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BG > SEC Filings for BG > Form 10-Q on 6-Nov-2012All Recent SEC Filings

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Form 10-Q for BUNGE LTD


6-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Third Quarter 2012 Overview

You should refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting Operating Results" in our Annual Report on Form 10-K for the year ended December 31, 2011 for a discussion of key factors affecting operating results in each of our business segments.

Beginning in the first quarter of 2012, management responsibilities for certain Brazilian port facilities were moved from the agribusiness segment to the fertilizer segment. Accordingly, amounts presented for prior periods have been reclassified to conform to the current period segment presentation.

Segment Overview

Agribusiness - Agribusiness segment results of $406 million in the third quarter of 2012 were significantly higher than the $149 million reported for the third quarter of 2011 primarily due to strong results in oilseed processing in our North American, European and Asian operations. Our grain merchandising operations benefited from the combination of strong export demand and large South American grain supplies. Total agribusiness volumes increased 15% compared to the same period last year. This increase resulted from increased grain merchandising business in Europe due to increased supplies, compared to a weak prior year period which was affected by a drought in the region, as well as the ramp up of our port terminal facility in the Black Sea. In addition, our U.S. Pacific Northwest port terminal and related grain origination facilities contributed to the volume increase. Oilseed processing volumes were also higher, in part due to our additional oilseed processing capacity in Asia and the resumption of oilseed processing at our Mannheim, Germany facility after a fire in 2010.


Table of Contents

Sugar and Bioenergy - Sugar and bioenergy segment results in the third quarter of 2012 were a loss of $47 million compared with a loss of $43 million in the third quarter of 2011. Impairment charges of $39 million related to a North American corn ethanol joint venture in the third quarter of 2012 more than offset improved results in both our sugar industrial and merchandising operations. The increase in total sales volumes compared to the same period of 2011 is primarily attributable to higher merchandising volumes.

Edible oil products - Edible oil products segment results of $29 million in the third quarter of 2012 were slightly higher than the $28 million reported for the third quarter of 2011 as improvements in our European and Brazilian operations more than offset lower results in our North American operations. Results in the third quarter of 2011 included a $6 million gain on the sale of an idled facility in North America.

Milling products - Milling products segment results in the third quarter of 2012 were $30 million compared to $24 million in the third quarter of 2011. Wheat milling margins in Brazil improved when compared to the same period of last year and operating expenses were lower, but these positive factors were partially offset by lower volumes. Our acquisition of a controlling interest in a North American wheat mill in the second quarter of 2012 also contributed to the higher results. Our corn milling business performed well, consistent with last year.

Fertilizer - Fertilizer segment results of $23 million for the third quarter of 2012 were lower than the $33 million reported in the third quarter of 2011 as volumes and margins were weaker in Brazil. The lower results in Brazil were partially offset by improved results in our Moroccan joint venture which had higher production volumes.


Table of Contents

Segment Results



A summary of certain items in our condensed consolidated statements of income
and volumes by reportable segment for the periods indicated is set forth below.



                                        Three Months Ended           Nine Months Ended
                                           September 30,               September 30,
(US$ in millions, except volumes)       2012           2011          2012          2011
Volumes (in thousands of metric
tons):
Agribusiness                              35,770        31,142       101,143        84,643
Sugar and Bioenergy                        2,855         2,372         5,990         6,072
Edible oil products                        1,692         1,535         4,876         4,398
Milling products                           1,097         1,113         3,230         3,494
Fertilizer                                 1,795         1,873         4,321         4,239
Total                                     43,209        38,035       119,560       102,846

Net sales:
Agribusiness                         $    11,993    $    9,995    $   31,890    $   27,721
Sugar and Bioenergy                        1,522         1,731         3,482         4,212
Edible oil products                        2,395         2,337         6,947         6,553
Milling products                             485           525         1,333         1,516
Fertilizer                                   898         1,028         2,177         2,296
Total                                $    17,293    $   15,616    $   45,829    $   42,298

