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MONSANTO COMPANY 1986 ANNUAL REPORT PERFORMANCE. I9j^Oh STLCOPCB4006991 MONSANTO'S BUSINESS MIX HAS CHANGED OVER THE PAST FIVE YEARS Operating Units In chemicals, fibers and plastics, we have shifted away from commodities to value-added products. We have also added important new businesses. World Areas Our commitment to doing business worldwide remains strong. Major Markets Our markets continue to be diversified. Sales mix in percent STLCOPCB4006992 MONSANTO AT A GLANCE Monsanto Company delivers value to customers and society by providing high-quality chemical and agricultural products, pharmaceuticals, lowcalorie sweeteners, industrial process controls, man-made fibers, plastics and electronic materials. Building on our historic strengths in technology, we are aggressively developing new products to meet customer needs. At the same time, our 52,000 employees are committed to the highest standards of conduct in the more than 100 countries where we do business. Operational hwhughts Monsanto Company and Subsidiaries (Dollars in millions, except per share) Net Sales Net Income (Loss) Per Common Share: Net Income (Loss) Dividends Shareowners' Equity Depreciation and Amortization Funds Provided by Operations Research and Development Expenses Percent of Total Debt to Total Capitalization 1986 $6,879 $ 433 1985 $6,747 $ (98) 1984 $6,691 $ 439 1 $ 5.55 2.575 48.69 $ 780 $1,050 $ 523 35% $(1.27) 2.45 44.38 $ 5.42 2.25 46.43 $ 599 $ 503 $ 889 $1,008 $ 470 $ 370 45% 23% Contents Letter To Our Shareowners 2 Performance Initiatives 5 Financial Report Contents 1A Board of Directors and Officers 40 Shareowner Information 41 Cover Monsanto's ability to manipu late molecules is a unifying theme in its many products that benefit mankind. The cover shows a blend of old and new products, with many yet to emerge. Products on the cover are represented by trademarks and grade designations of Monsanto Company and its subsidiaries. Elsewhere in the Annual Report, Monsanto's trademarks are identified by italics. DSW 021684 STLCOPCB4006993 Letter to our shareowners DSW 021685 2 STLCOPCB4006994 In last year's shareowners letter, we described the year just ended as "The pivotal year in recent Company history. The decisions taken . . . will influence the Company's fortunes for years to come" Nineteen eighty-six was the first "year to come." It was a glimpse at the poten tial of Monsanto. The many positive results reconfirmed the importance of the actions taken earlier. The parts that we didn't like about 1986 illustrate that the transformation is not yet complete. In 1985, we moved out of essentially the last major segments of our underper forming commodity chemi cal assets. We promised in doing so that the new Monsanto product mix would be more dependent on our actions and less on the whims of external forces. The result: some of each. Our actions in the Chem ical Company unit -- our largest -- produced far lower overhead and added higher customer value to purchased raw materials -- a combination that resulted in an outstanding year which was rewarded by the mar ketplace. All of our major chemical businesses pro duced higher profits, espe cially fibers. Several new products were launched as we continued to regenerate our product lines and grow selectively into new areas in chemicals, fibers and plas tics. The external forces of a weaker dollar and lower oil prices were also positive and added to our own actions. In last year's report, we said we'd intensified our efforts to move Roundup herbicide into new uses. In 1986, sales volumes of Roundup herbicide were up significantly -- by far the largest growth year in the '80s. The whims of weather helped, but much of the gain was from strategy -- new mixes and new posi tioning. The Agricultural Company increased earn ings and still funded impor tant new growth programs in crop chemicals and ani mal sciences. The exciting biotechnology program for increased milk productivity is on schedule, including a production facility under way. G.D. Searle & Co. remains as we said last year: "Current earnings are nonexistent -- but the rewards look very promts ing indeed. " A quick look at the financials on page 21 will certainly confirm the nonexistence of earnings. But the promise was enhanced by important important franchise after the U.S. patent expires in 1992 is well under way. Last developments: Cytotec year we said to watch the prostaglandin -- Searle's "earnings power and dura first major new pharma bility" of our low-calorie ceutical product in over sweetener. Events in a decade -- has received the marketplace and in clearance for sale in 24 NutraSweet's plants and countries. Approval is laboratories in 1986 justify now pending in 30 others, that statement. Despite a including the United States. slowdown at year-end, A second-generation tPA largely attributable to cus (tissue plasminogen activa tomer inventory reduction, tor) product is being devel it was a good year and a oped to prevent and treat solid base for further gains blood clots associated with in 1987 and beyond. heart attacks. This new At the outset of this let product is based on ter, perhaps euphemisti Monsanto molecular biol cally, we mentioned that ogy coupled with research some events illustrate that sponsored at Oxford and Monsanto's transformation Washington universities. is not yet complete. In sili Added to this collaboration con, we're ready, but the is unique Monsanto pro customers showed up only duction technology to make sporadically in the United large volumes of proteins States -- our biggest by cell culture techniques. market -- which did not Other internally generated recover as we had hoped. programs are moving Capacity utilization moved along, but at the same up from its 1985 low, but time, we are strongly seek still not enough to put us in ing external opportunities the black. While this asset in the acquisition of prod after write-down in 1986 is uct licenses or facilitating just 3 percent of the total acquisitions. One licensed asset base of the Corpora product, Calan (verapamil tion, it is highly visible. In HC1), was recently approved the 1985 Annual Report, in the United States for a we said we wouldn't make new use in controlling high any more rosy forecasts -- blood pressure. It achieved but let events speak for good market acceptance themselves. Silicon pros upon launch and is off to pects still depend on a a fast start. cyclical upturn in semi The NutraSweet Com conductors that is not yet pany continues to fulfill its apparent. promise -- a superb and Fisher Controls Inter growing income source. national, Inc., concluded The development of a strat egy for maintaining this 3 DSM 021686 STLCOPCB4006995 a poor year financially in 1986 with the sudden downturn in capital spend ing by oil, gas and chemical companies -- nearly half of its current markets. In the business that was available, Fisher improved market share, particularly in PRoVOX control systems, installation and services. During the year, we took a number of actions that depressed Fisher's 1986 earnings but will improve future operating costs. The result of Monsanto's successful strategy execution and favorable external events -- the oil price reduction and S85 million from one time net gains -- brought net earnings to $433 mil lion. This helped us deliver on last year's promise of impressive ability to gener ate cash. Monsanto retired $800 million of debt -- bringing debt to total capi talization to 35 percent from the Searle acquisition high of 52 percent in 1985. In this letter, we have focused our comments on the progress in 1986 on the promises made in 1985. We made another important statement in last year's report that will remain relevant for the years to come -- and for purposes of emphasis, we repeat it here. To your management, the job is very dear. We have invested substantial assets towards the future, and we must make the future happen as quickly as possible. We know our stake holders have both short term and longer-term inter ests in the Company. Our intention to serve them is simple in concept. We intend to place Monsanto among the handful ofgreat industrial enterprises in the world -- the best in what we choose to do -- mea sured by consistent returns for our many stakeholders. It requires no new strat egy. Those decisions are behind us. It does require these actions: For the shareownerstakeholders, this promise means aiming for a return on equity year after year in the 20 percent range. Our restructured product mix can get us there in the 1990s -- we have a good balance now, and we intend to reach for this target. For our customer-stake holders, we must work every day to meet the high est standards of value, quality and service in the products we sell. Their rewards will be measured in how well we meet their needs. For our employee-stake holders, we must provide safe, meaningful and rewarding work in an environment in which each person has an equal opportunity to succeed. We want to ensure that Monsanto is a great place for our people to invest in their careers. For our neighbor-stake holders, we must strive for a lasting and rewarding partnership which respects their needs. We want our communities to benefit from the contributions of a desirable neighbor. The job of the Board of Directors and your management is to serve each of these groups. We're delivering. I've covered in the letter the returns we produced for today's shareowners. For tomorrow's shareowners, we're investing in market growth, inventing and licensing new products, developing new partner ships, making acquisitions, strengthening good assets and trimming those that don't meet expectations. We're more responsive to our customers by mobiliz ing all parts of Monsanto to meet their needs and add value to what we sell. Our progress toward the total customer and market orien tation we seek is still incomplete, but we're going in the right direction. We have entered into a closer partnership with our plant communities, opening our doors to what we are doing and working jointly to ensure the safety of our neighbors. This year, we made strides in cleaning up the industrial wastes we disposed of based on the standards of yesterdav, while investing in new tech nology to make our plants cleaner and safer for the future. Monsanto's 86-vear record of doing what's right for employees, within the overall need to prosper as a corporation, serves us well in a world where sustained change is the only certainty. We intend to provide chal lenge and opportunity with commensurate rewards. We seek innovation and dedica tion to achieving the great industrial enterprise status we have targeted. All of us will share the pride that stems from that accomplishment. We have a clear view of the company we intend to be. The initiatives we must take to get there and exam ples of the good progress we have made so far are described in the following pages of this report. As we move forward, the rewards are coming for all our stakeholders. Richard J. Mahoney Chairman and Chief Executive Officer March 4, 1987 4 DSW 021687 STLCOPCB4006996 Performance initiatives Monsanto is determined to be one of the world's trulv great industrial enterprises, a company that delivers meaningful benefits to shareowners, customers, employees and neighbors. Essential to achieving this objective are consistent results from important performance initiatives set by management. In 1986, the Company made solid progress against those initiatives. Although results are not yet flowing from every corner of the Company, we arc generally on track for the targets we have set. And we have the products, the people and the technology to accelerate our momentum. The following pages describe these initiatives and highlight Monsanto's progress against each. The review of results for Monsanto and its six oper ating units appears on pages 19 to 24. DSW 021688 5 STLCOPCB4006997 021689 STLCOPCB4006998 We must continue to balance UMQ-TOM (XMLS WITH SHORT TERM RESUTS. Top photo: Most food and beverage spills in the home are driven into the carpet by the force of the spill. New Wear-Dated Gold Label carpet makes cleanup easier, particularly for the more difficult to remove stains. Bottom photo: The NutraSweet plant in Augusta, Georgia, began installing important new technology to strengthen the company's cost leadership in aspartame manufacturing. Monsanto is determined ship in quality, cost and product sales and is intro to be a leader in its chosen technology. For example, ducing new products, such markets for the 1990s, but production equipment at as Cytotec for treating we must deliver results in its Augusta, Georgia plant, ulcers. the short-term as well as although only two years generate the resources old, is being replaced by In the Monsanto Elec needed for the coming dec important new technology tronic Materials Company ade. We will achieve this to lower costs and keep its and Fisher Controls, we goal by aggressively man lead as the world's most aggressively cut costs, got aging good businesses, by efficient producer of out of low-return product inventing and licensing new aspartame. lines, and took other products that meet cus actions that will improve tomers' needs, and by mov a In many Monsanto busi near-term returns. ing out of businesses that nesses, long-standing prod prove unable to meet tar ucts have been bolstered For the longer term, gets. The recent streamlin to expand and protect their Monsanto continues to ing of Monsanto allows our positions. Roundup herbi take actions that will managers to focus on doing cide continues on the improve future earnings. In just these things. growth track with new 1986, the Chemical Com mixtures and product posi pany unit alone invested In addition, Monsanto is tioning. Lasso herbicide nearly $350 million in entering into new markets has held its position as the research programs and and expanding in existing United States' leading com manufacturing facilities ones by seeking partner and soybean herbicide. around the world. In so ships with other enter Recent tests show it out doing, it is developing new prises. These complement performs the competition products to strengthen its our strong and growing in delivering higher crop long-term future in key partnerships with cus yields -- and the market markets, such as home fur tomers and research place responded to that. A nishings, automotive, laun universities. 