internal R&D. Will Carpenter and Lee Miller show how rejuvenated chemical herbicide research and pioneering biotechnology are leading to new agricultural products. Licensing, acquisitions and joint ventures all complement research as routes to new products. Ronald Goode and Hendrik Verfaillie tell how G.D. Searle & Co. and Monsanto Agricultural Company follow those routes. In today's global economy, we must respond to the specific needs of distinct geographical markets. Kim Dong Sung and James Nisbet highlight our activities in Korea and Brazil. Earning the right to operate is basic to our corporate strategy. Hal Corbett points to Monsanto's achieve ments in environmental stewardship. These cases show our strategy at work, but they are not unique. Rather, they represent numerous instances of thousands of Monsanto employees accepting the challenge of greatness. Nor do these case studies tell the whole Monsanto story. The overview of operating company performance is presented in the financial review and statements, on pages 19-43. These cases do show the strategy being put into practice by Monsanto people around the world -- excited and determined people who will place Monsanto among the handful ot the world's great industrial enterprises. DSW 021778 5 STLCOPCB4007087 STLCOPCB4007088 by Dan Bell, Director, Fiber Manufacturing, ' " Monsanto Chemical Company* To succeed in global competition, we need to use manufacturing as a competitive weapon in ways we haven'c done before. One of the critical needs is earning recognition in the industries we serve as a quality producer -- to build partnerships with our customers that benefit both them and ourselves. These improvements have been caking place in plants throughout Monsanto with some dramatic results. I know firsthand the changes in our fibers manufacturing, which makes a good case study. To be a successful manufacturer of nylon and acrylic fiber for Wear-Dated carpet and apparel, we identified two challenges: improve productivity by 50 percent in three years, and improve quality dramatically while making it a line responsibility. These simple objectives represent multimilliondollar challenges of a magnitude we've never faced before. The response has been threefold: enlightened personnel management, a systematic approach co quality improvement, and advanced computerintegrated manufacturing. Each of these changes would be beneficial by itself, but the "Plant of the '90s" combines all three. That's what we installed in the plants at Pensacola, Florida; Decatur, Alabama; Greenwood, South Carolina; and Chocolate Bayou in Alvin, Texas. Workers Given More Freedom, ReqwnsibUity We gave our employees more freedom and bolstered their commitment by creating self-directed work groups that eliminated one layer of supervision. We asked our people to use their minds as well as their hands. We invited them to meet with the peonl** who use our products, so our employees could define doing a good job in the same terms as the customer. * Effective January 1, 1989, Ball became group vice president. Measurement and Process Instrumentation, at Fisher Controls International Inc., a Monsanto subsidiary. We improved the quality and quantity of business information available to line employees so that they could see the priorities for themselves and work on real-life solutions. In some instances, our operators can now look at a control screen and determine -- immediately -- whether or not the process is making money Quality Emphasized We provided training in the Total Quality approach to continuous improvement, which emphasizes improving systems and processes to deliver consis tent results. Joint teams of Monsanto people and their customers were formed to improve quality and yields all the way through to the ultimate consumer. The cost of fixing, recycling or throwing away imperfect products was reduced 65 percent. Other Plants of the '90s Fisher Technology Integral to Improvements We provided tools, including PROVOX process controls from The same synergy among people, technology and Total Quality is dramatically improving productivity and customer Monsanto's Fisher Controls Interna tional subsidiary. Fisher is a strategic partner in the Plant of the '90s, and worked with major computer vendors -- including Digital Equip ment, Hewlett-Packard and IBM -- to develop a coordinated manufac turing strategy. Along with process controls, this strategy combines service at Monsanto plants from Soda Springs, Idaho, to Antwerp, Belgium. Some examples: Sew technology at the Muscatine, Iowa, plant is designed to reduce emissions of hazardous chemicals hy 95 percent and repay the investment hy salvaging material. information systems and electronic communications in a fully inte < A new utility contract, PROVOX instrumen grated network. The results speak for themselves: Decatur doubled cost savings; productivity at Chocolate Bayou is up over 50 percent; and tation and software, and employee quality improvement teams com bined to allow the Soda Springs, Idaho, phos phorus plant to operate above its rated capacity. both Pensacola and Greenwood have demon strated significant With statistical procea controls, the Antwerp, Belgium, plant produced Santoflcx rubber pro improvement in the consistency of our nylon carpet fibers. cessing chemicals at 1J5 percent oj previous capacity. 1 The commitment ot the people at the Sitro, West Wirgirua, plant has increased output err employee hy 40 percent since 1985. PROVOX controls m central to thejully inte grated manufacturing process. DSW 021780 STLCOPCB4007089 DSW 021781 STLCOPCB4007090 by Will D. Carpenter, Vice President, Tech nology Division, Monsanto Agricultural Company, and Lee A. Miller, Vice President, Animal Sciences Division, Monsanto Agricultural Company An ever-increasing stream of internally generated new products is an essential component of Monsanto's strategy. At Monsanto Agricultural Company (MAC), we've renewed our research and development program through reinvigorated chemi cal research and pioneering work in the new science of biotechnology. We have 1,000 professionals working with a budget of more than $140 million a year. Thanks to their efforts, MAC's new-product pipeline has more candidates now than at any time in the past 15 years. Most have come from our own labs, bolstered by some technologies we've licensed or acquired. Thirteen products are on an accelerated commer cialization track, and the first of these will come to market during 1989. Another 14 will be evaluated in 1989 for the fast track, and 20 more will be taken to field tests, the last step prior to the decision to take them to market. New Chemistry Yields Crabgrass Killer In chemistry, five herbicide candidates are rapidly moving to commercialization. The first will be Dimension crabgrass killer, which we anticipate will be tested in the United States in 1989. Superior to existing products. Dimension is harmless to desirable grasses and effective season-long. This product comes from a whole new class of herbicide chemis try that has also yielded commercialization-track products for rice, cotton, soybeans, peanuts, trees, nuts and vines. The market demand to control plant diseases is big and growing, and we have several fungicide candidates under development. One that protects rice is already on the commer cialization track. Sfk also have discovered a chemi cal hybridizing agent that increases yields in wheat strains grown in Europe; it coo is on a commercialization track. Biotechnology Promises Unprecedented Products Our other approach to discovering new products is based on the science of biotechnology, which is delivering unprecedented potential products for the animal and plant sciences. The firsc product from this program is bovine soma totropin, or BST, a naturally occurring protem that increases the efficiency of milk production in dairy cows, lowering costs for dairy farmers. BST is awaiting approval by the U.S. Food and Drug Administration. Porcine somatotropin, or PST, enhances feed effi ciency in hogs and delivers to health conscious consumers leaner pork with less fat. Regulatory approval is expected in the early 1990s. tacking Wcrobes Ifgenetically engineered microbes are to be used to We are also developing genetically engineered varieties of crops that resist certain viruses or inseas. Virus- and insect-resistant plants protect plants from tr.seas and disease, scientists must first know how those microbes behave in soil. Do they stay m place, or should be introduced toward the mid-1990s. In laboratories, we recendy engineered cotton for resis tance to certain caterpillars. do they migrate? How long do they survive? Such questions are central to noth the testing and marketabil ity ofgenetically One of the most promising plant areas is the engineering of crops that tolerate Roundup herbicide. This engineered microbes. Monsanto is the research leader in answering these questions. Our scientists would benefit farmers by allowing them substantially increased flexibil ity in their weed control programs. have engineered a marking system onto a common strain of soil bactena, allowing theirfates to be By the mid-1990s, we plan to intro duce varieties of soybeans, cotton and canola tolerant to Roundup. We're also observed. This technique has been tested successfully in the field arid in scores of university research labora tories to which wt have working on even larger worldwide crops, wheat and com, to make them tolerant to Roundup. made our workfeely available. These tests are proving the efficacy and value of our microbial marking method as a research tool. M protein that increases efficiency $ milk production in dairy cows will be Monsanto's first bwtechiology product. OSW 021782 STLCOPCB4007091 DSW 021783 STLCOPCB4007092 w*+ *** by Ronald L. Goode, Ph.D., Senior Vice President, Corporate Commercial Develop ment, G.D. Searle & Co., and Hendrik A. Verfaillie, Vice President, Commercial Development, Monsanto Agricultural Company Monsanto intends to increase shareowner value with new and better products. Some come from our own research, but some equally important products come from licensing, acquisitions and joint ventures. At G.D. Searle & Co., our goal is for such exter nally derived products to provide $2 billion in sales by the mid-1990s. Sales of such products came to S416 million in 1988. In Monsanto Agricultural Company, acquired and licensed products will provide 25 to 30 percent of MAC's sales by the mid1990s, compared with less than 5 percent in 1988. Licensing Fills Short- ami Long-Term Needs Some licensing efforts at MAC fill short-term prod uct needs. That was the case when we recently bought the distribution, patent and technology rights for Expedite pesticide applicator outside the United Kingdom. That was also the reason we obtained U.S. distribution rights for Clipper tree growth regulator and access to a cereal fungicide in Europe. Looking to the longer term, we now have several licensed herbicides and fungicides under commercial development, and we regularly evaluate new candidates. Licensing at Searle has already produced one big winner. The family of Calan cardiovascular drugs has become Searle's biggest seller, accounting for more than $240 million in 1988 sales. Another licensed product, lomefloxacin, looks especially promising. This antiinfective belongs to the third-largest and fastest-growing segment of the market, quinolones. During the past year alone, Searle licensed 10 compounds that will be developed as ethical drugs. Unlike any other major pharma ceutical company, we have established a worldwide group whose sole mission is the development ot licensed compounds. Its struc ture and mission discourage the "not invented here" syndrome, in which licensed compounds get treat ment inferior to that of in-house discoveries. About every 10 days, Searle looks at another new com pound from external sources. Acquisitions, Mergers Add Products, Market Position Acquisitions and mergers are ways to obtain new products and to establish a new market position. To complement Roundup lawn and garden herbicide, MAC in 1988 bought the lawn- and garden-care product line sold under the Greensweep brand. We also bought the Western Hemisphere rights to Rohm and Haas chemical hybridizing agents, which improve the hybridi zation process. One such agent Growing Contraction promises to deliver higher yields in North American wheat strains. of licensed/Acquired Searle Products (dollars in millions) Also in 1988, Searle merged its Ital ian affiliate, Searle Italia, with the ethical pharmaceutical division of Schiapparelli Farmaceutici S.p.A. to get a larger presence in the Italian pharmaceutical market, the world's fifth-biggest. One of Searle's priori ties is an acquisition in West Germany, the world's third-biggest pharmaceuticals market, where we are now under-represented. Joint ventures, another useful strat egy, spread risks of new product development. Lorex, Searle's joint venture with a French pharmaceuti cal firm, has been developing new products since 1982. We are close to commercializing the first of these, Kerlone (betaxolof hyperten sive drug. Searle now has 13 joint ventures. 