Monsanto Case Study

Team 8

04/01/13

Our team was asked to provide an educated prediction of Monsantos financial standing as of
August 31st, 2009. We used given growth rates to forecast Roundup and Corn Seeds and Traits, and
calculated the remaining accounts on the income statement and balance sheet using the percentage of
sales method, as well as any trends we noticed in the data to justify our forecast. We expect sales revenue
to grow 8.7% to $12.35 billion while maintaining a stable gross margin of roughly 50% through 2009.
Since Monsanto is committed to the innovation and further advancement in the seeds and genomics sector,
we predict that operating expenses, which include research and development, will increase by 18% to
$4.08 billion. With expenses growing at a faster rate than revenue, we do not foresee as sharp of an
increase in net income for 2009 as in 2008. In fact, we forecast a 30% decrease in net income, from $2.02
billion to $1.40 billion. We expect Monsanto to experience an ROA of 0.07, and an ROE of 0.14, both of
which are drops from the previous year, but still appear to be in the right range considering historical
values. Overall, the unusually remarkable numbers from 2008 are unsustainable, and we expect
Monsanto to return to more consistent performance, with an increase in revenue, increase in expenses,
and a decline in net income.
Monsanto is a multinational corporation headquartered in Coeur, Missouri, and specializes in the
production of genetically modified seeds, herbicides, and pesticides. It is one of the biggest players in the
agribusiness industry, taking in roughly one third of the revenue (11.365 billion) amassed by the entire
industry ($30 billion) in 2008. Monsanto has managed to successfully differentiate itself from its
competition with Roundup, its flagship product. Roundup is the best-selling herbicide in the world, and is
used to control weeds in plants everywhere from major agricultural farms to household gardens.
According to a JPMorgan equity research report from October 2008, Roundup brand of nonselective
glyphosate herbicide has been the most successful crop chemical in history, due to its high effectiveness,
broad spectrum of weed control, and strong environmental profile. (Case Study) It is largely due to the
success of Roundup that Monsanto remains strong during the recent recession, while its competitors
stock prices dipped as much as 41% and were downgraded to underperform.

Monsanto has also been on the frontier of genetic modification. In 1982, Monsanto was the first
company to genetically modify a plant cell, and by 2008 was the leading producer of genetically modified
seeds, with market shares ranging from 75% to 100%, depending on the seed. (Case Study) This
innovation is vital because plants grown from these seeds could power through weeds, pests, and
unfavorable growing conditions. The company was responsible for 90% of the market share in acres
planted with such seeds in 2008. Genetic modification has played a big role in corn production, which
was tied to 55% of revenue in Monsantos Seeds and Genomics segment. Monsanto uses cash earned by
the success of Roundup to fund research and development in genetically modified seeds, which is what
Monsantos focus is in the long run.
With all of the success Monsanto has had, it still faces some challenges. In the short term, there
is uncertainty in how the company will fare in the economic crisis. Farming may slow down as a result of
the crisis, driving down the demand for products that Monsanto offers. Furthermore, a fall in oil prices
may lower the demand for ethanol, which would decrease revenues related to corn production. The patent
for Roundup has been expired for nearly a decade, and the product could yield weaker sales as new
competition works its way into the market. In the long-run, Monsanto will face opposition by consumers
and environmental groups who believe that genetically modified products carry human health and
environmental risks. The challenge will be to ensure everyone that these Frankenfoods are just as
healthy as foods grown the traditional way.
Before forecasting the future of the company, it is important to understand how well the company
is doing. We will first start off with measuring its liquidity followed by various activity ratios. We will
end with looking at leverage measures and the ever important measures of profitability. However, instead
of looking just at the previous year of 2008, it is important to look at the ratios over a certain time period
to statistically work out any outliers. There are two reasons as to why we are doing this: one is because
historical growth should be represented, and two is because of the observed abnormal growth that
occurred during 2008.

