Analysis of Annual Financial Report Project

Intermediate Accounting - Section 10736 Professor William Whitley By Tanisha Wilson June 16, 2013

Introduction

This financial statement covered the fiscal reporting year of September 1, 2011 to August 31, 2012. My statements and analysis refer to this reporting year in comparison with the previous year in accordance with the financial report. Some sections also include information for the 2010 fiscal year. The following is my analysis of the financial report in accordance with the questions outlined in the project rubric and the guidelines set forth for comprehensive financial reporting for publicly traded companies.

Section I

Auditors Statement

The auditors for the firm are Deloitte & Touche. They are one of the biggest four accounting firms in the world. It was created from the merger of two large firms. The reputation of the company is well established although they have been involved in a few scandals including an Adelphia audit in which the SEC made them pay $50 million. The auditors report is found on page 46 of the Annual Financial Report. One of the key parts of any auditors report is the expression of an opinion on the effectiveness of the internal controls over financial reporting. Deloitte expressed an unqualified opinion of the financial statements. This means basically, that the financial statements have passed the audit or better stated meet the standards of the Public Company Accounting Oversight Board. In my personal opinion I found some parts to be unclear. The majority of the statement is explaining the standards for the audit according to Public Company Accounting Oversight Board. regulations, which is good for shareholders. Those paragraphs include short disclaimers such as Because of the inherent limitations of internal control over financial reporting, including

the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis (46). That is what they are auditing to assess. I feel that statement seems to promote a lack of responsibility for the auditing company if a discrepancy should arise. Another statement I found to be ambiguous was assessing the risk that a material weakness exists, It seems that this weakness should require further explanation. It would seem that an unqualified opinion with reservations stated would be a more accurate assessment considering these statements. The auditors report is signed with the firm name.

Section II Subsequent Events, Errors and Irregularities, Illegal Acts, or Related-Party Transactions

Although no subsequent events, errors and irregularities, illegal acts, or related-party transactions have been specifically defined in the financial statements, the closing of the dairy section of operations should be considered a subsequent event. It is noted on page 25 and shown in the Statement of Consolidated Operations on page 48. The company is also the subject of several lawsuits brought on by different parties. The outline of the risk factors is included in the 10-K (17) and more specific information about the lawsuits is detailed in the notes to the financial statements (96). In addition, the 19% ownership in the seed supply company (67) under the title Equity Affiliates in the notes to the financial statements could be considered a related-party transaction under the definition transactions with owners, management, families of owners or management, affiliated companies, and other parties that can significantly influence or be influenced by the company.(IA G-8) The notes actually states that Monsanto holds influence over the supply company and then purchased almost $400 million dollars worth of seed from them in 2011 and 2012.

Section III

Trend in Total Assets and Total Liabilities

5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 Inventory Long Term Receivables Accrued Marketing Program All other Current Liabilities

2012

Property Plant & Equipment

Long-Term Debt

Cash & Cash equivalents

Current Receivables

ASSETS

LIABILITIES

According to the Statement of Consolidated Financial Position (50) the trend in assets and liabilities is positive. Generally, the assets are lower, save Cash & Cash Equivalents which is up. Liabilities for the most part are lower this year also. The difference between Assets and Liabilities are $4,650 and $5,192 for 2011 and 2012, respectively. This means a comparative increase in Equity. In other words, although they own less (assets) than last year, they also owe less (liabilities) than last year. Two areas that offer concern for this portion of the financial statements are the Current Receivables, and Long Term Debt. Long Term Debt has risen by $500 million. That signifies a large loan. Yet, Current Receivables is down $200 million. When I look at a company, I expect receivables to be higher than the year before. This shows me that business has increased. The debt in itself is not a deterrent. But higher debt coupled with less monies expected in the near future is. To rectify, I can also see that a larger portion of dollar are

All Other Long Term Liabilities

2011

invested in marketing. This offers some insight as to what the management is thinking about receivables.

Section IV Three Largest Assets for 2012

The three largest assets of the company are Cash & Cash Equivalents, Property, Plant & Materials and Goodwill. Because of the value of buildings and equipment Property, Plant & Materials should be large holdings in a company. This amount is shown twice on the balance sheet (Statement of Consolidated Financial Position pg. 50) for Monsanto. It is displayed first as a total amount less accumulated depreciation and then again as a net figure. The Net is the actual figure used in determining the value of total assets. Goodwill is usually intangible property valued by the effect it has or can produce on the market. A reputation of a company is considered goodwill and can have a fiscal value, although it is not tangible property. The Goodwill of Monsanto is its second largest asset (behind Property, Plant and Equipment). The increase in 2012 according to Note 11 (66) is due to the acquisition of Divergence and Pannon Seed (companies). On page 40 of the 10-K report under the title Goodwill Monsanto goes into further detail stating that The majority of our Goodwill relates to our seed company acquisitions. (40) It is funny that this section should be called goodwill. In fact, often when a large company acquires another a whole mass of bad feelings and press accompany the change. Fortunately this term goodwill does not relate to the consumers feelings about Monsanto, but instead to the reputation, established trade and long standing customers of the acquired companies. Monsanto acquired one of the (then) largest seed company in 2005, Seminis, Inc., (OSA 1). These are some of the large seed company purchases that account for Monsanto high Goodwill amount.