0 1986 1987 1988 ! Sales of Searle discovered products ; Sales of licensed and acquired products In-vitro tests demonstrate the superior anti-infective efficacy cflometloxacin, which was recently licensed by Searle. DSW 021784 STLCOPCB4007093 DSW 021785 STLCOPCB4007094 Hby HaroldJ. Corbett, Senior Vice President, Environment, Safety and Health, Monsanto Company Monsanto's environmental vision is simply stated: Monsanto will do the right thing and be known for doing the right thing. We will do the right thing first and foremost because that's the kind of company we are, and we expect it of ourselves. Furthermore, it is what the public expects, and it is the public from whom we earn the right to operate. That vision was expressed in our 1988 goal to reduce toxic air emissions worldwide by 90 percent by the end of 1992. That aggressive initiative follows a series of programs during the last five years that demonstrate our determination to protect human health and the environment. In 1984, Monsanto approved S100 million for cleanup of waste sites in which the Company was involved. That same year, following the tragedy at Bhopal, we became the first company to offer to the public our Material Safety Data Sheets on all prod ucts and raw materials. We also established the High Hazard Materials Task Force to analyze and reduce potential risks at all manufacturing facilities worldwide. That task force continues to make recommendations to the operating divisions, which have the responsibility for implementation. And in 1988, going far beyond the requirements of the Emergency Planning and Community Right-toknow Act, we actively communicated our data on emissions to air, water and land to a broad range of national and local publics. Air Emissions Reduced Across Monsanto All of Monsanto's operating divisions and subsid iaries are involved in the 90 percent reduction program. Teams of manufacturing experts, environmental experts, engineers and others have been formed to make recom mendations for specific projects. Generally, these projects fall into three categories: product substitu tion, in which less volatile materials can be substituted to reduce air emissions; process change and modification; and installation of new pollution control technology. These projects will be implemented during the next four years. Goal Is Reduction of All Wastes Because reducing emissions to the air can increase emissions to water, land or other media, and because our goal is a net reduction of all wastes, we are also formalizing a general waste elimination program, with specific goals and checkpoints. Each operating division is developing specific plans and recommen dations. These include process revisions and material substitutions to eliminate hazardous waste; recycling and reuse within the processor plant; and waste treat ment through such technologies as incineration and biotreatment. Outright elimination and recycling take much longer to achieve, but are more environmentally desirable. Therefore, we are encouraging process research focused on these methods, rather than exclusively on the easier "end-of-pipe" treatment. Old Waste Sites Cleaned Up Significant progress has been made A Neighbor Speaks on cleanup of a number of major Superfund waste sites. Cleanup is scheduled to begin this year at the Motco site in Texas and the Seymour, Indiana, site. We expect a consent decree to be concluded shortly for the Brio/Dixie Proces sors site in Texas. A consent decree for cleanup at the Woburn Industriplex site in Massachusetts has been Having Monsanto as a neighbor has been the good fortune of Decatur. Alabama, says the city's mayor, Bill Dukes. "They've sera good exam ple since their first days here and have never deviated," Dukes says. Part of that record is envi ronmental: According to the mayor, some of the lodged in federal court. Monsanto is the project manager for cleanup at all four sites. Company's standards exceed those of the Envi ronmental Protection Agency. Part is philan All these Monsanto programs, along thropic: A Monsanto I'und with the 90 percent air reduction gift helped build a cancer center Jor the Decatur effort, have been undertaken Central Hospital. to fulfill our vision for the environment. The record also includes community service by Monsanto employees in activities ranging Jrom die Chamber of Commerce to kids' softball teams. "Monsanto," Mayor Dukes says, "is unusually community-minded. " DSW 021786 STLCOPCB4007095 DSW 021787 STLCOPCB4007096 *5 by Kim Dong Sung, Country Director, 9 Monsanto Korea Inc. Monsanto's 20 years in Korea have been a partner ship with the history of modem Korea itself. As Korea has grown and modernized, the Company has supplied many of the nation's basic needs and grown with it. Today, Korea has become an economic force that no global company can ignore. Monsanto came to Korea in 1968. At that time, we were a nation still recovering from nearly four decades of occupation by a foreign power and two destructive wars. The second was for us the more tragic, since in it Koreans killed Koreans. When the killing stopped in 1953, my country had little left but its mountains and rivers . . . and the people who remained. The people barely survived from one day to the next. Through the 1960s, we depended heavily on inter national aid. And we suffered from several chronic economic diseases -- trade deficit, government debt, currency devaluation and double-digit inflation. Today those chronic problems are virtually gone. Our economy is growing more than 8 percent each year, and our products are now known for quality and value throughout the world. Many see Korea as an economic miracle. Before 1968, Monsanto sold a few products through agents. There were no Monsanto employees in Korea, and no Monsanto products were made here. Today, Monsanto has grown to more than 380 employees in Korea. If we count their spouses and children, Monsanto paychecks support an extended family of more than 1,650 people. Last year, sales of Monsanto products amounted to nearly $115 million, including S50 million from sales of products marketed by our joint ventures. Monsanto Product Met Special Needs From the beginning, Monsanto's products provided special value to the Korean nation at each stage of growth. When I was hired in August 1968, Monsanto wanted someone to introduce two miraculous new herbi cides, Lasso herbicide for upland crops and Machete herbicide for rice and barley. At the time there was serious overpopulation in rural areas, creating a high jobless rate in the off season. And here was Monsanto wanting to replace 5,000year-old labor-intensive hand weeding with labor saving products! But this almost magical chemical weed control helped increase food production for a population moving to the industrializing cities where there were good jobs. Korea was the first country to use Machete on barley and rice, and it was quickly adopted by our farmers. The first sales of liquid Machete in 1970 brought in $35,000. When we introduced the granular form a year later, the demand was so great that we placed an order 100 times the volume of the previous year. First Investment an Agricultural Joint Venture This progress led Monsanto to Static Soaring in Korea G.D. Searle's huntress in Korea is ;<3c7rws>. Sales grew 113 percent jrom 1986 to 1987. and 59 percent invest in Korea. The result was KORAG, a 50-50 joint venture with Han-Nong Corporation, Korea's largest agricultural chemicals distributor. KORAG was an imme diate success. During the first full year of production, it earned more than twice the initial investment. Jrom 1987 to 1988. They are expected to %row another 50 percent in-1989 beginning wtth the estab lishment oj Searie Korea Ltd. m 1982, the rapid growth was Juvled by local manufacturing, which began in 1985 m an award-winning plant. As Monsanto grew and gained experience in Korea, the growing Korean economy needed other new products. When Korea began manufacturing electronic goods, Monsanto supplied silicon wafers to that budding industry through another joint venture. Although there is a healthy market for electronic materials in Korea, Monsanto's electronic materials business overall has not been able to sustain profitability Of its two dozen products, the best-selling prescription drugs are Aldaccone diuretic and Cvcocec ulcer medication Searie Korea is the onlv pharmaceutical joint oatlure m Korea wtth an extensive /itvnjjnjj pro gram. Seven licensed products arc sold there under the Searie name, including its two overall best sellers, both non prescription products and no longer fits the Company's f (continued on page 18) Searie Korea's prospects are bright in ti market that is growing at almost 20 percent a year DSN 021788 STLCOPCB4007097 DSW 021789 STLCOPCB4007098 by James H. S'u'oet, President, Monsanto Brazil Brazil has become a major world area for Monsanto, and it will grow in importance as our Company becomes more global. We have done well during the 25 years we have been in this huge and compli cated land. It's risky to generalize about Brazil. Highly indus trialized and wealthy in the South, where the economy has long revolved around the sophisticated cities of Rio de Janeiro and Sao Paulo, Brazil is also a young, emerging frontier nation in the western interior. Often viewed as a potential power, Brazil is in many respects already an economic giant. It produces almost half of South America's goods, nearly three times as much as the next-largest economy on that continent. A market economy prevails, yet the government is a major economic force. The government controls imports and exports, and it has created special "market reserves" to encourage the growth of certain Brazilian industries. The government's presence is felt in another way. That's in the form of hyperinflation -- nearly 1,000 percent in 1988. Government borrowing contributes to the inflation, but it has attempted to attack the problem -- with wage and price-control "shock treatments," for example, and indexation of prices and wages. The problem remains to be solved, but unlike most countries, Brazil has kept growing in spite of it. Monsanto has also grown by learning how to do business in this variable and unpredictable economy, which sometimes frustrates managers schooled in the business practices of Europe and North America. To succeed, we've learned the value of being flexible, informal, tolerant, adaptable and agile. Above all, we must be patient and look to the long term, for it is only over time that the complexities can be managed and the results measured with accuracy. First Significant Investment in 1973 Monsanto entered the Brazilian market in 1963 with the opening of a sales office in Sao Paulo. We increased our presence in 1973, when we made our first significant investment there in the form of a minority interest in a local company. Within a year, we also invested in a manufacturing facility at Sao Jose dos Campos. Since then, a steady pace of investment -- running today at S20-S25 million a year -- has created perhaps the most comprehensive range of Monsanto operations in any country outside the United States. From our initial investments in rubber chemical and phosphate production and later investments in poly styrene and herbicide production, the Sao lose dos Campos facility has grown into a complex network of process units making many Monsanto products. Agricultural, Automotive Markets Largest Monsanto do Brasil sales, excluding our joint ventures, have climbed from S5 million in 1974 to SI 88 million in 1988, with industrial chemicals and agricultural products leading the way. Brazil is the world's No. 1 coffee producer, and coffee growing constitutes the largest Brazilian market for Roundup herbicide. Brazil, in fact, is the third-largest country for Roundup in the world. Destined to become an even larger market for Monsanto products is the automobile industry. Brazil today ranks eighth in the world as an auto mobile manufacturer. By the mid1990s, it is expected to rank fourth. Already Monsanto is the leading producer of rubber chemicals in Brazil, and the expected growth in the auto market will fuel sales of rubber chemicals. (continued on page 18 HutraSweet in a Land of Sugar Brazil is a land of sugar. The average Brazilian con sumes 25 kgs ' 55 Ibsf 5W\'ur each year, compared with 7 fegs (15 lbs) lor each person m the United States. Until early 198S, use of nun-sugar sweeteners :n Brazil was restricted to a small number of prodints The SuiraSweet Com pany sought to change th.it through an informational campaign. Pint, The SuiraSweet Company became a regular source of scientific injonnauon for government officials. Second, it enihted the support of potential customers in the effort to make NutraSwecc wr?:ener available to Brazilian cortiumers. The strategy succeeded. NutraSwccc ii now approved jor sale in Brazil. It ivill so\'n be manufactured there DSW 021790 STLCOPCB4007099 Globalization: Korea (continued) strategies and objectives. It is being sold. Joint Venture for Automotive Market Formed Korea also has emerged as one of the world's major automotive mar kets. In 1985, we began talks with Korea's largest tire maker, Kumho, who was attracted to our superior rubber chemi- Automob.le products u becommg cals and other ^St-rate Monsanto's largest Korean market. products for the automo tive market, like Sajlex interlayer in safety glass and Santoprene thermoplastic rubber. The upshot was Monsanto's latest Korean joint venture, Kumho Monsanto Company, founded in 1987. The Monsanto family in Korea gained another member in 1985, when the Company acquired G.D. Searle & Co. (see sidebar on page 15). This new business is also in step with the increasing mod ernization of the Korean economy and society Thus, Monsanto has evolved and prospered in harmony with Korea, assisting in each stage of Korean development while doing a profitable business. Monsanto continues to develop new products that will help boost Korean agricultural production. Feasibility studies are also under way to determine appropriate investments to supply the automotive market. Monsanto and Korea are good for each other. We Koreans have a can-do attitude. Our spiritual heri tage encourages us not to dwell on problems but instead to seek opportunities. Monsanto will always find new opportunities for profitable business as Korea grows and prospers. Globalization: Brazil (continued) The same market will become a major con sumer of Sajlex plastic interlayer for laminated safety glass. Beginning in 1991, Brazilian law will require laminated safety glass in all new autos. That's why we are building a plant to manufacture Sajlex. Automobiles will also be the leading market for Emerging as Brazil's largest customerfor Monsanto products is the auto industry. Santoprene thermoplastic rubber, which we will soon be supplying from a new production unit at Sao Jose dos Campos. NutraSweet brand sweetener is another product with large market potential. Until recently, non-sugar sweeteners were highly restricted by the Brazilian government. But a new legal status for these sweet eners changed that in early 1988 (see sidebar on page 17). Now NutraSweet is being sold and a plant is being built at Sao Jose dos Campos to satisfy the extraordinary sweet tooth and fit-and-trim attitudes of the Brazilian people. Quality Gives Competitive Edge To take full advantage of these and other opportuni ties in Brazil, we have initiated a Total Quality program. Not only do we expect quality-improve ment programs to result in cost savings, but we are convinced that improved quality throughout our operations will also give us a significant competitive advantage. For as Brazil develops further, increased domestic consumption and exports to other coun tries will lead to demands for higher-quality products. We intend to be the preferred supplier in our targeted markets of the highest-quality products to those customers. We expect Monsanto's record of success in Brazil to continue. The population is young -- 50 percent are below the age of 18. This will provide a growing consumer base and an eager work force. Further more, many of the major growth markets in Brazil are ones that Monsanto is well equipped to supply. The future looks promising. 