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BG > SEC Filings for BG > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for BUNGE LTD


8-Nov-2013

Quarterly Report


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

Third Quarter 2013 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, 2012 for a discussion of key factors affecting operating results in each of our business segments.

As a result of our entrance into an agreement with Yara International ASA under which Yara would acquire our Brazilian fertilizer distribution business on December 6, 2012 and our announcement of the sale of our interest in our U.S. fertilizer distribution to our partner in that venture, GROWMARK, these businesses have been reported within discontinued operations, net of tax, in our consolidated statements of income beginning in the fourth quarter of 2012 and have been excluded from segment results for all periods presented.

Segment Overview

Agribusiness - Our Agribusiness segment performed well in the third quarter of 2013, though EBIT of $326 million was well below the record year-ago third quarter EBIT of $406 million. Strong margins and volumes in our Brazilian processing and merchandising operations were the primary driver of results for the quarter. In Argentina, oilseed processing results improved with a larger soybean crop and a pick-up in farmer selling, but did not fully offset lower earnings in grain merchandising, which was negatively impacted by the poor wheat crop. Results in Europe and Asia were similar to last year. Oilseed processing capacity utilization in North America was low for both soybeans and canola, impacted by last year's drought which reduced available raw material. U.S. grain


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exports were also low, reflecting the impact of last summer's extreme drought on corn production and the delay to this year's harvests caused by late planting. Our teams managed global supply lines and market volatility well in a challenging environment. Results in the third quarter of 2013 included an $8 million gain related to the sale of our investment in a U.S. biofuels company.

Sugar and Bioenergy - Sugar and bioenergy segment EBIT for the third quarter of 2013 was a loss of $37 million compared to a loss of $47 million in the third quarter of 2012. Results for the third quarter of 2013 were driven by a loss in our Brazilian sugarcane milling business. Lower unit costs from higher crushing volume and productivity improvements were more than offset by lower sugar prices, as well as costs related to land where we did not harvest or plant this year due to wet weather. Compared to our expectations, third quarter milling results were substantially below target, primarily due to lower sucrose content in the cane (ATR) across all of our mills resulting from wet weather and frost, lower sugarcane crushing volume due to excessive rain and the impact of mark-to-market losses in forward sugar hedges as sugar futures rallied in late September. Our global trading & merchandising business performed well, continuing to grow in volume and market share. Results in U.S. biofuels were higher primarily due to improved margins in our ethanol joint venture. EBIT in the third quarter of 2013 included provisions of approximately $18 million related to equipment and machinery held for sale. Results in the third quarter of 2012 included an impairment charge of $39 million related to a North American corn ethanol joint venture.

Edible oil products - Edible oil products segment EBIT of $43 million in the third quarter of 2013 was higher than the $29 million reported in the third quarter of 2012 due to improved volumes and margins benefiting from our portfolio diversification across product mix and geographies. Lower results in Brazil and in the U.S. were more than offset by good performances in Europe, Canada and Asia which were driven by continuing cost reduction programs, improved category innovation and pricing.

Milling products - Milling products EBIT for the third quarter of 2013 declined to $24 million compared to $30 million in the same period of 2012. Results for the third quarter of 2013 included a $7 million charge related to transactional tax credits in Brazil. Performance in our Brazilian and Mexican wheat milling operations improved compared with the same period of last year, more than offsetting lower results in corn milling which, after a strong first half of the year, experienced softer volumes as some customers delayed purchases until the arrival of new crop. Contributing to the improved wheat milling results were a combination of lower industrial costs and higher margins. In Brazil, margins also benefitted from good raw material procurement strategies in a market of tight wheat supplies and high flour prices. Rice milling results were similar to last year.

Fertilizer - Fertilizer segment EBIT for the third quarter of 2013 declined to $15 million compared to $22 million in the same period of 2012. Higher results in our Brazilian fertilizer port operation more than offset lower results in Argentina which was impacted by lower volumes from reduced corn and wheat planting.

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.


