FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
May 10, 2004
Commission File Number 001-16625
BUNGE LIMITED
(Translation of registrant's name into English)
50 Main Street
White Plains, New York 10606
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F:
Form 20-F /X/ Form 40-F / /
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1):
Indicate by check mark if the registrant is submitting the Form
6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
Indicate by check mark whether by furnishing the information contained in
this Form the registrant is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes / / No /X/
If "Yes" is marked, indicate below the file number assigned to the
registrant with Rule 12g3-2(b): 82-
This report on Form 6-K shall be incorporated by reference into the
Registration Statements of Bunge Limited on Form F-3 (Registration Nos.
333-104974, 333-106182, 333-107376, 333-108441-01, 333-109309,
333-110904, 333-113194-01 and 333-114973), as amended, filed under the
Securities Act of 1933, as amended; the Registration Statement of Bunge
Limited on Form F-4 (Registration Statement No. 333-113786), as amended,
filed under the Securities Act of 1933, as amended; the Registration
Statements of Bunge Limited on Form S-8 (Registration Nos. 333-66594,
333-75762, 333-76938 and 333-109446) filed under the Securities Act of
1933, as amended; the Registration Statements of Bunge Limited Finance
Corp. on Form F-3 (Registration Nos. 333-104974-01, 333-106182-01,
333-107376-01, 333-108441, 333-109309-01, 333-110904-01, 333-113194 and
333-114973-01), as amended, filed under the Securities Act of 1933, as
amended; and the Registration Statement of Bunge Limited Finance Corp. on
Form F-4 (Registration Statement No. 333-113786-01), as amended, filed
under the Securities Act of 1933, as amended; to the extent not
superseded by documents or reports subsequently filed under the
Securities Act of 1933 or the Securities Exchange Act of 1934, as
amended.
BUNGE LIMITED
INDEX TO FORM 6-K
Page
----
FINANCIAL STATEMENTS 2
Consolidated Interim Statements of Income for the Three Months Ended
March 31, 2004 and 2003 2
Consolidated Balance Sheets at March 31, 2004 and December 31, 2003 3
Consolidated Interim Statements of Cash Flows for the Three Months Ended
March 31, 2004 and 2003 4
Notes to Consolidated Interim Financial Statements 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 17
Disclosure Regarding Forward-Looking Information 17
Events Affecting Operating Results 17
Results of Operations 18
Liquidity and Capital Resources 22
Recent Developments 25
Dividends 25
Critical Accounting Policies 26
Recent Accounting Pronouncements 26
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26
OTHER INFORMATION 28
EXHIBIT INDEX 30
1
FINANCIAL STATEMENTS
BUNGE LIMITED AND SUBSIDIARIES
CONSOLIDATED INTERIM STATEMENTS OF INCOME
(UNITED STATES DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
-------- --------
(UNAUDITED)
Net sales ...................................................................... $ 5,739 $ 4,842
Cost of goods sold ............................................................. (5,374) (4,569)
-------- --------
GROSS PROFIT ................................................................... 365 273
Selling, general and administrative expenses ................................... (178) (149)
Interest income ................................................................ 16 20
Interest expense ............................................................... (52) (54)
Foreign exchange gains (losses) ................................................ (16) 7
Other income (expense)-net ..................................................... 11 1
-------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX AND MINORITY INTEREST....... 146 98
Income tax expense ............................................................. (58) (37)
-------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST ..................... 88 61
Minority interest .............................................................. (18) (20)
-------- --------
INCOME FROM CONTINUING OPERATIONS .............................................. 70 41
Discontinued operations ........................................................ - (1)
-------- --------
NET INCOME ..................................................................... $ 70 $ 40
======== ========
EARNINGS PER COMMON SHARE - BASIC (NOTE 14):
Income from continuing operations .............................................. $ .70 $ .41
Discontinued operations ........................................................ - (.01)
-------- --------
Net income per share ........................................................... $ .70 $ .40
======== ========
EARNINGS PER COMMON SHARE - DILUTED (NOTE 14):
Income from continuing operations .............................................. $ .65 $ .41
Discontinued operations ........................................................ - (.01)
-------- --------
Net income per share ........................................................... $ .65 $ .40
======== ========
The accompanying notes are an integral part of these consolidated interim
financial statements.
2
BUNGE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNITED STATES DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2004 2003
-------- --------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 523 $ 489
Trade accounts receivable (less allowance of $98 and $100) .................. 1,587 1,495
Inventories (Note 3) ........................................................ 3,950 2,867
Deferred income taxes ....................................................... 83 93
Other current assets (Note 5) ............................................... 1,636 1,474
-------- --------
Total current assets ........................................................... 7,779 6,418
-------- --------
Property, plant and equipment, net ............................................. 2,066 2,090
Goodwill (Note 6) .............................................................. 145 148
Other intangible assets ........................................................ 103 92
Investments in affiliates ...................................................... 536 537
Deferred income taxes .......................................................... 232 233
Other non-current assets ....................................................... 364 366
-------- --------
TOTAL ASSETS ................................................................... $ 11,225 $ 9,884
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt ............................................................. $ 1,553 $ 889
Current portion of long-term debt ........................................... 331 128
Trade accounts payable ...................................................... 1,946 1,678
Deferred income taxes ....................................................... 54 42
Other current liabilities (Note 7) .......................................... 1,410 1,200
-------- --------
Total current liabilities ...................................................... 5,294 3,937
-------- --------
Long-term debt ................................................................. 2,331 2,377
Deferred income taxes .......................................................... 191 206
Other non-current liabilities (Note 10) ......................................... 417 433
Commitments and contingencies (Note 10)
Minority interest in subsidiaries .............................................. 564 554
Shareholders' equity:
Common shares, par value $.01; authorized - 240,000,000 shares; issued and
outstanding: 2004 - 100,203,786 shares, 2003 - 99,908,318 shares ............ 1 1
Additional paid-in capital .................................................. 2,017 2,010
Retained earnings ........................................................... 1,081 1,022
Accumulated other comprehensive loss ........................................ (671) (656)
-------- --------
Total shareholders' equity ..................................................... 2,428 2,377
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................................... $ 11,225 $ 9,884
======== ========
The accompanying notes are an integral part of these consolidated interim
financial statements.
3
BUNGE LIMITED AND SUBSIDIARIES
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(UNITED STATES DOLLARS IN MILLIONS)
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
-------- --------
(UNAUDITED)
OPERATING ACTIVITIES
Net income ..................................................................... $ 70 $ 40
Adjustments to reconcile net income to cash used for operating activities:
Foreign exchange (gain) loss on debt ...................................... 6 (48)
Bad debt expense .......................................................... 2 3
Depreciation, depletion and amortization .................................. 51 49
Deferred income taxes ..................................................... 10 (28)
Minority interest ......................................................... 18 20
Changes in operating assets and liabilities, excluding the effects of
acquisitions:
Trade accounts receivable .............................................. (96) (91)
Inventories ............................................................ (1,105) (46)
Recoverable taxes ...................................................... (27) 1
Trade accounts payable ................................................. 260 (59)
Other - net ............................................................ 91 156
-------- --------
Cash used for operating activities .................................. (720) (3)
-------- --------
INVESTING ACTIVITIES
Payments made for capital expenditures ......................................... (52) (53)
Business acquisitions, net of cash acquired .................................... (3) (5)
Proceeds from disposal of property, plant and equipment ........................ 8 9
-------- --------
Cash used for investing activities .................................. (47) (49)
-------- --------
FINANCING ACTIVITIES
Net change in short-term debt .................................................. 655 (51)
Proceeds from long-term debt ................................................... 315 99
Repayment of long-term debt .................................................... (160) (53)
Proceeds from sale of common shares ............................................ 5 6
Dividends paid to shareholders ................................................. (11) (10)
Dividends paid to minority interest ............................................ (1) (31)
-------- --------
Cash provided by (used for) financing activities .................... 803 (40)
Effect of exchange rate changes on cash and cash equivalents ................... (2) 18
-------- --------
Net increase (decrease) in cash and cash equivalents ........................... 34 (74)
Cash and cash equivalents, beginning of period ................................. 489 470
-------- --------
Cash and cash equivalents, end of period ....................................... $ 523 $ 396
======== ========
The accompanying notes are an integral part of these consolidated interim
financial statements.
4
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated interim financial
statements of Bunge Limited and its subsidiaries (Bunge) have been
prepared in accordance with United States of America generally accepted
accounting principles (U.S. GAAP) for interim financial information and
with reference to the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by U.S. GAAP for complete financial statements. In
the opinion of management, all adjustments necessary for a fair
presentation have been included. The consolidated balance sheet at
December 31, 2003 has been derived from Bunge's audited financial
statements at that date. Operating results for the three months ended
March 31, 2004 are not necessarily indicative of the results to be
expected for the year ending December 31, 2004. The financial statements
should be read in conjunction with the audited consolidated financial
statements and notes thereto for the year ended December 31, 2003
included in Bunge's 2003 Annual Report on Form 20-F filed with the
Securities and Exchange Commission.
Reclassifications - Certain reclassifications were made to the
consolidated financial statements to conform to the current period
presentation.
2. NEW ACCOUNTING STANDARDS
In March 2004, the Financial Accounting Standards Board (FASB)
Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No.
04-2 (Issue No. 04-2), WHETHER MINERAL RIGHTS ARE TANGIBLE OR INTANGIBLE
ASSETS, that mineral rights, as defined in Issue No. 04-2, are tangible
assets. There is an inconsistency between this consensus that mineral
rights are tangible assets and the characterization of mineral rights as
intangible assets in Statement of Financial Accounting Standards (SFAS)
No. 141 and No. 142. In April 2004, the FASB issued proposed Staff
Position (FSP) No. FAS 141-a and 142-a, INTERACTION OF FASB STATEMENTS
NO. 141, BUSINESS COMBINATIONS AND NO. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS AND EITF ISSUE NO. 04-2, WHETHER MINERAL RIGHTS ARE TANGIBLE OR
INTANGIBLE ASSETS to eliminate the inconsistency between EITF Issue No.