To start off, we will measure liquidity using the current ratio and net working capital. Both of
these will determine Monsantos ability to meet daily operating expense as well as fulfill liabilities as they
come into fruition. As shown in the ratio spreadsheet, Monsantos current ratio and net working capital
shows a rollercoaster effect, with a huge drop in 2007, but rising thereafter. Translated, this means
Monsanto funded more of its operations with short term debt during that year and became more efficient
in the year to come. This is because of the financial crisis started crippling the economy. This is going to
be a trend seen throughout many of Monsantos ratios. As mentioned above, these ratios began
normalizing in 2008 due to the high revenue gains for its products.
To determine if Monsanto is utilizing its various assets efficiently, we found its receivables
turnover, inventory turnover, and assets turnover. Once again, in 2007 accounts receivable turnover
peaked, showing Monsanto efficiently, or desperately collecting on its balances in comparison to other
years. It is the same case for inventory turnovers as well. Even though inventory has continuously
increased throughout the years, this turnover ratio dropped in 2008. The same outcome is witnessed in
respect to asset turnover. Overall, Monsanto is doing very well in terms of managing its assets.
It is also important to note how much Monsanto is financing its operations through debt. By
looking at the debt to equity ratio, we can visualize how Monsanto finances its corporation. Even though
they took out more short term debt, they paid off even more long term debt and financed this year in more
equity than any other. This looks like a precaution to remove as much interest bearing debt as possible
while the financial crisis was kicking up.
Lastly, we are measuring its profitability through its net profit margin, return on assets, and return
on equity. Overall, Monsanto has been showing growth in its profitability year after year. They
continuously show an increase in all these ratios, thereby showing a promising future and increasing
efficiency among all their lines.
Furthermore, we analyzed Monsantos sustainable growth rate. This is the rate that a company
would be able to grow at, before seeking finances from outside sources. For most years, it should be able
to grow at a 9% increase, except for 2008 where its revenues spiked. Monsanto would able to fund more

of its operations solely off of its equity, and grow at a 16%, which seems unsustainable due to many of
the issues Monsanto is facing.
The foundation for finding the 2009 financials in the income statement is to first find the 2009 net
sales. We started with the net sales of Roundup. We multiplied the 2008 net sales of $4094 million by a 5%
growth rate (4094 * 1.05) to give us an estimated 2009 net sales of $4299 million. There are two reasons
as to why we believe Roundup only grew 5% from 2008-2009, rather than the average growth rate of 22%
(the average of the percentage change from 2005-2008): in anticipation of a price increase from 2008
from the credit crisis, as well as Monsanto allocating more resources into the crops and seeds sector,
therefore cashing in on its cash cow, Roundup. It is also important to note the 59% sales increase from
2007 to 2008 as an anomaly because it is an unnatural and unsustainable growth. This anomaly occurred
because of the huge demand for crops to support the growth of the emerging Asian and South American
economies, and a rise in crop prices which justified the purchase of more and better herbicides.
Next came the net sales of corn seeds and other traits. Much like the process of the net sales of
Roundup, we multiplied the 2008 corn seeds and other traits net sales of $3542 million by a 10% growth
rate (3542 * 1.1) to yield an estimated net sale of $3896 million. We believe Monsanto decided to use a
10% growth rate rather than the average growth rate of 28% (the average of the percentage of change
from 2005-2008) because of skepticism. Because the advancement of genetically modified seeds was so
recent, Monsanto did not have enough prior knowledge to make a strong percent increase prediction.
The final step to finding the 2009 net sales was to find the net sales of all other products. For this,
we used the percent of change method. We subtracted $2732 million from $3010 million then divided that
number by $2732 and got .1017. We repeated this process using the 2006, 2007 and 2008 numbers. We
found the average of the three numbers to be .1145 or 11.45% change, and multiplied the 2008 revenue
from all others, by 11.45% (3729 * .1145) This yielded our 2009 estimate of 4156 million. After adding
our 2009 estimates of 4299, 3896 and 4156, our final net revue of sales is 12,351 million.
A key takeaway from the income statement is the comparison of the cost of goods sold to the
final net revenue. What looks like a continually larger increase in final net revenue, is in fact