200-gallon reusable tank dry detergents, consumer system was introduced as appliances and construc Near-term results are part of an aggressive mar tion. The stain resistance of already evident. Monsanto's keting effort to help farm Wear-Dated Gold Label Chemical Company unit, ers save time and simplify carpet fiber, introduced in which by itself would rank handling. Lasso Micro 1986, is a textbook exam among the nation's 125 tech, developed in response ple of successfully respond largest firms, doubled oper to farmers' needs, controls ing to what customers said ating income to $464 mil weeds when used in conser they need. lion in 1986 -- even after vation tillage for soybeans. excluding one-time gains Searle has increased its of nearly $150 million. Searle is developing new research and development applications and dosage to a level that ranks it The popularity of forms to strengthen the among the world's leading NutraSweet brand sweet market positions of its pharmaceutical companies ener gives The NutraSweet $665 million in existing --an example of Monsanto's Company excellent momen commitment to a steady tum as new applications for stream of profitable life the product are introduced. sciences products. It is committed to leader 7 DSW 021690 STLCOPCB4006999 We MUST ADO GREATER VALUE TO AIL THE PRODUCTS MONSANTO PROOUCES. Top photo: Marketing strategy is discussed for the many brands of glyphosate, the principal ingredient in Roundup, to extend the reach of the world's most-successful herbicide into more than 100 countries. Bottom photo: Saflex interlayer is increasingly used in architectural glass for safety, insulation and noise control, as in this new terminal at Heathrow. London, the world's largest airport. The value we add to our products -- over and above the purchased raw mate rials -- has moved up sub stantially in the last five years and now accounts for two thirds of Monsanto's sales dollar. This resulted from our drive to increase the quality and perfor mance of our products. The value-added approach also helps us strengthen our position in international markets, where lower-value commodity producers face fierce competition. We have largely com pleted our move out of cyclical commodity petro chemicals to a product mix driven by our technology, our commitment to cus tomer service and our man agement ability. Whereas cyclical businesses were about two-thirds of sales, they are now about half. This change means we are less at the mercy of exter nal events and more in control of our results. Monsanto Chemical Company (MCC) has undergone the most strik ing transformation. Adding value to such products as Lustran ABS plastics, Acrilan fibers and Saflex plastic interlayer has resulted in many new prod doing things right the first ucts that are helping drive time, whether making MCC's evolution to a less products or providing ser cyclical, more profitable vices. The results have won specialty producer. awards and praise from customers. Saflex is the world's leading plastic interlayer for the In late 1986, the U.S. laminated glass used in Food and Drug Administra automobile windows and tion (FDA) approved architectural applications. NutraSweet brand sweet Building on that leadership, ener for use in refrigerated Monsanto has achieved fruit juices and other food three major technological categories. These were the advances in Saflex manu FDA's most important new- facturing and is now in use approvals for the prod corporating them in its uct since 1983 and will operations in the United provide consumers with States, Japan and Belgium. additional food and bever age choices. It is already New applications used in over 160 products and new market niches in the United States and is enhance the value of our approved for use in prod successful businesses. For ucts in more than 50 other example, Monsanto countries. Agricultural Compan^has developed Roundup L&G, PRoVOX process con a new lawn and garden trols add value to Fisher formulation. It is specially customers' plants by mak designed for homeowners ing their operations more and sold through lawn and efficient. In 1986, Permea, garden retailers and mass Inc., a Fisher subsidiary, merchandising outlets. introduced a new Prism Monsanto herbicides are Alpha unit that separates now sold in over 100 coun nitrogen from ordinary air. tries for a wide range of The nitrogen can be used to agricultural, industrial and blanket perishable foods other uses. and grain to reduce spoil age and eliminate pests. * Monsanto employees This product moved from are the most important con concept to commercializa tributors to the value we tion in just seven months. deliver. For example, MCC people have enthusiastically embraced a Total Quality Improvement process -- DSW 021691 STLCOPCB4007000 B 021692 9 STLCOPCB4007001 DSW 021693 10 STLCOPCB4007002 We are determined to be A LEADER IN DEVaOPMG AND MARKETING UFESCSNCES PROOUCTS FOR HEALTH CARE AND AGRICULTURE. Top photo: Nearly 60 million Americans have high blood pressure. Searle's new Calan SR treats this problem and is one of a broad line of products for cardio vascular ailments. Bottom photo: Bovine somatotropin to improve the milk productivity of cows is being evaluated at various sites around the world, including Monsanto's Dardenne harm in eastern Missouri. The life sciences offer growth outside the tradi tional chemical industry, but in areas clearly related to our technological kind of innovative product that can improve the profit ability of dairy farmers, both large and small. Regu latory review for BST com important factor in causing hypertension and it has far fewer side effects than tra ditional treatments. strengths. Capitalizing on the synergy of combining Monsanto's health care mercialization is progressing Searle is licensing other in several countries. companies' technology to supplement its product line. efforts with Searle's, we Though still in research, During 1986, it began one are embarked on building genetically engineered of the most extensive licen Searle into one of the plants have been developed sing program in the phar world's leading pharma that are resistant to viruses maceutical industry and is ceutical companies. In that cause millions of dol reviewing more than 100 agriculture, Monsanto's lars of damage each year potential new products. profitable products are to food crops. Plant genetic As an outgrowth of these increasingly addressing engineering is only four efforts, Searle has entered a farmers' needs for the high years old, and already its cooperative venture for the yields and efficiency that commercial applications development of new drug- will help them stay compet are becoming clear. delivery technologies. itive. For both efforts, developments in biotech nology are leading to new Cytotec, an antiulcer drug from Searle, is fast Searle is developing a second-generation tissue products with tremendous gaining momentum in the plasminogen activator potential. $2.6 billion worldwide (tPA) product, which dis market for such products. solves blood clots in coro Monsanto's herbicides Approved most recendy in nary arteries. TPA has been have long been leaders in Argentina, it now is sold in labeled a very important their markets. We are also helping fanners stabilize costs and improve yields with livestock feed supple ments, such as the popular Alimet, used in the poultry industry, and high-perfor 24 countries with approval pending in 30 others, including the United States. Searle's research has pro duced more products that have entered clinical trials, such as enisoprosc, an development by industry observers. Searle is also developing an atrial peptide product that could provide a significant new way of using a natural body sub stance to control high mance seed products. antiulcer drug expected to blood pressure. Over the longer term, Monsanto's biotechnology efforts will play a key role in the development of new products for those markets. be more potent than any thing now on the market. Calan SR (verapamil HC1), a Searie product already used for the treat Successful commercializa tion of biotechnology takes more than good research. It takes effective government review to ensure the safety In fact, biotechnology will transform Monsanto's entire effort in the life sciences. One of the Company's first commercial products will be bovine somatotropin (BST), a protein that increases the efficiency of dairy cow milk production. BST is the ment of angina, is now the first calcium-blocker drug approved in the United States for use in controlling high blood pressure. Calan corrects a cellular defect now thought to be an of products as well as public understanding of the benefits they will bring. Monsanto actively supports both. For example, we have an active education pro gram to reinforce accep tance of our agriculture and animal health products. u DSW 021694 STLCOPCB4007003 Our research must CONTINUALLY RENEW OUR EXISTING BUSINESSES AND PRODUCE A STREAM OF PROFITABLE PRODUCTS TO MEET CUSTOMER NEEDS. Top photo: Searie researchers test the effects of different pharmaceutical compounds while looking for products that prevent brain damage from heart attacks, strokes and comas. Bottom photo: Research renews long-standing product lines. Simulating a detergent manufacturing process to test techniques, formulations and raw materials helps Monsanto maintain its leadership in the detergent market. In 1986, Monsanto crossed over from being a capital intensive company to a research-intensive company, with R&D investment exceeding capital invest ment. Research spending now equals nearly 8 percent of sales, up from 3 percent five years ago. We are working to quickly convert as much of this investment as possible into profitable products -- in fact, more new products are in the pipeline than ever before. Matching customer needs with our technical expertise helps us select the best products for accelerated development. These criteria have helped Searie sharpen its research focus by identi fying a series of priorities for rapid development, including new uses for Cytotec. Collaborative agreements with universities are one of Monsanto's most important research resources. These arrangements join the strengths and interests of Monsanto with such insti tutions as Washington, Oxford and Rockefeller universities. It's an asset that few of our competitors have -- and none to the extent of Monsanta Focusing on the life sci ences and human health care, the partnership between Monsanto and Washington University in St. Louis is aimed at devel oping new therapies for major human diseases. During 1986, Monsanto and Washington University extended their research agreement through 1990 and more than doubled the level of funding. We spent $105 million in 1986 on research for prod uct improvements and new products to regenerate our chemicals, plastics and fibers businesses. Results are coming. For example, in 1986 there were an unprecedented number of new fiber products, includ ing nine new sweater yams, a second-generation Acrilan acrylic fiber offering 50 percent improved wear in men's socks, and the new Wear-Dated Gold Label carpet fiber. Close collaboration with customers is an important part of the research effort. This is demonstrated by the construction of a Plastics Applications Development Center at the Indian Orchard plant in Massa chusetts. The facility, to be completed in 1987, will be used for joint research with customers on resins and their applications. At Monsanto Agricultural Company, research is directed toward developing new products through syn thesis and screening pro grams. But it takes looking at about 20,000 candidates to find one herbicide that has commercial value, and then another five to seven years to develop it for sale. Biotechnology researchers are developing plants that can resist Roundup herbi cide so that it can be used for weed control in many commercial crops. Research also supports existing products, such as maleic anhydride used in fiberglass reinforced plas tics, food additives, agri cultural chemicals and lubricating oil. We lead the world in this technology and have entered a research project with another com pany to explore the next generation of manufactur ing processes. NutraSweet opened a new research and develop ment facility in 1986 that will house programs in pro duction technology, new applications for aspartame, and the development of new sweeteners and other potential new products. DSW 021695 STLCOPCB4007004 DSW 021696 13 STLCOPCB4007005 DSW 021697 14 STLCOPCB4007006 WE RECOGNIZE OUR RESPONSIBaiTY TO BE * GOOO NEIGHBOR WHEREVER WE DO 8USMESS. Top photo: Monsanto employees volunteer their time and talents to communities of all sizes. In inner-city St. Louis, a Fisher Controls employee teaches youngsters about business. Bottom photo: Monsanto's Newport, United Kingdom, plant helped spearhead "Selfstart in Business" to guide entrepreneurs such as Lesley Ann Tull, who started a knitwear business that now employs two full-time and 10 part-time workers. From worldwide industry matters to community needs in our plant cities, Monsanto brings the same determined, thoughtful, action orientation it uses in its businesses. We believe in meeting our responsibilities to our neighbors -- and our successful financial per formance lets us deliver on those responsibilities. In a special program tar geted at the thousands of Americans who suffer from hypertension, angina and other heart-related ailments but cannot afford the nec essary medication, Searle is distributing, free, $10 million worth of Calm (verapamil HC1) through physicians. Without proper medication, one-third of these people would stand a substantial chance of suffering a stroke within one year. In late July 1986, a convoy of 27 Monsanto trucks drove from Green ville, South Carolina, to central Michigan to collect more than 350 tons of donated hay for delivery to drought-stricken South Carolina fanners. The 1,900-mile mercy mission was the idea of two Monsanto transportation supervisors. Helping the community is part of life for many Monsanto people. Florida Plant Technician Rodney equipment to protea employees, property, neigh bors and the environment. We are cleaning up wastes Dunn and his wife open resulting from the less strin their home to provide tem gent standards of past years porary shelter for troubled and using new technology children. "It's heartbreak to minimize any waste gen ing to see these kids who erated in the future. have no chance in life," he said. "I just want to be able Early in 1986, a Monsanto to say I gave a child a little task force concluded a shot at making it." year-long examination of Company procedures for Monsanto's philanthropic handling high-hazard mate fund and management tal rials. As a result, storage of ent help in other ways, too. high-hazard materials