Document
Table of Contents
MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q

 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Feb. 28, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     
Commission file number 001-16167
MONSANTO COMPANY
(Exact name of registrant as specified in its charter)
Delaware
43-1878297
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
800 North Lindbergh Blvd.,
63167
St. Louis, MO
(Zip Code)
(Address of principal executive offices)
 
(314) 694-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
  
Accelerated filer
o
Non-accelerated filer
o  (Do not check if a smaller reporting company)
  
Smaller reporting company
o
 
 
 
Emerging growth company
o
If any emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 441,283,987 shares of common stock, $0.01 par value, outstanding as of April 2, 2018.
 


Table of Contents
MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q

CAUTION REGARDING FORWARD-LOOKING STATEMENTS
In the interests of our investors, this section of our report explains some of the important reasons that actual results may be materially different from those that we anticipate. In this report, and from time to time throughout the year, we share our expectations for our company’s future performance. These forward-looking statements include statements about our business plans; the pending transaction with Bayer Aktiengesellschaft (“Bayer”); the potential development, regulatory approval, and public acceptance of our products; our expected financial performance, including sales performance, and the anticipated effect of our strategic actions; the anticipated benefits of acquisitions; the outcome of contingencies, such as litigation; domestic or international economic, political and market conditions; and other factors that could affect our future results of operations or financial position, including, without limitation, statements under the captions “Overview — Executive Summary — Outlook,” “Seeds and Genomics Segment,” “Agricultural Productivity Segment,” “Financial Condition, Liquidity and Capital Resources,” “Outlook,” “Critical Accounting Policies and Estimates” and “Legal Proceedings.” Any statements we make that are not matters of current reportage or historical fact should be considered forward-looking. Such statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “will,” and similar expressions. By their nature, these types of statements are uncertain and are not guarantees of our future performance.
Since these statements are based on factors that involve risks and uncertainties, our company’s actual performance and results may differ materially from those described or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, among others: continued competition in seeds, traits and agricultural chemicals; the company’s exposure to various contingencies, including those related to intellectual property protection, regulatory compliance and the speed with which approvals are received, and public understanding and acceptance of our biotechnology and other agricultural products; the success of the company’s research and development activities; the outcomes of major lawsuits; developments related to foreign currencies and economies; the impact of exploring, responding to, entering into or consummating potential acquisitions or other transactions and proposals, including risks related to the pending Merger with Bayer; fluctuations in commodity prices; compliance with regulations affecting our manufacturing; the accuracy of the company’s estimates related to distribution inventory levels; the increases in and expected higher levels of indebtedness; the company’s ability to fund its short-term financing needs and to obtain payment for the products that it sells; the effect of weather conditions, natural disasters, accidents, and security breaches, including cybersecurity incidents, on the agriculture business or the company’s facilities; and other risks and factors described or referenced in Part II — Item 1A — Risk Factors — below and Part I — Item 1A of our Report on Form 10-K for the fiscal year ended Aug. 31, 2017.
Our forward-looking statements represent our estimates and expectations and are based on currently available information at the time that we make those statements. However, circumstances change constantly, often unpredictably, and many events beyond our control will determine whether the expectations encompassed in our forward-looking statements will be realized. As a result, investors should not place undue reliance on these forward-looking statements. We disclaim any current intention or obligation to revise or update any forward-looking statements, or the factors that may affect their realization, whether in light of new information, future events or otherwise, and investors should not rely on us to do so.



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Table of Contents
MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q

TABLE OF CONTENTS
Page
Item 1.
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2.
Item 5.
Item 6.

 

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Table of Contents
MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q

PART I—FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
The Statements of Consolidated Operations of Monsanto Company and its consolidated subsidiaries for the three and six months ended Feb. 28, 2018, and Feb. 28, 2017, the Statements of Consolidated Comprehensive Income for the three and six months ended Feb. 28, 2018, and Feb. 28, 2017, the Statements of Consolidated Financial Position as of Feb. 28, 2018, and Aug. 31, 2017, the Statements of Consolidated Cash Flows for the six months ended Feb. 28, 2018, and Feb. 28, 2017, the Statements of Consolidated Shareowners’ Equity for the six months ended Feb. 28, 2018, and year ended Aug. 31, 2017, and related Notes to the Consolidated Financial Statements follow. Unless otherwise indicated, “Monsanto” and the “company” are used interchangeably to refer to Monsanto Company or to Monsanto Company and its consolidated subsidiaries, as appropriate to the context. Unless otherwise indicated, “earnings per share” and “per share” mean diluted earnings per share. In the Notes to the Consolidated Financial Statements, all dollars are expressed in millions, except per share amounts. Unless otherwise indicated, trademarks owned or licensed by Monsanto or its subsidiaries are shown in special type. Unless otherwise indicated, references to “Roundup herbicides” mean Roundup branded herbicides, excluding all lawn-and-garden herbicides and other glyphosate-based herbicides, and references to “Roundup and other glyphosate-based herbicides” exclude all lawn-and-garden herbicides.

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Table of Contents
MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q

Statements of Consolidated Operations
Unaudited
(Dollars in millions, except per share amounts)
Three Months Ended
Six Months Ended
Feb. 28, 2018
Feb. 28, 2017
Feb. 28, 2018
Feb. 28, 2017
Net Sales
$
5,019

$
5,074

$
7,677

$
7,724

Cost of goods sold
2,053

2,122

3,399

3,513

Gross Profit
2,966

2,952

4,278

4,211

Operating Expenses:
 
 
 
 
Selling, general and administrative expenses
652

657

1,316

1,242

Research and development expenses
394

381

776

751

Restructuring charges
(1
)
23

3

(13
)
  Pending Bayer transaction related costs
25

27

45

120

Total Operating Expenses
1,070

1,088

2,140

2,100

Income from Operations
1,896

1,864

2,138

2,111

Interest expense
105

102

229

238

Interest income
(24
)
(18
)
(39
)
(36
)
Other income, net
(24
)
(88
)
(121
)
(45
)
Income from Continuing Operations Before Income Taxes
1,839

1,868

2,069

1,954

Income tax provision
381

505

441

566

Income from Continuing Operations Including Portion Attributable to Noncontrolling Interest
$
1,458

$
1,363

$
1,628

$
1,388

Discontinued Operations:
 
 
 
 
Income from operations of discontinued business
2

5

4

21

Income tax provision

2

1

8

Income from Discontinued Operations
2

3

3

13

Net Income
$
1,460

$
1,366

$
1,631

$
1,401

Less: Net income (loss) attributable to noncontrolling interest
1

(2
)
3

4

Net Income Attributable to Monsanto Company
$
1,459

$
1,368

$
1,628

$
1,397

Amounts Attributable to Monsanto Company:
 
 
 
 
Income from continuing operations
$
1,457

$
1,365

$
1,625

$
1,384

Income from discontinued operations
2

3

3

13

Net Income Attributable to Monsanto Company
$
1,459

$
1,368

$
1,628

$
1,397

Basic Earnings per Share Attributable to Monsanto Company:
 
 
 
 
Income from continuing operations
$
3.30

$
3.11

$
3.69

$
3.16

Income from discontinued operations
0.01

0.01

0.01

0.03

Net Income Attributable to Monsanto Company
$
3.31

$
3.12

$
3.70

$
3.19

Diluted Earnings per Share Attributable to Monsanto Company:
 
 
 
 
Income from continuing operations
$
3.27

$
3.08

$
3.64

$
3.13

Income from discontinued operations

0.01

0.01

0.03

Net Income Attributable to Monsanto Company
$
3.27

$
3.09

$
3.65

$
3.16

Weighted Average Shares Outstanding:
 
 
 
 
Basic
441.0

438.7

440.6

438.4

Diluted
445.5

442.3

445.9

442.3

Dividends Declared per Share
$
1.08

$
1.08

$
1.08

$
1.08

The accompanying notes are an integral part of these consolidated financial statements.



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Table of Contents
MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q

Statements of Consolidated Comprehensive Income
Unaudited
(Dollars in millions)
 Three Months Ended
Six Months Ended
Feb. 28, 2018
Feb. 28, 2017
Feb. 28, 2018
Feb. 28, 2017
Comprehensive Income Attributable to Monsanto Company
 
 
 
 
Net Income Attributable to Monsanto Company
$
1,459

$
1,368

$
1,628

$
1,397

Other Comprehensive Income (Loss), Net of Tax:
 
 
 
 
Foreign currency translation, net of tax of $28, $(1), $(2) and $0, respectively
107

171

25

(98
)
Postretirement benefit plan activity, net of tax of $49, $6, $53 and $12, respectively
(39
)
13

(33
)
23

Unrealized net losses on investment holdings, net of tax of $1, $0, $0 and $(1), respectively

(1
)
(1
)
(2
)
Realized net (gains) losses on investment holdings, net of tax of $0, $1, $0 and $1, respectively
(1
)
1

(1
)
1

Unrealized net derivative (losses) gains, net of tax of $28, $6, $32 and $21, respectively
(18
)
7

(11
)
38

Realized net derivative losses, net of tax of $1, $4, $1 and $19, respectively
1

8

3

29

Total Other Comprehensive Income (Loss), Net of Tax
50

199

(18
)
(9
)
Comprehensive Income Attributable to Monsanto Company
$
1,509

$
1,567

$
1,610

$
1,388

Comprehensive Income (Loss) Attributable to Noncontrolling Interests
 
 
 
 
Net Income (Loss) Attributable to Noncontrolling Interests
1

(2
)
3

4

Other Comprehensive Income
 
 
 
 
Foreign currency translation

1



Total Other Comprehensive Income

1



Comprehensive Income (Loss) Attributable to Noncontrolling Interests
$
1

$
(1
)
$
3

$
4

Total Comprehensive Income
$
1,510

$
1,566

$
1,613

$
1,392

The accompanying notes are an integral part of these consolidated financial statements.



