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BG > SEC Filings for BG > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for BUNGE LTD

Form 10-K for BUNGE LTD


28-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following should be read in conjunction with "Cautionary Statement Regarding Forward Looking Statements" and our combined consolidated financial statements and notes thereto included in Item 15 of this Annual Report on Form 10-K.

Operating Results

Factors Affecting Operating Results

Bunge Limited, a Bermuda company, together with its subsidiaries, is a leading global agribusiness and food company operating in the farm-to-consumer food chain. The commodity nature of the Company's principal products, as well as regional and global supply and demand variations that occur as an inherent part of the business, make volumes an important operating measure. Accordingly, information is included in the table below that summarizes certain items in our consolidated statements of income and volumes by reportable segment. The unit of measure for all reported volumes is metric tons, a common unit of measure within our industry. A description of reported volumes for each reportable segment has also been included in the discussion of key factors affecting results of operations in each of our business segments as discussed below.

Agribusiness

In the agribusiness segment, we purchase, store, transport, process and sell agricultural commodities and commodity products. Profitability in this segment is affected by the availability and market prices of agricultural commodities and processed commodity products and the availability and costs of energy, transportation and logistics services. Profitability in our oilseed processing operations is also impacted by volumes procured, processed and sold and by capacity utilization rates. Availability of agricultural commodities is affected by many factors, including weather, farmer planting decisions, plant disease, governmental policies and agricultural sector economic conditions. Reported volumes in this segment primarily reflect (i) grains and oilseeds originated from farmers, cooperatives or other aggregators and from which "origination margins" are earned; (ii) oilseeds processed in our oilseed processing facilities and from which "crushing margins" are earned-representing the margin resulting from the industrial separation of the oilseed into its protein meal and vegetable oil components, both of which components are separate commodity products themselves; and (iii) third party sales of grains, oilseeds and related commodity products merchandised through our distribution businesses and from which "distribution margins" are earned. The foregoing sub-segment volumes may overlap as they produce separate margin capture opportunities. For example, oilseeds procured in our South American grain origination activities may be processed in our oilseed processing facilities in Asia and will be reflected at both points within the segment. As such, these reported volumes do not represent solely volumes of net sales to third parties, but rather where margin is earned, appropriately reflecting their contribution to our global network's capacity utilization and profitability.

Demand for our purchased and processed agribusiness products is affected by many factors, including global and regional economic conditions, changes in per capita incomes, the financial condition of customers and customer access to credit, worldwide consumption of food products, particularly pork and poultry, population growth rates, relative prices of substitute agricultural products, outbreaks of disease associated with livestock and poultry, and demand for renewable fuels produced from agricultural commodities and commodity products.

We expect that the factors described above will continue to affect global supply and demand for our agribusiness products for the foreseeable future. We also expect that, from time to time, imbalances will likely exist between oilseed processing capacity and demand for oilseed products in certain regions, which impacts our decisions regarding whether, when and where to purchase, store, transport, process


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or sell these commodities, including whether to change the location of or adjust our own oilseed processing capacity.

Sugar and Bioenergy

Our sugar and bioenergy segment is an integrated business which includes the procurement and growing of sugarcane and the production of sugar, ethanol and electricity in our eight mills in Brazil, five of which were acquired in February 2010 in the Moema acquisition, global sugar trading and merchandising activities and investment interest in certain corn-based ethanol producers.

Profitability in this segment is affected by the availability and quality of sugarcane, which impact our capacity utilization rates and the amount of sugar that can be extracted from the sugarcane, and by market prices of sugarcane, sugar and ethanol. Availability and quality of sugarcane is affected by many factors, including weather, geographical factors such as soil quality and topography, and agricultural practices. Once planted, sugarcane may be harvested for several continuous years, but the usable crop decreases with each subsequent harvest. As a result, the current optimum economic cycle is generally five or six consecutive harvests, depending on location. We own and/or have partnership agreements to manage farmland on which we grow and harvest sugarcane. We also purchase sugarcane from third parties. Prices of sugarcane in Brazil are established by Consecana, the São Paulo state sugarcane and sugar and ethanol council, and are based on the sucrose content of the cane and the market prices of sugar and ethanol. Demand for our products is affected by such factors as changes in global or regional economic conditions, the financial condition of customers and customer access to credit, worldwide consumption of food products, population growth rates, changes in per capita incomes and demand for and governmental support of renewable fuels produced from agricultural commodities, including sugarcane. We expect that these factors will continue to affect supply and demand for our sugar and bioenergy products in the foreseeable future. Reported volumes in this segment reflect third-party sales of sugar and ethanol.