18 OSW 021791 STLCOPCB4007100 Financial Section Monsanto Company and Subsidiaries 19 DSW 021792 STLCOPCB4007101 Financial Section Contents Management Report Audit Committee Report Independent Auditors' Opinion Statement of Consolidated Income Review of Consolidated Results of Operations Operating Unit Segment Data Geographic Data Statement of Consolidated Financial Position Review of Liquidity and Capital Resources Statement of ConsoHdstod Cart Ftew Review of Cash Flow oiiwTMni oi umunoM mwmmuri bjorj ROM V nRRHI oMuM Significant Accounting Policies Basis ofConsolidation Currency Translation Principal Acquisitions and Divestitures 20 Restructuring 21 Depreciation and Amortization 21 Inventory Valuation 22 Income Taxes 37 37 38 38 23 Short- Term Debt and Credit Arrangements 39 25 Long-Term Debt 39 30 Pension Benefits 39 32 Other Postemployment Benefits 40 33 Stock Option Plans 40 34 Earnings per Share 40 36 Capital Stock 41 36 Commitments and Contingencies 41 37 Supplemental Data 41 37 Segment Information 41 37 Quarterly Data 42 37 Financial Summary 43 37 Unless otherwise indicated by the context, "Monsanto" means Monsanto Company and consolidated subsidiaries, and "the Company" means Monsanto Company only. All dollars are in millions, except per share data. Management Report Monsanto Company management is responsible for the fair presentation and consistency of all financial data included in this Annual Report in accordance with generally accepted accounting principles. Where necessary, the data reflect management's best estimates and judgments. Management also is responsible for maintaining a system of internal accounting controls with the objectives of providing reasonable assurance that Monsanto's 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. The effectiveness of internal controls is maintained by: (1) personnel selection and training; (2) division of responsibilities; (3) establishment and communication of policies; and (4) ongoing internal review programs and audits. Management believes that Monsanto's system of internal controls as of December 31, 1988 is effective and adequate to accomplish the above described objectives. Richard J. Mahoney Chairman and Chief Executive Officer February 24,1989 Francis A. Stroble Senior Vice President and Chief Financial Officer S Monsanto Company and Subsidiaries DSW 021793 STLCOPCB4007102 Audit Committee Report The Audit Committee is composed of five non employee members of the Board of Directors and met three times in 1988. It reviews and monitors Monsanto's internal controls, financial reports, accounting practices and the scope and effectiveness of the audits performed by the independent auditors and internal auditors. The Committee also recommends to the full Board of Directors the appointment of Monsanto's principal independent auditors and approves in advance all significant audit and non-audit services provided by such auditors. As ratified by shareowner vote at the 1988 Annual Meeting, Deloitte Haskins & Sells was appointed as independent auditors to examine, and express an opinion as to the fair presentation of, the consolidated financial statements. This opinion appears below. The Audit Committee discusses audit and financial reporting matters with representatives of the Company's financial management, its internal auditors and Deloitte Haskins & Sells. The internal auditors and Deloitte Haskins & Sells meet wich the Committee, with or without management representatives present, to discuss the results of their examinations, the adequacy of Monsanto's internal accounting controls and the quality of financial reporting. The Committee encourages the internal auditors and Deloitte Haskins & Sells to communicate directly with the Committee. The Audit Committee has reviewed and approved the financial section of this Annual Report. Pursuant to the recommendation of the Audit Committee, the Board of Directors also has approved the financial section. Buck Mickel Chairman, Audit Committee February 24, 1989 Independent Auditors' Opinion To the Shareowners of Monsanto Company: We have audited the accompanying statement of consolidated financial position of Monsanto Company and Subsidiaries as of December 31, 1988 and 1987, and the related statements of consolidated income, shareowners' equity and cash flow for each of the three years in the period ended December 31, 1988. These financial statements arc the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly in all material respects the financial position of Monsanto Company and Subsidiaries at December 31, 1988 and 1987, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1988, in conformity with generally accepted accounting principles. Deloitte Haskins & Sells Saint Louis, Missouri February 24, 1989 Monsanto Company and Subsidiaries 21 OSW 021794 STLCOPCB4007103 Statement of Consolidated Income (Dollars in millions, except per share) Net Sales Cost of goods sold Grot* Profit Marketing expenses Administrative expenses Technological expenses Amortization of intangible assets Restructuring expense (income) -- net Operating Income Interest expense Interest income Other income -- net income Before Income ten Income taxes Nn room* Earnings per Share The above statement should be read in conjunction with pages 37 through 42 ofthis report. 1988 $8,293 4,972 3,321 1,013 474 648 231 955 (174) 46 66 893 302 $ 591 $ 8.27 1987 $7,639 4,755 2,884 918 424 615 225 (32) 734 (172) 42 69 673 237 $ 436 S 5.63 1986 S6.879 4,344 2,535 816 428 596 218 (158) 635 (201) 41 161 636 203 S 433 $ 5.55 tMf_y_r*t-r-a--n--c-oi~ne ImMMsiluirtGimiSm ftrcent Change from Prior Year Net Sales Operating Income Net Income Earnings per Share As a Percent ofNet Sales: Gross Profit Marketing, Administrative and Technological Expenses Research and Development Expenses Operating Income Net Income Effective Income Tax Rate Return on Shareowners' Equity 1988 9% 30 36 47 40 26 7 12 7 34 15 1987 11% 16 1 1 38 26 7 10 6 35 11 1986 2% -- -- -- 37 27 8 9 6 32 12 8 Monsanto Company and Subsidiaries DSW 021795 STLCOPCB4007104 Review of Consolidated Results of Operations 1988 Was Record Year The strategies established in prior years and the continued economic growth in Monsanto's key markets throughout the world produced strong sales demand, which resulted in record earnings in 1988. Net income for 1988 was $591 million compared with S436 million in 1987, a 36 percent increase. Earnings per share for 1988 were $8.27 versus S5.63 in 1987, a 47 percent increase. In addition to the strong income performance, earnings per share benefited from the reduction in the number of common shares outstanding as a result of the treasury stock purchase program. Sales Demand Strong Across All Segments Net sales increased 9 percent in 1988. Sales volume was 6 percent higher than 1987. The volume improvement was experienced across all operating units. The improvement in sales volume and mix contributed an additional $2.47 per share to 1988 earnings per share. Demand was strong for both U.S. export and ex-U.S. produced goods as these sales increased 12 percent and comprised 43 percent of Monsanto's total net sales in 1988. New applica tions and market expansion contributed to robust demand for established agricultural products such as Roundup and Lasso herbicides. Alimet animal feed supplement had a record sales year with a substantial increase in volume. Products such as Saftex plastic interlayer and Lustran ABS thermoplastics experi enced vigorous demand from the automotive and housing industries. Sales demand for Wear-Dated stain-resistant carpet fibers continued to grow. The volume growth of NutmSweet brand low-calorie sweetener reflected the continued strength of the U.S. diet carbonated soft drink market and further penetration of international markets. Sales of the Calan family of pharmaceutical products increased 79 percent. The overall impact of selling price increases was favorable in 1988. Strong demand supported selling price increases for a number of products. However, the Roundup herbicide global marketing strategy, which included reducing selling prices, contributed to increased market penetration and development of new markets, which resulted in substantial volume increases. Internationally, the continued weakness of the U.S. dollar gave U.S.-produced goods a com petitive advantage in certain world area markets. The currency translation of ex-U.S. denominated sales into U.S. dollars also produced a favorable effect. Gross Margin Improved Gross profit was 40 percent of sales in 1988, a good improvement compared with 38 percent for the prior year. Monsanto's strategy to exit from cyclical commodity chemicals businesses in favor of higher value-added products has improved the quality of the product portfolio. This shift to higher margin products contributed significantly to the gross profit improvement in 1988. In addition, benefits were realized from continuing manufacturing cost reduc tion projects. The effect of higher selling prices ($240 million) exceeded the effect of raw material cost increases ($140 million). Marketing and Administrative Expenses Affected by Higher Sales and Profitability Marketing expenses increased 10 percent in 1988. Of this increase, about one-fourth was from higher agents' sales commissions resulting from the higher sales level. Another one-fourth of the increase was the effect of ex-U.S. currency translation, and the remaining increase generally was due to infla tion. Marketing expenses as a percent of net sales were 12 percent in 1988, unchanged year-to-year. Marketing expenses as a percent of net sales differ substantially between operating units, the highest being in Pharmaceuticals and the lowest being in Chemicals. Administrative expenses increased 12 percent in 1988. About one-half was from higher employee incentive compensation resulting from the record profitability. The remainder of the increase was due to inflation and the effect of ex-U.S. currency translation. Resaardi Commitment Continues Monsanto continues to commit significant resources to research with technological expenses of $648 million in 1988, 5 percent higher than 1987. Significant expenditures were in the areas of life sciences -- pharmaceuticals and agriculture. A strategy of in-house research complemented by university collaboration and aggressive licensing programs sustains the momentum established in recent years. As a result, Crop Chemicals has more potential new products in the pipeline than at any time in the past 15 years. Pharmaceuticals has numerous products in various stages of research and development, some of which are now awaiting regu latory approval for commercialization. Cytotec anti ulcer drug was approved in the United States in late 1988 and will be commercially launched in 1989. Animal Sciences' bovine somatotropin and The NutraSweet Company's Simplesse all-natural fat substitute are anticipated to be introduced in 1989. Monsanto also has devoted significant research effort to existing product lines, focusing primarily on improving the technology and expanding product applications, such as a Saflex plastic interlayer that can screen out heat-causing solar radiation. Monsanto Company and Subsidiaries 23 DSW 021796 STLCOPCB4007105 Review of Consolidated Results of Operations (continued) Operating Income Up 30 Percent Operating income was S955 million in 1988, up 30 percent from S734 million in 1987. The operating profit margin improved to 12 percent of net sales in 1988 as compared to 10 percent in the prior year. Sales volume and selling price improvements favorably affected operating income; but rising raw material and marketing costs had an unfavor able impact. ROE Improved to IS Percent The 15 percent return on shareowners' equity (ROE) in 1988 represents considerable improvement over the 11 percent attained in 1987 and demonstrates continuing progress toward management's target of a 20 percent return on equity by the early 1990s. The 1988 improvement was primarily due to the higher profit performance, supplemented by the treasury stock purchase program. 