04-2 and SFAS No. 141 and No. 142. The guidance in this FSP would be
effective for the first reporting period beginning after the date that
this FSP is finalized. Early application of this guidance is permitted in
periods for which financial statements have not yet been issued. Bunge
has applied the EITF and the proposed FSP to its consolidated balance
sheet at March 31, 2004 and has reclassified the prior period
consolidated balance sheet to conform to this presentation.
In January 2004, the FASB issued Staff Position (FSP) No. FAS
106-1, ACCOUNTING AND DISCLOSURE REQUIREMENTS RELATED TO THE MEDICARE
PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF 2003. The act,
signed into law in December 2003, introduces a prescription drug benefit
under Medicare as well as a federal subsidy, under certain conditions, to
sponsors of retiree health care benefit plans. Presently, authoritative
guidance on the accounting for this subsidy has not been issued. Bunge
has elected a one-time deferral of the accounting for the effects of the
act, as permitted by this FSP. This deferral continues to apply until
authoritative guidance on the accounting for the federal subsidy is
issued, and when issued Bunge may need to reclassify previously reported
information.
In December 2003, FASB issued revised SFAS No. 132, EMPLOYERS'
DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. This
revision of SFAS No. 132 does not change the measurement or recognition
of those plans required by SFAS No. 87, EMPLOYERS' ACCOUNTING FOR
PENSIONS, PENSION PLANS AND TERMINATION BENEFITS, and SFAS No. 106,
EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS.
This statement retains the disclosure requirements of SFAS No. 132, which
it replaces. It
5
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
2. NEW ACCOUNTING STANDARDS (CONTINUED)
requires additional disclosures to those in the original SFAS No. 132
about plan assets, investment strategy, measurement dates, plan
obligations, cash flows of defined benefit pension plans and other
defined benefit postretirement plans. Also required for interim reporting
will be the components of periodic benefit cost recognized during the
interim period. Bunge has complied with the disclosure requirements of
the revised SFAS No. 132.
3. INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
(US$ IN MILLIONS) 2004 2003
----------------- ------------- ------------
(UNAUDITED)
Agribusiness - Readily marketable inventories at market value (1)..... $2,879 $1,868
Fertilizer............................................................ 481 316
Edible oils........................................................... 267 308
Milling............................................................... 74 68
Other (2)............................................................. 249 307
------------- ------------
Total................................................................. $3,950 $2,867
============= ============
----------
(1) Readily marketable inventories are agricultural commodities
inventories that are readily convertible to cash because of their
commodity characteristics, widely available markets and international
pricing mechanisms.
(2) Other consists of agribusiness inventories carried at lower of cost
or market.
4. BUSINESS COMBINATIONS AND ALLIANCES
J. MACEDO EXCHANGE TRANSACTION - In the quarter ended March 31,
2004, Bunge completed an exchange transaction with J. Macedo, whereby
Bunge exchanged its Brazilian domestic retail flour assets for J.
Macedo's industrial flour assets and approximately $7 million in cash.
The assets exchanged were comprised primarily of brands. Bunge recognized
a pre-tax gain of $5 million as a result of this transaction, which is
included in other income (expense)-net in the consolidated statement of
income.
ACQUISITION RESTRUCTURING - In connection with the Cereol
acquisition, Bunge has accrued termination benefits and facility related
realignment obligations as part of its integration plan (the "Plan"). The
Plan is designed to streamline personnel and realign facilities acquired
from Cereol. These obligations, which totaled $35 million, have been
accrued as part of the purchase price and are included in other current
liabilities on the consolidated balance sheet. Bunge's integration
process and the Plan regarding this acquisition, which included an
evaluation of these issues was finalized in 2003. Of the obligations
accrued, $29 million relate to employee termination and $6 million relate
to facility realignment. The following table summarizes activity related
to the Plan:
6
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
4. BUSINESS COMBINATIONS AND ALLIANCES (CONTINUED)
EMPLOYEE FACILITY
TERMINATION REALIGNMENT
(US$ IN MILLIONS) OBLIGATIONS OBLIGATIONS TOTAL
----------------- ---------------- ---------------- -----------
Balance, December 31, 2003.......................... $ 20 $ 4 $ 24
Amount paid......................................... (5) (1) (6)
---------------- ---------------- -----------
Balance, March 31, 2004............................. $ 15 $ 3 $ 18
================ ================ ===========
Payments related to employee termination and facility realignment
obligations are expected to be substantially completed in 2004. The Plan
is expected to be funded by cash flows from operations. No significant
unresolved issues exist related to the Plan. Any adjustments to the Plan
will be reported as an adjustment to net income.
5. OTHER CURRENT ASSETS
Other current assets consist of the following:
MARCH 31, DECEMBER 31,
(US$ IN MILLIONS) 2004 2003
----------------- ----------------- ----------------
(UNAUDITED)
Prepaid commodity purchase contracts.............................. $ 8 $ 247
Secured advances to suppliers..................................... 288 280
Unrealized gain on derivative contracts........................... 720 418
Recoverable taxes................................................. 106 70
Marketable securities............................................. 13 13
Other............................................................. 501 446
----------------- ----------------
Total............................................................. $1,636 $1,474
================= ================
6. GOODWILL
At March 31, 2004, the changes in the carrying value of goodwill
by segment are as follows:
EDIBLE OIL MILLING
(US$ IN MILLIONS) AGRIBUSINESS PRODUCTS PRODUCTS UNALLOCATED TOTAL
----------------- ---------------- -------------- -------------- -------------- ----------
Balance, December 31, 2003................ $138 $5 $5 $- $148
Tax benefit on goodwill amortization (1).. (3) - - - (3)
---------------- ------------- -------------- -------------- -----------
Balance, March 31, 2004................... $135 $5 $5 $- $145
================ ============= ============== ============== ==========
----------------------
(1) Bunge's Brazilian subsidiary's tax deductible goodwill is
in excess of its book goodwill. For financial reporting purposes,
the tax benefits attributable to the excess tax goodwill are first
used to reduce goodwill and then intangible assets to zero, prior
to recognizing any income tax benefit in the statement of income.
7
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
7. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
MARCH 31, DECEMBER 31,
(US$ IN MILLIONS) 2004 2003
----------------- ------------------ ------------------
(UNAUDITED)
Accrued liabilities............................................... $ 598 $ 608
Unrealized loss on derivative contracts........................... 511 336
Advances on sales................................................. 165 146
Other............................................................. 136 110
------------------ ------------------
Total............................................................. $1,410 $1,200
================== ==================
8. RELATED PARTY TRANSACTIONS
Bunge sells soybean meal and fertilizer products to Seara
Alimentos S.A., a subsidiary of Mutual Investment Limited, engaged in the
business of meat and poultry production. These sales were $2 million for
both the three months ended March 31, 2004 and 2003, respectively.
In addition, Bunge sold soybeans and related soybean products to
Solae, which totaled $6 million for the three months ended March 31,
2004. Bunge also purchased soybean meal and soybean oil from Solae, which
totaled $45 million for the three months ended March 31, 2004. Bunge
believes these transactions are recorded at values similar to those with
third parties.
9. EMPLOYEE BENEFIT PLANS
PENSION BENEFITS POSTRETIREMENT BENEFITS
THREE MONTHS ENDED MARCH 31, THREE MONTHS ENDED MARCH 31,
----------------------------- ----------------------------
(US$ IN MILLIONS) 2004 2003 2004 2003
----------------- --------------- ------------ ------------- -------------
(UNAUDITED)
Service cost................................... $2 $2 $- $-
Interest cost.................................. 4 4 - 1
Expected return on plan assets................. (4) (4) - -
Recognized net (gain) loss..................... 1 - - -
--------------- ------------ ------------- -------------
Net periodic benefit cost...................... $3 $2 $- $1
=============== ============ ============= =============
Bunge disclosed in its consolidated financial statements for the
year ended December 31, 2003, that it expected to contribute $9 million
to its defined pension plans and $2 million to its postretirement benefit
plans during 2004. Of these amounts, as of March 31, 2004, no
contributions were made to the defined pension plans and approximately
$300,000 was paid to the postretirement benefit plans for the 2004 plan
year. As of March 31, 2004, Bunge made contributions to the defined
pension plans totaling $1 million, which related to the 2003 plan year.
In addition, Bunge disclosed in its consolidated financial statements for
the year ended December 31, 2003, that it expected to contribute $6
million to a non-qualified plan for a lump-sum distribution from this
plan in 2004. As of March 31, 2004, Bunge has made the $6 million
contribution and distribution from this plan.
8
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES
Bunge is party to a number of claims and lawsuits, primarily tax
and labor claims in Brazil, arising out of the normal course of business.
After taking into account liabilities recorded for all of the foregoing
matters, management believes that the ultimate resolution of such matters
will not have a material adverse effect on Bunge's financial condition,
results of operations or liquidity. Included in other non-current
liabilities as of March 31, 2004 and December 31, 2003 are the following
accrued liabilities:
MARCH 31, DECEMBER 31,
(US$ IN MILLIONS) 2004 2003
----------------- ----------------- -----------------
(UNAUDITED)
Tax claims............................................... $116 $112
Labor claims............................................. 80 79
Civil and other.......................................... 64 67
----------------- -----------------
Total.................................................... $260 $258
================= =================
TAX CLAIMS - The tax claims relate principally to claims against
Bunge's Brazilian subsidiaries, including income tax claims, value added
tax claims (ICMS and IPI) and sales tax claims (PIS and COFINS). The
determination of the manner in which various Brazilian federal, state and
municipal taxes apply to Bunge's operations is subject to varying
interpretations arising from the complex nature of Brazilian tax law as
well as changes in tax laws introduced by the PLANO REAL in 1993 and the
1988 Brazilian constitution.
LABOR CLAIMS - The labor claims relate principally to labor claims
against Bunge's Brazilian subsidiaries. Court rulings under Brazilian
laws have historically been in favor of the employee-plaintiff. The labor
claims primarily relate to dismissals, severance, health and safety,
salary adjustments and supplementary retirement benefits.