at In Newport, United King Company facilities was dom, for example, we reduced about 50 percent helped develop "Selfstart and handling procedures in Business," a program for some materials were that gives young men and tightened. women the guidance and financial support to turn Overall safety perfor good ideas into thriving mance in 1986 again placed small businesses. Amid Monsanto among the best widespread unemployment, in our industry. By the end entrepreneurship offers of 1986, at the John F. these bright, imaginative Queeny plant in St. Louis, youngsters challenges -- employees had worked and a future. more than four million hours without an injury Monsanto's philosophy serious enough to prevent about safety and the envi a return to work the next ronment has been distilled day. Fewer than 1 percent to one sentence: We will of all industrial facilities meet every mandated stan ever achieve that perfor dard and requirement, and mance level, according go beyond them if neces to the National Safety sary to conduct our busi Council. ness responsibly around the world. To make that policy a 24-hour-a-day reality, more than 1,000 people spend about $200 million a year on programs and DSW 021698 15 STLCOPCB4007007 FnUNGUL REPORT COMTEKTS Management Report 17 Independent Auditors' Opinion Statement of Consolidated Income 17 is Review of Consolidated Results of Operations 19 Operating Unit Segment Data 21 Geographic Data 24 Research and Development 2t Quarterly Data 27 Statement of Consolidated Financial Position 2S Review of Liquidity and Capital Resources 29 Statement of Changes in Consolidated Financial Position 30 Review of Sources and Uses of Funds 31 Statement of Consolidated Shareowners' Equity 32 Notes to Financial Statements 33 Significant Accounting Policies 33 Reclassification 33 Basis of Consolidation 33 Currency Translation 33 Principal Acquisitions 33 Restructuring 34 Depreciation and Amortization 34 Inventory Valuation 34 Income Taxes 3S Earnings per Share 39 Supplemental Data 39 Employee Retirement Benefits 30 Short-Term Debt and Credit Arrangements 37 Long-Term Debt 37 Capital Stock 37 Stock Option Plans 30 Commitments and Contingencies 30 Segment Information 30 Financial Summary 30 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. Net Sales 0_____________ Year____________ Dollars in Millions 1984 $6,691 1985 $6,747 1986 $6,879 IS Monsanto Company and Subsidiaries DSW 021699 STLCOPCB4007008 Management report Monsanto Company management is responsible for the fair presentation and consistency of all financial data included in this Annual Report. Where necessary, the data reflect management estimates. Management also is responsible for maintaining a system of internal accounting controls to provide reasonable assurance that assets are safeguarded against material loss from unauthorized use or disposition and that authorized transactions are properly recorded to permit the preparation of accurate financial data. Costbenefit 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 com munication of policies; and (4) ongoing internal review programs and audits. As ratified by shareowner vote at the 1986 Annual Meeting, Deloitte Haskins & Sells was appointed to examine, and express an opinion as to the fair presenta tion of, the consolidated financial statements. This opinion appears below. Monsanto's Audit Committee, consisting of six non-employee directors, meets with Controllership, Internal Audit and Deloitte Haskins 8c Sells personnel to review internal controls, financial reporting and account ing practices. Deloitte Haskins Sc Sells and internal auditors meet with the Committee, with and without management present, to discuss their examinations, the adequacy of internal controls and the quality of financial reporting. Richard J. Mahoney Chairman and Chief Executive Officer February 27,1987 Francis A. Stroble Senior Vice President and Chief Financial Officer Independent aumtors' otmom To the Shareowners of Monsanto Company: We have examined the statement of consolidated financial position of Monsanto Company and Subsidiaries as of December 31,1986 and 1985 and the related statements of consolidated income, shareowners' equity and changes in financial position for each of the three years in the period ended December 31,1986. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, such consolidated financial statements present fairly the financial position of Monsanto Company and Subsidiaries at December 31, 1986 and 1985, and the results of their operations and changes in their financial position for each of the three years in the period ended December 31, 1986, in conformity with generally accepted accounting principles. These principles were consistently applied during the period except for the change, with which we concur, in 1986 in the method of determining pension expense as described in the Employee Retirement Benefits note to the financial statements. Saint Louis, Missouri February 27,1987 Monsanto Company and Subsidiaries 17 DSW 021700 STLCOPCB4007009 STATEMENT OF CONSOLIDATED MCOME (Dollars in millions, except per share) Net Sales Cost of goods sold Gross Profit Marketing and administrative expenses Technological expenses Amortization of intangible assets Restructuring expense (income) -- net Operating Income (Loss) Interest expense Interest income Gain from sale of oil and gas operations Other income -- net Income (Loss) Before Income Taxes and Extraordinary Gain Income taxes Income (Loss) Before Extraordinary Gain Extraordinary gain from debt repayment Net Income (Loss) 1986 $6,879 4,344 2,535 1,244 596 218 (158) 635 (201) 41 161 636 203 433 $ 433 1985* $6,747 4,841 1,906 919 548 88 949 (598) (178) 63 392 23 (298) (170) (128) 30 $ (98) 1984 $6,691 4,839 1,852 722 446 7 i 677 (100) 92 38 707 268 439 $ 439 Earnings per Share: Before extraordinary gain Extraordinary gain After extraordinary gain * Restructuring expense (income) -- net has been reclassified. See notes to financial statements. The above statement should be read in conjunction with pages 33 through 38 of this report $ 5.55 $ 5.55 $(1.67) 0.40 $(1.27) $ 5.42 $ 5.42 Key Financial Statistics As a Percent of Sales: Gross Profit Marketing and Administrative Expenses Research and Development Expenses Operating Income (Lou) Net Income (Loss) Effective Income lax Rate 1986 37% 18 8 9 6 32 1985 28% 14 7 (9) (1) (57) 1984 28% ; 11 ! 6! 10 7; 38 j 1ft Monsanto Company and Subsidiaries OSW 021701 STLCOPCB4007010 REWEW or CONSOUMTED RESUUS Of OKMnONS 1986 Was an Important Transition Year The year 1986 represented an important transition for Monsanto Company, following the acquisition of G.D. Searle & Co. and The NutraSweet Company and several years of restructuring actions. Net income was S433 million in 1986, compared with a net loss of $98 million in 1985. The net loss in 1985 resulted from costs associated with the restructuring program. Earnings per share for 1986 were $5.55, compared with a 1985 loss of $1.27 per share. Operating performance for 1986 was strong, with Monsanto's chemicals, plastics and fibers products, Roundup herbicide and NutraSweet low-calorie sweetener performing well and accounting for most of the improve ment over 1985 operating results. Searle made progress in expanding acceptance of several drugs in international markets. The performance of Electronic Materials and Fisher Controls, however, was very disappointing. Restructuring Actions Benefit 1986 Operating Performance The strategies planned in recent years, and particularly the restructuring actions taken in 1985, yielded significant profit benefits in 1986. Beginning in late 1985 and continu ing in 1986, Monsanto divested numerous low-return and non-strategic businesses and assets. In addition, the Company streamlined operations by reducing the number of employees and levels of management Management continues its efforts to strike a positive balance between long-term growth and near-term enhancement of share owner value. Sales Increased and Mix Changed Net sales increased to $6,879 million, compared with $6,747 million in 1985. Two factors affect this com parison. First, net sales of products that were sub sequently divested as part of the restructuring program ($931 million) were included only in 1985. Second, the acquired Searle and NutraSweet businesses were included for only the last five months of 1985, versus a full twelve months of 1986. On a comparable basis, sales volume increased 3 percent. Worldwide selling prices increased 1 percent due to the translation of stronger ex-U.S. currency-denominated selling prices into U.S. dollars. Excluding the impact of ex-U.S. currency translation, worldwide selling prices decreased 2 percent. The gross profit margin improved significantly in 1986 to 37 percent, as compared with 28 percent in 1985. The full-year effect of higher margins associated with Searle and NutraSweet products, lower raw material costs and the benefits of the 1985 restructuring program were the principal contributing factors. Partially depress ing the improved gross profit margin was the $90 million obsolescence charge for the Electronic Materials property write-down. Overall, raw material costs declined approxi mately 8 percent. The year-to-year increase in marketing and admin istrative expenses reflected the inclusion of the Searle and NutraSweet businesses for a full year, with their heavier marketing-related expenses, and the translation effect of ex-U.S. currency-denominated expenses into U.S. dollars. Excluding Searle and NutraSweet, and the impact of ex-U.S. currency translation, marketing and administrative expenses increased 5 percent Technological expenses in 1986 were $596 million, including $523 million of research and development expenses. Patent, engineering and commercial develop ment expenses comprise the rest of technological expenses. The 9 percent increase in 1986 technological expenses over 1985 is due to Monsanto's continuing commitment to research and development programs and the acquired Searle and NutraSweet businesses. R&D expenses were 8 percent of sales in 1986, compared with 7 percent in 1985. Increases in the level of R&D expenses continue to be directed toward emerging technologies. Searle made progress in eliminating duplicate research efforts, thus increasing the efficiency of the Searle and Monsanto programs. Amortization of intangible assets increased as a result of a full year's amortization of the acquired Searle and NutraSweet patents and other intangible assets. Many Factors Led to Improved Income Operating income in 1986 was $635 million, compared with an operating loss of $598 million in 1985. The oper ating loss in 1985 resulted from the net restructuring expense of $949 million. The benefits of the 1985 restruc turing program, higher sales volumes of most continuing product lines, a more profitable product mix, lower raw material costs and an improved economic climate throughout the world (including a weaker U.S. dollar) all contributed to higher operating income in 1986. Included in 1986 operating income was $158 million of restructuring income ($97 million after related taxes, or $1.25 per share) and die $90 million charge for the Electronic Materials property write-down ($46 million after related taxes, or $0.59 per share). Monsanto Company and Subsidiaries 19 DSW 021702 STLCOPCB4007011 Review of consolidated results of operations . Continued) The 1986 restructuring income pnmarily resulted from the sale of certain product lines associated with the Texas City, Texas petrochemicals production facility, which was planned for divestiture under the 1985 restruc turing program. Included in 1986 other income were $88 million of gains from the sales of product lines that were not pan of the 1985 restructuring program, includ ing acetic acid (which was part of the Texas City plant sale) and vanous small product lines, along with royalty income and currency gains. The sale of the Texas City plant and related assets resulted in a $175 million gain ($114 million after related taxes, or $1.46 per share). Interest expense was higher in 1986 reflecting the full year's cost of a higher debt level resulting from the acquisition of Searle and NutraSweet. Interest income declined in 1986 due to lower interest rates and securities investment levels. Net income in 1986 benefited from the adoption of the Financial Accounting Standards Board's new pension accounting rule, which reduced 1986 pension cost by $49 million ($25 million after related taxes, or $0.32 per share). The impact of prior years' inflation is not completely reflected in companies' historical cost finan cial statements. The reason is that the cost of an asset today (current cost) is generally higher than its original cost (historical cost). As a result, historical cost deprecia tion expense included in the income statement is lower than depreciation expense using the current cost approach. For Monsanto, current cost depreciation expense in 1986 (based on construction and equipment indexes) would have been approximately $80 million higher than historical cost depreciation expense. In October 1986, the Tax Reform Act of 1986 (the Act) was enacted. The Act reduces corporate income tax rates in 1987 and 1988, but eliminates investment tax credits that have reduced income tax expense for Monsanto in the past. The Act did not have a significant impact on Monsanto in 1986, nor is it expected to have a significant impact in 1987. Net sales in 1985 increased from 1984, as the additional 1985 net sales of the acquired Searle and NutraSweet businesses more than offset the volume and price declines in other businesses. Sales volume declined 4 percent, excluding divestitures and the acquisition of Searle and NutraSweet, and selling prices declined 3 percent. Weak conditions in several of Monsanto's markets, particularly agriculture and semiconductors, and the cost of the restructuring program, resulted in an oper ating loss in 1985. The effect of the restructuring program was $949 million ($542 million after related taxes, or $7.04 per share). Also occumng in 1985 was a $392 million gain ($201 million after related taxes, or $2.61 per share) from the sale of the oil and gas operations. The strength of the U.S. dollar fueled heavy1985 imports from international competitors. The net loss was partially offset by an extraordinary gain of $30 million ($0.40 per share) from the repayment of long-term debt at a discount. Analysis of Change in Earnings per Share -- Better (Worse) Sales Related Factors: Selling prices Sales volume and mix Total Sales Related Factors 1986 vs. 1985 vs. 1985 1984 $ 0.28 0.69 0.97 5(1.18} (1.98! (3.16! Cost Related Factors: Raw material prices Other manufacturing costs Marketing, administrative and technological expenses Nonrecurring costs (including Electronic Matenals property write-down} 1.28 0.09 (0.49) 0.52 0.40 (0.42) (0.98) Total Cost Related Factors (0.10) 0.50 Other Factors: Acquisinons Operations Intangible asset amortization Restructuring -- net Divestitures Total Other Factors 1.31 (0.87) 8.29 (0.48) 8.25 075 i0.62) (7.04! 