1987 Showed Improvement Net sales increased to $7,639 million in 1987, an 11 percent increase over 1986. Sales volume increased 8 percent in 1987. Worldwide selling prices increased 3 percent. The gross profit margin in 1987 was 38 percent versus 37 percent in 1986 due to increased sales of products with higher margins (Pharmaceuticals and Crop Chemicals). Chemicals margins were lower because of a selling price/raw material cost squeeze. Monsanto's total raw material costs increased approximately 13 percent. The gross profit margin was adversely affected in 1986 by the $90 million obsolescence charge for the Electronic Materials property write-down. Net income of $436 million in 1987 was up margin ally from $433 million in 1986. Included in 1986 net income, however, was $85 million of net gains asso ciated with unusual items resulting from the sale, closure or impairment of facilities and businesses as well as other unusual income and expenses. Only $18 million was included in 1987 for gains from similar items. The countries in which Monsanto operates have experienced varying degrees of inflation; therefore, the historical cost of certain assets is generally lower than current cost. Generally accepted accounting principles require financial statements to be prepared at historical cost. Consequently, the depreciation expense reported in the Statement of Consolidated Income is less than that which would be reported using current cost. Analysis of Change in Earnings per Share -- Better (Worse) Sales Related Factors: Selling prices Sales volume and mix lbtal Sales Related Factors Cost Related Factors: Raw material costs Other manufacturing costs Marketing, administrative and technological expenses Nonrecurring 1986 costs IM Cost Related Factors Other Factors: Restructuring -- net Divestitures Mai Other Fadon Operating Incontt Interest expense Interest income Other income -- net Change in income taxes Change in shares outstanding CftMQi in Earnings par Stan 1988 vs. 1987 vs. 1987 1986 $ 1.78 2.47 4.25 S 1.21 2.12 3.33 (1.02) 0.19 (1.30) (2.13) (1.70) (0.07) (0.93) 0.98 (1.72) (0.24) (0.26) (0.50) 1.62 (0.01) 0.03 (0.02) 0.38 0.64 * 2.64 (1.01) (0.13) (1.14) 0.47 0.19 0.01 (0.87) 0.25 0.03 S 0.08 Sales VotameMn (1985 1.0) 0.8 Sattng Pries Mu (1985 - 1.0) 1986 1987 1988 0.8 Raw Malarial Cost Mas (1985 = 1.0) 1986 1987 1988 24 Monsanto Company and Subsidiaries 0.8 1986 1987 1988 DSW 021797 STLCOPCB4007106 Operating Unit Segment Data Agricultural Products: Crop Chemicals Animal Sciences Chemicals Electronic Materials Fisher Controls NutraSweet Pharmaceuticals Biotechnology Product Discovery Corporate lOGtt COnSOlOTM 1988 Operating Research Net Sales_______________Income (Loss)___________ and Development 1987 1986 1988 1987 1986 1988 1987 1986 *1,377 169 3,989 209 840 736 973 *1,178 127 3,858 185 749 722 820 *1,067 86 3,548 154 645 711 665 3 *8,293 *7,639 *6,879 *434 (10) 486 11 29 154 (62) (47) (40) *955 *359 (43) 450 (5) 26 145 (119) (43) (36) *734 *318 (35) 613 (139) (66) 142 (119) (41) (38) *635 *110 43 108 6 19 35 198 47 9 *575 S 94 47 108 8 18 31 199 43 9 *557 S 94 41 105 15 21 25 177 39 6 *523 Agricultural Products: - Crop Chemicals Animal Sciences Chemicals Electronic Materials Fisher Controls NutraSweet Pharmaceuticals Biotechnology Product Discovery Corporate *I-PK-HC---O----n--U--HUJO--B BQ1 1988 Total Assets 1987 1986 *1,001 260 2,883 217 682 1,484 1,604 67 263 *8,461 * 918 221 2,856 234 654 1,724 1,484 78 286 *8,455 S 939 217 2,704 228 612 1,883 1,394 50 242 *8,269 1988 Capital Expenditures 1987 1986 *101 22 329 10 25 36 56 7 4 *590 t 71 21 287 11 22 31 50 6 6 *505 * 55 33 244 51 38 39 53 6 1 *520 The above data should be read in conjunction until the Segment Injomation note to thefinancial statements on pages 41 and 42. Chemicals operating income was favorably affected by unusual items of $149 million in 1986 and $30 million in 1987 from the actions instituted under the 1985 restructuring program. The Electronic Materials operating loss in 1986 included asset impairment costs of $90 million. The following describes the principal factors for the operating units' strong overall performance in 1988 and 1987, along with the factors that are expected to affect operating results in 1989. Depreciation and Amortization 1988 1987 1986 $ 85 25 235 20 37 209 79 11 2 *703 S 82 22 231 17 34 206 75 8 4 *679 S 84 21 236 122 36 205 67 7 2 *780 Crop Chemicals Animal Sciences Chemicals Electronic Materials Fisher Controls NucraSweet Pharmaceuticals Monsanto Company and Subsidiaries 25 OSW 021798 STLCOPCB4007107 Operating Unit Segment Data (continued) Crop Chemicals Net Sales Operating Income 1988 $1,377 434 1987 $1,178 359 1986 $1,067 318 The Crop Chemicals operating unit is a leading worldwide producer and marketer of agricultural herbicides, including Roundup, Lasso, Avadex and Machete herbicides. More than half of Crop Chemicals net sales are in markets outside the United States. Crap Chemicals Net Sales (dollars in millions) 0 1986 1987 1988 U.S. I ex-U.S. Crop Chemicals achieved significant increases in 1988 net sales, up 17 percent, and operating income, up 21 percent. Roundup herbicide set a record for sales volume in 1988. Crop Chemicals had signifi cant sales volume gains outside the United States. Operating results also were favorably affected by the translation of ex-U.S. currencies into the U.S. dollar. Price reductions for Roundup herbicide, part of a continuing global marketing strategy begun in 1985, facilitated further market expansion. The resulting volume-related gains more than compen sated for the lower selling prices. Net sales of Lasso herbicide for control of grassy weeds in com and soybean crops improved in 1988 due to increased planted acreage in the United States coupled with an aggressive marketing program. Besides herbicides, Crop Chemicals research programs are focused on the discovery and develop ment of fungicides ami insecticides, as well as plants genetically engineered to have a resistance to insects and viruses, or tolerance to Roundup herbicide. In various stages of research and development are several new herbicides and soybean and cotton plants, which have a resistance to Roundup herbicide. In 1987, Crop Chemicals net sales increased 10 percent and operating income improved 13 percent. The increase was accomplished through innovative marketing programs which increased the sales volume of Roundup herbicide. Both Roundup and Avadex herbicides had strong demand outside the United States. Lower U.S. planted corn acreage and increased competition contributed to lower Lasso herbicide sales and operating income in 1987. Outlook-Crap Chemicals The devastating 1988 drought in the United States significantly lowered yields of com, wheat and soybeans and depleted surplus grain stocks. Plant ings of these crops in the United States are expected to increase substantially in 1989 as a result of lower government requirements for idled acres and stronger commodity prices. New applications and expansion of ex-U.S. markets are also expected to grow sales volume in 1989. The acquisition of the Greensiveep lawn and garden care business in 1988 also is expected to facilitate additional growth in U.S. residential sales. Continuing the Roundup her bicide global marketing strategy, price reductions effective in 1989 have been announced in several ex-U.S. markets. Animal Sciences Net Sales Operating Income (Loss) 1988 $169 (10) 1987 $127 (43) 1986 $86 (35) The Animal Sciences business focuses on animal nutrition and growth products. The major commer cial products are Alimet animal feed supplement and Santoquin antioxidant. Animal Sciences had record sales in 1988. Net sales increased 33 percent due to an increase in sales volume of Alimet animal feed supplement. The ease of handling Alimet versus competitive products and innovative marketing programs were the principal reasons for the record level of sales. Significant research expenditures continue for bovine somatotropin (BST), a naturally occurring protein produced through biotechnology that enhances the efficiency of milk production in dairy cows, which is awaiting regulatory approval in the United States and market introduction. Monsanto also is develop ing a porcine somatotropin (PST) which research demonstrates improves the feed efficiency and growth rate of hogs and results in leaner pork. The increased earnings from the record 1988 sales level and lower manufacturing start-up costs reduced the operating loss significantly. However, the continuing high BST/PST funding resulted in an operating loss. 3 Monsanto Company and Subsidiaries OSW 021799 STLCOPCB4007108 Operating Unit Segment Data (continued) Net sales for 1987 increased 48 percent over 1986 as sales volume of Alimet animal feed supplement increased significantly. The increase in 1987 research and development expenses and BST manufactur ing start-up costs was greater than the effect of the higher profits resulting from the increased sales of Alimet. Outlook - Animal Sciences BST is awaiting approval by the U.S. Food and Drug Administration. This product is expected to bring significant value to the dairy industry through the reduction of milk production costs. The poultry market that Alimet serves is expected to grow as diet trends continue to move toward consumption of white meat. Pricing actions by ex-U.S. competitors may result in Alimet selling prices being lower in 1989 to maintain a competitive position. Chemicals Net Sales: Detergents and phosphates Engineered products Man-made fibers Plastics Resin products Rubber chemicals and instruments Specialty chemicals Total Operating Income 1988 1987 1986 S 513 109 962 887 677 417 424 *3,989 486 $ 494 200 950 804 645 366 399 *3,858 450 * 536 205 856 639 584 319 409 *3.548 613 The Chemicals unit produces a wide range of chemi cals, plastics, fibers and other products listed in the table above. The unit's principal strengths are nylon carpet fiber, high-performance plastics, Sajlex plastic interlayer, detergents and phosphates, rubber chemi cals and maleic anhydride. Chemical: Nat Satai (dollars in millions) 0 U.S. ex-U.S. 1986 1987 1988 Net sales increased 3 percent in 1988. However, excluding businesses subsequently divested, 1988 net sales increased 9 percent principally from strong demand across the continuing product lines. Parti cularly robust were the ex-U.S. markets for most business lines. For continuing product lines, U.S. export sales increased 22 percent and ex-U.S. manu factured sales increased 16 percent. The translation of ex-U.S. financial results into U.S. dollars also had a positive effect. Higher 1988 sales volume and selling prices generated solid income gains. The selling price increases were in response to higher raw material costs. Plant capacity utilization was 83 percent in 1988 versus 80 percent in 1987. This higher plant utilization also contributed to improved 1988 operating income. Overall, operating income in 1988 was up 8 percent. Because of strong worldwide demand, net sales of plastics were vigorous and increased 10 percent over 1987 in spite of the Australian business divestiture in 1988. Lustran ABS thermoplastics and high perfor mance alloys and blends benefited from an increase in worldwide motor vehicle production. The high demand permitted some increases in selling prices, which were necessary to recover escalating raw material costs. Resin products net sales increased 5 percent in 1988. Sajlex plastic interlayer, used primarily in automo bile windshields, benefited from the high level of worldwide automobile production and expanded use in architectural markets. Net sales of specialty resins, plasticizers and resins for adhesives and paint addi tives were also strong. Hbers net sales increased only 1 percent over 1987. However, Wear-Dated stain-resistant carpet fibers continued to generate strong consumer acceptance and demand. Advertising and promotional expenses were higher to maximize consumer response to these stain-resistant carpet fiber products introduced in 1987. In the other Chemicals businesses, specialty chemi cals net sales increased 6 percent driven largely by maleic anhydride performance. Led by surfactants and phosphorus derivatives demand, detergents and phosphates net sales increased 4 percent in 1988. Rubber chemicals and instruments 1988 net sales were 14 percent ahead of 1987. Engineered products net sales declined primarily due to the 1987 divesti ture of the polyethylene bottle business (net sales of approximately $60 million in 1987). Monsanto Company and Subsidiaries 21 DSW 021800 STLCOPCB4007109 Operating Unit Segment Data (continued) Chemicals research continues to focus primarily on improving the technology and broadening the appli cations for existing products to meet customers' changing needs. The success of these programs is seen in the commercial strength of Monsanto's improved carpet fibers, maleic anhydride, Sajlex plastic interlayer, plastic alloys and specialty resins. Net sales of the Chemicals unit in 1987 increased 9 percent driven by a 33 percent increase in U.S. exported products. Ex-U.S. selling prices were favorably affected by currency translation, while U.S. selling prices decreased. Operating income of $450 million was down versus S613 million in 1986. However, operating income in 1986 included $149 million of restructuring income versus $30 million in 1987. Outlook - Chemicals The Chemicals unit has a solid portfolio of products that provide value to customers. Rationalization of capacity and cost reduction actions have lowered the capacity utilization break-even point. The carpet fiber technology (with "locked-in" stain blockers) is a generation ahead of the competition by applying protection as the fiber is produced. Sajlex plastic interlayer was 50 years old in 1988 and continues to be an exceptional product. New applications for automotive use are in advanced stages of develop ment and architectural applications continue to expand. Additional ex-U.S. manufacturing capacity for Sajlex plastic interlayer is under construction to supply the demand from worldwide motor vehicle markets. Other new manufacturing facilities completed in 1988 include a Santoprene thermoplastic rubber facility in Brazil. Also, a cooperative agree ment to produce and market maleic anhydride in Taiwan has been signed. Bedronlc Materials Net Sales Operating Income (Loss) 1988* $209 11 1987 $185 (5) 1986 $154 (139) mFor the ten-month periodjanuary-October. Monsanto has signed an agreement to sell this busi ness to Huels AG, subject to governmental approvals in the various countries where facilities are located. This approval and the recording of the sale are expected to occur in the first part of 1989. Monsanto has not reported this business as a discontinued oper ation in the Statement of Consolidated Income as the effect is immaterial. The 1988 operating income was a record for Elec tronic Materials. This strong performance resulted from the growth in worldwide semiconductor demand and greater penetration in ex-U.S. markets. Sales in 1987 increased 20 percent and operating performance improved substantially, moving from an operating loss of $139 million in 1986 to nearly break-even in 1987. The 1986 results included a $90 million asset impairment write-down. Rsher Controls Net Sales Operating Income (Loss) 1988 $840 29 1987 $749 26 1986 S645 (66) Fisher Controls is a leading worldwide producer of industrial valves and regulators, as well as PROVOX electronic process instrumentation and gas separa tion systems. Net sales increased 12 percent in 1988 on the strength of customer demand and improved selling prices. Fisher Controls markets began to revive late in 1987 and continued to improve through 1988. In addition, this unit benefited from the favorable currency effect of a weaker U.S. dollar. Operating income increased 12 percent in 1988 despite raw material cost increases for specialty metal castings and electronic components and adverse inventory adjustments in part of the ex-U.S. operations. Net sales increased 16 percent in 1987 due to sales volume and selling price improvements. Operating income was $26 million in 1987 versus a $66 million operating loss in 1986. The 1986 loss resulted princi pally from depressed sales to the chemical and oil and gas industries and from actions taken late in 1986 to lower future operating costs. AUlifilUJOjuOiLK - nSMf coonm Fisher Controls business is dependent primarily upon capital expenditures in the