CIVIL AND OTHER - The civil and other claims relate to various
disputes with suppliers and customers.
OLEINA HOLDING ARBITRATION - Bunge is involved in arbitration with
Cereol's former joint venture partner over the final purchase price of
Oleina Holding and related issues. Cereol purchased the 49% of Oleina it
did not already own from its joint venture partner for $27 million in
February 2002. In April 2004, Bunge was notified that the arbitration
tribunal had determined the purchase price to be approximately $73
million plus interest of approximately $5 million. Subsequently, Cereol's
former joint venture partner submitted a request for rectification to
increase the purchase price to approximately $108 million. Bunge is
currently reviewing the decision of the arbitration tribunal and
analyzing its alternatives with respect to this decision. Bunge is
entitled to be indemnified by Edison S.p.A., from whom it purchased
Cereol in October 2002, for any portion of the final purchase price which
exceeds $39 million. As of March 31, 2004, Bunge has recorded an
obligation of $39 million to Cereol's joint venture partner and a
receivable in the same amount from Edison relating to its indemnity.
Edison has informed us that it is currently evaluating whether the
conditions precedent to this indemnification have been satisfied. Bunge
has assessed the collectibility of this receivable under the terms of its
agreement whith Edison and believes this amount is fully collectible
under the agreement.
ANTITRUST APPROVAL OF MANAH ACQUISITION - In April 2000, Bunge
acquired Manah S.A., a Brazilian fertilizer company that had an indirect
participation in Fosfertil. Fosfertil is the main Brazilian producer of
phosphate used to produce NPK fertilizers. This acquisition was approved
by the Brazilian antitrust commission in February 2004. The approval was
conditioned on the formalization of an operational agreement between
Bunge and the antitrust commission relating to the maintenance of
existing competitive conditions in the fertilizer market. Although the
terms of the operational agreement have not
9
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
been finalized, Bunge does not expect them to have a material adverse
impact on its business or financial results.
GUARANTEES - Bunge has issued or was a party to the following
guarantees at March 31, 2004:
MAXIMUM POTENTIAL
(US$ IN MILLIONS) FUTURE PAYMENTS
----------------- ---------------------
Operating lease residual values............................... $ 69
Unconsolidated affiliates financing........................... 17
Customer financing............................................ 94
---------------------
Total......................................................... $ 180
=====================
Prior to January 1, 2003, Bunge entered into synthetic lease
agreements for barges and railcars originally owned by Bunge and
subsequently sold to third parties. The leases are classified as
operating leases in accordance with SFAS No. 13, ACCOUNTING FOR LEASES.
Any gains on the sales have been deferred and are being recognized
ratably over the related lease terms. Bunge has the option under each
lease to purchase the barges or railcars at fixed amounts based on
estimated fair values or to sell the assets. If Bunge elects to sell, it
will receive proceeds up to fixed amounts specified in the agreements. If
the proceeds of such sales are less than the specified fixed amounts,
Bunge would be obligated under a guarantee to pay supplemental rent for
the deficiency in proceeds. The operating leases expire through 2007.
There are no recourse provisions or collateral that would enable Bunge to
recover any amounts paid under this guarantee.
Prior to January 1, 2003, Bunge issued a guarantee to a financial
institution related to debt of its joint ventures in Argentina, its
unconsolidated affiliates. The term of the guarantee is equal to the term
of the related financing, which matures in 2009. There are no recourse
provisions or collateral that would enable Bunge to recover any amounts
paid under this guarantee.
Bunge issued guarantees to a financial institution in Brazil
related to amounts owed the institution by certain of its customers. The
terms of the guarantees are equal to the terms of the related financing
arrangements, which can be as short as 120 days or as long as 360 days.
In the event that the customers default on their payments to the
institutions and Bunge would be required to perform under the guarantees,
Bunge has obtained collateral from the customers. At March 31, 2004, $35
million of these financing arrangements were collateralized by tangible
property. Bunge has determined the fair value of these guarantees to be
immaterial at March 31, 2004.
Bunge has provided parent level guarantees of the indebtedness
outstanding under certain senior credit facilities and senior notes,
which were entered into by its wholly owned subsidiaries. The debt under
these guarantees had a carrying amount of $3,008 million at March 31,
2004. Debt related to these guarantees is included in the consolidated
balance sheet at March 31, 2004. There are no significant restrictions on
the ability of any Bunge subsidiary to transfer funds to Bunge.
In addition, certain of Bunge's subsidiaries have provided
guarantees of indebtedness of certain of their subsidiaries under certain
lines of credit with various institutions. The total borrowing capacity
under these lines of credit guarantees is $267 million.
10
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
11. COMPREHENSIVE INCOME (LOSS)
The following table summarizes the components of comprehensive
income (loss):
THREE MONTHS ENDED
MARCH 31,
---------------------------------
(US$ IN MILLIONS) 2004 2003
----------------- --------------- ---------------
(UNAUDITED)
Net income......................................................... $ 70 $ 40
Other comprehensive income (loss):
Foreign exchange translation adjustment, net of tax expense of
$0 (2004), $(8) (2003)......................................... (27) 104
Unrealized gains (losses) on commodity futures, net of tax
(expense) benefit of $(2) (2004), $1 (2003).................... 4 (2)
Reclassification of realized (gains) losses to net income, net
of tax (expense) benefit of $4 (2004), $(2)(2003).............. 8 (3)
--------------- ---------------
Total comprehensive income......................................... $ 55 $139
=============== ===============
12. STOCK-BASED COMPENSATION
Bunge has an employee equity incentive plan and a non-employee
directors' equity incentive plan. Awards under the employee equity
incentive plan may be in the form of stock options, restricted stock
units (including performance-based and regular time-vested restricted
stock units) or other awards. The non-employee directors' equity
incentive plan provides for awards of stock options to Bunge's non-
employee directors. To date, Bunge has granted stock options,
performance-based restricted stock unit awards and regular time-vested
restricted stock unit awards under its employee equity incentive plan and
stock options under its non-employee directors' plan. Under these equity
incentive plans, during the three months ended March 31, 2004, Bunge (1)
issued 237,976 common shares upon the exercise of stock options, (2)
issued 57,492 shares upon the vesting of certain performance-based
resticted stock units and regular time-vested restricted stock units,
which included dividend equivalents paid in common shares and (3)
pursuant to an election made by participants, paid out 158,181 vested
performance-based restricted stock units in cash, rather than common
shares.
In accordance with the provisions of SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION (SFAS No. 123), Bunge has elected to continue to
account for stock-based compensation using the intrinsic value method
under Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES (APB 25) and FASB Interpretation No. 28,
ACCOUNTING FOR STOCK APPRECIATION RIGHTS AND OTHER VARIABLE STOCK OPTION
OR AWARD PLANS (FIN 28).
In accordance with APB 25, Bunge accrues costs for its restricted
stock awards granted over the vesting or performance period and adjusts
costs related to its performance-based restricted stock for subsequent
changes in the fair market value of the awards. These compensation costs
are recognized in Bunge's consolidated statements of income. There is no
compensation cost recorded for stock options granted under either plan,
since the exercise price is equal to the market value of the underlying
common shares on the date of grant. In accordance with SFAS No. 123,
Bunge discloses the pro forma effect of accounting for stock-based awards
under the fair value method.
11
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
12. STOCK-BASED COMPENSATION (CONTINUED)
The following table sets forth pro forma information as if Bunge had
applied the fair value recognition provisions of SFAS No. 123 to stock
options granted to determine its stock-based compensation cost.
THREE MONTHS ENDED
MARCH 31,
--------------------------
(US$ IN MILLIONS, EXCEPT PER SHARE DATA) 2004 2003
---------------------------------------- ----------- ------------
(UNAUDITED)
Net income, as reported........................................................... $ 70 $ 40
Deduct: Total stock-based compensation expense determined under
fair value based method for stock options granted, net of related tax effects. (2) (2)
----------- ------------
Pro forma net income............................................................ $ 68 $ 38
=========== ============
Earnings per common share:
Basic- as reported............................................................. $ .70 $.40
=========== ============
Basic- pro forma............................................................... $ .69 $.38
=========== ============
Diluted- as reported........................................................... $ .65 $.40
=========== ============
Diluted- pro forma (1)......................................................... $ .63 $.38
=========== ============
---------------
(1) In the three months ended March 31, 2004, the numerator for
the calculation of diluted pro forma earnings per share was
adjusted by $1 million for interest expense related to the
Convertible Notes (see Note 14).
13. INCOME TAXES
Bunge's annual effective tax rate is affected by the geographic
locations in which it does business, movements in foreign exchange and
U.S. tax incentives on export sales. In addition, Bunge's annual
estimated effective tax rate for the three months ended March 31, 2004
reflects an increased effective tax rate from the 2003 annual effective
tax rate and is principally attributable to reduced tax benefits in U.S.
export sales and higher taxes payable in Bunge's various tax
jurisdictions as a result of new tax laws.
Bunge has obtained tax benefits under U.S. tax laws providing tax
incentives on export sales from the use of a U.S. FSC through 2001.
Beginning in 2002, due to the repeal of the FSC, Bunge was required to
use the tax provisions of the Extraterritorial Income (ETI) exclusion,
which was substantially similar to the FSC. The U.S. Congress is
currently considering legislation to repeal the ETI and propose a new tax
incentive for certain domestic manufacturers. Bunge will continue to
monitor the new legislation and determine its effects as the legislation
continues to develop.