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                                        Three Months Ended           Nine Months Ended
                                           September 30,               September 30,
(US$ in millions, except volumes)       2013           2012          2013          2012
Volumes (in thousands of metric
tons):
Agribusiness                              35,472        35,770       101,273       101,143
Sugar and Bioenergy                        3,005         2,855         7,329         5,990
Edible oil products                        1,779         1,692         5,187         4,876
Milling products                           1,010         1,097         3,052         3,230
Fertilizer                                   293           322           622           622

Net sales:
Agribusiness                         $    10,718    $   11,993    $   33,058    $   31,890
Sugar and Bioenergy                        1,133         1,522         3,185         3,482
Edible oil products                        2,225         2,395         6,898         6,947
Milling products                             487           485         1,531         1,333
Fertilizer                                   138           148           300           299
Total                                $    14,701    $   16,543    $   44,972    $   43,951
Cost of goods sold:
Agribusiness                         $   (10,234 )  $  (11,399 )  $  (31,806 )  $  (30,466 )
Sugar and Bioenergy                       (1,135 )      (1,472 )      (3,096 )      (3,409 )
Edible oil products                       (2,098 )      (2,282 )      (6,518 )      (6,630 )
Milling products                            (426 )        (425 )      (1,346 )      (1,174 )
Fertilizer                                  (120 )        (122 )        (256 )        (249 )
Total                                $   (14,013 )  $  (15,700 )  $  (43,022 )  $  (41,928 )

Gross profit:
Agribusiness                         $       484    $      594    $    1,252    $    1,424
Sugar and Bioenergy                           (2 )          50            89            73
Edible oil products                          127           113           380           317
Milling products                              61            60           185           159
Fertilizer                                    18            26            44            50
Total                                $       688    $      843    $    1,950    $    2,023

Selling, general and
administrative expenses:
Agribusiness                         $      (208 )  $     (206 )  $     (600 )  $     (626 )
Sugar and Bioenergy                          (40 )         (69 )        (116 )        (150 )
Edible oil products                          (90 )         (83 )        (277 )        (264 )
Milling products                             (36 )         (30 )        (100 )         (95 )
Fertilizer                                    (8 )          (8 )         (23 )         (28 )
Total                                $      (382 )  $     (396 )  $   (1,116 )  $   (1,163 )

Foreign exchange gains (losses):
Agribusiness                         $        38    $       32    $       (5 )  $      106
Sugar and Bioenergy                            2           (15 )           2           (15 )
Edible oil products                            7            (2 )           6            (5 )
Milling products                              (1 )           1            (1 )           1
Fertilizer                                     3            (1 )           5            (1 )
Total                                $        49    $       15    $        7    $       86

Noncontrolling interests:
Agribusiness                         $         2    $      (13 )  $       32    $      (10 )
Sugar and Bioenergy                            2             -             5             4
Edible oil products                           (2 )           1            (3 )           2
Milling products                               -             -             -             -
Fertilizer                                    (2 )          (1 )          (3 )          (2 )
Total                                $         -    $      (13 )  $       31    $       (6 )

Other income (expense) - net:
Agribusiness                         $        10    $       (1 )  $        7    $       10
Sugar and Bioenergy                            1           (13 )           3           (20 )
Edible oil products                            1             -             9             2
Milling products                               -            (1 )           5             -
Fertilizer                                     4             6            37            (2 )
Total                                $        16    $       (9 )  $       61    $      (10 )

Gain on sale of agribusiness
investment in affiliate              $         -    $        -    $        -    $       85

Gain on acquisition of milling
business controlling interest        $         -    $        -    $        -    $       36
Segment earnings before interest
and tax:
Agribusiness                         $       326    $      406    $      686    $      989
Sugar and Bioenergy                          (37 )         (47 )         (17 )        (108 )
Edible oil products                           43            29           115            52
Milling products                              24            30            89           101
Fertilizer                                    15            22            60            17
Total (1)                            $       371    $      440    $      933    $    1,051

Depreciation, depletion and
amortization:
Agribusiness                         $       (63 )  $      (55 )  $     (181 )  $     (160 )
Sugar and Bioenergy                          (54 )         (52 )        (133 )        (124 )
Edible oil products                          (25 )         (22 )         (74 )         (69 )
Milling products                              (6 )          (8 )         (21 )         (21 )
Fertilizer                                    (5 )          (5 )         (14 )         (14 )
Total                                $      (153 )  $     (142 )  $     (423 )  $     (388 )


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(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.