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Table of Contents
MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q

Statements of Consolidated Financial Position
Unaudited
(Dollars in millions, except share amounts)
As of
Feb. 28, 2018
Aug. 31, 2017
Assets
 
 
Current Assets:
 
 
Cash and cash equivalents (variable interest entity restricted - 2018: $19 and 2017: $94)
$
2,409

$
1,856

Trade receivables, net (variable interest entity restricted - 2018: $124 and 2017: $74)
2,520

2,161

Miscellaneous receivables (variable interest entity restricted - 2018: $8 and 2017: $5)
772

827

Inventory, net
4,015

3,340

Assets held for sale
30

199

Other current assets (variable interest entity restricted - 2018: $0 and 2017: $1)
310

268

Total Current Assets
10,056

8,651

Total property, plant and equipment
12,705

12,231

Less accumulated depreciation
6,596

6,301

Property, Plant and Equipment, net
6,109

5,930

Goodwill
4,100

4,088

Other Intangible Assets, Net
977

1,024

Deferred Tax Assets (variable interest entity restricted - 2018: $11 and 2017: $11)
495

564

Long-Term Receivables, Net
58

121

Other Assets (variable interest entity restricted - 2018: $4 and 2017: $4)
892

955

Total Assets
$
22,687

$
21,333

Liabilities and Shareowners’ Equity
 
 
Current Liabilities:
 
 
Short-term debt, including current portion of long-term debt (variable interest entity restricted - 2018: $2 and 2017: $0)
$
1,212

$
870

Accounts payable (variable interest entity restricted - 2018: $1 and 2017: $9)
875

1,068

Income taxes payable
200

58

Accrued compensation and benefits
261

578

Accrued marketing programs
1,754

1,918

Deferred revenues (variable interest entity restricted - 2018: $1 and 2017: $0)
1,686

727

Grower production accruals
189

59

Dividends payable
239

237

Customer payable
13

106

Restructuring reserves
18

37

Miscellaneous short-term accruals (variable interest entity restricted - 2018: $2 and 2017: $2)
702

740

Total Current Liabilities
7,149

6,398

Long-Term Debt (variable interest entity restricted - 2018: $97 and 2017: $104)
6,635

7,254

Postretirement Liabilities
303

313

Long-Term Deferred Revenue
114

114

Noncurrent Deferred Tax Liabilities
139

192

Long-Term Portion of Environmental and Litigation Liabilities
213

218

Other Liabilities
368

386

Shareowners’ Equity:
 
 
Common stock (authorized: 1,500,000,000 shares, par value $0.01)
 
 
Issued 614,841,751 and 613,219,246 shares, respectively
 
 
Outstanding 441,200,613 and 439,578,276 shares, respectively
6

6

Treasury stock 173,641,138 and 173,640,970 shares respectively, at cost
(15,053
)
(15,053
)
Additional contributed capital
11,956

11,840

Retained earnings
13,290

12,072

Accumulated other comprehensive loss
(2,445
)
(2,427
)
Total Monsanto Company Shareowners’ Equity
7,754

6,438

Noncontrolling Interest
12

20

Total Shareowners’ Equity
7,766

6,458

Total Liabilities and Shareowners’ Equity
$
22,687

$
21,333

The accompanying notes are an integral part of these consolidated financial statements.


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MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q

Statements of Consolidated Cash Flows
Unaudited
(Dollars in millions)
Six Months Ended
Feb. 28, 2018
Feb. 28, 2017
Operating Activities:
 
 
Net Income
$
1,631

$
1,401

Adjustments to reconcile cash provided (required) by operating activities:
 
 
Items that did not require (provide) cash:
 
 
Depreciation and amortization
381

372

Bad-debt expense
24

49

Stock-based compensation expense
63

67

Excess tax benefits from stock-based compensation

(5
)
Deferred income taxes
(14
)
54

Restructuring impairments
2

20

Equity affiliate expense, net
3

3

Net gain on sale of a business or other assets
(118
)
(83
)
Other items
35

54

Changes in assets and liabilities that provided (required) cash, net of acquisitions:
 
 
Trade receivables, net
(357
)
(690
)
Inventory, net
(699
)
(416
)
Deferred revenue
973

829

Accounts payable and other accrued liabilities
(361
)
68

Restructuring, net
(28
)
(111
)
Pension contributions
(11
)
(27
)
Other items, net
106

(48
)
Net Cash Provided by Operating Activities
1,630

1,537

Cash Flows Provided (Required) by Investing Activities:
 
 
Maturities of short-term investments
7

50

Capital expenditures
(661
)
(543
)
Acquisition of businesses, net of cash acquired

(7
)
Technology and other investments
(25
)
(38
)
Other investments and property disposal proceeds
313

100

Net Cash Required by Investing Activities
(366
)
(438
)
Cash Flows Provided (Required) by Financing Activities:
 
 
Net change in financing with less than 90-day maturities
39

(140
)
Short-term debt proceeds
60

18

Short-term debt reductions
(14
)
(11
)
Long-term debt proceeds

600

Long-term debt reductions
(367
)
(510
)
Debt issuance costs

(2
)
Stock option exercises
82

37

Excess tax benefits from stock-based compensation

5

Tax withholding on restricted stock and restricted stock units
(27
)
(15
)
Dividend payments
(476
)
(475
)
Payments to noncontrolling interests
(11
)
(1
)
Net Cash Required by Financing Activities
(714
)
(494
)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
3


Net Increase in Cash and Cash Equivalents
553

605

Cash and Cash Equivalents at Beginning of Period
1,856

1,676

Cash and Cash Equivalents at End of Period
$
2,409

$
2,281

See Note 18Supplemental Cash Flow Information for further details.
The accompanying notes are an integral part of these consolidated financial statements.


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MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q

Statements of Consolidated Shareowners’ Equity
  
Monsanto Shareowners
  
  
Unaudited
(Dollars in millions, except per share data)
Common Stock
Treasury Stock
Additional Contributed Capital
Retained Earnings
Accumulated Other Comprehensive (Loss)(1)
Non-Controlling
Interest
Total
Balance as of Aug. 31, 2016
$
6

$
(15,053
)
$
11,626

$
10,763

$
(2,808
)
$
11

$
4,545

Net Income



2,260


13

2,273

Other Comprehensive Income For Fiscal 2017




381

1

382

Restricted Stock and Restricted Stock Unit Tax Withholding


(18
)



(18
)
Issuance of Shares Under Employee Stock Plans


105




105

Stock-based Compensation Expense


127




127

Cash Dividends of $2.16 per Common Share



(951
)


(951
)
Payments to Noncontrolling Interest





(5
)
(5
)
Balance as of Aug. 31, 2017
$
6

$
(15,053
)
$
11,840

$
12,072

$
(2,427
)
$
20

$
6,458

Net Income



1,628


3

1,631

Other Comprehensive Income for Fiscal 2018




(18
)

(18
)
Reclassification of Accumulated Other Comprehensive Loss Tax Effects (2)



68



68

Issuance of Shares Under Employee Stock Plans


80




80

Restricted Stock and Restricted Stock Unit Tax Withholding


(27
)



(27
)
Stock-based Compensation Expense


63




63

Cash Dividends of $1.08 per Common Share



(478
)


(478
)
Payments to Noncontrolling Interest





(11
)
(11
)
Balance as of Feb. 28, 2018
$
6

$
(15,053
)
$
11,956

$
13,290

$
(2,445
)
$
12

$
7,766

(1)
See Note 16Accumulated Other Comprehensive Loss — for further details of the components of accumulated other comprehensive loss.
(2)
See Note 2 — New Accounting Standards — for further information.
The accompanying notes are an integral part of these consolidated financial statements.