12
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
14. EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income
by the weighted average number of common shares outstanding, excluding
any dilutive effects of stock options and restricted stock unit awards
during the reporting period. Diluted earnings per share is computed
similar to basic earnings per share, except that the weighted average
number of common shares outstanding is increased to include additional
shares from the assumed exercise of stock options, restricted stock unit
awards and convertible notes, if dilutive. The number of additional
shares is calculated by assuming that outstanding stock options were
exercised and that the proceeds from such exercises were used to acquire
common shares at the average market price during the reporting period.
In addition, the computation of diluted earnings per common share
for the three months ended March 31, 2004 includes the 7,778,425 common
shares that would be issuable on conversion of Bunge's 3.75% convertible
notes due 2022 (the "Convertible Notes"). The Convertible Notes became
convertible as of March 31, 2004. The Convertible Notes are convertible
at the option of the holder into Bunge's common shares, among other
circumstances, during any calendar quarter in which the closing price of
Bunge's common shares for at least 20 of the last 30 trading days of the
immediately preceding calendar quarter is more than 120% of the
conversion price of $32.1402, or approximately $38.57 per share. The
closing price condition was satisfied as of March 31, 2004 and the
Convertible Notes may be converted at the option of the holder. The
Convertible Notes will remain convertible until June 30, 2004, unless the
closing price condition described above is satisfied again at June 30,
2004, at which point the Convertible Notes will remain convertible for
another calendar quarter. The number of Bunge's dilutive weighted average
common shares outstanding for the three month period ended March 31, 2003
does not include the common shares that would be issuable upon conversion
of these Convertible Notes, because in accordance with their terms, these
Convertible Notes had not yet become convertible.
The following table sets forth the computation of basic and
diluted earnings per share for the three months ended March 31, 2004 and
2003.
THREE MONTHS ENDED
MARCH 31,
----------------------------------
(US$ IN MILLIONS, EXCEPT SHARE DATA) 2004 2003
------------------------------------ ---------------- ----------------
(UNAUDITED)
Income from continuing operations - basic...................... $70 $41
Interest on Convertible Notes, net of tax...................... 1 -
---------------- ----------------
Income from continuing operations - diluted.................... $71 $41
================ ================
Weighted average number of common shares outstanding:
Basic...................................................... 100,016,833 99,585,790
Effect of dilutive shares:
-Stock options and awards.................................. 1,770,441 916,340
-Convertible Notes......................................... 7,778,425 -
---------------- ----------------
Diluted.................................................... 109,565,699 100,502,130
================ ================
Income from continuing operations per share:
Basic...................................................... $ .70 $ .41
================ ================
Diluted.................................................... $ .65 $ .41
================ ================
13
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
15. ARGENTINA
In 2002, Bunge commenced and continues to record allowances
against certain recoverable taxes owed to it by the Argentine government
due to delayed payment and uncertainty regarding the local economic
environment. The balance of these allowances fluctuates depending on the
sales activity of existing inventories, the purchase of new inventories,
seasonality, changes in applicable tax rates, cash payment by the
Argentine government and compensation of outstanding balances against
income or certain other taxes owed to the Argentine government. At March
31, 2004 and December 31, 2003, these allowances for recoverable taxes
were $16 million and $25 million, respectively. In the three months ended
March 31, 2004, Bunge decreased this allowance for recoveries of these
taxes in the amount of $9 million as a result of either cash received by
Bunge or compensation against taxes owed by Bunge to the Argentine
government. In the three months ended March 31, 2003, Bunge had increased
this allowance in the amount of $11 million.
16. SEGMENT INFORMATION
In the first quarter of 2003, Bunge changed the name of its "wheat
milling and bakery products" segment to "milling and baking products" in
connection with the reclassification of its corn milling products
business line from the "other" segment to the "milling and baking
products" segment. As a result of this change, Bunge's "other" segment
reflects only its Brazilian soy ingredients business line, which was sold
to The Solae Company, Bunge's joint venture with DuPont, in May 2003. In
the fourth quarter of 2003, Bunge changed the name of its "milling and
baking products" segment to "milling products" in connection with the
sale of its U.S. bakery business. The operating results of the disposed
U.S. bakery business have been reported as discontinued operations for
the three months ended March 31, 2003.
In the fourth quarter of 2003, Bunge changed its presentation of
segment information to include segment operating profit as a measure of
segment profitability. Segment operating profit includes the financial
costs of carrying operating working capital, including foreign exchange
gains and losses and interest expense on debt financing working capital
and interest income earned on working capital items, which is consistent
with how management views the results for operational purposes. This
change is reflected for the three months ended March 31, 2003.
With the completion of the sale of the Brazilian soy ingredients
business and the sale of its U.S. bakery business, Bunge has four
reporting segments - agribusiness, fertilizer, edible oil products and
milling products, 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 activities of the fertilizer
segment include raw material mining, mixing fertilizer components and
marketing products. 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.
The "Unallocated" column in the following table contains the
reconciliation between the totals for reportable segments and Bunge's
consolidated totals, which consists primarily of corporate items not
allocated to the operating segments and inter-segment eliminations.
Transfers between the segments are generally valued at market. The
revenues generated from these transfers are shown in the following table
as "Intersegment revenues."
14
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
16. SEGMENT INFORMATION (CONTINUED)
OPERATING SEGMENT INFORMATION
EDIBLE OIL MILLING
(US$ IN MILLIONS) AGRIBUSINESS FERTILIZER PRODUCTS PRODUCTS OTHER UNALLOCATED TOTAL
----------------- ------------ ---------- --------- --------- ----- ----------- -----
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, 2004
Net sales to external customers. $ 4,631 $ 366 $ 542 $ 200 $ - $ - $ 5,739
Intersegment revenues........... 363 - 9 5 - (377) -
Gross profit.................... 206 85 56 18 - - 365
Foreign exchange gain (loss).... (5) (11) - - - - (16)
Interest income................. 2 9 3 2 - - 16
Interest expense................ (30) (11) (7) (3) - (1) (52)
Segment operating profit........ 72 41 17 6 - - 136
Depreciation, depletion and
amortization.................. $ (24) $ (17) $ (7) $ (3) $ - $ - $ (51)
THREE MONTHS ENDED
MARCH 31, 2003
Net sales to external customers. $ 3,802 $ 286 $ 536 $ 172 $ 46 $ - $ 4,842
Intersegment revenues........... 220 - 21 6 - (247) -
Gross profit.................... 117 60 64 15 17 - 273
Foreign exchange gain (loss).... 11 (2) - - 1 (3) 7
Interest income................. 3 11 1 - - 5 20
Interest expense................ (13) (12) (9) (2) (2) (16) (54)
Segment operating profit........ 44 38 17 3 9 - 111
Depreciation, depletion and
amortization.................. $ (27) $ (12) $ (6) $ (4) $ - $ - $ (49)
A reconciliation of income from continuing operations before
income tax and minority interest to total segment operating profit follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
(US$ MILLIONS) 2004 2003
-------------- ------------- -----------
(UNAUDITED)
Income from continuing operations before income tax and minority interest $146 $ 98
Unallocated expenses - net (1)................................................ (10) 13
------------- -----------
Total segment operating profit................................................ $136 $111
============= ===========
--------------------
(1) Unallocated expenses-net included interest income, interest
expense, foreign exchange gains and losses and other income and
expense not directly attributable to Bunge's operating segments.
15
BUNGE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
17. SUBSEQUENT EVENTS
On April 13, 2004, Bunge completed the sale of $500 million
aggregate principal amount of unsecured senior notes bearing interest at
a rate of 5.35% per year that mature in April 2014. The notes were issued
by Bunge's wholly owned finance subsidiary, Bunge Limited Finance Corp.,
and are fully and unconditionally guaranteed by Bunge. Interest on these
unsecured senior notes is payable semi-annually in arrears in April and
October of each year, commencing in October 2004. Bunge used the net
proceeds of this offering, approximately $496 million, for the repayment
of outstanding indebtedness.
On April 29, 2004, Bunge filed a registration statement with the
Securities and Exchange Commission relating to a proposed primary
offering of 9.5 million of its common shares. The proposed offering is
expected to close in the second quarter of 2004. With the proceeds of
the offering, Bunge intends to buy back the minority interests of Bunge
Brasil S.A., its publicly traded Brazilian subsidiary, through a tender
offer in Brazil. The tender offer is expected to close in the third
quarter of 2004. Assuming 100% of the shares of Bunge Brasil held by
minority shareholders are acquired, approximately $295 million of the
proceeds of the proposed equity offering will be required for this
transaction. The remaining proceeds from this offering will be used for
general corporate purposes, which may include acquisitions, capital
expenditures and working capital purposes.
In connection with Cereol's operations in Eastern Europe, Cereol
entered into a joint venture with the European Bank for Reconstruction
and Development, or EBRD, pursuant to which Cereol owns approximately 60%
and the EBRD owns approximately 40% of Polska Oil Investment B.V., or
Polska Oil. Polska Oil, in turn, owns 50% of Zaklady Thuszczowe Kruszwica
S.A., or Kruszwica, a Polish producer of bottled edible oils. Bunge also
has a 32% additional direct interest in Kruszwica. Polska Oil and
Kruszwica are consolidated subsidiaries of Bunge. Pursuant to an amended
and restated shareholders agreement between Cereol and the EBRD, the EBRD
had the option to put its shares in Polska Oil to Bunge at any time prior
to June 3, 2005 at the then current fair market value as determined by an
independent expert, subject to a floor and cap based on a contractual
formula. In April 2004, the EBRD exercised its put option and Bunge
purchased the EBRD stake in Polska Oil for approximately EURO22 million
or approximately $27 million.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains both historical and forward-looking statements. All
statements, other than statements of historical fact are, or may be deemed to
be, forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements are not based on
historical facts, but rather reflect our current expectations and projections
about our future results, performance, prospects and opportunities. We have
tried to identify these forward-looking statements by using words including
"may," "will," "expect," "anticipate," "believe," "intend," "estimate" and
"continue" and similar expressions. These forward-looking statements involve
known and unknown risks, uncertainties and other factors that could cause our
actual results, performance, prospects or opportunities to differ materially
from those expressed in, or implied by, these forward-looking statements. The
following important factors, among others, could affect our business and
financial performance: our ability to complete, integrate and benefit from
acquisitions, divestitures, joint ventures and alliances; estimated demand for
commodities and other products that we sell and use in our business; industry
conditions, including the cyclicality of the agribusiness industry;
agricultural, economic and political conditions in the primary markets where we
operate; and other economic, business, competitive and/or regulatory factors
affecting our business generally. You should refer to "Item 3. Key Information -
Risk Factors" in our annual report on Form 20-F for the year ended December 31,
2003 for a more detailed discussion of these factors. The forward-looking
statements included in this report are made only as of the date of this report,
and except as otherwise required by federal securities law, we do not have any
obligation to publicly update or revise any forward-looking statements to
reflect subsequent events or circumstances.