chemical, oil and pulp and paper industries. Sophisticated control valves and systems may take months to produce. As a result, booked orders for production is a key indicator for future business performance. Booked orders in the process control business at the end of a Monsanto Company and Subsidiaries DSW 021801 STLCOPCB4007110 Operating Unit Segment Data (continued) 1988 were up 8 percent from the end of 1987. In addition, selling price increases for valve and instru mentation products have been announced to be effective at the beginning of 1989, reflecting higher raw material costs experienced in 1988. NutraSweet Net Sales Operating Income 1988 *736 154 1987 S722 145 1986 *711 142 The NutraSweet Company manufactures and markets NutraSweet brand low-calorie sweetener which is sold worldwide. The company also markets Equal low-calorie tabletop sweetener throughout the United States. A new product, Simplesse all-natural fat substitute, has been announced and is awaiting affirmation of its Generally Recognized As Safe (GRAS) status by the U.S. Food and Drug Administration (FDA) and regulatory authorities in other countries. Operating income in 1988 increased 6 percent compared to 1987 principally due to production cost reductions and 10 percent higher NutraSweet sales volume attributable to the growth of the diet carbonated soft drink market worldwide. While sales volume was higher, net sales increased only 2 percent because of lower worldwide average sell ing prices. Operating expenses increased as a result of higher marketing costs and expanded technologi cal expenses associated with Simplesse. This unit's 1987 net sales and operating income were up slightly from the prior year. Sales volume of NutraSweet brand low-calorie sweetener increased 9 percent. Continued strong growth in the United States of diet carbonated soft drinks and further manufacturing cost reductions were countered by the effects of lower worldwide average selling prices, some customer inventory reductions and higher administrative and technological expenses. Outlook-NutraSweet The U.S. diet carbonated soft drink market will continue to be the principal market for NutraSweet in 1989 and is expected to grow. Internationally, the company expects strong unit sales growth. However, worldwide average selling prices are expected to continue to decline in response to competition. It also is anticipated that regulatory authorities will allow Simplesse to be sold in several markets in 1989. Pharmaceuticals Net Sales Operating Income (Loss) 1988 *973 (62) 1987 *820 (119) 1986 *665 (119) G.D. Searle & Co. is a research-based, worldwide pharmaceuticals business concentrating on drugs for the treatment of cardiovascular, gastrointestinal, infective and central nervous system diseases. In 1988, cardiovascular products accounted for 56 percent of worldwide net sales. Over half of Searle's net sales were outside the United States. Plwrmaeaudem Nat Sato (dollars in millions) 0 1986 1987 1988 U.S. I ex-U.S. Pharmaceuticals sales growth of 19 percent in 1988 was driven by increasing demand for the Calan family of calcium channel blocker products for hypertension (a 79 percent increase) in the United States and Canada. A wide range of products contributed to the 13 percent ex-U.S. sales growth. Several strategically important mergers, joint ventures and restructurings were completed in 1988 to strengthen Searle's presence in the key world markets in Germany, Italy, the United Kingdom and Brazil. As a result of the above factors, the operating loss in 1988 was reduced dramatically (48 percent) from 1987. Research and development expenses were $198 million in 1988, level with 1987. This research effort is concentrated on molecular and cell biology and traditional chemical discovery methods. As part of its R&D strategy, Searle has also acted to acceler ate the process of bringing new products to the market by actively pursuing various licensing oppor tunities to complement its in-house product portfolio. Among the many licensing agreements signed by Searle during the past two years, the two having greatest potential for near-term impact are lomefloxacin, a quinolone class anti-infective, and oxaprozin, a new once-a-day non-steroidal anti inflammatory drug for the treatment of rheumatoid Monsanto Company and Subsidiaries 29 DSW 021802 STLCOPCB4007111 Operating Unit Segment Data (continued) arthritis and osteoarthritis. Also, the ongoing collaborative research program with Oxford University in the United Kingdom is focused on developing glycobiological compounds for the treatment of AIDS, arthritis and other diseases. Glycobiology is a newly emerging area of scientific inquiry involving the role of various sugars in a variety of biological processes. In 1987, Pharmaceuticals sales increased 23 percent, primarily due to strong growth for Calan SR. The operating loss in 1987 was the same as 1986 as increased income from higher sales was invested in higher research and development and increased marketing expenses for new product launches. Outlook - Pharmaceuticals In 1989, Searle expects further growth for the Calan family of products. In December 1988, the FDA approved the marketing of Cytotec, an anti-ulcer drug for the prevention and treatment of ulcers that are often associated with the use of many arthritis medicines. Cytotec is already marketed in many ex-U.S. countries and will be introduced in the United States in 1989. Kerlone, a new beta blocker for the treatment of high blood pressure, is antici pated to receive U.S. regulatory approval in 1989. Biotechnology Product Discovery The Company conducts basic and applied biotech nological research in the life sciences businesses for discovery of new biotechnology-based product opportunities. This research is coordinated with the strategic direction of the life sciences businesses: Crop Chemicals, Animal Sciences and Pharma ceuticals. Discoveries are further developed and commercialized by those businesses. The cost of biotechnology product development effort directly related to Crop Chemicals, Animal Sciences and Pharmaceuticals is included as an expense in those segments. Geographic Data United States Europe-Africa Canada Latin America Asia-Pacific Inter-area Eliminations Corporate ra nl-iO--R-wuv-u-nav Net Sales to Unaffiliated Customers 1988 1987 1986 *5,219 1,801 377 304 592 *4,883 1,537 329 293 597 *4,638 1,231 290 283 437 *8,293 *7,639 *6,879 Operating __________ Income (Loss) 1988 1987 1986 *638 245 37 27 74 (26) (40) *501 181 31 2 49 6 (36) *506 117 26 6 16 2 (38) *955 *734 *635 ______________ Total Assets 1988 1987 1986 $6,240 1,447 149 242 478 (358) 263 *6,431 1,256 116 235 513 (382) 286 *6,608 1,013 116 243 385 (338) 242 *8,461 *8,455 *8,269 The data above are prepared on an "entity basis," which means that net sales, operating income and assets of a legal entity are assigned to the geographic area where the legal entity is located (e.g., a sale from the United States to Latin America is reported as a United States sale). Inter-area sales between Monsanto entities have been excluded from the above table, but are shown in the Segment Informa tion note to the financial statements on pages 41 and 42. The reported operating income for the ex-U.S. geographic areas does not include the full profit ability generated by sales of Monsanto products imported from other locations, principally from the United States. United States Domestic and Export Sales Increased Net sales by entities in the United States increased 7 percent over 1987 and operating income increased by 27 percent. The year-to-year improvement in sales and profitability was experienced across all business segments. Crop Chemicals herbicides, Alimet animal feed supplement, certain Chemicals products and Pharmaceuticals products, primarily Calan SR calcium channel blocker, generated the most pronounced improvement. U.S. export sales volume, especially for Crop Chemicals and Chemi cals, expanded during 1988 because of worldwide economic conditions and competitive pricing. Direct sales from the United States to ex-U.S. third party customers were S502 million, $408 million and $279 million for 1988-1986, respectively. a Monsanto Company and Subsidiaries DSW 021603 STLCOPCB4007112 Geographic Data (continued) Net sales in 1987 increased 5 percent over 1986. Operating income was positively affected by the growth of Roundup herbicide and improved profit ability of Fisher Controls and Electronic Materials. However, Chemicals unit profit margins were lower. In addition, Lasso herbicide experienced lower selling prices and volumes. Operating income in 1986 included S155 million of restructuring income and a S90 million write-down of Electronic Materials assets. Operating income in 1987 included S32 million of restructuring income. Excluding these unusual items, operating income increased 6 percent in 1987. Europe-Africa Had Record Results Net sales increased 17 percent in 1988 and operating income was up 35 percent; both were new records. Selling price reductions, expansion of differentiated products and innovative marketing programs produced a significant gain in Roundup herbicide sales volume and profit. Lustran ABS thermoplastics, Sajlex plastic interlayer, rubber chemicals and phar maceutical products also had improved performance in both sales volumes and profits due to strong market demand. Net sales in 1987 in Europe-Africa improved 25 percent over 1986, while operating income increased 55 percent. Net sales and operating income benefited in 1987 from increased sales volumes of U.S.-produced Chemicals products resold in Europe-Africa and higher Pharmaceuticals and Crop Chemicals net sales. Operating income in 1986 included expenses associated with the fixed cost reduction program of Fisher Controls. Canada Herbicide Sales Growth Continued Led by Crop Chemicals, net sales increased 15 percent in 1988 and operating income increased 19 percent. Roundup and Avadex BW herbicides continued to be the principal products contributing to Canada's improved financial results. Pharmaceuti cals had record sales and Fisher Controls sales and operating income rebounded. Sales and operating income continued to benefit from the translation of a stronger Canadian dollar into the U.S. dollar. Net sales and operating income in 1987 increased 13 percent and 19 percent, respectively, over 1986. Most business segments improved over 1986, led by strong sales volumes of Roundup and Avadex BW herbicides and Chemicals products. The effect of translating stronger Canadian dollar-denominated operating results into U.S. dollars helped 1987 sales and operating income. Latin America Improved in All Businesses Net sales increased 4 percent over 1987 in Latin America and operating income grew significantly. Increases in Roundup and Lasso herbicides sales volume contributed to the sales and profit im provement. The rubber chemicals business also experienced performance gains. Pharmaceuticals profitability improved with the restructured Brazil ian operations. In Brazil, a Santoprene thermoplastic rubber facility was completed and a rubber chemicals raw material plant is under construction. Projects for manufactur ing Sajlex plastic interlayer and NutmSweet brand low-calorie sweetener in Brazil also were approved. Latin American operating income does not include the equity income from Monsanto's joint venture companies in Latin America. Such equity income is reflected in "Other income -- net" in the Statement of Consolidated Income. Latin American sales in 1987 increased 4 percent, but operating income declined. Sales volumes of Roundup herbicide, Lustrex polystyrene and rubber chemicals improved in 1987, but an unfavorable change in product sales mix coupled with the impact of currency devaluation in Argentina resulted in a year-to-year decline in operating income. In addi tion, Brazilian import restrictions hampered Pharmaceuticals commercial activities. Asia-Padflc Martat* Prospered Economic growth in the Asia-Pacific world area continued to escalate. Operating income increased 51 percent in 1988 despite a slight decline in net sales brought about by the sale of the Australian commodity chemicals and plastics businesses early in 1988. The higher 1988 profitability was principally generated from higher Crop Chemicals and Electronic Materials sales. Crop Chemicals volume continued to increase in all major Asia-Pacific coun tries. Electronic Materials sales benefited from strong semiconductor demand. Solid financial performance was achieved by the Chemicals busi ness, led by plastics and specialty chemicals. The sale of the Australian businesses represented another step in Monsanto's strategy to divest from cyclical, capi tal-intensive commodity chemicals businesses. Asia-Pacific net sales and operating income improved 37 percent and 206 percent, respectively, in 1987. Sales and profitability of styrene, phenol and Lustrex polystyrene businesses, which were divested in 1988, were particularly strong in Australia. Fisher Controls and Pharmaceuticals also had significant sales and operating income improvements. In addi tion, sales volume of Roundup herbicide was higher in all major Asia-Pacific countries. Monsanto Company and Subsidiaries 31 DSN 021804 STLCOPCB4007113 Statement of Consolidated Financial Position (Dollars in millions, except per share) Assets Current Assets: Cash, rime deposits and certificates of deposit Short-term securities, at cost which approximates market Trade receivables, net of allowances of S28 in 1988 and S38 in 1987 Miscellaneous receivables and prepaid expenses Deferred income tax benefit Inventories Ibtai Currant Assets Intangible Assets, net of accumulated amortization of $798 in 1988 and $566 in 1987 Investments In Affiliates Other Assets Property, Plant and Equipment Land Buildings Machinery and equipment Construcrion-m-progress Total property, plant and equipment Less accumulated depreciation Net Property, Plant and Equipment Ibtai Assets At December 31, 1988 1987 $ 203 18 1,234 284 188 1,170 3,097 S 180 43 1,209 325 165 1,081 3,003 1,790 205 223 1,953 240 183 111 1,122 5,388 305 6,926 3,780 3,146 $8,461 112 1,097 5,242 279 6,730 3,654 3,076 $8,455 Uabfflties and 8heteownsrs' Equity Currant UabNMes: Accounts payable Wages Income and other taxes Miscellaneous accruals Short-term debt Tbtal Current Liabilities Lonq-lbrm Debt Deferred Income bxu Other UabiMes Shareowners' Equip Common stock -- authorized, 200,000,000 shares, par value $2; issued, 82,197,097 shares in 