Cost of goods sold:
Agribusiness                         $   (11,399 )  $   (9,547 )  $  (30,466 )  $  (26,472 )
Sugar and Bioenergy                       (1,472 )      (1,712 )      (3,409 )      (4,114 )
Edible oil products                       (2,282 )      (2,230 )      (6,630 )      (6,218 )
Milling products                            (425 )        (469 )      (1,174 )      (1,349 )
Fertilizer                                  (856 )        (952 )      (2,110 )      (2,153 )
Total                                $   (16,434 )  $  (14,910 )  $  (43,789 )  $  (40,306 )

Gross profit:
Agribusiness                         $       594    $      448    $    1,424    $    1,249
Sugar and Bioenergy                           50            19            73            98
Edible oil products                          113           107           317           335
Milling products                              60            56           159           167
Fertilizer                                    42            76            67           143
Total                                $       859    $      706    $    2,040    $    1,992

Selling, general and
administrative expenses:
Agribusiness                         $      (206 )  $     (199 )  $     (626 )  $     (565 )
Sugar and Bioenergy                          (69 )         (39 )        (150 )        (121 )
Edible oil products                          (83 )         (84 )        (264 )        (241 )
Milling products                             (30 )         (33 )         (95 )         (90 )
Fertilizer                                   (28 )         (39 )         (96 )        (104 )
Total                                $      (416 )  $     (394 )  $   (1,231 )  $   (1,121 )

Foreign exchange gains (losses):
Agribusiness                         $        32    $     (113 )  $      106    $      (10 )
Sugar and Bioenergy                          (15 )         (20 )         (15 )           3
Edible oil products                           (2 )           1            (5 )           -
Milling products                               1             -             1             -
Fertilizer                                     4             5            17            (1 )
Total                                $        20    $     (127 )  $      104    $       (8 )

Noncontrolling interest:
Agribusiness                         $       (13 )  $       11    $      (10 )  $        1
Sugar and Bioenergy                            -            (2 )           4            (4 )
Edible oil products                            1            (1 )           2            (5 )
Milling products                               -             -             -             -
Fertilizer                                    (1 )          (1 )          (2 )          (3 )
Total                                $       (13 )  $        7    $       (6 )  $      (11 )

Other income (expense) - net:
Agribusiness                         $        (1 )  $        2    $       10    $       (6 )
Sugar and Bioenergy                          (13 )          (1 )         (20 )           1
Edible oil products                            -             5             2             3
Milling products                              (1 )           1             -             2
Fertilizer                                     6            (8 )         (38 )          (8 )
Total                                $        (9 )  $       (1 )  $      (46 )  $       (8 )

Gain on sales of agribusiness
investments in affiliates            $         -    $        -    $       85    $       37

Gain on acquisition of milling
business controlling interest        $         -    $        -    $       36    $        -

Segment earnings before interest
and tax:
Agribusiness                         $       406    $      149    $      989    $      706
Sugar and Bioenergy                          (47 )         (43 )        (108 )         (23 )
Edible oil products                           29            28            52            92
Milling products                              30            24           101            79
Fertilizer                                    23            33           (52 )          27
Total (1)                            $       441    $      191    $      982    $      881

Depreciation, depletion and
amortization:
Agribusiness                         $       (55 )  $      (49 )  $     (160 )  $     (140 )
Sugar and Bioenergy                          (52 )         (55 )        (124 )        (129 )
Edible oil products                          (22 )         (26 )         (69 )         (67 )
Milling products                              (8 )          (6 )         (21 )         (20 )
Fertilizer                                   (13 )         (15 )         (40 )         (42 )
Total                                $      (150 )  $     (151 )  $     (414 )  $     (398 )



(1) Total segment earnings before interest and taxes (EBIT) is an operating performance measure used by Bunge's management to evaluate segment operating activities. Bunge's management believes total segment EBIT is a useful measure of operating profitability, since the measure allows for an evaluation of the performance of its segments without regard to its financing methods or capital structure. In addition, EBIT is a financial measure that is widely used by analysts and investors in Bunge's industries. Total segment EBIT is not a measure of consolidated operating results under U.S. GAAP and should not be considered as an alternative to net income or any other measure of consolidated operating results under U.S. GAAP.