EVENTS AFFECTING OPERATING RESULTS
FIRST QUARTER 2004 OVERVIEW
Our agribusiness results for the first quarter of 2004 were higher than
last year as a result of volume growth and improved gross profit margins.
Customer demand for our soybeans and related products was strong. The volume
increase was driven by origination volumes in South America, as well as solid
demand from U.S. and Brazilian meat producers, which more than offset lower U.S.
export volumes.
The poor U.S. harvest in 2003/2004 and revised downward expectations for
the current year soybean crop in South America resulted in soybean futures
prices increasing to a level not seen in over 15 years. However, our earnings
are not directly tied to soybean prices as gross profit margins are determined
by the relative spread between the price at which we buy soybeans and the price
at which we sell the derived products of soybean meal and oil. North American
margins improved in the first quarter of 2004 due to improved softseed margins,
but margins in Southern Europe continue to be depressed due to excess capacity.
Despite higher freight rates, improved logistics management also contributed
to our quarterly results.
Our fertilizer business continued performing well, driven by higher
margins which offset a decline in volumes. Volumes decreased in the Brazilian
market as excess rain in the east and northeast parts of Brazil and shortage of
rain in the south and southeast parts of Brazil prevented the planting of the
winter crop. International prices for imported fertilizer and raw materials were
higher than the first quarter of 2003. For example, phosphate, ammonia and urea
prices were 35%, 58% and 36% higher in the first quarter of 2004 compared to the
first quarter of 2003. Margins improved since locally produced fertilizer is
priced to import parity.
In our edible oil products segment, our sales volumes decreased compared
to the same quarter in 2003; however, excluding the volumes of Lesieur, which
was sold to our Saipol joint venture in July 2003, sales volumes increased
slightly driven by growth in Brazil. Segment operating profit was flat compared
to 2003; however, excluding the results of Lesieur, segment operating profit
increased 55% as margins expanded in our softseed business in Eastern Europe. In
Eastern Europe, we purchase all the softseeds we use to produce our bottled oils
at harvest time. Prices of vegetable oils have increased since the 2003 harvest
due to increases of soybean oil prices, and have contributed to the improvements
in our margins. These benefits were
17
partially offset by increases in raw material costs, primarily soybean oil, in
our edible oil businesses in the U.S. and Brazil, and a difficult competitive
environment in Brazil.
RESULTS OF OPERATIONS
Set forth in the table below is a summary of certain items in our
consolidated statements of income and volumes by reportable segment for the
periods indicated.
In the fourth quarter of 2003, we changed our presentation of segment
information to include segment operating profit as a measure of segment
profitability. Segment operating profit includes the financial costs of carrying
operating working capital, including foreign exchange gains and losses and
interest expense on debt financing working capital and interest income earned on
working capital items, which is consistent with how management views the results
for operational purposes. This change is reflected for the three months ended
March 31, 2003.
THREE MONTHS ENDED
MARCH 31,
----------------------
(US$ IN MILLIONS, EXCEPT VOLUMES AND PERCENTAGES) 2004 2003 CHANGE
------------------------------------------------- -------- -------- ------
VOLUMES (IN THOUSANDS OF METRIC TONS):
Agribusiness ................................................................... 20,393 19,232 6%
Fertilizer ..................................................................... 1,760 1,861 (5)%
Edible oil products ............................................................ 714 859 (17)%
Milling products ............................................................... 966 825 17%
Other (soy ingredients) ........................................................ - 132 (100)%
-------- --------
Total .................................................................... 23,833 22,909 4%
======== ========
NET SALES:
Agribusiness ................................................................... $ 4,631 $ 3,802 22%
Fertilizer ..................................................................... 366 286 28%
Edible oil products ............................................................ 542 536 1%
Milling products ............................................................... 200 172 16%
Other (soy ingredients) ........................................................ - 46 (100)%
-------- --------
Total .................................................................... $ 5,739 $ 4,842 19%
======== ========
COST OF GOODS SOLD:
Agribusiness ................................................................... $ (4,425) $ (3,685) 20%
Fertilizer ..................................................................... (281) (226) 24%
Edible oil products ............................................................ (486) (472) 3%
Milling products ............................................................... (182) (157) 16%
Other (soy ingredients) ........................................................ - (29) (100)%
-------- --------
Total .................................................................... $ (5,374) $ (4,569) 18%
======== ========
GROSS PROFIT:
Agribusiness ................................................................... $ 206 $ 117 76%
Fertilizer ..................................................................... 85 60 42%
Edible oil products ............................................................ 56 64 (13)%
Milling products ............................................................... 18 15 20%
Other (soy ingredients) ........................................................ - 17 (100)%
-------- --------
Total .................................................................... $ 365 $ 273 34%
======== ========
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Agribusiness ................................................................... $ (101) $ (74) 36%
Fertilizer ..................................................................... (31) (19) 63%
Edible oil products ............................................................ (35) (39) (10)%
Milling products ............................................................... (11) (10) 10%
Other (soy ingredients) ........................................................ - (7) (100)%
-------- --------
Total .................................................................... $ (178) $ (149) 19%
======== ========
18
THREE MONTHS ENDED
MARCH 31,
----------------------
(US$ IN MILLIONS, EXCEPT PERCENTAGES) 2004 2003 CHANGE
------------------------------------- -------- -------- ------
FOREIGN EXCHANGE GAIN (LOSS):
Agribusiness ................................................................... $ (5) $ 11 (145)%
Fertilizer ..................................................................... (11) (2) 450%
Edible oil products ............................................................ - - -
Milling products ............................................................... - - -
Other (soy ingredients) ........................................................ - 1 (100)%
-------- --------
Total .................................................................... $ (16) $ 10 (160)%
======== ========
INTEREST INCOME:
Agribusiness ................................................................... $ 2 $ 3 (33)%
Fertilizer ..................................................................... 9 11 (18)%
Edible oil products ............................................................ 3 1 200%
Milling products ............................................................... 2 - -
Other (soy ingredients) ........................................................ - - -
-------- --------
Total .................................................................... $ 16 $ 15 7%
======== ========
INTEREST EXPENSE:
Agribusiness ................................................................... $ (30) $ (13) 131%
Fertilizer ..................................................................... (11) (12) (8)%
Edible oil products ............................................................ (7) (9) (22)%
Milling products ............................................................... (3) (2) 50%
Other (soy ingredients) ........................................................ - (2) (100)%
-------- --------
Total .................................................................... $ (51) $ (38) 34%
======== ========
SEGMENT OPERATING PROFIT:
Agribusiness ................................................................... $ 72 $ 44 64%
Fertilizer ..................................................................... 41 38 8%
Edible oil products ............................................................ 17 17 -
Milling products ............................................................... 6 3 100%
Other (soy ingredients) ........................................................ - 9 (100)%
-------- --------
Total (1) ................................................................ $ 136 $ 111 23%
======== ========
DEPRECIATION, DEPLETION AND AMORTIZATION:
Agribusiness ................................................................... $ 24 $ 27 (11)%
Fertilizer ..................................................................... 17 12 42%
Edible oil products ............................................................ 7 6 17%
Milling products ............................................................... 3 4 (25)%
Other (soy ingredients) ........................................................ - - -
-------- --------
Total .................................................................... $ 51 $ 49 4%
======== ========
NET INCOME ..................................................................... $ 70 $ 40 75%
======== ========
--------------------
(1) Total segment operating profit is our consolidated income from
continuing operations before income tax and minority interest that includes
an allocated portion of the foreign exchange gains and losses relating to
debt financing operating working capital, including readily marketable
inventories. Also included in total segment operating profit is interest
income and interest expense attributable to the financing of operating working
capital. Total segment operating profit is a non-U.S. GAAP measure and is not
intended to replace income from continuing operations before income tax and
minority interest, the most directly comparable U.S. GAAP measure. Total
segment operating profit is a key performance measurement used by our
management to evaluate whether our operating activities cover the financing
costs of our business. We believe total segment operating profit is a more
complete measure of our operating profitability, since it allocates foreign
exchange gains and losses and the cost of debt financing working capital to the
appropriate operating segments. Additionally, we believe total segment operating
profit assists investors by allowing them to evaluate changes in the operating
results of our portfolio of businesses before non-operating factors that affect
19
net income. Total segment operating profit is not a measure of consolidated
operating results under U.S. GAAP and should not be considered as an alternative
to income from continuing operations before income tax and minority interest or
any other measure of consolidated operating results under U.S. GAAP.
Below is a reconciliation of income from continuing operations before
income tax and minority interest to total segment operating profit:
THREE MONTHS ENDED
MARCH 31,
-----------------------
(US$ IN MILLIONS) 2004 2003
----------------- ----- -----
Income from continuing operations before income tax and minority interest $146 $ 98
Unallocated expenses-net (1)....................................... (10) 13
----- -----
Total segment operating profit..................................... $136 $111
===== =====
--------------------
(1) Unallocated expenses-net included interest income, interest expense, foreign
exchange gains and losses and other income and expense not directly attributable
to our operating segments.