1988 and 1987 Additional contributed capital Accumulated currency adjustment Reinvested earnings Treasury stock, at cost (13,364,917 shares in 1988 and 8,099,580 shares in 1987) Ibtai Shareowners' Equity Ibtal Liabilities and Shareowners' Equfty The above statement should be read in conjunction with pages 37 through 42 ofthis report. $ 545 208 124 547 556 1,980 1,408 588 685 $ 485 175 101 500 539 1,800 1,564 584 606 164 874 52 3,662 (952) 3,800 $8,461 164 872 100 3,282 (517) 3,901 $8,455 32 Monsanto Company and Subsidiaries DSW 021805 STLCOPCB4007114 Review of Liquidity and Capital Resources Monsanto's financial position remained strong in 1988. Financial resources were readily available to support existing businesses and fund new business opportunities. In order to maintain adequate financial flexibility and access to debt markets worldwide, Monsanto management intends to maintain a debt rating in the United States of "A" or equivalent. An important factor in establishing that rating is the interest cover age ratio which improved to 5.5 in 1988 from 4.5 in 1987. Monsanto utilizes both the domestic and interna tional financial markets for its financing needs and has available various short- and medium-term bank credit facilities, which are discussed in the notes to financial statements (page 39). These credit facilities provide the financing flexibility to take advantage of investment opportunities that may arise and satisfy future funding requirements. Management believes that a total debt to total capitalization ratio of approximately 35 percent is appropriate. At year-end 1988, that percentage was 34 percent versus 35 percent in 1987. The current ratio was 1.6 at year-end 1988, compared with 1.7 at year-end 1987. Working capital was 51,117 million, 586 million lower than year-end 1987. Trade receivables increased 525 million primarily because of higher sales levels. Inventories at year-end increased 589 million from 1987, with a turnover ratio approximating 4 times per year. However, trade accounts payable and accrued liabili ties increased 5163 million. Intangible assets declined due to amortization, principally The NutraSweet Company's aspartame patent. Intangible assets of 550 million were acquired in G.D. Searle & Ca's merger of its Italian business with a local firm. Net property, plant and equipment increased in 1988 as capital additions exceeded depreciation, normal retirements and reductions due to divestitures of several businesses. Other liabilities increased $79 million principally due to the higher minority interest from G.D. Searle & Co.'s Italian merger. The Financial Accounting Standards Board has issued new accounting rules that change the method of calculating deferred income taxes. These new rules must be adopted by 1990. The new rules will have no effect on cash flow and, under existing tax laws, are not expected to have a material effect on Monsanto's financial position or future results of operations. Monsanto is subject to various laws and govern mental regulations concerning employee health, product safety and environmental matters. It can be anticipated that increasingly stringent requirements will be imposed upon Monsanto and the chemical industry. Monsanto is dedicated to a long-term envi ronmental protection program which reduces emissions of hazardous materials into the environ ment, as well as the remediation of identified existing environmental concerns. Monsanto showed leadership in the industry by announcing its goal to reduce its hazardous air emissions by 90 percent by 1992. Achieving this target will require the develop ment and installation of new technology. The cost to accomplish this target is not expected to affect oper ating results materially. In 1988, Monsanto spent 536 million on environ mental capital projects and approximately 5207 mil lion for operation and maintenance of environmental protection facilities. Monsanto is negotiating with various government agencies concerning Superfund clean-up sites. The Company spent 519 million in 1988 for remediation of old waste disposal sites and expenditures of a similar or greater amount can be expected in future years. Monsanto's liquidity, financial position or results of operations are not expected to be materially affected by the cost of clean-up of Superfund and old waste disposal sites. Monsanto's commitments and contingencies are described in the notes to financial statements on page 41. Monsanto continually evaluates risk retention and insurance levels for product liability, property damage and other potential areas of risk. Monsanto devotes significant effort to maintaining and improving safety and internal control programs, which reduce exposure to certain risks. Based on the cost and availability of insurance and the likeli hood of a loss occurring, management decides the amount of insurance coverage to purchase from unaffiliated companies and the appropriate amount of risk to retain. This risk includes being insured in the liability area on the "claims made" policy basis. Management believes that the current levels of risk retention are appropriate and are consistent with those of other companies in the various industries in which Monsanto operates. Key Financial Statistics_____________________________________________ Woridng Capitt (Current assets less current liabilities) ClHTMt Redo (Current assets divided by current liabilities) Pwcont oTWal DaM to Tbfrl Capitalization*_________________________________ Total capitalization is the sum ofshort-term debt, long-term debt and shareowners' equity. 1988_____________ 1987 *1,117 1.6 34% $1,203 1.7 35% Monsanto Company and Subsidiaries 33 OSW 021806 STLCOPCB4007115 Statement of Consolidated Cast* Flow (Dollars in millions) Increase (Decrease) In Cash and Cash Equivalents Operating Activities: Net income Add income tax expense Income before income taxes Adjustments to reconcile to Cash Provided by Operations: Income tax payments Items that did not use (provide) cash: Depreciation and amortization Restructuring income -- net Other Working capital changes that provided (used) cash: Accounts receivable Inventories Accounts payable and accrued liabilities Other Nonoperating gains from asset disposals (before tax) Cash Provided by Operations Investing Activities: Property, plant and equipment purchases Acquisition and investment payments Investment and property disposal proceeds Cash Used In Investing Activities Financing Activities: Net change in short-term financing Long-term debt proceeds Long-term debt reductions Treasury stock purchases Dividend payments Other financing activities Cash Used hi Financing Activities Decrease In Cash and Cash Equivalents Cash and Cash Equivalents*; Beginning of year End of year 1988 $ 591 302 893 (235) 703 14 (46) (136) 86 67 (42) 1,304 . (590) (100) 121 (569) 53 21 (167) (457) (211) 24 (737) (2) 223 $ 221 1987 S 436 237 673 (229) 679 (32) 37 (172) (22) 13 (19) (26) 902 (505) (59) 75 (489) 150 26 (122) (339) (212) 33 (464) (51) 274 S 223 1986 S 433 203 636 (221) 780 (158) (9) 117 (2) (173) 80 (90) 960 (520) (29) 503 (46) (315) 675 (1,139) (199) 45 (933) (19) 293 $ 274 The above statement should be read in con/unction with pages 37 through 42 ofthis report. The effect ofexchange rate changes on cash and cash equivalents was not material. Cash payments for interest (net ofasneusits capitalized) were 1167 million, 1167 million and 1173 million for the years 1988-1986, respectively. *Includes cash, time deposits, certificates ofdeposit and short-term securities. M Monsanto Company and Subsidiaries DSW 021807 STLCOPCB4007116 Review of Cash Row Monsanto's cash flow for the three-year period 1988 1986 is shown in the Statement of Consolidated Cash Flow on the preceding page. Cast] Provided by Operations (dollars in millions) 0 1986 1987 1988 Record Cash Provided by Operations Cash provided by operations was $1,304 million in 1988, an increase of 45 percent over 1987 due primarily to the record profit performance. The Chemicals, Crop Chemicals and NutraSweet busi nesses continued to demonstrate excellent cash generating capabilities. Major uses of cash included capital expendi tures, treasury stock purchases and dividends. Monsanto's capital expenditures of $590 million in 1988 were focused on improved technology and ex-U.S. capacity expansions. The more significant expenditures were for expanded glyphosate and Sajlex plastic interlayer capacity and a new deter gent product facility. Monsanto's operations have generated sufficient cash to fund existing businesses, growth-related research and investments. Management expects cash provided by operations supplemented by periodic borrowings to be adequate to fund its future oper ating requirements. Stock Purchase Program Continued In 1987 and 1988, the Company's Board of Directors authorized the purchase of up to 13 million shares of Monsanto common stock, liirough December 31, 1988, the Company purchased 9.7 million shares for $796 million under these authorities. Management believes the treasury stock purchase program repre sents a sound economic investment for Monsanto's shareowners. In addition, these share purchases favorably affect earnings per share and augment profitability improvements as a means of achieving management's return on equity target. Dividends Increase for the 16th Consecutive Year The Company has paid dividends on its common shares without interruption or reduction since 1928 and has increased the dividend in each of the past sixteen years. Dividend payout for 1988 was 16 percent of cash provided by operations and 36 percent of net income. The Company's dividend policy reflects a desired long-term payout percentage based on Monsanto's expectation of future growth and profitability levels. In any individual year, addi tional consideration is given to expected financial position and results, working and fixed capital needs, scheduled debt repayments and economic conditions, including inflation. Monsanto's common stock is traded principally on the New York Stock Exchange. The number of shareowners of record as of February 24, 1989, was 64,804 and the high and low common stock prices on that date were $89 and $88Vi. Monsanto Company and Subsidiaries 38 DSW 021808 STLCOPCB4007117 Statement of Consolidated Shareowners' Equity (Dollars in millions, except per share) Common Stodc Balance, January 1 and December 31 Additional Contributed Capital: Balance, January 1 Employee stock plans Balance, December 31 Accumulated Cunency Adjudment Balance, January 1 Translation adjustments Income taxes Balance, December 31 nWlKBSM MMHJyL Balance, January 1 Net income Dividends Balance, December 31 leatury Stodc Balance, January 1 Shares purchased (5,605,300 and 4,120,100 shares in 1988 and 1987, respectively) Shares issued under employee stock plans (33y,963; 558,52b and 906,536 shares in 1988-1986, respectively) Balance, December 31 The above statement should be read in conjunction with pages 37 through 42 ofthis report. 1988 $ 164 $ 872 2 $ 874 $ 100 (53) 5 S 52 $3,282 591 (211) $3,662 S (517) (457) 22 $ (952) 1987 S 164 $ 861 11 S 872 S (98) 197 1 S 100 $3,058 436 (212) $3,282 $ (204) (339) 26 $ (517) 1986 $ 164 $ 854 7 S 861 S (191) 103 (10) S (98) $2,824 433 (199) $3,058 $ (244) 40 $ (204) Key Financial Statistics Stock Price* High Low Year-end Per Share Dividends Shareowners' Equity Average Daily Share Hading \folume (thousands of shares) 'Based on daily reported high and low stock prices. 1988 $ 92% 73% 81% 2.95 55.21 323 1987 i 100% 57 83 2.75 52.65 372 1986 S 81% 44% 76% 2.575 48.69 269 23 Monsanto Company and Subsidiaries DSH 021809 STLCOPCB4007118 Notes to Financial Statements Significant Accounting Policies Monsanto's significant accounting policies are itali cized in the following Notes to Financial Statements. Basis of Consolidation The consolidatedfinancial statements include the Company and its majority-owned subsidiaries. Intercompany trans actions have been eliminated in consolidation. Other companies in which Monsanto has a significant ownership interest (generally greater than 20 percent) are included in "Investments in Affiliates" in the Statement of Consoli dated Financial Position, and Monsanto's share ofthese companies' income or loss is included in "Other income -- net" in the Statement ofConsolidated Income. Currency Dansiation Most ofMonsanto's ex-U.S. entities'financial statements are translated into U.S. dollars using current exchange rates. Unrealized currency adjustments in the Statement of Consolidated Financial Position are accumulated in shareowners' equity. The financial statements ofex-U.S. entities that operate in hyperinflationary economies, includ ing Brazil, Mexico and Argentina, are translated at either current or historical exchange rates, as appropriate. These currency adjustments are included in net income. Major currencies are the U.S. dollar, British pound sterling and Belgian franc. Other important curren cies include the Brazilian cruzado, Canadian dollar, French franc, Japanese yen, Mexican peso and West German mark. Currency restrictions are not expected to have a significant effect on Monsanto's cash flow, liquidity or capital resources. Principal Acquisitions and Divestitures Monsanto has signed an agreement to sell the Electronic Materials business, subject to governmen tal approvals in the countries where that business has facilities. These approvals and the recording of the sale are expected to occur in the first part of 1989 and the income effect will be immaterial. Monsanto's Australian commodity chemicals and plastics businesses (with net sales of $60 million for the first quarter of 1988 and $164 million for the fullyear 1987) were sold in March 1988. The gain on this divestiture was not material. G.D. Searle & Ca's Italian subsidiary was merged with an Italian pharmaceuticals company in September 1988. This transaction increased intangible assets $50 million. Pro forma operating results of this acquired business are not presented due to immateriality. Restructuring In October 1985, the Company implemented a restructuring and reorganization program. The actions included the withdrawal from selected lowreturn businesses and production facilities, the sale of certain assets that no longer had strategic importance and reductions in the number of employees. The 1986 gain included in "Restructuring expense (income) -- net" resulted from the sale of product lines that were planned for divestiture under the 1985 restructuring program. The principal sale was product lines of the Texas City, Texas petrochemicals plant that were part of the restructuring program. The impart on 1986 net income from the restructur ing gain was $97 million (after related taxes), or $1.25 per share. Depredation and Amortization Depreciation Amortization of intangible assets Obsolescence Total 1988 $435 231 37 $703 1987 $421 225 33 $679 1986 $423 218 139 $780 Property, plant and equipment is recorded at cost. The cost ofplant and equipment is depreciated over weighted aver age periods of23 years for buildings and 12 years for machinery and equipment, using the straight-line method. Intangible assets are recorded at cost less accumulated amortization. The components of intangible assets, and their estimated remaining useful lives, were as follows: Estimated Remaining Life* Patents Goodwill Other intangible assets 5 34 22 Total Weighted average, in years, as December 31, 1988. 