0.03 : 6.8 8) Operating income 9.12 '9.54, Interest expense Acquisition related Other Interest income Gain from sale of oil and gas operations Other income -- net Change m income taxes Shares outstanding (0.20) 0.06 (0.15) (2.61) 0.92 0.15 (0.07) (0.84) 0.24 (0.22) 2.61 (0.1 li 0.65 0.12 Change in Income Before Extraordinary Gain 7.22 : .09) Extraordinary gam Change in Earnings per Share .0.40) 0.40 I 6.82 S 6.b9 20 Monsjnto C.ampjnx jnd Subsidunes DSW 021703 STLCOPCB4007012 Operating umt segment two* Agricultural Products: 1986 Net Sales 1985 1984 1986 Operating Income (Loss) 1985 1984 1986 Research and Development 1985 1984 -- Crop Chemicals Animal Sciences Chemicals Electronic Materials Fisher Controls NutraSweet Pharmaceuticals Oil and Gas Biotechnology Product Discovery Corporate Items and Eliminations $1,067 86 3,548 154 645 711 665 $1,073 79 4,051 137 652 317 262 172 $1056 82 4,360 220 550 15 203 345 * 318 (35) 613 (139) (66) 142 (119) (41) (38) S 177 (92) (480) (84) 34 58 (139) 16 (31) (57) $438 (49) 336 4 27 (30) 27 (24) (52) $ 94 41 105 15 21 25 177 $110 32 128 16 20 11 96 SI 07 22 131 14 23 24 39 31 24 6* 26* 25* Total consolidated *6379 $6,747 $6,691 $635 $(598) $677 $523 $470 $370 *Corporate R&D expenses an allocased on a weighted average basis ofinvestment to operating touts in dsterrmnmg operating income (loss). Agricultural Products: Crop Chemicals Animal Sciences Chemicals Electronic Materials fisher Controls NutraSweet Pharmaceuticals Oil and Gas Biotechnology Product Discovery Corporate Assets Total consolidated 1986 Total Assets 1985 1984 $ 939 217 2,704 228 612 1,883 1,394 $1,061 174 2,982 302 636 1,862 1,438 $1,236 184 3,222 280 536 80 578 50 33 31 242 389 226 $8,269 $8,877 $6,373 Capital Expenditures 1986 1985 1984 * 55 33 244 51 38 39 53 6 1 $520 $ 84 31 291 55 53 4 33 85 3 6 $645 $ 88 31 279 47 32 7 107 17 6 $614 The above data should be read its conmncsson with the Segment Information non to the financial statements on page 39. Depredation and Amortization | 1986 1985 1984 $ 84 21 236 122 36 205 67 7 2 *780 $ 89 21 248 37 28 73 39 59 2 3 $599 5 80 20 j 273 | 30 ; 21 7 69 1 2 5503 In accordance with the recently issued Securities and Exchange Commission Staff Accounting Bulletin No. 67, operating income (loss) reflected in the operating unit segment data above has been restated to indude the income (expense) associated with the restructuring program. The effect of the restructuring program on each operating unit segment for 1586 and 1985 is shown below. Agricultural Products: Crop Chemicals Animal Sciences Chemicals Electronic Materials fisher Controls Pharmaceuticals Corporate Items Increase (decrease) in operating income Income (Expense) 1986 1985 $ (4) 8 149 1 4 $158 $(121) (37) (714) (17) (2) (55) (3) $(949) Crop Chemicals Net Saks Herbiddes and other agricultural chemicals 1986 $1,067 1985 $1,073 1984 j 1 %hZ56 ! The Crop Chemicals operating unit is a leading world wide producer of agricultural herbicides, induding Roundup, Lasso, Avadex BW and Machete herbiddes. The Crop Chemicals business overcame an extremely weak United States agricultural environment to post a solid performance in 1986, and a year-to-year improve ment in operating results. Crop Chemicals sales, however, were essentially level year-to-year, but operating income in 1986 increased 80 percent Operating income for 1985 was reduced by $121 million of restructuring expense. Sales volume growth in 1986 for Roundup herbidde throughout the world more than offset lower sales volume of Lasso herbidde. Triggered by a new pridng strategy, the use of Roundup herbidde to control peren nial and annual weeds brought strong worldwide demand. Additional demand in the United States came Monsanto Company and Subsidiaries 21 QSW 021704 STLCOPCB4007013 0KMTM6 U1*T SOMOff MIX (Continued) from the industrial and residential markets. Lasso herbi cide, which is sold principally in the United States to control grassy weeds in corn and soybean crops, was adversely affected by reduced plantings of these major crops due to the poor United States farm economy. In 1986, the United States Environmental Protection Agency (EPA) issued a proposed regulatory decision as part of their Special Review of the benefits and potential risks of Lasso herbicide. The proposed regulatory decision would permit the continued use of alachlor (the active ingredient of Lasso herbicide) for all major crops, with certain conditions and label modifica tions, including "restricted use" classification. This classification would mean that use of Lasso herbicide would be restricted to certified applicators, or persons under their supervision, and to the method of application. The Company expects a final decision by the EPA in 1987. Monsanto's tests confirm that Lasso herbicide poses no unreasonable adverse effects to humans or the environ ment when used properly. No significant effect on financial results is expected from this review. Crop Chemicals sales and operaring income in 1985 declined 15 percent and 60 percent, respectively, from 1984 due to the costs associated with the restructur ing program and lower sales volumes and prices in certain products. Sales volume of Lasso herbicide decreased 20 percent due to the weak United States farm economy, and was further affected by uncertain customer demand for the 1986 season. Worldwide usage of Roundup herbicide increased in 1985, but sales volume declined 2 percent, as United States customers reduced inventory levels. Strong demand for Roundup herbicide in other world areas partially offset lower United States sales. Animal Sciences Net Sales Animal products 1986 $86 1985 $79 1984 $82 The Animal Sciences business focuses on animal nutrition and growth products, including Alimet animal feed supplement and BST, a bovine growth promotant that , research indicates enhances the efficiency of milk production. Sales for 1986 increased 9 percent over 1985. Sales volume of Alimet animal feed supplement increased significantly in 1986, but was partially offset by the elimi nation of sales of discontinued products, which were included in 1985 operating results. Progress continues to be made on BST, and management expects to begin ex-U.S. commercialization in 1988. A BST manufacturing facility is being constructed in Austria by a third party who will operate the facility for Monsanto Continuing high levels of R&D expenses, principally for BST development, resulted in an operating loss in each of the last three years. The loss was lower in 1986 as a result of increased Alimet animal feed supplement sales, while 1985 included charges associated with the restructuring program. Sales for 1985 declined 4 percent, as higher sales volume of Alimet animal feed supplement was offset by lower selling prices, resulting from ex-U.S. competition. Heavy R&D expenses, principally related to BST, the costs associated with the restructuring program and expanded marketing efforts resulted in an operating loss for 1985. Chemicals Net Sales Detergent materials Engineered products Man-made fibers Plastics Resin products Rubber chemicals and instruments Specialty chemicals 1986 $536 205 856 639 584 319 409 1985 $ 550 251 1,080 804 637 283 446 1984 ! $ 577 281 1,194 874 693 310 i ! j j j j 431 | Monsanto's worldwide chemicals unit produces a wide range of chemicals, plastics, fibers and other products listed in the table above. Following several years of planned restructuring and cost reduction programs, the Chemicals businesses had an outstanding income performance in 1986. Operat ing income in the restructured, continuing higher-margin businesses improved significantly through efforts to increase gross margins, aided by favorable raw material and utilities costs, lower cost from reduced personnel, higher sales volumes and increased plant efficiencies. Compared to 1985, however, sales declined in 1986 due to divested product lines. Sales related to the divested product lines were $645 million in 1985. For continuing product lines, 1986 sales volumes increased 4 percent. Selling prices were level in 1986, reflecting positive translation effects of ex-U.S. currency denomi nated sales which were offset by lower domestic prices. Operating income improved significantly to $613 million in 1986, as compared with a $480 million operating loss in 1985. The 1985 loss resulted from the $714 million net expense associated with the restructuring program. All major businesses, led by fibers, achieved higher year-to-year profitability. Sales of various other products to the automotive, appliance and home furnish ings industries also remained relatively strong throughout 1986. The weaker U.S. dollar also benefited the Chemicals segment operating performance, generating positive translation effects on ex-U.S. operations and increasing the competitiveness of Monsanto's United States produced products in world markets. Product lines sold during 1986 that were not part of the 1985 restructuring program were acetic acid, paper chemicals and vanillin. In addition, Monsanto has announced its intention to sell the container business in early 1987. Sales of these products in 1986 were $164 million. As part of the 1985 restructuring program, the Seal Sands, United Kingdom plant was sold in 22 Monsanto Company and Subsidiaries DSW 021705 STLCOPCB4007014 OpCIUTMG UWT SESttEMT MIX Continued) December 1985, and the Texas City, Texas plant was sold in August 1986. Various other product lines and facilities were shut down in 1986, including the Columbia, Tennessee plant. Sales in 1985 declined 7 percent, as compared with 1984. This segment had an operating loss as a result of the costs associated with the 1985 restructuring program. Intense import competition and stagnant United States economic sectors associated with many of this segment's product lines resulted in lower selling prices and volumes for many of the product lines. The effects of lower plant capacity utilization rates in 1985 were partially offset by the benefits obtained from cost reduction programs and lower raw material costs. Electronic Materials Net Sales Electronic-grade silicon materials 1986 $154 1985 $137 1984 $220 The Electronic Materials business produces electronicgrade silicon wafers for the semiconductor industry and has production facilities in Japan, South Korea, Malaysia, the United Kingdom and the United States. The facilities in Japan and the United Kingdom began production in 1986, and the facility in South Korea began production in early 1987. Sales in 1986 were higher than 1985, but still weak due to the prolonged downturn of the United States elec tronics end-user equipment markets, primarily the computer and office equipment segments. Ex-U.S. sales continued to grow in 1986. Operating losses increased significantly in 1986 as a result of the $90 million pre-tax write-down of property, plant and equipment values. The decision to write down these assets was made in recogni tion of reduced growth in the worldwide semiconductor industry, coupled with a continuing shift of demand to Japanese and other Pacific Basin producers of semicon ductor devices. The reduced growth is compounded by the difficulty in effectively penetrating the large Japanese market. The write-down reduced asset values to a level more properly reflecting future cash flows under pro jected market conditions, principally for the United States operations. Also in 1986, the company reduced the number of employees, reduced manufacturing costs and discontinued certain technical programs not related to current product lines. Actions taken in the past few years have significantly reduced Monsanto's break-even point in plant capacity utilization, which will benefit this segment in the future. Sales in 1985 declined 38 percent from 1984, reflecting sharply lower demand for silicon wafers in the depressed semiconductor market during the second half of the year. This resulted in an operating loss in 1985. The operating loss in 1985 was increased by costs associated with the restructuring program. Fisher Controls Net Sales Valves, regulators, electronic process controls and gas separation systems 1986 $645 1985 $652 1984 i | $550 , Fisher Controls is a leading worldwide producer of indus trial valves and regulators, as well as state-of-the-art PRoVOX electronic process control systems and gas separation systems. Fisher Controls experienced a difficult year in 1986. Sales declined 1 percent in 1986, and operating income declined from $34 million in 1985 to a loss of $66 million in 1986. Demand for control valves and gas separation systems was weak as a result of poor economic conditions in the oil and gas industry, and lower capital spending by customers in the chemical industry. Sales of PRoVOX systems increased slightly in 1986. Fisher Controls' engineering and installation business, however, experienced a significant increase in European sales in 1986. The 1986 operating loss resulted principally from depressed sales to the important oil and gas and chemicals industries and from actions taken in late 1986 to reduce future operating costs. These actions included reducing employment 14 percent worldwide in the process control business, discontinuing certain low-return product lines and consolidating certain facilities. The objective of these actions is to return Fisher Controls to profitability in 1987. Sales in 1985 increased 19 percent from 1984 as sales of PRoVOX instrumentation systems grew and sell ing prices for other products were higher. Sales of gas separation systems also increased significantly. Operating income improved 26 percent, as these positive factors were partially offset by higher levels of marketing effort associated with launching PRoVOX, an operating loss of a small company acquired in 1985 and currency devalua tions in Mexico. HutraSweet Net Saks NutraSweet low-calorie sweetener products 1986 $711 1985* | i $317 i 'For the fit t-month period August-December 1985. The NutraSweet Company manufactures NutraSweet brand sweetener, a low-calorie sweetening ingredient, which is sold worldwide. The company also markets the low-calorie tabletop sweetener Equal throughout the United States. The NutraSweet Company continued its strong performance in 