Table of Contents

A reconciliation of total segment EBIT to net income attributable to Bunge follows:

                                        Three Months Ended            Nine Months Ended
                                          September 30,                 September 30,
(US$ in millions)                      2012           2011           2012           2011
Total segment EBIT                  $       441    $       191    $       982    $       881
Interest income                              13             28             60             72
Interest expense                            (86 )          (80 )         (230 )         (222 )
Income tax (expense) benefit                (80 )            1           (162 )          (62 )
Noncontrolling interest share of
interest and tax                              9              -             13             19
Net income attributable to Bunge    $       297    $       140    $       663    $       688

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Agribusiness Segment. Agribusiness segment net sales in the third quarter of 2012 increased 20% over the same period of 2011 with increases in both volumes and commodity prices. The 15% increase in volumes represented approximately 70% of the increased sales for the period with higher commodity prices representing approximately 30%. The higher volumes primarily came from higher merchandising volumes in Europe, Middle East and Africa (EMEA), from increased grain origination, which benefited from additional grain and logistics investments in North America, and from higher oilseed processing volumes in Asia, Europe and North America. Asia processing volumes increased due to our recent capacity expansions and North America volumes increased as a result of higher export demand. The increase in oilseed processing in Europe came partially from our Mannheim, Germany plant, which was back in operation after a fire in 2010, and also from a larger supply of sunseed compared to very tight supplies in 2011 as a result of the 2010 drought.

Cost of goods sold for the third quarter of 2012 increased 19%, similarly to net sales, primarily as a result of the above-mentioned increases in volume and commodity prices.

Gross profit in the third quarter of 2012 increased to $594 million compared to $448 million in the same period of 2011 with higher volumes and margins in oilseed processing, particularly in North America and Asia, and higher margins in grain origination and merchandising, primarily in South America and EMEA.

SG&A expenses in the third quarter of 2012 increased 4% over the same period of last year largely due to the expansion of our operations in Asia and North America as well as higher employee related costs. These increases were partially offset by the favorable impact of weaker global currencies on functional currency costs when translated to U.S. dollars.

Foreign exchange in the third quarter of 2012 and 2011 was a gain of $32 million and a loss of $113 million, respectively, related primarily to fluctuations of the Brazilian real relative to the U.S. dollar during both periods.


Table of Contents

Noncontrolling interest was $(13) million in the third quarter of 2012 compared to $11 million in the third quarter of 2011 and represents the noncontrolling interest share of period (income) loss of consolidated entities, primarily in our North American operations.

Segment EBIT in the third quarter of 2012 increased by $257 million to $406 million from $149 million in the third quarter of 2011 primarily due to higher volumes and margins and foreign exchange gains in the third quarter of 2012 compared to significant foreign exchange losses in the same period of 2011.

Sugar and Bioenergy Segment. Sugar and bioenergy segment net sales for the third quarter of 2012 decreased 12% when compared to the third quarter of 2011 primarily due to lower average sugar and ethanol prices compared to last year, partially offset by a 20% increase in volumes, primarily in sugar merchandising activities.

Cost of goods sold decreased 14% in the third quarter of 2012 compared to the same period of 2011 driven by lower average sugar prices and lower unit costs for sugar and ethanol produced in our mills primarily as a result of the favorable impact of the devaluation of the Brazilian real on local currency costs when translated to U.S. dollars.

Gross profit increased to $50 million in the third quarter of 2012 from $19 million in the comparable period of 2011 primarily as a result of improved margins from higher volumes of sugarcane processed and cost reduction efforts in our industrial business, offset partially by the impact of weaker total recoverable sugar content in the sugarcane. Our trading and merchandising operations also improved over the same period of last year with lower demurrage costs and stronger merchandising results.

SG&A expenses increased to $69 million in the third quarter of 2012 from $39 million in the comparable period of 2011 primarily due to impairment charges of $29 million related to a loan receivable from a North American corn ethanol joint venture.

Foreign exchange losses in the third quarter of 2012 and 2011 were $15 million and $20 million, respectively and resulted primarily from the fluctuations of the Brazilian real in both periods.

Other income (expenses)-net was a loss of $13 million in the third quarter of 2012 compared to a loss of $1 million in the same quarter of 2011 primarily due to an impairment charge of $10 million related to a North American corn ethanol investment.

Noncontrolling interest was $0 in the third quarter of 2012 and $(2) million in the same quarter of 2011 and represents the noncontrolling interest share of period income from our non-wholly owned Brazilian sugarcane mills.