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Table of Contents

MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED




NOTE 1.
BACKGROUND AND BASIS OF PRESENTATION
Monsanto Company, along with its subsidiaries, is a leading global provider of agricultural products for farmers. Monsanto’s seeds, biotechnology trait products, herbicides and digital agriculture products provide farmers with solutions that help improve productivity, reduce the costs of farming and produce better food for consumers and better feed for animals.
Monsanto manages its business in two reportable segments: Seeds and Genomics and Agricultural Productivity. Through the Seeds and Genomics segment, Monsanto produces leading seed brands, including DEKALB, Asgrow, Deltapine, Seminis and De Ruiter, and Monsanto develops biotechnology traits that assist farmers in controlling insects and weeds and digital agriculture products, including Climate Fieldview to assist farmers in decision making. Monsanto also provides other seed companies with genetic material and biotechnology traits for their seed brands. Through the Agricultural Productivity segment, the company manufactures Roundup and XtendiMax Herbicide with VaporGrip Technology brand herbicides and other herbicides. See Note 20Segment Information — for further details.
In the fourth quarter of 2008, the company announced plans to divest its animal agricultural products business, which focused on dairy cow productivity and was previously reported as part of the Agricultural Productivity segment. This transaction was consummated on Oct. 1, 2008, and included a 10-year earn-out with potential annual payments being earned by Monsanto if certain revenue levels are exceeded. As a result, financial data for this business has been presented as discontinued operations.
On Jul. 25, 2017, the company signed a definitive agreement with AGCO Corporation to sell the Precision Planting equipment business for approximately $200 million in cash. As of Aug. 31, 2017, Monsanto had $156 million of assets held for sale and $12 million of liabilities held for sale classified within miscellaneous short-term accruals on the Statement of Consolidated Financial Position related to this transaction. The assets were primarily classified as inventory, net; trade receivables, net; property, plant, and equipment, net; goodwill; and other intangible assets, net, and the liabilities were primarily classified as accrued marketing programs and accounts payable. In the first quarter of fiscal 2018, the company closed on its sale of the Precision Planting equipment business, and a gain of approximately $52 million was recognized within other income, net in the Statement of Consolidated Operations.
In addition to the aforementioned divestment, during the three and six months ended Feb. 28, 2018, the company recognized income of approximately $50 million and $83 million within other income, net in the Statements of Consolidated Operations as a result of non-core asset sales. During the three months ended Feb. 28, 2018, approximately $50 million of income was recorded in the Agricultural Productivity segment. During the six months ended Feb. 28, 2018, approximately $83 million of income was split by segment as follows: $50 million in Agricultural Productivity and $33 million in Seeds and Genomics.
In the second quarter of fiscal 2017, the company divested its European-based silthiofam seed-treatment chemical business previously reported as part of the Agricultural Productivity segment for approximately $140 million in cash. Approximately $85 million, less the carrying amount of assets sold of approximately $2 million, was recognized within other income, net in the Statements of Consolidated Operations for the three and six months ended Feb. 28, 2017. The recognition of the remaining $55 million is contingent on silthiofam re-registration within the European Union.
The company did not have any other material non-core asset sales in the three and six months ended Feb. 28, 2017, except as described above.
The accompanying consolidated financial statements have not been audited but have been prepared in conformity with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these unaudited consolidated financial statements contain all necessary adjustments which are normal and recurring to present fairly the financial position, results of operations and cash flows for the interim periods reported. This Report on Form 10-Q should be read in conjunction with Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2017. Financial information for the second quarter and first six months of fiscal year 2018 should not be annualized because of the seasonality of the company’s business.
NOTE 2.
NEW ACCOUNTING STANDARDS
In February 2018, the Financial Accounting Standards Board (“FASB”) issued accounting guidance, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” which permits entities to reclassify tax effects stranded in accumulated other comprehensive income(loss) as a result of the Tax Cuts and Jobs Act to retained earnings. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018, with early adoption permitted. Monsanto is required to adopt the standard in the first quarter of fiscal year 2020. The company elected to early adopt this standard in the second quarter of fiscal 2018, which coincides with the period of enactment of the Tax Cuts and Jobs

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Table of Contents

MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






Act. In the second quarter of fiscal 2018, Monsanto reclassified $68 million of income from accumulated other comprehensive loss into retained earnings due to the change in the U.S. federal corporate income tax rate. Monsanto did not have any other income tax effects of the Tax Cuts and Jobs Act on items remaining in accumulated other comprehensive loss that the company needed to reclassify into retained earnings under this adoption.
In August 2017, the FASB issued accounting guidance, “Targeted Improvements to Accounting for Hedging Activities” which seeks to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018. Adoption will be applied on a modified retrospective approach to existing hedging relationships as of the date of adoption. Monsanto is required to adopt this standard in the first quarter of fiscal year 2020. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In May 2017, the FASB issued accounting guidance, “Scope of Modification Accounting” which clarifies modification accounting for share-based payment awards should not be applied if the fair value, vesting conditions, and classification of the modified award are the same before and immediately after the modification. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2017. Adoption will be applied prospectively to awards modified on or after the adoption date. Accordingly, Monsanto is required to adopt this standard in the first quarter of fiscal year 2019. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In February 2017, the FASB issued accounting guidance, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” which requires the disaggregation of the service cost component from other components of net periodic benefit cost, clarifies how to present the service cost component and other components of net benefit costs in the Statements of Consolidated Operations and allows only the service cost component of net benefit costs to be eligible for capitalization. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2017, with early adoption permitted as of the beginning of a fiscal year for which interim or annual statements have not been issued. Adoption will be applied on a retrospective basis for the presentation of all components of net periodic benefit costs and on a prospective basis for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. Accordingly, Monsanto is required to adopt this standard in the first quarter of fiscal year 2019. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In February 2017, the FASB issued accounting guidance, “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sale of Nonfinancial Assets” which clarifies the scope of transactions that are accounted for in accordance with the Other Income topic of the ASC as well as when these assets would be derecognized. The Other Income topic of the ASC applies to a sale or transfer to a non-customer of nonfinancial assets or financial assets in a contract with substantially all of the fair value concentrated in nonfinancial assets. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2017, with an early adoption of one-year permitted. This guidance is required to be adopted at the same time “Revenue from Contracts with Customers” is adopted. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the Statement of Consolidated Financial Position. The method of adoption elected may be different than the method of adoption for “Revenue from Contracts with Customers.” Monsanto is required to adopt this standard in the first quarter of fiscal year 2019. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In January 2017, the FASB issued accounting guidance, “Simplifying the Test for Goodwill Impairment” which would eliminate the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, the amount of an impairment charge would be recognized if the carrying amount of a reporting unit is greater than its fair value. This standard is effective for annual or any interim goodwill impairments tests in fiscal years beginning after Dec. 15, 2019, with early adoption permitted. Adoption will be applied on a prospective basis. Monsanto is required to adopt this standard in the first quarter of fiscal year 2021. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.

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MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






In January 2017, the FASB issued accounting guidance, “Clarifying the Definition of a Business” which requires an evaluation of whether substantially all fair value of the assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process. Transactions that meet the definition of a business are expected to decrease as a result of the adoption of this guidance. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2017, with early adoption permitted. Adoption will be applied on a prospective basis. Monsanto is required to adopt this standard in the first quarter of fiscal year 2019. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In November 2016, the FASB issued accounting guidance, “Statement of Cash Flows: Restricted Cash” which requires restricted cash and restricted cash equivalents to be classified in the Statements of Cash Flows as cash and cash equivalents. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2017, with early adoption permitted. Adoption will be applied on a retrospective basis to all periods presented. Monsanto is required to adopt this standard in the first quarter of fiscal year 2019. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In October 2016, the FASB issued accounting guidance, “Income Taxes: Intra-Entity Transfers of Assets Other than Inventory” which will require the income tax effects of intra-entity transfers of assets other than inventory to be recognized when the transfer occurs. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2017, with early adoption permitted as of the beginning of an annual period. Adoption will be applied on a modified retrospective basis. Monsanto is required to adopt the standard in the first quarter of fiscal year 2019. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In August 2016, the FASB issued accounting guidance, “Classification of Certain Cash Receipts and Cash Payments” which clarifies the classification of the activity in the Statements of Consolidated Cash Flows and how the predominant principle should be applied when cash receipts and cash payments have more than one class of cash flows. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2017, with early adoption permitted. Adoption will be applied retrospectively. Monsanto is required to adopt the standard in the first quarter of fiscal year 2019. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In June 2016, the FASB issued accounting guidance, “Measurement of Credit Losses on Financial Instruments” which replaces the incurred loss methodology to record credit losses with a methodology that reflects the expected credit losses for financial assets not accounted for at fair value with gains and losses recognized through net income. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2019, with early adoption permitted for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018. This standard will be adopted on a modified retrospective basis. Monsanto is required to adopt this standard in the first quarter of fiscal year 2021, with early adoption permitted in the first quarter of fiscal year 2020. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In February 2016, the FASB issued accounting guidance, “Leases”, which has been further clarified and amended. This guidance will supersede the existing lease guidance and will require all leases with a term greater than 12 months to be recognized in the Statements of Financial Position and eliminate current real estate-specific lease guidance, while maintaining substantially similar classification criteria for distinguishing between finance leases and operating leases. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018, with early adoption permitted. This standard will be adopted on a modified retrospective basis. Monsanto is required to adopt the standard in the first quarter of fiscal year 2020. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In January 2016, the FASB issued accounting guidance, “Recognition and Measurement of Financial Assets and Financial Liabilities” which would require equity investments not accounted for as an equity method investment or that result in consolidation to be recorded at their fair value with changes in fair value recognized in the Statements of Consolidated Operations. Those equity investments that do not have a readily determinable fair value may be measured at cost less impairment, if any, plus or minus changes resulting from observable price changes. In February 2018, the FASB issued guidance amending the previous guidance to clarify that entities must use a prospective transition approach for equity securities they elect to measure using the new measurement alternative. The amendments also clarify other aspects of the guidance on