1986, with sales of $711 million and oper ating income of $142 million. Sales and operating income included in 1985 were for the August-December period only, following the acquisition of this business by Monsanta Product sales in 1985 included $49 million of certain consumer products which were divested in December 1985. Monsanto Company and Subsidiaries 23 osw 021706 STLCOPCB4007015 OraUTWG UWT SCSMEMT (MIX ,Cotttmutd) Sales in 1986 reflected the market performance of retail products containing NutraSweet and changes in inventory levels throughout the distribution chain. The sugar-free segment of carbonated soft drinks, the largest market for NutraSweet, continued to grow as it has in the past few years. However, the powdered soft drink market declined in 1986, resuming a long-term declining trend that had been temporarily reversed by the introduction of NutraSweet brand sweetener in 1983. In November 1986, the Food and Drug Administration approved NutraSweet for use in several new food categories, including refrigerated juice drinks in concentrate and ready-to-drink form, and ready-to-eat frozen confections on a stick. Operating income in 1986 reflected die impact of amortization expense related to intangible assets recorded as part of the acquisition. Operating income benefited from lower raw material costs and additional manufac turing efficiencies. A new process technology is being installed at the Augusta, Georgia manufacturing facility and is scheduled to be completed in early 1987. Sales in 1985 benefited from the leading compa nies in the carbonated soft drink industry converting from a NutraSweet/saccharin formulation to 100 percent NutraSweet. Pharmaceuticals Net Saks Pharmaceutical products 1986 $665 1985* $262 1984 $15 'Includts Stark for ths fwt-month period August-Dtctmbtr 19SS. This segment includes die woddwide prescription pharmaceutical business of G.D. Seatie Sc Co. Searie is investing heavily in the research and development programs necessary to introduce new prescription pharmaceuticals. Sales increased to S665 million in 1986 and were 10 percent higher than the full year 1985, including the period prior to acquisition. Sales in 1986 benefited from more favorable ex-U.S. currency translation and increased sales of physician-promoted products such as Calan and Demulen 35. Sales of Cytotec, Searie's ulcer treatment drug, continued to grow in many ex-U.S. markets. Cytotec was introduced in West Germany, Brazil and Canada in 1986 and work continues toward eventual registration of the drug for sale in the United States, the United Kingdom and Japan. Sales of certain mature prod ucts, such as Norpace and Flagyl, declined. Operating losses in 1986 and 1985 resulted from the continuing research efforts in human health care. The operating loss in 1985 was also affected by the costs of the restructuring program. Sales in 1985 included the acquired Seatie product lines for the August-December period only, following acquisition by Monsanto. Operating losses in 1985 and 1984 included Monsanto's pharmaceutical research effort. Biotechnology Product Discovery Research and development expenses 1986 $39 1985 $31 1984 i $24 i These expenses relate to basic and applied biotechnologi cal research aimed at discovering new biotechnology-based product opportunities that are further developed and commercialized by the Pharmaceuticals, Crop Chemicals and Animal Sciences businesses. The cost of the current biotechnology product development effort directly related to Pharmaceuticals, Crop Chemicals and Animal Sciences activities is included as an expense in those segments. Continuing high levels of research have resulted in increasing expenses over the three-year period, and promising new product leads. United States Europe-Africa Canada Latin America Asia-Padfic Inter-area Eliminations Corporate Items Total consolidated Net Sales to UnaffiUated Customers 1986 1985 1984 $4,638 1,231 290 283 437 $4,794 1,076 298 220 359 $4,914 945 278 203 351 $6379 $6,747 $6,691 1986 $506 117 26 6 16 2 (38) $635 Operating Income (Loss) 1985 1984 $(784) 191 34 (3) 9 12 (57) $475 192 25 4 31 2 (52) $(598) $677 1 1986 Total Assets j 1985 1984 i $6,608 $7,077 $5,088 ( 1,013 1,019 772 ; 116 120 105 j 243 232 178 : 385 299 257 ! (338) (259) (253) ( 242 389 226 ; $8,269 $8,877 $6,373 The data above are prepared on an "entity basis," which means that sales, operating income and assets of the legal entity are assigned to the geographic area where the 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 24 Monsanto Company and Subsidiaries Segment Information note to the financial statements on page 38. United States Sales in 1986 declined slightly from 1985. The compari son is affected by divestitures and by the acquisition of Searie and NutraSweet. Sales of continuing businesses increased 2 percent in 1986. Sales in 1986 were positively DSW 021707 STLCOPCB4007016 Geographic data (Continued) affected by strong Chemicals, NutraSweet and Roundup herbicide sales. Lasso herbicide, Electronic Materials and Fisher Controls sales were depressed because of extreme weakness in their end-use markets. The significantly improved profitability of the Chemicals businesses, along with Roundup herbicide growth and the inclusion of NutraSweet operating results for the full year, were major contributors to 1986 operat ing income. Operating income was positively affected by cost reduction measures, lower raw material costs, the implementation of a new pension accounting rule and $155 million in restructuring income, partially offset by the Electronic Materials property write-down. The 1985 operating loss resulted from a $963 million net expense related to the restructuring program. For 1985, sales declined slightly as sales of the acquired Searie and NutraSweet businesses were offset by the effects of a difficult United States farm economy, a downturn in the semiconductor materials market and stiff competition from ex-U.S. manufacturers. The strength of the U.S. dollar adversely affected prices and volumes of many chemical-based product lines. These factors, coupled with the net expense for the restructuring program, resulted in an operating loss in 1985. Sales from the United States to ex-U.S. third party customers were $346 million, $379 million and $417 million for 1986-1984, respectively. These sales and the related income are included in the United States geographic data. The impact of product divestitures on 1986 sales more than offset the 1986 benefits of the weaker U.S. dollar's impact on the competitiveness of United States produced materials in the world markets. Europe-Africa European-African 1986 sales were $1,231 million* an increase of 14 percent over 1985. The year-to-year comparison is affected by divested product lines and by the inclusion of Searie results for the full year 1986. Europe-Africa benefited in 1986 from saies volume gains in Roundup herbicide and certain chemicals. The effect of translating stronger ex-U.S. currency-denominated operating results into U.S. dollars also increased sales and operating income. Operating income in 1986 was affected by cost reduction program expenses in Fisher Controls and the exclusion of operating income of the chemical intermediates plant at Seal Sands, United Kingdom, which was divested in late 1985. Oper ating income in 1986 also declined due to the inclusion in 1985 of $26 million of net restructuring income. In mid1986, a new Electronic Materials finishing plant began production in the United Kingdom. Sales in 1985 increased over 1984 on the strength of Chemicals, Fisher Controls and the inclusion of Searie businesses for the August-December 1985 period follow ing the acquisition. Excluding the impact of the net restructuring income, operating income declined due to lower Chemicals profitability and higher Pharmaceuticals expenses. Canada Canadian 1986 sales were $290 million, a 3 percent decline from 1985 due to lower sales of Avadex BW herbicide and discontinued product lines, partially offset by NutraSweet sales and the inclusion of Searie sales for the full year 1986. The lower sales of Avadex BW and the divested oil and gas business also negatively affected oper ating income, which declined 24 percent from 1985. Offsetting these factors was the inclusion of Searie oper ating income for the full year 1986. Canadian operating income does not include the full profitability generated by sales into Canada from other Monsanto locations. Sales in 1985 increased from 1984 due to higher Fisher Controls sales and the acquired Searie product lines, which more than offset the lower sales of deter gent products. Operating income increased due to the addition of profitable Searie product lines and improved Crop Chemicals and Chemicals profitability. Latin America Latin American sales in 1986 were $283 million, an increase of 29 percent over 1985. Two thirds of this increase was due to the inclusion of Searie sales for the full year 1986. Improved economic conditions in Brazil and Argentina resulted in sales volume gains for Crop Chemicals, Lustrex plastic, rubber chemicals and phosphates. Shipments of Roundup herbicide were partic ularly strong in 1986. Latin American operating income does not include the full profitability generated by sales into Latin America from other Monsanto locations. Sales in 1985 increased over 1984, as strong sales of plastics and the inclusion of Searie sales offset lower sales of Crop Chemicals. The operating loss in 1985 resulted from restructuring expenses. Asia-Pacific Asia-Pacific sales in 1986 were $437 million, an increase of 22 percent over 1985. Operating income increased to $16 million, principally due to the inclusion of Searie operating results for the full year 1986. Sales in 1986 also benefited from higher volume of Roundup herbicide and the positive effect of translating ex-U.S. currency-denomi nated sales into U.S. dollars. While Electronic Materials sales increased in the Japanese market, Monsanto's market share remains well below the potential. New plants were commissioned in Japan and South Korea which will further strengthen Monsanto's position in these critical Asian markets. Asia-Pacific operating income does not include the full profitability generated by sales into Asia-Pacific from other Monsanto locations. Sales in 1985 increased slightly from 1984 due to the inclusion of Searie sales, but operating income declined 71 percent. Operating income in 1985 was down significantly because of lower Crop Chemicals and Electronic Materials sales and lower Chemicals profit ability. Sales and operating income were also adversely affected by the Australian dollar currency translation. Monsanto Company and Subsidiaries 25 DSW 021708 STLCOPCB4007017 research and dcviloment New Product Commercialization Is Top Priority New product development and commercialization spring ing from a unique and highly technological base remain a top priority. Monsanto's commitment to developing new products and market opportunities is evidenced by the direction of expenditures in recent years. R&D expenses as a percent of sales reached a record 8 percent in 1986, compared with 7 percent in 1985 and 6 percent in 1984. Research Focused on Emerging Technologies Monsanto's research efforts in 1986 continued to focus on emerging technologies -- biotechnology, human health care, plant biology and animal nutrition. In 1986, approx imately 40 percent of total R&D expenses was directed toward these emerging technologies. The bovine growth promotant, BST, will probably be the first commercial product resulting from Monsanto's biotechnology research. Other potential products from biotechnology are diverse and include genetically improved crops and second generation tPA (tissue plasminogen activator) for use in treating heart attacks. These products are expected to generate profits in the early 1990s. Substantial research efforts also continue to support existing areas of strength within Monsanto, including agricultural chemistry, catalysis, polymer Percent of Total RScD Expenses 1% 7% 25% 67% science, industrial chemistry, electronic materials, chemi cal engineering systems and applications research. The NutraSweet Company also conducts research aimed at expanding markets for NutraSweet and developing new sweeteners for the future. Monsanto/Searle Research Successfully Combined Significant efforts were devoted in 1986 to optimize human health care research programs, facilities and staff of Monsanto and Searle. These efforts have resulted in the elimination of duplicate research efforts. The acquisition of Searie significantly expanded and complemented Monsanto's research capabilities in biotechnology and human health care, adding experienced professionals and facilities to Monsanto's existing research organization. Searie also brought to Monsanto established organizations skilled at developing and marketing products that flow from the research program. The combination of these strengths, with the Company's strengths in basic and applied research in molecular biology and biotechnology and with Washington University's extensive biomedical discovery capabilities, will further Monsanto's efforts to ward its goal of becoming a major worldwide supplier in the pharmaceutical industry. This research focuses on dis eases of the cardiovascular and gastrointestinal systems, the central nervous system and the immune system. 26 Monsanto Company and Subsidiaries DSW 021709 STLCOPCB4007018 QUAKTtRUf MTU Net Sales Gross Profit Income (Loss) Before Extraordinary Gain Net Income (Loss) Earnings per Share Before Extraordinary Gain After Extraordinary Gain Dividends per Share Common Stock Price 1986 1985 1986 1985 1986 1985 1986 1985 1986 1985 1986 1985 1986 1985 1986 1985 High Low High Low First Quarter $1,745 1,624 678 441 118 87 118 87 1.52 1.12 1.52 1.12 0.625 0.575 65 y< 44% 46V. 41% Second Quarter $1,869 1,627 778 471 148 124 148 124 1.90 1.60 1.90 1.60 0.65 0.625 74% 56% 49 42% Third Quarter $1,695 1,741 527 470 144 31 144 31 1.85 0.42 1.85 0.42 0.65 0.625 77 63% 55% 44% Fourth Quarter $1,570 1,755 552 524 23 (370) 23 (340) 0.28 (4.81) 0.28 (4.41) 0.65 0.625 81% 67% 49% 40% Total 1 Year ! $6,879 1 6,747 i 2,535 j 1,906 I 433 (128) ! 433 ! (98) | ! 