Segment EBIT decreased by $4 million to a loss of $47 million in the third quarter of 2012 from a loss of $43 million in the third quarter of 2011. Segment EBIT for the third quarter of 2012 included impairment charges of $39 million related to a North American corn ethanol joint venture, which was largely offset by improved gross profit in both industrial and trading and merchandising operations.

Edible Oil Products Segment. Edible oil products segment net sales increased 2% in the third quarter of 2012 compared to the third quarter of 2011 driven by a volume increase of 10% primarily due to our expanded operations in China, our acquisition of a business in India and higher volumes in Europe. These volume increases were partially offset by the impact on prices of the depreciation of currencies relative to the U.S. dollar in Brazil, India and Europe.

Cost of goods sold in the third quarter of 2012 increased 2% when compared to the same period of 2011 primarily due to the increase in volumes. These increases were partially offset by the impact of currency depreciations on cost of goods sold.

Gross profit increased 6% when compared to the third quarter of 2011 primarily due to higher volumes in China, India and Europe.

SG&A expenses decreased 1%, primarily from the favorable impact of currency devaluations, mainly in Brazil. This benefit was partially offset by higher advertising expenditures and the impacts of acquisitions and expansions in Asia.


Table of Contents

Foreign exchange results in the third quarters of 2012 and 2011 were a loss of $2 million and a gain of $1 million, respectively.

Noncontrolling interest was $1 million in the third quarter of 2012 and $(1) million in the same period of 2011, and represents the noncontrolling interest share of period loss (income), primarily in our European operations.

Segment EBIT increased 4% as a result of the higher gross profit and lower SG&A costs.

Milling Products Segment. Milling products segment net sales decreased 8% primarily as a result of lower selling prices when translated into U.S. dollars and lower volumes in wheat milling in Brazil. Volumes decreased by 1%, with increased volumes from the acquisition of a controlling interest in a wheat milling operation in North America more than offset by lower wheat milling volumes in Brazil and lower corn and rice milling volumes in North America. The volume reduction in Brazil related primarily to lost sales opportunities arising from the continued impact of the SAP implementation completed earlier in the year.

Cost of goods sold for the third quarter of 2012 decreased 9% from the third quarter of 2011 primarily as a result of lower raw material costs as raw materials were purchased prior to the 26% increase in average wheat prices in the third quarter of 2012. Volumes for this segment also declined slightly when compared to the third quarter of 2011, and the currency devaluation in Brazil reduced costs when translated into U.S. dollars. These reductions were partially offset by the impact of the recently acquired wheat milling business in North America.

Gross profit increased 7% compared to the third quarter of 2011 as margins in wheat milling in Brazil improved, largely offsetting the impact of lower volumes. Corn milling margins improved slightly primarily due to unrealized gains on hedges which will be largely offset when products are delivered. Rice milling margins also improved over the same period of 2011. The recently acquired wheat milling business in North America also contributed positively to gross profit.

SG&A expenses decreased from $33 million to $30 million during the third quarter of 2012 when compared to the third quarter of 2011 primarily resulting from the impact of the devaluation of the Brazilian real, partially offset by costs associated with the North American wheat mill acquired in the second quarter of 2012.

Segment EBIT increased 25% to $30 million in the third quarter of 2012 from $24 million in the third quarter of 2011 as a result of the higher gross profit and lower SG&A expenses.

Fertilizer Segment. Fertilizer segment net sales decreased 13% in the third quarter of 2012 when compared to the third quarter of 2011 primarily due to lower selling prices and a 4% decrease in volumes. Fertilizer sales in Brazil were also impacted by the currency devaluation.

Cost of goods sold decreased 10% primarily as a result of lower raw material costs driven by lower international fertilizer prices in the third quarter of 2012 when compared to the third quarter of 2011. Cost of goods sold also declined as a result of the devaluation of the Brazilian real.

Gross profit decreased to $42 million in the third quarter of 2012 from $76 million in the comparable period of 2011. The decrease in gross profit was primarily driven by the impact of lower margins in Brazil from deliveries of earlier contracted lower margin shipments and logistics issues at Brazilian ports that reduced margins.

SG&A decreased to $28 million in the third quarter of 2012 from $39 million in the comparable period of 2011 primarily as a result of the devaluation of the Brazilian real and cost reduction efforts.