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
AGRIBUSINESS SEGMENT. Agribusiness segment net sales increased 22% due to
higher average selling prices for soy commodity products and a 6% increase in
volumes. Soy commodity product prices continued increasing during the first
quarter driven by the reduced U.S. soybean crop and a reduction in forecasted
soybean production in South America. Prices for our canola and sunflower seed
products benefited from the increase in soybean prices as customer demand for
these products increased as a substitute for higher priced soybean products.
Cost of goods sold increased 20% due to the increased volumes and raw
material costs, higher prices for ocean freight and increased costs related to
the settlement of forward sales contracts due to the increase of soy commodity
product prices. Also included in cost of goods sold in the first quarter of 2004
was a $9 million decrease in our allowances for recoverable taxes as a result of
either cash received by us or compensation against taxes owed by us to the
Argentine government. Cost of goods sold in the first quarter of 2003 included
an $11 million charge relating to reserves for recoverable taxes from the
Argentine government.
Gross profit increased 76% due to the increase in volumes and
improvements in margins, assisted by effective risk management. Efficiency
improvements in logistics, favorable effects from freight risk management
programs and higher North American margins due to improved softseed margins
contributed to the increase in our results.
Selling, general and administrative expenses (SG&A) increased 36%
primarily due to increases in employee compensation expense and a stronger
Brazilian REAL in the first quarter of 2004, which resulted in higher expenses
when local currency expenses were converted to U.S. dollars compared to the
first quarter of 2003 when the REAL was weaker.
Segment operating profit increased 64% primarily due to the volume growth
and improvements in margins. The devaluation of the Brazilian REAL against the
U.S. dollar during the first quarter of 2004 versus the value at December 31,
2003 resulted in foreign exchange losses on our U.S. dollar net monetary
liability position in Brazil. In the first quarter of 2003, the REAL appreciated
versus the U.S. dollar at December 31, 2002, which resulted in foreign exchange
gains. Interest expense increased primarily due to higher inventory levels
associated with the higher commodity prices.
FERTILIZER SEGMENT. Fertilizer segment net sales increased 28% due to
higher average selling prices. Selling prices benefited from higher
international selling prices for imported fertilizers and raw materials, such as
phosphate, ammonia and urea, which helped boost local prices as products are
priced to import parity. Sales volumes decreased 5% in the first quarter of 2004
compared to the same quarter of 2003. In the first quarter of 2003 we benefited
from accelerated sales to Brazilian farmers, which did not occur in the first
quarter of 2004
20
due to excess rain in the east and northeast parts of Brazil and shortage of
rain in the south and southeast parts of Brazil which delayed the planting of
the winter crop.
Cost of goods sold increased 24% due to higher imported raw material
costs mitigated in part by lower cost local production. Gross profit increased
42% as a result of higher fertilizer selling prices offset partially by
increases in imported raw material costs.
SG&A increased 63% due to increases in employee compensation expense due
to higher salaries and certain other labor and civil provisions and the effects
of a stronger Brazilian REAL in the first quarter of 2004 compared to first
quarter of 2003 when the REAL was weaker.
Segment operating profit increased 8% primarily due to the increase in
gross profit, partially offset by the increase in SG&A and foreign exchange
losses. The increase in foreign exchange losses was primarily due to the effects
of the first quarter of 2004 devaluation of the Brazilian REAL on our Brazilian
U.S. dollar net monetary liability position and related hedge costs.
EDIBLE OIL PRODUCTS SEGMENT. The table below outlines our edible oil
products segment results for the three months ended March 31, 2004 and 2003. The
results for the three months ended March 31, 2003 include the results of
Lesieur, which we sold to our Saipol joint venture in July 2003. In addition,
for comparative purposes, the results of our edible oil products segment
excluding Lesieur and the results of Lesieur alone, both for the three months
ended March 31, 2003, are also presented.
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- -----------------------
2004 2003 2003 2003
-------- -------- --------- --------
EXCLUDING
(US$ IN MILLIONS, EXCEPT VOLUMES) ACTUAL ACTUAL LESIEUR LESIEUR
--------------------------------- -------- -------- -------- --------
Volumes (in thousands of metric tons) .................................... 714 859 702 157
Net sales ................................................................ $ 542 $ 536 $ 380 $ 156
Cost of sales ............................................................ (486) (472) (334) (138)
-------- -------- -------- --------
Gross profit ............................................................. 56 64 46 18
Selling, general and administrative expenses ............................. (35) (39) (27) (12)
Interest income .......................................................... 3 1 1 -
Interest expense ......................................................... (7) (9) (9) -
-------- -------- -------- --------
Segment operating profit ........................................... $ 17 $ 17 $ 11 $ 6
======== ======== ======== ========
Edible oil products segment net sales, excluding Lesieur, increased 43%
primarily due to higher average selling prices and changes in sales mix in
Hungary and Poland towards higher margin products.
Cost of goods sold, excluding Lesieur, increased 46% primarily due to
higher raw material costs. Gross profit, excluding Lesieur, increased 22%
primarily due to a higher margin product mix in Eastern Europe. In our South
American operations, gross profit declined primarily due to higher crude soybean
oil costs and competitive pressures as big grocery retailers changed to generic
brands to reduce costs.
SG&A, excluding Lesieur, increased 30% primarily due to the effects of a
stronger Brazilian REAL and EURO in the first quarter of 2004 compared to first
quarter of 2003 when these currencies were weaker.
Segment operating profit, excluding Lesieur, increased 55% primarily due
to the improvement in gross profit in Eastern Europe.
MILLING PRODUCTS SEGMENT. Milling products segment net sales increased
16% primarily due to increases in corn milling volumes and increases in average
selling prices for wheat milling products. Corn milling volumes increased
primarily due to higher sales to U.S. commercial customers, higher sales under
the U.S. government food aid program and the addition of a facility acquired in
the latter half of 2003. The increase in wheat and corn milling selling prices
reflects increases in raw material costs.
Cost of goods sold increased 16% due to the increase in corn milling
sales volumes and higher raw material costs. Gross profit increased 20%
primarily due to the increase in corn milling sales volumes and
21
higher average selling prices for wheat milling products. Segment operating
profit increased by $3 million as a result of the improvement in gross profit.
OTHER SEGMENT (SOY INGREDIENTS). Our soy ingredients business was
contributed to Solae, our joint venture with DuPont, in the second quarter of
2003. Therefore, historical results are presented herein for comparative
purposes.
FINANCIAL COSTS. A summary of consolidated financial costs for the
periods indicated follows.
THREE MONTHS ENDED
MARCH 31,
--------------------
(US$ IN MILLIONS, EXCEPT PERCENTAGES) 2004 2003 CHANGE
------------------------------------- -------- -------- --------
Interest income...................................................... $ 16 $ 20 (20)%
Interest expense..................................................... (52) (54) (4)%
Foreign exchange gains (losses)...................................... (16) 7
Interest income decreased 20% due to lower interest rates earned on
invested cash in Brazil. Interest expense decreased 4% despite increases in
average borrowings for the first quarter of 2004 compared to the first quarter
of 2003 primarily due to lower average interest rates on long-term borrowings.
During 2003, we replaced long-term debt assumed in the acquisition of Cereol and
long-term debt maturing in 2003 with lower interest rate debt.
Foreign exchange losses of $16 million included hedging costs related to
our monetary exposure in Brazil and exchange losses on our Brazilian U.S. dollar
net monetary liability position primarily due to the 1% devaluation in the value
of the Brazilian REAL in the first quarter of 2004 against the U.S. dollar. In
contrast, in the first quarter of 2003, the value of the Brazilian REAL
increased by 5% against the U.S. dollar, resulting in foreign exchange gains.
OTHER INCOME (EXPENSE) - NET. Other income (expense) - net increased $10
million to $11 million in the first quarter of 2004 from $1 million of income in
the first quarter of 2003 primarily due to higher earnings from our joint
ventures in Argentina and the Solae joint venture. Solae was formed in the
second quarter of 2003.
In the quarter ended March 31, 2004, we completed an exchange transaction
with J. Macedo, whereby we exchanged our Brazilian domestic retail flour assets
for J. Macedo's industrial flour assets and approximately $7 million in cash. We
recognized a pre-tax gain of $5 million as a result of this transaction, which
is included in other income (expense)-net in the consolidated statement of
income.
INCOME TAX EXPENSE. Income tax expense increased $21 million to $58
million in the first quarter of 2004 from $37 million in the first quarter of
2003. Our effective tax rate for the first quarter of 2004 increased to 40%,
compared to 28% in 2003. Excluding the tax-free gain on the sale of our
Brazilian soy ingredients business to Solae, the 2003 annual effective tax rate
was 33%. Our effective tax rate for the first quarter of 2004 reflects an
increase from the annual 2003 effective tax rate predominantly due to reduced
tax benefits related to lower U.S. export sales and higher taxes payable in
various tax jurisdictions as a result of new tax laws.
NET INCOME. Net income increased $30 million to $70 million in the first
quarter of 2004 from $40 million in the first quarter of 2003. Net income for
the first quarter of 2004 includes the $3 million gain, net of tax, from the
exchange of our Brazilian domestic retail flour assets. Net income for the first
quarter of 2003 included a discontinued operations loss of $1 million, net of
tax, relating to the North American bakery operations sold in December 2003.
LIQUIDITY AND CAPITAL RESOURCES
Our primary financial objective is to maintain sufficient liquidity
through a conservative balance sheet to provide flexibility to pursue our growth
objectives. Our current ratio, defined as current assets divided by current
liabilities, was 1.47 and 1.63 at March 31, 2004 and December 31, 2003,
respectively.
22
CASH AND READILY MARKETABLE INVENTORIES. Cash and cash equivalents were
$523 million at March 31, 2004 and $489 million at December 31, 2003. At March
31, 2004, we had $83 million of restricted cash, which is included in cash and
cash equivalents, and is set aside as collateral against short-term loans for
our operations in Europe.