1988 $ 864 653 273 $1,790 1987 $1,057 639 257 $1,953 Patents obtained in a business acquisition are recorded at the present value ofestimated future cash flows resulting firom patent ownership. The cost ofpatents is amortized over their legal lives. Goodwill is the cost ofacquired busi nesses in excess ofthe fair value of their identifiable net assets and is amortized over the estimated periods of benefit (5 to 40 years). The cost ofother intangible assets (princi pally product rights and trademarks) is amortized over their estimated useful lives. Monsanto Company and Subsidiaries 37 DSW 021810 STLCOPCB4007119 Notes to Financial Statements (continued) Obsolescence in 1986 included a S90 million charge (S46 million after tax, or SO.59 per share) to write down property, plant and equipment values of the Electronic Materials segment to amounts expected to be recovered from future cash flows. Deferred taxes result from timing differences in the recognition of revenue and expense for tax and financial statement purposes. The source of these timing differences and the tax effect of each were as follows: Inventory Valuation Inventories are stated at cost or market, whichever is less. Actual cost is used to value raw materials and supplies; standard cost, which approximates actual cost, is used to value finished goods and goods in process. Standard costs include direct labor, raw material and manufacturing over head based on practical capacity. The cost of56 percent ofall inventories is determined using the last-in, first-out (LIFO) method, generally reflecting the effects ofinflation or deflation on cost ofgoods sold sooner than other inven tory cost methods. The cost ofother inventories generally is determined using thefirst-in, first-out (FIFO) method. The components of inventories were as follows: finished goods Goods in process Raw materials and supplies Inventories, at FIFO cost Excess of FIFO over LIFO cost Total 1988 $ 662 333 545 1,540 (370) $1,170 1987 $ 689 261 461 1,411 (330) $1,081 Inventories at FIFO cost approximate current cost. Incanwtaat The components of income before income taxes were: Total u.s. Ex-U.S. 1988 8481 412 $893 1987 $422 251 $673 1986 $462 174 $636 The components of income tax expense were: Current: Deferred: Total Federal State Ex-U.S. Federal State Ex-U.S. 1988 Sill 18 139 268 31 1 2 34 $302 1987 $ 82 14 72 168 39 9 21 69 $237 1986 $ 20 12 88 120 74 13 (4) 83 $203 Depreciation and obsolescence Restructuring program Employee benefit plans Other Total 1988 $ 28 31 (12) (13) $ 34 1987 $ 46 43 15 (35) $ 69 1986 $(61) 161 (10) (7) $ 83 Factors causing Monsanto's effective tax rate to differ from the United States federal statutory rate were: Federal statutory rate Higher (lower) ex-U.S. tax rates Investment and other tax credits Capital gains benefits Benefits attributable to: United States export earnings Puerto Rico operations Other Effective income tax rate 1988 34% -- -- -- 1987 40% (1) (1) (2) 1986 46% 1 (4) (8) (2) (1) 3 34% (2) (2) 3 35% (3) (3) 3 32% Investment tax credits were available in 1986 and earlier years as a reduction ofthe United States federal income tax liability. Such credits were recorded as a reduction of income tax expense in the year they reduced the United States federal income tax liability. Investment tax cred its, net of recapture, were $15 million for 1986. Income and remittance taxes have not been recorded on S499 million ofundistributed earnings ofsubsidiaries, either because any taxes on dividends would be offset substantially by foreign tax credits or because Monsanto intends to indefinitely reinvest those earnings. Income and remittance taxes on these earnings would be approximately $50 million at December 31,1988. Various ex-U.S. subsidiaries have tax loss carry forwards for which no tax benefits have been recorded. These carryforwards totaled $60 million at December 31,1988, a substantial portion of which has an unlimited carryforward period. As mentioned under Review of Liquidity and Capital Resources, Monsanto has not yet adopted Statement of Financial Accounting Standards No. 96, the new income tax accounting standard, which is effective beginning in 1990. a Monsanto Company and Subsidiaries _ DSW 021811 STLCOPCB4007120 Notes to Financial Statements (continued) Short-Term Debt ami Credit Arrangements Short-term debt was: Notes payable: Banks Commercial paper Bank overdrafts Current portion of long-term debt Total Maximum amount ofnotes payable and bank overdrafts outstanding at any month-end Average notes payable and bank overdrafts outstanding Weighted average interest rate during the year Weighted average interest rate at December 31 1988 $ 79 228 121 128 $556 1987 S127 157 136 119 $539 $588 $438 411 335 9.9% 8.1% 7.9% 7.6% Certain ex-U.S. subsidiaries have aggregate short term loan facilities of S277 million, under which loans totaling $79 million were outstanding at December 31, 1988. Interest on these loans is related to various ex-U.S. bank rates. Monsanto's world wide unused short-term loan facilities were S198 million at December 31, 1988. Long-Term Debt Long-term debt (exclusive of current maturities) was: Industrial development bond obligations, weighted average interest rate of 716%, due 1990 to 2021 944% Eurodollar notes due 1991 10Vi% notes due 1992 944% notes due 19% 8Vi% sinking fund debentures due 2000 844% sinking fund debentures due 2008 1144% sinking fund debentures due 2015 Other Total 1988 1987 S 256 101 150 150 127 169 214 241 $1,408 $ 262 101 150 150 127 169 225 380 $1,564 Maturities and sinking fund requirements on long-term debt are $128 million, $54 million, $139 million, $187 million and $40 million for 1989-1993, respectively. A $750 million intermediate-term credit facility expires ratably from 1991 to 1994. There were no borrowings under this facility at December 31, 1988. The credit facility is used to support the issuance of commercial paper ($228 million outstanding at December 31, 1988). Interest on amounts borrowed under this agreement would likely be at money market rates determined by competitive bidding. Alternatively, interest may also be at, or at a margin above, the Citibank, N. A. base interest rate, or at a margin above the rates paid on either certificates of deposit or the London Interbank Offered Rate (LIBOR). Covenants under this credit facility restrict maxi mum borrowings. It is not anticipated that future borrowings will be limited by these restrictions. Pension Benefits Most Monsanto employees are covered by noncon tributory pension plans. The components of pension cost were as follows: 1988 1987 1986 Service cost for benefits earned during the year Interest cost on projected benefit obligation Assumed return on plan assets* Amortization of unrecognized net gain $ 65 223 (246) (38) S 64 212 (237) (32) S 60 202 (208) (21) Total $4 $7 $ 33 *Actual return on plan assets was $340 million in 1988, $187 million in 1987 and $458 million in 1986. Pension benefits are determined based on the employee's years of service and compensation level. Pension plans are funded in accordance with Monsanto's long-range projections of the plans' financial conditions, considering benefits earned and expected to be earned in the future, anticipated future returns on pension plan assets and income tax and other regulations. The excess of the fair value of plan assets over the projected benefit obligation as ofJanuary 1, 1986 for each plan is being amortized over the average expected future service period of employees (ranging generally from 14 to 18 years). The fair value of plan assets was used to calculate the assumed return on plan assets. Pension expense was lower in 1987 compared with 1986 due principally to the effect of favorable investment performance of plan assets in 1986. Monsanto Company and Subsidiaries 39 DSW 021812 STLCOPCB4007121 Notes to Financial Statements (continued) Pension Benefits (continued) Assumptions used for the principal plans were as follows: Discount rate Assumed long-term rate of return on plan assets Annual rates of salary increase (for plans that base benefits on final compensation level) 1988 8Vi% 8'/2 1987 8'/a% SVl 1986 8'A% 8>/2 6`/a 6!/2 6'/a The funded status of Monsanto's pension plans at year-end was: 1988 1987 18,100 individuals retired from active service were eligible to participate in these programs. These other postemployment benefits are not fitnded and are expensed as benefits are paid. The 1988-1986 expense recorded for other postemployment benefits was $38 million, $37 million and $26 million, respectively. Stock Option Plans As an incentive to increase shareowner value, key officers and employees have been granted Monsanto stock options under the Company's 1974, 1984 and 1988 Management Incentive Plans and the Searle Monsanto Stock Option Plan (Searle Plan). Infor mation about the status of such stock options is presented below. Actuarial present value of plan benefits: Vested Nonvested Accumulated benefit obligation Effect of projected future salary increases Projected benefit obligation Plan assets at fair value Excess of plan assets over projected benefit obligation Less: Unrecognized net gain at January 1, 1986 Subsequent unrecognized net gain Accrued pension liability EL202 no 2,312 328 S2.640 13,169 12,124 154 2,278 337 12,615 13,118 1 529 1 503 386 302 1 159 422 257 1 176 Projected benefit obligations and plan assets included in the above table for the principal United States plans were approximately $2,437 million and $2,838 million, respectively, at December 31, 1988. Plan assets consist principally of common stocks and United States government and corporate obligations. Because the Company's pension plans are wellfunded, contributions to the Company's principal plans were neither required nor made in 1988-1986. For some employee savings plans, employee contributions are matched in part by Monsanto. The 1988-1986 expense recorded for such plans was $34 million, $33 million and $35 million, respectively. December 31,1986 1987: Granted Exercised Expired December 31,1987 1988: Granted Exercised Expired December 31,1988 Shares Price Exercisable Outstanding per Share 1,295,094 2,484,167 126.16-179.31 620,200 (550,559) (28,751) 66.56- 94.19 26.16- 69.00 41.75- 94.19 1.203,305 2.525.057 26.16- 94.19 1,226,582 (370,451) (67,833) 75.88- 89.44 26.16- 79.31 45.63- 94.19 1,319,795 3J 13,355 26.16- 94.19 Under the 1988 Management Incentive Plans and the Searle Plan, 3,894,061 shares remain available for grant. Stock appreciation rights (SARs) have been authorized to be granted to Monsanto officers in tandem with stock options under the Plans, includ ing retroactive grants for unexercised options. SARs may be exercised in lieu of stock options included in the table above. At December 31,1988, SARs related to stock options for 1,141,2% shares were outstand ing, of which 250,702 options were exercisable. During 1988, SARs related to stock options for 536,266 shares were granted and for 108,570 shares were exercised. Other PwtBmptayment BawflU Monsanto provides certain health care and life insur ance benefits for retired employees. Substantially all of Monsanto's regular, full-time United States employees and certain employees in other countries may become eligible for these benefits if they reach retirement age while employed by Monsanto. At December 31, 1988, approximately 28,600 active employees were eligible upon retirement to partici pate in these programs. In addition, approximately Earnings per Stars Earnings per share were computed using the weighted average number of common shares and common share equivalents outstanding each year (71,501,322; 77,498,752 and 77,957,975 in 1988-1986, respectively). Common share equivalents (344,986; 645,527 and 616,178 in 1988-1986, respectively) consist primarily of common stock issuable upon exercise of outstanding stock options. Earnings per share assuming full dilution were not significantly different from the primary amounts. 