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MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






how to apply the measurement alternative and the presentation requirements for financial liabilities measured under the fair value option. This standard, including the clarifications, is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2017, with early adoption prohibited. Monsanto is required to adopt the standard in the first quarter of fiscal year 2019. The company is currently evaluating the impact this guidance will have on the consolidated financial statements and related disclosures.
In May 2014, the FASB issued accounting guidance, “Revenue from Contracts with Customers” which has been further clarified and amended. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and clarify guidance for multiple-element arrangements. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the Statement of Consolidated Financial Position. In August 2015, the FASB amended the guidance to allow for the deferral of the effective date of this standard. The standard is effective for fiscal years, and interim periods within those years, beginning after Dec. 15, 2017. Accordingly, Monsanto is required to adopt this standard in the first quarter of fiscal year 2019. One-year early adoption is permitted. The initial analysis identifying areas that will be impacted by the new guidance is substantially complete, and the company is currently analyzing the potential impacts to the consolidated financial statements and related disclosures. Revenue from seed sales, agricultural chemical products and biotechnology trait licenses recognized as third-party seed companies sell seed is expected to remain substantially unchanged. The company believes the most significant impact relates to its accounting for biotechnology trait license revenue with fixed payments. Specifically, under the new standard, revenue for biotechnology trait licenses with fixed payments are expected to be recognized upon commencement of the license term rather than over the contract period. Due to complexities of certain biotechnology trait license agreements, the actual revenue recognition treatment under the standard will be dependent upon contract-specific terms and may vary in some instances from recognition upon commencement of the license term. Upon adoption, the company may recognize a cumulative material adjustment to increase retained earnings, reflecting license revenue for which the contract period has not yet finished. The company does not expect the adoption of this standard to have an impact on the cash flows related to these license agreements. The company anticipates utilizing the modified retrospective method for adopting the standard.

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MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






NOTE 3.
RESTRUCTURING
Restructuring charges were recorded in the Statements of Consolidated Operations as follows:
 
Three Months Ended
Six Months Ended
(Dollars in millions)
Feb. 28, 2018
Feb. 28, 2017
Feb. 28, 2018
Feb. 28, 2017
Cost of Goods Sold(1)
$
(4
)
$
(6
)
$
(17
)
$
(7
)
Restructuring Charges(2)
1

(23
)
(3
)
13

Income from Continuing Operations Before Income Taxes
$
(3
)
$
(29
)
$
(20
)
$
6

Income Tax Provision
15

15

23

5

Net Income
$
12

$
(14
)
$
3

$
11

(1)
For the three months ended Feb. 28, 2018, $4 million of restructuring charges in cost of goods sold was recorded in the Agricultural Productivity segment. For the three months ended Feb. 28, 2017, $6 million of restructuring charges in cost of goods sold was split by segment as follows: $5 million in Seeds and Genomics and $1 million in Agricultural Productivity. For the six months ended Feb. 28, 2018, $17 million of restructuring charges in cost of goods sold was split by segment as follows: $10 million in Seeds and Genomics and $7 million in Agricultural Productivity. For the six months ended Feb. 28, 2017, $7 million of restructuring charges in cost of goods sold was split by segment as follows: $6 million in Seeds and Genomics and $1 million in Agricultural Productivity.
(2)
For the three months ended Feb. 28, 2018, the net reversal of previously recognized expense of $1 million was recorded in the Seeds and Genomics segment. For the three months ended Feb. 28, 2017, $23 million of restructuring charges was split by segment as follows: $22 million in Seeds and Genomics and $1 million in Agricultural Productivity. For the six months ended Feb. 28, 2018, $3 million of restructuring charges was split by segment as follows: $2 million in Seeds and Genomics and $1 million in Agricultural Productivity. For the six months ended Feb. 28, 2017, the net reversal of previously recognized expense of $13 million was split by segment as follows: $12 million in Seeds and Genomics and $1 million in Agricultural Productivity.
On Oct. 6, 2015, the company approved actions to realign resources to increase productivity, enhance competitiveness by delivering cost improvements and support long-term growth. On Jan. 5, 2016, the company approved additional actions which, together with the Oct. 6, 2015 actions, comprise the 2015 Restructuring Plan. Actions include streamlining and reprioritizing some commercial, enabling, supply chain and research and development efforts.
Cumulative pretax charges related to the 2015 Restructuring Plan are estimated to be in the range of $890 million to $955 million. Implementation of the 2015 Restructuring Plan is expected to be completed by the end of fiscal year 2018, and substantially all of the cash payments are expected to be made by the end of fiscal year 2018. These pretax charges are currently estimated to be comprised of the following categories: $315 million to $325 million in work force reductions, including severance and related benefits; $95 million to $130 million in facility closures/exit costs, including contract termination costs; $480 million to $500 million in asset impairments and write-offs related to property, plant and equipment, inventory and goodwill and other assets. These pretax charges are currently estimated to be incurred primarily by the Seeds and Genomics segment.
The following tables summarize the activities related to the company’s 2015 Restructuring Plan.
 
Three months ended Feb. 28, 2018
Three months ended Feb. 28, 2017
(Dollars in millions)
Seeds and
Genomics
Agricultural
Productivity
Total
Seeds and
Genomics
Agricultural
Productivity
Total
Work Force Reductions
$
(6
)
$
(1
)
$
(7
)
$
2

$

$
2

Facility Closures/Exit Costs
5

5

10

8

1

9

Asset Impairments and Write-offs:
 
 

 
 
 
Property, plant and equipment



18

1

19

Inventory



(1
)

(1
)
Goodwill and other assets






Total Restructuring Charges, Net
$
(1
)
$
4

$
3

$
27

$
2

$
29


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MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






 
Six months ended Feb. 28, 2018
Six months ended Feb. 28, 2017
Cumulative Amount through Feb. 28, 2018
(Dollars in millions)
Seeds and
Genomics
Agricultural
Productivity
Total
Seeds and
Genomics
Agricultural
Productivity
Total
Seeds and
Genomics
Agricultural
Productivity
Total
Work Force Reductions
$
(10
)
$
(1
)
$
(11
)
$
(34
)
$
(2
)
$
(36
)
$
297

$
17

$
314

Facility Closures/Exit Costs
20

9

29

10

1

11

62

19

81

Asset Impairments and Write-offs:
 
 
 
 
 
 
 
 
 
Property, plant and equipment



19

1

20

153

3

156

Inventory
2


2




106


106

Goodwill and other assets



(1
)

(1
)
189

20

209

Total Restructuring Charges, Net
$
12

$
8

$
20

$
(6
)
$

$
(6
)
$
807

$
59

$
866

The company’s written human resource policies are indicative of an ongoing benefit arrangement with respect to severance packages. Benefits paid pursuant to an ongoing benefit arrangement are specifically excluded from the Exit or Disposal Cost Obligations topic of the ASC; therefore, severance charges incurred in connection with the 2015 Restructuring Plan are accounted for when probable and estimable as required under the Compensation - Nonretirement Postemployment Benefits topic of the ASC. In addition, when the decision to commit to a restructuring plan requires a long-lived asset and finite-lived intangible asset impairment review, Monsanto evaluates such impairment issues under the Property, Plant and Equipment topic of the ASC.
The three months ended Feb. 28, 2018, and Feb. 28, 2017, include the reversal of $8 million and $12 million, respectively, of previously recognized expense due to changes in estimates related to work force reductions. The six months ended Feb. 28, 2018, and Feb. 28, 2017, include the reversal of $14 million and $57 million, respectively, of previously recognized expense due to changes in estimates related to work force reductions.
The following table summarizes the activities related to the company’s 2015 Restructuring Plan.
(Dollars in millions)
Work Force Reductions(1)
Facility Closures/Exit Costs(2)
Asset Impairments and Write-offs
Total
Ending Liability as of Aug. 31, 2016
$
244

$

$

$
244

Net restructuring charges recognized in fiscal year 2017
(81
)
24

46

(11
)
Cash payments
(119
)
(22
)

(141
)
Asset impairments and write-offs


(46
)
(46
)
Ending Liability as of Aug. 31, 2017
$
44

$
2

$

$
46

Net restructuring charges recognized in first six months of fiscal year 2018
(11
)
29

2

20

Cash payments
(17
)
(29
)

(46
)
Asset impairments and write-offs


(2
)
(2
)
Ending Liability as of Feb. 28, 2018
$
16

$
2

$

$
18

(1)
There was no long-term restructuring liability balance as of Feb. 28, 2018. The restructuring liability balance included $8 million of long-term liabilities that was recorded in other liabilities in the Statement of Consolidated Financial Position as of Aug. 31, 2017.
(2)
There was no long-term restructuring liability balance as of Feb. 28, 2018. The restructuring liability balance included $1 million of long-term liabilities that was recorded in other liabilities in the Statement of Consolidated Financial Position as of Aug. 31, 2017.