5.55 (1.67) 5.55 (1.27) 2.575 2.45 81% 44% 55% 40% | Net income in each quarter of 1986 was higher than the comparable quarter of 1985. Affecting the year-to-year comparison are the elimination of the operating results of certain low-return businesses and assets divested as part of the restructuring program, and the inclusion of Searie and NutraSweet operating results for the full year in 1986. Crop Chemicals sales historically are concentrated in the first half of the year and generally are more profitable than sales of other segments. The 1986 and 1985 nonrecurring or unusual items increasing (decreasing) earnings per share (after related taxes) were as follows: 1986 Restructuring income -- net Gains from other asset sales Change in accounting for pension expense Electronic Materials property write-down Change in annual effective tax rate Other nonrecurring expenses first Quarter $(0.04) Second Quarter $0.16 (0.08) Third Quarter $ 1.04 0.75 0.08 (0.59) (0.06) (0.39) Fourth Quarter $0.21 0.08 0.08 0.18 Total Year i $ 1.25 0.83 0.32 (0.59) (0.39) 1985 Restructuring expense -- net Gain from sale of oil and gas operations Gain from repayment of debt (7.04) 2.61 0.40 (7.04) 2.61 0.40 Monsanto Company and Subsidiaries 27 OSW 021710 STLCOPCB4007019 SWTBWff Of COeOUMTO RNAMCiAL POST** (Dollars in millions, except per share) Assets Current Assets: Cash, time deposits and certificates of deposit Short-term securities, at cost which approximates market Trade receivables, net of allowances of $36 in 1986 and $42 in 1985 Miscellaneous receivables and prepaid expenses Deferred income tax benefit Inventories Total Current Assets Intangible Assets, net of accumulated amortization of $337 in 1986 and $110 in 1985 Investments in Affiliates Other Assets Property, Plant and Equipment, at cost: Land Buildings Machinery and equipment Construction-in-progress Total Property, Plant and Equipment, at cost Less accumulated depreciation Net Property, Plant and Equipment Total Assets At December 31 1986 1985 $ 206 68 1,037 221 207 1,069 2,808 $ 195 98 1,218 402 267 1,097 3,277 ; : ! ; t 2,144 198 206 2,199 ! 164 j 203 ; 102 1,002 4,964 258 6,326 3,413 2,913 $8,269 101 961 5,494 284 i ! ; ; 6,840 ; 3,806 ; 3,034 ; $8,877 : Liabilities and Shareowners' Equity Current Liabilities: Accounts payable Wages Income and other taxes Miscellaneous accruals Short-term debt Total Current Liabilities Long-Term Debt Deferred Income Taxes Other Liabilities Shareowners' Equity: Common stock -- authorized, 200,000,000 shares, par value $2; issued 82,197,097 shares in 1986 and 1985 Additional contributed capital Accumulated currency adjustment Reinvested earnings Treasury stock, at cost (4,538,008 shares in 1986 and 5,444,544 shares in 1985) Total Shareowners' Equity Total Liabilities and Shareowners' Equity Tb* about aatrmtnt should ba rtad m conjunction wtth pagts 33 through 3S ofthis report. $ 460 133 157 577 389 1,716 1,630 548 594 $ 522 129 348 675 704 2,378 2,087 584 421 ; ; ! ' ; : : ; 164 861 (98) 3,058 (204) 3,781 $8,269 164 854 (191) 2,824 (244) 3,407 ; $8,877 23 Monsanto Company and Subtuiiarias DSW 021711 STLCOPCB4007020 Review of uqwmty and captdu. resources Significant Progress Made in Strengthening Financial Position Monsanto met its aggressive 1986 goal of significantly improving its financial position, which in late 1985 had temporarily declined as a result of the additional debt incurred to finance the acquisition of Searle and NutraSweet. This improvement was possible due to the strong 1986 operating cash flow of the Chemicals, Crop Chemicals and NutraSweet businesses and from the significant cash proceeds from the divestitures of product lines and assets. Debt Reduction Program Accomplished Monsanto reduced the $2.8 billion debt incurred to finance the August 1985 acquisition of Searle and NutraSweet to $1 billion at year-end 1986. The total debt to total capitalization ratio improved significantly by year-end 1986 to 35 percent, as compared with 45 percent at year-end 1985. Management believes this 1986 year-end ratio is an acceptable level. The Company's long-term debt continues to carry a "single A" rating. The interest coverage ratio (times interest earned) improved compared with 1985 due to higher profitability levels, partially offset by higher interest expense. That ratio was 3.2 in 1986 (excluding the restructuring income), compared with 2.3 in 1985 (excluding the restructuring expense, the gain from the sale of the oil and gas operations and the extraordinary gain) and 6.9 in 1984. Management expects continued improvement of this ratio over time. Monsanto has available various short- and medium-term bank credit lines, which are discussed in the "Short-Tenn Debt and Credit Arrangements" and "Long-Term Debt" notes to financial statements (page 37). When beneficial, Monsanto utilizes both the United States and ex-U.S. financial markets for its financ ing needs. To a limited extent, Monsanto has used other forms of financing, principally lease arrangements and joint venture arrangements, when the effective interest cost is attractive or the nature of the capital project requires their use. Monsanto has also made use of pollu tion control and industrial development bonds to finance qualified projects. Pollution control and industrial develop ment bond obligations were 16 percent of all outstanding long-term debt at year-end 1986. Monsanto's assets gener ally are free from lien and not used to collateralize debt. Working Capital Strengthened Monsanto's current ratio (current assets divided by current liabilities), an indicator of liquidity, was 1.6 at year-end 1986, compared with 1.4 at year-end 1985. Management believes the year-end 1986 ratio is accept able, but seeks to further improve it to a 2.0 ratio Work ing capital increased to $1,092 million at year-end 1986, compared with $899 million in 1985. Working capital benefited from funds provided by operations and divesti tures. Trade receivables and inventories declined in 1986, compared with 1985 levels, as increases associated with the growth of continuing businesses were more than offset by the elimination of receivables and inventories associated with discontinued product lines. Intangible assets declined slighdy as amortization in 1986 was partially offset by final appraisal adjustments to the recorded values of Searle and NutraSweet patents and other intangible assets. Property, plant and equipment declined in 1986, as depreciation and assets associated with facilities sold during the year exceeded capital expenditures. The weakening of the U.S. dollar, relative to ex-U.S. currencies in which Monsanto conducts business, resulted in the accumulated currency adjustment account decreasing to $98 million at year-end 1986. Currency adjustments are accumulated in this account until the related ex-U.S. investment is sold or liquidated. As part of its program to manage assets effectively, Monsanto continually evaluates risk retention and insur ance levels for product liability, property damage and other potential losses. Monsanto devotes significant effort to maintaining and improving safety and internal control programs, which minimize certain risks. Based on the cost and availability of insurance and the likelihood of a loss occurring, management decides the amount of insurance coverage to purchase from unaffiliated companies and the appropriate amount of risk to retain. To achieve the opti mal balance of risk and cost, Monsanto is retaining a greater portion of its total risk than it has in prior years. Management believes that the current levels of risk reten tion are appropriate and are consistent with other companies in the various industries in which Monsanto operates. Key Financial Statistics Walking Capital (Current assets less current liabilities) Current Ratio (Current assets divided by current liabilities) Percent of Total Debt to Total Capitalization* Percent of Total Debt to Total Shareowners' Equity *Total capitalization is the sum ofshort-term debt, long-term debt and shareowners' equity: 1986 $1,092 1.6 3J% 53% 1985 S899 1.4 45% 82% Monsanto Company and Subsidiaries 29 DSW 021712 STLCOPCB4007021 STWBWKT or CMMOES M COMSOUOWED TOANC1M. POSTON (Dollars in millions) Sources (Uses) of Funds Operations: Income (loss) before extraordinary gain Charges not using (credits not providing) funds: Depreciation and amortization Deferred income taxes Other Gains from asset sales -- net (after tax) Restructuring -- net (after tax) Funds provided by operations, before changes in working capital and extraordinary gain Investment and Other Transactions: Extraordinary gain from debt repayment Working capital changes: Trade receivables Inventories Other current assets Accounts payable and accrued liabilities Short-term debt Total working capital changes Foreign currency adjustments on working capital Property, plant and equipment additions Net proceeds from investment and property disposals (gross proceeds of S344 in 1986 and $1,612 in 1985) Repayment of short-term acquisition debt Acquisitions and investments (other than Searle) Other Acquisition of Searle: Acquisition financing Searle assets and liabilities acquired: Working capital, excluding cash Intangible assets Other noncurrent assets Noncurrent liabilities Searle cash, time deposits and certificates of deposit at acquisition Financial Transactions: Long-term financing Long-term debt reduction Treasury stock purchases Common stock issuances under employee stock plans Dividends Decrease in Funds 1986 $ 433 780 24 (12) (78) (97) 1,050 mi 28 181 (275) 33 148 42 (520) 266 (348) (29) (7) (448) 675 (1,139) 42 (199) (621) $ (19) Increase (Decrease) in Elements of Funds: Cash, time deposits and certificates of deposit Short-term securities Decrease in Funds The above statement should be read in conjunction with pages 33 through 38 of this report. 39 Monsanto Company and Subsidiaries $ 11 (30) S (19) 1985 $ (128) 599 93 (16) (201) 542 889 30 2 (54) (258) 28 (108) (390) 69 (645) 1,402 (1,154) (78) 62 (704) 2,754 279 (2,166) (1,023) 372 216 415 (723) (91) 20 (188) (567) $ (166) $ 46 (212) $ (166) 1984 , S 439 503 ! 103 ; (37) j 1,008 1 37 i (61) ! (16) | (42) 1 24 | (58) | (58) j (614) j 39 i (94) 47 (738) 1 1 i i j 12 (127) (184) 13 (182) j (468) i S (198) S (15) (183) $ (198) DSM 021713 STLCOPCB4007022 REVEW OF SOURCES AND USES OF FUNDS Monsanto's sources and uses of funds for the three-year period 1986-1984 are shown in the Statement of Changes in Consolidated Financial Position on the preceding page. at NutraSweet's Augusta, Georgia facility and new Electronic Materials plants in Japan and the United Kingdom. Depreciation and amortization expense increased significantly in 1986 due to a full year's amortization of the Searie and NutraSweet intangible assets and the Electronic Materials property write-down. Operations Provided Substantial Financial Resources Funds provided by operations were strong in 1986, reach ing $1,050 million, due to substantial funds generated by the Chemicals, Crop Chemicals and NutraSweet busi nesses. The amortization expense related to the acquired Searie and NutraSweet intangible assets significantly reduces operating income, but does not reduce funds provided by operations. The significant level of 1986 funds provided by operations, supplemented by an additional $344 million of gross proceeds from the sales of product lines and other assets, was used to reduce debt to more acceptable levels and to fund Monsanto's aggressive research programs and growth investments. At year-end 1985, total debt (both short-term and long-term debt) was $2,791 million. The Company surpassed its debt repay ment target in 1986, reducing total debt to $2,019 million at year-end 1986 -- a significant accomplishment. Also during 1986, the Company refinanced $606 million of commercial paper by issuing medium- and long-term debt in the United States and ex-U.S. financial markets at favorable interest rates. Future Operations Expected to Fund Growth The most important impact of inflation, in the Company's view, is its effect on comparisons of annual investment levels and cash generation. Other than the acquisition of Searie and NutraSweet, Monsanto's opera tions have generated sufficient cash to fund investments required to maintain the existing earnings base, and a significant portion of the research programs and growthrelated investments. In the future, a major portion of Monsanto's growth will continue to be financed with internally generated funds. Dividends Increase for 14th 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 fourteen years. Dividend payout for 1986 was 19 percent of funds provided by operations and 46 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, additional consideration is given to expected finan cial 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 share owners of record as of February 27,1987, was 68,178 and the high and low common stock prices on that date were $7714 and $76Vi. New Monsanto Is Less Capital Intensive Expenditures for property plant and equipment declined to $520 million in 1986. The lower level of capital spend ing is indicative of the future growth investment strategy, as Monsanto moves away from capital intensive busi nesses toward research-based businesses. This trend is expected to continue. Prior years' capital expenditures included $85 million in 1985 and $107 million in 1984 for the oil and gas business, which was sold in December 1985. The more significant 1986 expenditures were for the installation of new process technology Monsanto Company and Subsidiaries 31 DSW 021714 STLCOPCB4007023 SlXTEMENT OF CONSOUOOTEB SHAREOWNERS' EQUITY (Dollars in millions, except per share) Common Stock: Balance, January 1 New shares issued (138,117 shares in 1984) Par value of stock issued in two-for-one stock split Balance, December 31 Additional Contributed Capital: Balance, January 1 New shares issued Par value of stock issued in two-for-one stock split Other Balance, December 31 Accumulated Currency Adjustment: Balance, January 1 Translation adjustments Income taxes Balance, December 31 Reinvested Earnings: Balance, January 1 Net income (loss) Common dividends Balance, December 31 Common Stock in Treasury: Balance, January 1 Shares purchaseid (2,052,300 and 4,053,300 shares in 1985 and 1984, respectively) Issuances under employee stock plans (906,536; 523,827 and 349,837 shares in 1986-1984, respectively) Balance, December 31 The above statement should be read in conjunction with pages 33 through 38 of this report. 1986 $ 164 $ 164 | 854 7 $ 861 S (191) 103 (10) $2,824 433 (199) $3,058 $ (244) 40 $ (204) 00 1985 $ 164 $ 164 $ 855 (1) S 854 S (319) 131 (3) $ (191) $3,110 (98) (188) $2,824 $ (176) (91) 23 $ (244) 1984 ; $ 82 -- 82 S 164 | ; j $ 936 ; _ (82) i 11 $ 855 j $ (200) , (121) i 2| $ (319) | i $2,853 ! 439 (182) $3,110 , $ (4) ' (184) 12 $ (176) Key Financial Statistics Common Stock Price* Per Common Share High Low Dividends Shareowners' Equity ' Based on daily reported high and low common stock prices. 1986 $ 81% 44V. 2.575 48.69 1985 S 55% 40% 2.45 44.38 1984 $ 53% 40% 2.25 46.43 ; : : ! 