Foreign exchange gains were $4 million in the third quarter of 2012 compared to $5 million in the third quarter of 2011 and related primarily to the translation of net monetary liabilities primarily in Brazil.

Other income (expenses)-net was a gain of $6 million in the third quarter of 2012 compared to a loss of $8 million in the third quarter of 2011 primarily due to higher results in our Moroccan phosphate joint venture as a result of higher margins resulting from an increase in international fertilizer prices during the third quarter of 2012 and higher production rates.

Noncontrolling interest in the third quarters of 2012 and 2011 was $1 million, which represents the noncontrolling interest share of period income.


Table of Contents

Segment EBIT for the third quarter of 2012 was $23 million compared to $33 million in the same period of 2011 due to lower gross profit partially offset by lower SG&A expenses and improved results from our Moroccan joint venture. EBIT contributions for the third quarter of 2012 from our operations in Argentina and North America were consistent with the same period of last year.

Interest. A summary of consolidated interest income and expense for the periods indicated follows:

Three Months Ended

                          September 30,
(US$ in millions)      2012           2011
Interest income     $       13     $       28
Interest expense           (86 )          (80 )

Interest income decreased when compared to the same period of 2011 as a result of lower average interest bearing cash balances. Interest expense increased when compared to the same period last year primarily driven by higher working capital usage, largely resulting from higher average commodity prices.

Income Tax Expense. In the quarter ended September 30, 2012, we recorded income tax expense of $80 million compared to income tax benefit of $1 million in the quarter ended September 30, 2011. The effective tax rate in the third quarter of 2012 increased to 21% compared to (1)% in the third quarter of 2011 driven by increased earnings in high tax rate jurisdictions and lower financing costs in Brazil.

Net Income Attributable to Bunge. For the quarter ended September 30, 2012, net income attributable to Bunge increased to $297 million from $140 million in the quarter ended September 30, 2011. This increase was primarily the result of higher agribusiness segment EBIT partially offset by impairment charges of $25 million (net of tax) in the sugar and bioenergy segment related to the write down of an investment in and loan to a North American corn ethanol joint venture.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Agribusiness Segment. Agribusiness segment net sales in the nine months ended September 30, 2012 increased by 15% when compared to the same period of 2011 driven by a 19% increase in volumes, primarily in grain merchandising and oilseed processing in Europe. Volumes also increased as a result of the impact of our recent expansions, including more grain origination capacity supporting our export terminal in the U.S. Pacific Northwest and our Ukraine port facility and additional oilseed processing capacity in Asia. In Europe, 2011 volumes were weak as a result of a severe drought in Eastern Europe in the second half of 2010 that reduced grain availability in the region in late 2010 and the first half of 2011. Strong merchandising demand in EMEA also increased sales volumes. South American volumes were consistent with a very strong prior year period, driven by strong export demand due to smaller grain harvests in the U.S. in 2011. The 2012 volume increases were partially offset by slightly lower average commodity prices for corn and wheat during the first nine months of 2012 compared with the same period of 2011.

Cost of goods sold in the nine months ended September 30, 2012 increased 15% primarily as a result of the increase in volumes, including the expansions of our business mentioned above.

Gross profit increased in the nine months ended September 30, 2012 by 14% compared to the comparable period of 2011, driven by strong grain merchandising margins in South America, which benefited from strong export demand during 2012 due to the smaller 2011 U.S. grain harvests, and, to a lesser extent, in EMEA, with increased 2012 demand.

SG&A expenses in the nine months ended September 30, 2012 increased 11% compared with the nine months ended September 30, 2011, largely due to the U.S. and Asia expansions, higher employee related costs, primarily in South America, and increased bad debt expenses in Brazil and Europe, when compared to the same period of 2011.


Table of Contents

Foreign exchange gains and losses in the nine months ended September 30, 2012 and 2011 netted a gain of $106 million and a loss of $10 million, respectively, and related primarily to the fluctuations of global currencies relative to the U.S. dollar during those periods.

Gain on sale of investments in affiliates in the nine months ended September 30, 2012 of $85 million was related to the sale of our investment in Solae, a North American soy ingredients joint venture. Gain on sale of investments in . . .

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