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MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






NOTE 4.
CUSTOMER FINANCING PROGRAMS
Monsanto participates in customer financing programs as follows:
 
As of
(Dollars in millions)
Feb. 28, 2018
Aug. 31, 2017
Transactions that Qualify for Sales Treatment
 
 
U.S. agreement to sell trade receivables(1)
 
 
Outstanding balance
$
47

$
539

Maximum future payout under recourse provisions
15

21

European and Latin American agreements to sell trade receivables(2)
 
 
Outstanding balance
$
19

$
107

Maximum future payout under recourse provisions
5

27

Agreements with Lenders(3)
 
 
Outstanding balance
$
96

$
92

Maximum future payout under the guarantee
50

52

The gross amounts of receivables sold under transactions that qualify for sales treatment were: 
  
Gross Amounts of Receivables Sold
 
Three Months Ended
Six months ended
(Dollars in millions)
Feb. 28, 2018
Feb. 28, 2017
Feb. 28, 2018
Feb. 28, 2017
Transactions that Qualify for Sales Treatment
 
 
 
 
U.S. agreement to sell trade receivables(1)
$

$

$
13

$
115

European and Latin American agreements to sell trade receivables(2)
7

5

15

11

(1)
Monsanto has agreements in the United States to sell trade receivables, both with and without recourse, up to a maximum outstanding balance of $1.4 billion and to service such accounts. These receivables qualify for sales treatment under the Transfers and Servicing topic of the ASC and, accordingly, the proceeds are included in net cash provided by operating activities in the Statements of Consolidated Cash Flows. The liability for the guarantees for sales with recourse is recorded at an amount that approximates fair value, based upon the company’s historical collection experience and a current assessment of credit exposure.
(2)
Monsanto has various agreements in European and Latin American countries to sell trade receivables, both with and without recourse. These receivables qualify for sales treatment under the Transfers and Servicing topic of the ASC and, accordingly, the proceeds are included in net cash provided by operating activities in the Statements of Consolidated Cash Flows. The liability for the guarantees for sales with recourse is recorded at an amount that approximates fair value, based upon the company’s historical collection experience and a current assessment of credit exposure.
(3)
Monsanto has additional agreements with lenders to establish programs that provide financing for select customers in the United States, Latin America and Europe. Monsanto provides various levels of recourse through guarantees of the accounts in the event of customer default. The term of the guarantee is equivalent to the term of the customer loans. The liability for the guarantees is recorded at an amount that approximates fair value, based on the company’s historical collection experience with customers that participate in the program and a current assessment of credit exposure. If performance is required under the guarantee, Monsanto may retain amounts that are subsequently collected from customers.
In addition to the arrangements in the above table, Monsanto also participates in a financing program in Brazil that allows Monsanto to transfer up to 350 million Brazilian reais (approximately $108 million as of Feb. 28, 2018) for select customers in Brazil to a revolving financing program. Under the arrangement, a recourse provision requires Monsanto to cover the first credit losses within the program up to the amount of the company’s investment. Credit losses above Monsanto’s investment would be covered by senior interests in the entity by a reduction in the fair value of their mandatorily redeemable shares. The company evaluated its relationship with the entity under the guidance within the Consolidation topic of the ASC, and as a result, the entity has been consolidated. For further information on this topic, see Note 5Variable Interest Entities and Investments.
There were no significant recourse or non-recourse liabilities for all programs as of Feb. 28, 2018, and Aug. 31, 2017. There were no significant delinquent loans for all programs as of Feb. 28, 2018, and Aug. 31, 2017.

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MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






NOTE 5.
VARIABLE INTEREST ENTITIES AND INVESTMENTS
Variable Interest Entities
On Nov. 4, 2016, Monsanto entered into a financing program in Brazil that is recorded as a consolidated variable interest entity (“VIE”). For the most part, the arrangement of the Brazil VIE consists of a revolving financing program that is funded by investments from the company and other third parties, primarily investment funds, and has been established to service Monsanto’s customer receivables. Under the arrangement, third parties, primarily investment funds, hold senior interests of 80 percent and 85 percent in the entity as of Feb. 28, 2018, and Aug. 31, 2017, respectively, and Monsanto holds the remaining 20 percent and 15 percent, respectively. The senior interests held by third parties are mandatorily redeemable shares and are primarily included in long-term debt in the Statements of Consolidated Financial Position as of Feb. 28, 2018, and Aug. 31, 2017, respectively.
Under the arrangement, Monsanto is required to maintain an investment in the Brazil VIE of at least 11.1 percent and could be required to provide additional contributions to the Brazil VIE. Monsanto currently has no unfunded commitments to the Brazil VIE. Creditors have no recourse against Monsanto in the event of default by the Brazil VIE. The company’s financial or other support provided to the Brazil VIE is limited to its investment. Even though Monsanto holds a subordinate interest in the Brazil VIE, the Brazil VIE was established to service transactions involving the company, and the company determines the receivables that are included in the revolving financing program. Therefore, the determination is that Monsanto has the power to direct the activities most significant to the economic performance of the Brazil VIE. As a result, the company is the primary beneficiary of the Brazil VIE, and the Brazil VIE has been consolidated in Monsanto’s consolidated financial statements. The assets of the Brazil VIE may only be used to settle the obligations of the respective entity. Third-party investors in the Brazil VIE do not have recourse to the general assets of Monsanto. See Note 4Customer Financing Programs and Note 12Fair Value Measurements — for additional information.
Monsanto has entered into an agreement with a third party to establish an entity to focus on research and development (“R&D”) related to agricultural fungicides for agricultural applications. This entity is recorded as a consolidated VIE of Monsanto. Under the arrangement, Monsanto holds a call option to acquire the majority of the equity interests in the R&D VIE from the third-party owner. Monsanto funds the operations of the R&D VIE in return for additional equity interests or to retain the call option. The funding is provided in separate research phases if research milestones are met. The R&D VIE was established to perform agricultural-based R&D activities for the benefit of Monsanto, and Monsanto provides all funding of the R&D VIE’s activities. Further, Monsanto has the power to direct the activities most significant to the R&D VIE. As a result, Monsanto is the primary beneficiary of the R&D VIE, and the R&D VIE is consolidated in Monsanto’s consolidated financial statements. The third-party owner of the R&D VIE does not have recourse to the general assets of Monsanto beyond Monsanto’s maximum exposure to loss at any given time relating to the R&D VIE.
Monsanto has an agreement with a related party to establish an entity to focus on research, development and commercialization of insect resistant hybrid cotton in India. This entity is recorded as a consolidated VIE of Monsanto. Under the arrangement, Monsanto performs substantially all of the VIE’s activities, which are reimbursed by the VIE. Further, since this entity was formed with a Monsanto related party, it was determined that Monsanto is most closely associated with the VIE. As a result, Monsanto is the primary beneficiary of the VIE, and the VIE is consolidated in Monsanto’s consolidated financial statements. The related-party owner of the VIE does not have recourse to the general assets of Monsanto beyond Monsanto’s maximum exposure to loss at any given time relating to the VIE, unless Monsanto is required to indemnify the related-party owner as a result of a third-party claim for injury to a person or damage to property caused by Monsanto’s activities as it relates to the VIE.
Monsanto enters into agreements with agents and dealers to distribute certain branded seed in the United States. Monsanto offers financing to agents and dealers that constitutes a variable interest as it exposes Monsanto to variability of the agent or dealer. Certain agents and dealers with these financing arrangements have been determined to be VIEs. Monsanto does not consolidate the agents or dealers as Monsanto is not the primary beneficiary, and any exposure to loss is limited to the amount of financing provided to the agent or dealer. The amount of Monsanto’s exposure varies based on the seasonality of the business and was approximately $25 million and less than $1 million as of Feb. 28, 2018, and Aug. 31, 2017, respectively.
Monsanto enters into agreements with distributors and dealers to distribute certain branded seed in the United States. Monsanto offers distributors and dealers the right of return that exposes Monsanto to variability and constitutes a variable interest in certain distributors and dealers. Certain distributors and dealers with these arrangements have been determined to be VIEs. Monsanto does not consolidate the distributors and dealers with these arrangements as Monsanto is not the primary beneficiary, and any exposure to loss is limited to the amount of the variable interest in the entity.


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MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






In fiscal 2017, Monsanto entered into an agreement with a third party to establish an entity to focus on the sale of industrial, ornamental, and turf non-selective agricultural herbicides. Monsanto has provided an uncustomary indemnification to the third party that provides Monsanto the option under specified conditions to dissolve the entity, terminate all commercial agreements of the entity or receive all interest in the entity. Monsanto has determined the entity to be a VIE. Monsanto does not consolidate the entity as Monsanto is not the primary beneficiary. The amount of Monsanto’s exposure to loss related to the uncustomary indemnification is limited to approximately $29 million as of Feb. 28, 2018, and Aug. 31, 2017. Additionally, Monsanto has provided an indemnification to the third party and newly formed legal entity related to specified product claims. The amount of Monsanto’s exposure varies based upon the third party and newly formed legal entity’s losses related to such product claims and is not material as of Feb. 28, 2018, and Aug. 31, 2017.
Equity Method and Cost Basis Investments
Monsanto has equity method and cost basis investments recorded in other assets in the Statements of Consolidated Financial Position. Due to the nature of the cost basis investments, the fair market value is not readily determinable. These investments are reviewed for impairment indicators on a quarterly basis.
For such investments that were accounted for under the equity method and cost basis included in other assets in the Statements of Consolidated Financial Position, the amounts are summarized in the following table:
 
As of
(Dollars in millions)
Feb. 28, 2018
Aug. 31, 2017
Equity Method Investments
$
163

$
166

Cost Basis Investments
124

116

Total
$
287

$
282


NOTE 6.
RECEIVABLES
Trade receivables in the Statements of Consolidated Financial Position are net of allowances of $89 million and $78 million as of Feb. 28, 2018, and Aug. 31, 2017, respectively.
The company has long-term customer financing receivables that relate to past due accounts which are not expected to be collected within the current year. The long-term customer receivables were $338 million and $398 million with a corresponding allowance for credit losses on these receivables of $280 million and $277 million as of Feb. 28, 2018, and Aug. 31, 2017, respectively. These long-term customer receivable balances and the corresponding allowance are included in long-term receivables, net in the Statements of Consolidated Financial Position. For these long-term customer receivables, interest is no longer accrued when the receivable is determined to be delinquent and classified as long-term based on estimated timing of collection.