Cash & Cash Equivalents is the third largest asset. This is a very desirable aspect in business. Page 35 discusses the liquidity of the company saying that a major part of the liquidity is due to cash flow from operations. The current ratio is defined in the Working Capital and Financial Condition statement (33) as 2.29:1. The acid-test ratio of liquidity for Monsanto is 1.45:1.

Section V

Three Largest Liabilities for 2012

The three largest liabilities in this order are Long Term Debt, Accrued Marketing and Accounts Payable. As an explanation and note to Cash Flow, it is stated that $200 million in long term debt was acquired in this fiscal period (34). It is also stated that they paid more long term debt in this fiscal period ($436 million). This resulted in an increase of 32% in long term debt. Accrued Marketing as stated before is the second largest liability that the company owes. Although viable sources say that Monsanto is spending less on advertising (BizJournals) they have a 15% increase in this item. The large marketing campaign is mostly due to bad press on the effects of GMOs on the environment and food supply. In addition the companys many seed patents and holdings have sparked a score of small farming and organic advocates against them. This is the likely reason why so much is spent on marketing even though they control a large majority of the market. The third highest liability is Accounts Payable. Accounts Payable is simply the money owed to other companies, governments, institutions and people for trade, supplies, and overhead costs. Income Taxes, Customers Payable and Long Term Debt are listed as separate line items in this financial report.

Section VI Stock

Stock shares are valued in the Statement of Financial Position (50). The amounts listed are 500,000,000 shares of Common Stock (authorized: 1 par value $0.01), issued 596,136,929 and 591,516,732 shares, respectively, outstanding 534,373,880 and 535,297,120 shares, respectively worth $6 million, and Treasury Stock 61,763,049 and 56,219,612 shares, respectively, at cost.

Section VII Multiple-Step Income Statement

Monsanto uses a multi-step income statement format for financial reporting. The multi-step statement includes interim subtotals such as gross profit and income before taxes (IA 176). (Please see excerpt below). The Statement of Consolidated Operations (48) is Monsantos income statement. They also have included categories such as discontinued operations, provision for income taxes and interest expenses and income.

Section VIII

Income Statement: Discontinued Operations or Extraordinary Items

There is a section for discontinued operations in the Statement of Consolidated Operations (48). In the fourth quarter 2008, Monsanto effectively discounted the dairy portion of its business. This is the activity referred to in discontinued operations. The note for this transaction is listed on page 25. Monsanto also has discontinued seed products. These are consolidated to inventory. In other words the seed that can no longer be sold is considered an impairment to inventory.

Section IX Trend In Net Income

The Statement of Consolidated Cash Flows (51) gives a figure for Net Income for three years as does the Statement of Consolidated Operations (48). Net Income has risen since 2010. (See Chart below) It increased by $542 million in 2011 and $436 million from 2011 to 2012. Simply put this means that it operational expenses are consistently less than its gross profit for the three years presented. There are other line items that contribute to the figure estimated in net income such as investment expenses and income, discontinued operations, and provisions for income taxes. They have added a section to Net Income with the line item Net Income Attributable to NonControlling Interest (48). This amount is subtracted from net income to give the net income amount attributable to Monsanto Company. This essentially means that the company made money from and has interest in another company but does not hold a majority ownership in said company. It must still record the income, but stating that it is not from Monsantos direct operations.

Net Income
16000 14000 12000 $$ in Millions 10000 8000 6000 4000 2000 0 2010 2011 2012 Gross Profit Operating Expenses Net Income

Section X Other Comprehensive Income

The Statement of Consolidated Comprehensive Income shows a collective income of 8 million attributed to noncontrolling interests. I know from the notes to the financial statements (67) that they own a non-controlling interest about 19% in a seed company. They then buy seed from the company and as quoted exercise significant influence over the supplier. I believe this may account for some if not all of the non-controlling interest. I cannot however say for sure since there was no direct link, specified notes or footnotes that I could find the mention or title Non-controlling Interests and besides the example stated no other items were specified. This is possibly a place for improvement in the explanations and notes accompanying the financial statements.