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)                      2013           2012           2013           2012
Total segment EBIT                  $       371    $       440    $       933    $     1,051
Interest income                              27              5             47             43
Interest expense                           (103 )          (77 )         (264 )         (214 )
Income tax (expense) benefit               (591 )          (82 )         (702 )         (197 )
Income (loss) from discontinued
operations, net of tax                      103              2             94            (33 )
Noncontrolling interests' share
of interest and tax                          45              9             60             13
Net income (loss) attributable
to Bunge                            $      (148 )  $       297    $       168    $       663

Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

Agribusiness Segment - Agribusiness segment net sales decreased 11% to $11 billion in the third quarter of 2013 from $12 billion in the third quarter of 2012. Volumes were essentially flat and prices declined on all major agricultural commodities compared to last year's third quarter. Volume declines in North America resulted from last year's drought and were offset by volume increases in South America, particularly Brazil origination, resulting from strong South American harvests. Merchandising volumes in Asia were higher, but were largely offset by lower merchandising volumes in Europe. Prices of agricultural commodities were lower across the spectrum as the strong South American harvests reduced the North American drought impact on global supply and demand.

Cost of goods sold decreased 10% primarily as a result of the decline in global commodity prices mentioned above, which reduced commodity input costs.

Gross profit of $484 million in the third quarter of 2013 decreased 19% compared to the third quarter of 2012. Oilseed processing margins were lower across the regions, with the exception of Brazil and Argentina, where this business performed well with record harvests. Margins were particularly low in North America as a result of the reduced capacity utilization and in some cases interim plant shutdowns due to a lack of raw materials to process.


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Merchandising gross profit was generally lower with the exception of Brazil origination and EMEA oilseeds merchandising. Ports in South America contributed well to overall gross profit, as did our commodity trade flow structured finance activities. Risk management also performed well during the period.

SG&A expenses were $208 million in the third quarter of 2013 compared to $206 million in the third quarter of 2012. The increase from last year resulted primarily from higher bad debt charges, mainly in Brazil, and the favorable impact of the devaluation of the Brazilian real and Argentine peso on the translation of local currency costs into U.S. dollars.

Foreign exchange gains were $38 million in the third quarter of 2013 compared to gains of $32 million in the same period of 2012. These foreign exchange gains relate primarily to the weakness in the Brazilian real during the quarter.

Other income (expenses)-net was income of $10 million in the third quarter of 2013 compared to a loss of $1 million in the same period of 2012. The income in the third quarter of 2013 relates primarily to a gain of $8 million on the sale of our investment in a biofuels company in North America.

Noncontrolling interests represents (income) loss attributed to the noncontrolling interest holders in joint venture operations that are consolidated in our financial statements.

Segment EBIT decreased by $80 million to $326 million in the third quarter of 2013 from $406 million in the third quarter of 2012 as a result primarily of the 19% lower gross profit.

Sugar and Bioenergy Segment - Sugar and Bioenergy segment net sales decreased $389 million (26%) compared to the third quarter of 2012. The decline in sales was driven by a significant decline in prices, particularly sugar. Sugar production volumes in our industrial operations also contributed to the lower net sales with lower ATR (sugar content in the processed cane) during the period although crushing volumes increased. Merchandising volumes were 6% higher than last year's third quarter.

Cost of goods sold decreased 23% in the third quarter of 2013 compared to the same period of 2012 driven by the impact of the decline in average sugar prices on our trading and merchandising business. Cost of goods sold in 2013 includes approximately $15 million of charges relating to land that we did not harvest or plant this year due to the wet weather conditions.