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MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






The following table displays a roll forward of the allowance for credit losses related to long-term customer receivables.
(Dollars in millions)
  
Balance as of Aug. 31, 2016
$
228

Incremental provision
20

Recoveries
(38
)
Write-offs
(2
)
Reclassifications from allowance for current receivables
67

Foreign currency translation adjustments
2

Balance as of Aug. 31, 2017
$
277

Incremental provision
7

Recoveries
(1
)
Reclassifications from allowance for current receivables
1

Foreign currency translation adjustments
(4
)
Balance as of Feb. 28, 2018
$
280

On an ongoing basis, the company evaluates credit quality of its financing receivables utilizing aging of receivables, collection experience and write-offs, as well as evaluating existing economic conditions, to determine if an allowance is necessary.
NOTE 7.
INVENTORY
Components of inventory are:
 
As of
(Dollars in millions)
Feb. 28, 2018
Aug. 31, 2017
Finished Goods
$
1,964

$
1,477

Goods In Process
1,466

1,446

Raw Materials and Supplies
743

561

Total
4,173

3,484

Adjustment of Inventories to a LIFO Basis(1)
(158
)
(144
)
Total Inventories
$
4,015

$
3,340

(1) Adjustment is for the United States Agricultural Productivity segment inventories.
NOTE 8.
GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the net carrying amount of goodwill for the first six months of fiscal year 2018, by segment, are as follows:
(Dollars in millions)
Seeds and
Genomics
Agricultural
Productivity
Total
Balance as of Aug. 31, 2017
$
4,039

$
49

$
4,088

Effect of foreign currency translation and other adjustments
12


12

Balance as of Feb. 28, 2018
$
4,051

$
49

$
4,100

There were no events or circumstances indicating that goodwill might be impaired as of Feb. 28, 2018. The fiscal year 2018 annual goodwill impairment test will be performed as of Mar. 1, 2018.

18

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MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






Information regarding the company’s other intangible assets is as follows:
  
As of Feb. 28, 2018
As of Aug. 31, 2017
(Dollars in millions)
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Accumulated
Amortization
Net
Acquired Germplasm
$
1,080

$
(827
)
$
253

$
1,077

$
(814
)
$
263

Acquired Intellectual Property
1,079

(700
)
379

1,079

(671
)
408

Trademarks
336

(171
)
165

335

(165
)
170

Customer Relationships
293

(237
)
56

291

(228
)
63

Other
75

(44
)
31

68

(40
)
28

Total Other Intangible Assets, Finite Lives
$
2,863

$
(1,979
)
$
884

$
2,850

$
(1,918
)
$
932

In Process Research & Development, Indefinite Lives
93


93

92


92

Total Other Intangible Assets
$
2,956

$
(1,979
)
$
977

$
2,942

$
(1,918
)
$
1,024

Total amortization expense of total other intangible assets was $31 million and $28 million for the three months ended Feb. 28, 2018, and Feb. 28, 2017, respectively, and $54 million and $58 million for the six months ended Feb. 28, 2018, and Feb. 28, 2017, respectively.
The estimated intangible asset amortization expense for fiscal year 2018 through fiscal year 2022 is as follows:
(Dollars in millions)
Amount
2018
$
111

2019
111

2020
110

2021
108

2022
103

NOTE 9. DEFERRED REVENUE
As of Feb. 28, 2018, and Aug. 31, 2017, short-term deferred revenue was $1,686 million and $727 million, respectively. These balances primarily consist of cash received related to Monsanto’s prepayment programs in the United States and Brazil. These programs allow Monsanto’s customers to receive a discount if they prepay by a certain date, and the short-term deferred revenue balances are consistent with the seasonality of Monsanto’s business. Prepayment options are attractive to customers given the discounted pricing and the ability to utilize cash flow from the current year grain harvest to pay for the next season seed purchases. The deferred revenue balances related to these prepayment programs are considered short-term in nature and thus classified in current liabilities as the prepayments are for products to be shipped within the next 12 months.
NOTE 10.
INCOME TAXES
On Dec. 22, 2017, the United States enacted tax legislation, commonly known as the Tax Cuts and Jobs Act (the “Act”). Among other provisions, the Act lowered the corporate tax rate from 35% to 21% beginning on Jan. 1, 2018, and imposed a new tax (the “Transition Tax”) on certain earnings outside the United States that have previously not been subject to United States tax, which may be paid beginning in fiscal 2019 through fiscal 2026.

The Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Act. SAB 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting for the effects of the Act. Per SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting is complete. To the extent a company’s accounting for certain income tax effects of the Act is incomplete but it can determine a reasonable estimate, the company must record a provisional estimate in its financial statements. The company is still in the process of evaluating the impact the Act will have on the consolidated financial statements. However, for the six months ended Feb. 28, 2018, the company has included the following provisional estimates in its income tax provision:


19

Table of Contents

MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






The company provisionally recorded a discrete tax benefit of $165 million for the impact of remeasuring its U.S. deferred tax assets and liabilities to the 21% corporate tax rate. Since the Jan. 1, 2018, effective date of the reduction of the corporate tax rate from 35% to 21% is during the company’s fiscal year, the company must utilize a blended tax rate of 25.7% for fiscal 2018. The 21% tax rate will be applied to subsequent fiscal years. To revalue its deferred tax assets and liabilities, the company estimated the change in its deferred tax assets and liabilities that would occur in fiscal 2018 and adjusted that portion of the deferred balances to 25.7% and adjusted the remaining deferred balances to 21%. These estimates of changes in deferred tax assets and liabilities are provisional as they are all subject to refinement based on the actual change in deferred taxes during fiscal 2018.

The company provisionally recorded a discrete tax expense of $168 million for the Transition Tax, which includes $3 million of U.S. state tax. The remaining Transition Tax can be fully offset by the company’s foreign tax credits; therefore, the company does not expect a significant cash outlay for this tax. The Transition Tax segregates the untaxed foreign earnings between those that are held in cash and cash equivalents and those that are not and taxes these two subgroups at different tax rates. Further, these calculations utilize several dates to measure these components. The company is in the process of determining the earnings or cash balances as of each of the dates required by the Act, one of which is at the end of fiscal 2018. Furthermore, interpretive guidance could be forthcoming that may clarify various components of the legislation that would impact certain components of the calculation. Therefore, the estimated Transition Tax is provisional.

The company has provisionally not recorded any discrete tax expense associated with the excess of its basis in its foreign affiliates for financial reporting over the related tax basis for potential future repatriations of its undistributed foreign earnings. Certain undistributed earnings are subject to the Transition Tax. These earnings could also be subject to additional foreign withholding and U.S. state income taxes if they are repatriated. The company is currently evaluating the potential income tax liabilities that would result from future repatriations, if any, and how the Act will affect its existing accounting position regarding the indefinite reinvestment of these undistributed foreign earnings.

The company has provisionally not recorded any discrete tax expense associated with the Act’s new global intangible low-taxed income (“GILTI”) provisions. These provisions apply to the company beginning in fiscal 2019. However, the company must adopt an accounting policy to either treat taxes related to GILTI as a current-period expense when incurred or factor such amounts into the company’s measurement of its deferred taxes. Because of the complexity of the new GILTI tax rules and the possibility of forthcoming interpretive guidance, the company is still evaluating these provisions and has not yet adopted an accounting policy related to the potential taxes resulting from these provisions.

Aside from the net $3 million tax expense from the above discrete tax adjustments resulting from the Act, the company recorded a net $47 million discrete tax benefit for various other adjustments, resulting in a total discrete tax benefit of $44 million for the six months ended Feb. 28, 2018.

NOTE 11.
DEBT AND OTHER CREDIT ARRANGEMENTS
In April 2016, Monsanto filed a shelf registration with the SEC (“2016 shelf registration”) that allows the company to issue a maximum aggregate amount of $6 billion of debt, equity and hybrid offerings. The 2016 shelf registration expires in April 2019.
Monsanto has a $3 billion credit facility agreement that provides a senior unsecured revolving credit facility through Mar. 27, 2020. As of Feb. 28, 2018, Monsanto was in compliance with all debt covenants, and there were no outstanding borrowings under this credit facility.
Monsanto’s short-term debt instruments include the current portion of long-term debt, notes payable to banks and borrowings under the delayed draw term loan facility. As of Feb. 28, 2018, and Aug. 31, 2017, Monsanto did not have any commercial paper outstanding. Additionally, as of Feb. 28, 2018, and Aug. 31, 2017, the mandatorily redeemable shares of the Brazil VIE were classified primarily as long-term debt instruments. See Note 5Variable Interest Entities and Investments — for additional information.
In October 2016, Monsanto entered into a $1 billion delayed draw term loan facility that matures the earlier of October 2019 or the consummation of the Merger with Bayer. Borrowings under the facility were $500 million as of Feb. 28, 2018, and Aug. 31, 2017. Proceeds were used for general corporate purposes.