Included in our inventories were readily marketable inventories of $2,879
million at March 31, 2004 and $1,868 million at December 31, 2003. These
agricultural commodity inventories, which are financed primarily with debt, are
readily convertible to cash because of their commodity characteristics, widely
available markets and international pricing mechanisms. The increase in readily
marketable inventories was primarily due to higher prices and increased selling
by farmers that began in the latter half of 2003 due to the increase in soybean
commodity prices.
LONG AND SHORT-TERM DEBT. We conduct most of our financing activities at
the parent company level. We have a master trust facility designed to act as our
central treasury and permit us and our subsidiaries to borrow long and
short-term debt on a more efficient basis. The primary assets of the master
trust facility consist of intercompany loans made to Bunge Limited and its
subsidiaries. Bunge Limited's wholly owned financing subsidiaries fund the
master trust with long and short-term debt obtained from third parties,
including our commercial paper program.
To finance working capital, we use cash flows generated from operations
and short-term borrowings, including our commercial paper program, and various
long-term bank facilities and credit lines, which are sufficient to meet our
business needs. At March 31, 2004, we had $152 million outstanding under our
commercial paper program, which has a maximum available borrowing capacity of
$600 million. Our commercial paper program is our least expensive available
short-term funding source. We maintain back-up bank credit lines equal to the
maximum capacity of our commercial paper program. If we were unable to access
the commercial paper market, we would use our bank credit lines, which would be
at a higher cost than our commercial paper.
At March 31, 2004, we had approximately $541 million of committed unused
and available borrowing capacity under our commercial paper program, other
short-term lines of credit and under long-term credit facilities, all of which
are held through a number of lending institutions.
Our short-term and long-term debt increased by $821 million at March 31,
2004 from December 31, 2003 primarily due to the increase in soy commodity
prices which resulted in an increase in our inventory levels.
In April 2004, we completed an offering of $500 million aggregate
principal amount of unsecured senior notes bearing interest at a rate of 5.35%
per year that mature in April 2014. The notes were issued by our wholly owned
finance subsidiary, Bunge Limited Finance Corp., and fully and unconditionally
guaranteed by Bunge Limited. Interest on these unsecured senior notes is payable
semi-annually in arrears in April and October of each year, commencing in
October 2004. We used the net proceeds of this offering, approximately $496
million, for the repayment of outstanding indebtedness.
SHAREHOLDERS' EQUITY. Shareholders' equity increased to $2,428 million at
March 31, 2004 from $2,377 million at December 31, 2003 as a result of net
income of $70 million, other comprehensive loss of $15 million, which
includes foreign exchange losses of $27 million, and $7 million attributable
to the exercise of employee stock options and issuance of vested restricted
stock units. This increase was partially offset by dividends paid to
shareholders of $11 million.
CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO 2003. In the three months
ended March 31, 2004, our cash balance increased $34 million, reflecting the net
impact of cash flows from operating, investing and financing activities,
compared to a $74 million decrease in our cash balance in the three months ended
March 31, 2003.
Our operating activities used cash of $720 million in the three months
ended March 31, 2004, compared to cash used of $3 million in the three months
ended March 31, 2003. Historically, our cash flow from operations has varied
depending on the timing of the acquisition of, and the market prices for,
agribusiness commodity inventories. The decrease in cash flows from operating
activities is primarily due to
23
significant increases in our readily marketable inventories. Soybean prices
have increased 60% since mid-2003. This increase in soybean prices has
resulted in significant selling by farmers, which increased our use of cash
to acquire inventories. The rising agricultural commodity prices increased
use of working capital, which reduced cash from operations by approximately
$793 million in the three months ended March 31, 2004. Our risk management
policies include hedging strategies to mitigate the risk that the cost of
these inventories would not be recovered. We anticipate generating positive
cash flows from operating activities when these inventories are sold. In
addition, we expect that a return of prices to historical levels should also
contribute to positive cash flows from operating activities.
Cash used by investing activities was $47 million in the three months
ended March 31, 2004, compared to cash used of $49 million in the three months
ended March 31, 2003. Investments in property, plant and equipment of $52
million consisted primarily of additions under our normal capital expenditure
plan. Of this amount, $20 million represented maintenance capital expenditures
in the three months ended March 31, 2004, compared to $16 million in the three
months ended March 31, 2003. Maintenance capital expenditures are expenditures
made to replace existing equipment in order to maintain current production
capacity. The majority of non-maintenance capital expenditures in the three
months ended March 31, 2004 related to efficiency improvements to reduce costs,
equipment upgrades and business expansion. Also included in cash flow from
investing is $7 million received in the exchange of our Brazilian retail flour
assets for the industrial flour assets of J. Macedo.
Cash provided by financing activities was $803 million in the three
months ended March 31, 2004, compared to cash used of $40 million in the three
months ended March 31, 2003. In the three months ended March 31, 2004, we
increased our borrowings of short and long-term debt primarily to finance our
additional working capital requirements. Dividends paid to our shareholders in
the three months ended March 31, 2004 were $11 million and $10 million in the
three months ended March 31, 2003.
GUARANTEES
We have issued or were a party to the following third-party guarantees at
March 31, 2004:
MAXIMUM POTENTIAL
(US$ IN MILLIONS) FUTURE PAYMENTS
----------------- ---------------
Operating lease residual values............................... $ 69
Unconsolidated affiliates financing........................... 17
Customer financing........................................... 94
---------------
Total........................................................ $ 180
===============
Prior to January 1, 2003, we entered into synthetic lease agreements for
barges and railcars originally owned by us and subsequently sold to third
parties. The leases are classified as operating leases in accordance with SFAS
No. 13, ACCOUNTING FOR LEASES. Any gains on the sales have been deferred and are
being recognized ratably over the related lease terms. We have the option under
each lease to purchase the barges or railcars at fixed amounts based on
estimated fair values or to sell the assets. If we elect to sell, we will
receive proceeds of such sales up to fixed amounts specified in the agreements.
If the proceeds are less than the specified fixed amounts, we would be obligated
under a guarantee to pay supplemental rent for the deficiency in proceeds. The
operating leases expire through 2007. There are no recourse provisions or
collateral that would enable us to recover any amounts paid under this
guarantee.
Prior to January 1, 2003, we issued a guarantee to a financial
institution related to the debt of our joint ventures in Argentina, our
unconsolidated affiliates. The term of the guarantee is equal to the term of the
related financing, which matures in 2009. There are no recourse provisions or
collateral that would enable us to recover any amounts paid under this
guarantee.
We issued guarantees to a financial institution in Brazil related to
amounts owed to the institution by certain of our customers. The terms of the
guarantees are equal to the terms of the related financing arrangements, which
can be as short as 120 days or as long as 360 days. In the event that the
customers default on their payments to the institutions and we would be required
to perform under the guarantees, we have obtained collateral from the customers.
At March 31, 2004, approximately $35 million of these financing
24
arrangements were collateralized by tangible property. We have determined the
fair value of these guarantees to be immaterial at March 31, 2004.
We have provided parent level guarantees of the indebtedness
outstanding under certain senior credit facilities and senior notes which
were entered into by our wholly owned subsidiaries. The debt under these
guarantees had a carrying amount of $3,008 million, all of which is through
the master trust facility at March 31, 2004. All outstanding debt related to
these guarantees is included in the consolidated balance sheet at March 31,
2004. There are no significant restrictions on the ability of any of our
subsidiaries to transfer funds to us.
In addition, certain of our subsidiaries have provided guarantees of
indebtedness of certain of their subsidiaries under certain lines of credit with
various institutions. The total borrowing capacity under these lines of credit
guarantees is $267 million.
RECENT DEVELOPMENTS
On April 29, 2004, we filed a registration statement with the
Securities and Exchange Commission relating to a proposed primary offering of
9.5 million of our common shares. The proposed offering is expected to close
in the second quarter of 2004. With the proceeds of the offering, we intend to
buy back the minority interests of Bunge Brasil S.A., our publicly traded
Brazilian subsidiary, through a tender offer in Brazil. The tender offer is
expected to close in the third quarter of 2004. Assuming 100% of the shares
of Bunge Brasil minority interest shareholders are acquired, approximately
$295 million of the proceeds of the proposed equity offering will be required
for this transaction. The remaining proceeds from this offering will be used
for general corporate purposes, which may include acquisitions, capital
expenditures and working capital purposes.
We are involved in arbitration with Cereol's former joint venture partner
over the final purchase price of Oleina Holding and related issues. Cereol
purchased the 49% of Oleina it did not already own from its joint venture
partner for $27 million in February 2002. In April 2004, we were notified that
the arbitration tribunal had determined the purchase price to be approximately
$73 million plus interest of approximately $5 million. Subsequently, Cereol's
former joint venture partner submitted a request for rectification to increase
the purchase price to approximately $108 million. We are currently reviewing the
decision of the arbitration tribunal and analyzing our alternatives with respect
to this decision. We are entitled to be indemnified by Edison S.p.A., from whom
we purchased Cereol in October 2002, for any portion of the final purchase price
which exceeds $39 million. As of March 31, 2004, we have recorded an obligation
of $39 million to Cereol's former joint venture partner and a receivable in the
same amount from Edison relating to its indemnity. Edison has informed us that
it is currently evaluating whether the conditions precedent to this
indemnification have been satisfied. We have assessed the collectibility of
this receivable under the terms of our agreement with Edison and believe this
amount is fully collectible under the agreement.
In connection with Cereol's operations in Eastern Europe, Cereol entered
into a joint venture with the European Bank for Reconstruction and Development,
or EBRD, pursuant to which Cereol owns approximately 60% and the EBRD owns
approximately 40% of Polska Oil Investment B.V., or Polska Oil. Polska Oil, in
turn, owns 50% of Zaklady Thuszczowe Kruszwica S.A., or Kruszwica, a Polish
producer of bottled edible oils. We also have a 32% additional direct interest
in Kruszwica. Polska Oil and Kruszwica are consolidated subsidiaries of Bunge.