Food and Ingredients

In the food and ingredients business, which consists of our edible oil products and milling products segments, our operating results are affected by changes in the prices of raw materials, such as crude vegetable oils and grains, the mix of products that we sell, changes in consumer eating habits, changes in per capita incomes, consumer purchasing power levels, availability of credit to customers, governmental dietary guidelines and policies, changes in regional economic conditions and the general competitive environment in our markets. Raw material inputs to our production processes in the edible oil products segment and the milling products segment are largely sourced at market prices from our agribusiness segment. Reported volumes in these segments reflect third-party sales of our finished products and, as such, include the sales of products derived from raw materials sourced from the agribusiness segment as well as from third parties. The unit of measure for these volumes is metric tons as these businesses are linked to the commodity raw materials which are their primary inputs.

Fertilizer

In the fertilizer segment, demand for our products is affected by the profitability of the agricultural sectors we serve, the availability of credit to farmers, agricultural commodity prices, the types of crops planted, the number of acres planted, the quality of the land under cultivation and weather-related issues affecting the success of the harvests. Our profitability is impacted by international selling prices for fertilizers and fertilizer raw materials, such as phosphate, sulfur, ammonia and urea, ocean freight rates and other import costs, as well as import volumes at the port facilities we manage in Brazil. As our operations are in South America, primarily Argentina, our results in this segment are typically seasonal, with fertilizer sales normally concentrated in the third and fourth quarters of the year due to


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the timing of the South American agricultural cycle. Reported volumes in this segment reflect third-party sales of our finished products.

In addition to these industry related factors which impact our business areas, our results of operations in all business areas and segments are affected by the following factors:

Foreign Currency Exchange Rates

Due to the global nature of our operations, our operating results can be materially impacted by foreign currency exchange rates. Both translation of our foreign subsidiaries' financial statements and foreign currency transactions can affect our results. On a monthly basis, for subsidiaries whose functional currency is their local currency, subsidiary statements of income and cash flows must be translated into U.S. dollars for consolidation purposes based on weighted-average exchange rates in each monthly period. As a result, fluctuations of local currencies compared to the U.S. dollar during each monthly period impact our consolidated statements of income and cash flows for each reported period (quarter and year-to-date) and also affect comparisons between those reported periods. Subsidiary balance sheets are translated using exchange rates as of the balance sheet date with the resulting translation adjustments reported in our consolidated balance sheets as a component of other comprehensive income (loss). Included in accumulated other comprehensive income for the years ended December 31, 2013, 2012, and 2011 were foreign exchange net translation gains (losses) of $(1,221) million, $(805) million, and $(1,130) million, respectively, resulting from the translation of our foreign subsidiaries' assets and liabilities.

Additionally, we record transaction gains or losses on monetary assets and liabilities that are not denominated in the functional currency of the entity. These amounts are remeasured into their respective functional currencies at exchange rates as of the balance sheet date, with the resulting gains or losses included in the entity's statement of income and, therefore, in our consolidated statements of income as foreign exchange gains (losses).

We primarily use a combination of equity and intercompany loans to finance our subsidiaries. Intercompany loans that are of a long-term investment nature with no intention of repayment in the foreseeable future are considered permanently invested and as such are treated as analogous to equity for accounting purposes. As a result, any foreign exchange translation gains or losses on such permanently invested intercompany loans are reported in accumulated other comprehensive income (loss) in our consolidated balance sheets. In contrast, foreign exchange translation gains or losses on intercompany loans that are not of a permanent nature are recorded in our consolidated statements of income as foreign exchange gains (losses).

Income Taxes

As a Bermuda exempted company, we are not subject to income taxes on income in our jurisdiction of incorporation. However, our subsidiaries, which operate in multiple tax jurisdictions, are subject to income taxes at various statutory rates ranging from 0% to 39%. The jurisdictions that most significantly impact our effective tax rate are Brazil, the United States and Argentina.
Determination of taxable income requires the interpretation of related and often complex tax laws and regulations in each jurisdiction where we operate and the use of estimates and assumptions regarding future events.

Results of Operations

2013 Overview

Net income attributable to Bunge for 2013 was $306 million compared to $64 million for 2012. Net income for 2013 includes significant tax charges of $512 million for income tax valuation allowances, primarily in the sugar and bioenergy segment from management's evaluation of its net deferred tax


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assets, primarily net operating loss (NOL) carryforwards, $46 million as a result of new legal precedents that impacted our assessment of an uncertain income tax position in Brazil and provisions related to tax years 2008 through 2010, and $4 million related to the finalization of a European tax audit. Net income for 2013 also includes a $112 million after-tax gain on the sale of our fertilizer distribution business in Brazil to Yara International for cash of $750 million. Net income for 2012 includes a goodwill impairment charge of $327 million (after tax and noncontrolling interest share) in the sugar and bioenergy segment, an after-tax gain of $54 million on the sale of our investment in The Solae Company and an after-tax loss of $342 million associated with discontinued fertilizer operations held for sale at December 31, 2012. This 2012 loss in discontinued operations includes a $266 million valuation allowance for certain tax assets that were no longer expected to be recoverable as a result of the planned sale of the fertilizer business.