Gross profit decreased by $52 million to $(2) million in the third quarter of 2013 from $50 million in the comparable period of 2012 primarily as a result of lower sugar prices and charges during the quarter related to land that we did not harvest or plant this year due to wet weather. Gross profit benefited from solid risk management performance in our merchandising business.

SG&A expenses were $40 million in the third quarter of 2013 compared to $69 million in the third quarter of 2012. SG&A for the third quarter of 2012 included a $29 million charge for impairment of a loan receivable from a North American corn ethanol joint venture.

Foreign exchange gains (losses) in the third quarters of 2013 and 2012 was a gain of $2 million and loss of $15 million, respectively, and related primarily to the Brazilian real.

Other income (expenses)-net was a gain of $1 million in the third quarter of 2013 compared to a loss of $(13) million in the same quarter of 2012. Other income (expense), net for the third quarter of 2012 included a $10 million charge for impairment of an equity investment in a North American corn ethanol joint venture.

Noncontrolling interests were $2 million in the third quarter of 2013 compared with nil in the third quarter of 2012 and represents the noncontrolling interests' share of period loss from our non-wholly owned Brazilian sugarcane mills.

Segment EBIT improved by $10 million to a loss of $37 million in the third quarter of 2013 from a loss of $47 million in the third quarter of 2012. Segment EBIT in the third quarter of 2012 included $39 million of impairment charges in SG&A and Other income (expense) related to a North American corn ethanol joint venture. Industrial results were weaker in the third quarter of 2013 compared to last year as a result of lower sucrose content


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in the harvested sugarcane, low sugar and ethanol prices, and provisions of $18 million for the impairment of certain assets held for sale.

Edible Oil Products Segment - Edible oil products segment net sales decreased by approximately 7% in the third quarter of 2013 compared to the third quarter of 2012, resulting from lower average selling prices which more than offset a 5% increase in volumes, primarily in Europe. Argentina and Asia also reported volume increases.

Cost of goods sold in the third quarter of 2013 decreased 8% when compared to the same period of 2012 as the increase in sales volumes in 2013 was more than offset by lower raw material costs in which average soybean oil futures prices declined approximately 19% in the third quarter of 2013 compared with the same period of 2012.

Gross profit increased to $127 million in the third quarter of 2013 compared to $113 million in the third quarter of 2012. The increase was driven by higher margins, with improved pricing policy management primarily in Brazil, but margins also increased in Asia and the U.S. Increased volumes also contributed to higher gross profit.

SG&A expenses increased 8%, primarily as a result of increased advertising and other selling expenditures consistent with the 2013 volume increases and improved pricing management and product mix initiatives.

Foreign exchange results in the third quarters of 2013 and 2012 were a gain of $7 million and loss of $2 million, respectively.

Segment EBIT increased to $43 million in the third quarter of 2013 compared to $29 million in the third quarter of 2012, as a result of higher gross profit which was partially offset by higher SG&A costs.

Milling Products Segment - Milling products segment net sales for the third quarter of 2013 were flat compared with the same period of 2012. Volumes declined by 8%, primarily in Brazil wheat milling and U.S. corn milling. In Brazil, the reduction related to our termination of a local selling alliance and an effort to maintain margin levels. The U.S. reduction related primarily to customer delays in building inventories until new crop corn prices are available. Volume declines, primarily in Brazil, were essentially offset by local currency price increases, although prices translated to U.S. dollar equivalents are flat relative to last year.

Cost of goods sold was flat for the third quarter of 2013 compared with the same quarter of 2012 as both volumes and commodity prices declined in US Dollar equivalents. Improved raw material procurement practices, particularly in Brazil, benefited local currency cost of goods sold in 2013 compared to the third quarter of 2012.

Gross profit was $61 million for the third quarter of 2013 compared with $60 million in the third quarter of 2012, and related primarily to improved margins in our Brazilian wheat milling operations that translated into fewer U.S. dollar improvements as the Brazilian real weakened relative to the comparative period. Gross profit was slightly higher in Mexico wheat milling and was lower in U.S. corn milling as a result primarily of lower volumes as customers delayed purchases pending new crop arrival.