Pursuant to an amended and restated shareholders agreement between Cereol and
the EBRD, the EBRD had the option to put its shares in Polska Oil to us at any
time prior to June 3, 2005 at the then current fair market value as determined
by an independent expert, subject to a floor and cap based on a contractual
formula. In April 2004, the EBRD exercised its put option and we purchased the
EBRD stake in Polska Oil for approximately EURO 22 million or approximately $27
million.
DIVIDENDS
On March 12, 2004, we announced that we will pay a regular quarterly
dividend of $.11 per share on June 1, 2004 to shareholders of record on May 17,
2004.
25
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those policies that are both
important to the portrayal of our financial condition and results of operations
and require management to exercise significant judgment. For a complete
discussion of our accounting policies, see our annual report on Form 20-F for
the year ended December 31, 2003, filed with the Securities and Exchange
Commission. There have been no significant changes in our critical accounting
policies since December 31, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the Financial Accounting Standards Board (FASB)
Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 04-2
(Issue No. 04-2), WHETHER MINERAL RIGHTS ARE TANGIBLE OR INTANGIBLE ASSETS,
that mineral rights, as defined in Issue No. 04-2, are tangible assets. There
is an inconsistency between this consensus that mineral rights are tangible
assets and the characterization of mineral rights as intangible assets in
Statement of Financial Accounting Standards (SFAS) No. 141 and No. 142. In
April 2004, the FASB issued proposed Staff Position (FSP) No. FAS 141-a and
142-a, INTERACTION OF FASB STATEMENTS NO. 141, BUSINESS COMBINATIONS AND NO.
142, GOODWILL AND OTHER INTANGIBLE ASSETS AND EITF ISSUE NO. 04-2, WHETHER
MINERAL RIGHTS ARE TANGIBLE OR INTANGIBLE ASSETS to eliminate the
inconsistency between EITF Issue No. 04-2 and SFAS No. 141 and No. 142. The
guidance in this FSP would be effective for the first reporting period
beginning after the date that this FSP is finalized. Early application of
this guidance is permitted in periods for which financial statements have
not yet been issued. We have applied the EITF and the proposed FSP to our
consolidated balance sheet at March 31, 2004 and have reclassified the prior
period's consolidated balance sheet to conform to this presentation.
In January 2004, the FASB issued Staff Position No. FAS 106-1, ACCOUNTING
AND DISCLOSURE REQUIREMENTS RELATED TO THE MEDICARE PRESCRIPTION DRUG,
IMPROVEMENT AND MODERNIZATION ACT OF 2003. The act, signed into law in December
2003, introduces a prescription drug benefit under Medicare as well as a federal
subsidy, under certain conditions, to sponsors of retiree health care benefit
plans. Presently, authoritative guidance on the accounting for this subsidy has
not been issued. We have elected a one-time deferral of the accounting for the
effects of the act, as permitted by this FSP. This deferral continues to apply
until authoritative guidance on the accounting for the federal subsidy is
issued, and when issued we may need to reclassify previously reported
information.
In December 2003, FASB issued revised SFAS No. 132, EMPLOYERS'
DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. This revision of
SFAS No. 132 does not change the measurement or recognition of those plans
required by SFAS No. 87, EMPLOYERS' ACCOUNTING FOR PENSIONS, PENSION PLANS AND
TERMINATION BENEFITS, AND SFAS NO. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT
BENEFITS OTHER THAN PENSIONS. This statement retains the disclosure requirements
of SFAS No. 132, which it replaces. It requires additional disclosures to those
in the original SFAS No. 132 about plan assets, investment strategy, measurement
dates, plan obligations, cash flows of defined benefit pension plans and other
defined benefit postretirement plans. Also required for interim reporting will
be the components of periodic benefit cost recognized during the interim period.
We have complied with the disclosure requirements of the revised SFAS No. 132.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
RISK MANAGEMENT
As a result of our global operating and financing activities, we are
exposed to changes in agricultural commodity prices, foreign currency exchange
rates and interest rates, which may affect our results of operations and
financial position. We use derivative financial instruments for the purpose of
managing the risks and/or costs associated with fluctuations in commodity prices
and foreign exchange rates. While these hedging instruments are subject to
fluctuations in value, those fluctuations are generally offset by the value of
26
the underlying exposures being hedged. The counterparties to these contractual
arrangements are primarily major financial institutions or, in the case of
commodity futures and options, a commodity exchange. As a result, credit risk
arising from these contracts is not significant and we do not anticipate any
significant losses. Our finance and risk management committee supervises,
reviews and periodically revises our overall risk management policies and risk
limits. We only enter into derivatives that are related to our inherent business
and financial exposure as a global agribusiness company.
COMMODITIES RISK
We operate in many areas of the food industry from agricultural raw
materials to the production and sale of branded food products. As a result, we
use and produce various materials, many of which are agricultural commodities,
including soybeans, soybean oil, soybean meal, wheat and corn. Agricultural
commodities are subject to price fluctuations due to a number of unpredictable
factors that may create price risk. We enter into various derivative contracts,
primarily exchange-traded futures, with the objective of managing our exposure
to adverse price movements in the agricultural commodities used for our business
operations. We have established policies that limit the amount of unhedged
fixed-price agricultural commodity positions permissible for our operating
companies, which are a combination of quantity and value at risk limits. We
measure and review our sensitivity to our net commodities position on a daily
basis.
We use a sensitivity analysis to estimate our exposure to market risk on
our agricultural commodity position. The daily net agricultural commodity
position consists of inventory, related purchase and sale contracts, and
exchange-traded contracts, including those used to hedge portions of our
production requirements. The fair value of that position is a summation of the
fair values calculated for each agricultural commodity by valuing each net
position at quoted average futures prices for the period. Market risk is
estimated as the potential loss in fair value resulting from a hypothetical 10%
adverse change in prices. The results of this analysis, which may differ from
actual results, are as follows:
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 2004 DECEMBER 31, 2003
--------------------------------- ---------------------------------
(US$ IN MILLIONS) FAIR VALUE MARKET RISK FAIR VALUE MARKET RISK
----------------- --------------- ---------------- --------------- ----------------
Highest long position............. $330 $ 33 $517 $52
Highest short position............ (27) (3) (50) (5)
CURRENCY RISK
Our global operations require active participation in foreign exchange
markets. To reduce the risk of foreign exchange rate fluctuations, we follow a
policy of hedging net monetary assets and liabilities and transactions
denominated in currencies other than the functional currencies applicable to
each of our various subsidiaries. Our primary exposure is related to our
businesses located in Brazil and Argentina and to a lesser extent, Europe, the
Middle East and Asia. To minimize the adverse impact of currency movements, we
enter into foreign exchange swaps and option contracts to hedge currency
exposures.
When determining our exposure, we exclude intercompany loans that are
deemed to be permanently invested. The repayments of permanently invested
intercompany loans are not planned or anticipated in the foreseeable future
and therefore are treated as analogous to equity. As a result, the foreign
exchange gains and losses on these borrowings are excluded from the
determination of net income and recorded as a component of accumulated other
comprehensive income (loss). The balance of permanently invested intercompany
borrowings was $681 million as of March 31, 2004 and December 31, 2003,
respectively. Included in other comprehensive income (loss) are exchange
losses of $3 million in the three months ended March 31, 2004 and exchange
gains of $118 million in the year ended December 31, 2003, related to
permanently invested intercompany loans.
For risk management purposes and to determine the overall level of
hedging required, we further reduce the foreign exchange exposure determined
above by the value of our agricultural commodities
27
inventories. Our agricultural commodities inventories, because of their
international pricing in U.S. dollars, provide a natural hedge to our
currency exposure.
Our net currency position, including cross-currency swaps and currency
options, and our market risk, which is the potential loss from an adverse 10%
change in foreign currency exchange rates, is set forth in the following table.
In addition, we have provided an analysis of our foreign currency exposure after
reducing the exposure for our agricultural commodities inventory. Actual results
may differ from the information set forth below.
AS OF MARCH 31, AS OF DECEMBER 31,
(US$ IN MILLIONS) 2004 2003
----------------- --------------- -----------------
BRAZILIAN OPERATIONS:
Net currency short position, from financial instruments, including
derivatives .................................................................. $ (1,216) $ (1,080)
Market risk .................................................................... (122) (108)
Agricultural commodities inventories ........................................... 1,215 1,063
Net currency long position, less agricultural commodities inventories .......... (1) (17)
Market risk .................................................................... $ - $ (2)
ARGENTINE OPERATIONS:
Net currency long position, from financial instruments, including derivatives... $ (5) $ (32)
Market risk .................................................................... - (3)
Agricultural commodities inventories ........................................... 46 71
Net currency long position, less agricultural commodities inventories .......... 41 39
Market risk .................................................................... $ 4 $ 4
INTEREST RATE RISK
There have been no significant changes in our interest rate risk since
December 31, 2003.
OTHER INFORMATION
COMPLIANCE WITH EXCHANGE ACT REPORTING REQUIREMENTS
We have filed timely our Form 20-F and all other reports required to be
filed by us pursuant to the Securities Exchange Act of 1934, as amended.
CONTROLS AND PROCEDURES
As of March 31, 2004, we carried out an evaluation, under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures, as that term is defined in
Exchange Act Rule 13a-15(e) and 15(d)-15(e), as of the period covered by this
Form 6-K. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to Bunge
(including our consolidated subsidiaries) required to be included in our
filings with the Securities and Exchange Commission.
During the quarterly period covered by this Form 6-K, there have been no
changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BUNGE LIMITED
Date: May 10, 2004 By: /s/ William M. Wells
------------------------
William M. Wells
Chief Financial Officer
/s/ T.K. Chopra
------------------------
T.K. Chopra
Controller and Principal
Accounting Officer
29
EXHIBIT INDEX
Exhibit 99.1 Certifications of Bunge Limited's Chief Executive Officer and
Chief Financial Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Exhibit 99.2 Certifications of Bunge Limited's Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
30