32 Monsanto Company and Subsidiary DSW 021715 STLCOPCB4007024 NOTES TO FINANCIAL STATEMENTS Significant Accounting Policies The Company's significant accounting policies are itali cized in the following Notes to Financial Statements. Reclassification In December 1986, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 67, "Income Statement Presentation of Restructuring Charges" (SAB No. 67). SAB No. 67 requires restruc turing charges to be included in operating income. In accordance with SAB No. 67, "Restructuring expense (income) -- net" in the 1985 Statement of Consolidated Income has been reclassified as a reduction of operating income. In addition, the gain from the sale of the oil and gas operations has been shown separately in the 1985 Statement of Consolidated Income. Basis of Consolidation The consolidated financial statements include the Company and its majority-owned subsidiaries. Intercom pany transactions have been eliminated in consolidation. Companies in which Monsanto has an ownership interest between 20 and SO percent are included in "Investments in Affiliates'' in the Statement of Consolidated Financial Position, and Monsanto's share of these companies' income or loss is included in "Other income -- net" in the Statement of Consolidated Income. Currency Translation Most of Monsanto'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 of ex-U.S. entities that operate in hyperinflationary economies, including 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 currencies include the German mark, French franc, Canadian dollar, Australian dollar, Japanese yen, Brazilian cruzado and Mexican peso. Currency restrictions are not expected to have a significant effect on Monsanto's cash flow, liquid ity or capital resources. Principal Acquisitions In August 1985, Monsanto acquired G.D. Searle 8c Co. for $2,754 million. The pharmaceutical business of Searle and the former health care division of Monsanto operate as G.D. Searle 8c Co., a Monsanto subsidiary. The low-calorie sweetener business, formerly a part of Searle, operates as another Monsanto subsidiary, The NutraSweet Company. The acquisition was accounted for using the purchase method, and Searle's and NutraSweet's assets and liabilities were recorded at their estimated fair values at the date of acquisition. The $604 million excess of the purchase price over the fair value of the identifi able net assets acquired is being amortized on a straight line basis over 40 years. Searle's and NutraSweet's results of operations have been included in the Statement of Consolidated Income from August 1985. The following table presents unaudited, pro forma operating results as if the acquisition of the Searle and NutraSweet businesses and the sales of certain assets (described below) had occurred on January 1,1985 and 1984. Net sales Net income (loss) Earnings per share, after extraordinary gain 1985 $7,150 (136) (1.77) 1984 : S7,469 j 331 | 4.09 j The pro forma operating results include Searle's and NutraSweet's results of operations for the indicated years, less increased amortization of intangible assets, increased interest expense on the acquisition debt, and related income tax effects. In addition, the pro forma results reflect lower interest expense that would have resulted from using the net proceeds from certain sales of assets to reduce debt, as if those transactions had occurred on January 1 of the years presented. Asset sales include the sale of Searle's investment in Pearle Health Services, Inc. and Searle's nonprescription pharmaceuti cals business; and Monsanto's oil and gas Business, the Seal Sands, United Kingdom plant and certain other assets. The gross sales proceeds from these transactions were $1,612 million. Where determinable, the operating results associated with the above described assets have been eliminated from the pro forma data presented above. Nonrecurring gains and losses from the sales of these assets have been excluded from the pro forma operating results. The pro forma operating results do not purport to present Monsanto's actual operating results had the acquisition of the Searle and NutraSweet businesses and the other transactions referred to above occurred on January 1 of the years presented, nor to present Monsanto's consolidated operating results for any subsequent period. Monsanto Company and Subsidiaries 33 DSW 021716 STLCOPCB4007025 Nous TO FINANCIAL STXTIMJ(TS (Continued) Restructuring In October 1985, the Company's Board of Directors approved a restructuring and reorganization program. The approved actions included the withdrawal from selected low-return businesses and production facilities, the sale of certain assets that no longer had strategic importance and reductions in the number of employees. During the fourth quarter of 1985 the Company provided a $949 million charge to "Restructuring expense (income) -- net" in the Statement of Consolidated Income, comprising the following: Asset write-downs Cost of employee reductions, including a Special Incentive Retirement Program Other costs Gains on sales of assets Total $530 252 273 (106) $ 949 As part of the restructuring and reorganization program, several sales of businesses and production facili ties subsequently occurred. The gains on asset sales shown above principally were from the sale of the Seal Sands, United Kingdom chemical intermediates plant in the fourth quarter of 1985 at a net after-tax gain of $82 million, or $1.06 per share. The impact on 1985 net income from the restruc turing and reorganization program was $542 million (net of estimated tax benefits of $407 million), or $7.04 per share. Also in the fourth quarter of 1985, Monsanto sold its oil and gas operations at a net gain of $201 million ($392 million before tax), or $2.61 per share. The gain is shown separately in the Statement of Consolidated Income. Subsequent to its acquisition by Monsanto, Searie sold its investment in Pearle Health Services, Inc. and its nonprescription pharmaceuticals business in 1985. Because Monsanto recorded the assets of these businesses at their fair values as of the date of acquisition, no gain or loss resulted from these sale*. The 1986 gain included in "Restructuring expense (income) -- net" resulted from the sales of product lines that were planned for divestiture under the 1985 restruc turing program. The principal sale was those product lines of the Texas City, Texas petrochemical plant that were part of the restructuring program. The impart on 1986 net income from the restructuring gain was $97 million (after related taxes), or $1.25 per share. A Special Incentive Retirement program was effective in November and December 1985. Of the 3,880 United States employees eligible under the program, 2,358 elected to accept early retirement. The restructuring program was substantially completed by the end of 1986. Net sales in 1985 of the subsequently divested product lines were $931 million, principally in the Chemicals segment. Depreciation and Amortization Depreciation and depletion Amortization of intangible assets Obsolescence Total 1986 $423 218 139 $780 1985 $477 88 34 $599 1984 ; $449 i 7; 47 i $503 i The cost of plant and equipment is depreciated over weighted average periods of 22 years for buildings and 11 years for machinery and equipment, using the straight line method. Patents (SI,234 million and $1,219 million at December 31,1986 and 198S, respectively) are amortized over their legal lives (approximately 8 years in 1986). Other intangible assets ($257 million and $330 million at December 31,1986 and 1985, respectively) are amortized over their estimated useful lives (approximately 28 years in 1986). Goodwill ($653 million and $650 million at December 31,1986 and 1985, respectively) is amortized over periods of 5 to 40 years, with a weighted average amortization period of 38 years in 1986. Obsolescence in 1986 included a $90 million charge ($46 million after tax, or $0.59 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. 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 overhead based on practical capacity. The cost of sub stantially all United States inventories is determined using the last-in, first-out (LIFO) method, generally reflecting the effects of inflation or deflation on cost ofgoods sold sooner than other inventory cost methods. The cost of other inventories (approximately 34 percent of all inven tories) generally is determined using the first-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 Inventories, at UFO cost 1986 $ 707 225 426 1,358 (289) $1,069 1985 $ 792 231 482 1,505 (408) $1,097 Inventories at FIFO cost approximate current cost. 34 Monsanto Company and Subsidiaries DSW 021717 STLCOPCB4007026 NOTES TO FINANCIAL STATEMENTS Continued) Income Taxes The components of income before income taxes were: Total u.s. Ex-U.S. 1986 $462 174 $636 1985 $(590) 292 $'(298) 1984 $442 265 $707 The components of income tax expense were: Current: Deferred: Total Federal State Ex-U.S. Federal State Ex-U.S. 1986 $ 20 12 88 120 74 13 (4) 83 $203 1985 $ 44 13 154 211 (338) (21) (22) (381) $(170) 1984 $ 72 21 56 149 72 3 44 119 $268 The sources of timing differences in the recognition of revenue and expense for tax and financial statement purposes and the tax effect of each were: Depreciation, depletion and obsolescence Restructuring program Pension expense Intangible drilling and development costs Other Total 1986 1985 $(61) 161 (10) $ 70 (307) (32) (7) $ 83 (98) (14) $(381) 1984 $ 92 11 16 $119 Factors causing the effective tax rate to differ from the 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: Export earnings Puerto Rico operations Dividends from ex-U.S. subsidiaries Reversal of prior years' foreign tax credits Other Effective income tax rate 1986 46% 1 (4) (8) (3) (3) 1 2 32% 1985 (46)% (12) (9) 1984 46% (3) (5) (3) (2) 9 8 (2) (57)% (2) - 2 38% Investment tax credits are recorded as a reduction of income tax expense in the year they reduce the federal income tax liability. Investment tax credits, net of recap ture, for 1986-1984 were $15 million, $10 million and $30 million, respectively. Income taxes have not been provided on $365 million of undistributed earnings of subsidiaries, either because any taxes on dividends would be offset substantially by foreign tax credits or because Monsanto intends to indefinitely reinvest those earnings. Earnings per Share Earnings per share were computed using the weighted average number of common and common equivalent shares outstanding each year (77,957,975; 76,995,625 and 80,909,755 in 1986-1984, respectively). Common share equivalents (616,178; 116,247 and 335,979 in 1986-1984, respectively) consist primarily of common stock issuable upon exercise of outstanding stock options. Earnings per share assuming full dilution were not signifi cantly different from the primary amounts. Supplemental Data Raw material and energy costs Employee compensation and benefits Current income and other taxes Rent expense Technological expenses: Research and development Engineering, commercial development and patent Total technological expenses Interest expense: Operations Searle acquisition Less capitalized interest Net interest expense Equity in affiliates' income Currency gains (losses) including equity in affiliates' currency gains and losses 1986 $2,023 1985 $2557 1984 $2,522 | 1,937 356 99 1,886 435 92 1,739 1 363 80 ! 523 470 370 73 78 76 596 548 446 89 126 (14) 201 12 97 95 (14) 178 25 117 (17) 100 18 8 (13) 2 Monsanto Company and Subsidiaries 3$ DSW 021718 STLCOPCB4007027 NOTES TO FMMICML STKTEMEMTS (Continued) Employee Retirement Benefits Most Monsanto employees are covered by noncontribu tory pension plans. Upon retirement, many Monsanto employees also receive other benefits, principally medical and life insurance. In 1986 Monsanto adopted Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions" (SFAS No. 87). Information for prior years has not been restated. The components of pension cost for 1986 were as follows: 1986 United States plant: Service cost (for benefits earned during the year) Interest cost on projected benefit obligation Return on plan assets: Actual Deferred gain Amortization of unrecognized net gain at adoption of SFAS No. 87 Ex-U.S. plans Total $ 56 194 (458) 250 (22) 13 $ 33 Pension cost for all plans was S85 million in 1985 and $116 million in 1984. Pension cost is determined based on years of service and compensation levels. For pbns that base benefits on final compensation levels, pension cost for 1986 and 1985 was determined using the projected unit credit method (the entry-age normal method was used for Monsanto's principal plans in 1984). Prior service costs and unrecognized gains and losses are amortized over the estimated future service periods of active employees in the respective plan, ranging generally from 14 to 18 years. Pension plans are funded in accordance with Monsanto's long-range projections of the plans' financial condition, considering benefits earned and expected to be earned in the future, anticipated future returns on pension plan assets and income tax and other regulations. Other post retirement benefits currently are not funded and are expensed as benefits are paid. In accordance with SFAS No. 87, the $412 million unrecognized net gain (representing the excess of the fair value of plan assets over the projected benefit obligation at the date of adoption) is being amortized over the aver age expected future service periods of employees. Also in accordance with SFAS No. 87, the fair value of plan assets was used to calculate the assumed return on plan assets for 1986. These two changes from prior practice were the primary cause for the $52 million decrease in pension expense in 1986 as compared to 1985. This lower pension expense principally benefited the Crop Chemicals segment (approximately $7 million) and the Chemicals segment (approximately $25 million). The decrease in pension expense in 1985 as compared with 1984 was due to updating actuarial assumptions and a change in actuar ial cost method for one plan, offset in part by the pension expense of Searle, following the acquisition. The projected benefit obligation was determined generally using assumed discount rates of 8'/<-9 percent for 1986 and 1985. The assumed long-term rates of return on plan assets were generally 8Vi-9 percent for 1986 and 1985. For those plans that pay benefits based on final compensation levels, the actuarial assumptions generally included overall annual rates of salary increase of 5 Vi-6 Vi percent. The 1986-1984 expense recorded for other post retirement benefits was $26 million, $18 million and $18 million, respectively. For some employee savings plans, employee contributions are matched in pan by Monsanto. The 1986-1984 expense recorded for such plans was $35 million, $36 million and $33 million, respectively. The funded status of Monsanto's pension plans at year-end 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 1986 $2,124 187 2,311 303 $2,614 $3,014 1985 $1,994 i 154 j 2,148 j 318 ; $2,466 j $2,672 Excess of plan assets over projected benefit obligation Less: Unrecognized net gain at adopdon Unrecognized 1986 net gain Accrued pension liability $ 400 412 178 $ 190 | I Projected benefit obligations and plan assets included in the above table for the principal United States plans were approximately $2,483 million and $2,776 million, respectively, at December 31,1986. Plan assets consist principally of common stocks and United States government and corporate obligations. 