SG&A expenses increased by $6 million or 20% for the third quarter of 2013 compared to the third quarter of 2012, primarily due to a provision of $7 million for recoverable tax assets in a Brazilian state where we no longer have significant activities. Excluding this item, expenses benefited from the effect of the weaker Brazilian real on translated costs in Brazil.

Other income (expenses)-net was nil in the third quarter of 2013 compared to a loss of $1 million in the comparable period of 2012.

Segment EBIT in the third quarter of 2013 was $24 million compared to $30 million in the third quarter of 2012. Lower results in our Brazilian wheat milling and U.S. corn milling businesses were only partially offset by higher contributions from our Mexico wheat milling business and consistent performance by U.S. rice milling. Margins in Brazil were stronger than the same period of last year as a result of the tight South American supply, but results were reduced by a $7 million provision for recoverable taxes.

Fertilizer Segment - Fertilizer segment net sales decreased 7% to $138 million in the third quarter of 2013 when compared to $148 million in the third quarter of 2012 primarily due to lower volumes in Argentina as a result of reduced corn and wheat planting.


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Cost of goods sold for the third quarter of 2013 was 2% lower than the third quarter of 2012 and related primarily to the decline in volumes in Argentina.

Gross profit decreased to $18 million in the third quarter of 2013 from $26 million in the comparable period of 2012. The decrease in gross profit was primarily driven by lower margins, primarily in Argentina in the third quarter of 2013 which more than offset the impact of higher throughput volumes and improved margins in our Brazilian port operations.

SG&A was $8 million in the third quarter of 2013 and equal to the comparable period of 2012.

Foreign exchange gains were $3 million in the third quarter of 2013 compared to $1 million loss in the third quarter of 2012.

Other income (expenses)-net was income of $4 million in the third quarter of 2013 compared to income of $6 million in the third quarter of 2012.

Segment EBIT was $15 million compared to $22 million in the same period of 2012 driven by lower volumes in Argentina and related lower gross profit.

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

                      Three Months Ended
                        September 30,
(US$ in millions)      2013         2012
Interest income     $       27     $     5
Interest expense          (103 )       (77 )

Interest income increased when compared to the same period of 2012 as a result of higher average interest bearing cash balances, largely in Brazil. Interest expense also increased when compared to the same period last year primarily due to higher average local borrowings and borrowing rates.

Income Tax Expense - In the quarter ended September 30, 2013, income tax expense for continuing operations was $591 million compared to income tax expense of $82 million in the quarter ended September 30, 2012. Income tax expense for the third quarter of 2013 included $464 million related to the recording of a full valuation allowance for net deferred tax assets in our industrial sugar business in Brazil as a result of continuing cumulative net operating losses and $14 million related to a full valuation allowance for deferred tax assets in our agribusiness and edible oils operations in Romania.

Discontinued Operations - Discontinued operations results were income of $103 million, net of tax, in the third quarter of 2013 and $2 million in the comparable period of 2012. A pre-tax gain of $148 million ($112 million, net of tax) is included in net income from discontinued operations for the third quarter of 2013 related to the sale of our Brazilian fertilizer distribution business to Yara.

Net Income Attributable to Bunge - For the quarter ended September 30, 2013, net loss attributable to Bunge was $148 million compared with net income of $297 million in the quarter ended September 30, 2012. This decrease primarily resulted from the $464 million of income tax valuation allowances noted in Income Tax Expense above, partially offset by the net gain of $112 million on the sale of our Brazilian fertilizer distribution business included in Discontinued Operations.

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Agribusiness Segment - Agribusiness segment net sales increased 4% to $33 billion in the nine months ended September 30, 2013 compared to $32 billion in the nine months ended September 30, 2012. Volumes were flat compared to the same period last year. Price increases in the first half of the year account for essentially all of the increase and were partially offset by price declines in the third quarter of 2013 compared to the year-ago period. The third quarter . . .

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