20

Table of Contents

MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






On Jan. 29, 2018, Monsanto redeemed all $365 million of the 4.30% Notes, due Jan. 29, 2045.
The fair value of total short-term debt was $1,212 million and $877 million as of Feb. 28, 2018, and Aug. 31, 2017, respectively. The fair value of the total long-term debt was $6,750 million and $7,603 million as of Feb. 28, 2018, and Aug. 31, 2017, respectively. See Note 12Fair Value Measurements — for additional information.
NOTE 12.
FAIR VALUE MEASUREMENTS
Monsanto determines the fair market value of its financial assets and liabilities based on quoted market prices, estimates from brokers and other appropriate valuation techniques. The company uses the fair value hierarchy established in the Fair Value Measurements and Disclosures topic of the ASC, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy contains three levels as follows, with Level 3 representing the lowest level of input.
Level 1 — Values based on unadjusted quoted market prices in active markets that are accessible at the measurement date for identical assets and liabilities.
Level 2 — Values based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, discounted cash flow models, or other model-based valuation techniques adjusted, as necessary, for credit risk.
Level 3 — Values generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions would reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques could include use of option pricing models, discounted cash flow models and similar techniques.
The following tables set forth by level Monsanto’s assets and liabilities disclosed at fair value on a recurring basis as of Feb. 28, 2018, and Aug. 31, 2017. As required by the Fair Value Measurements and Disclosures topic of the ASC, assets and liabilities are classified in their entirety based on the lowest level of input that is a significant component of the fair value measurement. Monsanto’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of fair value assets and liabilities within the fair value hierarchy levels.

21

Table of Contents

MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






  
Fair Value Measurements at Feb. 28, 2018, Using
(Dollars in millions)
Level 1
Level 2
Level 3
Net Balance
Assets at Fair Value:
 
 
 
 
Cash equivalents
$
2,150

$

$

$
2,150

Short-term investments
5



5

Equity securities
6



6

Derivative assets related to:
 
 
 
 
Foreign currency contracts

3


3

Commodity contracts
18

9


27

Total Assets at Fair Value
$
2,179

$
12

$

$
2,191

Liabilities at Fair Value:
 
 
 
 
Short-term debt instruments(1)
$

$
1,210

$
2

$
1,212

Long-term debt instruments(1)

6,653

97

6,750

Derivative liabilities related to:
 
 
 
 
Foreign currency contracts

15


15

Commodity contracts
9

7


16

Total Liabilities at Fair Value
$
9

$
7,885

$
99

$
7,993

(1)
Debt instruments, excluding mandatorily redeemable shares, are not recorded at fair value on a recurring basis; however, they are measured at fair value for disclosure purposes, as required by the Fair Value Measurements and Disclosures topic of the ASC.
  
Fair Value Measurements at Aug. 31, 2017, Using
(Dollars in millions)
Level 1
Level 2
Level 3
Net Balance
Assets at Fair Value:
 
 
 
 
Cash equivalents
$
1,034

$

$

$
1,034

Short-term investments
8



8

Equity securities
10



10

Derivative assets related to:
 
 
 


Foreign currency contracts

10


10

Commodity contracts
3

7


10

Total Assets at Fair Value
$
1,055

$
17

$

$
1,072

Liabilities at Fair Value:
 
 
 
 
Short-term debt instruments(1)
$

$
877

$

$
877

Long-term debt instruments(1)

7,499

104

7,603

Derivative liabilities related to:
 
 
 
 
Foreign currency contracts

16


16

Commodity contracts
7

6


13

Total Liabilities at Fair Value
$
7

$
8,398

$
104

$
8,509

(1)
Debt instruments, excluding mandatorily redeemable shares, are not recorded at fair value on a recurring basis; however, they are measured at fair value for disclosure purposes, as required by the Fair Value Measurements and Disclosures topic of the ASC.
The company’s derivative contracts are measured at fair value, including forward commodity purchase and sale contracts, exchange-traded commodity futures and option contracts and over-the-counter (“OTC”) instruments related primarily to agricultural commodities, energy and raw materials, interest rates and foreign currencies. Exchange-traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified as Level 1. Fair value for forward commodity purchase and sale contracts is estimated based on exchange-quoted prices adjusted for differences in local markets. These differences are generally determined using inputs from broker or dealer quotations or market transactions in either the listed or OTC markets and are classified as Level 2. Interest rate contracts consist of interest rate swaps measured using broker or dealer quoted prices. When observable inputs are available for substantially the full term of the contract, it is classified as

22

Table of Contents

MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






Level 2. Based on historical experience with the company’s suppliers and customers, the company’s own credit risk and knowledge of current market conditions, the company does not view nonperformance risk to be a significant input to the fair value for the majority of its forward commodity purchase and sale contracts. The effective portions of changes in the fair value of derivatives designated as cash flow hedges are recognized in the Statements of Consolidated Financial Position as a component of accumulated other comprehensive loss until the hedged items are recorded in earnings or it is probable the hedged transaction will no longer occur. Changes in the fair value of derivatives are recognized in the Statements of Consolidated Operations as a component of net sales, cost of goods sold and other income, net.
The company’s short-term investments consist of cash which is contractually restricted as to withdrawal or usage. The company’s equity securities consist of publicly traded equity investments. Publicly traded equity investments are valued using quoted market prices and are classified as Level 1. Contractually restricted cash may be held in an interest bearing account measured using prevailing interest rates and is classified as Level 1. Short-term debt instruments are classified as Level 2. The company’s long-term debt securities are classified as Level 2 and valued using broker or dealer quoted prices with a maturity greater than one year.
Short-term debt instruments may consist of commercial paper, current portion of long-term debt, borrowings under the delayed draw term loan facility, notes payable to banks and mandatorily redeemable shares. Commercial paper, notes payable to banks and borrowings under the delayed draw term loan facility are recorded at amortized cost in the Statements of Consolidated Financial Position, which approximates fair value. Current portion of long-term debt is measured at fair value for disclosure purposes and determined based on current market yields for Monsanto’s debt traded in the secondary market. Mandatorily redeemable shares are recorded in the Statements of Consolidated Financial Position at fair value, which represents the amount of cash the consolidated variable interest entity would pay if settlement occurred as of the respective reporting date. Fair value of the mandatorily redeemable shares of the variable interest entity is calculated using observable and unobservable inputs from an interest rate market in Brazil and stated contractual terms (a Level 3 measurement). See Note 11Debt and Other Credit Arrangements for additional disclosures.
Long-term debt was measured at fair value for disclosure purposes and determined based on current market yields for Monsanto’s debt traded in the secondary market. Long-term debt includes mandatorily redeemable shares. See Note 11Debt and Other Credit Arrangements for additional disclosures. Accretion expense is included in the Statements of Consolidated Operations as interest expense.

23

Table of Contents

MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)







For the six months ended Feb. 28, 2018, and Feb. 28, 2017, the company had no transfers between Level 1, Level 2 and Level 3. Monsanto does not have any assets with fair value determined using Level 3 inputs as of Feb. 28, 2018, and Aug. 31, 2017. The following table summarizes the change in fair value of the Level 3 short-term debt instrument for the six months ended Feb. 28, 2018.
(Dollars in millions)
 
Balance Aug. 31, 2017
$

Reclass from long-term
2

Balance Feb. 28, 2018(1)
$
2

(1)    Includes interest on 315,000 mandatorily redeemable shares outstanding with a par value of 1,000 Brazilian reais (approximately $308) as of Feb. 28, 2018.
The following table summarizes the change in fair value of the Level 3 long-term debt instrument for the six months ended Feb. 28, 2018.
(Dollars in millions)
 
 Balance Aug. 31, 2017
$
104

Reclass to short-term
(2
)
Accretion expense
3

Payments
(5
)
Effect of foreign currency translation adjustments
(3
)
 Balance Feb. 28, 2018(1)
$
97

(1)
Includes 315,000 mandatorily redeemable shares outstanding with a par value of 1,000 Brazilian reais (approximately $308) as of Feb. 28, 2018.
There were no significant measurements of liabilities to their implied fair value on a nonrecurring basis during the six months ended Feb. 28, 2018, and Feb. 28, 2017. There were no significant measurements of assets to their implied fair value on a nonrecurring basis during the six months ended Feb. 28, 2018.
Significant measurements during the six months ended Feb. 28, 2017, of assets to their implied fair value on a nonrecurring basis were as follows:
Property, Plant and Equipment, Net: During the three and six months ended Feb. 28, 2017, property, plant and equipment within the Seeds and Genomics segment with a net book value of $18 million was written down to its implied fair value estimate of $7 million, resulting in an impairment charge of $11 million, with $4 million included in cost of goods sold and $7 million included in restructuring charges in the Statement of Consolidated Operations. The implied fair value calculations were performed using a discounted cash flow model (a Level 3 measurement). See Note 3Restructuring — for additional disclosures.
The recorded amounts of cash, trade receivables, miscellaneous receivables, third-party guarantees, accounts payable, grower production accruals, accrued marketing programs and miscellaneous short-term accruals approximate their fair values as of Feb. 28, 2018, and Aug. 31, 2017.
Management is ultimately responsible for all fair values presented in the company’s consolidated financial statements. The company performs analysis and review of the information and prices received from third parties to ensure that the prices represent a reasonable estimate of fair value. This process involves quantitative and qualitative analysis. As a result of the analysis, if the company determines there is a more appropriate fair value based upon the available market data, the price received from the third party is adjusted accordingly.