complimented by a cost of goods sold of about half that. This pattern continues from 2005-2009 which
ultimately shows financial stability.
Similar methods to compute the numbers in the income statement were used in the balance
sheet. To get the inventory, we used the percent of sales method but divided the inventory revenues by
the respectful cost of goods sold. This is because the inventory directly relates to COGS and has zero
relevance to net revenue.
The biggest take away from the balance sheet was what it took to have the assets equal the
liabilities and equity. In order for both sides to balance, Monsanto will have to increase its long term debt
to support its growth of revenue and assets.
If we kept Monsantos revenue and costs of goods sold constant from 2008 to 2009, while
keeping the SG&A and R&D the same as to what we found through our forecasting, we could determine
a loss in net income. Through the income statement, we calculated a detraction in our net income of 30
million resulting from additional unsupported expenses, without any revenue growth.
We believe that Monsanto will continue to excel in its industry, especially with the success of
Roundup. Net income will fall, but the expenses incurred will be well worth it, as Monsanto will have to
fund research and development for its future venture in seeds and traits. We expect the company to take
on more long-term debt for the same reason. We also expect Monsanto to operate with a 0.07 ROA and
0.14 ROE, which arent too strong, but dont show signs of deterioration either. The Roundup producer
has a major cash cow in its star product, and can use its success to fund its innovation of genetically
modified seeds for the future, as it moves away from the herbicides market and into seeds and genomics.

Exhibit 1
MONSANTO COMPANY
Income Statement
(in millions of dollars)

Years ended August 31

Forecast

2005

2006

2007

2008

2009

Roundup

2,049

2,262

2,568

4,094

4,299

Corn Seeds and Traits

1,494

1,793

2,807

3,542

3,896

All Other

2,732

3,010

2,974

3,729

4,156

6,275

7,065

8,349

11,365

12,351

3,280

3,622

4,119

5,188

6,130

2,995

3,443

4,230

6,177

6,221

1,404

1,604

1,858

2,312

2,707

813

700

963

1,144

1,373

2,217

2,304

2,821

3,456

4,080

Net Income from Operations

778

1,139

1,409

2,721

2,141

Other Expenses

304

(13)

(123)

(312)

14

Interest Expense

115

133

136

110

110

359

1,019

1,396

2,923

2,017

Income Taxes

104

330

403

899

610

Net Income

255

689

993

2,024

1,407

Net Sales

Cost of Goods Sold

Gross Profits
Selling, General, and
Administrative
Research & Development
Operating Expenses

Income Before Taxes

Data source: Monsanto Company annual reports,

200508.

Exhibit 2
MONSANTO COMPANY
Balance Sheet
(in millions of dollars)

As of August 31

Forecast

2005

2006

2007

2008

2009

Cash

525

1,460

866

1,613

1,655

Accounts Receivable(a)

1,473

1,455

1,578

2,703

2,679

Inventory

1,664

1,688

1,719

2,453

2,856

Other Current Assets

982

858

1,000

1,476

1,629

4,644

5,461

5,163

8,245

8,819

Property, Plant, & Equipment, Net

2,378

2,418

2,656

3,323

4,112

Goodwill

2,401

2,751

4,040

4,663

5,145

Other Long-Term Assets(b)

1,156

1,098

1,124

1,760

1,943

Fixed Assets

5,935

6,267

7,820

9,746

11,199

Total Assets

10,579

11,728

12,983

17,991

20,018

Short-Term Debt

126

28

270

24

Accounts Payable

525

514

649

1,090

Income Taxes Payable

208

234

150

161

304

Dividends Payable

55

96

132

127

Deferred Revenues

120

260

867

512

1,328

1,650

2,165

Assets

Current Assets

Liabilities and Shareholders Equity

Other Accruals

1,300

181
1,019

2,419

Current Liabilities

2,159

2,279

3,075

4,439

4,562

Long-Term Debt

1,458

1,639

1,150

1,792

2,825

Other Deferred Revenue/Liabilities

1,349

1,285

1,255

2,386

2,338

4,966

5,203

5,480

8,617

9,724

Common Stock

Treasury Stock

(500)