49 Monsanto Company and Subsidiaries DSW 021813 STLCOPCB4007122 Notes to Financial Statements (continued) Capital Stock At December 31, 1988, there were 7,207,977 common shares reserved for employee stock options. In January 1986, the Company's Board of Directors declared a dividend to shareowners consisting of one Common Stock Purchase Right on each outstanding share of the Company's common stock. A right will also be issued with each share of the Company's common stock that becomes outstanding prior to the time the rights become exercisable or expire. If a person or group acquires beneficial ownership of 20 percent or more, or announces a tender offer that would result in beneficial ownership of 30 percent or more, of the Company's outstanding common stock, the rights become exercisable and each right will entitle its holder to purchase one share of the Company's common stock for $150. If Monsanto is acquired in a business combination transaction, each right will entitle its holder to purchase, for $150, common shares of the acquiring company having a market value of $300. Alternatively; if a 20 percent holder were to acquire Monsanto by means of a reverse merger in which Monsanto and its stock survive or were to engage in certain "self-dealing" transactions, each right not owned by the 20 percent holder would entitle its holder to purchase, for $150, common shares of the Company having a market value of $300. The Company can redeem each right for 5 cents at any time prior to its becoming exercis able. The rights expire in 19%. These rights may cause substantial ownership dilution to a person or group who attempts to acquire the Company with out approval of the Company's Board of Directors. The rights should not interfere with a business combination transaction that has been approved by the Board of Directors. As of December 31, 1988, 68,832,180 rights were outstanding. Commitments and Contingencies Commitments, principally in connection with uncompleted additions to property, were approxi mately $150 million at December 31,1988. Monsanto was contingently liable as guarantor of bank loans and for discounted customers' receivables totaling approximately $94 million at December 31,1988. Future minimum payments under noncancellable operating leases and unconditional inventory purchases are $73 million; $66 million; $62 million; $57 million and $56 million for 1989-1993, respec tively, and $1% million thereafter. Monsanto is a party to a number of lawsuits, which it is vigorously 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. Supplemental Data Supplemental income statement data were as follows: 1988 Raw material and energy costs Employee compensation and benefits Current income and other taxes Rent expense *2,587 2,022 527 115 Technological expenses: Research and development Engineering, commercial development and patent 575 73 Total technological expenses 648 Interest expense: Total interest cost Less capitalized interest 193 (19) Net interest expense 174 Equity in affiliates' income (loss) (5) Currency gains (losses) including equity in affiliates' currency gains and losses (20) 1987 *2,383 1,955 398 108 557 58 615 188 (16) 172 7 (U) 1986 $2,023 1,937 356 99 523 73 5% 215 (14) 201 12 8 Segment Information Certain operating unit segment data and geographic data for 1988-1986 appear on pages 25 and 30 and are integral parts of the accompanying financial state ments. The principal product lines included in each operating unit are shown in the operating unit segment data. Sales between operating units were not significant. Inter-area sales, which are sales between Monsanto locations in different world areas, were made on a market price basis. Certain corporate expenses, primarily those related to the overall management of Monsanto, were not allocated to the operating units or geographic areas. Corporate assets principally include certain miscella neous receivables and investments. Monsanto Company and Subsidiaries 41 DSW 021814 STLCOPCB4007123 Notes to Financial Statements (continued) Segment Information (continued) Inter-area sales by entities in each geographic area were: World area shipped from: United States Europe-Africa Canada Latin America Asia-Pacific Inter-area Eliminations Total consolidated Inter-area Sales (Between Monsanto Entities) 1988 1987 1986 $ 85S 167 13 22 39 (1,096) $- S 624 103 8 12 35 (782) i- $ 527 82 4 5 26 (644) S- Following is a reconciliation ofex-U.S. operating income and total assets to the net income and net assets of consolidated ex-U.S. subsidiaries. Operating income Interest expense Interest income Other income -- net Income taxes Net income of consolidated ex-U.S. subsidiaries Total operating assets Total liabilities Net assets of consolidated ex-U.S. subsidiaries 1988 $ 383 (54) 45 38 (141) 1987 $ 263 (52) 38 2 (93) 1986 $ 165 (42) 40 (16) (70) $ 271 $ 2,316 1,040 S 158 $2,120 801 $ 77 $1,757 855 $ 1,276 $1,319 $ 902 Quarterly Data Net Sties Gross Profll Operating Income eeSI-1 icome Earning* per Shan Dividends per Share Common Stock Piles 1988 1987 Net sales and net income for each quarter of 1988 were higher than the comparable 1987 quarter. Monsanto's net income is historically higher during the first half of the year attributable primarily to a concentration of the generally more profitable Crop Chemicals sales in the first half of the year. First Second Third Fourth Quarter Quarter Quarter Quarter 1988 1987 $2,127 1,866 $2,263 2,025 $2,022 1,902 $1,881 1,846 1988 890 977 764 690 1987 765 801 684 634 1988 329 365 187 1987 250 251 164 74 69 1988 210 220 116 1987 138 154 100 45 44 1988 2.86 3.04 1.67 0.70 1987 1.76 1.95 1.30 0.62 1988 1987 0.70 0.65 0.75 0.70 0.75 0.70 0.75 0.70 Total Year $8,293 7,639 3,321 2,884 955 734 591 436 8.27 5.63 2.95 2.75 High Low High Low 89% 74 87% 73 89% 75% 89V. 77% 92% 73% 99% 83 83% 75 100% 57 92% 73% 100% 57 The only significant unusual item affecting net income was the 1987 restructuring income of SI million, $7 million and S10 million in the second, third and fourth quarters, respectively. 42 Monsanto Company and Subsidiaries DSW 021815 STLCOPCB4007124 Financial Summary (Dollars in millions, except per share) Operating Result! Net Sales Operating Income (Loss) As a Percent of Net Sales Income (Loss) Before Extraordinary Gain Net Income (Loss) As a Percent of Net Sales Return on Shareowners' Equity Earnings per Stare Before Extraordinary Gain Net Income (Loss) Year-end Financial Portion Total Assets Working Capital 1988 1987( 1986 1985 1984 $8,293 955 12% 591 591 7% 15% $7,639 734 10% 436 436 6% 11% $6,879 635 9% 433 433 6% 12% $6,747 (598) (9)% (128) (98) (1)% (3)% $6,691 677 10% 439 439 7% 12% $ 8.27 8.27 $ 5.63 5.63 $ 5.55 5.55 $(1.67) (1.27) $ 5.42 5.42 $8,461 1,117 $8,455 1,203 $8,269 1,092 $8,877 899 $6,373 1,395 Property, Plant and Equipment Gross Net $6,926 3,146 $6,730 3,076 $6,326 2,913 $6,840 3,034 $6,919 3,374 Long-Term Debt Shareowners' Equity $1,408 3,800 $1,564 3,901 $1,630 3,781 $2,087 3,407 $ 824 3,634 Current Ratio Percent of Total Debt to Total Capitalization 1.6 34% 1.7 35% 1.6 35% 1.4 45% 2.2 23% Other Data Property, Plant and Equipment Purchases Depreciation and Amortization Interest Expense Research and Development Expenses Income Taxes Cash Provided by Operations Stock Price High Low Year-end Price/Eamings Ratio on Year-end Stock Price $ 590 703 174 575 302 1,304 $ 92% 73% 81% 10 $ 505 679 172 557 237 902 $100% 57 83 15 $ 520 780 201 523 203 960 $ 81% 44% 76% 14 $ 645 599 178 470 (170) 535 $ 55% 40% 47% -- $ 614 503 100 370 268 915 $ 53% 40% 44 8 Per Share Dividends Shareowners' Equity Shareowners (year-end) Shares Outstanding (year-end, in millions) Employees (year-end) $ 2.95 55.21 66,066 69 45,635 $ 2.75 52.65 68,032 74 49,734 $2,575 48.69 70,367 78 51,703 $ 2.45 44.38 72,081 77 56,103 $ 2.25 46.43 71,343 78 50,754 (1) Net incomefor 1987 includes net restructuring income oft18 million (10.24 per share). (2) Net incomefor 1986 includes 885 million (81.10 per share) ofnet gains, principally from the sale ofthe Texas City, Texas petrochemicals plant and related assets, partially offset by the Electronic Materials asset impairment write-down. In addition, net income was increased 825 million (80.32 per share)from adopting the requirements ofStatement ofFinancial Accounting Standards No. 81, "Employers' Accountingfor Pensions." (3) Net loss for 1985 includes net restructuring expense of8542 million (87.04 per share), the gainfrom the sale ofthe oil and gas operations of 8201 million (82.61 per share) and an extraordinary gain of830 million (80.40 per share) from repayment ofdebt. Monsanto Company and Subsidiaries 43 DSN 021816 STLCOPCB4007125 Monsanto Company and Subsidiaries DSW 021817 STLCOPCB4007126 Monsanto's Board of Directors Monsanto's Advisory Directors Monsanto's shareowners are represented by a Board of Directors drawn from diverse backgrounds and experiences, including business management, university administration, government service, scholarship and teaching. military command and other functions in fields such as manufacturing, banking, insurance, public utilities, construction and technology. This diversity of experience and knowledge is critical to guiding a company that sells to a broad range of markets in more than 100 countries. Monsanto's board represents the interests of all stake holders -- customers, neighbors and employees, as well as shareowners. This requires independence and objectivity, and for that reason, oursidc directors predominate. Currently, 13 of the 15 members of the board are outside directors. While it is essential to have the breadth of experience and the-independent objectivity of a board composed mainly of outside directors, board decisions should also have the benefit of an intimate and detailed knowledge of the Company 's ongoing operations. For that reason,' six of Monsanto's senior executives serve as non-voting advisory directors. DSW 021818 STLCOPCB4007127 Board of Directors Richard J. Mahoney St. Louis Chairman and Chief Executive Officer, Monsanto Company Age: 55 Monsanto Director: (0 years f & ;v Marguerite Ross Barnett, Ph.D. St. Louis Chancellor, University of Missouri-St. Louis Age: 46 Monsanto Director: 1 year Joan T. Bok Weseborough, Massachusetts Chairman, New England Electric System Age: 59 Monsanto Director: 2 years Donald C. Carroll, Ph.D. King of Prussia, Pennsylvania Chairman, Schulco, Inc.; Retired Dean, The Wharton School, University of Pennsylvania Age: 58 Monsanto Director: 14 years C. Raymond Dahl San Francisco Retired Chairman and Chief Executive Officer, Crown Zellcrbach Corporation Age: 67 Mcmsanto Director: 11 years Richard I. Fricke Montpelier, Vermont Chairman, Executive Committee, National Life Insurance Company Age: 66 Monsanto Director: 14 years John W. Hanley Palm City, Florida Chairman, I lanley Hazeldcn Center, Retired Chairman and Chief Executive Officer. Monsanto Company Age: 67 ALmitwro Director: 10 years Earle H. Harbison,Jr. St. Louis President and Chief Operating Officer, Monsanto Company Age: 60 Monsanto Director: 3 years Robert M. Heyssel, M.D. Baltimore President and Chief Executive Officer, The Johns Hopkins Health System and The Johns Hopkins Hospital Age: 60 Monsanto Director: less than 1 year 46 Monsanto Company and Subsidiaries DSW 021819 STLCOPCB4007128 y Howard M. Love Pittsburgh Chairman and Chief Executive Officer, National Intereroup, Inc. Age: 58 Monsanto Director: 11 years Buck Mickel Greenville, South Carolina Chairman and Chief Executive Officer, R.S.I. Corp.; Retired Vice Chairman, Fluor Corp.; Chairman, Daniel International Corp., a Fluor subsidiary Age: 63 Monsanto Director: 14 years John S. Reed New York Chairman, Citicorp and Citibank, N.A. Age: 50 Monsanto Director: 4 years ... I- William D. Ruckelshaus Houston Chairman and Chief Executive Officer, Browning-Ferns Industries, Inc.; Former Administrator, U.S. Environmental Protection Agency Age: 56 Monsanto Director: 4 years John B. Slaughter, Ph.D. Los Angeles President, Occidental College; Former Director, National Science Foundation Age: 54 Monsanto Director: 6 years Admiral Stansfield Turner (U.S. Navy, Retired) McLean, Virginia Lecturer and Writer; Former Director, U.S. Central Intelligence and Central Intelligence Agency Age: 65 Monsanto Director: 8 years Richard W. Duesenberg Senior Vice President, General Counsel and Secretary, Monsanto Company Age: 58 Monsanto (Company and Subsidiaries 47 DSW 021820 STLCOPCB4007129 Advisory Directors Robert L. Berra Sc. Louis Senior Vice President, Administration, Monsanto Company Ago: 64 Advisory Director: 7 years Harold J. Corbett St. Louis Senior Vice President, Environment, Safety & Health, Monsanto Company Age: 61 Advisory Director: 4 years Robert G. Potter St. Louis Group Vice President, Monsanto Company; President, Monsanto Chemical Company Age: 49 Advisory Director: 3 years Nicholas L. Reding St. Louis Executive Vice President, Monsanto Company; President, Monsanto Agricultural Company Age: 54 Advisory Director: 7 years Howard A. Schneiderman, Ph.D. St. Louis Senior Vice President, Research & Development, Monsanto Company Age: 62 Advisory Director: 1 years Francis A. Stroble St. Louis Senior Vice President and Chief Financial Officer, Monsanto Company Age: 58 Advisory Director: 1 years 48 Monsanto (Company and Subsidiaries DSW 021821 STLCOPCB4007130 Committees of the Boartf Audit Committee______________________ Buck Mickcl, Chairman Joan T. Bok Robert M. Heyssel. M.D. William D. Ruckclshaus John B. Slaughter, Ph.D. Corporate Social Responsibility Committee Admiral Stanstield Turner. Chairman Join T. Bok William D. Ruckclshaus John B. Slaughter, Ph.D. Executive Committee ___________________ John W. Hanley, Chairman Marguerite Ross Barnett. Ph.D. Earle H. Harbison, Jr. Richardj. Mahoney Executive Compensation and Development Committee_____________ Howard H. Love, Chairman Richard l. Fncke John W. Hanley Buck Mickel Finance Committee______________________ Donald C. Carroll. Ph.D.. Chairman Marguerite Ross Barnett. Ph.D. C. Raymond Dahl John W, Hanley Richardj. Mahoney John S. Reed Nominating Committee__________________ Buck Mickcl. Chairman C. Raymond Dahl Howard M. Love Pension and Savings Funds Committee Richard l. Fricke, Chairman Donald C. Carroll, Ph.D. Earle H. Harbison, Jr. Admiral Stansficld Turner Officers Chairman and Chief Executive Officer ___________ Richardj. Mahoney President and Chief Operating Officer Earle H. Harbison. Jr. Executive Vice President Nicholas L. Reding Senior Vice Presidents_________________ _____ Robert L. Berra Harold J. Corbett Howard A. Schnciderman, Ph.D. Senior Vice President and Chief Financial Officer Francis A. Stroblc Senior Vice President, Secretary and General Counsel Richard W. Duesenberg Group Vice President Robert G. Potter Vice Presidents Earl N. Brastield Leonard A. Cohn A. Nicholas Filippello, Ph.D. S. Allen Heiningcr. Ph.D. Martin j. Kallen Thomas H. Lafferrc Philip Needleman. Ph.D. Richard A. Overton James H. Scnger David L. Sliney Virginia V. Weldon, M.D. Vice President, Finance Lawrence B. Skatoff _________________ Vice President and Controller____________________ B. Clare Harris Vice President and Treasurer Juanita H. Hinshaw ______________ Shareowner Information Annual Meeting _ The next annuatmeeting of the shareowners of Monsanto Company will be held at 1:45 p.m., Friday, April 28, 1989, in fC Building at the Company's World Headquarters, 81)0 N. Lindbergh Blvd., St. Louis, Missouri. A formal notice of the meeting, together with a proxy statement, is being mailed to each shareowner. 10-K, Report, Corporate Data Book and Investor News A copy of Monsanto Company's 1988 Form 10-K Report filed with the Securities and Exchange Commission; 1988 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 Stock Symbol -- MTC Stock Exchanges/Bourscs_______ ___________ United States; New York Chicago (options) Europe: Amsterdam Brussels Frankfurt Geneva London Paris Zurich Transfer Agent and Registrar The First National Bank of Boston Box 644 ' Boston, Massachusetts 02102 DSW 021822 STLCOPCB4007131 Monsanto Company 800 North Lindbergh Boulevard St. Louis, Missouri 63167 DSW 021823 STLCOPCB4007132