24

Table of Contents

MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






NOTE 13.
FINANCIAL INSTRUMENTS
Cash Flow Hedges
The company uses foreign currency options and foreign currency forward contracts as hedges of anticipated sales or purchases denominated in foreign currencies. The company enters into these contracts to protect itself against the risk that the eventual net cash flows will be adversely affected by changes in exchange rates.
Monsanto’s commodity price risk management strategy is to use derivative instruments to minimize significant unanticipated earnings fluctuations that may arise from volatility in commodity prices. Price fluctuations in commodities, mainly in corn and soybeans, can cause the actual prices paid to production growers for corn and soybean seeds to differ from anticipated cash outlays. Monsanto generally uses commodity futures and options contracts to manage these risks. Monsanto’s energy and raw material risk management strategy is to use derivative instruments to minimize significant unanticipated manufacturing cost fluctuations that may arise from volatility in natural gas, diesel and ethylene prices.
 
Monsanto’s interest rate risk management strategy is to use derivative instruments, such as forward-starting interest rate swaps and option contracts, to minimize significant unanticipated earnings fluctuations that may arise from volatility in interest rates of the company’s borrowings and to manage the interest rate sensitivity of its debt.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive loss and reclassified into earnings in the period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
The maximum term over which the company is hedging exposures to the variability of cash flow (for all forecasted transactions) is six months for foreign currency hedges and 30 months for commodity hedges. During the next 12 months, a pretax net loss of approximately $15 million is expected to be reclassified from accumulated other comprehensive loss into earnings. A pretax loss of $37 million was reclassified into other income, net as a result of the discontinuance of an interest rate hedge during the six months ended Feb. 28, 2017, because it was probable the original forecasted transaction would not occur by the end of the originally specified time period. During the three months ended Feb. 28, 2017, a pretax loss of less than $1 million was reclassified into cost of goods sold in the Statement of Consolidated Operations as a result of the discontinuance of foreign currency cash flow hedges because it was probable that the original forecasted transactions would not occur by the end of the originally specified time period. No cash flow hedges were discontinued during the three and six months ended Feb. 28, 2018.
Fair Value Hedges
The company uses commodity futures, forwards and options contracts as fair value hedges to manage the value of its soybean inventory and other assets. For derivative instruments that are designated and qualify as fair value hedges, both the gain or loss on the derivative and the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. No fair value hedges were discontinued during the three and six months ended Feb. 28, 2018, and Feb. 28, 2017.
Derivatives Not Designated as Hedging Instruments
The company uses foreign currency contracts to hedge the effects of fluctuations in exchange rates on foreign currency denominated third-party and intercompany receivables and payables. Both the gain or loss on the derivative and the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.
The company uses commodity option contracts to hedge anticipated cash payments to growers, which can fluctuate with changes in commodity price. Because these option contracts do not meet the provisions specified by the Derivatives and Hedging topic of the ASC, they do not qualify for hedge accounting treatment. Accordingly, the gain or loss on these derivatives is recognized in current earnings.
To reduce credit exposure in Latin America, Monsanto collects payments on certain customer accounts in grain. Such payments in grain are negotiated at or near the time Monsanto’s products are sold to the customers and are valued at the prevailing grain commodity prices. By entering into forward sales contracts related to grain, Monsanto mitigates the commodity price exposure from the time a contract is signed with a customer until the time a grain merchant collects the grain from the customer on Monsanto’s behalf. The forward sales contracts do not qualify for hedge accounting treatment under the Derivatives and Hedging topic of the ASC. Accordingly, the gain or loss on these derivatives is recognized in current earnings.

25

Table of Contents

MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






Monsanto uses interest rate contracts to minimize the variability of forecasted cash flows arising from the company’s consolidated VIE in Brazil. The interest rate contracts do not qualify for hedge accounting treatment under the Derivatives and Hedging Topic of the ASC. Accordingly, the gain or loss on these derivatives is recognized in current earnings.
Financial instruments are neither held nor issued by the company for trading purposes.
The notional amounts of the company’s derivative instruments outstanding as of Feb. 28, 2018, and Aug. 31, 2017, are as follows:
 
As of
(Dollars in millions)
Feb. 28, 2018
Aug. 31, 2017
Derivatives Designated as Hedges:
 
 
Foreign exchange contracts
$
299

$
453

Commodity contracts
621

430

Total Derivatives Designated as Hedges
$
920

$
883

Derivatives Not Designated as Hedges:
 
 
Foreign exchange contracts
$
1,709

$
2,133

Commodity contracts
161

189

Interest rate contracts
7

21

Total Derivatives Not Designated as Hedges
$
1,877

$
2,343


26

Table of Contents

MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






The net presentation of the company’s derivative instruments outstanding was as follows:
 
 
 
As of Feb. 28, 2018
(Dollars in millions)
Gross Amounts Recognized
Gross Amounts Offset in the Statement of Consolidated Financial Position
Net Amounts Included in the Statement of Consolidated Financial Position
Collateral Pledged
Net Amounts Reported in the Statement of Consolidated Financial Position
Other Items Included in the Statement of Consolidated Financial Position
Statement of Consolidated Financial Position Balance
Asset Derivatives:
 
 
 
 
 
 
 
Other current assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
$
18

$
(9
)
$
9

$

$
9

 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
8


8


8

 
 
 
 
Foreign exchange contracts
3


3


3

 
 
Total other current assets
29

(9
)
20


20

$
290

$
310

Other assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
1


1


1

 
 
Total other assets
1


1


1

891

892

Total Asset Derivatives
$
30

$
(9
)
$
21

$

$
21

 
 
Liability Derivatives:
 
 
 
 
 
 
 
Other current assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
$
9

$
(9
)
$

$

$

 
 
Total other current assets
9

(9
)



 
 
Miscellaneous short-term accruals
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
1


1


1

 
 
 
 
Foreign exchange contracts
6


6


6

 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
6


6


6

 
 
 
 
Foreign exchange contracts
9


9


9

 
 
Total miscellaneous short-term accruals
22


22


22

$
680

$
702

Total Liability Derivatives
$
31

$
(9
)
$
22

$

$
22

 
 
(1)
As allowed by the Derivatives and Hedging topic of the ASC, commodity derivative assets and liabilities have been offset by collateral subject to an enforceable master netting arrangement or similar arrangement. Therefore, these commodity contracts that are in an asset or liability position are included in asset accounts within the Statements of Consolidated Financial Position.

27

Table of Contents

MONSANTO COMPANY
 
SECOND QUARTER 2018 FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (continued)






 
 
 
As of Aug. 31, 2017
(Dollars in millions)
Gross Amounts Recognized
Gross Amounts Offset in the Statement of Consolidated Financial Position
Net Amounts Included in the Statement of Consolidated Financial Position
Collateral Pledged
Net Amounts Reported in the Statement of Consolidated Financial Position
Other Items Included in the Statement of Consolidated Financial Position
Statement of Consolidated Financial Position Balance
Asset Derivatives:
 
 
 
 
 
 
 
Other current assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
$
2

$
(7
)
$
(5
)
$
5

$

 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
6


6


6

 

 
 
Foreign exchange contracts
10


10


10

 
 
Total other current assets
18

(7
)
11

5

16

$
252

$
268

Other assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
1


1


1

 
 
Total other assets
1


1


1

954

955

Miscellaneous short-term accruals
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
1

(1
)



 
 
Total miscellaneous short-term accruals
1

(1
)



 
 
Total Asset Derivatives
$
20

$
(8
)
$
12

$
5

$
17





Liability Derivatives:
 
 
 
 
 
 
 
Other current assets
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
$
7

$
(7
)
$

$

$

 
 
Total other current assets
7

(7
)



 
 
Miscellaneous short-term accruals
 
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts(1)
3

(1
)
2


2

 
 
 
 
Foreign currency contracts
14


14


14

 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Commodity contracts
3


3


3

 
 
 
 
Foreign exchange contracts
2


2


2

 
 
Total miscellaneous short-term accruals
22

(1
)
21


21

$
719

$
740

Total Liability Derivatives
$
29

$
(8
)
$
21

$

$
21





(1)
As allowed by the Derivatives and Hedging topic of the ASC, commodity derivative assets and liabilities have been offset by collateral subject to an enforceable master netting arrangement or similar arrangement. Therefore, these commodity contracts that are in an asset or liability position are included in asset accounts within the Statements of Consolidated Financial Position.

28