(623)

(814)

(1,177)

Additional Contributed Capital

8,588

8,879

9,106

9,495

Retained Earnings

(2,478)

(1,737)

(795)

1,050

Shareholders Equity

5,613

6,525

7,503

9,374

10,294

Total Liabilities and Equity

10,579

11,728

12,983

17,991

20,018

Total Liabilities

(a)

Includes some long-term receivables

(b)

Largely deferred taxes

Data source: Monsanto annual reports, 200508.

6
(1,177)
9,495
1,976

Exhibit 3
MONSANTO COMPANY
Statement of Cash Flows
(in millions of dollars)
Year Ended August 31
2006
2007
2008
Operating Activities
Net Income
Adjustments for Items That Did Not Require (Provide) Cash:
Depreciation and Amortization
Deferred Taxes (Other Long-Term Assets)
Changes is Assets and Liabilities That Provided (Required)
Cash:
Accounts Receivable(a)
Inventory
Other Current Assets
Accounts Payable
Income Taxes Payable
Dividends Payable
Deferred Revenues
Other Accruals
Other Deferred Revenue/Liabilities
Net Cash Provided by Operating Activities

689

993

2,024

519
58

527
(26)

573
(636)

18
(24)
124
(11)
26
55
120
28
(64)
1,538

(123)
(31)
(142)
135
(84)
41
140
322
(30)
1,722

(1,125)
(734)
(476)
441
11
36
607
515
1,131
2,367

Investing Activities
Capital Expenditures
Acquisitions
Net Cash Required by Investing Activities

(370)
(539)
(909)

(509)
(1,545)
(2,054)

(918)
(945)
(1,863)

Financing Activities
Net Purchases of Short-Term Investments
Net Long-Term Debt Proceeds
Dividend
Treasury Stock Purchase
Other Equity Account Changes
Net Cash Required by Financing Activities

(98)
181
(133)
(123)
479
306

242
(489)
(299)
(191)
475
(262)

(246)
642
(481)
(363)
691
243

935

(594)

747

Net Increase (Decrease) in Cash

Note: Statement developed by case writer to be consistent with accompanying income statement and
balance sheet while employing reported depreciation and capital expenditure amounts. Companyreported figures may differ since they are reported net of acquisitions.

Exhibit 5
MONSANTO
COMPANY
Key Financial Ratios
2005

2006

2007

2505.00
2.16

3182.00
2.40

2088.00
1.68

Measures of Activity
Accounts Receivable Turnover
Inventory Turnover
Asset Turnover

4.26
3.77
0.59

4.86
4.19
0.60

5.29
4.86
0.64

4.20
4.63
0.63

4.61
4.32
0.62

Measure of Leverage
Debt To Equity

0.88

0.80

0.73

0.92

0.94

Measures of Profitability
ROA
Net Profit Margin

0.02
0.04

0.06
0.10

0.08
0.12

0.11
0.18

0.07
0.11

Dupont Components
Profit Margin
Equity Multiplier
Asset Turnover

0.04
1.88
0.59

0.10
1.80
0.60

0.12
1.73
0.64

0.18
1.92
0.63

0.11
1.94
0.62

ROE(Dupont)

0.05

0.11

0.13

0.22

0.14

0.81
0.09

0.70
0.09

0.76
0.16

0.66
0.09

Measures of Liquidity
NWC (In Millions)
Current Ratio

Sustainable Growth Rate

Retention Rate
SRG (ROE * Retention)

2008

2009

3806.00 4257.00
1.86
1.93