34 Monsanto Company and Subsidiaries DSW 021719 STLCOPCB4007028 Notes to financial statements .continued) Short-Term Debt and Credit Arrangements Short-term debt was: 1986 1985 Notes payable: Banks Commercial paper Bank overdrafts Current portion of long-term debt Total $107 14 130 138 $389 S 130 468 81 25 $ 704 Maximum amount of notes 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 $611 $1,962 372 730 8V4% 9% 7Vz% 9% Certain ex-U.S. subsidiaries have aggregate short term loan facilities of $266 million, under which loans totaling $107 million were outstanding at December 31, 1986. Interest on these loans is related to various ex-U.S. bank rates. Monsanto's unused short-term loan facilities were $159 million at December 31,1986. Long-Term Debt Long-term debt (exclusive of current maturities) was: 1986 1985 Industrial development bond obligations, weighted average interest rate of 716%, due 1988 to 2021 Commercial paper expected to be refinanced on a long-term basis, weighted average rate of 8V<% Medium-term notes, weighted average interest rate of 7Vi%, due 1988 to 1990 9V*% Eurodollar notes due 1991 10Vs% notes due 1992 9V% notes due 1996 9'/% sinking fund debentures due 1996 8Vi% sinking fund debentures due 2000 83/<% sinking fund debentures due 2008 1 l3/i% sinking fund debentures due 2015 Capitalized lease obligations Other Total $ 264 $ 264 950 131 101 150 150 43 127 169 225 16 254 $1,630 149 66 127 169 250 17 95 $2,087 Maturities and sinking fund requirements on long term debt are $138 million, $124 million, $129 million, $40 million and $126 million for 1987-1991, respectively. During 1986, the Company issued $425 million of long-term debt in the United States and ex-U.S. financial markets, and $250 million of medium-term notes in the United States financial markets. Proceeds from these borrowings were used principally to reduce the Company's commercial paper outstanding. The $3.0 billion bank credit agreement used to finance the acquisition of Searle has been renegotiated and reduced to a $750 million intermediate-term facility, expiring ratably from 1988 to 1993. All of this facility was unused at December 31,1986. Interest on amounts borrowed under this agreement is at, or at a margin above, the Citibank, N.A. base interest rate, or at a margin above either the rates paid on certificates of deposit or the London interbank offered rate. The credit agreement may also be used to support the issuance of commercial paper. Covenants under the bank credit agreement restrict maximum borrowings. It is not anticipated that future borrowing needs will be affected by these restrictions. In November 1985, the Company repaid $168 million principal amount of debentures and notes prior to their scheduled maturity from 1993 to 2008. Because these debentures and notes were repaid at less than face value, the Company recorded an extraordinary net gain of $30 million ($59 million before tax), or $0.40 per share. Capital Stock At December 31, 1986, there were 5,101,603 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 outstand ing 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 exercisable. The rights expire in 1996. These rights may cause substantial ownership dilution to a person or group who attempts to acquire the Company without approval of the Company's Board of Directors. The rights should not interfere with a business combina tion transaction that has been approved by the Board of Directors. As of December 31,1986, 77,659,089 rights were outstanding. Monsanto Company and Subsidiaries 37 DSW 021720 STLCOPCB4007029 Nora TO FVMNCttLSTKrEmfTS (Continued) Stock Option Flans At December 31, 1986, there were 2,484,167 shares under options outstanding for the Company's 1974 and 1984 Management Incentive Plans and the Searie Monsanto Stock Option Plan (Searie Plan) at prices ranging from $26.16 to $79.31 per share. Options for 1,295,094 shares were exercisable at December 31,1986. During 1986, 583,650 options were granted and 696,734 options, granted at prices ranging from $26.16 to $57.59 per share, were exercised. Under the 1984 Management Incentive Plan and the Searie Plan, 2,617,436 shares remain available for grant. Grants under the Searie Plan are subject to ratification by the Company's shareowners. Stock appreciation rights (SARs) are authorized to be granted under both the Company's 1974 and 1984 Plans, including retroactive grants for unexercised options. At December 31, 1986, SARs related to options for 675,691 shares were outstanding; of these, 316,697 were exercisable. During 1986, SARs related to options for 100,300 shares were granted and 176,074 shares were exercised. Commitments and Contingencies Commitments in connection with uncompleted additions to property and investments in affiliates were approxi mately $125 million at December 31,1986. Monsanto was contingently liable as guarantor of bank loans and for discounted customers' receivables totaling approxi mately $107 million at December 31,1986. 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. Segment Information Certain operating unit segment data and geographic data for 1986-1984 appear on pages 21 and 24, and are inte gral parts of the accompanying financial statements. 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 from one Monsanto loca tion to another Monsanto location in a different world area, were made on a market price basis. Net sales in 1985 of product lines divested that were included in the Chemicals segment were $645 million. Certain corporate expenses, primarily those related to the overall management of Monsanto, were not allo cated to the operating units or geographic areas. Corporate assets principally include certain miscellaneous receiv ables and investments. Inter-area sales by entities in each geographic area were: United States Europe-Africa Canada Latin America Asia-Pacific Inter-area Eliminations Total consolidated later-area Sales (Between Monsanto Entities) 1986 1985 1984 $ 527 $ 529 $ 534 82 163 207 45 9 526 26 21 33 (644) (720) (789) j $ -S -$ - Following is a reconciliation of ex-U.S. operating income and total assets to Monsanto's equity in 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 1986 $ 165 (42) 40 (16) (70) 1985 S 231 (26) 38 (21) (70) 1984 S 252 (53) 36 29 (108) $ 77 $1,757 855 $ 152 51,670 847 S 156 $1,312 519 $ 902 $ 823 $ 793 38 Monsanto Company and Subsidiaries DSN 021721 STLCOPCB4007030 FlNANCtAl SUMMARY (Dollars in millions, except per share) 19861 1985J 1984 1983J 1982* ! Operating Results Net Sales Operating Income (Loss) Income (Loss) Before Extraordinary Gains Net Income (Loss) As a Percent of Net Sales As a Percent of Average Shareowners' Equity As a Percent of Average Capital Employed5 Earnings per Share Before Extraordinary Gains Net Income (Loss) $6,879 635 433 433 6% 12% 9% $ 5.55 5.55 $6,747 (598) (128) (98) (1)% (3)% --% $6,691 677 439 439 7% 12% 10% $(1.67) (1.27) $ 5.42 5.42 $6,299 521 369 402 6% 11% 10% $ 4.48 4.89 $6,325 1 479 : 329 ! 352 : 6% j 10% i 9% ! i $ 4.10 ; 4.39 ; Year-end Financial Position Total Assets Working Capital Property, Plant and Equipment Gross Net Long-Term Debt Shareowners' Equity Current Ratio Percent of Total Debt to Total Capitalization $8,269 1,092 $6,326 2,913 $1,630 3,781 1.6 35% $8,877 899 $6,373 1,395 $6,840 3,034 $2,087 3,407 1.4 45% $6,919 3,374 $ 824 3,634 2.2 23% $6,427 1,535 $6,639 3,284 $ 937 3,667 2.3 24% $6,077 1,503 56,530 3,313 i 1 ! ! j j $1,003 3,490 2.6 25% Other Data Property, Plant and Equipment Additions Depreciation and Amortization Interest Expense Research and Development Expenses Income Taxes Stock Price High Low Price/Eamings Ratio on Year-end Stock Price $ 520 780 201 523 203 $ 81% 44% 14 $ 645 599 178 470 (170) $ 553/s 4oy< -- $ 614 503 100 370 268 $ 53% 40% 8 $ 560 523 96 290 201 $ 58% 37 Vs 11 5 673 439 82 264 172 $ 44 Vi 28 Va 9 i Per Common Share Dividends Shareowners' Equity $ 2.575 48.69 $ 2.45 44.38 $ 2.25 46.43 $ 2.075 44.83 $ 1.975 42.99 Common Shareowners Common Shares Outstanding (in millions) Employees 70,367 78 51,703 72,081 77 56,103 71,343 78 50,754 69,787 82 48,835 75,943 81 52,199 'Net income for 1986 includes net restructuring mcome ofS97 million (S1.2S per share), a umts-down for reduced (Met values m the electronic-grade silicon wafer business of S46 million (S0.S9 per share), and reduced pension expense from adopting the requirements of Statement of financial Accounting Standards No. 87, "Employers' Accounting for Pensions," of SIS million (S0.32 per share). '-Net loss for 198S includes net restructuring expense of 5S42 million (S7.04 per share), the gam from the sale of the oil and gas operations of SZOl million 52.61 per share) and an extraordinary gain ofS30 million [50.40 per share) from repayment of debt. `Net income for 1983 includes extraordinary tax benefits of 533 million [50.41 per share) from the utilization of ex-U.S. loss carryforwards. `Net income for 1982 includes an extraordinary gain ofS23 million {S0.29 per share) from an exchange ofdebt for common shares. 'Capital employed is the sum of short-term debt, long-term debt and shareoumers' equity. The beginning of the year and the end of the year capital employed are averaged and divided into net income after adding back the after-tax effect of interest costs. Monsanto Company and Subsidiaries 39 DSW 021722 STLCOPCB4007031 Board of directors Richard J. Mahoney St. Louis Chairman and Chief Executive Officer Monsanto Company joan T. Bok Westborough, Massachusetts Chairman New England Electric System Dr. Donald C. Carroll King of Prussia, Pennsylvania Chairman Schulco, Inc. C. Raymond Dahl San Francisco Director Richard l. Fricke Montpelier, Vermont Chairman and Chief Executive Officer National Life Insurance Company John W. Hanley Palm City, Florida Retired Chairman and Chief Executive Officer Monsanto Company Earle H. Harbison, Jr. St. Louis President and Chief Operating Officer Monsanto Company Howard M. Love Pittsburgh Chairman and Chief Executive Officer National Intergroup, Inc Committees of the boars Officers Dr. Jean Mayer Medford, Massachusetts President Tufts University Buck Mickel Greenville, South Carolina Vice Chairman Fluor Corporation and Chairman* Daniel International Corporation (a subsidiary of Fluor Corporation) John S. Reed New York Chairman Citicorp and Citibank, N.A. William D. Ruckclshaus Seattle Attorney Perkins Coie Dr. John B. Slaughter College Park, Maryland Chancellor University of Maryland at College Park Admiral Stansfield Turner U.S. Navy, Retired McLean, Virginia Lecturer and Writer Margaret Bush Wilson St. Louis Attorney Wilson, Smith and Seymour Advisory Directors: Robert L Berra Harold J. Corbett Robert G. Potter Nicholas L. Reding Dr. Howard A. Schneiderman Francis A. Stroble Audit Committee Dr. Jean Mayer, Chairman Joan T. Bok Buck Mickel William D. Ruckclshaus Dr. John B. Slaughter Margaret Bush Wilson Corporate Social Responsibility Committee Admiral Stansfield Turner, Chairman Dr. Jean Mayer William D. Ruckelshaus Dr. John B. Slaughter Executive Committee John W. Hanley, Chairman Earle H. Harbison, Jr. Richard J. Mahoney Margaret Bush Wilson Executive Compensation and Development Committee Howard M. Love, Chairman Richard I. Fricke John W. Hanley Buck Mickel Finance Committee Dr. Donald C. Carroll, Chairman C. Raymond Dahl John W. Hanley Richard j. Mahoney John S. Reed Margaret Bush Wilson Nominating Committee Buck Mickel, Chairman C. Raymond Dahl Howard M. Love Pension and Savings Funds Committee Richard I. Fricke, Chairman Dr. Donald C. Carroll Earie H. Harbison, Jr. Admiral Stansfield Turner Chairman and Chief Executive Officer Richard J. Mahoney President and Chief Operating Officer Earie H. Harbison, Jr. Executive Vice President Nicholas L. Reding Senior Vice Presidents Robert L. Berra Harold J. Corbett Dr. Howard A. Schneiderman Senior Vice President and Chief Financial Officer Francis A. Stroble Senior Vice President, Secretary and General Counsel Richard W. Duesenberg Group Vice Presidents Thomas L Gossage Robert G. Potter Vice Presidents Earl N. Brasfield Leonard A. Cohn Stewart D. Daniels Dr. S. Allen Heininger Martin J. Kallen Thomas H. Lafferre Richard A. Overton James H. Senger David L. Sliney Vice President and Controller Lawrence B. Skatoff Vice President and Treasurer B. Clare Harris *until March 31,1987; Chairman and Chief Executive Officer, RS.I. Corporation, effective April 1,1987 40 Monsanto Company and Subsidiaries DSU 021723 STLCOPCB4007032 Shareowner information Annual Meeting The nexr Annual Meeting or the shareowners or Monsanto Company will be held at 1:45 p.m., Friday, April 24, 1987, m K Building at the Com pany's World Headquarters, 800 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 Com pany's 1986 Form 10-K Report tiled with the Securities and Exchange Commission; 1986 Corporate Data Book, which contains additional infor mation 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/ Bourses United States: New York Chicago foptions) Europe: Amsterdam Brussels Frankfurt Geneva London Paris Zurich Transfer Agent and Registrar The First National Bank of Boston Box 644 Boston, Massachusetts 02102 The photographs on pages 6 through 14 include the following employees: Page 6: William Alston, The NutraSweet Company. Page 9: (clockwise, from top center) Jim Altemus, Lon Fisher and Alvaro Canizares, all Monsanto Agricultural Company. Page 10: (bottom) John Washburn, Monsanto Agricultural Company. Page 13: (top) Tom Landthorn, G.D. Searle & Co.; (bottom) Jim Young, Monsanto Chemical Company. Page 14: (top) Gary Stanulus, Fisher Controls International, Inc. Monsanto Company and Subsidiaries 41 DSW 021724 STLCOPCB4007033 Monsanto company 800 North Lindbergh Boulevard St. Louis, Missouri 63167 DSW 021725 STLCOPCB4007034