Section XI Cash Flow Statement

Monsanto approaches cash flow using the indirect method. That is they state Net Income first and work backward to achieve that figure. The Statement of Consolidated Cash Flows is on page 51 of the financial reports. Net Income is stated first. Then expenses that are indirectly and directly related to operation are stated as adjustments. Then Cash Provided by Operating Activities and Cash Required by Investing Activities are stated. In short, the Cash and Cash Equivalents are stated amounting to $3,283 million for the 2012 fiscal year. This is an

increase from 2011 by 28%. The report also displays an increase from 2010 to 2011 of 73%. It can therefore be said that cash flow was higher in the year 2011 than in 2012.

Section XII Cash from Operations

The Net Cash from Operating Activities is outlined for 2010, 2011 and 2012 in the Statement of Consolidated Cash Flows (51). Below is a graph showing the trend in millions of dollars.

Operating Activities
Net Cash Increase in Net Cash

2814

3051

1398

1416

0 2010

237 2011 2012

The blue line above represents the actual amount of Net Cash for each of the Year represented. As you can see, there was a major increase in cash from the 2010 fiscal year end to the 2011 fiscal year end. Although, last year also saw an increase it was far less than the year before. The increase is represented by the green line. This could be due to the release of Monsantos new pest resistant seed strain released in 2011. The brand labeled Genuity saw a major increase in stock prices and accounted for the increase in sales in 2011.

Section XIII Cash from Investing Activities

Maturities of Short Term Investment are the largest item in cash from investing activities. Yet, the purchases of short-term investments match that category dollar for dollar. The next and only other activities mentioned in this category to turn a profit is Other Investments and Property Disposal Proceeds. This is hardly a title at all and yields only $11 million in profit compared to short term investments which yields 746. I can assuming some of the disposal proceeds may come from the disbanded dairy activity. An overview, yet again incomprehensive overview of investments can be seen on Note 12. to the financial statements (67). The note states that they hold long term securities (ready for sale as of August 2012) for $35 & $26 million respectively. It also states they have cost basis in other assets recorded at $70 and $74 million in which the fair market value is undeterminable. All of these investments are included in the Statement of Consolidated Financial Position (50). None are separately stated, named, or explained anywhere else in the financial reporting and notes. I am definitely curious as to which major holdings are included in these so called investments. This is yet another medium for improvement of financial reporting.

Summary & Conclusion

Monsantos annual financial report outlays income, expenses, assets and liabilities. They include notes that express the discontinuing operations whose income is included in the financial statements. Overall assets and income along with the notes for financing and capital seem to present a healthy company financial picture. More information could be included in this already 110 page long report. I believe that the report does give a good understand to shareholders about the financial position of Monsanto. In conclusion I found the Annual Financial Report for Monsanto Company to be fairly informative. Certain formation such as the investment holdings could be expounded upon. On the other hand a good portrait of income and expense was given regarding operations. I also found the Management Report and notes to the 10-K to be very inclusive as to the position, past present and future of the company. They give a good view of their overall plans for the next fiscal year also. Some detail could be added to give the share and stakeholders a more in depth view of the company holdings. Yet, from what I have learned (in class) so far the report is in compliance with the accounting standards set by the FASB and Public Company Accounting Oversight Board.

Works Cited

Monsanto 2012 Annual Report: Connections Which can be read and downloaded at: http://www.monsanto.com/investors/Documents/Annual%20Report/2012/monsanto-2012annual-report.pdf

Monsanto Company History. Retrieved from http://www.monsanto.com/whoweare/Pages/monsanto-history.aspx Dillon, Mathew. (2004, Feb). And We Have the Seeds:Monsanto Purchases Worlds Largest Vegetable Seed Company. Organic Seed Alliance. Retrieved from http://www.seedalliance.org/seed_news/seminismonsanto/

Solomont, E.B., (2013, Jan 18). Monsanto ad spending drops $33 million. St. Louis Business Journal. Retrieved from http://www.bizjournals.com/stlouis/print-edition/2013/01/18/monsanto-ad-spending-drops-33million.html?page=all

Although I could no longer find articles to link such old news on the internet, I completed a paper last year entitled Bioengineered Food: Dire Consequences in which I research Moansanto and came across the relationship between the release of this product and Monsantos increase in sales. More on this product can be seen at http://www.monsanto.com/whoweare/Pages/monsanto-history.aspx Wilson, Tanisha (2012) Bioengineered Food: Dire Consequences.

(2005, April 25). Sec Charges Deloitte & Touche For Adelphia Audit. US Securities and Exchange Commission. Retrieved from http://www.sec.gov/news/press/2005-65.htm

Deloitte Tightens Client Screening After China Scandals. The Wall Street Journal. Retrieved from http://online.wsj.com/article/SB10001424127887323468604578245201953713258.html

(2012) Deloitte and Touhe. NNDB. Retrieved from http://www.nndb.com/company/550/000119193/