Total segment EBIT of $1,329 million in 2013 increased from $628 million in 2012. EBIT for 2012 was reduced by $496 million from the impairment of goodwill (net of $18 million attributable to noncontrolling interest), and $49 million impairments of equity investments and related affiliate loans, both in our sugar and bioenergy segment, which were partially offset by a $85 million gain in our agribusiness segment from the sale of our interest in The Solae Company and a $36 million gain from the acquisition of a controlling interest in a North American wheat milling business.

Agribusiness segment EBIT of $1,032 million for the year 2013 was $15 million below 2012 segment EBIT of $1,047 million. The first six months of 2013 showed a market suffering from effects of the 2012 droughts in the U.S. and Black Sea region. This was followed by a transition in the third quarter as the market moved from a deficit position to a surplus with very strong South American crops followed by stronger production in the northern hemisphere at the end of the year. Volumes in the segment increased 3% from 2012 to 2013, while gross profit was essentially flat. Higher volume was largely offset by increased logistics costs, primarily in Brazil which experienced a challenging environment due to the combination of its record crops and changes in the country's trucking policies. Despite these challenges, results in our Brazilian agribusiness operations were a record in 2013, as were our soybean processing results in the U.S. and China. The larger crops also benefitted our soybean processing operations in Spain and our European distribution business, particularly to the Middle East. Softseed margins also recovered in the second half of 2013 with the arrival of new crops, boosting results in our European operations. Offsetting these improved results were weaker results in grain origination in Argentina, North America and Europe and lower oilseed trading and distribution results in Asia.

Sugar and bioenergy segment EBIT was a loss of $60 million compared to a much larger loss of $637 million in 2012, which included a goodwill impairment charge of $496 million and impairment charges of $39 million related to the write-down of an equity investment in a North American corn ethanol joint venture and a loan to the joint venture. EBIT for 2013 was impacted by $28 million of impairment and restructuring charges as we incurred charges in our efforts to reduce future costs, buying out of some equipment leases and reducing personnel. Overall, our normalized results improved year-over-year with stronger trading and merchandising results and better results in our U.S. ethanol joint ventures only partially offset by a lower contribution from our industrial operations, mainly as a result of lower sugar prices, lower sucrose content in the cane (ATR) and lower sales volumes.

In our food and ingredients businesses, edible oil products EBIT increased to $163 million in 2013 from $80 million in 2012 driven by higher results in all of our operating regions with particular improvements in our Brazilian business led by higher results in margarine. In 2012, our Brazilian business struggled through challenges associated with an ERP system implementation. Our North American operations reported lower volumes, but good margins on improved product
mix. Our European operations benefitted primarily from increased volumes, and our Asia operations improved on lower raw material costs and higher volumes. Milling products segment EBIT increased to $125 million from $115 million in 2012 which included a $36 million gain on the acquisition of a


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controlling interest in a North American wheat milling business. Excluding this gain, results of milling activities in all regions improved over last year with the largest improvement in Brazilian wheat milling, which benefitted from well-executed wheat import programs from North America, which replaced wheat volumes from Argentina. U.S. corn milling results also increased over last year as a result of higher corn milling yields.

Fertilizer segment EBIT increased to $69 million in 2013 compared to $23 million in 2012 driven by strong results in our Brazilian fertilizer port operations. This was partially offset by lower results in our operations in Argentina as corn and wheat planting areas were reduced by drought. Results in 2013 included a gain of $32 million related to the sale of Bunge's rights to certain legal claims.

Segment Results

Bunge has five reportable segments-agribusiness, sugar and bioenergy, edible oil products, milling products and fertilizer-which are organized based upon similar economic characteristics and are similar in nature of products and services offered, the nature of production processes, the type and class of customer and distribution methods. The agribusiness segment is characterized by both inputs and outputs being agricultural commodities and thus high volume and low margin. The sugar and bioenergy segment involves sugarcane growing and milling in Brazil, sugar and ethanol trading and merchandising in various countries, as well as sugarcane-based ethanol production and corn-based ethanol investments and related activities. The edible oil products segment involves the manufacturing and marketing of products derived from vegetable oils. The milling products segment involves the manufacturing and marketing of products derived primarily from wheat and corn. Following the completion of the sale of Bunge's Brazilian fertilizer nutrients assets in May 2010, the sale of the Brazilian fertilizer blending and distribution and North American fertilizer businesses which were presented as discontinued operations (see Note 3), and the sale of Bunge's 50% ownership interest in its joint venture in Morocco, the activities of the fertilizer segment include its port operations in Brazil and its operations in Argentina.


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

                                                       Year Ended December 31,
    (US$ in millions)                               2013        2012        2011
    Volume (in thousands of metric tons):
    Agribusiness                                    137,405     132,760     117,155
    Sugar and Bioenergy                              10,316       8,587       8,238
    Edible Oil Products                               6,972       6,654       5,989
    Milling Products                                  4,034       4,262       4,617
    Fertilizer                                          958         986       1,141
    Net sales:
    Agribusiness                                  $  45,507   $  44,561   $  38,844
    Sugar and Bioenergy                               4,215       4,659       5,842
    Edible Oil Products                               9,165       9,472       8,839
    Milling Products                                  2,012       1,833       2,006
    Fertilizer                                          448         466         566


    Total                                         $  61,347   $  60,991   $  56,097




    Cost of goods sold:
    Agribusiness                                  $ (43,710 ) $ (42,775 ) $ (37,157 )
    Sugar and Bioenergy                              (4,123 )    (4,595 )    (5,693 )
    Edible Oil Products                              (8,625 )    (9,026 )    (8,377 )
    Milling Products                                 (1,750 )    (1,632 )    (1,772 )
    Fertilizer                                         (379 )      (390 )      (471 )


    Total                                         $ (58,587 ) $ (58,418 ) $ (53,470 )




    Gross profit:
    Agribusiness                                  $   1,797   $   1,786   $   1,687
    Sugar and Bioenergy                                  92          64         149
    Edible Oil Products                                 540         446         462
    Milling Products                                    262         201         234
    Fertilizer                                           69          76          95


    Total                                         $   2,760   $   2,573   $   2,627

Selling, general & administrative expenses:

    Agribusiness                                  $    (836 ) $    (858 ) $    (774 )
    Sugar and Bioenergy                                (166 )      (194 )      (167 )
    Edible Oil Products                                (384 )      (353 )      (325 )
    Milling Products                                   (139 )      (123 )      (132 )
    Fertilizer                                          (34 )       (35 )       (38 )


    Total                                         $  (1,559 ) $  (1,563 ) $  (1,436 )




    Foreign exchange gain (loss):
    Agribusiness                                  $      41   $     111   $     (16 )
    Sugar and Bioenergy                                   3         (15 )        (4 )
    Edible Oil Products                                   5          (8 )         3
    Milling Products                                     (1 )         1           -
    Fertilizer                                            5          (1 )         1


    Total                                         $      53   $      88   $     (16 )


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                                                             Year Ended December 31,
(US$ in millions)                                           2013        2012      2011
Noncontrolling interests:
Agribusiness                                              $      31    $    (9 ) $   (18 )
Sugar and Bioenergy                                               9         25        (2 )
Edible Oil Products                                              (7 )        2        (6 )
Milling Products                                                  -          -         -
Fertilizer                                                       (5 )       (3 )      (4 )


Total                                                     $      28    $    15   $   (30 )




Other income (expense):
Agribusiness                                              $      (2 )  $   (68 ) $   (11 )
Sugar and Bioenergy                                               2         (3 )       4
Edible Oil Products                                              10         (7 )       3
Milling Products                                                  3          -         2
Fertilizer                                                       34        (14 )       9


Total                                                     $      47    $   (92 ) $     7




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




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




Loss on impairment of sugar and bioenergy goodwill        $       -    $  (514 ) $     -




Segment earnings before interest and tax(1)
Agribusiness                                              $   1,032    $ 1,047   $   905
Sugar and Bioenergy                                             (60 )     (637 )     (20 )
Edible Oil Products                                             163         80       137
Milling Products                                                125        115       104
Fertilizer                                                       69         23        63


Total                                                     $   1,329    $   628   $ 1,189

Depreciation, depletion and amortization:

Agribusiness                                              $    (240 )  $  (221 ) $  (184 )
Sugar and Bioenergy                                            (184 )     (175 )    (171 )
Edible Oil Products                                             (99 )      (93 )     (87 )
Milling Products                                                (28 )      (30 )     (27 )
Fertilizer                                                      (17 )      (18 )     (24 )


Total                                                     $    (568 )  $  (537 ) $  (493 )

Net income attributable to Bunge $ 306 $ 64 $ 942


º (1)
º Total segment earnings before interest and tax (EBIT) is an operating performance measure used by Bunge's management to evaluate its segments' operating activities. Total segment EBIT is a non-GAAP financial measure and is not intended to replace net income attributable to Bunge, the most directly comparable U.S. GAAP financial measure. Bunge's management believes segment EBIT is a useful measure of its segments' 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 attributable to Bunge or any other measure of consolidated operating results under U.S. GAAP.


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

                                                             Year Ended December 31,
(US$ in millions)                                            2013        2012     2011
Total segment earnings from continuing operations
before interest and tax                                   $    1,329    $  628   $ 1,189
Interest income                                                   76        53        96
. . .
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